MIT Sloan Management Review

Corporate Strategy

 

Designing Global Strategies: Comparative and Competitive Value-Added Chains

By Bruce Kogut

July 15, 1985

This article, the first of a two-part series, shows how the value-added chain can be used to analyze sources of international strategic advantages. The author argues that it is essential that a distinction be drawn between competitive and comparative advantage. He illustrates the importance of this distinction by looking at structural shifts in the world economy and arguing that these shifts reflect changes in comparative advantage. The impact of these changes leads to only a few choices for the firm facing import competition and possessing no competitive advantage. The author stresses that if the global advantages acquired by international participation are not sustained, competition reverts to domestic competition among firms with different national names. Ed.

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The design of international strategies is based upon the interplay between the comparative advantages of countries and the competitive advantages of firms. These two advantages determine the answer to the two principal questions in international strategy:

  1. Where should the value-added chain be broken across borders?
  2. In what functional activities should a firm concentrate its resources?

Answers to both of these questions are affected by comparative and competitive advantage. Comparative advantage, sometimes referred to as location-specific advantage, influences the decision of where to source and market. It is based on the lower cost of a factor (labor, for example) in one country relative to another, favoring industries that use this factor intensively. Competitive advantage, sometimes referred to as firm-specific advantage, influences the decision of what activities and technologies along the value-added chain a firm should concentrate its investment and managerial resources in, relative to other firms in its industry. It stems from some proprietary characteristic of the firm such as a brand name, which cannot be imitated by rivals without substantial cost and uncertainty.1 The value-added chain is the process by which technology is combined with material and labor inputs, and then processed inputs are assembled, marketed, and distributed. A single firm may consist of only one link in this process, or it may be extensively vertically integrated, such as steel firms that carry... To read the complete article, login or sign-up using the form below.

 
 

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