Towards A Competitive Malaysia #8

Chapter 3 The Diamond of Development (Cont’d)

Porter’s Diamond of Competitiveness

Porter discerned four basic conditions that promote the competitiveness of companies and industries. These elements interact with and feed on each other, forming a self-reinforcing synergistic virtuous cycle. He schematized the relationship with his famous “diamond diagram,” with each element forming the angles. Two-way arrows connect each corner to the other three, representing the mutually reinforcing relationships.

The four elements are:

Factor conditions: These are the economists’ traditional factors of production: land, labor, capital, and infrastructure.

Demand conditions: The characteristics of the domestic market, including the size, demand, value, and sophistication.

Related supporting industries: The presence of suppliers and supporting industries that are equally competitive and of high quality.

Firm strategy, structure, and rivalry: The regulatory and other governmental environment in which companies are created, organized, and managed, including the nature of the domestic competition.

Favorable factor conditions include efficient infrastructures (good ports, communication system) and availability of skilled workers. These would be conducive to and enhance heavy industries like automobile manufacturing. Similarly, the availability of large areas of arable land permitted the development of America’s massive agribusiness. Some of the factors like availability of land and natural resources are the natural or geographic attributes of the nation, “inherited” as it were. Others like the availability of capital and skilled workforce are created or “acquired” traits. The factors critical to higher order and more sustainable competitive advantage are created rather than inherited, as seen with the remarkable successes of such resource-poor nations as Singapore and South Korea.

The absence of these favorable factors, the competitive disadvantages, may at times work in favor of a nation by forcing it to innovate and compensate for the disadvantage. Japan, with its the high energy costs, is forced to produce energy efficient machines. Its narrow streets, the consequence of critical land shortage, were the stimulus for developing a niche for compact and subcompact cars.

The role played by demand factors is illustrated by Italy’s well-regarded leather craft and fashion industry. It is the consequence of its stylish, sophisticated and demanding domestic consumers. They demand high fashion and are not satisfied with any rag to wrap themselves. Italian designers and manufacturers have to cater to those demanding tastes, ushering Italy to lead the world in this sector. Afghanistan and Saudi Arabia are unlikely to lead the fashion world; their consumers are satisfied with the formless and colorless robes and burkas. American onsumers too are discerning; they seek high quality products. They do not hesitate returning a toaster that does not work. Unlike in Malaysia and the Third World, Western manufacturers and retailers are loathed to blame their consumers; instead they focus on improving their products and making them safer and better.

To compete effectively in a demanding market, American retailers have liberal “No Questions Asked!” return policy; they in turn demand rigorous standards from their suppliers and manufacturers. Each returned item represents a loss for the retailer, supplier, and manufacturer. As these companies have to satisfy a demanding domestic market, their products are continually being improved, which in turn make them more in demand in the global market.

Companies in protective markets or where their customers are passive and not demanding have little incentive to improve or innovate. This is the fate of Russian industries. With globalization, and deprived of their protective market, they simply cannot compete. Russian plane designers are among the most talented, yet they hardly make a dent globally. In America with the ending of the Cold War, once leading defense contractors like Lockheed and McDonald-Douglas, long dependent on lucrative “cost plus” military contracts, have either been adsorbed by others or disappeared entirely.

In Malaysia, a major and persistent problem with Bumiputra enterprises is that they rely substantially if not exclusively on government contracts. The government in turn, because of political pressures, does not demand high standards. As a result, these companies are rarely competitive locally, much less abroad. With the 1997 economic crisis and the consequent drying up of government projects, these companies simply folded, much like the Pentagon contractors with the ending of the Cold War. They could not compete. The government is clearly misguided in protecting Bumiputra companies. What they desperately need is more, not less competition.

I am not suggesting that these companies be thrown open to the harsh market right away. The weaning must be cautious and not disruptive, with the competition initially restricted to within the Bumiputra community, and later enlarging it to other Malaysian, and thereafter, regional and international competitors. The important concept is that they must be continually exposed to ever increasing competition. That is the only way to create truly competitive enterprises.

Malaysian leaders point to the Japanese experience to justify protecting domestic, especially Bumiputra, enterprises. The Japanese were initially protective of their “infant” industries, and only after they had become strong would they enter the international arena. Unfortunately Malaysia in its eagerness to ape the Japanese is learning the wrong lesson. As Porter has clearly shown, the truly competitive Japanese industries like automobile and electronics have survived brutal domestic competition. They did not receive any support or preferential treatment from their government, nor has it singled them to be in the “strategic national interest” and therefore be protected and subsidized. The much-coddled Japanese banks and other financial institutions on the other hand failed miserably when exposed to international competition. Likewise its retail sector, long protected because of political pressure, is the least productive. The added costs of that inefficiency are borne by Japanese consumers. Even Japanese-made goods cost more in Japan than elsewhere! Porter’s observation on Japan is equally valid for Malaysia.

The third determinant of competitiveness is the presence of other equally high quality and competitive supporting and related industries and conditions. Italy is rightly famous for its quality leather fashions with such premium brands as Gucci and Bruno Magli. This is possible because Italy has well-developed leather industry and many talented designers. Similarly with the computer industry; the ready availability of skilled engineers and the confluence of Stanford, the University of California, Berkeley, and others in the area, together with innovative venture capitalists willing to take risks, made Silicon Valley a reality. Add to that the openness and lack of deference to tradition and precedence that is the hallmark of the California lifestyle.

Malaysia has much less success with its Multimedia Super Corridor (MSC) in replicating the Silicon Valley experiment, despite its bold attempts. Knowing that the country lacks venture capitalists, the government created its own firms. Unfortunately, they have only the appearance of a venture capital fund; in style and operations they are like the usual conservative and risk-averse banks. Their staff—essentially civil service types—together with the reward system would ensure that the atmosphere remains that of the civil service, the very antithesis of a “high risk, high reward” culture of a venture capital enterprise.

Malaysia also grants companies in the MSC considerable autonomy, like greater leeway in employing foreigners, freedom from onerous regulatory burdens, and significant tax advantages. Still, Malaysia has a long way to go before it recognizes the importance of giving its citizens, especially its intellectuals, entrepreneurs, and risk takers, greater freedom. The crudest and most egregious expression of this Neanderthal “control freak” mentality was demonstrated when the government seized the computers of the Internet news portal Malaysiakini.com in January 2003. By mid 2006 the government was openly mulling censoring the Internet.

Nor have Malaysian universities done their part in producing much-needed qualified personnel. The few graduates are so poorly prepared that companies have to recruit foreign workers even for low to mid level jobs. While America has expedited visa programs to recruit talented foreigners, Malaysian companies have to go through hoops. It reflects the perverted thinking—and priorities—of those in power that it is much easier to bring in hordes of unskilled Indonesian maids and Bangladeshi laborers than talented foreign PhDs and engineers.

Porter introduces the concept of clustering, the interrelated and reinforcing supporting industries and infrastructures. Silicon Valley has the cluster of high-tech companies like HP, Intel, National Semiconductor, and others big and small. One would think that these companies would mortally cannibalize each other, clobbering each other through brutal competition. On the contrary, such competitions and clustering enhance the competitiveness of the industry as a whole.

The fourth element, firm strategy, structure, and rivalry, includes the regulatory and other environments in which firms and companies are created, organized and managed. Senior personnel in German, Japanese, and American firms often are individuals with scientific and technological training. They are fast to grasp the implications of scientific or technological initiatives. Executives with non-scientific background have to be briefed exhaustively by their technical staff.

Most multinational firms are home based in America and Europe rather than China and other Asian countries. Japan and increasingly South Korea are the exceptions. The cultural and social make up of their societies have as much to do with this. Switzerland is made up of three or four major European stocks (Germanic, French, Italian, Flemish). The Swiss are used to living with and exposed to persons of different cultures and languages. Their circle of trust readily extends beyond their cultural and linguistic group. This is also true of Americans. When I give seminars to “high tech” companies in Silicon Valley who are sending their employees to Malaysia, the one item that strikes me is the diversity of their workforce. American managers are attuned to and encourage this diversity; it comes in handy in this era of globalization. American and European executives thrive in foreign cultures.

In contrast, East Asian societies are ethnically and culturally homogenous; their people are parochial, their circle of trust rarely extends beyond family and clan. They do not trust anyone not like them. In Malaysia, few Malaysians have reached the upper reaches of management in Japanese, South Korean or Taiwanese companies, as compared to that of American or British, Asian solidarity notwithstanding. The few senior Malaysians in Taiwanese companies are ethnic Chinese. It would take a major change in mentality for East Asians to break free from their clannishness.

The various components in the cluster synergistically reinforce each other by their close proximity. They stimulate innovation, facilitate the distribution of supplies and products, and allow for close interactions among the participants.

Malaysia’s Multimedia Super Corridor (MSC) clearly lacks many of the elements that made Silicon Valley a thundering success, in particular the lack of high-powered educational institutions to spur research and to provide the necessary skilled manpower. Most importantly, Malaysia lacks the culture of openness and receptiveness to new ideas.

Next: Role of Government and Public Policies