Chapter 3 Flashcards
Michael Porter argues that a company’s ability to compete abroad is
based on a set of
location advantages in its home country
The idea is that when a company experiences a high level of pressure in the home
country it will
It will push the firm to innovate and upgrade systematically.
This will create new FSAs, which will be the instruments for the expansion to foreign markets.
Why does Porter believe companies should not rely on natural factor endowments?
Such natural factor endowments are short-term advantages which can be easily replicated
by rival firms.
A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade.
Porter says that the most important aspects of international business strategy are the four key home country location advantages. Those are:
Factor conditions
Demand conditions
Related and supporting industries
Firm strategy, industry structure and rivalry
Factor conditions
Like natural resources and created factor conditions (such as skilled labor, knowledge, and infrastructure).
These are particularly valuable when specialised, so when they are customised towards effective deployment in specific economic activities and companies.
Firms need to continuously develop new skills, like continuous learning of employees and continuous innovation of machines
Demand conditions
Not only domestic market size, but also domestic buyer sophistication. When buyers are demanding, the external pressure on the firm increases and so the competitiveness increases.
Related and supporting industries
Firm strategy, industry structure and rivalry
Firm strategy, industry structure and rivalry
A competitive industry, not-sheltered protective markets and a well-functioning industry may help the firm in that industry to become more internationally competitive.
2 external variables for Porter’s diamond
Government and ‘chance’
What are the 4 requirements per country country to have a strong diamond?
Factor conditions
Demand conditions
Related and supporting industries
Domestic rivalry
Factor conditions
The factor conditions accessible to the firm need to be continuously upgraded through the development of skills and the creation of new knowledge. Even when natural endowments are limited the firm could turn disadvantages into advantages
Demand conditions
Companies must respond to new customer demands by pushing the envelope of existing technology and by designing new features. So the presence of demand conditions encourages companies to be innovative. This may lead to early
insights into the future needs of customers abroad which can lead to first-mover advantages.
Related and supporting industries
High competitive firms at home, especially suppliers, are crucial to enhance innovation through:
◦ More efficient outputs
◦ Ongoing exchange of ideas
◦ Timely feedback
◦ Short lines of communications between activities in the vertical chain.
Domestic rivalry
Rivalry forces companies to develop unique FSAs,
beyond the generally available location advantages in their home base.
In this way companies get motivated to enter international
markets and exploit these FSAs.
Domestic rivalry is a key instrument to international competitiveness.
Kuemmerle identified two other, more aggressive, international expansion patters:
1 The resources of the home country are used to exploit substantial cross-border opportunities in output markets. This works if the internationally transferable FSAs can immediately be used to satisfy demand in the foreign markets.
2 The newly established firms search for resources such as capital in foreign input markets, while maintaining their operations and sales primarily in the home country.
