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The Company AgendaUltimately, only companies themselves can achieve and sustain competitive advantage. To do so, they must act on the fundamentals described above. In particular, they must recognize the central role of innovation—and the uncomfortable truth that innovation grows out of pressure and challenge. It takes leadership to create a dynamic, challenging environment. And it takes leadership to recognize the all-too-easy escape routes that appear to offer a path to competitive advantage, but are actually short-cuts to failure. For example, it is tempting to rely on cooperative research and development projects to lower the cost and risk of research. But they can divert company attention and resources from proprietary research efforts and will all but eliminate the prospects for real innovation.Competitive advantage arises from leadership that harnesses and amplifies the forces in the diamond to promote innovation and upgrading. Here are just a few of the kinds of company policies that will support that effort:Create pressures for innovation. A company should seek out pressure and challenge, not avoid them. Part of strategy is to take advantage of the home nation to create the impetus for innovation. To do that, companies can sell to the most sophisticated and demanding buyers and channels; seek out those buyers with the most difficult needs; establish norms that exceed the toughest regulatory hurdles or product standards; source from the most advanced suppliers; treat employees as permanent in order to stimulate upgrading of skills and productivity.Seek out the most capable competitors as motivators. To motivate organizational change, capable competitors and respected rivals can be a common enemy. The best managers always run a little scared; they respect and study competitors. To stay dynamic, companies must make meeting challenge a part of the organization’s norms. For example, lobbying against strict product standards signals the organization that company leadership has diminished aspirations. Companies that value stability, obedient customers, dependent suppliers, and sleepy competitors are inviting inertia and, ultimately, failure.Establish early-warning systems. Early-warning signals translate into early-mover advantages. Companies can take actions that help them see the signals of change and act on them, thereby getting a jump on the competition. For example, they can find and serve those buyers with the most anticipatory needs; investigate all emerging new buyers or channels; find places whose regulations foreshadow emerging regulations elsewhere; bring some outsiders into the management team; maintain ongoing relationships with research centers and sources of talented people.Improve the national diamond. Companies have a vital stake in making their home environment a better platform for international success. Part of a company’s responsibility is to play an active role in forming clusters and to work with its home-nation buyers, suppliers, and channels to help them upgrade and extend their own competitive advantages. To upgrade home demand, for example, Japanese musical instrument manufacturers, led by Yamaha, Kawai, and Suzuki, have established music schools. Similarly, companies can stimulate and support local suppliers of important specialized inputs—including encouraging them to compete globally. The health and strength of the national cluster will only enhance the company’s own rate of innovation and upgrading.In nearly every successful competitive industry, leading companies also take explicit steps to create specialized factors like human resources, scientific knowledge, or infrastructure. In industries like wool cloth, ceramic tiles, and lighting equipment, Italian industry associations invest in market information, process technology, and common infrastructure. Companies can also speed innovation by putting their headquarters and other key operations where there are concentrations of sophisticated buyers, important suppliers, or specialized factor-creating mechanisms, such as universities or laboratories.Welcome domestic rivalry. To compete globally, a company needs capable domestic rivals and vigorous domestic rivalry. Especially in the United States and Europe today, managers are wont to complain about excessive competition and to argue for mergers and acquisitions that will produce hoped-for economies of scale and critical mass. The complaint is only natural—but the argument is plain wrong. Vigorous domestic rivalry creates sustainable competitive advantage. Moreover, it is better to grow internationally than to dominate the domestic market. If a company wants an acquisition, a foreign one that can speed globalization and supplement home-based advantages or offset home-based disadvantages is usually far better than merging with leading domestic competitors.Globalize to tap selective advantages in other nations. In search of “global” strategies, many companies today abandon their home diamond. To be sure, adopting a global perspective is important to creating competitive advantage. But relying on foreign activities that supplant domestic capabilities is always a second-best solution. Innovating to offset local factor disadvantages is better than outsourcing; developing domestic suppliers and buyers is better than relying solely on foreign ones. Unless the critical underpinnings of competitiveness are present at home, companies will not sustain competitive advantage in the long run. The aim should be to upgrade home-base capabilities so that foreign activities are selective and supplemental only to over-all competitive advantage.The correct approach to globalization is to tap selectively into sources of advantage in other nations’ diamonds. For example, identifying sophisticated buyers in other countries helps companies understand different needs and creates pressures that will stimulate a faster rate of innovation. No matter how favorable the home diamond, moreover, important research is going on in other nations. To take advantage of foreign research, companies must station high-quality people in overseas bases and mount a credible level of scientific effort. To get anything back from foreign research ventures, companies must also allow access to their own ideas—recognizing that competitive advantage comes from continuous improvement, not from protecting today’s secrets.Use alliances only selectively. Alliances with foreign companies have become another managerial fad and cure-all: they represent a tempting solution to the problem of a company wanting the advantages of foreign enterprises or hedging against risk, without giving up independence. In reality, however, while alliances can achieve selective benefits, they always exact significant costs: they involve coordinating two separate operations, reconciling goals with an independent entity, creating a competitor, and giving up profits. These costs ultimately make most alliances short-term transitional devices, rather than stable, long-term relationships.
Most important, alliances as a broad-based strategy will only ensure a company’s mediocrity, not its international leadership. No company can rely on another outside, independent company for skills and assets that are central to its competitive advantage. Alliances are best used as a selective tool, employed on a temporary basis or involving noncore activities.
Locate the home base to support competitive advantage. Among the most important decisions for multinational companies is the nation in which to locate the home base for each distinct business. A company can have different home bases for distinct businesses or segments. Ultimately, competitive advantage is created at home: it is where strategy is set, the core product and process technology is created, and a critical mass of production takes place. The circumstances in the home nation must support innovation; otherwise the company has no choice but to move its home base to a country that stimulates innovation and that provides the best environment for global competitiveness. There are no half-measures: the management team must move as well.
The Role of Leadership
Too many companies and top managers misperceive the nature of competition and the task before them by focusing on improving financial performance, soliciting government assistance, seeking stability, and reducing risk through alliances and mergers.
Today’s competitive realities demand leadership. Leaders believe in change; they energize their organizations to innovate continuously; they recognize the importance of their home country as integral to their competitive success and work to upgrade it. Most important, leaders recognize the need for pressure and challenge. Because they are willing to encourage appropriate—and painful—government policies and regulations, they often earn the title “statesmen,” although few see themselves that way. They are prepared to sacrifice the easy life for difficulty and, ultimately, sustained competitive advantage. That must be the goal, for both nations and companies: not just surviving, but achieving international competitiveness.
And not just once, but continuously.
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