Financial Times

Bureaucracy - enemy of competitive advantage
By Dinesh Weerakkody
The economic expansion of Japan seems unstoppable. The U.S.A. once the paragon of productivity, continues to lag. Korea's prospects brighten as Britain's fade. Italy succeeds in spite of or perhaps because of being Italian. What accounts for these differences in the fortunes of economies of the world? Harvard's Michael Porter some years back proposed a paradigm to explain the dynamic relationships among countries, industries, institutions, and people that are pivotal to achieving economic advantage. Porter, a Professor at Harvard Business School, is an author of two best selling works on this subject. Porter's paradigm is based on a four-year study of 10 countries that focuses on their patterns of winning and losing in international markets.

His thesis is that a nation's ability to upgrade its existing advantages to the next level of technology and productivity is the key to international success. In his view, the U.S. is slipping, measured by its gains and losses of share of the world export market in specific industries or products. Furthermore Porter clearly explains his theory and how it accounts for both the rise of Japan and the decline of the U.S.A.

Comparative advantage
Swiss chocolates and watches, Japanese robots, German high performance cars and U.S. computers have achieved success in the world marketplace. Traditional explanations point to a comparative advantage - a nation's ability to export because it is blessed with natural or human resources that make its cost lower than other countries.

However, the global scoreboard does not support the traditional view. Switzerland is a land locked nation with high labour costs, strict environmental laws and few natural resources - least of all cocoa. Yet it is a world leader in chocolates not to mention pharmaceuticals, banking and specialized machinery. The story of modern industrial history not exploiting abundance but creating it, not enjoying advantage but coping with disadvantage. Japan and West Germany, which have the broadest success in sophisticated industries both, began the post-war period in shambles. How is this abundance and sophistication created? According to Professor Porter a country needs a demand of national competitive advantage (a four points form).

Factor conditions or a nation's ability to turn the basics - e.g. natural resources, education, infrastructure - into specialized advantage. The Dutch do not lead the cut flower industry because of Holland's tropical weather. The main advantage is the existence of highly specialized research organizations in flower cultivation.

Demand conditions of the number and, most important, the sophistication of domestic customers for the industry's product or service. Consumer demands for convenience, disposability, utility and affordability made the U.S. the first mass market, mass production society and put U.S. industry in a strong position to capitalize on subsequent demand all over the world for goods that have those qualities.

Related and supporting industries
An industry striding towards the top needs world-class suppliers and benefits from competition among companies in fields related to its own that march with it. These manufacturers and suppliers form industrial "Clusters". Sillicon Valley in the U.S.A. is one that accelerates innovation. German advances in printing presses were accompanied by a similar lead in paper manufacturing.

Company strategy, structure and rivalry, the conditions governing how the nation's business is created, or organized and managed as well as the domestic competition. The harsh domestic rivalry among Japanese companies, not government, not cheap labour, not exports - has been the key to that nation's success. Goals are also vital. Countries and industries committed to achieving long-term advantages are often the ones that get it. The crux of the issue is that bureaucracy is an enemy of competitive advantage.

Industries thrive when they are forced to overcome high labour costs or lack of natural resources. When their customers won't accept inferior outmoded products, when their local competitors are 'murderous', and when government offers no protection from their competition and sets tough technical and regularity standards. In practice the competitive demand is a dynamo whose parts push each other forward or backward. For instance the Italian shoe industry is prodded by sophisticated consumer demand that encourage entry by many new firms. Many of them, family owned compete very jealousy.

The shoemakers are compelled to spew out new models continually and must keep improving to increase efficiency to stay competitive within Italy's quirky, high cost infrastructure. On the other hand, when the home market got saturated the Italian manufacturers looked to the export market and achieved international success. According to Porter competitive advantage based on only two points of the dynamo usually proves unsustainable. South Korea's construction industry grew rapidly during the mid-80's simply by applying low cost labour to projects that did not require sophisticated engineering.

It lost out when other countries which had cheap labour jumped in. Resource-based advantages too frequently suffer the same fate. Two additional variables, "chance" and "government" have an important affect. Chance development is outside the control of the companies, such as wars and embargoes and can reshape industry structure in a country for or against it. States, at all levels, can improve or detract from the national advantage.

Single factor
Vigorous enforcement of anti-trust laws encourages competition and stimulates innovation. Sustained national advantage in an industry reflects a properly functioning demand. The formation of a local industry is normally triggered by a single factor such as natural resources of domestic demand. For an industry to flourish, domestic rivalry is nearly always necessary. It drives companies to move beyond whatever initial advantage that led to the founding of the industry and to begin developing their international potential. To maintain competitive advantage, the industry must normally broaden and upgrade from their original sources of success.

Japanese experience
For example, Japan began exporting cars in the 1950's but did not reach international success until the late 1970's. The Japanese auto industry moved through four distinct phases. Its initial success reflects a number of circumstances, low cost, skilled labour and cheap steel; home demand conditions that led Japanese firms to concentrate on small cars, and emphasis on "fit and finish" to satisfy Japanese consumers sensitive to appearance and a succession of new entrants that created intense domestic rivalry by the 1960's. On the other hand, British companies fell asleep as competition thrived. British Leyland is a good example. Japan also demonstrated the benefits of being disadvantaged in natural resources, capital or labour.

Faced with labour shortages and higher wages in the 1960's Japanese automakers took labour out of manufacturing, achieving wide gains in productivity. Furthermore, prodded by the high priced Yen, Japan took process technology to a unique level, the use of robots, just-in-time supply and redesigning parts for more efficiency. Today the Japanese industry has introduced cars such as Toyota Lexux, Honda Accura and Infinity that are now competing in the high performance and luxury segments with cars like the BMW and the Mercedes Benz. A recent survey carried out by the US Automobile Association revealed that, Toyota Lexux was the most outstanding car out of the luxury segment.

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