The Historical Competitive Advantage of the United States of America
1. Introduction
Economic processes are important to study because they have great influence on a nation's prosperity. Many economics have developed theories to gain insight in economic processes. Traditionally, these economic theories mention factors like land, location, natural resources, labor, and local population size as being important factors when comparing different regions. These would determine the comparative advantage of regions or countries. However, these factors are very passive and sketches little room for any influence on improving the performance of national economies. In many historical cases, even the abundance of one of these factors reduced the comparative advantage of an economy (Porter, 1990, Grant, 1991 and Porter, 1998).
In Michael Porter's book ‘The competitive Advantage of Nations' (1990), he introduced a model often referred to as Porter's Diamond or national Diamond, to understand the competitive advantage of nations or other major geographic regions in a global economy with global competition. This theoretical framework focuses on the performance of a nation (rather than the performance of a firm) and gives predictions and explanations of the international pattern of competitive advantage. This research will use the Porters framework to describe the third and fourth wave defined by Nikolai Kondratiev and experience its pro's and con's.
The Kondratiev-waves are based on the idea of the existence of long (trigonometric) waves in modern capitalist development. These waves have approximately a period of fifty to sixty years and describe an alternating faster and slower economical growth. Until now, no real consensus is found about both when each wave started and finished and what the causes are of this phenomenon. Nevertheless, most scientists are following the ‘Schumpeter-Freeman-Perez'-paradigm of five waves sins the industrial revolution, being (Solomou, 1990 and Freeman and Louçã, 2001):
Aim of this research is, to give a description of the third and fourth Kondratiev-wave, using the Porter framework, and examine its suitability. The empirical data about the first and second Kondratiev-wave are obtained from the book ‘As time goes by' from Freeman and Louçã (2001). During both Kondratiev-waves, the economy of the United States of America (US) was dominant in international trade and competition (Freeman and Louçã, 2001). For this reason, this paper will bound its research only to the US. To structure this research, the following research question is formulated:
How can the competitive advantage of the United States of America during the third and fourth Kondratiev-wave be described, according to the theoretical framework of Porter and how suitable is this framework?
2. The competitive advantage of nations
Although the primary goal of Porters book is to find an explanation why some countries are more successful in certain industries than others are, the most important actors are not nations, but firms. Nations do influence companies, but this mainly occurs through the ways firms define their activities and investments that give them a competitive advantage. Although many firms focus their activities globally, most of them start small in a particularly nation. This plays a key-role on how the top management of firm is characterized, what the identity of a firm is, what its approach to strategy and organization is, and what the availability and quality of its necessary resources are. Even on the long run, when small companies become large multinationals with access to globally available resources and scale economies, the environment in the firm's original country still plays a very important role in its competitive advantage. This view of a nation influencing the competitive advantage of firms has some advantages:
Porter names his analytical framework the ‘national diamond' that is formed around four sets of variables (factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry) and change and government (Figure 1).
All these variables influence the ability of firms to create and/or maintain a competitive advantage, both nationally and internationally (Porter, 1990; Grant, 1991 and Porter, 1998).
2.1 Determinants of Porters ‘Diamond'
Factor conditions
Factor conditions describe “the characteristics of factors of production, the processes by which they are created and their relationship to firms' competitiveness” (Grant, 1991, p. 537). Basically, factor conditions can be grouped into five different categories: human resources, physical resources, knowledge resources, capital resources and infrastructure (Porter 1990), but Porter makes a difference between ‘basic factors' (like natural resources, climate, and location) and ‘advanced factors' (like communication infrastructure, skills, and research facilities) (Porter 1990 and Grant, 1991). The advanced factors are the most significant for competitive advantage and can be enhanced by investments made by individuals, companies or government. Basic factors are initially quit important and can give starting companies a competitive advantage, but they have to be upgraded by advanced factors, to remain a firm's competitive advantage. Disadvantages in basic factors can create pressure to invest in advanced factors (Porter, 1990; Grant, 1991 and Porter, 1998).
Demand conditions
The home demand of a company is important for realizing competitive advantage, because firms are more sensitive to the needs of its closest customers (Porter, 1990). They are often the most important reason why firms differentiate in products, improve quality and/or innovate (Grant, 1991). The quality of home demand is more important than the quantity, so Porter particularly emphasizes the importance of the sophisticated and demanding customers for realizing competitive advantage. According to Porter, the three most important characteristics of home demand, important for competitive advantage, are (Porter, 1990 and Porter, 1998):
Although demand size and pattern growth probably also play an important role in gaining competitive advantage, this is less clear and has been prominent in discussions of national competitiveness. Porter gives the following selection of characteristics, additionally important for competitive advantage: size of home demand (both absolute and relative to the size of the country), number of independent buyers, rate of growth of home demand, early home demand, and early saturation (Porter, 1990; Grant, 1991 and Porter, 1998).
Related and Supporting Industries
The third important factors concerning a national advantage in an industry are the availability of supplier industries or other related industries within a country. Competitive advantage in supplier industries could create a competitive advantage in another industry, by creating access to the most cost-effective inputs (reduction of transaction costs), increased reliability, and easy exchange of knowledge necessary to create a competitive advantage. Related industries could stress the urgency to innovate and with that, enhance a firm's competitive advantage globally. Sharing of activities can be in technology development, manufacturing, distribution, marketing, or service. These clusters of industries provide opportunities for exchange in information and technology (Porter, 1990; Grant, 1991 and Porter, 1998).
Firm Strategy, Structure and rivalry
According to Porter, there are systematic differences between nations, in characteristics of business sectors. These different characteristics, like strategies, structures, goals, managerial practices, individual attitudes, and intensity of rivalry within the business sector, have an important influence on industries competitive advantage. Domestic rivalry and the creation and persistence of competitive advantage are of major interest to Porter. Rivalry creates pressure on companies to reduce costs, improve quality, and innovate, which enhances the competitive advantage of that company. Domestic rivalry is even more effective in promoting and upgrading competitive advantage, because it is more intense (due to its emotive and personal character), compared with foreign rivalry (Porter, 1990; Grant, 1991 and Porter, 1998).
Besides these four determinants of national advantage, historical studies of successful industries showed, that two more determinants played a role: change and government (Porter 1990).
Change
Change events have a random character; they occur outside the power of firms and have little to do with characteristics of a nation itself. They are very hard to influence by either management or government. Some examples of these kinds of events are wars, oil shocks, and policy creation in foreign countries. Change events are so important, because they create discontinuities, which can change the competitive advantage of firms by altering conditions in the ‘diamond' (Porter, 1990; Grant, 1991 and Porter, 1998).
Government
Governments can (both positive and negative) influence the four determinant of the ‘diamond', which makes it an important factor when analyzing competitive advantages. It can for example affect the conditions by subsidies, policies toward the capital marked or education. However, its influence can also be more subtle when government is a major buyer or when they impose a product standard (Porter, 1990; Grant, 1991 and Porter, 1998).
2.2 Dynamics of Porters ‘Diamond'
The previously discussed determinants of Porters ‘diamond' do not operate individually, but interdependently. For a positive influence on competitive advantage, it is important that all sets are present and interact, which causes the dynamics of this ‘diamond' to be very complex. The intensity of this interaction determines to what extend the national environment is conducive to (international) success. This intensity or strength depends on two primary factors: industry clustering and geographical concentration of industries. Within industry-clusters, the vertical and horizontal linkages are of great help improving the ‘advanced factors' such as technologies, employee skills, and infrastructure. Successful downstream industries create demand conditions, which can encourage development and upgrading of supplier industries or entry by successful firms in related industries, which can increase rivalry. The proximity or geographical concentration of industry can accelerate diffusion of innovation, facilitates investment in skills, and encourages the development of supporting industries (Porter, 1990; Grant, 1991 and Porter, 1998)
3. Results
This chapter will give empirical evidence from the book from Freeman and Louçã (2001), related to the four elements of the framework (factor conditions, demand conditions, related and supporting industries, and firm strategy, structure & rivalry) described by Porter (1990) and related to the 2 additional elements important in Porters ‘diamond': change and government. The dynamics between the determinants of the ‘diamond' are discussed when applicable, throughout the discussion of the determinants itself.
3.1 The third Kondratiev-wave (1900-1940)
Factor conditions
Industries in the US became more and more science-related. For example in the electrical industries, scientists both investigated the electrical properties of materials and the electro-chemistry in laboratory experiments. These scientists were educated in new institutions of higher education called ‘institutes of technology' (German equivalent of ‘Technische Hochschulen').
In the early days, many electricity-related inventions were related to communication, but later developed technologies like magnetos, dynamos, armatures, alternators, and rotors caused an application in illumination on a commercial scale. A further development in electricity-related industries was the invention of the carbon filament lamp, which made it possible to bring illumination to households and with that, increase the market. All these inventions not only improved communicating and chemical processes, but also gave the possibility to convert energy from a central plant (heat-energy or kinetic energy) into electric energy, transport it in an efficient way, and convert it in mechanical energy at consumer's electric motors. Electricity did not replace the mechanical engineering industry, but transformed it.
Wires and cables necessary for the transportation of electricity were made of copper. This relationship was sustained by the large reserves of copper ore in the US and the investments in advanced factors concerning mining, smelting and refining techniques, which made it possible for the copper industry to keep pace with the demand. The availability of high quality copper in the US added to its competitive advantage in the beginning of this wave, but soon mines around the world were exploited to catch up with growing demand.
Although the US had sources of cheap hydro-electric power (necessary for the electro-chemical industry), for commercial exploitation they had to invest in technologies and large scale production processes to overcome or offset the large fixed costs of the hydro-electric power installations. Process technologies often had a European origin, but were adapted to the conditions in the US. But before electricity became widely available, a large infrastructure had to be designed and implemented. The investments for this came from both private investors like Edison, who also had a big influence in establishing the dominant design of centralized power plants, and governments.
The large-scale research in the steel-industry and with that the improvement of the production process of steel gave a competitive advantage to the US-steel industry and caused a reduction of costs and prices.
Demand conditions
Because of long distances between work and home in the US, the urge for a good transportation system was high, which explains the success and rapid introduction of the electric-powered street cars of the urban transit lines. The rapid growth of electrical applications increased the demand for high quality copper, which could only be produced using electricity.
The possibility of a reliable, flexible and robust source of energy for consumers caused the rapid growth of the production of electric motors. Also the increased bureaucracy in large firms contributed to an increased demand for electrical applications, like the telephone and the typewriter.
The largest and most important application of steel was for steel rails, but also its application in ship building increased. The ship building industry was initially quit distrustful of steel, but its distrust was overcome because of improvements in quality, availability, and costs.
Related and Supporting Industries
The copper industry delivered copper suitable for the electrical industry, because the electrification of the copper industry improved the production process of the copper industry and with that the quality of the copper. The electrification of the US could not have been so successful without the improved copper industry and the copper industry could not have been so successful without the demand for high quality copper for the electricity industry. But electricity also had other industrial applications like the electro-metallurgy and electro-chemistry. The steel industry influenced the electricity industry by developing silicon steel, which had excellent magnetic properties and high electrical resistance. Steel also replaced the tin used in the tin-industry and the bricks used in construction of large buildings. So this could be seen as a reinforcing cluster of industries in the US.
Because the global infrastructure of trains and shipping was well developed, it was possible to sell globally and also to use basic resources from abroad, like copper from Africa.
Firm Strategy, Structure and rivalry
Because of expensive equipment, advanced technology, complex maintenance and repair, sophisticated accounting and statistics, and new forms of coordination and political arrangements, the overall management-style had to change. Instead of owner-operators or municipal managers of horse-drawn systems, full-time salaried managers were introduced. Also an entire new design and production philosophy arose, involving the re-design of machine tools, handling equipment, and much other production equipment. New ways of communication (by telephone/telegraph) made it possible to control business-parts in various locations and the production and delivery of materials, components, and machinery from distant countries. These management changes are often referred to as ‘Taylorism'.
The steel industry in the US improved its competitive advantage by both investing in the production of cheaper steel, but also by investing in the development of special steels, to redesign many products and processes. One of the most important steel-related entrepreneurs was Andrew Carnegie, who was able to raise large sums of money needed for steel manufacturing and introduced a new management style, focused mainly on reducing production costs.
The increasing importance of global markets caused competition to intensify. This caused a strong tend of industries to cartelization, international patent agreements, and market sharing agreements.
Change
The treat and occurrence of the First World War stimulated the development of new steel alloys and heavy engineering in general for the production of weapons, armory plates and naval yards. Also the copper industry was positively influenced by this war.
The great decline in output and exports at the end of the third wave was one of the most notable features of the Great Depression and decreased the competitive advantage of the US.
Government
Governments had to decide on a new regulatory framework, new legislation, new standards and massive investments. The combination of cheap steel and electric power brought not only a new source of energy and materials but a transformation of the whole productive system and socio-economic structure. Governments introduced protective measures, international trade diminished and nationalism and imperialism grew. This caused a reduction of productivity.
3.2 The fourth Kondratiev-wave (1940-1980)
Factor conditions
The growth of the oil industry, because of increasing demands by the users of trucks and automobiles, was only possible because of the investments made in innovations. These inventions and innovations were necessary to produce sufficiently large quantities petroleum, of good enough quality and at low cost. Patenting the inventions gained income and thus resources for further investments in research laboratories.
The introduction of the ‘mass production paradigm' or ‘Fordism paradigm', and with this the introduction of the assembly line, caused major organizational innovations. This assembly line increased productivity and reduced costs, because of the combination of organizational, technical and social innovations. It also reduced the need for skilled workers and the plants were controlled and coordinated by industrial (production) engineers and foremen. Many workers were collected from abroad, because the work was easy to learn and well paid.
GM challenged Ford by investing in large R&D activities for (incremental) product innovations, increasing its competitive advantage. Radical innovations were hard to introduce, because (according to scientists and engineers at GM) of the absence of a crisis-situation for the company. GM found it unnecessary to innovate, as long as their models were equal to its best competitors. The presence of only three large automobile-companies (GM, Ford and Chrysler) was one of the main reasons why radical innovations were scarce. When incomes in Europe leveled with the ones in the US, it adapted American industrial technology and management techniques to its own situation and actively invested in innovating the entire production process and especially the design of cars. This caused a reduction of the competitive advantage of the US automobile industry.
Demand conditions
Because the fast grow of the automobile industry, the demand for petrol grew even more rapidly, causing the growth of the output of oil refineries to be even larger. The lock-in effect of the internal combustion engine, caused by the relatively long operating time and the availability of cheap petrol, was one of the main reasons for the success of Ford's assembly line, which reduced the costs of an automobile dramatically. This caused an advantage of the IC-engine, contributed to Ford's success and caused the US to become dominant in the world exports marked.
An important change among customers in the US was the occurrence of mass consumption, mass entertainment and mass tourism. These demand characteristics had a great influence on the success of mass production and gave the American industry a competitive advantage.
Related and Supporting Industries
The presence of both European and Japanese automobile industries in the US caused a formation of a cluster, with competing firms. The automobile industry in the US initially lost its competitive advantage, but because of successful imitation of some key features of these companies, it regained its world leadership. The strengths of the related industries improved the American industry itself.
The Oil industry felt threatened by the ‘Houdry process' and formed a group of eight different companies, know as the ‘Catalytic Research Process', to improve the cracking process. Because of their joint efforts, a fluid catalytic cracking process was invented, taking over half of the world cracking capacity.
Because of the rapid growth of the automobile and oil industry, also related industries grew (like distributors of products, service stations for repair and maintenance, tire manufacturers, tankers, pumps, et cetera), because their products and services were directly needed by these leading sectors. Other not directly related industries such as those producing consumer durables like refrigerators and washing machines, the tractor industry, the aviation industry, or the synthetic material industry, grew because they used similar production techniques and /or similar materials.
Firm Strategy, Structure and rivalry
Henry Ford was the first man who applied mass production techniques in the US. He eliminated craft-made components and introduced the moving assembly line, made possible by machines and presses which could cut, shape, or stamp out each relevant component. Because of the boring nature of work, Ford had to double the wages for his workers. GM challenged Ford by introducing a more sophisticated strategy, with various divisions focusing on particular marked segments, a greater range of models, more frequent model changes, and steady incremental improvements.
In the aviation industry, the ‘just in time' strategy reduced the waste of time and stocks of materials and components during manufacture. This new strategy made it possible to meet the increased military demand, related to the Second World War.
Change
The initial diminishing prices of oil in the US gave both the automobile and the oil industry a competitive advantage. The later rise of oil prices gave some advantages to European rivals of the US automobile industry, because of their innovations and specialization in smaller, more fuel-efficient cars, instead of the American focus on ‘comfort' innovations. But the biggest loss in competitive advantage of the US (most clearly visible in the automobile industry) was caused by the Japanese companies. Japanese management, engineers, and workers grew accustomed to thinking of the entire production process as a system. Rather than improving part of it, they improved the entire system as a whole.
World War 2 and the following Cold War caused a vast increase in military demand, which could be met because of the intensive and large-scale R&D and the improvements in technology. The automobile, oil and aviation industry benefited very much from this military demand.
Government
The role of government was less pronounced in the US than in Europe, but the combination of Roosevelt's ‘New Deal' and the wartime mobilization of industry caused a remaining macroeconomic coordination. Government expenditures for R&D and weapons remained at a high level, during the entire third Kondratiev-wave. The resistance of the US-industry to this macroeconomic coordination gave room for the Keynesian managed economy. This framework included an enlarged ‘welfare state' with mass provision of a variety of social benefits and public services, public ownership of many industries, heavy investments in roads and airports, and mass primary and secondary education.
4. Conclusion
Although Porters framework is mainly based on the more high-tech economies of the fifth wave, based on the results in chapter 3, it must be concluded that Porter's framework is also quit suitable for investigating the third and fourth Kondratiev-wave, described by Freeman and Louçã (2001). All six determinants are clearly visible and although more difficult, also the dynamics between these determinants is often clear. They give a clear insight in what the cause was, of the large competitive advantage of the United States, how it was threatened during the last century and how the American industries dealt with this threat and overcome it, to increase its competitive advantage again.
Despite the overall usefulness of Porter's framework, some determinants were more difficult to extract from Freeman and Louçã (2001). The quality of home demand, although clearly explained theoretically, was difficult to describe. When are costumers ‘sophisticated or demanding' or not? This was not always clear, while being an important aspect of the determinant ‘demand conditions'. Also the quality of clusters (part of the determinant ‘firms and related industries') is very difficult to determine. When is a cluster big enough to ad to a nation's competitive advantage? It was also more difficult to describe each downswing in the Kondratief-wave with Porter's framework. It seems, that Porter's framework is more suitable for the upswing-periods, but provides less ‘handles' for the historical recessions.
Change and government are kind of ‘added' to the framework, because Porter does acknowledge their importance, but find them less relevant because they are difficult to influence. I think, based on studying the historical cased described in Freeman and Louçã (2001), these are perhaps the most important determinants of a competitive advantage, because they can ‘make or brake' every effort of nation's industries to increase its competitive advantage. For example, industries can enhance their ‘advanced factors' to reinforce its competitive advantage, but I think the effect of an active war (and with that the increased military demand) is as equal or perhaps of more importance to a nation's competitive advantage. So research about the role and importance of change and government for a nation's competitive advantage should be elaborated.
References
Freeman, C. and F. Louçã. 2001. As time goes by. Oxford, Oxford University Press.
Grant, R.M. 1991. Porter's ‘Competitive Advantage Of Nations': An Assessment. Strategic Management Journal, Vol. 12, p. 535-548.
Hippel, E. von. 2007. Horizontal innovation networks - by and for users. Industrial and Corporate Change, Vol. 16, No.2, p. 293-315.
Porter, M.E. 1990. The Competitive Advantage of Nations. The Free Press, New York.
Porter, M.E. 1998. The Competitive Advantage of Nations (With a new Introduction). The Free Press, New York.
Solomou, S. 1990. Phases of Economic Growth, 1850-1973: Kondratieff Waves and Kuznets Swings. Cambridge, Cambridge University Press.
