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-à-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.
Intro
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