Question Determinants of national competitive advantage create the national environment in which companies are born a


Determinants of national competitive advantage create the national environment in which companies are born and learn how to compete.

Your business tour around industrial city in your country 🙁 Bahrain, Lebanon, Oman, Jordan, Kuwait, Egypt, Saudi Arabia, and Sudan) revealed the following:

Many shops, show rooms, restaurants and hotels among other business and industrial premises bear the following sign boards:

Factories closed and put on receivership…etc.
Many companies closed and relocated to other countries… etc.


1. As a strategy and policy expert, you are required to apply Porter’s model of ‘the diamond of national advantage’ using the four determinants to critically analyze the impact of above scenario on the competitive advantage in Sultanate of Oman. (1000 words)

2. Suggest and critically discuss 4 main strategies together with policies that the government can adopt to enable firms/ business organizations survive in the above environment. (500 words)

*** Words Count = 1500 Words.

*** In-Text Citations and References using Harvard style.

*** MUST include E-library and course materials.

*** I’ve uploaded attachments related to this assignment.

Block 3: Readings
Reading 12 (p156-178):
The competitive advantage of nations.
By: Michael E. Porter
Porter, M. E. (1990) ‘The Competitive Advantage of Nations’, Harvard
Business Review, March–April.
A nation’s competitiveness depends on the capacity of its
industries to innovate. Companies will get lots of benefit
from having strong domestic rivals, good domestic
suppliers, and demanding local customers.
With global markets and global competition, nations have
become more important. Due to globalization and increased
integrating knowledge to focus on innovation.
Countries values, culture, economic structures, institutions, and
histories all contribute to competitive success. Each country succeeds
in specific industries. Productivity of a nation is the most important
concept in the competitive advantage of nations. The main goal of a
nation is to produce high standard of living for the people, and to be a
favorable home for companies that compete internationally.
A nation’s companies must improve quality and productivity, improve
technology and production efficiency, and add desirable features and
new product innovations. Remember no nation can be competitive in
How companies succeed in international markets
New technological innovations help companies to achieve competitive
advantage. Most innovations involve investments in skills and knowledge, as
well as in physical assets. Innovation can be new product design, new
production process, new marketing or training approach. Once a company
achieves competitive advantage through an innovation, it can sustain the
competitive advantage through continuous improvement.
To sustain competitive advantage:

The company must adopt a global approach to strategy. It must sell its
product worldwide, under its own brand name, through international
marketing channels that it controls.

The company must make its own advantage very strong with continuous
improvement in order to sustain it competitive advantage.
The diamond of national advantage
There are four attributes of a nation that constitute the
diamond of national competitive advantage (Figure 1 page
1. Factor
conditions: including factors of production such as labor or
2. Demand
conditions: the home-market demand for the product.
3. Related
and supporting industries: the presence or absence in the
nation of supplier or related industries that are internationally
4. Firm
strategy, structure, rivalry: the conditions in the nation
governing how companies are created, organized, and managed, as
well as the nature of domestic rivalry.
The diamond of national advantage
The diamond of national advantage
These determinants create the national environment in which
companies are born and learn how to compete.
Achieving international competitive success depends on:
◼ The
availability of resources and skills.
◼ The information that shapes the opportunities
◼ The directions in which they deploy their skills
◼ The goals of the owners and managers.
◼ The pressures to invest and innovate.
Companies gain a competitive advantage through the
accumulation of specialized assets and skills, and through
ongoing information and insight into products and process
1 – Factor conditions
Factor Conditions are the factors of production that includes things like
skilled labour, education, capital, climate, and infrastructure. Companies
gain a competitive advantage through the accumulation of specialized
assets and skills, developing solid infrastructure to facilitate business,
promoting innovation etc.
1 – Factor conditions
◼ According to Adam Smith and David Ricardo, the factors of production
(labor, land, capital, natural resources & Infrastructure) determined the
flow of trade. This is incomplete.
◼ In
the sophisticated industries, a nation creates the important factors of
production (skilled human resources and the science base) and does not
inherit them.
◼ What
is important is the rate and efficiency with which a nation creates,
upgrades, and deploys factors of production.
◼ Important
factors of production (for knowledge-intensive industries)
are those involving heavy investment, and are specialized. (ex.: a
specialized institute in optics).
1 – Factor conditions
To turn disadvantages into advantages, Companies
◼ Should
innovate before foreign rivals.
◼ Must have access to people with appropriate skills.
◼ Must have home demand conditions.
◼ Must have active domestic rivals who create pressure to innovate.
◼ Finally company goals that lead to sustained commitment to the
consumer-electronics companies eliminated the
need for labour through automation, which resulted in lower
assembly costs and improved quality.
US companies decided to relocate their activities to
Taiwan, Indonesia… (Soon Japanese companies were
building assembly plants in the US).
2 – Demand conditions
Nations gain competitive advantage in industries:
◼ Where
home demand gives the firm an early picture of
emerging buyer needs.
◼ Where
demanding buyers pressure companies to innovate
faster than foreign rivals.
◼ When
a segment is larger in the domestic market than in
foreign markets. (this segment will gain more attention, ex. Hydraulic
excavators, Japan)
◼ Where
domestic buyers are the world’s most sophisticated and
demanding buyers for the product or service. (Demand conditions
force companies to respond to tough challenges).
2 – Demand conditions

Japanese consumers live in very small homes. In
response, Japanese companies have pioneered
compact, quiet air-conditioners.

Japanese companies are pioneers in products that
are light-thin-short-small (kei-haku-tan-sho) and
internationally accepted.

In many countries, local buyers can act as early
indicators of global market trends.

A nation’s companies can anticipate global trends if
the country is exporting its values and tastes as well
as its products (like the franchises from USA: fast
food, credit cards..)
3 – Related and supporting industries
Internationally competitive home-based related and
supporting industries create advantages in several ways:
◼ Deliver
the most cost effective inputs in an efficient, early and
rapid way. (ex.: Italian jewellery companies lead the world because
Italians supply two-thirds of the world’s jewellery-making machines).
◼ Provide
close working relationships, quick flow of
information, exchange of ideas and innovations. (ex.: Italian
Footwear Cluster, shoe producers interact with leather manufacturers,
proximity is important)
◼ The
nation’s companies benefit most when the suppliers and
related industries are global competitors. It is self defeating
for a company or country to have suppliers who are totally
dependent on the domestic industry.
4 – Firm strategy, structure, and rivalry
A nation’s success depends on the types of education chosen by its
talented people, the place where they choose to work? and their
commitment and effort.
Attaining international success makes an industry prestigious,
reinforcing its advantage.
The presence of strong local rivals stimulates competitive
advantage. Among all the points on the diamond of national
advantage, domestic rivalry is the most important because of the
stimulating effect it has on all the other. In Switzerland, the strong
rivalry between Swiss pharmaceutical companies (Sandoz,
Hoffmann-La Roche, Ciba-Geigy) made all of them global leaders.
4 – Firm strategy, structure, and rivalry
◼ Conventional
wisdom argues that domestic competition is wasteful.
It leads to duplication and
◼ Prevents firms from achieving economies of scale.
◼ The government should embrace 1 or 2 national champions only.

◼ But
real cases have shown that national champions are the least competitive
globally. (ex.: Aerospace)
◼ Domestic
rivalry creates pressure on local companies to innovate and
constantly improve.

The result will be lower costs, improved quality, and product & process
◼ The
closer the domestic rivals are to each other in their geographic location,
the better. (example: pharmaceutical companies in the Swiss city of Basel).
◼ The
presence of domestic competitors cancels advantages arising from being
in a particular nation. Thus, firms are obliged to move beyond them.
The diamond as a system
The diamond national advantage system works like a
common system. And a system achieves its goal by means
of interrelated components. Same like that diamond system
have four interrelated components to gain national and
competitive advantage. Every single factor of diamond
system has its impacts on all other three components.
The role of government
Government rules and regulations also play a vital role in
Porter’s Diamond of National Advantage. For example
government encourages a firm to raise its product standard
by imposing strict product standards. Government of a
country can also stimulate early demand for technological
advanced products.
Recommended Government Policy Approaches
Focus on specialized factor creation: Government should
work on improving the skills of its citizens by giving them
specialized training on specific field. They should promote
research and connect the university research with industry.
2. Avoid intervention in factor and currency markets: When
market forces create higher factor costs or higher exchange rate,
government should not push them back down.
3. Enforce strict standards: Government should enforce product
standards, as well as safety and environmental standards. This
will result in improved quality and more advanced technology.
Recommended Government Policy Approaches
4. Limit direct cooperation among industry rivals:
Companies don’t contribute their best scientists and
engineers to cooperative projects or shared R&D.
Companies focus on their own private research. Cooperative
research should be indirect it could be through some
university labs.
5. Promote goals leading to sustained investment:
Governments should encourage investment in human skills
and innovation. The single most powerful tool is a taxincentive for long-term capital gains.
6. Deregulate competition: Allowing entry into an industry
encourages competition and innovation.
Recommended Government Policy Approaches
7. Enforce strong domestic antitrust policies: Real national
competitiveness requires governments to disallow mergers, acquisitions,
and alliances that involve industry leaders.
Government policy should favor internal entry, both domestic and
international, over acquisition.
However, firms should be allowed to acquire small firms in related
industries when the move promotes the transfer of skills that could
ultimately create competitive advantage.
8. Reject managed trade: Government should have a trade policy
promoting open markets. Trade barriers should be dismantled.
The Company Agenda
Competitive advantage comes by promoting innovation in the
organization. Here are just a few of the kinds of company policies that
will support that effort:
Create challenges and pressures for innovation:
• Seek out sophisticated and demanding buyers.
• Upgrade employees’ skills and productivity.
• Establish toughest regulations
• Source from the most advanced suppliers.
Seek out tough competitors as motivators:
Companies that value stability, obedient customers, dependent
suppliers, and sleepy competitors may not become successful in the
long run.
The Company Agenda
Improve the national diamond:
• By improving people skills and supporting local suppliers.
• Upgrade home demand. (Japan, musical schools).
• Invest in market information, process technology, and common
• Locate your HQ where there are concentrations of sophisticated
buyers, important suppliers, or universities and laboratories.
Welcome domestic rivalry: Welcome domestic rivalry, because
strong domestic competitors help in challenging your company to
become stronger and to grow internationally.
The Company Agenda
Globalize to tap the advantages of other nations: Identify
sophisticated foreign buyers. Helps firms identify different needs
and create pressure to innovate. Station high quality people in
overseas bases to take advantage of foreign research.
Use alliances only selectively: Alliances are best employed on a
temporary basis, and involving non-core activities.
Locate the home-base in a way to support competitive
A company can have different home bases for distinct businesses or
segments. The environment should support innovation and global
competitiveness, otherwise the firm will have to move.
The role of leadership
Too many managers misperceive the nature of competition by
focusing on improving financial performance, seeking stability, and
reducing risk through alliances and mergers.
Leaders should believe in change and continuous innovations. They
should recognize the importance of their home country Leaders should
recognize the need for pressure and challenge.
Companies should not only aim for survival, but for achieving
international competitiveness.
Block 3: Readings
Reading 13 (p.179-202):
National policies and domestic politics.
By: Debora L. Spar
Spar, D. L. (2001) ‘Chapter 8: National Policies and Domestic Policies’ in
Rugman, A. M. and Brewer, T. L. (eds) Oxford Handbook of International
Business, Oxford, Oxford University Press.
The present essay describes the types of state
policies that can shape and constrain the behavior
of firms.
It examines five different kinds of domestic
• Trade policy,
• Foreign direct investment,
• Capital controls,
• Regulation, and
• Competition policy
Trade Policy:
The trade policies are different from country to country and
they are formulated by its government officials. The aim of
trade policy is to boost the nation’s international trade. A
country’s trade policy includes taxes imposed on import and
export, inspection regulations, and tariffs and quotas.
Three kinds of rules of trade policy:
1. export controls,
2. protectionism, and
3. strategic trade policy.
Trade Policy:
Export Controls: Government should try to limit the goods that the
domestic producers can ship across their borders. These controls
• An economic object:
Protecting the domestic economy from the
inflationary impact of excess foreign demand.
• A political purpose: They are designed to prevent a rival countries from
gaining access to key resources and technology or to punish a state for
some wrongdoing (ex. US is imposing all types of trade sanction on
North Korea)
• Firms need to keep a careful watch on political events that could lead
to sanctions or other export controls.
Trade Policy: Protectionism
In its oldest and most clear form in which countries protect their trade
and businesses from foreign companies by implementing variety of
strategies like prices, quota and taxes. These activities of imposing quota
and taxes are called as protectionism.
Sometimes countries immediately raise the price of the imported goods
to make them less competitive when compared to local goods. This
method works the best for countries with a lot of imports, such as the
United States.
Trade Policy: Strategic trade policy
By definition it means protecting certain large and critically
important industries.
Strategic Trade Policy (STP) is defined as government policy
which attempts to shift excess profits in an oligopolistic
international market towards the home country firms.
Rules of foreign direct investment
In FDI, firms can invest directly in the territory of foreign states.
FDI rules shape the investment climate in a number of ways.
• First, even as states increasingly welcome foreign investments,
they still restrict it.
• Many states maintain formal licensing procedures for foreign
firms; most prohibit, or at least limit, investment in certain
‘strategic’ sectors (ex.: Japan limits foreign investment in the
banking, insurance, radio, etc.)
• Second, even some countries where investment is permitted, it
may be conditional—on the participation of a local joint venture
• In other cases, states can influence foreign investment through
operational restrictions, such as limits on the employment of
foreign people.
Capital controls
All developed countries allow free repatriation of capital invested abroad
and, generally, the free transfer of profits and dividends from overseas
In the developing world, however, capital controls more prevalent. They
constitute another area of rules that impinge (impose) upon the conduct
of international trade and investment.
Where capital controls are in place, multinational firms need to include
them as part of the strategic landscape, and respond to them accordingly.
For countries that are economically volatile (unstable), firms also need to
consider the possibility of policy shifts (ex.: China page 187)
The government will impose some rules and regulations not
only to control international trade but also domestic business.
But because these policies vary so widely across national
borders, they are inherently important to the conduct of
international business.
Governments regulate:
• In order to promote a public good or redress a public bad.
• They regulate to improve economic efficiency.
• They regulate in order to guide market forces towards certain
noneconomic, socially desirable ends: cleaner air, for example,
or more effective medical treatments.
• To achieve these societal goals, regulators employ a
multitude of policy tools: price caps; rate regulation; wage
controls; health and safety standards.
Antitrust and competition policy
The antitrust and competition policy is very important to
control monopoly and promote competition. Countries should
promote free market entry and perfect competition in all the
industries. These competition policies will support the
societies and create positive impact on the lives of its people in
all aspect.
In the European Union, for example, tightly enforced
competition policies in the telecommunications and banking
sectors have provided a windfall for foreign firms
Domestic politics
The politics of the country can affect and influence on international
business. It is important for the company to understand the
domestic politics to know policies of the country which may
influence their business. They need to understand the domestic
politics of the countries in which they trade or invest. So where do
policies come from? And how are they created?
Ex.: The US persists in sanctioning trade with Cuba because of a
domestic lobby in favor of the sanctions, while the reverse is true
with China because large US firms have interests there.
The role of international forces
A final aspect of national policy comes from an unlikely
source. It comes, from the international external
institutions and groups such as GATT (General Agreement
on Tariff & Trade) and WTO (World Trade Organization).
The WTO & GATT have been entrusted with the following
1. They would facilitate proper implementation of
multinational trade agreements.
2. It will review trade policies undertaken by the member
3. It will act as a forum for the negotiation of disputes
among the member countries over trade related problems.
4. They will work in cooperation with the IMF and the
World Bank.
Despite the undeniable growth of international pressure groups and
multinational firms, most nations still employ most of the policies
described above.
• They favor certain domestic industries for protection or growth;
• They restrict or encourage foreign investment in particular
• They regulate commerce along a multitude of dimensions; and
they determine the composition of ‘fair’ competition.
Some of these policies may be shrinking somewhat in scope; some
may be simultaneously negotiated and applied at the national level.
But nations remain largely able and fully willing to impose their
own policies on the firms that operate across their territory.
B301 Making sense of strategy
for Block 3
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SUP 01726 8
Reading 1: The five competitive forces that shape strategy
Michael E. Porter
Reading 2: The core competence of the corporation
C. K. Prahalad and Gary Hamel
Reading 3: The resource-based theory of competitive
advantage: implications for strategy formulation
Robert M. Grant
Reading 4: Knowledge management and the knowledgebased view of the firm
Robert M. Grant
Reading 5: Extract from ‘Dynamic capabilities: what
are they?’
Kathleen M. Eisenhardt and Jeffrey A. Martin
Reading 6: Extract from ‘The development of the resourcebased view of the firm: a critical appraisal’
Andy Lockett, Steve Thompson and Uta Morgenstern
Reading 7: Extract from ‘Toward a theory of stakeholder
identification and salience’
Reading 8: Extract from ‘Commentary on “Corporate
strategies and environmental regulations: an organizing
Ronald K. Mitchell, Bradley R. Agle and Donna I. Wood
John McGee
Reading 9: Six cases of corporate strategic responses to
environmental regulation
Reading 10: Extract from ‘Navigating in the new competitive
Reading 11: Extract from ‘Responding to the challenges of
global markets’
Reading 12: The competitive advantage of nations
Alan M. Rugman and Alain Verbeke
Michael A. Hitt, Barbara W. Keats and Samuel M. DeMarie
C. Samuel Craig and Susan P. Douglas
Michael E. Porter
Reading 13: National policies and domestic politics
Debora L. Spar
Reading 14: Corporate strategy and parenting theory
Michael Goold, Andrew Campbell and Marcus Alexander
Reading 15: Extract from ‘Related diversification, core
competences and corporate performance’
Constantinos C. Markides and Peter J. Williamson
Reading 16: Decision processes
Chris Gore, Kate Murray and Bill Richardson
Reading 17: Decision-making as a political process
Andrew M. Pettigrew
Reading 18: Extract from ‘Strategic decision making’
Kathleen M. Eisenhardt and Mark J. Zbaracki
Reading 19: Cognitively skilled organizational decision
making: making sense of deciding
Reading 20: Intuition in strategic decision making: friend or
foe in the fast-paced 21st century?
Julia Balogun, Annie Pye and Gerald P. Hodgkinson
C. Chet Miller and R. Duane Ireland
Reading 21: The hidden traps in decision making
Reading 22: Emotions and rational deliberations
Reading 23: Humble decision making
Reading 24: Foundations for making smart decisions
Reading 25: Strategy as strategic decision making
John S. Hammond, Ralph L. Keeney and Howard Raiffa
Niels G. Noorderhaven
Amitai Etzioni
Ralph L. Keeney
Kathleen M. Eisenhardt
Black plate (5,1)
Reading 1: The five competitive forces that shape strategy
Reading 1: The five competitive
forces that shape strategy
Michael E. Porter
Porter, M. E. (2008) ‘The Five Competitive Forces That Shape Strategy’,
Harvard Business Review, January, pp. 78–93.
Editor’s Note: In 1979, Harvard Business Review published “How
Competitive Forces Shape Strategy” by a young economist and associate
professor, Michael E. Porter. It was his first HBR article, and it started a
revolution in the strategy field. In subsequent decades, Porter has brought
his signature economic rigor to the study of competitive strategy for
corporations, regions, nations, and, more recently, health care and
philanthropy. “Porter’s five forces” have shaped a generation of academic
research and business practice. With prodding and assistance from Harvard
Business School Professor Jan Rivkin and longtime colleague Joan
Magretta, Porter here reaffirms, updates, and extends the classic work. He
also addresses common misunderstandings, provides practical guidance for
users of the framework, and offers a deeper view of its implications for
strategy today.
IN ESSENCE, the job of the strategist is to understand and cope with
competition. Often, however, managers define competition too narrowly, as if
it occurred only among today’s direct competitors. Yet competition for
profits goes beyond established industry rivals to include four other
competitive forces as well: customers, suppliers, potential entrants, and
substitute products. The extended rivalry that results from all five forces
defines an industry’s structure and shapes the nature of competitive
interaction within an industry.
As different from one another as industries might appear on the surface, the
underlying drivers of profitability are the same. The global auto industry, for
instance, appears to have nothing in common with the worldwide market for
art masterpieces or the heavily regulated health-care delivery industry in
Europe. But to understand industry competition and profitability in each of
those three cases, one must analyze the industry’s underlying structure in
terms of the five forces. (See [Figure 1].)
Black plate (6,1)
Readings for Block 3
Threat of New
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
Threat of
Substitute Products
or Services
Figure 1: The five forces that shape industry competition
Side note 1: Differences
in industry profitability
The average return on
invested capital varies
markedly from industry
to industry. Between
1992 and 2006, for
example, average return
on invested capital in
U.S. industries ranged as
low as zero or even
negative to more than
50%. At the high end are
industries like soft drinks
and prepackaged
software, which have
been almost six times
more profitable than the
airline industry over the
If the forces are intense, as they are in such industries as airlines, textiles,
and hotels, almost no company earns attractive returns on investment. If the
forces are benign, as they are in industries such as software, soft drinks, and
toiletries, many companies are profitable. Industry structure drives
competition and profitability, not whether an industry produces a product or
service, is emerging or mature, high tech or low tech, regulated or
unregulated. While a myriad of factors can affect industry profitability in the
short run – including the weather and the business cycle – industry structure,
manifested in the competitive forces, sets industry profitability in the
medium and long run. (See [Side note 1].)
Understanding the competitive forces, and their underlying causes, reveals
the roots of an industry’s current profitability while providing a framework
for anticipating and influencing competition (and profitability) over time. A
healthy industry structure should be as much a competitive concern to
strategists as their company’s own position. Understanding industry structure
is also essential to effective strategic positioning. As we will see, defending
against the competitive forces and shaping them in a company’s favor are
crucial to strategy.
Forces that shape competition
The configuration of the five forces differs by industry. In the market for
commercial aircraft, fierce rivalry between dominant producers Airbus and
Boeing and the bargaining power of the airlines that place huge orders for
aircraft are strong, while the threat of entry, the threat of substitutes, and the
power of suppliers are more benign. In the movie theater industry, the
proliferation of substitute forms of entertainment and the power of the movie
producers and distributors who supply movies, the critical input, are
The strongest competitive force or forces determine the profitability of an
industry and become the most important to strategy formulation. The most
salient force, however, is not always obvious.
Black plate (7,1)
Reading 1: The five competitive forces that shape strategy
For example, even though rivalry is often fierce in commodity industries, it
may not be the factor limiting profitability. Low returns in the photographic
film industry, for instance, are the result of a superior substitute product – as
Kodak and Fuji, the world’s leading producers of photographic film, learned
with the advent of digital photography. In such a situation, coping with the
substitute product becomes the number one strategic priority.
Industry structure grows out of a set of economic and technical
characteristics that determine the strength of each competitive force. We will
examine these drivers in the pages that follow, taking the perspective of an
incumbent, or a company already present in the industry. The analysis can be
readily extended to understand the challenges facing a potential entrant.
THREAT OF ENTRY. New entrants to an industry bring new capacity and
a desire to gain market share that puts pressure on prices, costs, and the rate
of investment necessary to compete. Particularly when new entrants are
diversifying from other markets, they can leverage existing capabilities and
cash flows to shake up competition, as Pepsi did when it entered the bottled
water industry, Microsoft did when it began to offer internet browsers, and
Apple did when it entered the music distribution business.
The threat of entry, therefore, puts a cap on the profit potential of an
industry. When the threat is high, incumbents must hold down their prices or
boost investment to deter new competitors. In specialty coffee retailing, for
example, relatively low entry barriers mean that Starbucks must invest
aggressively in modernizing stores and menus.
The threat of entry in an industry depends on the height of entry barriers that
are present and on the reaction entrants can expect from incumbents. If entry
barriers are low and newcomers expect little retaliation from the entrenched
competitors, the threat of entry is high and industry profitability is
moderated. It is the threat of entry, not whether entry actually occurs, that
holds down profitability.
Barriers to entry. Entry barriers are advantages that incumbents hav