A Modern Look at The Competitive Advantage of Nations

When I was 21 years old I went to work for the management consulting firm, Bain and Company. Hindsight would prove that I was probably the worst Associate Consultant they ever hired. After almost getting fired six months into the job for non-performance, I got my act together and kept my position for a full year. At that point I departed and returned to my old software company.

When I first joined Bain I was given a copy of Michael Porter’s seminal work, Competitive Strategy (1980). His description of the “five forces” was like a revelation; a powerful tool to think about why companies succeed or fail. When Porter published The Competitive Advantage of Nations (1989), I devoured it to see what wisdom he could provide to explain the success and failures of industries at the national level. Though this latter work was not as widely celebrated as Competitive Strategy, it talked about four key variables that drive national success:

• Factor Conditions: Items such as a specialized workforce in a key area.

• Demand Conditions: The nature of the home and local market to drive innovation and competition.

• Supporting Industries: Robust and easy access to supply chains.

• Firm Strategy and Structure: The nature of management competence and competition that drives behaviors and capabilities.

While this framework still provides a helpful tool to think about how well countries compete in business, a new set of variables is emerging that is closely tied into a new intertwined system of critical components for a country’s success.

Making Sense of Our Current World

Recently I’ve been thinking about why countries rise and fall at moments in time, and why some nations have been able to stay strong economically for extended periods.

This came to the forefront in December when I was approached by a friend who has been a senior executive in the semiconductor industry for the last 40 years. He is also a seasoned investor and Board member at some of the world’s most successful companies. He wanted to explore writing a book about the changes in the semiconductor arena and what it takes to lead in today’s global economy. We both used to work at Intel, and we share the common bond of working at what was the most successful semiconductor company in the world during our tenures.

The more we discussed his idea, we came to realize how the complex nature of producing silicon is tied into much bigger and more dynamic geopolitical and economic systems. We quickly acknowledged that we are seeing something nuanced and layered about today’s global business, cultural, and national systems. To be competitive in today’s global economy, countries and regions not only need tremendous access and advancement in key technical areas (AI, semiconductors, etc.), but they also need a wide variety of other capabilities to control their destinies.

We also realized that these capabilities are becoming increasingly interconnected in a new type of “stack.”

It’s a Different Kind of Stack

Technologists often refer to a tech stack, which comprises all of the components required to deliver an application or solution to a customer. We are now seeing at the country level an emerging set of technologies and broader capabilities that drive the competitive advantage of nations — a new kind of stack which involves more than technologies.

An example of a critical area for a country to succeed is the need for a very deep and liquid financial market to finance new technology developments. A recent Wall Street Journal article exposed that the amount of money being invested by today’s large tech companies in AI is larger than the investments in the United States’ railroads, the development of the country’s national highway system, and even the program to send humans to the moon:

Right now, only two countries on the planet have the capabilities to make the big bets required in both AI and semiconductors: the United States and China. This is true both from a technology and financial standpoint. Yet both of those countries have their own fiscal challenges of the relative health of their governments’ and citizens’ balance sheets.

Countries also need to control their energy supply. The discussion in the last few years has changed from “the energy transition” to “we don’t have enough energy.” If a country doesn’t control its energy resources, or if it makes choices for its energy supply that creates dependency on others, it will become subordinate to other nations. And these other countries may have different interests and goals — both economically and politically (think Western Europe and Russia). Aside from the needs that AI imposes on a country’s electrical grid, inexpensive energy is critical for business and also for the quality of life of a country’s citizens — possibly even more so in developing countries.

Cultural attitudes toward business success also come into play for a country’s competitive capabilities — how do countries and social structures feel about the rise of large companies and the huge financial successes of both corporations and individuals? What if size becomes increasingly important for global economic success?

Do countries make it easy for employees to share in a company’s economic success (e.g. how hard or easy is it to grant stock options and equity to employees)? How do structural impediments actually create more inequality than intended?

The rule of law and political stability also factor heavily in the long-term success of a nation. How do the laws and the judiciary help or inhibit the reliability of legal and financial markets? How stable is the political system?

Note I do not ask how “free” the system is — I ask about its reliability and determinism.

A well-educated labor force is critical for success. Does the education system in a country turn out a large number of people who can contribute to modern business? Does the education system attract top talent from other countries?

Finally, countries need to be able to defend themselves against aggression from neighbors and enemies who have different objectives than simply successfully and peacefully building their economies. How strong is a country’s military and can a country defend itself?

Doing one of these things is not easy. Doing several of them is difficult. But doing all of them can seem a daunting task.

The New Stack More Deeply Intertwines Business and Politics

The aforementioned items in “the stack” illustrate that business and national agendas are becoming increasingly inseparable. How this impacts global relations is profound.

In The Systems Leader I wrote that Globalization 1.0 was based on labor arbitrage (e.g. a company could put low-cost manufacturing in Asia, low-cost software engineering in Eastern Europe, and low-cost customer service in India, etc.). I argued that Globalization 2.0 would be structured more like a mesh network, with communication and collaboration tools allowing centers of excellence to operate in more equal capacities. Labor could (and would) be more evenly distributed.

I believe we are headed into Globalization 3.0,¹ where geopolitical clashes come more directly from the business arena than ever before. Twentieth century geopolitical conflict was shaped by political ideology — originally fascism vs. Western democracy, and then communism vs. Western democracy.

Twenty-first century geopolitical conflict is being shaped by economic ideology. The three most common being (at the extremes): dictatorial capitalism, unbridled capitalism, and democratic socialism.

And today’s business leaders are at the center of these forces.

Despite the geopolitical conflicts we read about every day, today’s business leaders will continue to cross borders and encounter each of these economic and political systems as globalization evolves into a new phase. Even with evolving/dissolving trade agreements and tariffs, businesses both large and small need to understand how to navigate between different economic and political systems if only due to relationships with customers, suppliers, and employees who remain geographically disbursed.

The Verticalization of Countries?

One wonders if what it takes to compete at national and business levels in the next several decades requires doing many/most of the aforementioned items in the stack to be successful. What if those who have more control over more parts of the stack have disproportionate competitive advantage over others, and the need to “verticalize” is required to compete effectively going forward?

What if the parts of this system continue to become increasingly intertwined?

A wise friend of mine asked if this notion of the “verticalization of countries” is even possible — what if countries need to collaborate because they can’t do it all?

It’s an interesting thought to ponder. But I wonder what both country and business leaders should do if their partners or their enemies are playing by a different set of rules or optimizing for different outcomes? How does one partner effectively in these situations?

Where does one agree to partner and where does one look to control one’s own destiny?

Porter’s original framework is still helpful, but the new global business and economic system requires a different lens to understand what is happening and to provide guidance on what steps to take going forward.

Many questions are raised.

An exploration of answers is forthcoming.

To be continued…

1. I want to give a shout-out to Thomas Friedman, who talked about “Globalization 3.0” as a phase driven by the individual vs. countries (Globalization 1.0) or companies (Globalization 2.0). I posit that in his nomenclature, my numbering could be adjusted to Globalization 4.0 and Globalization 5.0, but I am going to stick to my original numbering as the conventional wisdom of the phrase “Globalization” used in most modern vernacular refers to the last ~30 years.