Porter Misunderstood Comparative Advantage in Competitive Advantage of Nations
Dr. Michael Porter of Harvard Business School is credited with fundamentally shifting the perspectives of global competition with his books on comparative and competitive advantage. Harvard Universities' Institute for Strategy and Competitiveness was in large part founded based on the research and writings of Dr. Michael Porter. Porter's books (1980, 1985, 1990, et.al) including The Competitive Advantage of Nations, Competitive Advantage; Creating and Sustaining Superior Performance, and Competitive Strategy: Techniques for Analyzing Industries and Competitors are extensions of Ricardian approaches to trade than any new, revolutionary thought. Ricardian trade theories posit that absolute advantage of nations is where national competitiveness emanates from. Porter's many books and articles and the extensive research competed for the publication of the book, The Competitive Advantage of Nations (Porter, 1990) reflect an extension to the Ricardian-based theories of global trade competitiveness emanating from productivity of specific industries within nations, stating that human, not automated productivity is the clearest measure of national competitiveness. In fact this is exactly what Ricardo was saying over
The structure of Porter's Determinants of Competitive Advantage, sometimes called the Porter diamond due to its shape and four anchored areas of factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry, reflects the assumption that a nation's industries are what increase competitiveness. Comparative advantage seeks to explain value generation across nations, while competitive advantage blindly assumes that personal productivity alone is going to deliver higher competitiveness. There is the major omission in the Porter diamond with regard to time, and the quickening pace of change itself. Porter's assessment of comparative advantage between nations is flawed as a result, as is the assessment Porter makes of competitive advantage. As many critics including Reich (1990) have pointed out, a multinational corporation with operating subsidiaries and reach into literally over 100 nations like General Electric drives up productivity in subsidiary nations, like Singapore for example, yet does not necessarily translate this into a higher standard of living for Americans. This dichotomy that Reich (1990) and others point out show that home base productivity is irrelevant to global strength. Ethical and political arguments aside, outsourcing is actually benefiting India more than the U. More like a snapshot of a balance sheet instead of an income statement showing activity over time, the diamond is interesting yet increasingly irrelevant in a world where the nature of change itself is changing. In the short term this significant infusion of capital into India stimulates their entire economy, and even after the centers are build, functioning, and accruing revenue from services, the American-based workers will see little if any benefit in their salaries or raises. , and they will spend $6B to develop their outsourcing centers in India. While Porter does deserve credit for defining how technologies can increase productivity by the re-alignment and greater efficiency of business processes, he does not make the sequencing of these steps clear. IN conjunction with the disconnect between comparative and competitive advantage, Porter mistakenly posits that any nation must attain a level of best practice performance where technologies, not processes, define competitive strength. The personal productivity of these nations is not spectacular; in fact one could argue personal productivity of Indian outsourcing employees is by far more efficient. Implicit in this and many other examples Porter uses to show competitive advantage, the technological investments in speeding up processes are stressed and highlighted.
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