 Good morning class. In the previous sessions I had made an attempt to explain the concept of strategy and provide an understanding on the basic definition of what strategy is all about. More than the understanding I think you should clear the misunderstandings on what popularly people think strategy is all about. So if that misunderstanding is cleared then I think there will be more understanding on the concept of strategy. The fundamental understanding that everybody, every one of us have is that it is about doing things differently and uniquely as a result of which an entity gains some advantage which is competitive and long term sustainable as well. Now we must also understand that this entity need not necessarily be a firm an organization but also be something that is external to it. Now that brings to this class a discussion on the need for countries to have that comparative or I should say competitive advantage. The reason is that it is not only that firms or organizations should do things differently to create that value but also it is quite possible that the ecosystem around which these organizations function and the aggregate of this ecosystem if we call it as a nation as a whole if that is able to generate some advantage which firms and organizations can leverage then there is a strategic source in what I call as the nation's competitive advantage. And to understand this with a very structured framework Michael Porter provides this Porter's diamond to understand the competitive advantage of nations. And there are different schools of thought to this framework the two major schools of thought one looks at the nation's competitiveness from an economic perspective and the other from a management perspective. So it is more on the management school of thought that this Porter's diamond has to be understood not that the economic school of thought is not necessary but then the perspective with which we have to look at this model needs to be more management than economics or trade. Now let us ask this fundamental question as to why should nations be competitive today just as different firms and companies compete against each other for market share countries also compete against each other for a different number of reasons and we are restricting our discussion for the purpose of gaining an economic advantage. So a country needs to be competitive to attract investment investment from indigenous firms investment from firms within the country and also investments from firms outside the country because it is only these investments that can spur some economic activity in a country and generate because it generates business. So if there is investment there is growth in the business and any country that has an economic strength has this very strong brand of being the most favored nation a powerful nation from an economic perspective. So the brand building of a nation the positive brand building of a nation reinforces additional investment and additional growth in business so these are all intertwined as a result of which the combination of the propensity to attract huge investments and generate enormous growth in business and build a very strong brand for the country as a whole makes a country very powerful at a geopolitical level where decisions at the geopolitical level are influenced by such powerful countries which have a very strong combination of a favored investment climate good business potential as well as a very strong brand as a result of which such countries are able to influence decision making at the geopolitical level. So you need to understand that it is definitely important that countries also need to gain some competitiveness so it is not just that strategy or competitive advantage is something that is unique to organizations or firms doing business but also equally applicable to countries as well and if that is an accepted theory then what model will we be using to understand the different sources of such competitive advantage that the country can get. Now Porto's diamond identifies four broad parameters or sources that provide countries some competitive advantage the factor conditions the demand conditions related and supporting industries and the firm strategy structure and rivalry so these four forms these four form the cornerstones of the Porto's diamond that is used to understand a nations competitive advantage now different nations have different combinations or different characters in each of these four individual points but all of these will influence some ingredients within a nation which when aggregated together provides that comparative advantage for a given nation that makes one nation better than a different nation not only individually these four points and as a whole these four makes a very strong case to provide a comparative advantage for different nations and this advantage can be generated either from the availability of resources and the skill set available within a nation or provides a warehouse of information that different firms operating in different nations can use based on which they decide on the business opportunities that organizations need to pursue and what type of resources or skills that they would be requiring and if adequately found in those nations go to those nations and at times a nation's advantage also influences the goal of individual companies as well and it is also possible that based on all of these ingredients based on all of these parameters in the Porto's diamond companies will also be forced or rather pressurized to innovate and invest because of such influencing factors which are not internal to the company but then operate from an exterior and this exterior I am talking about is a country itself the surrounding environment is influenced in such a way that companies are pressurized to innovate and invest so let us see each of these cornerstones of these Porto's diamond and I will try and provide some perspective to it with some examples so that you understand this better the first thing is the factor conditions now the factor conditions is more the local conditions the situation that is that characterizes a country and this could be regarding the production factors which is got to do with the availability of skill labor or the infrastructure that is available which is necessary for competition in particular industries and the source of such factor conditions could be different but mainly can be grouped under some specific heads where identical sources are categorized for example human resources the qualification level the cost of human capital that is employed the quality of the human capital that is employed which can be measured from the commitment level of the human resources or the availability of material resources itself like natural resources or we are talking about a different industry let us say an agrarian type the type of vegetation or the extent of land itself the space that is available or could be the knowledge resources which could be the type of education system in a country or capital resources how advanced are these financial markets could be the stock market or the banking system in the country how regulated or deregulated it is what is the access that companies can get to financial capital or even the infrastructure resources good roads good ports availability of power now these are all the factor conditions that I am talking about and if countries are able to have these factor conditions positively influencing investment then a country can gain some competitive advantage because any firm or organization would be more than willing to invest in a country where human resources good where material resources is available where knowledge resources is rich good access to financial capital good access to material flow by way of good infrastructure by way of good roads ports power so these are factor conditions that I am talking about and of course I had also made a mention about the quality of education institutions or other factor conditions like the quality of research in universities that can be a good input to companies liquidity of national stock markets which again it is tied with the capital resources so you should understand that such factor conditions play a very important role for countries to gain a competitive advantage because these are things that directly or indirectly influence the competitiveness of companies of firms and these are conditions which when favorably disposed will attract some of the best quality investments into a country I will give you some examples for you to understand this better take for example Switzerland since one of the factor conditions that I was mentioning is the quality of human resource which also means the quantity of human resource due to labor shortage in Switzerland it was because of this that they had to abandon a labor intensive watchmaking industry and that is one of the reasons why they went to a niche or a innovative high-end watches which was not that labor intensive and that is the reason why today if you talk of talk of high-end niche watches it is the Swiss watchmaking industry that is globally competitive the reason is because that Switzerland as a country could not afford to provide as much labor as it is required for a labor intensive watchmaking industry and then the companies decided to move up the value chain and engage in non-labor intensive and premium niche high-end watches and it is because of this factor condition that companies were able to that forced to rather provide these high-end watches and not the low-end watches and that explains why Switzerland today is known more for its niche watches than the conventional low-end watches another example is the high-priced land for Japan in Japan which means that since land is premium factory space is premium so Japanese manufacturing companies could not afford to hold such premium space just to store inventory as a result of which this factor condition of land being priced at such a high premium made the Japanese companies to follow what is today called the just in time inventory techniques. So if you go back and ask the question what was one of the reasons for all these just in time and these world-class inventory management practices the single or the more the most important reason is that the land price was so expensive as a result of which the Japanese companies were forced to adopt these just in time inventory practices because they cannot afford to have heavily priced high-priced land just been used for storage another example for you to understand how factor conditions also made countries to develop some unique source of competitive advantage is the case of take the case of Sweden since the building season was very short and coupled with high and construction cost you find that there was a need for prefabricated houses which is very popular in the Swedish geography reason because building seasons are very short and the construction cost is very high and hence prefabricated houses became the need in the Swedish construction industry the building construction industry. So you can understand that these factor conditions which are unique to a nation also makes companies to innovate to come out with new strategies that provides them that unique competitive advantage now what will happen over a period of time is these factor conditions provide that that initial momentum that first mover advantage which firms build subsequently to generate a company's unique competitive advantage now in the process we should not forget that it was the nation's factor conditions that form the very foundation on which companies build their competitive advantage so you should not forget that each country will have its own particular set of factor conditions and it is these factor conditions in each country that companies use optimally to gain that competitive advantage for their own for a company's own competitive advantage so this will explain that in low cost countries low cost meaning where the cost of labour is low you find certain set of industries being able to leverage such low cost labour and you can characterize some countries to be agrarian because of the availability of huge extent of fertile soil or you can you can understand the venture capital market the Silicon Valley in the US for example where the startup culture is so predominant so that explains why venture capital as a developed concept is so popular in the United States so these factor conditions are influenced not only by availability of natural resources but also by some the political establishment the economics or the financial capital markets or the society as a whole which I will be explaining later when we look at different other factors so the factor conditions of a particular nation which is influenced by not only by the nature but also by politics the society the economics provides a fundamental basis and this fundamental basis has a source of competitive advantage which provides that initial drive for companies to build a company's own competitive advantage on it so you should understand that the factor condition as a nation's competitive advantage provides that first mover advantage for companies on which they subsequently build the company's own competitive advantage but do not forget that these factor conditions provided the playground for these companies to play the next is the demand conditions the sophisticated domestic market in a given country is an important element for countries becoming competitive and the process how when firms that operate in countries where the domestic market itself is sophisticated how they become sophisticated themselves because when firms engage in a sophisticated domestic market it is more likely that they end up and selling superior products the reason being very simple that the domestic demand itself is very sophisticated that they will not settle for anything less but of high quality so if you are proximate to such consumers then such firms are able to better understand the needs of such customers and meet those high end requirements not because these are export requirements these are requirements that the domestic market itself requires now what characterizes the home demand or the domestic demand it is a mix of the customers needs and wants which is domestic the scope and growth rate within this domestic market and over and above that the mechanisms that can transmit these domestic preferences to foreign markets of these characterize the sophistication of home demand now if this sophisticated domestic demand spreads to other countries and that it is already sophisticated at the domestic level then there is every reason that local firms will become globally competitive I will give you one example for you to understand this the French wine industry the French they are sophisticated wine consumers now being French being local in France these consumers now force the French wineries to produce high quality wines so you now understand that the demand condition which is characteristic of a particular nation is driving companies in that particular industry to meet meet that sophistication that sophistication and in the process they are not only meeting the local demand conditions but also emerging to be globally competitive as well you can think of other examples as well for example the fashion industry in Italy the locals are very fashion conscious as a result of which you find today the Italian brand is also globally competitive because it is meeting the sophisticated demand requirements of the local or the Italian fashion industry and since this demand requirement is also a globally competitive becoming a globally competitive one there is by natural default that these companies become globally competitive as well so you should understand that demand conditions at the local level if they are very sophisticated then there is a potential for companies in such demand environments to also become globally competitive and another important element in the porters diamond is the related and supporting industries if you have a very strong set of related and supporting industries that can that can support the competitiveness of a particular firm around which these related and supporting industries operate then there is a probability that that particular industry becomes globally competitive and I am talking about the suppliers and the related vendors to that particular industry and this usually act occurs at a regional level as opposed to a national level examples for that the typical examples would be the Silicon Valley in the US or the Detroit the auto industry in Detroit or in Italy the leather shoes or the leather goods industry in Italy or at our own knitwear industry in Thirupur now these are all examples of how at a very regional level the presence of related and supporting industries is providing some competitive advantage which is a strong source for countries to gain a comparative advantage when it comes to positioning them as a competitive tool now there are advantages and disadvantages of such cluster based competitive advantage cluster based meaning locating upstream or downstream industries in the same area and we also call this as the agglomeration advantage there is a great potential for technology and knowledge spillover across the entire value chain the potential to generate some market power because we are able to aggregate within a particular region a set of crucial value chain elements that start from the supplier level up and also reach up to the consumer level and such association is also providing some advantage from a labour perspective which will also become a disadvantage because that is also resulting in potential poaching and also increases competition within the value chain that might reduce the margins as well but by and large the presence of such related and supporting industries is by itself providing an inherent competitive advantage to a particular geography the fourth important diamond important part of the porters diamond is the firms strategy structure and rivalry let us begin with strategy and I will give you one example beginning with capital markets how a domestic capital market the characterization of a domestic capital market influences company strategies now for example some countries where the capital markets do not have a very long run outlook for example take the short run outlook that is typically that is typically let us say is American now there industries where investment is short term that will be very competitive for example the IT industry I am talking about the hardware industry now there you will find that since the outlook itself is short term considering that this is IT you will find that the capital markets in which potential investors are also looking only at short term benefits those will become competitive as against countries where the investor class itself is characterized by those who have a long run outlook for example take Switzerland in that case industries that also require that long gestation period also become competitive and that explains why the pharmaceutical industry for example Novartis in Switzerland is being able to be competitive because it can generate and I am just talking about from a capital market point of view that it can raise capital from investors whose DNA is of that being long run and as a result of which industries that also have long gestation periods become competitive and I gave you the examples of the pharmaceutical industry in Switzerland. Another example is the individual's career choices where an individual base where an individual bases his or her career decisions on the opportunities that are available and also the prestige of being able to work for a particular industry so a country where you find that a key personnel holds positions that are considered to be very prestigious then that country will become very competitive take for example holding the position of CEO of an IBM headquartered in the US or Intel headquartered in the US and a very key personnel holding that position by a natural process also adds competitive advantage to the country as a whole because of this person holding a very prestigious in this case the CEO of an Intel or an IBM or a Microsoft the next thing is structure sometimes best management styles vary across industries not only industries across countries as well some countries may be oriented towards a particular style of management and those countries will tend to be more competitive in industries that require that style of management so if there is a natural sink between an industries required style of management and that particular management is also the characteristic of a particular country then it makes things a little easier for example Germany, Germany tends to have hierarchical management structures composed of managers with strong technical backgrounds and that explains why German companies are a technologically the management structure is more towards people having a technological mindset and as a country as a whole nurtures that management structure then companies that require that technology leadership become competitive or China today the government itself is a little capitalistic so you can understand the transition that it is making today it is making today or India for example dominated by family run businesses and I do not know how many of you know that a majority of successful Indian corporations are family run where the stakes the majority stakes are held within the family and you can extend this also in other decision makings one example is the governance standards whether governance standards in US where it is not family where it is not a owner led business whether they apply in India where it is a owner led business so you could you should understand that the structure which is essential for industries to be competitive and if a particular structure is the requirement for an industry to be competitive and if that structure is also epitomized by the country by enlarge then it is easy for the industry to synchronize with a particular country and also the rivalry if there is intense competition then the competition itself is an inherent source of innovation and that explains why in Japan there is fierce competition as a result of which innovation as a key for growth is now a DNA of most of the Japanese companies and today we are looking at it in the Indian software services industry as well there is fierce competition the social networking take the example of the Facebook or the orchards where there is intense competition as a result of which there is a lot of innovation and if that happens within a country that that spurs such competition then there is more innovation now where does the government fall into the potos diamond now we will have to look at it from the perspective of what would be the implications of government and at times you will you will have this feeling that the government they do some things that they shouldn't and other things that they should be doing they don't and if you ask this question from this perspective we should view the role of government to that of being a catalyst to one where it encourages or pressurizes forces pushes companies to raise their ambitions to raise their aspirational levels and move to the higher levels of competitive performance and the government should be the tool be the catalyst that makes these companies to do things this way and how can they do that and they can do that in all the possible four parameters of the potos diamond they can subsidize monetarily or not or even indirectly by creating infrastructure or by tax provisions or by generating a highly talented intellectual pool through its educational policies or they can focus on specialized factor creations today the Indian software services industry is catering to a non-Indian specialized IT requirement the reason is because the sophistication in terms of the requirement of software as a service within India is not that high and that explains why much of the revenues comes from different countries not in India so if you are able to specialize and create a focus to growth in the software as a sophisticated requirement locally then you will understand how much is the business potential for the IT services the software services companies another area where the government can influence is by just enforcing tough standards maybe high technical and product standards environmental standards because then we are pushing organizations to achieve these or meet these high standards that the government is setting through its policy making I will just give this very popular example of the Japanese fax machine industry that illustrates that best epitomizes the potos diamond for national advantage that I am talking about beginning from the Japanese factor conditions you know Japan has a relatively high number of electrical engineers per capita so that is the factor condition that I am talking about and the demand condition is also very complicated because the Japanese language is a little different from the conventional English language so you can understand how high demanding that the fax machine industry is because of the need for a specialized text and the large number of related and supporting industries in this case I am talking about the hardware industry the miniature miniaturized components and also the fact that the mindset of being less in space explains the also the miniaturization in the in the technology sense and the intense competition within the Japanese that explains the extent of the domestic rivalry that the Japanese fax machine have as a result of which all of them were pushed to innovate and result in cost reductions and how the government in this case a government owned company the entity which is the state owned telecom company changed its cumbersome approval requirement and today it is more general and friendly so if you look at the entire Japanese fax machine industry of course each companies they have their own strategic advantage technology superiority they have their own market share but if you look at it from a very bird's eye perspective from a nation's perspective and split it to understand it from the Porto's diamond then you will understand that the factor condition that it had a number of electrical engineers the sophisticated demand condition that it is because of these Japanese text and if we are able to provide a fax machine that can transmit Japanese script then it is easy to do with English language and that explains why the Japanese fax machines became globally competitive and also the presence of the related supporting industry the hardware industry and the intensity with which there was domestic competition this explains why the Japanese fax machine also became globally competitive so you understand that nation's competitive advantage is not only advantages for the nation but also for companies participating in such geographies because it makes them globally competitive and you can do this by picking many countries adopting these Porto's diamond and ask this question how companies which leveraged which encased on these four ingredients were also becoming globally competitive and there are many examples that you can take to do this you take you can take the as I explained before the Italian shoe industry or the Tirupur's knitwear export industry or the Malaysian Puyter industry so these are all different industries and different countries that you can take as examples and check the applicability of Porto's diamond and in the process you will understand why certain type of products became globally competitive so the Porto's diamond gives you an understanding how even countries can gain that competitiveness and get that absolute cost advantage that companies will get out of a nation's competitiveness the next class just as we have a model to understand nation's competitiveness we also have another model that provides the understanding of how an industry can be attractive and that you will understand when I explain to the class about the Porto's five forces model to understand the industry's attractiveness we will see that in the next class thank you