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Vision on Innovation: 2. Models on the dynamics of innovation

What do scholars tell us on the market dynamics of innovations ?

What does the academic literature tell us on the dynamics of major technology innovations and the formation of fast growing companies? We believe that the following studies are relevant for the purpose of exploring the cause of Europe 's underperformance in creating fast growing companies, as well as the relation between leading giants, new challengers and the innovation performance of regions and nations. We will refer to this material in the next section, where we address these topics.

"Diffusion of Innovations", Everett Rogers (1983). Rogers achieved academic fame for his diffusion of innovations theory. He showed that adopters of any new innovation or idea could be categorized as innovators, early adopters, early majority, late majority and laggards, based on a normal distribution (as shown in the top left side in the figure below). Each adopter's willingness and ability to adopt an innovation would depend on their awareness, interest, evaluation, trial, and adoption. People could fall into different categories for different innovations - a farmer might be an early adopter of hybrid corn, but a late majority adopter of of portable gaming devices. When graphed, the rate of adoption formed what came to typify the Diffusion of Innovations (DOI) model, an "S shaped curve." (S curve, as shown in the bottom left side in the figure below). The graph essentially shows a cumulative percentage of adopters over time - slow at the start, more rapid as adoption increases, the leveling off until only a small percentage of laggards have not adopted.

"Crossing the Chasm: Marketing and Selling High-tech Products to Mainstream Customers" and "Inside the tornado: Marketing Strategies from Silicon Valley's Cutting Edge", Geoffrey A. Moore (1991,1995). Moore uses the diffusion of innovations theory from Everett Rogers, but argued that there is a chasm between the early adopters of the product (the technology enthusiasts and visionaries) and the early majority (the pragmatists). Moore argues that this is because visionaries and pragmatists have very different expectations. Moore attempts to explore those differences and builds from there to suggest techniques to successfully cross the "chasm".



To cross the Chasm, Moore suggests that the company focus on a "beachhead" or a total solution for a problem built around the needs of a niche market. Moore calls this total solution a "whole product," an imperative for penetrating the pragmatic buyers. Moore defines the whole product as "the minimum set of products and services necessary to ensure that the target customer will achieve his or her compelling reason to buy." The whole product created for a niche market represents the entry into the mainstream market, an area called the Bowling Alley.

Once across the Chasm, the Bowling Alley phase begins, representing the early majority. The creation of the whole product to fulfill the needs of a niche market requires an additional strategy beyond product leadership: customer intimacy. Once the whole product satisfies the needs of a niche market, pragmatists embrace the technology, and a "pin" - as Moore calls it - is knocked over. Technology vendors should seek a beachhead that will allow them to leverage their success in one niche market to attack another. For example, an application may be created to better enable customer support via telephone. Once this market is dominated, the application may be modified to address customer support on the Internet.

As more niche markets are successfully penetrated, the solution is perceived to be less of a niche product and more of an all-purpose solution. This creates momentum around the technology, and the hyper growth phase of the Tornado begins. The Tornado is a period of hyper growth when the pragmatic buyers flock en masse to adopt the technology as the standard. The product focus has also shifted away from the problems of the end user and toward the infrastructure buyer that can implement the technology to solve their problems. Successful companies with technology in the Tornado "just ship" the product and focus less on the customer because this is a hyper growth phase where market share is determined and leadership is established. A leader is needed to create stability in the market, and the company that sets the standard for the technology will reap tremendous financial rewards. Companies create value in the Tornado phase by balancing product leadership and operational excellence, or the ability to successfully execute the business plan.

Main Street represents a time when the purchasing fury has subsided and supply and demand is brought to equilibrium. Moore describes the entrance into Main Street as a "calamitous" experience. Revenue shortfall, loss of talented employees, and shareholder lawsuits due to a floundering stock price are not uncommon. However, if a corporation comes to terms with the fact that Main Street is an inevitable part of the life cycle, it can be quite profitable. To ensure success, corporate strategy must shift once again toward a combination of customer intimacy and operational excellence.

"The Innovators Dilemma", by Clayton M. Christensen (1997). Christensen addresses the question why large successful companies often can't capitalize on the opportunities brought about by major changes in their market. The computer industry provides one example of a more general pattern in the dynamics of major technology innovations. IBM dominated the mainframe market, but missed by years the emergence of minicomputers, which were technologically, much simpler than mainframes. Digital Equipment Corporation (DEC) created the minicomputer market and was joined by companies as Data General, Prime, Wang, Hewlett-Packard and Nixdorf. But each of these companies in turn missed the desktop personal computer market, which was initially left to Apple, Commodore, Tandy and IBM's stand-alone PC division. But Apple and IBM in turn lagged five years behind the leaders in bringing portable computers to the market.

Christensen describes companies whose successes and capabilities can actually become obstacles in the face of changing markets and technologies. He distinguishes two types of technologies: Sustaining technologies and disruptive technologies. Sustaining technologies are technologies that improve product performance. These are technologies that most large companies are familiar with; technologies that involve improving a product that has an established role in the market. Most large companies are adept at turning sustaining technology challenges into achievements. Christensen claims that large companies have problems dealing with disruptive technologies. Disruptive technologies are "innovations that result in worse product performance, at least in the near term. They are generally "cheaper, simpler, smaller, and, frequently, more convenient to use".



As the above figure shows, disruptive technologies cause problems because they do not initially satisfy the demands of even the high end of the market. Because of that, large companies choose to overlook disruptive technologies until they become more attractive profit-wise. Disruptive technologies, however, eventually surpass sustaining technologies in satisfying market demand with lower costs. When this happens, large companies who did not invest in the disruptive technology sooner are left behind.

Christensen identifies five main reasons why large outstanding firms can fail to capitalize on disruptive technologies and gives advice to companies wrestling with the Innovator's dilemma :

  • Companies Depend on Customers and Investors for Resources: Well-run companies find it difficult to allocate resources for products outside the mainstream demands. However, products that do not appear to be useful to customers today, may squarely address their needs tomorrow. While keeping close to our customers is an important management paradigm for handling sustaining innovations, it may therefore provide misleading data for handling disruptive ones. The solution is to create a separate unit within the company or create a spin-off that focuses on the new opportunity. For example, when employees at Quantum Corporation, a leading maker of 8-inch drives used in the minicomputer industry, recognized an emerging market for the 3.5-inch drives that powered personal computers, a separate company was set up to commercialize the smaller drives. In 10 years time, the market for 8-inch drives had disappeared, and Quantum, through its wholly-owned spin-off venture, emerged as the largest unit-volume producer of disk drives in the world.
  • Small Markets Don't Solve the Growth Needs of Large Companies: Influenced by the need to maintain share prices and to create opportunities for employees, most large companies adopt a strategy of waiting until new markets are "large enough to be interesting," leaving the door wide open to quick-acting start-ups. Placing responsibility in organizations small enough to get excited about small opportunities and small wins while the mainstream company is growing gives managers the best of both world. Johnson & Johnson has had great success with this strategy. Made up of 180 autonomously operating companies, it has launched products of disruptive technologies through several small enterprises acquired specifically for that purpose.
  • Markets that Don't Exist Can't Be Analyzed: Christensen writes "the only thing we may know for sure when we read experts' forecasts about how large emerging markets will become is that they're wrong." The innovator's dilemma is how to grasp the essential first-mover advantage when virtually nothing is known about the potential market. The key is planning to fail early and inexpensively in the search for a market. Honda's invasion of the North American motorcycle industry reflects this process of trial and error perfectly. Planning to introduce a fast, high-powered motorcycle in the US in 1959, Honda discovered an untapped market for small, inexpensive motorized bikes and created an ad campaign tailored to a market very different from the established network in which Harley-Davidson, BMW, and other traditional motorcycle manufacturers competed. The 50cc motorbike, a disruptive technology in the American market, fueled Honda's growth; by 1975, the company had captured a substantial share of the market with annual sales of 5,000,000 units largely with a product it had not even foreseen in its initial planning.
  • An Organization's Capabilities Define its Disabilities: When managers tackle an Innovation problem they instinctively work to assign capable people to the job. But once they've found the right people, too many managers assume that the organization in which they'll work will also be capable of succeeding at the task. And that is dangerous because organizations have capabilities that exist independently of the people who work within them. An organization's capabilities reside in two places. The first is in its processes the methods by which people have learned to transform inputs of labor, energy, materials, information, cash and technology into outputs of higher value. The second is in the organization's values, which are the criteria that managers and employees in the organization use when making prioritization decisions. People are quite flexible, in that they can be trained to succeed at different things. An employee of IBM, for example, can readily change the way he or she works, in order to work successfully in a small start-up company. But processes and values are not flexible. A process that is effective in the design of minicomputer, for example, would be ineffective in the design of a desktop personal computer. Similarly, values that cause employees to prioritize projects to develop high-margin products, cannot simultaneously accord priority to low-margin products. The very processes and values that constitute an organization's capabilities in one context, define its disabilities in another context.
  • Technology Supply May Not Equal Market Demand: The attributes that make disruptive technologies unattractive in the mainstream market are often the very ones that constitute their great value in emerging markets. In markets as diverse as disk drives, accounting software, and diabetes care, Christensen shows how the basis of competition changed when the performance of two or more products improved beyond what customers required. In these situations, convenience and price become the ultimate considerations, opening a doorway for disruptive technologies. Instead of racing toward higher performance and higher margins, companies who want to stay on top need to be aware of what their mainstream customers value at each stage of a product's life cycle, and be prepared to introduce more convenient, lower cost products into established markets when competitive environment demands them.

"Open innovation, The new imperative for creating and profiting from technology", by Henry Chesbrough. (2002). "Most innovations fail. And, companies that don't innovate die" is the opening statement of Chesbrough's book. He stresses that innovation is vital to sustain and advance companies' current businesses and critical to growing new businesses. Innovation is, however, a difficult process to manage and meta-innovation (i.e. innovating how to innovate) is becoming increasingly important for high-tech companies to maintain their competitive edge. Chesbrough describes the transition from the traditional internally focused "closed" innovation paradigm to an "open" innovation paradigm. His central thesis is that the closed innovation paradigm is now being rendered obsolete, primarily due to the growing mobility of skilled workers and the increased availability of Venture Capital.

The closed innovation paradigm is based on research and development, production and distribution done entirely in-house and has been the pre-dominant model for companies as AT&T, IBM, GE, DuPont and Philips during most of the 20th century. These companies typically thought to discover new breakthroughs; develop them into products; build the products in their factories; and distribute, finance and service those products all within the four walls of the company. New technologies were heavily patented to exclude rivals from using that technology. Although frictions between cost oriented R&D groups and P&L responsible business units often caused long development cycles and many new technologies to be shelved, the closed model worked well in an environment of live long employment and absence of external funding to productize technologies outside the company. Chesbrough indicates four factors eroding this paradigm: The growing mobility of skilled people; the growing presence of Venture Capital; the increasing external options for ideas sitting on the shelf; and the increasing capability of external suppliers. The combination of these factors increases the permeability of the firm, and allows ideas and intellectual property to escape the company's boundaries. Chesbrough outlines how these erosions factors impacted Xerox in its PARC research center. He shows how Xerox failed to capitalize on several of the groundbreaking innovations that originated in those labs, such as the Graphical User Interface (GUI), ethernet technology and the post-script standard. Some of the people who pioneered these technologies left Xerox in frustration to leverage their ideas in new ventures started with Venture Capital backing (and often in consent with Xerox). This lead to the creation of highly successful companies like 3Com, Adobe, SLDI and Documentum.

Chesbrough points out that that the development of nascent technologies in new markets is very different from the advancement of technologies in current market and follow different rules. While the first resembles the game of chess (a carefully managed, strategically sound, but slow stage gate process directed to serve existing customers better vis--vis existing competitors), the second can best be compared to playing poker (a high risk approach, involving quick decisions often based on a relatively superficial technology assessment and aimed to exploit first mover advantages). His observations resemble the ideas of Clayton Christensen on why incumbents have difficulties in capitalizing on disruptive technologies. To overcome this situation, companies need to carefully review their options to benefit from inventions that do not fit the current mainstream business model, e.g. through the creation of a separate business unit, the formation of a spin-out or by licensing-out the IP to another company altogether. Chesbrough adds that in the open innovation paradigm, companies should also leverage external research, consider options to license-in third party IP or acquire technology start-ups in order to strengthen their own business model. They should furthermore consider indirect sales channels as an alternative to their own direct sales force. In other words, companies have to turn the Not-Invented-Here (NIH) and Not-Sold-Here (NSH) syndromes that often stopped them to leverage third party capabilities into the guiding principles for open innovation. They should claim a tangible portion of the total value chain, rather than the whole, and support others to strengthen the value chain at large. Chesbrough further clarifies these statements with a detailed description of how IBM, Intel and Lucent have taken the lessons of the open paradigm on-board.

The figure below shows the knowledge landscape in the open innovation paradigm and summarizes, the key drivers of change (i.e. the factors eroding the closed innovation paradigm), as well as the contrasting principles of closed and open innovation. Whereas the closed paradigm is characterized by stage gate process to drive projects from internal research to internal development and market launch (typically represented as a funnel where only the best ideas pass through), various other options are utilized in the open innovation model, such as the spin-out of technology that does not fit the business model of the company, the licensing-out of IP to other companies to strengthen the value system, the licensing-in of best-of-breed IP of third parties and the acquisition of advanced technology companies to advance their own business model.



Chesbrough suggests that if firms are working in a fertile innovation environment, innovation will flourish, and that it is much cheaper and safer for firms to shop for the ideas that they consider most promising and supplement their internal development efforts. The purchasing company must continue the development in-house, refine and eventually integrate the new product with existing products or services. In the open innovation paradigm companies use their internal R&D primarily to:

  • Identify, understand, select from and connect to the wealth of available external knowledge;
  • Fill in the missing pieces of knowledge;
  • Integrate internal and external knowledge to form more complex combinations and to create new systems and architectures;
  • To generate additional revenues and profits from selling research outputs to other firms as well as spin-out participations.

The open innovation paradigm implies that large companies will do less basic research themselves and will more rely on Universities and government funded research institutes for that purpose. Governments therefore will need to fund a good deal of basic research. But spending a lot of public money on research is not enough. Chesbrough stresses that programs should be awarded on merit, rather than on political connections, and highlights the importance to aspire for excellence and to publish the results in the open literature to ensure the reuse of ideas in a wide array of situations.

Chesbrough stresses the significance of a viable "business model" to link technical decisions to economical outcomes. It serves as a framework to link technical decisions on how to combine internal research with external ideas and capabilities and how to integrate both internal and external pieces together into systems and architectures. According to Chesbrough, the functions of a business model are as follows:

  • To articulate the value proposition, that is, the value created for users by offering based on the technology;
  • To identify market segments, that is, the users to whom the technology is useful and the purpose for which it is used;
  • To define the structure of the firm's value chain, which is required to create and distribute the offering, and to determine the complementary assets needed to support the firm's position in this chain;
  • To specify the revenue generation mechanisms for the firm, and estimate the cost structure and target margins of producing the offering, given the value proposition and value chain structure chosen;
  • To describe the position of the firm within the value network linking suppliers and customers, including identification of potential complementary firms and competitors;
  • To formulate the competitive strategy by which the innovating firm will gain and hold advantage over rivals.

Chesborough points out that an inferior technology with a better business model will often trump a better technology commercialized through an inferior business model. Constructing a business model requires managers to deal with a significant amount of complexity and ambiguity, something most managers and technologists often don't handle vary well. To be a company that successfully innovates requires new levels of skills and abilities from its innovators and an open approach to innovation.

"The Slow Pace of Fast Change: Bringing Innovations to Market in a Connected World", by Bhaskar Chakravorti (2003). This study addresses the underlying factors that determine market acceptance of new products, technologies, services, and entire industries. Chakravorti's vision is that a deep understanding of the dynamics of networks is essential to bringing certain types of innovation to life. He uses the concepts of equilibrium and game theory as an extension of the framework popularized in the book and movie A Beautiful Mind, which is based on the Nobel Prize-winning work of John Nash. In a connected market, what is adopted and when it is adapted are determined by strategic choices made by each participant. Each participant makes the choice that is in that person's best interest, and these choices depend on the choices of others. For example, if a teenager, her friends, her parents, and the local retailer think that a certain digital music player is going to be the ''next big thing'' and have reasonable longevity, this digital music player is probably on its way to market success. If any member of this group expresses doubt about this digital music player, the equilibrium is shifted away from market success. The rate of market acceptance is similar to that described as diffusion by Roger's categories of adopters, described above.

Chakravorti defines game theory as a "general framework for reducing any strategic situation into the circumstances of individual players whose interconnected actions, together with external events, determine the outcome of the situation". Using Moore's Law (the doubling of the number of transistors on integrated circuits every 18 months) as an example of technological progress, he explains that innovation adoption occurs at a slower rate because of market inefficiencies due to fragmented and privately motivated forms of decision- making. The "slower rate" implication is the basis for the book's title.

Chakravorti presents the strategy questions that should be considered to manipulate the innovation's rate of adoption. These include "Who are the players on the critical path to the innovation's adoption?" and "What are the innovator's levers?" Chakravorti tells the story of Napster's growth to provide examples of answers to these questions. He maintains that the "strategist has a two-part objective: unravel a status quo and orchestrate a new outcome that re-coordinates the choices of several players".

Chakravorti furthermore suggests to apply a reverse engineering process to the desired end-game to extract the strategy that will bring success. He declares, "The principle of endgame reasoning is an approach to using the future as a way to screen various strategic options available to the innovator in the present". When scenarios are developed, innovators look forward into time. Using endgames, innovators look backward in time. He advocates, "Imagine the future first before making choices in the present".

"The Cyclic Innovation Model", Guus Berkhout (2000). This model expresses that the successful market introduction of products and services is not a linear process, but rather involves many cyclic interactions between different actors from various disciplines. The Cyclic Innovation Model reconciles the "technology push model" - a supply driven pipeline process progressing in one direction from fundamental to applied science, to product development, to market application - and the "market pull model" - a demand driven pipeline process progressing the other way around in one direction from market opportunity, to product development, to applied and fundamental science - into the cyclic model shown in the figure below.



The model explains why a holistic multi-disciplinary view is required to develop effective policies to facilitate the innovation system and why short planning, implementation and feedback cycles provide the best results.

The Gartner hype curve (1995). Since 1995, Gartner has used Hype Cycles to characterize the over-enthusiasm or "hype" and subsequent disappointment that typically happens with the introduction of new technologies. A Hype Cycle is a graphic representation of the maturity, adoption and business application of specific technologies. The figure below shows our (Caneval Ventures) assessment from 2005 of the location of various technologies in the ICT and media industry on the hype curve.



Gartner distinguishes the following phases on the hype curve:

  • Technology Trigger: The first phase of a Hype Cycle is the "technology trigger" or breakthrough, product launch or other event that generates significant press and interest.
  • Peak of Inflated Expectations: In the next phase, a frenzy of publicity typically generates over-enthusiasm and unrealistic expectations. There may be some successful applications of a technology, but there are typically more failures.
  • Trough of Disillusionment: Technologies enter the "trough of disillusionment" because they fail to meet expectations and quickly become unfashionable. Consequently, the press usually abandons the topic and the technology.
  • Slope of Enlightenment: Although the press may have stopped covering the technology, some businesses continue through the "slope of enlightenment" and experiment to understand the benefits and practical application of the technology.
  • Plateau of Productivity: A technology reaches the "plateau of productivity" as the benefits of it become widely demonstrated and accepted. The technology becomes increasingly stable and evolves in second and third generations. The final height of the plateau varies according to whether the technology is broadly applicable or benefits only a niche market.

"Competitive Advantage: Creating and sustaining superior performance" and "Competitive Advantage of Nations", by Michael Porter (1985,1998). In his book, The Competitive Advantage of Nations, Michael Porter's explores the question of why some industries, economic institutions, or nations prosper while others fail. His underlying theme is that economic prosperity arises from establishments that are able to obtain and sustain a competitive advantage.

In order to measure the potential of continued success, Porter examines the economic patterns of Denmark, Germany, Italy, Japan, Korea, Singapore, Sweden, Switzerland, United Kingdom, and the United States. He maps the successful industries in each national economy, studies the histories of successful industries, and then defines a broader concept of competitive advantage.

In order to begin to answer this question it is necessary to understand the nature of competitive advantage, addressed in his earlier books "Competitive Strategy" and "Competitive advantage". Positioning is the key to obtaining and sustaining a competitive advantage. The goal is to be situated in the most favorable position possible when competing with others. Achieving low costs or differentiation are two basic strategies for positioning. According to Porter, any competitive strategy must grow out of a sophisticated understanding of the rules of competition that determine an industry's attractiveness. The ultimate aim of competitive strategy is to cope with and, ideally, to change those rules in the firm's favor. In any industry, whether it is domestic or international or produces a product or a service, the rules of competition are embodied in five competitive forces (see the figure below): Threat of new entrants, threat of substitute products or services, bargaining power of suppliers, bargaining power of buyers, and rivalry among the existing competitors.



Porter's five-forces models concentrates on five structural industry features that comprise the competitive environment, and hence profitability, of an industry. Applying the model means, to be profitable, the firm has to find and establish itself in an industry so that the company can react to the forces of competition in a favorable manner.

Porter's diamond model, shown in the figure below, offers a framework that can help understand the competitive position of a nation in global competition. It can be applied to major geographic regions as well. Porter distinguishes four fundamental determinants of national competitive advantage. The first is a nation's factor conditions, or the nation's position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry. The second is demand conditions, or the nature of home demand for the industry's product or service. The third is related and supporting industries, which refers to the availability of supplier industries and related industries that are internationally competitive. Lastly, the firm's strategy, structure, and the rivalry present in a nation determine the conditions that influence how companies are created, organized, and managed.



Nations gain competitive advantages in industries where the home demand gives domestic firms a better idea of buyer needs than that provided by foreign rivals. Strong domestic firms are equipped to succeed abroad. The diamond model suggests furthermore that new companies in specific industries can flourish, because local, leading-edge giants assure the presence of skilled labor, a network of relevant supplier and supporting companies and a benchmark for competitive performance. Michael Porter explores the components that made America, Switzerland, Sweden, and Germany "early postwar winners." Porter studies the patterns for national and international competitive advantage, which is measured by a significant and sustained share of world exports compared to a wide array of nations or foreign direct investment. Although America, Switzerland, and Sweden were positively affected by the war and Germany was negatively affected, these nations all share the ability of their industries to upgrade over time. Each nation has very bold characteristics which played important roles in their quest for economic control in industries worldwide.

The United States had the world's best minds in science and education in the postwar era. This, along with its endowment of natural factors of production, developed infrastructure, and huge pool of investment capital, gave the U.S. had a steady foundation on which to expand and upgrade its industries. To achieve this end, the government invested in education (with bills such as the GI bill) and space exploration; supported equal opportunity, health care, and environmental protection; and financed a large defense program, all of which created advanced home demand. However, the most beneficial elements to U.S. industry were probably the government's anti-trust regulations, and support of an open trading system, consequently creating the perfect competitive atmosphere to drive research and development in industries.

Switzerland and Sweden, on the other hand, had the advantage of maintaining their neutrality by opening up all markets. Both countries had the advantage of industries engaging in early foreign direct investment. Switzerland's strength lay in its their high savings rate, low stable interest rates, stable currency, political stability, and bank secrecy laws, which attracted foreign currency. Furthermore, its human capital is high due to universal public education, and high teaching standards. Sweden was successful in attracting foreign direct investment as well. Paying solidarity wages, it had lower wages than some major competing nations in industries like the auto, truck, and heavy machinery industries. Sweden also promotes its industries with a system of open, fluid buyer-supplier relationships and cross-industry collaboration.

Germany did not have similar advantages to the three previously discussed nations, but it was able to overcome the setbacks from WWII and moved on to become a world leader in several industries. With uniformly high education standards, Germany has an extremely educated and motivated work force. This, combined with excellent marketing skills and the continuous upgrading of products, gave Germany the ability to overcome its disadvantageous postwar position. One of the best things that happened to its industries was the unleashing of national rivalry between industries with anti-trust laws imposed by the U.S.

Porter also looks at Japan as a nation that gained its competitive advantage in the 1970s and 1980s. Although Japan had almost nothing in the postwar era, it did have a large pool of literate, educated, and increasingly skilled human resources. Japan was also able to benefit from the technology brought in by the U.S. during this time. To increase the rate of capital investments and the savings rate, the government instituted a financial investment policy (zaisei-to-yushi) that encouraged savings and deployed it in priority fields. The state also created tax incentives to deposit savings in the postal savings system (yubin chokin), national banks, and securities companies. Widely available data about those industries in which Japan maintains a strong position has stimulated rivalry, ultimately making Japan's industries internationally competitive. With governmental assistance and a strong belief in research and development in the most modern facilities and equipment, Japan has been able to emerge as one of the world leaders in many industries, such as the technology and automobile industries.

In the early post-war period, Italy depended on low cost labor for its competitive advantage. But Italy then managed to almost double its world exports because it was capable of aligning national circumstances with shifting demands of modern global needs. Italy has successfully upgraded the competitive advantages of its industries despite a chaotic government, poor telephone services, inadequate public services, and inefficient state-owned enterprises. Because its most successful firms are characteristically small- to medium-sized, domestic businesses have depended on the transferring of highly specialized knowledge from generation to generation. While Italy has internationally successful industries in ceramics, textiles, appliances, furniture, lighting, sinks, and other household products, it lacks substantial capital due to huge public debts and the inability to allocate capital. The financial market structure is the picture of inefficiency for funding and nurturing independent companies. Private capital is concentrated in a small group of individuals, and commercial banks are prohibited from holding equities or from making long-term loans.

Lastly, the study of Korea shows that it has great prospects of joining the ranks of the advanced nations. But even in 1990 when Porter's book was written, nearly all industries competed on cost. Korean's strongest industries are in textiles, apparel, and transportation, which includes shipping equipment and cars. Consumer electronic and semiconductors are also internationally competitive industries. Korea's largest natural resource is human labor, with a workforce of 17 million hard-working and disciplined people. Korea's main strategy is low labor costs and mass production of standardized products. Korea raised a lot of capital in the 1980s through rapidly rising saving rates. Korea represents a rapidly upgrading economy with a skilled and productive workforce, aggressive investment to acquire technology, and low-cost positions in a variety of industries. It seems Korea is whole-heartedly embracing the notion of competitive advantage by adjusting and focusing its strategies to improve its competitive position.

The last chapter of the book, entitled National Agendas, uses Porter's theory to identify the important long-term issues facing each nation and its government to gain competitive advantage in industry and in the national economy. By highlighting some of the constraints that must be overcome to further upgrade in coming decades, Porter demonstrates the characteristics unique to each nation that will help it to achieve sustained economic prosperity. He examines each nation in turn according to its stage of national competitive development in the postwar period. These include the factor-driven, investment-driven (Korea), innovation-driven (Italy, Japan, Sweden, Switzerland, and Germany), and wealth-driven stages (United States).

Each nation faces its own unique set of issues, opportunities, and constraints, but across all countries, certain clear themes emerge about upgrading its comparative advantage and achieving national economic prosperity. Nations need to continually improve the human and technical skills of their entire workforce by investing in advanced factor creation and by making quick improvements in new vital fields that affect many industries. Investment and support for education and training should come from both the public (government) and private sectors (companies). Porter praises those countries that spend a high percentage of their GDP on research and development, where Sweden and Japan lead in comparison to the other advanced nations. He also stresses the importance of having an efficient, well-developed, and sound capital market, banking system, and providing access to venture capital for investors and entrepreneurs who are willing to take risks. In regard to the proper size of the public sector, a small direct intervention role for the government will encourage healthy domestic competition and true innovation through the privatization of state-owned firms. The state's continuing enforcement of antitrust laws and avoidance of the trend towards mergers and consolidations will aid domestic firms' long-term success in international markets. In essence, economic policy should focus on creating competitive advantage and sustaining long-term growth rather than on defending against new competition or maintaining the status quo. Nations must not take their achieved success for granted or retreat in efforts to sustain those conditions, which originally made their economy thrive.


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