Competitive Advantage of Europe

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1 Competitive Advantage of Europe Franco Quillico Andromeda Consulting Università Luiss - Roma

2 Competitive Advantage of Europe Agenda Porter s Diamond of National Advantage Country Example: Italy Which competitive domain?

3 Competitive Advantage of Europe Agenda Porter s Diamond of National Advantage Country Example: Italy Which competitive domain?

4 Porter s Diamond of National Advantage Firm Strategy, Structure, and Rivalry Factor Conditions Demand Conditions Related and Supporting Industries

5 Porter s Diamond (continued) Factor Conditions: the nations s positions in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry. Demand Conditions: the nature of home-market demand for the industry s product or service. Related and Supporting Industries: the presence or absence in the nation of supplier industries and other related industries that are internationally competitive. Firm Strategy, Structure and Rivalry: the conditions in the nation governing how companies are created, organised and managed, as well as the nature of domestic rivalry.

6 Competitive Advantage of Europe Agenda Porter s Diamond of National Advantage Country Example: Italy Which competitive domain?

7 Country Example: Italy Factor Conditions: one of the historic strengths has been the growth of industrial districts, or clusters. However, infrastructure in general has been a weakness. Demand Conditions: sophisticated consumers and industrial buyers have put pressure on industrial companies. A much lower pressure has characterised most of the service industries. Related and Supporting Industries: Italy is the third producer of industrial machinery (after Germany and Japan) and this has provided an important source of competitive advantage. Firm Strategy, Structure and Rivalry: intense rivalry among small and medium-sized companies has historically coexisted with lack of competition among big players in a number of industries (e.g. transportation, banking and insurance, energy).

8 Italy: Michael Porter «In industries where Italian companies are world leaders - such as lighting, furniture, footwear, woolen fabrics, and packaging machines - a company strategy that emphasizes focus, customised products, niche marketing, rapid change and breathtaking flexibility fits both the dynamics of the industry and the character of the Italian management system.» Michael Porter, The Competitive Advantage of Nations The key concern - assuming Porter s analysis is accurate - is that Italy is NOT a world leader in any industry associated with primary research and this represents a major weakness on the medium-long term.

9 Italy: Luca Cordero di Montezemolo «We have all the right ingredients and businesses to thrive. But we have so few large companies that can lead the way. We must encourage more aggregations (joint ventures or mergers) of companies, improve the approach of the small business owner. That is not easy but we are on the right path.» Luca Cordero di Montezemolo

10 Italy: Financial Times WHERE REFORM IS NEEDED: Poor infrastructure. Too many undercapitalised small companies. Energy costs that are up to 30% higher than in other European countries. Ageing company founders with few modern business techniques. Few large multinationals that can act as catalysts for research and that can train future managers of mid-sized companies. Weak and inefficient spending for research and development: 1% of GDP, half that of the EU and little more than a third that of the US. FINANCIAL TIMES - 2, 2004

11 Competitive Advantage of Europe Agenda Porter s Diamond of National Advantage Country Example: Italy Which competitive domain?

12 Which Competitive Domain? We can follow two different approaches in analysising the competitive advantage of Europe: we can look at Europe as a collection of countries and apply our framework to each country; or we can look at Europe as an integrated competitive area (like the US).

13 Europe as a collection of countries If we follow the first approach we implicitely assume that Europe provides mainly an open and integrated market for goods and services for companies based in different home countries. The key concern in this case is that the same market is also open to players that are located outside Europe, like China or India (with, of course, the exception of regulated industries).

14 Europe as a collection of countries (continued) In other words the simple existence of a European market does not provide a source of sustainable competitive advantage for home-country-centric companies. Moreover the loosening up of constraints in crossborder trade is weakaning even further companies based in the weakest countries. In fact these were deriving substantial benefits from «protected markets» and trade barriers.

15 Europe as an integrated area If we follow the second approach we are looking instead for truly European companies that are multi-country-centric in their organisation and in their business model. This definition goes above and beyond opening factories in lower-wage countries or exporting goods from the home-base. These companies must look at Europe as the relevant dimension for all their needs, incuding (among others) capital raising, human resources and knowlege transfers. Needless to say there is a limited number of companies that can qualify for this definition. This small group includes the likes of Airbus, STMicroelectronics, Vodafone, Merloni and the newly born Air France - KLM.

16 Opportunities The introduction of the Euro has provided a unique opportunity for European companies wanting to become truly European. The enlargement of the European Union has created a much larger home-base. The development of international standards in telecommunications and IT has brought within reach an extremely high level of integration and knowledge transfer across borders, completely unthinkable only few years ago.

17 Threats The financial service industry, as well as capital markets, are striving to achieve a high level of cross-border integration. At present capital markets in Europe are, by and large, domestic in nature. Languages still provide natural barriers, although several companies are now using the English language for all internal communications. A number of regulated industries (e.g. transportations, energy) have been kept largely domestic and they are, in many instances, inefficient and uncompetitive.

18 Conclusions We are probably witnessing the dawn of a new era for European countries and companies. A healthy level of competition among different countries, coupled with a strong cooperation between governments and companies can create a new breed of corporations that are aiming at being real European citiziens. These companies will eventually compete, on an equal footing, with American corporations worldwide, pursuing market opportunities by building and sustaining competitive advantage.