New Global Strategies for

Competitive Advantage
By Michael E. Porter

Why do some nations win or lose a share of world trade?

Michael Porter, author of the two most widely quoted books
on strategic management, has just published a masterful new
book, The Competitive Advantage of Nations, which offers a
theory to explain the triumph of some nations in some markets.
Why are some nations able to produce certain
products that are recognized as the best in the world and,
as a result, capture international market share? Or more
bluntly, why do nations win or lose in the battles for
world trade? Harvard Business School's Michael Porter,
who is the author of the two most widely quoted books
on strategic management and a consultant much in
demand, has just published a new book that offers a
theory explaining the triumph of some nations in some
markets. The following excerpt is a condensation of
Chapter 11, "Company Strategy, "from The Competi­
tive Advantage of Nations, The Free Press, 1990, 831
pages.
Reduced to a phrase, Porter's thesis is: High-intensity
domestic competition breeds international success. But
his new paradigm for international competitive
advantage is best expressed in a diamond-shaped chart
(see Exhibit 1), showing that there are key elements of
domestic competitive conditions that must all be fostered
if success is to be sustained. The categories are:
■ Company strategy, structure and rivalry;
■ Factor conditions;
■ Demand conditions; and
■ Related and supporting industries.
Why, for example, did Japanese manufacturers take
the market lead for copiers away from powerful Xerox?
Porter's "diamond" provides the framework for
analysing the issues; it's the product of four years of
research on ten nations. For those who want the speed-
read version of his basic theory, we recommend "Why
Nations Triumph, " Fortune, March 12, 1990, pages 94
to 108.
In our selection from the book, Porter suggests which
actions top management must take at home to foster-
strength abroad. His proposals will frighten some
managers to their very core.
4 Planning Review
 C
ompanies, not nations, are on the front line of benefit the most from their national environment. They
international competition. Yet, the characteristics took steps to make their home nation (and location within
of the home nation play a central role in a firm's the nation) an even more favorable environment for
international success. The home base shapes a competitive advantage. Finally, they amplified their
company's capacity to innovate rapidly in technology home-based advantages and offset home-based
and methods and to do so in the proper directions. It is disadvantages through global strategies that tapped
the place from which competitive advantage ultimately selectively into advantages available in other nations.
emanates and from which it must be sustained. A global Competitive advantage ultimately results from an
strategy supplements and solidifies the competitive effective combination of national circumstances and
advantage created at the home base; it is the icing, not company strategy. Conditions in a nation may create an
the cake. However, on the one hand, while having a environment in which firms can attain international
home base in the right nation helps a great deal, it does competitive advantage, but it is up to a company to seize
not ensure success. On the other hand, having a home the opportunity.
base in the wrong nation raises fundamental strategic
concerns.
Harvard Business School professor Michael E. Porter,
The most important sources of national advantage
author of two influential books on strategic management,
must be actively sought and exploited, unlike low factor
Competitive Strategy (1980) and Competitive Advantage
costs obtainable simply by operating in the nation. (1985), recently published what is likely to be the most
Internationally successful firms are not passive bystand­ talked about business book of the early 90s, The Competi­
ers in the process of creating competitive advantage. tive Advantage of Nations (New York: The Free Press,
Those we studied were caught up in a never-ending 1990; Copyright © Michael E. Porter, excerpted here by
process of seeking out new advantages and struggling permission). Prof. Porter was a keynote speaker at The
with rivals to protect them. They were positioned to Planning Forum's 1989 Annual Conference.
May/June 1990 5
 The Context for Competitive Advantage Innovation grows out of pressure and challenge. It also
comes from finding the right challenges to meet. The
These imperatives of competitive advantage constitute main role of the firm's leader is to create the environment
a mind-set that is not present in many companies. Indeed, that meets these conditions. One essential part of the task
the actions required to create and sustain advantage are is to take advantage of the national "diamond" (see
unnatural acts. Stability is valued in most companies, not Exhibit 1) that currently describes competition in the
change. Protecting old ideas and techniques becomes the industry.
preoccupation, not creating new ones.
The long-term challenge for any firm is to put itself in The New Rules for Innovation
a position where it is most likely to perceive, and best
able to address the imperatives of competitive advantage. A company should actively seek out pressure and
One challenge is to expose a company to new market and challenge, not try to avoid them. Part of the task is to
technological opportunities that may be hard to perceive. take advantage of the home nation in order to create the
Another is preparing for change by upgrading and impetus for innovation. Some of the ways of doing so
expanding the skills of employees and improving the are:
firm's scientific and knowledge base. Ultimately, the ■ Sell to the most sophisticated and demanding
most important challenge is overcoming complacency buyers and channels. Some buyers (and channels) will
and inertia to act on the new opportunities and stimulate the fastest improvement because they are
circumstances. knowledgeable and expect the best performance. They
The challenge of action ultimately falls on the firm's will set a standard for the organization and provide the
leader. Much attention has rightly been placed on the most valuable feedback. However, sophisticated and
importance of visionary leaders in achieving unusual demanding buyers and channels need not be the firm's
organizational success. But where does a leader get the only customers. Focusing on them exclusively may
vision, and how is it transmitted in a way that produces unnecessarily diminish long-term profitability. Neverthe­
organizational accomplishment? Great leaders are less, serving a group of such buyers, chosen because
influenced by the environment in which they work. their needs will challenge the firm's particular approach
Innovation takes place because the home environment to competing, must be an explicit part of any strategy.
stimulates it. Innovation succeeds because the home ■ Seek out the buyers with the most difficult needs.
environment supports and even forces it. The right Buyers who face especially difficult operating require­
environment not only shapes a leader's own perceptions ments (such as climate, maintenance requirements, or
and priorities but provides the catalyst that allows the leader hours of use), who confront factor cost disadvantages in
to overcome inertia and produce organizational change. their own businesses that create unusual pressures for
Great leaders emerge in different industries in different performance, who have particularly tough competition,
nations, in part because national circumstances attract or who compete with strategies that place especially
and encourage them. Visionaries in consumer electronics heavy demands on the firm's product or service, are
are concentrated in Japan, chemicals and buyers that will provide the laboratory (and the pressure)
pharmaceuticals in Germany and Switzerland, and to upgrade performance and extend features and services.
computers in America. Leadership is important to any Such buyers should be identified and cultivated. They
success story, but is not in and of itself sufficient to become part of a firm's R&D program.
explain such successes. In many industries, the national ■ Establish norms of exceeding the toughest
environment provides one or two nations with a distinct regulatory hurdles or product standards. Some
advantage over their foreign competitors. Leadership localities (or user industries) will lead in terms of the
often determines which particular firm or firms exploit stringency of product standards, pollution limits, noise
this advantage. guidelines, and the like. Tough regulating standards are
More broadly, the ability of any firm to innovate has not a hindrance but an opportunity to move early to
much to do with the environment to which it is exposed, upgrade products and processes. Older or simplified
the information sources it has available—and consults— models can be sold elsewhere.
and the types of challenges it chooses to face. Seeking ■ Source from the most advanced and
safe havens and comfortable customer relationships only international home-based suppliers. Suppliers who
reinforces past behavior. Maintaining suppliers who are themselves possess competitive advantage, as well as the
captive degrades a source of stimulus, assistance, and insight that comes from international activities, will
insight. Lobbying against stringent product standards challenge the firm to improve and upgrade as well as
sends the wrong signal to an organization about norms provide insights and assistance in doing so.
and aspirations. ■ Treat employees as permanent. When employees
6 Planning Review
 are viewed as permanent instead of as workers who can competition. Success grows out of making the myth a
be hired and fired at will, pressures are created that work reality.
to upgrade and sustain competitive advantage. New If competition were purely domestic, confronting
employees are hired with care, and continuous efforts are powerful customers and tough competitors might seem
made to improve productivity instead of adding workers. to result in lower company profitability, because of high
Employees are trained on an ongoing basis to support buyer power and intense rivalry. But even in domestic
more sophisticated competitive advantages. They are competition, gaining competitive advantage allows a
transferred to new functions instead of laid off. Ideas for firm to outperform its industry. A firm need not
new products and related diversification are stimulated in exclusively serve demanding buyers nor should it
order to redeploy skilled people. compete head on with any rival. The aim in seeking
Unions, for their part, must also change their attitudes. pressure and challenge is to create the conditions in
Impediments to productivity improvement, job move­ which competitive advantage can be preserved. Short-
ment, and advancement on merit must be eliminated. term pressure leads to long-term sustainability.
In global competition, the pressures of demanding
■ Establish outstanding competitors as motivators.
local buyers, capable suppliers, and aggressive domestic
Those competitors who most closely match a company's
rivalry are even more valuable and necessary for long-
competitive advantages, or exceed them, must become
term profitability. These drive the firm to a faster rate of
the standard of comparison. Such competitors can be a
progress and upgrading than international rivals, and lead
source of learning as well as a powerful focal point to
to sustained competitive advantage and superior long-
overcome parochial concerns and motivate change for the
term profitability. A tough domestic industry structure
entire organization. They become the common enemy to
creates advantage in the international industry. A
be bested. Komatsu (Japan), for example, has long seen
comfortable, easy home base, in contrast, leaves a firm
Caterpillar (United States) this way, and the goal of
vulnerable to rivals who enjoy greater dynamism at
beating Caterpillar has energized remarkable improve­
home.
ments in Komatsu's product quality, productivity, and
relationship with distribution channels. A home base with demanding buyers, stringent needs,
and able competitors, then, is a distinct advantage to a
The implication is not that a firm should imitate such firm. A firm must actively position itself to capture the
competitors, because imitative strategies rarely succeed. benefits, however. If a firm lacks the pressures for
Komatsu competes differently from Caterpillar in im­ improvement and innovation, it must create them.
portant respects. Nevertheless, outstanding competitors
should serve as benchmarks and motivators. Instead, Perceiving Industry Change
companies have a tendency to compare themselves with Beyond pressure to innovate, one of the most
competitors that make them look good. This only rein­ important advantages an industry can have is early
forces complacency and inertia. insight into important needs, environmental forces and
trends that others have not noticed. Japanese firms had
The True Costs of Stability an early and clear warning about the importance of
energy efficiency. American firms have often gotten a
These prescriptions may seem counterintuitive. The jump in seeing demand for new services, giving them a
ideal would seem to be the stability growing out of head start in many service industries. Better insight and
obedient customers, captive and dependent suppliers, early warning signals lead to competitive advantages.
and sleepy competitors. Such a search for a quiet life, an Firms gain competitive position before rivals perceive an
understandable instinct, has led many companies to buy opportunity (or a threat) and are able to respond.
direct competitors or form alliances with them. In a Perceiving possibilities for new strategies more clearly
closed, static world, monopoly would indeed be the most or earlier comes in part from simply being in the right
comfortable and profitable solution. nation at the right time. Yet it is possible for a firm to
In reality, however, competition is dynamic. more actively position itself to see the signals of change
Complacent firms will lose to other firms who come from and act on them. It must find the right focus or location
a more dynamic environment. Good managers always within the nation, and work to overcome the filters that
run a little scared. They respect and study competitors. distort or limit the flow of information.
Seeking out and meeting challenges is part of their Identify and serve buyers (and channels) with the
organizational norm. By contrast, an organization that most anticipatory needs. Some buyers will confront
values stability and lacks self-perceived competition new problems or have new needs before others, because
breeds inertia and creates vulnerabilities. Some of their demographics, location, industry, or strategy.
companies maintain only the myth that they believe in Teaching hospitals see the most difficult medical cases,
May/June 1990 7
 for new products, such as do-it-yourself tools, that later
Competitive Advantages penetrated foreign markets.
and Disadvantages Find the localities in the regulatory vanguard
The "diamond" provides a framework for assess­ elsewhere. Some regions and cities will typically lead
ing important areas of competitive strength and others in terms of their concern with social problems such
weakness. as safety, environmental quality, and the like. Instead of
Factor Conditions. International rivals will avoiding such areas, as some companies do, they should
differ in the mix and cost of available factors and be sought out. A firm should define its internal goals as
the rate of factor creation. Swedish automobile meeting, or exceeding, their standards. An advantage
firms, for example, benefit from the solidarity wage will result as other regions, and ultimately other nations,
system that makes the wages of Swedish auto modify regulations to follow suit.
workers closer to those of other Swedish industries,
but relatively lower than the wages of auto workers Discover and highlight trends in factor costs.
in other advanced nations. Increases in the costs of particular factors or other inputs
Demand Conditions. Competitors from other may signal future opportunities to leapfrog competitors
nations will face differing segment structures of by innovating to deploy inputs more effectively or to
home demand, differing home buyer needs, and avoid the need for them altogether. A firm should know
home buyers with various levels of sophistication. which markets or regions are likely to reflect such trends
Demand conditions at their home base will help first.
predict foreign competitors' directions of product Maintain ongoing relationships with centers of
change as well as their likely success in product research and sources of the most talented people. A
development, among other things. firm must identify the places in the nation where the best
Related and Supporting Industries. new knowledge is being created that is now or might
Competitors based in other nations will differ in the become relevant to its industry. Equally important is to
availability of domestic suppliers, the quality of
identify the schools, institutions, and other companies
interaction with supplier industries, and the
presence of related industries. Italian footwear where the best specialized human resources needed in the
firms and leather goods producers, for example, industry are being trained. Investment in time, money,
have early access to new tanned leather styles and ongoing contact is necessary to ensure access to
because of the world-leading Italian leather tanning people and research. Regularly recruiting personnel from
industry. the top schools, or other training grounds, is a good way
Firm Strategy, Structure, and Rivalry. The to introduce new ideas and skills into the company.
environment in their home nation will strongly Study all competitors, especially the new and
influence the strategic choices of foreign rivals. unconventional ones. Rivals sometimes discover new
Italian packaging equipment firms, for example, ideas first. Innovators are often smaller, more focused
reflect their Italian context. They are mostly small competitors that are new to the industry. Alternatively,
and managed by strong, paternal leaders. Owners
they may be firms led by managers with backgrounds in
of firms have personal relationships with significant
buyers. This makes them unusually responsive to other industries not bound by conventional wisdom. Such
market trends and provides the ability to custom- "outsiders," with fewer blinders to cloud their percep­
tailor machinery to buyer circumstances. tion of new opportunities and fewer perceived constraints
in abandoning past practices frequently become industry
innovators. A firm should designate the most forward-
for example, and usually experiment first with new looking or unconventional competitors for particular
medical procedures and equipment. Customers facing the study, including foreign competitors who may enjoy the
most acute labor shortages will be unusually attuned to benefits of a very different home base. The aim is as
new automation equipment or labor-saving business much to learn from competitors as to develop strategies
services. to counter them.
Buyers with anticipatory needs should be identified, Bring some outsiders into the management team.
designated as priorities, and cultivated. Managers in all The incorporation of new thinking in the management
functions, as well as the chief executive, should have process is often speeded by the presence of one or more
direct contact with them regularly. "outsiders"—managers from other companies or
Investigate all emerging new buyers or channels. industries or from the company's foreign subsidiaries.
These types of buyers or channels often provide the While internal development of most management is
opportunity for shifts in competitive position. The early desirable for accumulating skills, the regular effort to
emergence of the suburban market in the United States, introduce new management perspectives will benefit the
for example, reated opportunities in numerous industries innovation process.
8 Planning Review
 Interchange Within the National Cluster
A firm gains important competitive advantages from "Find localities in the
the presence in its home nation of world-class buyers, regulatory vanguard...
suppliers, and related industries. They provide insight A firm should define its
into future market needs and technological develop­
ments. They contribute to a climate for change and
internal goals as meeting
improvement, and become partners and allies in the or exceeding their
innovation process. Having a strong cluster at home standards."
unblocks the flows of information and allows deeper and Michael E. Porter
more open contact than is possible when dealing with
foreign firms. Being part of a cluster localized in a small
geographic area is even more valuable.
backward instead of forward toward the next source of
Buyers, Channels, and Suppliers. The first hurdle to
competitive advantage. It will encourage efforts to
be cleared in taking advantage of the domestic cluster is
protect old advantages rather than create new ones,
attitudinal It means recognizing that home-based buyers
ultimately leading to a loss in position. This happened
and suppliers are allies in international competition and
many times in the history of British industry. The result
not just the other side of transactions. A firm must also
was always the same—foreign suppliers innovated while
pursue:
British suppliers became uncompetitive.
■ Regular senior management contact. Hesitation in encouraging local buyers to sell and even
■ Formal and ongoing interchange between research produce abroad is equally backward looking. It is far
organizations. better to face pressure from more sophisticated local
■ Reciprocity in serving as test sites for new products buyers and also to develop the capability to serve them
or services. in foreign nations. Home buyers and suppliers with a
■ Cooperation in penetrating and serving international global scope and outlook, will provide better insight into
markets. international and not just domestic needs and
Working with buyers, suppliers, and channels involves technological possibilities. Buyers and suppliers who are
helping them upgrade and extend their own competitive not captive will also challenge the firm to improve and
advantages. Their health and strength will only enhance upgrade, the only way to sustain competitive advantage.
their capacity to speed the firm's own rate of innovation. An orientation toward closer vertical relationships is
Open communications with local buyers or suppliers, and only just starting to take hold in many American com­
early access to new equipment, services, and ideas, are panies, though it is quite typical in Japanese and Swedish
important for sustaining competitive advantage. Such companies. Interchange with buyers, channels, and
communication will be freer, more timely, and more suppliers always involves some tension, because there is
meaningful than is usually possible with foreign firms. inevitably the need to bargain with them over prices and
Encouraging and assisting domestic buyers and service. In global industries, however, the competitive
suppliers to compete globally is one part of the task of advantage to be gained from interchange more than
upgrading them. A company's local buyers and suppliers compensates for some sacrifice in bargaining leverage.
cannot ultimately sustain competitive advantage in many Interchange should not create dependence but
cases unless they compete globally. Buyers and suppliers interdependence. A firm should work with a group of
need exposure to the pressures of worldwide competition suppliers and customers, not just one.
in order to advance themselves. Trying to keep them Related Industries. Industries that are related or po­
"captive" and prevent them from selling their products tentially related in terms of technology, channels, buy­
abroad is ultimately self-defeating. ers, or the way buyers obtain or use products, are
Some managements find it worrisome that potentially important to creating and sustaining compet­
internationally active buyers and suppliers might become itive advantage. The presence in a nation of such
overly influenced by foreign firms. These sorts of industries deserves special attention. These industries are
concerns, while understandable, reflect a static and often essential sources of innovation. They can also
overly narrow view of competitive advantage. Compet­ become new suppliers, buyers, or even new competitors.
itive advantage grows out of ongoing improvement and At a minimum, senior management should be visiting
innovation. Worrying about protecting today's secrets is leading companies in related industries on a regular
less important than creating tomorrow's. basis. The purpose is to exchange ideas about industry
Attempting to prevent local suppliers from selling the developments. Formal joint research projects, or other
current generation of equipment outside the nation looks more structured ways to explore new ideas, are advisable
May/June 1990 9
 where the related industry holds more immediate and British companies in particular leave investments in
potential to affect competitive advantage. the national "diamond" to others or to the government.
Locating Within the Nation. A firm should locate The result is that companies are well managed but lack
activities and its headquarters at those locations in the the human resources, technology, and access to capable
nation where there are concentrations of sophisticated suppliers and customers needed to succeed against
buyers, important suppliers, groups of competitors, or foreign rivals.
especially significant factor-creating mechanisms for its
industry (such as universities with specialized programs Where and How to Compete
or laboratories with expertise in important technologies). A firm's home nation shapes where and how it is likely
Geographic proximity makes the relationships within a to succeed in global competition. Germany is a superb
cluster closer and more fluid. It also makes domestic environment for competing in printing equipment, but
rivalry more valuable for competitive advantage. does not offer one conducive to international success in
heavily advertised consumer packaged goods. Italy
Serving Home Base Buyers Who Are represents a remarkable setting for innovation in fashion
International and Multinational and furnishing, but a poor environment for success in
industries that sell to government agencies or infrastruc­
To transform domestic competitive advantage into a ture providers.
global strategy, a firm should identify and serve buyers
at home that it can also serve abroad. Such buyers are Within an industry, a nation's circumstances also favor
domestic companies that have international operations, competing in particular industry segments and with
individuals who travel frequently to other nations, and certain competitive strategies. Given local housing
local subsidiaries of foreign firms. Targeting such buyers conditions, for example, Japan is a good home base for
has two benefits. First, they can provide a base of competing globally in compact models of appliances and
demand in foreign markets to help offset the costs of in appliances that are inherently compact (such as
entry. More important, they will often be sophisticated microwave ovens) but a poor home base for competing
buyers who can provide a window into international in full-sized refrigerators. Within compact appliances,
market needs. the Japanese environment is particularly conducive to
differentiation strategies based on rapid new model
Improving the National Competitive introduction and high product quality.
Environment Korea, on the other hand is without advanced local
demand and far from major markets. However, it
Sustaining competitive advantage is not only a provides an environment that favors low-cost strategies
function of making the most of the national environment. in relatively standardized product segments. Korean
Firms must work actively to improve their home base by home-demand conditions also mean that firms almost
upgrading the national "diamond" (see Exhibit 1). A invariably compete in compact, smaller-size models.
company draws on its home nation to extend and upgrade The national "diamond" becomes central to choosing
its own competitive advantages. The firm has a stake in the industries to compete in as well as the appropriate
making its home base a better platform for international strategy. The home base is an important determinant of
success. a firm's strengths and weaknesses relative to foreign
Playing this role demands that a company understand rivals.
how each part of the "diamond" best contributes to Understanding the home base of foreign competitors
competitive advantage. It also requires a long-term is essential in analyzing them. Their home nation yields
perspective, because the investments required to improve them advantages and disadvantages. It also shapes their
the home base often take years or even decades to bear likely future strategies. The "diamond" serves as an
fruit. What is more, short-term profits are elevated by important tool for competitor analysis in international
foregoing such investments, and by shifting important industries.
activities abroad instead of upgrading the ability to
perform them at home. Both actions will diminish the Choosing Industries and Strategies
sustainability of a firm's competitive advantages in the The likelihood that a firm can achieve breakthroughs
long run. or innovations of strategic importance in an industry is
Firms have a tendency to see the task of ensuring high- also influenced by its home nation. Innovation and
quality human resources, infrastructure, and scientific entrepreneurial behavior is partly a function of chance.
knowledge as someone else's responsibility. Another But it also depends to a considerable degree on the
common misconception is that, because competition is environment in which the innovator or entrepreneur
global, the home base is unimportant. Too often, U.S. works. The "diamond" has a strong influence on which
10 Planning Review
 EXHIBIT 2
Analyzing Industries and FIRM STRATEGY,
Segments for Which the STRUCTURE,
Nation Is a Favorable AND RIVALRY
Home Base • Does the style of management and
prevailing types of organizational structures
in the nation match industry needs?
• What types of strategies exploit national
norms of organization?
• Does the industry attract outstanding talent in the nation?
• Do investors' goals fit the competitive needs of the industry?
• Are there capable domestic rivals?
FACTOR CONDITIONS DEMAND CONDITIONS
• Does the nation have particularly advanced • Are the nation's buyers for the industry's
or appropriate factors of production? In products the most sophisticated or demanding?
what segments? For what strategies? • Does the nation have unusual needs in the
• Does the nation have superior factor creation industry that are significant but will likely be
mechanisms in the industry (for example, ignored elsewhere?
specialized university research programs, • Do buyer needs in the nation anticipate those
outstanding educational institutions)? of other nations?
• Are selective factor disadvantages in the • Are the distribution channels in the nation
nation leading indicators of foreign sophisticated, and do they foreshadow
circumstances? international trends?

RELATED AND SUPPORTING

INDUSTRIES
• Does the nation have world-class supplier
industries? For what segments?
• Are there strong positions in
important related industries?

The
Home Base
Diamond

nation (and even on which region within that nation) will enjoy a large pool of dedicated, disciplined workers who
be the source of an innovation. still earn moderate wages. Yet firms lack sophisticated
Important innovations in Denmark, for example, have local demand and must import many parts and most
occurred in enzymes for food processing, in natural machinery because domestic suppliers are poorly
vitamins, in measuring instruments related to food developed. American medical equipment firms face
processing, and in drugs isolated from animal organs relatively high wages as well as pressures to report high
(insulin and the anticoagulant, heparin). These are hardly levels of profitability, yet they benefit from the world's
random in a nation whose exports are dominated by a most advanced buyers, rapid and specialized factor
large cluster of food-and-beverage-related industries. A creation both in medical science and human resources,
firm or individual has the best odds of succeeding in and a pull-through effect from medical personnel trained
innovation, or in creating a new business, where the in the United States who practice abroad.
national "diamond" provides the best environment. The national circumstances most significant for
A firm's home base defines, in part, its competitive competitive advantage depend on a firm's industry and
advantages and disadvantages in global industries. strategy. In a resource- or basic factor-driven industry,
Korean firms in the automobile and apparel industries the most important national attribute is a supply of
May/June 1990 11
 superior or low-cost factors. In a fashion-sensitive focused ones that served as an initial entry point or
industry, the presence of advanced and cutting-edge reinforced an internal entry. Hewlett-Packard's acquisi­
customers is paramount. In an industry heavily based on tion of Sanborn in patient monitoring equipment, for
scientific research, the quality of factor-creating example, was a springboard for applying HP's
mechanisms in human resources and technology, coupled marketing, technological, and international marketing
with access to sophisticated buyers and suppliers, are skills to a new industry. Whenever a firm began broad-
decisive. ranging diversification, it was generally a sign that
Cost-oriented strategies are more sensitive to factor competitive advantage was about to fade. Where the
costs, the size of home demand, and the conditions that diversification took place through a series of major
favor large-scale plant investments. Differentiation acquisitions, the sign was even more reliable.
strategies tend to depend more on specialized human The reasons for this track record in diversification are
resources, sophisticated local buyers, and world-class not hard to understand when viewed in light of my
local supplier industries. Focus strategies rest on the theory. Improvement and innovation are at the heart of
presence of unusual demand in particular segments or on competitive advantage. They grow out of focus, com­
factor conditions or supplier access that benefit compet­ mitment, and sustained investment in an industry. Di­
ing in a particular product range. versification within a cluster, or that extends the cluster,
As competition globalizes, and as developments such tends to stimulate new ways of competing as comple­
as European trade liberalization and free trade between mentary skills and resources are brought to bear.
the United States and Canada promise to eliminate Internal diversification facilitates a transfer of skills
artificial distortions that have insulated domestic firms and resources that is quite difficult to accomplish when
from market forces, firms must increasingly compete in acquiring an independent company with its own history
industries and segments where they have real strengths. and way of operating. Internal entry tends to increase the
This must increasingly be guided by the national "dia­ overall rate of investment in factor creation. There is also
mond." an intense commitment to succeed in diversification into
A firm can raise the odds of success if it is competing closely related fields because of the benefits that accrue
in industries, and with strategies, where the nation to the base business and the effect on the overall cor­
provides an unusually fertile environment for competitive porate image.
advantage. The questions in Exhibit 2 are designed to Unrelated diversification, particularly through acqui­
expose such areas. Of major importance is a forward- sition, makes no contribution to innovation. Unrelated
looking view in answering these questions. The focus diversification almost inevitably detracts from focus,
must be on the nature of evolving competition, not the commitment, and sustained investment in the core
past requirements for success. industries, no matter how well intentioned management
is at the outset. Acquired companies, where there is no
Diversification link to existing businesses, often face short-term
While diversification is part of company strategy in financial pressures to justify their purchase price. It is
virtually every nation, its track record has been mixed at also difficult for corporate managers of a diversified firm
best. Widespread diversification into unrelated industries to be forward-looking in industries they do not know.
was rare among the international leaders we studied. The process of innovation and change is undermined. For
They tended instead to compete in one or two core example, in a number of U.S. industries we studied, the
industries or industry sectors, and their commitment to acquisition of competitors by widely diversified firms
these industries was absolute. For every widely diminished the rate of innovation and investment. Ex­
diversified Hitachi or Siemens, there were several amples include syringes, patient monitoring equipment,
Boeings, Koenig & Bauers, FANUCs, Novo Industries, oil field equipment, and machine tools. This pattern is
and SKFs, who are global competitors but heavily widespread.
focused on their core industry. The nations in which unrelated diversification has been
Internal diversification, not acquisition, has to a strik­ the most popular and acquisitions are the easiest to make
ing degree been the motivation for achieving leading today are America and Britain. In both nations, diver­
international market positions. Sandvik's move from sification seems to have contributed to competitive prob­
specialty steel to rock drills, the diversification of Swiss lems. In continental Europe and Japan, many of the
pharmaceuticals companies from dyes, and Canon's strongest international companies are either not diversi­
evolution from cameras to calculators to copiers to fied or have diversified into closely related businesses,
facsimile are just a few examples. often through internal development. There are disturbing
Where acquisitions were involved in international signs, however, that unrelated diversification is on the
success stories, the acquisitions were often modest or rise in both these areas.
12 Planning Review
 In Korea, unrelated diversification has been consistent consumer—a very demanding client indeed.
with investment-driven competitive advantage. The abil­ He added that, once Benetton was successful in Paris,
ity of the chaebol to mobilize capital and management he realized "we could make it anywhere."
talent into new fields was a benefit as long as Korea was
a nation with scarce capital and limited technical and Foreign Sourcing and Technology
managerial resources tended to undermine further A firm must be willing to source products or
national progress. However, today, the major chaebol equipment from foreign firms if they are superior. At the
are moving into too many unrelated industries because same time, it must also work to upgrade local suppliers.
of misplaced self-confidence. Unfortunately, the Access to the world's best inputs is necessary to sustain
prospects for gaining competitive advantage in such competitive advantage. Loyalty to domestic suppliers,
disparate businesses are dim. for its own sake, is ultimately self-defeating. By not
The implications of my theory for diversification buying cheaper foreign steel, for example, U.S. auto­
strategy are as follows: mobile companies did not really help the U.S. steel in­
■ New industries for diversification should be selected dustry, and in the long run undermined their own
where a favorable national "diamond" is present or can competitive position.
be created. Diversification proposals should be screened The best form of loyalty to domestic suppliers is to
for the attractiveness of the home base. confront them in no uncertain terms with the need to
■ Diversification is most likely to succeed when it match their foreign competitors in quality and
follows or extends clusters in which the firm already productivity in order to retain the business. Domestic
competes. suppliers should be given some leeway to allow time for
■ Internal development of new businesses, supple­ adjustment, and be provided with active technical help
mented by small acquisitions, is more likely to create and and other assistance in upgrading. But domestic suppliers
sustain competitive advantage than the acquisition of cannot be guaranteed the business. Unless they are taking
large, established companies. aggressive action to upgrade quality, boost productivity,
■ Diversification into businesses lacking common and globalize their own strategies, supporting domestic
buyers, channels, suppliers, or close technological suppliers is no one's ultimate gain.
connections is not only likely to fail but will also A firm aspiring to competitive advantage must be
undermine the prospects for sustaining advantage in the aware of, and ideally have some access to, all the im­
core businesses. portant scientific work going on in the world that is
related to its industry. No matter how favorable the home
Serving Sophisticated Buyers and Markets base, useful research is likely to be taking place outside
To sustain competitive advantage in global industries, the home country. Today, a firm seeking competitive
a firm must sell to all significant country markets. advantage should question its strategy if it does not have
Particularly important are nations that contain advanced at least one foreign site for technology monitoring or
and demanding buyers. All of the most advanced and research. Such sites should be in nations with the best
sophisticated buyers are rarely located at home, even national "diamond," not just the ones with a top
under the best of circumstances. Identifying such buyers laboratory.
in other nations will help a firm understand the most
Meeting the Best Foreign Competitors
important new needs, which in turn create pressures that
stimulate rapid progress in products and services. A firm must meet the best rivals in the marketplace in
Nations with sophisticated buyers may well be where order to sustain and upgrade its advantage. Capable rivals
leading international competitors are based, making it all provide the benchmark for measuring competitive
the more challenging to penetrate them. advantage. They are also the best stimulus for innovation
Benetton, the leading Italian apparel producer, fol­ and change. Ultimately, a firm must find a way to gain
lowed this principle very early in its development as an advantage over the best rivals in order to assure its
international company. The words of the chief executive, market position. Another reason to meet the best rivals
Luciano Benetton, describe the process: in all the important markets is to deny them profits in
We have always thought it essential, since 1969 in safe markets that can be used to cross-subsidize low
fact, that we expand our activities outside Italy. We profits in contested markets.
opened our first shop in Paris in 1969 and that was a Ideally, the most capable rivals are at home. Competing
major challenge for us. It was not easy to go into the with them will lead to many self-reinforcing benefits for
French market. I felt like a schoolboy taking a tough the entire national industry. However, a firm must meet
exam when I decided to try and bring Italian fashion to the best rivals in other nations as well.
Paris. We started out by trying to satisfy the Parisian Korean companies, for example, view Japanese rivals as
May/June 1990 13
 their prime competitors both for strategic and historical rea­ independence or requiring an expensive merger. They are
sons. The result is that there is little danger that Korean particularly common in industries undergoing structural
firms will fall into the classic trap of firms in low labor cost change, especially ones in which many firms feel
countries, that of resting on labor costs as their sole threatened.
advantage. They are setting out to challenge their Japanese Alliances are a tempting solution to the dilemma of a
rivals in terms of product sophistication, process firm seeking the home-base advantages of another nation
technology, and foreign marketing presence. This is without giving up its own. Unfortunately, alliances are
another example of how sustaining competitive advantage rarely a solution. They can achieve selective benefits, but
requires that a firm create pressure, not avoid it. they always involve significant costs in terms of
coordination, reconciling goals with an independent
Locating Regional Headquarters entity, creating a competitor, and giving up profits.
The principles I have described carry implications for These costs make many alliances temporary and destined
the choice of where to locate the regional headquarters to fail. They are often transitional devices rather than
responsible for managing a firm's activities in a group of stable arrangements.
nations. Regional headquarters are best placed not for No firm can depend on another independent firm for
administrative convenience but in the nation with the skills and assets that are central to its competitive
most favorable national "diamond." Of special impor­ advantage. If it does, the firm runs a grave risk of losing
tance is choosing a location that will expose the firm to its competitive advantage in the long run. Alliances tend
significant needs and pressures lacking at home. The to ensure mediocrity, not create world leadership. The
purpose is to learn as well as raise the odds that most serious risk of alliances is that they deter the firm's
information passes credibly back to the home base. own efforts at upgrading. This may occur because
DuPont, for example, moved its European headquarters management is content to rely on the partner. It may also
in agricultural chemicals from Geneva to Paris to take occur because the alliance has eliminated a threatening
advantage of a better developed national cluster. France competitor.
is the world's second-largest market for crop protection
after the United States, and is a highly sophisticated one. The Role of Leadership
Real corporate leaders believe in change. They possess
Selective Foreign Acquisitions
an insight into how to alter competition, and do not
Foreign acquisitions can serve two purposes. One is to accept constraints in carrying it out. Leaders energize
gain access to a foreign market or to selective skills. Here their organizations to meet competitive challenges, to
the challenge of integrating the acquisition into the global serve demanding needs, and above all, to keep
strategy is significant but raises few unusual issues. The progressing. They find ways of overcoming the filters
other reason for a foreign acquisition is to gain access to that limit information and prevent innovation. They
a highly favorable national "diamond." Sometimes the harness and even create external pressures to motivate
only feasible way to tap into the advantages of another change.
nation is to acquire a local firm because an outsider is Leaders have a broad view of competition in which
hard-pressed to penetrate such broad, systemic advan­ their national environment is integral to competitive
tages. The challenge in this latter type of acquisition is success. They work hard to improve that environment
to preserve the ability of the acquired firm to benefit from and to encourage appropriate (though sometimes painful)
its national environment at the same time as it is government policies. As a result, leaders are often seen
integrated into the company's global strategy. as statesmen, though few would describe their own
actions that way. Leaders also think in international
The Role of Alliances terms, not only in measuring their true competitive
Alliances, or coalitions, are a final mechanism by advantage but in setting strategy to enhance and extend
which a firm can seek to tap national advantages in other it.
nations. Alliances are long-term agreements between This concept of leadership has been lost in many
firms from different nations that go beyond normal companies. Too many companies and too many
market transactions but stop short of merger. They take managers misperceive the true basis of competitive
many forms, including joint ventures, licenses, sales advantage. They become preoccupied with improving
agreements, and supply agreements. They have become financial performance, soliciting government assistance,
prominent in international competition because they can and seeking stability through forming alliances and
speed the process of globalizing strategy, reap economies merging with competitors. These sorts of steps are not
of scale, gain access to technology or markets, and good for companies or for nations. Today's competitive
achieve other benefits without giving up corporate realities demand more. □
14 Planning Review