The Competitive Advantage of Nations: The Case of Turkey

Assessing Porter's Framework for National Advantage

Özlem Öz

• Publisher: Taylor & Francis
• Year: 2019
• eBook ISBN: 9780429798924
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1999, this volume applies Professor Michael Porter's diamond framework (1990) to the Turkish glass, construction, leather clothes, automobile and flat steel industries. Özlam Öz aims primarily to contribute towards an improvement of this framework, and thus towards a better understanding of the sources of competitive advantage. Her research presents a new approach to evaluate the competitiveness of the Turkish economy, given that alternative studies usually focus on factors like exchange rates and the cost of labour and raw materials as the determinants of competitive advantage.

The author begins her book by providing an evaluation of the diamond framework linked to the debate created by the publication of The Competitive Advantage of Nations. She then identifies the pattern of advantage in Turkey by specifying the internationally competitive industries and clusters. This is followed by a detailed examination of the five Turkish industry case studies - glass, construction, leather clothes, automobile and flat steel industries. The findings are generally supportive of Porter. The results suggest, however, several major areas in the framework - especially domestic rivalry and the role of government - where one or more of the Turkish cases question Porter's hypothesises. The book ends with the implications of the study for the sources of competitive advantage in general and for the Turkish economy in particular.

Porter and his diamond framework are both unquestionably influential. Improvements upon it forwarded in this book will be of use to academic readers as well as strategic planners and policy makers.

1 The Competitive Advantage of Nations

A Summary of Porter’s The Competitive Advantage of Nations

Porter (1990a) argues that there is a need for a new paradigm in order to understand in full why a nation succeeds in particular industries but not in others. In order to derive this new analytical framework, which he calls the ‘diamond’, Porter conducts a study of ten nations, purposefully chosen to vary widely with regard to different attributes like size, location and government policy toward industry. The nations studied are mostly developed countries: Denmark, Germany, Italy, Japan, Sweden, Switzerland, United Kingdom and the United States, with the exception of South Korea and Singapore, which are accepted as newly industrialised countries. The next section summarises the diamond framework which aims to capture the major determinants of competitive advantage as well as their interaction with each other and has been constructed in the light of information from over one-hundred case studies selected from these countries.

The Diamond Framework

According to Porter (1990a), the home base plays a critical role in that firms tend to build up competitive advantage in industries for which the local environment is the most dynamic and challenging. He finds out that four attributes of the home environment -namely; factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry- play a major role in shaping the context which allows domestic firms to gain and sustain competitive advantage. He also includes the roles played by the ‘government’ and ‘chance’ as factors influencing the functioning of these four major determinants. For a better understanding of this framework, it is essential to know how Porter explains each determinant as well as the functioning of the diamond as a system, each of which will be summarised in the pages that follow.

Factor Conditions Porter (1990a) defines two basic distinctions for factors of production. In accordance with the first one, they are grouped into two: basic and advanced factors. The basic factors include natural resources, climate, location, unskilled and semi-skilled labour, and debt capital, while the advance factors include ‘modern digital data communications infrastructure, highly educated personnel such as graduate engineers and computer scientists and university research institutes in sophisticated disciplines’ (Porter, 1990a: 77). The second distinction he defines is built on ‘specificity’. There are ‘generalised factors’ including ‘the highway system, a supply of debt capital, or a pool of well-motivated employees with college educations’ and ‘specialised factors’ including ‘narrowly skilled personnel, infrastructure with specific properties, knowledge basis in particular fields, and other factors with relevance to a limited range or even to just a single industry’ (Porter, 1990a: 78). Porter believes that basic and generalised factors are either inherited or easy to create and the advantage stemming from them is not that difficult to replicate, hence not sustainable. Advance and specialised factors, on the other hand, are viewed as being more decisive and sustainable basis for competitive advantage. Another interesting argument that he puts forward is that selective factor disadvantages may sometimes turn into bases for competitive advantage, provided that other determinants are favourable.

Demand Conditions Porter (1990a) believes that home demand has a considerable influence on competitive advantage, and he presents the composition, the size and pattern of growth, and the internationalisation of home demand as three broad attributes of it. Porter (1990a) thinks that the role home demand plays in shaping the competitive advantage is more important than that played by foreign demand because proximity makes it easier and faster to observe and understand immediate buyer needs and preferences. The composition of home demand relates to its qualitative features. Porter, for instance, argues that the more sophisticated and demanding the buyers, the more likely the firms in this industry are to create and sustain competitive advantage since such buyers put pressure on firms to upgrade and meet high standards in product quality, features and service. Similarly, the size and pattern of growth of home demand can reinforce competitive advantage in an industry, since, according to him, ‘the presence of a number of independent buyers in a nation creates a better environment for innovation than is the case where one or two customers dominate the home market for a product or service’ (Porter, 1990a: 94), and a rapidly growing home market provides a dynamic advantage to local firms, mainly because it fosters investment. The third way in which home demand conditions contribute to the competitive advantage of an industry is ‘through mechanisms by which a nation’s domestic demand internationalises and pulls a nation’s products and services abroad’ (Porter, 1990a: 97). This may happen, for instance, when the buyers of a product or service are mobile, or when they are multinational companies.

Related and Supporting Industries The existence of internationally competitive related and supporting industries in a nation, according to Porter (1990a), is an important determinant of creation and sustainability of competitive advantage. The competitive related industries that ‘share common technologies, inputs, distribution channels, skills, customers or activities, or provide products that are complementary’ (Crocombe et al., 1991: 30) may be beneficial for several reasons. Their similarities may, for instance, foster technological spillovers and interchange as well as joint research projects. The process of innovation is facilitated by a free and open information flow in a geographically and culturally proximate environment. Furthermore, a wider dissemination of business information may allow firms to perceive new business opportunities and facilitate the spin-offs. Know-how may spread amongst firms ‘as they draw upon the same pools of educated people and research institutions, and as managers and technical engineers move between firms or start up new spin-off firms’ (Solvell et al., 1991: 37). Lastly, firms from the related competitive industries may pose threats of new entry putting the necessary pressure on the existing firms to upgrade and advance their competitive advantage. Another reason for the importance of the presence of related competitive industries is that firms can enjoy externalities and share activities such as technological development, manufacturing, distribution and marketing. Apart from externalities, there are ‘pull through’ effects which occur when international success in one industry creates demand for complementary products or services as well. All these, according to Porter, make it quite likely for a nation to be competitive in groups of linked industries.

Firm Strategy, Structure and Rivalry Porter (1990a) defines the fourth broad determinant as including the strategies and structures of firms as well as the nature of domestic rivalry. According to him, although it is unrealistic to expect uniformity across all firms, there are noticeable distinct national patterns of goals, typical strategies and ways of organising firms. The resulting argument is that there should be a good fit between an industry’s sources of competitive advantage as well as its structure, and the strategies, structures and practices favoured by the national environment. The existence of intense domestic rivalry, on the other hand, is of special importance since it encourages firms in the industry to break the dependency on basic factor advantages. Moreover, domestic rivals compete not only for market share but for human resources and technological breakthroughs as well.

Government and Chance Porter (1990a) sees the role of government in the competitive development of an industry as an important but indirect one, mainly through influencing the four major determinants of competitive advantage. The proper role for the government, according to Porter, should be reinforcing the underlying determinants of national advantage rather than trying to create the advantage itself. It is necessary to note that Porter anticipates a more direct but still partial role for the government in the early stages of development of a country since ‘the tools at its disposal, such as capital, subsidies and temporary protection are most powerful at these stages in a nation’s competitive development’ (Porter, 1990a: 671). The second ‘outsider’ to the diamond is the role of chance. Porter defines the chance events as the ones that have little to do with circumstances in a nation and are often largely outside the control of firms. Examples include inventions, oil shocks, and wars. Chance events may create forces that reshape the industry structure altering the way the diamond operates and, thus, may allow shifts in competitive position.

The complete framework Porter (1990a) offers to capture the sources of competitive advantage in an industry can be seen in Figure 1.1. According to him, each determinant is influenced by the others, turning the system into a dynamic one in which all elements interact and reinforce each other. Actually, it is this systemic nature that makes it difficult to replicate the exact structure of the industry in another country. It is, therefore, essential that the advantage is based on the entire system rather than only one determinant. In fact, Porter (1990a: 145) believes that ‘where a nation has a disadvantage in one determinant, national success normally reflects unusual advantage in others and some way of compensating for the disadvantages’.

The dynamic character of the diamond is mostly magnified by the effects of domestic rivalry and geographic industry concentration. Domestic rivalry promotes improvements in all other determinants whereas locational proximity amplifies the interaction between the sources of competitive advantage. Pressure and challenge are of special importance in the emergence and sustainability of competitive advantage, and both are driven by intense domestic rivalry and felt more heavily in the case of physical proximity.

Figure 1.1 The Diamond Framework

Source: Porter, The Competitive Advantage of Nations, 1990, p. 127

Stages of Economic Development

After analysing the competitive industries and clusters of them for each of the ten nations, Porter (1990a: 543) extends his theory to the national economy as a whole and tries to ‘provide some ways of thinking about how entire national economies progress in competitive terms’. Although he accepts the uniqueness of the case of each country, he thinks that it is possible to classify the economic development process into four broad stages -the factor-driven, investment-driven, innovation-driven and wealth-driven stages-, which are identified according to the prevailing sources of advantage in the nation.

In the factor-driven stage, the major advantage for almost all internationally successful industries stems from basic and generalised factors of production such as abundant natural resources and low cost labour, limiting the range of industries in which the nation can be internationally competitive. This factor-driven advantage is often vulnerable to changes in costs and availability of factors. Firms usually compete on the basis of price, and technology is imported from other nations. The role played by the government is usually more direct. According to Porter (1990a: 548), nearly all developing countries are at this stage. Furthermore, at the expense of being the subject of severe criticism, he argues that Canada and Australia are also at this stage.

In the investment-driven stage, on the other hand, willingness and ability to invest, as the name implies, is the key for competitive advantage. The related investments concentrate not only on new production facilities but also on factor creation mechanisms. Unlike the factor-driven stage, technology is not only adopted but also improved upon. Firms, however, still usually compete in the relatively price-sensitive segments. At this stage, advantages are no longer entirely dependent on factor conditions. Although to a limited extent, home demand (not its sophistication but its size and growth) as well as firm strategy, structure and rivalry also play a role, whereas the related and supporting industries are still largely undeveloped. Industries are usually mature and typically produce end products, basic components and/or undifferentiated materials. Increases in the overall employment rate as well as in wages and factor costs are frequently observed. According to him, very few developing nations ever make the jump to this stage. Among the few, he includes South Korea, which is definitely at this stage, and Taiwan, Singapore, Hong Kong, Spain and to a lesser extent Brazil, which constitute the other likely candidates.

In the most ideal stage, that is the innovation-driven one, the full diamond is in place in a wide range of industries (Porter, 1990a: 552). Competitive advantage no longer stems from factor endowments, since success in many industries results in increases in factor costs and value of currency. If a nation’s firms are competing on the basis of cost, the related advantage usually stems from relatively higher productivity rates rather than low factor costs. Clusters of competitive industries deepen both vertically and horizontally, reducing dependence on any one sector. The economy becomes less vulnerable to external shocks. The increasing importance of services in the competitiveness of the nation is also typical in the innovation-driven stage. This stage necessitates an indirect role for the government such as encouraging the creation of more advanced factors and the establishment of new businesses. Japan, Germany and Italy are the leading innovation-driven economies of the 1980s, according to Porter (1990a).

In contrast to aforementioned stages, the wealth-driven stage signals a decline. Since the economy is mainly driven by past success and wealth, innovation and sustaining competitive advantage lose their importance. Firms start to lose competitive advantage for several reasons including fading rivalry, the decreasing role of entrepreneurs but increasing role of administrators and lack of motivation. Mergers and acquisitions are widespread reflecting the desire to reduce rivalry. Government is typically busy with redistribution of wealth rather than its creation. Due to customer loyalties and established market positions, symptoms may be slow to appear. According to Porter (1990a: 573), ‘the momentum created when a nation enters the wealth-driven stage takes decades or longer to halt or reverse’. He considers Britain as a country at the wealth-driven stage, adding, however, that recent improvements, which are evident from the productivity growth, are encouraging.

The Debate on Porter’s The Competitive Advantage of Nations

It is undeniable that Porter’s The Competitive Advantage of Nations has attracted considerable attention from a wide range of disciplines. In addition to the ten nations included in the original work, others, including Canada and New Zealand, have also been studied by the project teams headed by Porter himself, and other researchers have replicated it for several other countries such as Austria, Ireland, Finland, Mexico, and the Netherlands. Some scholars have come up with interesting improvement proposals that distort the nice shape of the ‘diamond’. In fact, even a summary of the criticisms about the diamond model has been provided recently (see Penttinen, 1994).

In this section, the debate spawned by the publication of Porter’s (1990a) study and findings will be analysed. Before proceeding with the resulting summary, I should state that it has become inevitable to mention a few points, which have created some dispute in the literature throughout the book. To avoid repetition, here the reader is referred to the relevant sections when necessary.

General Criticisms About the Study

Formal Modelling One of the most important criticisms of the study is the lack of formal analytic modelling. Gray (1991: 510), for instance, points to the problems of a less formal approach by stating that this ‘allows Porter to introduce superficially certain phenomena not identified as integral parts of the diamond, so that the treatment of some phenomena becomes an obiter dictum rather than a closely reasoned deduction’. Similarly, Stopford and Strange (1991: 8) state that the ‘diamond’ is just an explanatory framework rather than a deterministic theory. Another criticism concerning the lack of formal modelling comes from Greenaway (1993: 146) who believes that ‘many economists will be irritated by the constant reference to a ‘theory’ of competitive advantage which is never formally presented, nor formally tested’. Although these criticisms are mainly true, it should be stated that by preferring to use such a qualitative framework, Porter introduces several interesting points like the advanced and specific factor creation mechanisms and sophistication of demand conditions, which would have been very difficult, if not impossible, to capture if he had just focused on quantitative methods and formal modelling.

Originality Another frequently mentioned criticism of Porter’s work is its ‘lack of originality’. Many (for instance, Bellak and Weiss, 1993; Rugman and D’Cruz, 1993; Dunning, 1992; Grant, 1991; Rugman, 1991) argue that none of the determinants offered by Porter is neither new nor unexpected. Coté (1991: 312), for instance, draws our attention to the point made by several economists who argue that Porter’s work is basically a ‘rehash’ of the theory of comparative advantage. Similarly, Gray (1991: 506) argues that hard work, a high rate of investment, an intelligent strategy and good factor conditions (Gray calls these the ‘Puritan ethic’) would cover a great deal of the diamond at first glance. He goes on by stating that it is possible to reduce what Porter says to the fact that international trade in certain categories, mainly advanced goods, requires a consideration of a wide range of industry-specific variables and such trade will understandably change over time. According to him, these facts have already been recognised by the theory of intra-industry trade. Magaziner (1990: 189) argues that the points put forward by Porter are not new to business strategists, but it is important to raise them to the agenda of the policy makers. According to Thurow (1990: 96), there is nothing particularly new in Porter’s conclusions: ‘We all know that we should consume less and invest more in education, research and development, plants and equipment, and infrastructure’.

In sharp contrast to the arguments mentioned above, Smith (1993: 399) makes the following evaluation about Porter’s work: ‘It is the first serious attempt to develop a really original grand theory of national economic development process since the early years of Post-war development economics, and represents one of the most original ways of thinking about development policy in years’. In fact, it is true that each element in the diamond model has been the subject of many studies, and therefore it is hard to describe the framework as ‘original’. As Penttinen (1994) writes, the cluster concept is nothing new, the role attributed to factor conditions parallels the theory of comparative advantage, the idea of demand side effects dates back to Vernon (1966), and lastly, most of the issues that are related to the ‘firm strategy, structure and rivalry’ determinant have been covered under industrial economics. Porter’s contribution, however, is to combine all of these thoughts and, by linking them to his own earlier work in competitive strategy, form a coherent framework as a result of field research that can help us understand the possible sources of competitive advantage. By so doing, he makes a contribution both to the theory of international trade by offering a framework that may be a good complement to more quantitative studies of competitive advantage and to the theory of strategic management, since it is, in a sense, an attempt to understand a relatively premature area in this discipline: the national environment in which a firm operates.

Suitableness for Every Country To some researchers, Porter’s framework cannot be used to model every country. Rugman (1991: 61), for instance, believes that ‘while most of Porter’s analysis would work for managers based in the US, the European Community or Japan, much of it is superficial and plain wrong when applied in a Canadian situation’. The most important reason for that, according to Rugman, is the lack of a serious effort in Porter’s study to incorporate the true significance of multinational activity. He argues that ‘this weakness in Porter’s model would not only apply to Canadi...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Figures
• List of Tables
• Dedication
• Preface
• Acknowledgments
• List of Abbreviations
• 1 The Competitive Advantage of Nations
• 2 The Competitive Advantage of Turkey
• 3 The Turkish Glass Industry
• 4 The Turkish Construction Industry
• 5 The Turkish Leather Clothes Industry
• 6 The Turkish Automobile Industry
• 7 The Turkish Flat Steel Industry
• 8 Conclusion
• Appendices
• Bibliography
• Index