The Competitive Advantage of Nations

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NDOHarvardBusinessReview

HBRMARCH–Nationalprosperityiscreated,notgrowoutofacountry’snaturalendowments,itslaborpool,itsinterestrates,oritscurrency’svalue,n’scompeiesgainadvantageagainsttheworld’nefitfromhavingstrongdomesticrivals,aggressivehome-basedsuppliers,ldofincreasinglyglobalcompetition,na-tionshavebecomemore,notless,asisofcompetitionhasshiftedmoreandmoretothecreationandassimilationofknowledge,itiencesinnationalvalues,culture,eco-nomicstructures,institutions,restrikingdifferencesinthepatternsofcompetitivenessineverycountry;tely,nationssucceedinparticularindustriesbecausetheirhomeenvironmentisthemostforward-looking,dynamic,onclusions,thistheauthorofCompetitiveStrategy(FreePress,1980)andCompetitiveAd-vantage(FreePress,1985)andwillpublishTheCompetitiveAd-vantageofNations(FreePress)’snote:t,whoservedasprojectcoordina-torforthisstudy,ght᭧

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NDOofthepatternsofcompetitivesuccessintenleadingtradingnations,contradicttheconventionalwisdomthatguidesthethinkingofmanycompaniesandna-tionalgovernments—andthatispervasivetodayintheUnitedStates.(Formoreaboutthestudy,seetheinsert‘‘PatternsofNationalCompetitiveSuccess.’’)Accordingtoprevailingthinking,laborcosts,inter-estrates,exchangerates,aanies,thewordsofthedayaremerger,alliance,strategicpartnerships,collaboration,overnments,thereisagrowingtendencytoexperi-mentwithvariouspoliciesintendedtopromotena-tionalcompetitiveness—fromeffortstomanageexchangeratestonewmeasurestomanagetradetopoliciestorelaxantitrust—whichusuallyenduponlyunderminingit.(Seetheinsert‘‘WhatIsNa-tionalCompetitiveness?’’)Theseapproaches,nowmuchinfavorinbothcompaniesandgovernments,ngthem,withalltheirshort-termappeal,willvirtuallyguaranteethattheUnitedStates—oranyotheradvancednation—anewperspectiveandnewtools—anap-proachtocompetitivenessthatgrowsdirectlyoutofananalysisofinternationallysuccessfulindustries,wtoknow,verysimply,needtoapplyit.

PatternsofNationalCompetitiveSuccessToinvestigatewhynationsgaincompetitiveadvan-tageinparticularindustriesandtheimplicationsforcompanystrategyandnationaleconomies,Iconductedafour-yearstudyoftenimportanttradingnations:Den-mark,Germany,Italy,Japan,Korea,Singapore,Sweden,Switzerland,theUnitedKingdom,sistedbyateamofmorethan30research-ers,ations—theUnitedStates,Japan,andGer-many—aretheworld’ernationsrepresentavarietyofpopulationsizes,governmentpoliciestowardindustry,socialphiloso-phies,geographicalsizes,er,thetennationsaccountedforfully50%oftotalworldex-portsin1985,eviousanalysesofnationayingnationswithwidelyvaryingcharacteristicsandcircumstances,thisstudysoughttoseparatethefundamentalforcesnation,stidentifiedallindustriesinwhichthenation’scom-panieswereinternationallysuccessful,usingavailablestatisticaldata,supplementarypublishedsources,nedanation’sindustryasinter-nationallysuccessfulifitpossasuresofcompetitiveadvantage,suchasreportedprofitability,easthebestindicatorsthepresenceofsubstantialandsustainedex-portstoawidearrayofothernationsand/orsignificantoutbounnwasconsideredthehomebaseforacompanyifitwaseitheralocallyowned,indigenousenterpriseocreatedaprofileofalltheindustriesinwhicheachnationwasinternationallysuccessfulatthreepointsintime:1971,1978,ternofcompetitiveindustriesineacheconomywasfarfromrandom:icularinterestwerethecon-nectionsorrelationshipsamongthenation’econdpartofthestudy,weexaminedthehistoryofcompetitioninparasisofnationalprofiles,weselectedover100indus-triesorindustrygroupsfordetailedstudy;backasfarasneces-sarytounderstandhowandwhytheindustrybeganinthenation,howitgrew,whenandwhycompaniesfromthenationdevelopedinternationalcompetitiveadvan-tage,andthultingcasehistoriesfallshortoftheworkofagoodhistorianintheirlevelofdetail,buttheydoprovideinsightintothedevelopmentofboththeindustryandthenation’easampleofindustriesforeachnationthatrepreustriesstudiedac-countedforalargeshareoftotalexportsineachnation:morethan20%oftotalexportsinJapan,Germany,andSwitzerland,forexample,andmorethan40%iedsomeofthemostfamousandimportantinternationalsuccessstories—Germanhigh-performanceautosandchemicals,Japanesesemi-con-ductorsandVCRs,Swissbankingandpharmaceuticals,Italianfootwearandtextiles,cialaircraftandmotionpictures—andsomerelativelyobscurebuthighlycompetitiveindustries—SouthKoreanpianos,Italianskiboots,addedafewindustriesbecausetheyappearedtobeparadoxes:JapanesehomedemandforWestern-charactertypewrit-ersisnearlynonexistent,forexample,butJdedindustriesthatwerehighlydepen-dentonnaturalresources:suchindustriesdonotformthebackboneofadvancedeconomies,an,however,includeanumberofmoretechnologicallyintensive,natural-respleofnationsandindustriesoffersarichempiricalfoundationfordevelopompanyingarticleconcentratesonthedetermi-nantsofcompetitiveadvantageinindividualindustriesandalsosketchesoutsomeofthestudy’rtreatmentinmybook,TheCompetitiveAdvan-tageofNations,developsthetheoryandcontainsdetaileddescriptionsofthenationswestudiedandthefutureprospectsfortheireconomies.—74YOP

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NDOHARVARDBUSINESSREVIEWMarch–April1990

HowCompaniesSucceedinInternationalMarketsAroundtheworld,companiesthathaveachievedinternationalleeverysuccessfulcompanywillemployitsownparticularstrategy,theunderlyingmodeofoperation—thecharacterandtrajectoryofallsuccessfulcompa-nies—proachinnova-tioninitsbroadestsense,rctioncanbemanifestedinanewproductdesign,anewproduc-tionprocess,anewmarketingapproach,novationismundaneandincremental,dependingmoreonacu-mulationofsmallinsightsandadvancesthanonasingle,ninvolvesideasthatarenoteven‘‘new’’—ideasthathavebeenaround,ysinvolvesinvestmentsinskillandknowledge,novationscreatecompetitiveadvantagebyperceivinganentirelynewmpetitorsareslowtorespond,tance,inindustriessuchasautosandhomeelectronics,Japa-nesecompaniesgainedtheirinitialadvantagebyem-phasizingsmaller,morecompact,lowercapacitymodelsthatforeigncompetitorsdisdainedaslessprofitable,lessimportant,rnationalmarkets,innovationsthample,asinternationalconcernforproductsafetyhasgrown,SwedishcompanieslikeVolvo,AtlasCopco,therhand,innovationsthatrespondtocon-cernsorcircumstancesthatarepeculiaremarket,forinstance,alsandmachine-toolcompaniesfromattractive,ationplaysalargeroleintheprocessofinnovationandimprovement—informesitcomesfromsimpleinvest-mentinresearchanddevelopmentormarketre-search;moreoften,itcomesfromeffortandfromopennessandfromlookingintherightplaceunen-HARVARDBUSINESSREVIEWMarch–whyinnovtionmaycomefromanewcompany,whosefounderhasanontraditionalbackgroundorwassimplynotap-preciatedinanolder,apacityforinnovationmaycomeintoanexistingcompanythroughseniormanagerswhoarenewtotheparticularindustryavationmayoccurasacompanydiversifies,bringingnewresources,skills,vationsmaycomefromanowexceptions,panythatsuccessfullyim-plementsaneworbetterwayofcompetingpursuesitsapproachwithdoggeddetermination,,tosucceed,innovationusuallyrequirespressure,ne-cessity,andevenadversity:ompanyachievescompetitiveadvantagethroughaninnovation,companieshavealreadymatchedtheabilityoftheirJapaneserivalstomass-producestandardcolortelevisionsandVCRs;Brazil-iancompanieshaveassembledtechnologyitorswilleventuallyamesearly-moveradvantagessuchascustomerrelationships,scaleeconomiesinexistingtechnologies,ortheloyaltyofdistributionchannelsareenoughtopermitastnerorlater,moredynamicrivalswillfindawaytoinnovatnapplianceproducers,whichcompetedsuccessfullyonthebasisofcostinsellingmidsizeandcompactappliancesthroughlargeretailchains,lopingmoredifferentiatedproductsandcreatingstrongbrandfranchises,tely,theonlywaytosustainacompetitiveadvantageistoupgradeit—itiallypenetratedforeignmarketswithsmall,inexpensivecompiletheirlabor-costadvantagepersisted,however,theJapanesecompanieswereup-75YOP

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WhatIsNationalCompetitiveness?Nationalcompetitivenesshasbecomeoneallthediscussion,debate,andwritingonthetopic,more,thereisnotevenanaccepteddefinitionoftheterm‘‘competitive-ness’’henotionofacom-petitivecompanyisclear,enationalcompetitivenessasamacroeco-nomicphenomenon,drivenbyvariablessuchasex-changerates,interestrates,an,Italy,andSouthKoreahaveallenjoyedrap-idlyrisinglivingstandardsdespitebudgetdeficits;Ger-manyandSwitzerlanddespiteappreciatingcurrencies;many,Switzerland,s,shouldn’tanationseekhigherwagesforitsworkersasagoalofcompetitive-ness?A,then,canoneexplainthesuccessofGermany,Japan,Switzerland,Italy,andSouthKorea—countrieswithlimitednaturalresources?Morerecently,theargumenthasgainedfavorthatcompetitivenessisdrivenbygovernmentpolicy:tar-geting,protection,importpromotion,andsubsidieshavepropelledJapaneseandSouthKoreanauto,steel,shipbuilding,y,governmentinterventionhasbeenineffectual—any,ninJapanandSouthKorea,government’sroleinsuchimportantindustriesasfacsimilemachines,copiers,ro-botics,andadvancedmaterialshasbeenmodest;someofthemostfrequentlycitedexamples,suchassewingmachines,steel,andshipbuilding,popularexplanationfornationalcompetitive-nessisdifferencesinmanagementpractices,blemhere,how-ever,icessfulmanagementpracticesgoverningsmall,private,andlooselyorga-nizedItalianfamilycompaniesinfootwear,textiles,andjewelry,forexample,wouldproduceamanagementdisasterifappliedtoGermanchemicalorautocompa-nies,Swisspharmaceuticalmakers,ethecommonlyheldviewthatpowerfulunionsunderminecompetitiveadvantage,unionsarestronginGermanyandSweden—y,noneoftheseexplanationsisfullysatisfac-tory;noneissufficientbyitselftoratintainssometruth;butabroader,a‘‘competitive’’nationinthefirstplace?Isa‘‘competitive’’nationonewhereeverycompanyorindustryiscompetitive?panhaslargesectorsofitsecon-omythatfallfarbehindtheworld’‘‘competitive’’nationonewhoseexchangeratemakesitsgoodspricecompetitiveininternationalmar-kets?BothGermanyandJapanhaveenjoyedremarkablegainsintheirstandardsofliving—‘‘competitive’’nationonewithalargepositivebalanceoftrade?Switzerlandhasroughlybalancedtrade;Italyhasachronictradedeficit—‘‘competitive’’nationonewithlowlaborcosts?IndiaandMexicobothhavelowwagesandlowlaborcosts—ymeancipalgoalolitytodosodependsontheproductivitywithwhichanation’tivityde-pendsonboththequalityandfeaturesofproducts(whichdeterminethepricesthattheycancommand)-ductivityistheprimedeterminantofanation’slong-runstandardofliving;ductivityofhumanresourcesdeterminesemployeewages;theproductivitywin’sstandardoflivingdependsonthecapacityofitscompaniestoachievehighlevelsofproductivity—nedpn’scompaniesmustrelentlesslyimproveproductivityinexistingindustriesbyraisingproductquality,addingdesirablefeatures,improvingproducttechnology,stdevelopthenecessarycapabilitiestocom-peteinmoreandmoresophisticatedindustrysegments,76YOP

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NDOHARVARDBUSINESSREVIEWMarch–April1990

stfinallydevelopthecapabilitytocompeteinentirelynew,ationaltradeandforeigninvestmentcanbothimproveanation’pportrisingnationalproductivitybyallowinganationtospecializeinthoseindustriesandsegmentsofindustrieswhereitscompaniealistodeploythenation’osenationswiththehigheststandardsoernatposeana-tion’strywillloseoutifitsproduc-tivityisnotsufficientlyhigherthanforeignrivals’ionlosestheabilitytocompeteinarangeofhigh-productiv-ity/high-wageindustries,ngnationalcompetitiveansionofexportsbecauseoflowwagesandaweakcurrency,atthesametimethatthenationimportssophisticatedgoodsthatitscompaniescannotproducecompetitively,maybringtradeintobalanceorsurplusbutlowersthenation’’sthetypeofjobs,notjusttheabilitytoemploycitizensatlowwages,gtoexplain‘‘competitiveness’’atthenationallevel,then,mustunderstandinsteaan-swers,wemustfocusnounderstandhowandwhycommerciallyviableskillsandtechnologyarecreated,eoutcomeofthethousandsofstrugglesforcompet-itiveadvantageagainstforeignrivalsinparticularseg-mentsandindustries,inwhichproductsandprocessesarecreatedandimproved,elookscloselyatanynationaleconomy,therearestrikingdifferencesamonganation’exportsofcarsareheavilyskewedtowardhigh-performancecars,industriesandsegmentsofindustries,thecompetitorswitrch,then,isforthedecisivecharacteristicofanationthatallowsitscompaniestocreateandsustaincompetitiveadvantageinparticularfields—ar-ticularlyconcernedwiththedeterminantsofinter-nationalsuccessintechnology-andskill-intensivesegmentsandindustries,caltheoryexplainsthesuccessofnationsinparticularindustriesbasedonso-calledfactorsofpro-ductionsuchasland,labor,-tionsgainfactor-basedcomparativeadvantageinicaltheory,however,hasbeenovershadowedinadvancedindustriesandeeorymustrecognizethatinmoderninterna-tionalcompetition,companiescompetewitewtheorymustexplainiswhyanationpebaseisthena-tioninwhichtheesseereacompany’sstrategyisset,wherethecoreproductandprocesstechnologyiscreatedandmaintained,senceofthehomebaseinanationhasthegreatestpositiveinfluenceonotherlinkeddomesticindustriesandleadstootherbenefitsinthenation’heownershipofthecompanyisoftenconcentratedatthehomebase,eorymustmoreflectarichconceptionofcompetitionthatincludessegmentedmarkets,differentiatedproducts,technologydifferences,eorymustgobeyondcostandexplainwhycompaniesfromsomenationsarebetterthanothersatcreatingadvantagesbasedonquality,features,eorymustbeginfromthepremisethatcompe-titionisdynamicandevolving;itmustanswertheques-tions:Whydosomecompaniesbasedinsomenationsinnovatemorethanothers?Whydosomenationspro-videanenvironmentthatenablescompaniestoimproveandinnovatefasterthanforeignrivals?—HARVARDBUSINESSREVIEWMarch–April1990YOP

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veybecameinnovatorsinprocesstechnology,pioneeringjust-rocessimprove-mentsledtobetterproductquality,betterrepairre-cords,cently,Japaneseau-tomakershaveadvancedtothevanguardofproducttechnologyandareintroducingnew,premiumbrandnamestocompetewiththeworld’mpleoftheJapaneseautomakersalsoillus-tr,sellitsproductworldwide,underitsownbrandname,globalapproachmayevenrequirethecompanytolocateproductionorR&Dfacilitiesinothernationstotakeadvantageoflowerwagerates,togainorimprovemarketaccess,,creatingmoresustainableadvantagesoftenmeansthatacompanymustmakeitsexistingadvantageobsolete—seautocompaniesrecognizedthis;eithertheywouldmaketheiradvantageobso-lete,examplesuggests,ngeisanunnat-uralact,particularlyinsuccessfulcompanies;proachesbecomeinsti-ingemphasizestheonecorrectwaytodoanything;theconstructionofspecialized,dedicatedfacilitiessolidifiespastpracticeintoexpensivebrickandmor-tar;theexistingstrategytsfulcompaniestendtodevelopabiasforpredictabilityandstability;anizationatalllevelsfiltersoutinformationthatwouldsuggestnewapproaches,modifications,ernalenvironmentoperateslikeanimmunesystemtoisolateorexpel‘‘hostile’’tionceases;thecompanybecomesstagnant;sslypursueimprovements,seekinganever-moresophisticatedsourceofcompetitiveadvantage?Whyaretheyabletoovercomethesubstantialbarri-erstochangeandinnovationthatsooftenaccom-panysuccess?Theanswerliesinfourbroadattributesofanation,attributesthatindividuallyandasasystemconsti-tutethediamondofnationaladvantage,thepion’spositioninfac-torsofproduction,suchasskilledlabororinfra-structure,ureofhome-mar-ketdemandfortheindustry’s-enceorabsenceinthenationofsupplierindus-rategy,Structure,-ditionsinthenationgoverninghowcompaniesarecreated,organized,andmanaged,eterminantscreatethenationalenviron-mentinwhichcompaniesarebornandlearnhowtocompete.(Seethediagram‘‘DeterminantsofNa-tionalCompetitiveAdvantage.’’)EachpointontheTheDiamondofNationalAdvantageWhyarecertaincompaniesbasedincertainna-tionscapableofconsistentinnovation?Whydothey78HARVARDBUSINESSREVIEWMarch–April1990YOP

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NDOFirm Strategy,Structure,and RivalryFactorConditionsRelated andSupportingIndustriesDeterminantsofNationalCompetitiveAdvantageDemandConditions

diamond—andthediamondasasystem—affectses-sentialingredientsforachievinginternationalcom-petitivesuccess:theavailabilityofresourcesandskillsnecessaryforcompetitiveadvantageinanin-dustry;theinformationthatshapestheopportuni-tiesthatcompaniesperceiveandthedirectionsinwhichtheydeploytheirresourcesandskills;thegoalsoftheowners,managers,andindividualsincompanies;andmostimportant,thepressuresoncompaniestoinvestandinnovate.(Seetheinsert‘‘HowtheDiamondWorks:TheItalianCeramicTileIndustry.’’)Whenanationalenvironmentpermitsandsup-portsthemostrapidaccumulationofspecializedassetsandskills—sometimessimplybecauseofgreatereffortandcommitment—ationalenviron-mentaffordsbetterongoinginformationandinsightintoproductandprocessneeds,y,whenthenationalenvironmentpressurescompaniestoinnovateandinvest,companieingtostandardeco-nomictheory,factorsofproduction—labor,land,naturalresources,capital,infrastructure—nwillexportthosegooctrine,whoseoriginsdatebacktoAdamSmithandDavidRicardoandthatisembeddedinclassicaleconomics,ophisticatedindustriesthatformtheback-boneofanyadvancedeconomy,anationdoesnotinheritbutinsteadcreatesthemostimportantfac-torsofproduction—er,thestockoffactorsthatanationenjoysataparticulartimeislessim-portantthantherateandefficiencywithwhichitcreates,upgrades,timportantfactorsofproductionactors,suchasapooloflabororalocalraw-materialsource,-niescanaccessthrytoconventionalwisdom,simplyhavingageneralworkforcethatishighschoolorevencollegeeducatedrortcom-petitiveadvantage,afactormustbehighlyspecial-izedtoanindustry’sparticularneeds—ascientificinstitutespecializedinoptics,actorsaremorescarce,moredifficultforforeigncompetitorsHARVARDBUSINESSREVIEWMarch–April1990toimitate—ssitiveadvan-tageresultsfromthepresenceofworld-classinstitutionsthatfkhastwohospitalsthatconcentrateinstudyingandtreatingdiabetes—dhaspremierresearchinsti-tutesinthecultivation,packaging,andshippingofflowers,whereitistheworld’notsoobvious,however,isthatselectivedisadvantagesinthemorebasicfactorscanprodacompanytoinnovateandupgrade—adisadvantaereisanamplesupplyofcheaprawmaterialsorabundantlabor,companincompaniesfaceaselectivedisadvantage,likehighlandcosts,laborshortages,orthelackoflocalrawmaterials,itintheoft-repeatedJapanesestatement,‘‘Weareanislandnationwithnonaturalresources,’’istheunderstandingthatthesedeficiencieshaveonlyservedtospurJapan’-in-timeproduction,forexample,nsteelproducersintheBresciaareafacedasimilarsetofdisadvan-tages:highcapitalcosts,highenergycosts,dinNorthernLombardy,theseprivatelyownedcompaniesfacedstaggeringlogisticscostsduetotheirdistancefromsouthernportsult:theypioneeredtechnologicallyadvancedminimillsthatrequireonlymodestcapitalinvestment,uselessenergy,em-ployscrapmetalasthefeedstock,areefficientatsmallscale,andrwords,,theymustsendcompaniespropersignalsaboutcircumstancesthatwillspreadtoothernations,rland,thenationthatexperiencedthefirstlaborshortagesafterWorldWarII,ompaniesrespondedtothedisadvantagebyupgradinglaborproductivityandseekinghighervalue,iesinmostotherpartsoftheworld,wheretherewerestillampleworkers,focusedtheirattentiononotherissues,ondconditionfortransformingdisadvan-79YOP

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HowtheDiamondWorks:TheItalianCeramicTileIndustryIn1987,Italiancompanieswereworldleadersintheproductionandexportofceramictiles,a$nproducers,concentratedinandaroundthesmalltownofSassuolointheEmilia-Romagnare-gion,accountedforabout30%ofworldproductionandalmost60%liantradesurplusthatyearinceramictileswasabout$elopmentoftheItalianceramictileindustry’scompelo’ssustainablecom-petitiveadvantageinceramictilesgrticatedanddemandinglocalbuyers,stronganduniquedistributionchannels,andintensedgegrewquicklyeownershipofthecompaniesandloyaoducersbenefitedaswellfromahighlyde-velopedsetoflocalmachinerysuppliersandothersup-portingindustries,producingmaterials,services,senceofworld-class,y,thegeogranicnatureofthissystemrepresentsthemostsus-tainableadvantageofSassuolo’ileindustrybegantogrowandprosper,mrgingItalianTileCluster80YOP

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NDOTheOriginsoftheItalianIndustryTileproductioninSassuologrewoutoftheearthen-wareandcrockeryindustry,atelyafterWorldWarII,therewereonlyahandfulofceramictilemanufactur-ersinandaroundSassuolo,forceramictileswithinItalybegantogrowdramaticallyintheimmediatepostwaryears,astherendemandforceramictileswasparticularlygreatduetotheclimate,localtastes,eSassuolowasinarelativelyprosperouspartofItaly,thereweremanywhocouldcombinethemod-estamo1955,therewere14Sassuoloareatilecompanies;by1962,tionaroundSassu-olowashometoFerrari,Maserati,Lamborghini,andInitially,Italiantileproducerswere1950s,theprincipalrawmaterialsusedtomaketileswerekaolin(white)herewerered-butnowhite-claydepositsnearSassuolo,-makingequipmentwasalsoimportedinthe1950sand1960s:kilnsfromGermany,America,andFrance;me,theItaliantileproducerslearnedhowtomodifyimportedequipmenttofitlocalcircumstances:redversuswhiteclays,esstechniciansfromtilecompanieslefttostarttheirownequipmentcompanies,1970,Italiancompanieshademergedasworld-classproducersofkilnsandpresses;theearliersituationhadexactlyreversed:theywereationshipbetweenItaliantileandequipmentmanufacturerswasamutuallysupportingone,id-1980s,thereweresome200Italianequipmentmanufacturers;morethan60%ip-mentmanufacturerscompetedfiercelyforlocalbusi-ness,andtilemanufacturersbenefitemergingtileclustergrewandconcentratedintheSassuoloregion,apoolofskilledworkersandtechniciansdeveloped,includingengineers,productionspecialists,maintenanceworkers,servicetechnicians,ustry’sgeographiccon-centrationencouragedothersupportingcompaniestoform,offeringmolds,packagingmaterials,glazes,yofsmall,specializedconsultingcompaniesemergedtogiveadvicetotileproducersonplantdesign,logistics,andcommercial,advertising,smembershipconcentratedintheSassuoloarea,Assopiastrelle,theceramictileindustryassocia-tion,beganofferingservicesinareasofcommoninter-est:bulkpurchasing,foreign-marketresearch,wingtileclusterstimulatedtheformationofanew,specializedfactor-creatinginstitution:in1976,aconsortiumoftheHARVARDBUSINESSREVIEWMarch–April1990

UniversityofBologna,regionalagencies,andthece-ramicindustryassociationfoundedtheCentroCera-micodiBologna,ticatedHomeDemandBythemid-1960s,per-capitatillianmarketwasalsotheworld’ncustomers,whoweregenerallythefirsttoadoptnewdesignsandfeatures,andItalianproducers,whoconstantlyinnovatedtoimprovemanufacturingmethodsandcreatenewdesigns,quelysop1960s,1985,therewereroughly7,600specializedshowroomshan-dlingapproximately80%ofdomesticsales,1976,theItaliancompanyPiemmeintroducedtilesbyfamousdesignerstoganovationdrewonanotherrelatedindustry,designservices,inwhichItalywasworldleader,withover$entmanufacturersexceededdomesticsales;in1988,exportsrepresentedalmost80%gtogether,tilemanufacturersandequipmentmanufacturersmadethenextimportantbreakthroughduringthemid-andlate1970s:thedevelopmentofmaterials-handlingequipmentthattovationreducedhighlaborcosts—whichhadbeenasubstamonperceptionisthatItalianlaborcosetwocountries,however,y,wagesfordifferentskillcategorieswerecompressed,andwortrictionprovedcostly:oncecool,eofthisfactordisadvantage,theItaliancompanieswerethefirsttodevelopcontinuous,DBUSINESSREVIEWMarch–April1990YOP

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NDOInternationalizationSassuoloRivalryThesproductandpro-cessinnovationsspreadrapidly,andcompaniesseekingtechnological,design,heproducerswereprivatelyheld,ersalllivedinthesamearea,kneweachother,restoUpgradeIntheearly1970s,facedwithintensedomesticri-valry,pressurefromretailcustomers,andtheshockofthe1973energycrisis,ffortsledtoatechnologicalbreakthrough,therapidsingle-firingpro-cess,inwhichthehardeningprocess,materialtrans-formation,ssthattook225employeesusingthedouble-,smaller,arly1980s,exportsfromItalianBy1970,gnantItalsencdualtilemanufacturersbeganadver-tisinginItalianandforeignhome-designandarchi-tecturalmagazines,publicationswithwideglobalcirculationamongarchitects,designers,kerswerealsoabletocapitalizeonItaly’sleadingworldexportpositionsinrelatedin-dustrieslikemarble,buildingstone,sinks,washbasins,furniture,lamps,astrelle,theindustryassociation,establishedtrade-promotionofficesintheUnitedStatesin1980,inGermanyin1984,nizedelaboratetradeshowsn1980and1987,theassociationspentroughly$8milliontopromoteItaliantilesintheUnitedStates.—t,adoctoralstudentinbusinesseconomicsattheHarvardBusinessSchool,performednumerousentonsultantinstrategyandfinanceforMonitorCompanyandAnalysisF.A.–Milan.81

tagesintoadvantagesisfavorablecircumstanceselsewhereinthediamond—vate,com-paniesmusthaveaccesstopeoplewithapprorprecotsuchacom-mitmentandthepresenceofactiverivalry,acom-panymaytakeample,er-electronicscompa-nies,facedwithhighrelativelaborcosts,chosetoleavetheproductandproductionprocesslargelyun-changeddofupgradingtheirsourcesofadvantage,therhand,Japaneserivals,confrontedwithintensedomesticcompetitionandamaturehomemarket,dtolowerassemblycosts,panesecompanieswerebuildingassemblyplantsintheUnitedStates—tseemthatthegltice,however,,thecompositionandcharacterofthehomemarketusuallyhasadispro-portionateeffectonhowcompaniesperceive,inter-pret,sgaincompetitiveadvantageinindustrieswherethehomedemandgivestheircompaniesaclearerorearlierpictureofemergingbuyerneeds,andwherede-mandingbuyerspressurecompaniestoinnovatefasterandachieo-demandconditionshelpbuildcompetitiveadvantagewhenaparticularindustrysegmgermarketsegmentsinanationreceivethemostattentionfromthenation’scompanies;xampleishydraulicexcavators,whichrepresentthemostwidelyusedtypeofconstructionequipmentintheJapanesedomesticmarket—butwhicgmentisoneofthefewwheretherearevigorousJapaneseinternationalcompetitorsandwhereCaterpillardoesnotholdasubstantialshareoftheworldmarket.82Mon’scompaniesgaincompetitiveadvantageifdomesticbuyersaretheworld’ticated,de-mandingbuyersprovideawindowintoadvancedcustomerneeds;theypressurecompaniestomeethighstandards;theyprodthemtoimprove,toinno-vate,factorconditions,demandconditionmple,Japaneseconsumers,wholiveinsmall,tightlypackedhomes,mustcontendwithhot,humidsummersandhigh-costelectricalenergy—onse,Japanesecompanieshavepioneeredcompact,qu-dustryafterindustry,thetightlyconstrainedrequire-mentsoftheJapanesemarkethaveforcedcompaniestoinnovate,yieldingproductsthatarekei-haku-tan-sho—light,thin,short,small—uyerscanhelpanation’scompaniesgainadvantageiftheirneedsanticipateorevenshapethoseofothernations—iftheirneedsprovideongo-ing‘‘early-warningindicators’’mesanticipatoryneedsemergebe-causeanation’’slong-standingconcernforhandicappedpeoplehak’senvironmentalismhasledtosuc-nerally,anation’scompaniescanantici-pateglobaltrendsifthenation’svaluesarespread-ing—thatis,iesinfastfoodandcreditcards,forexample,reflectsnotonlytheAmericandesirsexporttheirvaluesandtastesthroughmedia,throughtrainingforeigners,throughpoliticalinfluence,rdbroaddeterminantofnationaladvantageisthepresenceinthenationofr-nationallycompetitivehome-ba,theydeliverthemostcost-effectivein-putsinanefficient,early,rapid,andsometimespref-HARVARDBUSINESSREVIEWMarch–April1990YOP

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ngoldandsilverjewelrycompaniesleadtheworldinthatindustryinpartbecauseotherItaliancompaniessupplytwo-thirdsoftheworld’esignificantthanmereaccesstocompo-nentsandmachinery,however,istheadvantagethathome-basedrelatedandsupportingindustriespro-videininnovationandupgrading—ersandend-userslocatedneareachothercantakeadvantageofshortlinesofcommunication,quickandconstantflowofinformation,ieshavetheopportu-nitytoinfluencetheirsuppliers’technicaleffortsandcanserveastestsitesforR&Dwork,ustrationof‘‘TheItalianFootwearCluster’’offersagraphicexampleofhowagroupofclose-by,supportingindustriescreatescompetitiveadvantageinarangoducers,forin-stance,interactregularlywithleathermanufacturersonnewstylesandmanufacturingtechniquesandlearnaboutrmanu-facturersgainearlyinsightsintofashiontrends,eractionismutuallyadvantageousandself-reinforcing,butitdoesnothappenautomatically:itishelpedbyprox-imity,ion’scompaniesbenefitmostwhenthesuppliersare,themselves,timatelyself-defeatingforacompanyorcountrytocreate‘‘captive’’supplierswhoaretotallydepen-denametoken,anationneednotbecompetitiveiniescanreadilysourcefromabroadmaterials,components,ortechnologieswithoutamajoreffectoninnovationorperformanceoftheindustry’eistrueofothergeneralizedtech-nologies—likeelectronicsorsoftware—-basedcompetitivenessinrelatedindustriesprovidessimilarbenefits:informationf-basedrelatedindustryalsoin-creasesthelikelihoodthatcompanieswillembracenewskills,anditalssssuccessinpharmaceuticalsemergedoutofpre-viousinternationalsuccessinthedyeindustry,forexample;JapanesedominanceinelectronicmusicalHARVARDBUSINESSREVIEWMarch–April1990keyboardsgrowsoutofsuccessinacousrategy,Structure,alcircumstancesandcontextcreatestrongtendenciesinhowcompaniesarecreated,organized,andman-aged,y,forexample,successfulinternationalcompetitorsareoftensmallormedium-sizedcompa-niesthatareprivatelyownedandoperatedlikeex-tendedfamilies;inGermany,incontrast,companiestendtobestrictlyhierarchicalinorganizationandmanagementpractices,anagerialsystemisuniversallyap-propriate—itivenessinaspecificindustryresultsfromconvergenceofthemanagementpracticesandorganizationalmodesfa-vostrieswhereItaliancompaniesareworldleaders—suchaslighting,furni-ture,footwear,woolenfabrics,andpackagingma-chines—acompanystrategythatemphasizesfocus,customizedproducts,nichemarketing,rapidchange,andbreathtakingflexibilityfitsboththedymanmanagementsystem,incontrast,workswellintechnicalorengineering-orientedindustries—optics,chemicals,complicatedmachinery—wherecomplexproductsdemandpreci-sionmanufacturing,acarefuldevelopmentprocess,after-saleservice,successismuchrarerinconsumergoodsandserviceswhereimagemarketiiesalsod-panygoalsreflectthecharacteristicsmple,inGermanyandSwitzer-land,wherebankscompriseasubstantialpartofthenation’sshareholders,iesdowellinmatureindustries,whereongoinginvest-mentinR&tedStatesisattheoppositeextreme,withalargepoolofriskcapitalbutwidespreadtradingofpubliccompaniesandastronmentcoadoeswellinrelativelynewindustries,likesoftwareandbiotechnology,oroneswhereequityfundingofnewcompaniesfeeds83YOP

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TheItalianFootwearClusterInjection-moldingMachinerySki Bootsactivedomesticrivalry,pressuresleadingtounderinvest-ment,however,dualmotivn’ssuccesslargelydependsonthetypesofeducationitstalentedpeoplechoose,wheretheychoosetowork,lsanation’sinstitutionsandvaluessetfor84YOP

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NDOSpecializedMachineToolsMoldsWoodworkingEquipmentModels`Apres-skiBootsAthleticFootwearParts ofFootwearLeatherFootwearProcessedLeatherLeatherHandbags,GlovesDesignServicesLeather-workingMachineryLeatherClothingindividualsandcompanies,andtheprestigeitat-tachestocertainindustries,guidetheflowofcapitalandhumanresources—which,inturn,stendtobecompetitiveinactivitiesthatpeopleadmireordependon—theactivitiesfromwhichthenation’zerland,el,mesitishardtodistinguishbetweenHARVARDBUSINESSREVIEWMarch–April1990

inginternationalsuccesscanmakeanindustryprestigious,senceofstronglocalrivalsisafinal,andpowerful,trueofsmallcoun-tries,likeSwitzerland,wheretherivalryamongitspharmaceuticalcompanies,Hoffmann-LaRoche,Ciba-Geigy,andSandoz,eistheroleoffiercerivalrymoreapparentthaninJapan,wherethereare112companiescompetinginmachinetools,34insemiconductors,25inaudioequipment,15incameras—infact,thereareusuallydoublefiguresintheindustriesinwhichJapanboastsglobaldominance.(Seethetable‘‘EstimatedNumberofJapaneseRivalsinSelectedIndustries.’’)Amongallthepointsonthediamond,domesticrivalryisEstimatedNumberofJapaneseRivalsinSelectedIndustriesAirConditionersAudioEquipmentAutomobilesCamerasCarAudioCarbonFibersConstructionEquipment*CopiersFacsimileMachinesLarge-scaleComputersLiftTrucksMachineToolsMicrowaveEquipmentMotorcyclesMusicalInstrumentsPersonalComputersSemiconductorsSewingMachinesShipbuilding†Steel‡SyntheticFibersTelevisionSetsTruckandBusTiresTrucksTypewritersVideocassetteRecorders51414210Sources:Fieldinterviews;NipponKogyoShinbun,NipponKogyoNenkan,1987;YanoResearch,MarketShareJitan,1987;researchers’estimates.*llestnumber,10,ncompaniesproducedshoveltrucks,truckcranes,ere20companiesinhydraulicexcavators,aproductareawhereJapanwasparticularlystrong.†Sixcompanieshadannualproductionexportsinexcessof10,000tons.‡lythemostimportionalwisdomarguesthatdomesticcom-petitioniswasteful:itleadstodupli‘‘rightsolution’’istoembraceoneortwonationalchampions,companieswiththescaleandstrengthtotackleforeigncompetitors,andtoguaranteethemthenecessaryresources,withthegovernment’,however,mostna-tionalchampionsareuncompetitive,oftheprominentindustriesinwhichthereisonlyonenationalrival,suchasaerospaceandtele-communications,efficiencyismuchlessimportantthandynamicimprovement,icrivalry,likeanyrivalry,ivalspusheachothertolowercosts,improvequalityandservice,ikerivalrieswithforeigncom-petitors,whichtendtobeanalyticalanddistant,localrivalriesoftengobeyicrivalsengageinactivefeuds;theycompetenotonlyformarketsharebutalsoforpeople,fortechnicalexcellence,andperhapsmostimportant,for‘‘braggingrights.’’Onedomesticrival’ssuccessprovestoothersiesoftenattributethesuccessofforeignrivalsto‘‘un-fair’’mesticrivals,tternisstrikinglycommonaroundtheworld:Italianjewelrycompaniesarelo-catedaroundtwotowns,ArezzoandValenzaPo;cutlerycompaniesinSolingen,WestGermanyandSeki,Japan;pharmaceuticalcompaniesinBasel,Switzerland;motorcyclesandmusicalinstrumentsinHamamatsu,elocalizedtherivalry,moreintense,rbenefitofdomesticrivalryisthepressuresenceofdomesticcompetitorsautomaticallycancelsthetypesofad-vantagethatcomefromsimplybeinginaparticularnation—factorcosts,accesstoorpreferenceinthehomemarket,iesareforcedtomovebeyondthem,andasaresult,er,competingdomiesarelesslikelytoget85HARVARDBUSINESSREVIEWMarch–April1990YOP

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hookedond,theindus-trywillseek—andbenefitfrom—moreconstructiveformsofgovernmentsupport,suchasassistanceinopeningforeignmarkets,aswellasinvesally,itisalsovigorousdomesticcompetitionthatultimatelypressuresdomesularlywhenthereareeconomiesofscale,localcompetitorsforceeachothertolookout-wardtingbeentestedbyfiercedomesticcompetition,talEquipmentcanholditsownagainstIBM,DataGeneral,Prime,andHewlett-Packard,gomondasaSystemEachofthesefourattributesdefinesapointonthediamondofnationaladvantage;ti-catedbuyerswillnottranslateintoadvancedprod-ucts,forexample,uivedisadvantagesinfactorsofproductionwillnotmotivateinnovationuroadestlevel,weaknessesinanyonedeter-minantwillconstrainanindustry’pointsofthediamondarealsoself-reinforc-ing:ments,domes-ticrivalryandgeographicconcentration,haveespeciallygreatpowertotransformthediamondintoasystem—domesticrivalrybecauseitpromotesim-provementinalltheotherdeterminantsandgeo-graphicconcentrationbecauseieofdomesticr-ousdomesticrivalrystimulatesthedevelopmentofuniquepoolsofspecializedfactors,particularlyiftherivalsarealllocatedinonecityorregion:theUniversityofCaliforniaatDavishasbecometheworld’sleadingcenterofwine-makingresearch,itureandshoes,forexample,Italianconsumershavelearnedtoexpectmoreand86betterproductsbecauseoftherapidpaceofnewprod-uctdevelopmentthat-mestic’sworld-leadinggroupofsemiconductorproducers,forinstance,hassectscanworkinalldirections:sometimesworld-cllysophis-ticatedbuyersmaythemselvesenterasupplierin-dustry,particuaseoftheJapaneseroboticsindustry,forexample,Mat-sushitaandKawasakioriginallyen,Sandvikmovedfromspecialtysteelintorockdrills,reffectofthediamond’ssystemicnatureisthatnationsarerarelyhometojustonecompeti-tiveindustry;rather,thediamondcitiveindustriesarenotscatteredhelter-skelterthroughouttheeconomybutareusu-allylinkedtogetherthroughvertical(buyer-seller)orhorizontal(commoncustomers,technology,chan-nels)clustersusuallyscatteredphysically;pet’sstrengthinconsumerelectronics,forexample,droveitssuccessinsemicond-nesestrengthinlaptopcomputers,whichcontraststolimitedsuccessinothersegments,reflectsthebaseofstrengthinothercompact,portableproductsandleadingexpertislusterforms,tsflowforward,backward,siverivalryinoneindustryspreadstoothersinthecluster,throughspin-offs,throughtheexerciseofbargainingpower,romotherindustrieswithintheclusterspursupgradingbystimulatingdiversityinR&Dap-htheconduitsofsuppli-ersorcustomerswhohavecontactwithmultiplecompetitors,onnectionswithinthecluster,oftenunanticipated,VARDBUSINESSREVIEWMarch–April1990YOP

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clusterbecomesavehicleformaintainingdiversityandovercomingtheinwardfocus,inertia,inflexibil-ity,andaccommodaeofGovernmentInthecontinuingdebateoverthecompetitivenessofnations,notopicengendersmoegovernmentasanessentialhelperorsupporterofindustry,employingahostofpoliciestocontributedacceptthe‘‘freemarket’’viewthattheo,followedtoitslogicaloutcome,wouldleadtothepermanentero-sionofacountry’and,advocatesofgovernmenthelpforindustryfre-quentlyproposepoliciesthatwouldactualltherhand,advocatesofadiminishedgovernmentpresenceignorethelegitimaterolethatgovernmentplaysinshapingthecontextandinstitutionalstructuresurroundingcompaniesandincreatingment’sproperroleisasacatalystandchal-lenger;itistoencourage—orevenpush—companiestoraisetheiraspirationsandmovetohigherlevelsofcompetitiveperformance,-mentcannotcreatecompetitiveindustries;mentplaysarolethatisinherentlypartial,thatsucceedsonlywh,government’srolementpoliciesthatsucceedarethosethatcreateanenvironmentinwhichcompa-niescangaincompetitiveadvantageratherthanthosethatinvolvegovernmentdirectlyinthepro-cess,indirect,ratherthanadirect,’sgovernment,atitsbest,understandsthisrolebetterthananyone—includingthepointthatnationspassthroughstagesofcompetitivedevelop-mentandthatgovernment’ulatingearlyde-mandforadvancedproducts,confrontingindustrieswiththeneedtopioneerfrontiertechnologythroughsymboliccooperativeprojects,establishingprizesHARVARDBUSINESSREVIEWMarch–April1990thatrewardquality,andpursuingotherpoliciesthatmagnifytheforcesofthediamond,egovernmentofficialsanywhere,attheirworstJapa-nesebureaucratscanmakethesamemistakes:at-temptingtomanageindustrystructure,protectingthemarkettoolong,andyieldingtopoliticalpressuretoinsulateinefficientretailers,farmers,distributors,thardtounderstandwhysomanygovern-mentsmakethesamemistakessoofteninpursuitofnationalcompetitiveness:competitivetimefntakesmorethanadecadeforanindustrytocreatecompetitiveadvan-tage;theprocessentailsthelongupgradingofhumanskills,investinginproductsandprocesses,buildingclusters,aseoftheJapaneseautoindustry,forinstance,compa-niesmadetheirfirstfalteringstepstowardexportinginthe1950s—olitics,-quently,mostgovernmentsfavorpoliciesthatoffereasilyperceivedshort-termbenefits,suchassubsid-ies,protection,andarrangedmergers—thepoliciesthatwouldmakearealdifferenceeitheraretooslowandrequiretoomuchpatienceforpoliticiansor,evenworse,latingaprotectedindustry,forexample,willleadtobankruptciessoonerandtostronger,esthatconveystatic,short-termcostadvan-tagesbutthatunconsciouslyundermineinnovationanddynamismrepreseiretohelp,itisalltooeasyforgovernmentstoadoptpoliciessuchasjointprojectstoavoid‘‘waste-ful’’R&na10%costsavingthrougheconomiesofscaleiseasilynullifiedthroughrapidproductandprocessimprovementandthepursuitofvolumeinglobalmarkets—resomesimple,basicprinciplesthatgov-ernmentsshouldembracetoplaythepropersupport-iverolefornationalcompetitiveness:encouragechange,promotedomesticrivalry,thespecificpolicyapproachestogu-menthascriticalresponsibilitiesforfundamentalsliketheprimaryandsecondaryeducationsystems,basicnationalinfrastructure,andresearchinareas87YOP

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sekindsofgene,thefactorsthattranslateintocompetitiveadvantageareadvanced,specialized,ismssuchasspecializedapprenticeshipprograms,researcheffortsinuniver-sitiesconnectedwithanindustry,tradeassociationactivities,and,mostimportant,theprivateinvest-mentsofcomparveninginfactorandcurrencymarkets,governmentshopetocreatelowerfactorcostsorafavorableexchangeratethcefromaroundtheworldindicatesthatthesepolicies—suchastheReaganadministration’sdollardevaluation—rkagainsttheupgradtrastingcaseofJapanisparticularlyin-structive,epast20years,theJapanesehavebeenrockedbythesuddenNixoncurrencydevaluationshock,twooilshocks,and,mostrecently,theyenshock—allofwntisnotthatgovernmentshouldpur,whenmarketforcescreaterisingfactorcostsorahigherexchangerate,estrictproduct,safety,governmentregulationscanpro-mentstandardsforproductperformance,productsafety,andenviron-mentalimpactpressurecompaniestoimprovequal-ity,upgradetechnology,standards,howevertempting,ughregulationsanticipatestandardsthatwillspreadinternationally,theygiveanation’scom-paniesaheads’sstrictstandardsforenvironmeopco,forexample,producesquietcompres-sorstandards,however,mustbecombinedwitharapidandstream-tpervasiveglobalpolicyfadinthe88competitivenessareingonthebeliefthatindependentresearchbyrivalsiswastefulandduplicative,thatcollaborativeeffortsachieveeconomiesofscale,andthatindividualcom-paniesarelikelytounderinvestinR&Dbecausetheycannotreapallthebenefits,nitedStates,antitrustlawshavebeenmodifiedtoallowmorecooperativeR&D;inEurope,megapro-jectssuchasESPRIT,aninformation-technologyproject,gbehindmuchofthisthinkingisthefascinationofWesterngovernmentswith—andfun-damentalmisunderstandingof—thecountlesscoop-erativeresearchprojectssponsoredbytheMinistryofInternationalTradeandIndustry(MITI),projectsthatappeartohavecontributedtoJapan’secompaniespartic-ipateinMITIprojectstomaintaingoodrelationswithMITI,topreservetheircorporateimages,andtohedgetheriskthatcompetitorswillgainfromtheproject—iesrarelycontributetheirbestscientistsandengineerstoco-operativeproject-cally,lvalueofJapanesecooperativeresearchistosignaltheimportanceo-operativeprojectspromptcompaniestoexplorenewfieldsandboostinternalR&Dspendingbertainlimitedconditions,tsshouldbeinareasofbasicproductandprocessresearch,notinsubjectscloselyconnectedtoacompany’ouldconstituteonlyamodestportionofacompany’ativeresearchshouldbeonlyindirect,channeledthroughindezationalstructures,likeuniversitylabsandcentersofexcellence,y,themostusefulcooperativeprojectsofteninvolvefieldsthattouchanumberofindustriesandthatrequiresubstantialR&menthasavitalroleinshapingthegoalsofinvestors,managers,nerinwhichcapi-talmarketsareregulated,forexample,shapestheHARVARDBUSINESSREVIEWMarch–April1990YOP

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incentivesofinvestorsand,inturn,mentshouldaimtoencouragesustainedinvestmentinhumanskills,ininnovation,sthesinglemostpow-erfultoolforraisingtherateofsustainedinvestmentinindustryisataxincentiveforlong-term(fiveyearsormore)-termcapitalgainsincentivesshouldalsobeappliedtopensionfundsandothercurrentlyuntaxedinvestors,tionofcompeti-tionthroughsuchpoliciesasmaintainingastatemonopoly,controllingentryintoanindustry,orfix-ingpriceshastwostrongnegativeconsequences:itstiflesrivalryandinnovationascompaniesbecomepreoccupiedwithdealingwithregulatorsandpro-tectingwhattheyalreadyhave;alationandprivatizationontheirown,however,willnotsucceedwithoutvigorousdomesticrivalry—andthatrequires,asacorollary,gantitrustpolicy—especiallyforhorizontalmergers,alliances,andcollusivebehavior—tisfashionabletodaytocallformergersandalliancesinthenameofglobal-izationandthecreationofnationalchampions,tionalcompetitivenessrequiresgov-ernmentstodisallowmergers,acquisitions,rmore,thesamestandardsfor-nally,governmentpolicyshouldfavorinternalentry,bothdomesticandinternational,iesshould,however,beallowedtoacquiresmallcompaniesinrelatedindustrieswhenthemovepromotesthdtraderepresentsagrowinganddanymar-ketingagreements,voluntaryrestraintagreements,orotherdevicesthatsetquantitativetargetstodivideupmarketsaredangerous,ineffective,thanpro-motinginnovationinanation’sindustries,mfective,tradepolicyshouldnotbeapassiveinstrument;itcannotrespondonlytocomplaintsorworkonlyforthoseindustriesthatcanmusterenoughpoliticalclout;itshouolicyshouldHARVARDBUSINESSREVIEWMarch–April1990seektoopenmarketswhereveranationhascompeti-tiveadvantagovernmentfindsatradebarrierinanothernation,itshouldconcentrateitsremediesondisman-tlingbarriers,aseofJapan,forexample,pressuretoacceler-atethealreadyrapidgrowthofmanusatorytariffsthatpncreasinglyimportanttoolstoopenmar-ketsarerestrictionsthatpreventcompaniesinoffendingnationsfrominvestinginacquisitionsorproductionfacilitiesinthehostcountry—therebyblockingtheunfaircountry’scompaniesfromusingheseremedies,however,rtuallyimpossibletocraftremediestounfairtradepracticesthatavoidbothreducingincentivesfo

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NDOTheCompanyAgendaUltimately,,icular,theymustrecognizethecentralroleofinnovation—andthsleadershiptocreateadynamic,akesleadershiptorecognizetheall-too-easyescaperoutesthatappeartoofferapathtocompetitiveadvantage,mple,itistemptingtorelyoncooperativycandivertcompanyattentionandresourcesfromproprietaryresitiveadvantagearisesfromleadershipthatharnessesaejustafewofthekindsofcompanypoliciesthatwillsupportthateffort:nyshouldseekoutpressureandchallenge,strategyat,companiescanselltothemostsophisti-catedanddemandingbuyersandchannels;seekoutthosebuyerswiththemostdifficultneeds;establish89

normsthatexceedthetoughestregulatoryhurdlesorproductstandards;sourcefromthemostadvancedsuppliers;treatemployevateorganizationalchange,tmanagersalwaysrunalittlescared;dynamic,companiesmustmakemeetingchallengeapartoftheorganization’mple,lobbyingagainststrictproductstandardssignaliesthatvaluestability,obedientcustomers,dependentsuppliers,andsleepycompeti-torsareinvitinginertiaand,ultimately,-paniescantakeactionsthathelpthemseethesignalsofchangeandactonthem,mple,theycanfindandservethosebuyerswiththemostanticipatoryneeds;investigateallemergingnewbuyersorchannels;findplaceswhoseregulationsforeshadowemergingregu-lationselsewhere;bringsomeoutsidersintothemanagementteam;maintainonieshaveavitalstakeinmacompany’sresponsibilityistoplayanactiveroleinformingclustersandtoworkwithitshome-nationbuyers,suppliers,andadehomedemand,forexample,Japanesemusi-calinstrumentmanufacturers,ledbyYamaha,Kawai,andSuzuki,rly,companiescanstimulateandsupportlocalsuppliersofimportantspecializedinputs—lthandstrengthofthenationalclusterwillonlyenhancethecompany’lyeverysuccessfulcompetitiveindustry,leadingcompaniesalsotakeexplicitstepstocreatespecializedfactorslikehumanresources,scientificknowledge,strieslikewoolcloth,ceramictiles,andlightingequipment,Italianindustryassociationsinvestinmarketinformation,processtechnology,iescanalsospeedinnovationbyputtingtheirheadquartersandotherkeyoperationswherethereareconcentrationsofsophisticatedbuyers,importantsuppliers,orspecializedfactor-creatingmechanisms,eteglobally,allyintheUnitedStatesandEuropetoday,managersarewonttocomplainaboutexcessivecompetitionandtoargueformergersandacquiplaintisonlynatural—er,panywantsanacquisition,aforeignonethatcanspeedglobalizationandsupplementhome-basedadvantagesoroffsethome-baseddisadvantachof‘‘global’’strategies,re,adopyingonforeignactivi-ttingtooffsetlocalfactordisadvantagesisbetterthanoutsourcing;developingdthecriticalunderpin-ningsofcompetitivenessarepresentathome,shouldbetoupgradehome-basecapabilitiessothatforeignactivitierectapproachtoglobalizationistotapse-lectivelyintosourcesofadvantageinothernations’mple,identifyingsophisticatedbuyersinothercountrieshelpscompaniesunder-standdifferentnerhowfavorablethehomediamond,moreover,advan-tageofforeignresearch,companiesmuststationhigh-qualinythingbackfromforeignresearchventures,companiesmustalsoallowaccesstotheirownideas—recognizingthatcompetitiveadvantagecomesfromcontinuousimprovement,notfromprotectingto-day’ceswithforeigncompanieshavebecomeanothermanagerialfadandcure-all:theyrepresentatemptingsolutiontotheproblemofacompanywantingtheadvantagesofforeignenterprisesorhedgingagainstrisk,ity,however,whilealliancescanachieveselectivebenefits,theyalwaysexactsignificantcosts:theyinvolvecoordinatingtwoseparateoperations,reconcilinggoalswithanindependententity,creatingacompetitor,andgivingHARVARDBUSINESSREVIEWMarch–April1990YOP

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ostsultimatelymakemostalli-ancesshort-termtransitionaldevices,ratherthanstable,portant,alliancesasabroad-basedstrategywillonlyensureacompany’smediocrity,anycanrelyonan-otheroutside,independentccesarebestusedasaselectivetool,hemostimportantdecisionsformultinationalcompantely,competitivead-vantageiscreatedathome:itiswherestrategyisset,thecoreproductandprocesstechnologyiscre-ated,cumstancesinthehomenationmustsupportinnovation;otherwisethecompanyhasnochoicebuttomoveitshomebasetoacountrythatstimu-latesinnovrenohalf-measures:eofLeadershipToomanycompaniesandtopmanagersmisper-ceivethenatureofcompetitionandthetaskbeforethembyfocusingonimprovingfinancialperfor-mance,solicitinggovernmentassistance,seekingstability,’sbelieveinchange;theyenergizetheirorgani-zationstoinnovatecontinuously;theyrecognizetheimportanceoftheirhportant,etheyarewillingtoencourageappropriate—andpainful—governmentpoliciesandregulations,theyoftenearnthetitle‘‘statesmen,’’epre-paredtosacrificetheeasylifefordifficultyand,ulti-mately,stbethegoal,forbothnationsandcompanies:notjustsurviving,justonce,DBUSINESSREVIEWMarch–April1990YOP

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