Porter exceedingly criticizes Britain’s lack of rivalry, which is necessary to “promote ongoing improvement and innovation instead of an easy life” (Porter, 1990, p. 68).
One of his explanations is that British companies traditionally rather strive for satisfactory instead of excellent performance. They are neither strongly profit orientated as are the Americans, nor market-share orientated as are the Japanese (Porter, 1990). Due to this lack of rivalry, the competitive advantage of British companies has waned in the course of the past few decades.
With regards to related and supporting industries, Porter states that there “has been a gradual unwinding of clusters” (Porter, 1990, p. 502) which usually ensure the mutual reinforcement of different industries and industry segments.
Furthermore, the lack of qualified labor, demanding buyers, and rivalry eliminates the formation of new businesses and the need for complementary products.
- Great Britain’s current Economic Situation
- Factor Conditions
The United Kingdom is particularly struggling with providing a competitive pool of human resources.
With regards to students per 1000 inhabitants, Britain is currently on rank 25 with 31.51 students, compared to 50.97 students in the USA, 50.92 students in Canada, 42.04 students in Korea and 34.89 students in France (web1).
When it comes to investments in universities, the UK, with $69,549,600,000, is only on rank 5, far behind the USA ($621,166,000,000), Japan ($169,488,460,000), and Germany ($96,340,600,000)(web2).
Furthermore, “the staying-on rates in full-time education in Britain are well below the West European average” (Northcott, 1991), which is at 67%, as can be seen in the chart below:
Staying-on rates in full-time education in the UK taken from Northcott, 1991, p.152
According to Malcolm Sawyer, economic growth and national competitiveness can be promoted “through an appropriately trained and educated workforce” which “ensures an efficient and flexible labor market” (Sawyer, 2001, p. 108).
However, the figures above show that the need for higher education is not met by the UK economy. Britain fails in continually reinvesting in educational institutions, and its education system as well as its skills base have significant deficiencies, which results in low competitiveness compared to other nations.
The UK has to see the need for high-skilled labor, which is an important, if not the most important, factor for competitive advantage.
Another figure which gives cause for concern is Britain’s expenditures on Research & Development, which were at 1.82% of GDP in 1998 compared to 2.2% in France, 2.32% in Germany, 2.17% in Japan, and 2.78% in the USA (Sawyer, 2001, p. 176).
This figure is not only somewhat lower than those of competing countries, a particularly high proportion of R&D expenditures also goes to areas related to defence. Britain ranks 10th with spendings of $639 per capita and year on defence, after countries such as the USA, Israel, Kuwait, Singapore and Saudi-Arabia (web4).
R&D expenditures are particularly important because a nation can only create and sustain competitive advantage through constant upgrading and improvement.
The figures above show that “Britain has not devoted enough of its resources to R&D ... , and the resources it has committed have gone to the wrong areas”, which resulted in “low rates of growth” (Smith, 1984, p. 44) and the loss of competitive advantage.
- Demand Conditions
Britain’s Gross Domestic Product per capita is currently at $22,800, on rank 21 after countries such as Luxemburg (rank 1, $36,400), the United States (rank 2, $36,200), Switzerland (rank 4, $28,600), Japan (rank 11, $24,900), and Germany (rank 16, $23,400) (web3).
Due to the lower GDP in Great Britain, the standard of living is rather lower than in competing nations, as are the wages, which therefore leads to lower and less complex demand.
According to Northcott,
a century ago Britain was the wealthiest country in the world, but by 1950 average income per head was already higher in the USA, Canada, Switzerland and Sweden; by 1970 in West Germany; by 1980 in France and Japan; and by 1990 in Italy (Northcott, 1991).
Although a fairly small percentage of Britons has a high demand for luxury products such as alcohol, toiletries and suchlike, as mentioned above, the average British consumer accepts services and products whose quality is under the international standard.
According to Porter, demanding buyers “pressure local firms to meet high standards in terms of product quality, features, and service” (Porter, 1990, p. 89).
Where there is a lack of sophisticated demand, companies consequently stop meeting international high standards, and therefore fall behind nations with highly demanding buyers who force their local companies to constantly innovate in order to meet their needs. This is the case in Great Britain.
As stated by Smith, “international competition is not just price competition ... but is in the areas of quality and design” (Smith, 1984, p. 50).
Britain’s lack of highly demanding buyers is a disadvantage as it does not encourage local companies to innovate and as its products, therefore, are not of the quality and standard expected in competing countries with more sophisticated buyers.
- Rivalry
According to Porter, “successful firms compete vigorously at home and pressure each other to improve and innovate” (Porter, 1990, p. 117).
What is most striking, however, is Britain’s high number of mergers in comparison to other countries, as can be seen in the following chart:
Mergers by country in 1988 (Bishop and Kay, 1993, p. 319)
With the majority of these mergers being strictly national, i. e. between two firms of the same nationality, it appears that British companies tend to merging rather than competing.
Expenditure on acquisition does not add to productive capacity but simply hands over the ownership of existing assets, whereas expenditure on new equipment, infrastructure, education and so on add to the competitiveness of a nation (Sawyer, 2001).
However, mergers have been encouraged in Britain as they were thought to make companies larger and therefore “more capable of being effective in international competition” (Bishop and Kay, 1993). Yet, the lack of success of mergers proves wrong that being large means being successful, and that instead, it is being successful which makes a company expand and grow.
As mentioned above, Britain fails to invest in those areas that would add to its competitive advantage.
- Related and Supporting Industries
It is due to the presence of related and supporting industries that British firms could sustain their competitive advantage in areas such as advertising and financial services. The formation of clusters in those industries has helped information flow, attracted skilled labor and boosted innovation and improvement due to fierce rivalry.
The specialized factor pools of these successful British industries were transferable to related and supporting industries and therefore implicated the formation of the very (Porter, 1990).
However, due to the “gradual unwinding of clusters” (Porter, 1990), the UK has lost competitive advantage, for example, in the car industry and in consumer durables such as appliances and consumer electronics.
For instance, according to Stuart Birch, “the car industry, perhaps more than any other in the world, is one in which only the fittest have any chance of survival” (web4).
For many car companies in the UK mergers and take-overs became the only route to survival and the result were a few large combines instead of numerous small businesses.
Today we “are seeing ... a huge move to global oligopolies” (Breverton, 2004), with only a few car companies worldwide (Ford, GM-Fiat, Toyota, Daimler-Chrysler, VW-Audi-Seat-Skoda, Renault-Nissan), of which none is British.
Britain’s lack of skilled labor and the absence of fierce rivalry as discussed earlier also retard new business formations.
Furthermore, only through demand for high quality, features and services can related and supporting industries thrive, and only sophisticated demand can pull through demand for complementary products.
As buyers in the United Kingdom are less sophisticated than those in other countries, as discussed earlier, there is low demand for complementary products and services, which consequently retards the formation of related and supporting industries.
- Conclusion
It must be noted that Britain’s economy has somewhat improved in certain areas in the course of the past few decades.
Britain’s GDP, for instance, has increased over the past few decades and is expected to rise more in the course of the coming years (Northcott, 1991), but more modest than that of other countries.
Income per capita rose by approximately 2% per annum between 1949 and 1999, but most other developed countries “were achieving faster growth than the UK” (Sawyer, 2001, p. 3).
It is therefore not particularly Britain’s failure but rather other nations’ success which lets UK economy look so bad in comparison with other countries (Northcott, 1991).
However, Britain “declined because of growing disadvantages in each part of the diamond” (Porter, 1990, p. 506):
The United Kingdom has so far not seen the need of investing in higher education, improving the educational system, and increasing expenditures on R&D.
Britain’s failure to constantly reinvest, which is particularly important in order to sustain competitive advantage, has resulted in the fact that Britain has fallen behind competing nations which provide a flourishing environment that encourages innovation and improvement.
Due to its comparatively low standard of living, Britain’s buyers have become less demanding and are satisfied with lower quality and a more narrow range of products and services.
This has lead to the fact that British companies have stopped improving and upgrading their products and services, which are now below the international standard.
In addition, this low demand and the lack of rivalry between local companies has diminished the need for complementary products and therefore retarded the creation of related and supporting industries and the formation of new businesses.
In conclusion it can be said that Porter’s evaluation of the UK’s economy is in synch with the current situation to an astoundingly enormous extent.
- List of References
Bishop, M. and Kay, J. (1993) European Mergers and Merger Policy, Oxford, Oxford University Press
Breverton, T. (2004) IBM Handout, autumn term 2004
Northcott, J. (1991) Britain in 2010, London, Policy Studies Institute
Porter, M. E. (1990) The Competitive Advantage of Nations, London, Macmillan
Sawyer, M. (2001) The UK Economy, Oxford, Oxford University Press
Smith, K. (1984) The British Economic Crisis, London, Penguin Books Ltd.
Web 1: accessed on October 22nd, 2004
Web 2: accessed on October 22nd, 2004
Web 3: accessed on October 22nd, 2004
Web 4: accessed on October 22nd, 2004
Web 5: accessed on November 6th, 2004
