Porter's Diamond of National Competitiveness - Assignment Example

To what extent does Porter’s model of national competitive advantage adequately account for variations in national business systems and comparative economic performance? Are other approaches or ideas required? 1. Introduction Porter’s theoretical postulates on national competitive advantage have been critically scrutinized by many authors. Among them Egan (1995) suggests that Porter’s focus on a specific country’s success in international trade in one particular industry is of importance due to the fact that there is the indefatigable enunciation of the often lofty ideal that the customer comes first. This paper examines Porter’s emphasis on the four determinants (the Diamond) of the national competitive advantage, viz. (i) Factor conditions (ii). Demand conditions (iii). Related and Supporting industries and (iv) Firm strategy, structure and rivalry (Porter, 1990) and then their adequacies or/and inadequacies. Porter’s arguments on factor conditions go to the other extreme as well. He suggests that lack of resources would not act as a hindrance to development, e.g. Switzerland. His demand conditions are equally loaded with such positivities as a sophisticated domestic market and its implications in guaranteeing a competitive edge in international markets to the country concerned, e.g. the wine industry of France. His related and supporting industries argument parenthetically emphasizes the technology-related benefits (Rao, & Holt, 2005). The spill-over effects of main industries lead to the creation of supporting industries and next the cyclical effect goes on and on to bring about a very positive outcome in competitive advantage, e.g. Italy’s leather shoe industry. Finally his firm strategy, structure and rivalry related posture focuses on capital markets, individuals’ career choices, management structures and strategic competitive environment in domestic markets. 2. Analysis - Outline of Porter’s Diamond of national competitiveness Competitive advantage in international trade is defined as “the nation’s capacity to entice firms (both local and foreign) to use the country as a platform from which to conduct business” (Paulson, & Wilber, 2002). The sectoral strength/weakness analysis of a nation’s economy to determine competitive advantage in international trade by Porter is a revolutionary idea which gathered some more momentum during the post 1998 period. While many economists have doubted the efficacy of Porter’s conceptual framework of the “diamond of national competitiveness” basically owing to its many shortcomings in structural coherence, others agree that its theoretical underpinnings have stronger relevance to modern international trade context. Factor conditions, as Porter defined them, not only refer to mere physical resources such as land, labor and capital but also to some key or specialized factors which are being continuously created as against being inherited (Murmann, 2003). For example the firm continuously innovates and produces a specialized set of resources such as capital, skilled labor and infrastructure. After all such specialized resources cannot be copied by rivals – the resource-based view of the firm and leadership. Then Porter goes on to discuss non-key or non-specialized resources such as unskilled labor. According to him they fail to create a continuous competitive advantage because they are not endowed with those difficult-to-duplicate characteristics or qualities that are inherent in specialized resources. In fact he goes on to argue that a lack of resources would not be altogether a disadvantage to a nation. Assuming that a certain nation lacks substantial resources to compete effectively in international markets, there is still a chance that the country would benefit from this factor-centric disadvantage. In the first place such countries have no alternative but to innovate continuously. This process leads to a level of competitive advantage in international trade (Kilduff, & Chi, 2007). For example countries like Switzerland and Singapore achieved competitive advantage in international markets for their products – the former for wrist watches and the latter for financial services – despite the fact that they did not have enough physical resources at the time of planning. This process of transformation is next applied to demand conditions by Porter. When demand for a nation’s products in its own domestic markets, flourishes due to continuous innovation, there is a greater likelihood of the country being more competitive in international markets. Countries that make substantial gains in this sphere are more likely to impose standards on the rest. For example, France has been able to produce the best wines in the world and its wines are so famous for their regional sophistication. Bordeaux region for instance has some of the best wineries in the world. According to Porter, there is the market power associated with such industry clustering or agglomeration. Unlike integration such agglomeration produces competitor oriented behavior by each firm to obviate the undesirable outcomes of competition (Keegan, & Davidson, 2005). While some well-footed companies would succeed in making continuous gains others would fail. For instance when completion is concentrated in a tightly defined geographical location, rivals would go for enticing employees from one another’s company. And above all intense competitive pressure would force firms to accommodate costs into mark-ups thus reducing the latter’s margin size. Finally firm strategy, structure and rivalry concepts, according to Porter, have a set of sub-elements in them and these elements matter to a greater extent in determining the strength/weakness paradigm of the nation in its competitive advantage. Strategic outcomes of domestic firms are largely determined by capital its quality. Countries that have well developed capital markets are more likely to benefit from this strategic shift and its subsequent orientation. Porter identifies two time periods – the long run and the short run. Here David Ricardo’s concept of comparative advantage is more pertinent because its latest version in the form of the Heckscher–Ohlin model provides a better understanding to the reader about the mathematically feasible equilibrium conditions in international trade. For example according to Porter when short run strategies come to be associated with a country’s outlook, it’s imperative for that country to adopt short term investment plans which would go along with such industries as continuously evolving technologies (Porter, 1994). For instance computer industry has more short term potential than long term potential while countries like Singapore found greater strategic advantage in long term investments in service sectors – finance, insurance and banking. If a particular country has more of its men and women holding key positions in some industries which are considered to be highly strategically important, then that country is more likely to have an impact on the rest of the world. Yet again this argument of Porter needs requalification. Next he concentrates on management structure of the organization as a critical measure of success. The tendency of a country to adopt a particular management structure or style, according to Porter, is a determinant of its futuristic orientation strategy (Best, 2001). Thus the preference for hierarchical management structures with less democratic leadership style can be a sign of pre-planned approach to achieve competitive advantage in particular industries. For instance Multinational Companies (MNCs) in Germany and Japan have such a tendency. Finally Porter focuses on innovation brought about by competition. He favors national competition against international competition. For example in countries like Japan and to a lesser extent in China there is a degree of motivation in industries to compete against each other so vigorously. He points out that it’s not the same in international markets because there is always an excuse available to exporters to claim that rivals are able to perform better due to a number of reasons. 3. Critical analysis of Porter’s Diamond of national competitiveness and other alternatives Porter has invariably argued on the lines of home-based advantage derived by firms rather than firms themselves being the sources of competitive behavior. Thus according to him factor conditions have acquired their current shape and quality through a continuously evolving national paradigm of development. USA, Europe and Japan did not have a national element in their evolutionary process of the firm-centric developments related to resources. Neither did they rely on a national paradigm to bring about the kind of qualitative shift in factor conditions. Toyota in Japan, IBM in America and Unilever in Britain did not depend on nationally determined qualities of their resources to achieve strategic competitive advantage in international markets. Ricardo did much better here though he lacked mathematical skills and therefore the model had some shortcomings thought that have now been remedied by newer models as cited above. However Porter does not altogether ignore sub-regional characteristics of national industries. His argument that sub-regional tendencies could act as greater catalysts of motivation in industries is not rejected out of hand by economists (Amable, 2003). In fact nationally or regionally reinforcing mutual benefits associated with competitive advantage do exist across national and regional industries though they cannot be aggregated to achieve nation-specific characteristics which exclusively determine success of firms in international markets. Thus the resource-based view of the organizational success is more relevant to an analysis of this nature than what Porter has sought to identify in an exclusively national context. Independent analysts have questioned Porter’s excessive reliance on chance to produce desirable outcomes. For instance Fitzgerald (1994) questions this position taken by Porter on chance occurrences so that highly positive outcomes take place in the national economy. Agglomeration or clustering of industries is assumed to be self-reinforcing, a kind of symbiosis between strategy and results, irrespective of the nature and the extent of strategic competitive environment in which the firm operates. Such platitudinous premises lack logicality and cohesiveness. However, with reference to demand conditions Porter has developed a very though provoking argument because every firm cuts its teeth on the domestic markets before they venture into international markets. This is a truism but it’s also important to know how far a domestic firm should go on selling its products in domestic markets to be perfect enough to launch into overseas markets. There are a few analysts who doubt the credibility of relying on domestic standards to launch into international markets (Chen, & Huang, 2009). China for instance, has been cited as an example. On many occasions China’s products have been found to be lacking in quality or safety. The credibility test fails here not because what Porter suggested is wrong but because inadequate safety and quality standards have been set up in domestic markets. Product monitoring strategies in countries like China have not come up to the Western and American levels. Demand conditions as Porter envisaged would more likely create a series of opportunities for domestic firms to test their strengths by selling more to a sophisticated customer, thus enabling them to produce qualitatively better goods for the export market. Porter did not pay attention here to the omnipresent fact that domestic firms act faster to capture international markets even before they have test-marketed their products in domestic markets. This is done with the active connivance of governments which inevitably shore up performance of these firms by giving them substantial subsidies (Fermer, 2006). As late as 2008 the USA, Japan, China and EU were found guilty of this practice despite the existence of the World Trade Organization (WTO). Subsides reduce costs and enable firms to capture sizeable shares in international markets through dumping substandard products. One of the most potentially debilitating blows has been delivered against Porter’s demand conditions argument by the recent developments in the software industry (Jones, 2000). For example very few Indian firms produce computer software in order to sell in the domestic markets. There are no bigger domestic computer firms in India who would want to buy such sophisticated software. Microsoft, IBM and Intel are all American firms though they have operations in India. Porter probably failed to foresee these developments. Next Porter presents the related and supporting industry argument as the basis for competitive advantage of a nation. Porter’s argument on clustering or agglomeration process is based on the premise that domestic industries would seek to achieve strategic operational capabilities across a number of sectors in the economy by concentrating in a particular region or regions (Hendrischki, & Chongyi, 1999). For example Detroit in America is so famous for the automobile industry and Bangalore in southern India is so famous for the computer software industry. Why did the attention shift away from the Silicon Valley in the US to Bangalore in India? Porter did not make an attempt to answer it probably because at the time of his writing the book, Bangalore was not so famous. Clustering is not a foregone conclusion either. Dispersion is more likely the scenario now. Service industries received very little attention by Porter. Labor is more on the move and that means with the mobility comes shifting of industries. Higher wages and more facilities help labor to relocate and industries have a tendency to follow suit. Footloose industries which do not depend on bulky raw materials are less likely to be amenable to interpretation under Porter’s related and supporting industry argument. Finally firm strategy, structure and rivalry concepts of Porter focus on the strategic environment, management structure and competitive environment respectively of the firm. Strategy is a dynamic concept with a variety of associated connotations and denotations. Its definitional variances make one of the most deterministic concepts in the firm’s operational and competitive environments (Hunt, & Morgan, 1995). According to Porter the strategic overview of the firm in a purely competitive domestic environment cannot be determined unless there is clear division between the long run and the short run. Indeed management structure of Porter has some relevance in the modern context because it’s the management style and structure which along with the organizational culture basically determines the organizational outcomes. As for rivalry or competition there is no gainsaying the fact that innovation is the benchmark on which the success or failure of a firm or a nation can be tested. Conclusion Porter’s Diamond of national competiveness is focused on the nation’s ability to achieve competitive advantage in international markets through the effective planning and development of national resources and goals. While his arguments as a whole have some relevance to the domestic and international contexts concerning the development of a nation’s competitive advantage, there are some glaring shortcomings in his Diamond of national competitiveness as well. For instance his focus on the quality and quantity of national resource base to determine the strategic firm-level performance is a total negation of the strategic management capabilities of individual firms to achieve success in competition. National characteristics cannot be regarded as the sole determinant of the shape and nature of the resource base of the average firm. Finally it must be said that his arguments on sub-regional and national successes cannot be ruled out as irrelevant because some regional or national features are embedded in the successful building up of a completion model especially against the backdrop of evolving competition. Overall his Diamond is a partial success in determining competitive advantage of a nation. However modern developments along the lines of older theories like that of Ricardo’s have pushed Porter’s theory into a corner. REFERENCES 1. Amable, B 2003, The Diversity of Modern Capitalism, Oxford University Press, New York. 2. Best, MH 2001, The New Competitive Advantage: The Renewal of American Industry, Oxford University Press, New York. 3. Chen, CR & Huang, YS 2009, ‘Economic freedom, equity performance and market volatility’, International Journal of Accounting and Information Management, vol. 17, no. 2, pp. 189-197. 4. Egan, C 1995, Creating Organizational Advantage, Butterworth-Heinemann, Oxford. 5. Fermer, A 2006, Multinationals, Institutions and the Construction of Transnational Practices, Palgrave Macmillan, New York. 6. Hendrischki, H & Chongyi, F 1999, Political Economy of Chinas Provinces: Competitive and Comparative Advantage, Routledge, London 7. 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