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Part 1 – Foundations

Chapter 2 – The Competitive Advantage of Firms in Global Industries

Firms, not nations, compete in international markets. We must understand how firms create and sustain competitive advantage in order to explain what role the nation plays in the process.¹ In modem international competition, firms need not be confined to their home nation. They can compete with global strategies in which activities are located in many countries. We must pay particular attention to how global strategies contribute to competitive advantage, because they recast the role of the home nation.

I will begin with the basic principles of competitive strategy. Many of the principles are the same whether competition is domestic or international. Having set this foundation, I will turn to the ways in which firms enhance their competitive advantage through competing globally. The principles of strategy will define what attributes of a nation are relevant.

Competitive strategy

The basic unit of analysis for understanding competition is the industry. An industry (whether product or service) is a group of competitors producing products or services that compete directly with each other.² A strategically distinct industry encompasses products where the sources of competitive advantage are similar. Examples are facsimile machines, low-density poly- ethylene, heavy on-highway trucks, and plastic injection molding equipment. There may be related industries that produce products that share customers,

technologies, or channels, but they have their own unique requirements for competitive advantage. In practice, drawing industry boundaries is inevitably a matter of degree.

Many discussions of competition and international trade employ overly broad industry definitions such as banking, chemicals, or machinery. These are not strategically meaningful industries because both the nature of competition and the sources of competitive advantage vary a great deal within them. Machinery, for example, is not one industry but dozens of strategically distinct industries such as weaving machinery, rubber processing equipment, and printing machinery (all of which we studied), each with its own unique requirements for competitive success.

The industry is the arena in which competitive advantage is won or lost. Finns, through competitive strategy, seek to define and establish an approach to competing in their industry that is both profitable and sustainable. There is no one universal competitive strategy, and only strategies tailored to the particular industry and to the skills and assets of a particular firm succeed.

Two central concerns underlie the choice of a competitive strategy. The first is the industry structure in which the firm competes. Industries differ widely in the nature of competition, and not all industries offer equal opportunities for sustained profitability. The average profitability in pharmaceuticals and cosmetics is extremely high, for example, while it is not in many kinds of apparel and steel. The second central concern in strategy is positioning within an industry. Some positions are more profitable than others, regardless of what the average profitability of the industry may be.

Neither concern by itself is sufficient to guide the choice of strategy. A firm in a highly attractive industry, for example, may still not earn satisfactory profits if it has chosen a poor competitive positioning.³ Both industry structure and competitive position are dynamic. Industries can become more (or less) attractive over time, as barriers to entry or other elements of industry structure change. Competitive position reflects an unending battle among competitors.

Industry attractiveness and competitive position can both be shaped by a firm. Successful firms not only respond to their environment but also attempt to influence it in their favor. Indeed, it is changes in industry structure, or the emergence of new bases for competitive advantage, that underlie substantial shifts in competitive position. Japanese firms became international leaders in television sets, for example, on the strength of a shift toward compact, portable sets and the replacement of vacuum tubes with semiconductor technology. One nation's firms supplant another's in international competition when they are in a better position to perceive or respond to such changes.