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  Kellog Professor J.Peter Murmann
© Evanston Photographic
Professor J. Peter Murmann

Faculty Bookshelf

What makes global players?
Prof. J. Peter Murmann finds institutional environment key to commercial success for national industries

By Ed Finkel

To understand what makes companies succeed over the long term in global markets, one must evaluate not only their capabilities but also the institutional environment in which they operate.

So says Kellogg Assistant Professor J. Peter Murmann, whose book, Knowledge and Competitive Advantage: The Coevolution of Firms, Technology, and National Institutions (Cambridge UP, 2003) tracks the synthetic dye industry in the United States, Britain and Germany from 1857 through 1914.

"The text is directed toward academics, but it's also for people in charge of firm strategy in high-tech industries, and R&D directors who want ideas on how to analyze their competitive position," Murmann says. "There are huge differences in the institutional and social environment of countries. You need to master those if you want to implement effective strategies."

To analyze the dye industry, Murmann spent nine years collecting data on all such firms, combing through trade directories, exhibitions and other sources with help from a historian of technology at the University of Maastricht. He focused on Germany, Britain and the United States and looked at all firms that ever participated in the industry. He also analyzed the life histories of top- and bottom-performing firms from each country.

"I acted as an industrial archaeologist. I looked at a lot of dead firms," Murmann says. "I had to limit my analysis to the most important countries because, since I perform comparative institutional analyses of these countries, I had to know a great deal about institutional makeup of these nations over time. I'm trying to explain why national industries often differ so much in their global success."

Murmann found that although Britain had both the raw materials and the largest market, within a decade Germany had established the dominant position. He found two key reasons: The university system in Germany trained more chemists and turned out the most cutting-edge research, while the lack of a patent system allowed more firms to freely enter the synthetic dye market, forcing them to build their capabilities through competition.

"Most of the innovations in this industry were developed for the first 25, 30 years not in firms but in academic laboratories," he says. And while American and British firms enjoyed patent protection for a while, "When their monopolies expired, the agile and very capable German firms just clobbered the ex-monopolists."

This success of German firms is based on the notion of coevolution among processes linking companies, technology and national institutions, Murmann says. "Germany had the largest number of firm entrants into the industry in that period, but it also had the largest number of failures," he says. "If you shoot 100 times, you're more likely to hit once than if you shoot once."

Once German firms began to establish competitive advantage, their dominance snowballed because they had the money to invest in product development and political clout to lobby for more university laboratory space and a more favorable regulatory environment, Murmann says. "Over time, you explain the big diversion in performance because you have these self-reinforcing processes," he says.

Murmann chose the synthetic dye industry for his research from among nine possibilities because it was the first science-based industry in the sense that little time passed between scientific discovery and a resulting commercial product, he says. The book's findings have played out in other industries, from computing to biotechnology, Murmann believes.

"You couldn't understand the dominance of American computer or software firms if you did not know that it was the Cold War and the Pentagon that initially funded virtually all the computer science departments," he says.

Biotechnology has even more parallels, Murmann contends. "Access to scientific talent among university researchers is absolutely crucial. If you're trying to answer the question, 'Given that I'm in a certain country, what are the chances I can compete in biotech versus a firm from another country,' this book gives you some ideas."

Murmann plans to continue similar research developing studies on several industries which differ in important respects.

"So then, any time you look at a current industry you can ask yourself, 'To what extent is this contemporary industry perhaps similar to an industry that started 150 years ago and therefore will undergo many of the same competitive dynamics?'

"Allocating a bit of time to the study of business history will yield very high returns for managers," Murmann concludes, "because, as George Santayana warned long ago, 'those who fail to learn the lessons of the past condemn themselves to repeat its errors.'"

©2002 Kellogg School of Management, Northwestern University