Comparative advantage porter pdf

You can hire an hour of babysitting services for less than you would make doing an hour of plumbing. Porters groundbreaking concept of the value chain disaggregates a company into activities, or the discrete. The essential complement to the pathbreaking book competitive strategy, michael e. Pdf comparative advantage and competitive advantage. Environmental regulation, comparative advantage and the porter hypothesis johan albrecht, university of ghent1 faculty of economics and applied economics, hoveniersberg 4, 9000 ghent, belgium. The principles of comparative advantage farnam street. The chapter examines the historical process of how the comparative advantage theory developed from james and john stuart mill to the modern theory, by way of viners real cost approach, haberler. In porters view, strategic management should be concerned with building and sustaining competitive advantage. Competitive advantage is the title of a book by michael porter see article which became a bible of business thinkers in the late 1980s. Absolute advantage comparative advantage and competitive. Competitive advantage introduces a whole new way of understanding what a firm does. Fall term 2019 comparative advantage study questions with answers page 4 of 7 9 7. There are two basic types of competitive advantage. He was born in ann, arbor, michigan, united states in 1947, may 23.

Porters competitive advantage explores the underpinnings of competitive advantage in the individual firm. It exports lowcost products at a reasonable quality level. Based on research in ten leading trading nations, the competitive advantage of nations offers the first theory of competitiveness based on the causes of the productivity with which companies compete. It does of the patterns of competitive success in ten leading not grow out of a countrys natural endowments, its trading nations, contradict the conventional wisdom. This fundamental concept in explaining why countries engage in international trade and why they gain from trade can only be understood in terms of relative.

Comparative advantage according to the law of comparative advantage, a country must specialise in. Grant management department, california polytechnic state university, san luis obispo, california, u. They argue that the new theory of competition explains key macro and micro phenomena better than neoclassical perfect competition theory. Competitive advantage rests on the notion that cheap labor is ubiquitous and natural. Comparative advantage is what you do best while also giving up the least. If each country now specializes in one producing good then assuming constant returns to scale, the output will double. The volume of trade is shown by the shaded triangles. Corporate strategy, the overall plan for a diversified company, is both the. Difference between comparative and competitive advantage. When each person specializes in producing the good for which he or she has a comparative advantage, total production in the economy rises, and this increase in the size of the economic pie can be used to make everyone better off. Porter is a professor at the harvard business school institute for strategy and competitiveness, and an internationally recognized author of several books and a theoretician. Old idea, new evidence by arnaud costinot and dave donaldson the anecdote is famous. It does of the patterns of competitive success in ten.

Now beyond its eleventh printing and translated into twelve languages, michael porters the competitive advantage of nations has changed completely our conception of how prosperity is created and sustained in the modern global economy. Porters competitive advantage of nations is an important book which bridges the gap between strategic management and international economics while contributing substantially. Enduring ideas and new opportunities professor michael e. The major objective is to contribute toward better understanding of various determinants of the diamond model in context within indian msmes. This presentation draws on ideas from professor porters articles and books, in particular, the competitive advantage of nations the free press, 1990, building the microeconomic foundations of competitiveness, in the global competitiveness. Diamond framework a new theory that explains the international competitiveness of countries. The first is to discuss whether developing countries can benefit by specializing according to their comparative advantage. Porter harvard business school 14th annual rotman school. A mathematician, stan ulam, once challenged paul samuelson to. It describes how the choice of competitive scope, or the range of a firms activities, can play a powerful role in determining competitive advantage. Comparative analyses of competitive advantage using porter. A number of students, indeed academics sometimes confuse comparative advantage to competitive advantage.

Achieving competitive advantage strengthens and positions a business better within the business environment. Republic and represent the comparative analysis of strategic management tools and techniques. The purpose of this paper is to measure and analyze the competitive advantage of micro, small and medium enterprises msmes based upon the porters diamond framework. An economics perspective and a synthesis by satya dev gupta there is a considerable amount of controversy about the models of comparative advantage and its applicability to international business, in particular as a guide to the success of nations andor firms in international markets. Therefore the uk has a comparative advantage in producing books because it has a lower opportunity cost of 0. Introduction to comparative advantage it has been said that everythings relative. Comparative advantage explains how a firm may benefit because of the lower opportunity cost it has from selecting. Comparative advantage and competitive advantage an economics perspective and a synthesisathens journal of business and economics, january 2015. The concept of a competitive advantage is more rooted in strategic management and refers to distinctive assets or competencies of a firm. This presentation draws on ideas from professor porters books and articles, in particular, competitive strategy the free press, 1980. Corporate strategy, the overall plan for a diversified company, is both the darling and the stepchild of contemporary management practicethe darling because ceos have been obsessed. Nevertheless, porter did not provide a formal definition for sustainable competitive advantage. According to the theory of comparative advantage, countries gain from trade because a. Competitive advantage is defined as the strategic advantage one business entity has over its rival entities within its competitive industry.

The second objective is to discuss if an economy that adopts a free market policy. The essence of competitive advantage to begin, it may be helpful to take a more indepth look at what it means to have a competitive advantage. That is surely not true, but it definitely is true of comparative advantage. Porter national prosperity is created, not inherited. Pdf strategic management is constantly evolving as both an academic discipline and as a reflection of management practice. Competitive advantage is the favorable position an organization seeks in order to be more profitable than its competitors. How global supply chains change our understanding of comparative advantage abstract as global supply chains proliferate and countries use more intermediate imports to produce exports, gross export statistics paint an increasingly misleading picture of comparative advantage. Additional information may be found at the website of the institute for strategy and competitiveness. Comparative advantage, economic theory, first developed by 19thcentury british economist david ricardo, that attributed the cause and benefits of international trade to the differences in the relative opportunity costs costs in terms of other goods given up of. Porter shows how traditional comparative advantages such as natural resources and pools of labor have been superseded as sources of prosperity. Competitive advantage is a theory that seeks to address some of the criticisms of comparative advantage.

Porter, starting from the actual economic reality which could no longer be explained on the basis of the model of comparative advantages, elaborated by david. Pdf the competitive advantage of south africa michael. A business strategy of through a value chain and comparative advantage analysis of amazons trademarks and intangibles amazon is considered the preeminent online retailer in the world. These three trade theories are important in order to make a country or business successfully. A developing economy, in subsaharanafrica, may have a comparative advantage in producing primary products metals, agriculture, but these products have a lowincome elasticity of demand, and it can hold back an economy from diversifying into more profitable industries, such as manufacturing. Competitive advantage seeks to address some of the criticisms of comparative advantage. Foreign direct investment theory and strategy the theory of comparative advantage the theory of comparative advantage provides a basis for explaining and justifying international trade in a model world assumed to enjoy free trade, perfect competition, no uncertainty, costless information, and no government interference.

Competitive advantage theory suggests that states and businesses should pursue policies that create highquality goods to sell at high prices in the market. Environmental regulation, comparative advantage and the. Trade makes firms behave more competitively, reducing their market power. Competitive strategy concerns how to create competitive advantage in each of the. Comparative and competitive advantage are different terms that mainly refer to what informs the decision behind the choice of what to produce in a competitive market. Competitive advantage summary generally speaking, globalization has produced a variety of new industries. Competitive advantage occurs when a company emerges as a. Its called national competitive advantage or comparative advantage. Comparative advantage occurs when a company or country can produce something at a relatively cheaper rate than can the competition or other countries. Therefore, the importance of absolute advantage, comparative advantage, and competitive advantage will be discussed thoroughly.

Unlike comparative advantage, which is determined by largely unchangeable factors, competitive advantage can be created. Transition to the innovation stage professor michael e. This book describes how a firm can gain a cost advantage or how it can differentiate itself. The concept of competitive advantage are quiet same in different industries or firms and writers are explain in different ways but they rotate on same point for example superior performance of the firm in a decent manner. Finally, they further explicate the theory of comparative advantage by evaluating a market orientation as a. Comparative advantage is an economic law, dating back to the early 1800s, that demonstrates the ways in which protectionism or mercantilism as it was called at the time is unnecessary in free. What is the difference between comparative and competitive. Definition of comparative advantage economics help. There are various theoretical framework are used to explain competitive advantage. Theory, empirical measures and case studies 61 that the autarky equilibriums are determined by ppf and cic. The comparative advantage theory of competition shelby d. Porter, starting from the actual economic reality which could no longer be explained on the basis of the model of comparative advantages, elaborated by david ricardo. In 1990, michael porter introduced the diamond model of new competitiveness theory cho et al.

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