FIRM STRATEGY, STRUCTURE, AND RIVALRY

The fourth broad attribute of national competitive advantage in Porter’s model is the strategy, structure, and rivalry of firms within a nation. Porter makes two important points here. First, different nations are characterized by different management ideologies, which either help them or do not help them to build national competitive advantage. For example, Porter noted the predominance of engineers in top management at German and Japanese firms. He attributed this to these firms’ emphasis on improving manufacturing processes and product design. In contrast, Porter noted a predominance of people with finance backgrounds leading many U.S. firms. He linked this to U.S. firms’ lack of attention to improving manufacturing processes and product design. He argued that the dominance of finance led to an overemphasis on maximizing short-term financial returns. According to Porter, one consequence of these different management ideologies was a relative loss of U.S. competitiveness in those engineering-based industries where manufacturing processes and product design issues are all-important (e.g., the automobile industry).

MANAGEMENT FOCUS The Rise (and Fall) of Finland’s Nokia

The wireless phone market is one of the great growth stories of the past 20 years. Starting from a low base in 1990, annual global sales of wireless phones surged to reach about 1.6 billion units in 2010. By the end of 2010, the number of wireless subscriber accounts worldwide was some 4.5 billion, up from less than 10 million in 1990. Nokia is one of the dominant players in the world market for mobile phones with a 28.9 percent share of the market in 2010. Nokia’s roots are in Finland, not normally acountry that comes to mind when one talks about leading-edge technology companies. In the 1980s, Nokia was a rambling Finnish conglomerate with activities that embraced tire manufacturing, paper production, consumer electronics, and telecommunications equipment. By the early 2000s it had transformed itself into a focused telecommunications equipment manufacturer with a global reach. How did this former conglomerate emerge to take a global leadership position in wireless telecommunications equipment? Much of the answer lies in the history, geography, and political economy of Finland and its Nordic neighbors.

In 1981, the Nordic nations cooperated to create the world’s first international wireless telephone network. They had good reason to become pioneers: It cost far too much to lay a traditional wire line telephone service in those sparsely populated and inhospitably cold countries. The same features made telecommunications all the more valuable: People driving through the Arctic winter and owners of remote northern houses needed a telephone to summon help if things went wrong. As a result, Sweden, Norway, and Finland became the first nations in the world to take wireless telecommunications seriously. They found, for example, that although it cost up to $800 per subscriber to bring a traditional wire line service to remote locations, the same locations could be linked by wireless cellular for only $500 per person. As a consequence, 12 percent of people in Scandinavia owned cellular phones by 1994, compared with less than 6 percent in the United States, the world’s second most developed market. This lead continued over the next decade. By 2008, 90 percent of the population in Finland owned a wireless phone, compared with 70 percent in the United States.

Nokia, a long-time telecommunications equipment supplier, was well positioned to take advantage of this development from the start, but other forces were also at work to help Nokia develop its competitive edge. Unlike virtually every other developed nation, Finland has never had a national telephone monopoly. Instead, the country’s telephone services have long been provided by about 50 autonomous local telephone companies whose elected boards set prices by referendum (which naturally means low prices). This army of independent and cost-conscious telephone service providers prevented Nokia from taking anything for granted in its home country. With typical Finnish pragmatism, its customers were willing to buy from the lowest cost supplier, whether that was Nokia, Ericsson, Motorola, or some other company. This situation contrasted sharply with that prevailing in most developed nations until the late 1980s and early 1990s, where domestic telephone monopolies typically purchased equipment from a dominant local supplier or made it themselves. Nokia responded to this competitive pressure by doing everything possible to drive down its manufacturing costs while staying at the leading edge of wireless technology. This all enabled Nokia to emerge as a leader in digital wireless technology.

However, there are now problems on the horizon for Nokia. In the last few years, it has lost leadership in the lucrative market for smart phones to Apple’s iPhone and phones using Google’s Android operating system. Nokia’s market share is now declining and its margins are being compressed. For too long the company clung to the idea that handsets were mainly about calling people and failed to notice that web-based applications were driving demand for products such as the iPhone. Why did the one-time technology leader make this mistake? According to some critics, Nokia was too isolated from web-based companies and other consumer electronics enterprises, whereas Apple, being based in California’s Silicon Valley, was surrounded by them. This meant that unlike Apple (and Google, whose Android operating system powers many smartphones), Nokia wasn’t exposed to the mix of innovative ideas swirling around Silicon Valley. Location, initially a Nokia advantage, had now become a disadvantage.

Sources: “Lessons from the Frozen North,”Economist, October 8, 1994, pp. 76–77; “A Finnish Fable,” Economist, October 14, 2000; D. O’Shea and K. Fitchard, “The First 3 Billion Is Always the Hardest,” Wireless Review 22 (September 2005), pp. 25–31; P. Taylor, “Big Names Dominate in Mobile Phones,” Financial Times, September 29, 2006, p. 26; Nokia website at www.nokia.com; and M. Lynn, “The Fallen King of Finland,” Bloomberg Businessweek, September 20, 2010.

Porter’s second point is that there is a strong association between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry. Vigorous domestic rivalry induces firms to look for ways to improve efficiency, which makes them better international competitors. Domestic rivalry creates pressures to innovate, to improve quality, to reduce costs, and to invest in upgrading advanced factors. All this helps to create world-class competitors. Porter cites the case of Japan:

Nowhere is the role of domestic rivalry more evident than in Japan, where it is all-out warfare in which many companies fail to achieve profitability. With goals that stress market share, Japanese companies engage in a continuing struggle to outdo each other. Shares fluctuate markedly. The process is prominently covered in the business press. Elaborate rankings measure which companies are most popular with university graduates. The rate of new product and process development is breathtaking.37

A similar point about the stimulating effects of strong domestic competition can be made with regard to the rise of Nokia of Finland to global preeminence in the market for cellular telephone equipment. For details, see the accompanying Management Focus.