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Last Updated: March 10, 1997
© Copy right 1997 by Keith Head. Do not reuse without permission.
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In 1990, management strategy professor Michael Porter launched a second attack on Factor Proportion Theory.
Porter on "Factor-driven" competitive advantage:
Technological differences much more important than differences in factor abundance.
Abundance of factors may actually undermine competitive advantage.
Why?
1. Imitability/substitutability make it very difficult to obtain sustained advantage based on abudant general-use factors.
2. Abundance generates waste. Scarcity generates innovative mindset.
Example: BC Forest-based industries
Lumber has seen rising competition from Chile (trees grow twice as fast?) and the Southeastern United States.
Newsprint has seen rise of "Urban Forest"--recycled newspaper.
Nevertheless, forest-products are a huge export for BC, and give us a clear example of the benefits of factor abudance.
How do Companies achieve competitive advantage?
Returning to the Ricardo framework, Porter proposed that technological advantage (greater output per unit of input), not relative factor abundance, was the key to obtaining competitive advantage.
And how to obtain technological advantage? INNOVATION .
Porter: "Innovation is the result of unusual effort."
"Innovation usually requires pressure, necessity, and even adversity: the fear of loss often proves more powerful than the hope of gain."
Example of competitive advantage based on innovation: Fresh- cut flowers from Holland. ($1b in exports despite cold, grey climate.) Innovations in glass-house growing, energy conservation (took advantage of abundant natural gas)
Definition:
Selective Factor Disadvantage (SFD): Absence of a basic factor that would be advantageous to have in abundance if there were no dynamic effects.
Proposition:
An SFD can stimulate innovation which more than compensates for the original disadvantage.
SFDs are best when they send an accurate signal about circumstances that will ultimately prevail elsewhere.
Since resource depletion seems to be a general trend, it pays to be the first mover in figuring out how to generate more output with fewer resources.
Porter's Diamond (the diagram).
What is the distinction being made?
Basic (endowed) versus advanced (created) factors
General (multiple use, mobile geographically) versus specific (dedicated to particular industries, often immobile)
Type I Factor (central focus of classical factor proportions theory): useful in multiple industries, endowed by nature.
Type II Factor (central focus of Porter): useful to a particular industry only, created by human activity. Principal examples include sources of specialized information or capital.
Examples: UC Davis--Napa, Denmark's Hospitals--Insulin producers, Dutch banks--accept bulbs as collateral. Also highly specialized research centers on cultivation, packaging, shipping (refrigerated so it blooms in shop). Venture capital houses that cater to specific industries (biotech, oil, entertainment, software) are increasing their importance relative to "generalists."
Why are specialized factors harder to imitate?
Not clear from Porter. One hypothesis is that scale effects in the provision of such factors lead to a Catch 22 for new entrants. Specialized factors are unavailable locally because the industry is to small to justify investments in factor creation. But the local industry is small because of poor local factor conditions.
Cases where endowments of general use factors appear to generate competitive advantage: Canadian strength in energy-intensive goods. Argentinian Leather--Pasture land, Japanese Manufacturing--Skilled assemblers. U.S. innnovation-based industries draw on general U.S. strength in basic science.
Two types of "relation": components and complements. examples: computers (semiconductors, software). leather shoes (leather tanneries, leather jackets)
Why? information exchange, specialized investment, transportation costs.
Examples: Italian Footwear/leather interaction ,Glass-house suppliers in Holland are competitive internationally.
Counterexamples: U.S. speakers despite lack of competitiveness in other stereo components, same w/ CPUs even tho weak in DRAM.
Example: Japanese air conditioners (small, quiet,effective).
Counterexample: Israeli Kosher wine, Japanese preference for extensive plastic packaging and small serving units.
"The more localized the rivalry, the more intense. And the more intense, the better."
Examples: Japanese electronics industries and Automobiles.
Counterexamples: Boeing, Reverse causation may be at play: For instance, when the decline of U.S. TV industry began (late 1960s), there were 25 domestic manufacturers, now one. Perhaps competitive advantage leads to lots of domestic producers, not vice versa! Further, it may be that Japan is able to support 9 motor vehicle manufacturers because its competitive advantage gives it ample success in export markets. Lacking that, the Japanese market would be too small and many of those companies would have to go out of business.
The existence of rivalry may have indirect benefits by stimulating specific factor supply, input makers, complementary industries, and user industries.
Implications for business:
trivially, "innovation is good" (actually we know that from the point of view of a specific industry's competitive advantage, innovations in unrelated industries are actually bad because they tend to drive up the prices of general use factors in your country. What matters for C.A. is a pace of innovation that is rapid relative to foreigners and other domestic industries)and "being lucky is good."
more important to pick the right location for headquarter functions (design, development, core manufacturing, marketing) than to find the lowest cost source of components, or the cheapest place to assemble the final product. possible that by dispersing a single line of business lose valuable intra-firm synergies. One tricky issue that porter skirts is how to know which are the related industries that really matter. if you don't know then its hard to decide if choosing separate "home bases" for different business segments is a good idea.
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