The Development of International Business: Porter and Canadas Competitiveness - Case Study Example

< Porter and Canada’s Competitiveness > by Abstract Michael Porter’s Diamond Model of International Competitiveness is regarded as one of the most important theories in the last few decades. This essay summarizes the main ideas of his diamond model and makes an assessment of the theory’s relevance to Canada. Introduction Michael Porter used to teach in Harvard University during the 1970’s and 80’s. Along with teaching Porter was also busy developing a theory which would analyze and better understand the structure of businesses and the competitiveness across various industries. Using the basic theory then developed by Porter, a number of academicians tried to evaluate the position of companies in a particular industry. Porter however realized that the theory needed to be improved, in order to understand how countries competed within industries. There are a number of factors which influenced a business, so a new theory was warranted which would explain the dynamics of businesses and industries. The final outcome of the research put in by Porter for such a theory was the research work ‘The Competitive Advantage of Nations’. Overview of Porter’s Diamond Model A four year research was conducted by Porter to investigate the reason behind a action’s competitive advantage in certain industries. The research examined the ten trading countries which included United Kingdom, Germany, Denmark, Italy, Singapore, Switzerland, Japan, Korea, Sweden and the United States. Porter concludes in his research that certain companies having a clear competitive advantage are located in a handful of countries. He goes on to state that the reason for this is because these countries have particular characteristics which make them the ideal base for the leading companies. Therefore, the influence of a country on an industry is more pronounced than the influence of a specific company, feels Porter. Furthermore, Porter goes on to add that competitive advantage can be better understood if the particular industries of a country are analyzed. According to him, a country which possesses a competitive advantage in a certain industry will also possess a competitive advantage in industries which are related to it. This is because of the fact that the industry clusters are located very close to each other, thereby allowing the related industries to upgrade their competitiveness. Diamond Model Porter believes that there are four major factors which determine the competitive advantage of a particular industry. These determinants are ‘Linked and Supporting Industries’, ‘Factor Conditions’, ‘Company Strategy And Competition’ and ‘Demand Conditions’. All these determinants are created within a particular nation. Moreover, there are two other influences as well, which are the influence of the government and chance influence. The governmental factor always works against the four determinants whereas the chance factors are certain events which affect the four factors positively or negatively. Dong-Sung Cho (2000, p.99) states Porters work is superficial and plain wrong when applied in Canadian situation. His work needs to be modifies in order to analyze the issue of Canadas international competitiveness. Canada is only one-tenth the economic size of the US. Since Canada is relatively small, almost all of Canada’s large multinationals rely on sales n the US and other triad countries.’ Government Influences on Cluster Upgrading. Source: Porter, M. On Competition. 1989. The clustering process of industries in certain nations or the linkages between the interrelated industries is further augmented by the four determinants. The interaction between these four important determinants which affects the clustering process is what Porter calls the Diamond Model Of Competitive Advantage. This model is visualized as a diamond shaped model by Porter, wherein the reinforcements of each of the corners of the diamond results in optimal competitive advantage. The diamond itself has a very variable nature, although the determinants keep constantly interacting with each other. There are two forces which help to change the diamond into a system. They are the concentration of industries in a specific location and domestic competition. The domestic competition upgrades the diamond whereas the geographic concentration intensifies the interactions taking place within the diamond. Clustering is further promoted by the diamond’s systematic nature, which comprises of horizontal and vertical links between the industries. Canada and the Diamond Model The determinants of factor are dependant on the productivity of a country. A country like Canada succeeds economically because it has access to a talented pool of economic about, which can be utilized either from its domestic borders or foreign countries. From the perspective of infrastructure, scientific know-how and economic information, Canada is far ahead from most countries. The governmental policies of Canada do support these factors in a positive way. It’s also equally important for companies in Canada to innovate and upgrade the prevailing factors, in order to give them a far better position in their competitive environment. Pertaining to this subject Porter states (1998, p.10) states ‘Nations gain advantage not as much from the factors available today as from the presence of unique institutional mechanism to upgrade them continually.’ For better productivity and an increased competitive advantage of Canada at the global market, Canada needs to further improve the abilities and skill sets of its present labor pool. As Porter (1998, p.11) sums up ‘There is little doubt from our research that education and training are decisive in national competitive advantage. The nations we studied that invest the most heavily in education had advantages in many industries that could be traced in part to human resources. What is even more telling is that in every nation, those industries that were the most competitive were often those where specialized investment in education and training had been unusually great. Characterization of Porter’s Model In Porter’s theory, the emphasis is put on the geographical location of a business. It’s the location of an industry which determines competitiveness and development. In the last decade or so, economists, industries and governments have started to show a renewed interest in the Diamond Model of International Competitiveness. Michael Porter (1998, p. 29) states ‘Understanding the competitive advantages of a global strategy and , in turn, the causes of industry globalization, requires that we specify the conditions under which concentrating activities globally and/or coordinating dispersed activities leads to either lower cost or differentiation. In each case, there are structural characteristics of an industry that work for and against globalization.’ Critiques of Porter Porter’s diamond theory has been analyzed and criticized throughout the world. What’s more, Porter has applied his methodology to countries such as Sweden and Canada with his team. There have been a number of important critiques of Porter’s Diamond Model. Some of which include an Inability of the Model to be specific. This means that the Diamond Model doesn’t have a good predictive ability. The second criticism against it is that the Diamond model‘s overemphasis on geographic proximity may actually be not as pronounced as the theory predicts. The third disadvantage of the model is that it doesn’t work very well with Small Open Economies or SOE’s. Countries like Austria, New Zealand Ireland and Canada have a small open economy. Particularly for Canada, researchers have found that a greater degree of offshore variable are required for explaining competitiveness as per the Diamond Model. In Porter’s model, the contribution or the influence of a foreign investment is ignored. It is proven that companies owned by foreign owners does effect the study of national competitive advantage. The investments of multinational companies can definitely create a national advantage in countries having advanced industries. Dong-Sung Cho (2000, p.100) states ‘Porters lack of knowledge of Canada tends to devalue the application of his core model to Canada. Porters focus on Canadas "home country" diamond cannot explain Canadian competitiveness. Whereas Canadas successful clusters are resource-based, they have value added in them. After Porter’s theory popularized the idea of industrial innovation and geographic location as important factors to industrial development, a number of similar theories have been proposed which delves deep into the subject Porter define. Some of these theories which academicians and governments are taking notice include Theories of National Business Systems (Whitley), Theories Industrial Districts (Piore and Sabel) and Theories of National Systems of Innovations (Nelson) Dong-Sung Cho (2000, p.99) states ‘Competitiveness is now a buzzword, despite the fact that there is no consensus of what competitiveness really is. Factors affecting competitiveness are quite controversial. In recent years of rapid globalization, competitiveness is often compared across countries by rankings. However, rankings may be misleading if they are not based on a rigorous model and an appropriate methodology.’ ’  The Cluster Process. Canada’s Competitiveness If Canada feels that Telecom is its priority industry and it needs to remain competitive, they have to evaluate their present expenditure in research and education. To remain competitive, it’s also important to have governmental policies which connect Canada’s educational system to the Canadian industry sector, thereby creating its own investments and training. Furthermore, improving the technological level of a country is directly proportional to the economic status of that country. Like many other governments, Canada has a number of policies which encourage industries to invest in research and infrastructural development. In this regard Porter (1998, p.12) states ‘Policy to stimulate commercial innovation must go beyond science and technology, and include policy related to competition, regulation and other areas impacting the diamond.’ Porter, explaining the diamond model of international competitiveness cites that tax incentives as well as investments are essential. Furthermore, it’s equally important to promote and increase knowledge sharing forums between companies as well as within industries. The exchange of knowledge is what propels the developments of new products and services. As the knowledge base of industries within a geographical area improves, so does the development of fresh products, and as a result the overall skills of the workforce improve. Eventually, the economy of a country improves, thereby increasing the profits of all the companies. Dong-Sung Cho (2000, p.101) states ‘The key result of the Porter study is the finding that Canada’s home "Diamond" is weak and leads to an inability of Canadian-based businesses to develop sustainable global competitive advantages, except in resources. But Porter states that resource -based industries are an essential part of Canadas "Bold Economic Order", which Porter thinks has no future. He says, in effect, that Canadas diamond is broken and that it needs to be upgraded to improve Canadas lack of international competitiveness.’ Infrastructure plays a huge role in a country’s development. Especially in logistics and telecommunications, infrastructure is quintessential. In Canada, the trend of outsourcing is on the rise, and hence the reliance on computing, logistics and communications becomes vital. What’s’ more, these aspects affect competitiveness to a large extent. Therefore a high quality of infrastructural development is required by Canada to remain competitive in the global market. Regarding infrastructure, there were several countries which were considered as poor in the 1970’s. Countries like India spend millions of dollars on infrastructural development and telecommunications. Today, India is regarded as one of the fastest growing economies in the world with a large pool of software engineers, who are considered one of the best and the cheapest in the world.. Likewise, South Korea invested hugely on telecommunications the last 20 years. Now they have one of the best developed electronics industry in the world, housing market leaders like Samsung and LG. Now these countries have definitely got a competitive advantage over Canada, especially in the field of electronics and software development. This is because of their wise investment in infrastructural development undertaken a few decades ago. Sources of Competitive Advantage. It is true that infrastructure does not exclusively help business requirements. Canada requires a good blend of cultural as well as recreational infrastructural development too. When attracting new labour force from other countries, infrastructural development in cultural and recreational areas plays a significant role also. Hence for Canadian industry to improve, infrastructural investment in all three aspects is required, which will eventually assist Canada in international competitiveness, according to the Diamond model of Porter. Porter’s theory further reinstates that demand conditions have more significance than creation of aggregate demand in any industry. The main objective of any government is to improve the home demand’s quality. Additionally, if the government turns out to be a guaranteed market, a negative impact may be created. This is because, if there is an assurance that the goods or services will be purchased, the innovation within industries as well as the competitiveness decreases, since the manufacturers know that the customers will remain loyal. The Canadian government needs to play an active role in the procurement of goods and services in Canada. It requires evaluating Canadian products against the benchmark of foreign products, so as to keep the products competitive in the global markets. In this new millennium, international competitiveness pervades all segments of the global market. Therefore, Canadian companies too are challenged by these competitive markets of the world. Presently, the biggest challenge for Canada is transforming into a innovation driven economy from an investment driven economy, since the Diamond model emphasizes on innovation. Dong-Sung Cho (2000, p103) states ‘After Canadian managers have read Porters study they should ask the following questions. First, does Canada need an industrial strategy to mend the broken Canadian Diamond. Second, should Canada give up on its resource-based industries and replace them by innovation -driven industries. Third does Canada need to keep out foreign-owned firms that do not develop product lines using Canada as a home base? The reason these questions are important is that Porter says that Canadas lack of international competitiveness is due to problems in these areas.’ The Road Ahead During the 1980’s and 1990’s Canada was basically an investment driven economy, which relied predominantly on imported technology to help in the production of its goods. However, Canada realized that it was slipping down in short list of competitive nations. Earlier, it was in the top five competitive nations of the world. It did not however switch to an innovation driven economy as proposed by Porter’s Diamond theory. Hence it slipped to the 9th position in 2001. Michael Porter (1998, p. 344) states ‘The basic challenge is to shift from competitive advantage to competitive advantage. Most firms based in developing countries have internationalized through exports of resource to labour-intensive commodities or via OEM agreements with multinationals that rest on resource labour costs. Such exports have been primarily directed to advanced countries.’ Canada is now realizing and changing to an innovative driven economy, wherein advanced technology is used to get the competitive advantage. All in all, Canada needs to closely evaluate the four determinants in the diamond model of competitive advantage, since Porter thinks that a proficient government and macroeconomic policies aren’t enough to for a country to be competitive, Canada also requires to cerate the right conditions for sustained growth of all its industries. Bibliography Porter, Michael E. 1998, On Competition. Harvard Business School Press. Boston Cho, D.S., Moon, H.C.2000, From Adam Smith to Michael Porter, World Scientific, Singapore Porter, Michael E. 1986, Competition in Global Industries. Harvard Business School Press. Boston Porter, M. E. 1998. The Competitive Advantage of Nations 2nd ed. MacMillan Press. London Cartwright, W.R. 1993, Multiple linked “diamonds” And The International Competitiveness Of Export-Dependent Industries: The New Zealand Experience, Management International Review, Vol. 33 pp.55-70. Rugman, A.M., DCruz, J.R. 1991, Fast Forward: Improving Canadas International Competitiveness, Kodak Canada, Toronto. DCruz, J.R., Rugman, A.M. 1993, Developing International Competitiveness: The Five Partners Model. Business Quarterly, Winter, pp.61-72. Read More