Modern Business in Comparative Perspective - Term Paper Example

How convincing is Porters model of national competitive advantage in explaining the characteristics and performance of the business systems of major economies? Name Professor Institution Course Date Introduction The term economic system refers to an organised manner through which a state or nation allocates its incomes as well as distributing goods and services in the said state or nation. The economy of a country is determined by its Gross Domestic Product or GDP; that entails four fundamental components. Gross Domestic Product is the outcome of the calculation of expenditure by households, government, and commercial ventures. In addition, GDP entails the additions of net exports that is arrived at by subtracting exports from imports. Various means are used in comparing the GDP of various countries. These include the purchasing power parity, which considers the standards of living of the people in countries under comparison to ascertain their purchasing might and ultimately the measure of GDP. The comparison concludes that some economies are better structured and better performing than the other economies around the world. Some of these better-performing economies have come to be referred to as the major economies of the world with United States, China, the European Union, Germany, and Japan fitting this classification. Questions linger into how they came to attain such a high status in the economic circles and not their peers such as Nigeria, Mexico or Haiti. It is such questions that this essay seeks to address with the major focus on Porter’s national competitive advantage theory in explaining the characteristics and performance of the business systems of major economies. Various other theories in existence Apart from Porter’s national competitive theory, various theories have been fronted the behaviour, characteristics and performance of business systems of major economies. These theories are referred to as international trade theories. They fall into two categories; that is the historical trade theories also known as classical and mainly centre on the perspective of a country; they are country based. The second category is the modern firm based theories developed in the 20thcentury by theories as a shift from the country-based theories. Among the classical trade, theories include mercantilism theory that asserts a country’s wealth is dependent on its gold, in addition to, silver holdings. The theory holds that the big economies of the world retain their holdings of silver and gold via promotion of exports and hindrance of imports. When the countries are buying more from these big economies instead of selling more to them, they pay the variation in gold as well as silver. The aim of every state is to have a trade surplus and discourage trade deficit. Mercantilism is a component of contemporary thinking in big economies. For instance, Germany and Japan still favour exports and discourage imports by adopting a blend of protectionist principles and limitations as well as domestic industry subsidies. Other classical trade theories include Smith’s absolute advantage theory, comparative advantage theory, and factor proportionate theory. On the other hand, modern firm based theories emerged after world war two and were largely developed by business school professors. Modern firm based theories developed as a result of the failure of country based theories to adequately address the explanation of multinational companies. The theories include Steffan Linder’s country similarity theory, Raymond Vernon’s product life cycle theory, Paul Krugman& Kelvin Lancaster’s global strategic theory and lastly Michael Porter’s National competitive advantage theory (Cho and Moon 2000). Porter’s National Competitive Advantage theory Michael Porter in 1990 came up with this theory. The theory asserts that a nation’s competitiveness in a business is reflected on the degree of its local industries innovation and competitiveness. Porter was motivated by the need to provide an answer to one of the most fundamental questions as to the reason that makes some countries more successful in specific industries when compared to others. Porter devised four factors that he referred to as the National Diamond to explain this theory. The determinants are the local market, resources, and capabilities, local market demand condition, local suppliers and complementary industries and the local firm characteristics (Fitzgerald, McSweeny and Smith 2008). Local market, aptitude and resources In addition to the factors that give countries a competitive edge recognised in the factor proportion theory such as natural resources and labour, porter recognised the existences of advanced factors that influence what a nation can import or export. They include skilled labour, infrastructure, investment in education and technology. These factors give country sustainable economic advantage. In addition, Porter notes that factor conditions do essentially not naturally exist or inheritable, that is, they may at any time change or develop. For instance, Political strategies, socio-cultural transformations, and technological advancements may vary the national factor conditions in existence. The truth of this can be ascertained in the case of the debate on the effect of ethics in genetic engineering and cloning that is expected to impact on the knowledge capital in genetic engineering and cloning in both Europe and North America (Cho and Moon 2000). Porter asserts that the availability of factor conditions in a given nation does not account much for the development of business systems in that country and ultimately the economy. Rather the usage of the available factor conditions creates the distinction between mere existences. In the same way, the disability of a nation to have availability of factor conditions can occasion innovation to cover for that disability which can create a competitive advantage for that nation to illustrate this point the case of Japan serves as an ideal example. Though being a small nation that has a big shortage of arable land, Japan has risen to overcome this disability by exploiting its vast human resources thereby becoming a world leader in technology. The reinvention of Japan to focus on its wealth of human resources gives the country and its industries a huge competitive advantage in the international markets (Cho and Moon 2000). Local market demand condition Availability of a stylish home market plays to the advantage of business systems of major world economies. A sophisticated market that is hugely demanding is vital in ensuring continuous innovation of latest products and improved technologies by the local companies in major economies. The highly demanding United States consumers, for instance, are credited with compelling the US software companies to keep on innovating thereby giving them a sustainable competitive edge in software products and services. Porter points out that the home market is influenced by various factors. Such factors can include the distinct tastes and preferences of customers as well as an industry’s ability to meet these tastes and preferences through the goods and services provided by the market. The local market demand conditions are a vital aspect in Porter’s Diamond since when the local demands outmuscle the demands from the foreign market; a competitive national advantage takes place since local companies concentrate more of their capital and resources producing products that demanded more locally than abroad (Cho and Moon 2000). The United States mobile phone market gives a good example of this illustration. When the demand for iPhone rises in the US, it will prompt Apple to work more on renovating the design of the iPhone to do better in the US consumer market and ultimately the international market. On the other hand, the techno savvy consumers in Japan have compelled the camera manufacturing industries in Japan to develop innovative models for the home market and ultimately the international market through exports. The same case can be witness the home market of Sweden mobile phone companies that forced Ericsson to invest in the industry of cellular phone equipment industry very early before the global demand for such exploded (Cho and Moon 2000). Local suppliers as well as complementary industries Having strong related supporting industries in provision of the inputs required in the industry gives a competitive advantage to business systems in major economies. The concept, in essence, implies that the realisation of competitive complementary industries spurs innovation and globalisation of similar closely related industries. The success of an automobile industry profits among others the rubber, metal and leather industries. In addition, industries closely related to the automobile industry such as car insurance firms also benefit. The success of one industry in the international market can result in returns and advantage to other supporting or related industries in these economies. The shoe and leather industry in Italy presents a classic case scenario of this concept. Through the significant success of Italy’s shoe and leather industry in international economic frontiers, related and supporting industries such as leather working machinery and design industries have enjoyed an advantage of this success to be competitive as well. This underlines the point that Competitive supplying industries motivate emphasise on innovation and internationalisation in related industries at preceding phases in the value structure (Dicken 2003). Local firm characteristics Local firm characteristics entail the strategy and policy adopted by a particular form as well as availability of healthy firm rivalry among local companies to encourage healthy competition that spurs improvement and innovation. The healthy competitive rivalry that exists between Androids and iPhones in the smartphone industry pushes both players to great innovative heights making them fundamental market players in the domestic market of U.S and the international market giving them a big national competitive advantage. Local firm characteristics present a unique proposition due to differences of company cultures from one country to another. For instance, the structure and strategy of family owned companies and businesses differ fundamentally from public limited companies in both the domestic and global competitions. The case of automobile firms in Japan, Germany, and US, show the importance of a culture that supports public limited companies as opposed to family owned companies. The automobile companies in Germany and Japan are run by the top management team distinct from family structures thus emphasizing on the development of the automobile designs and process. On the other hand, US automobile firms are run by the people with family structures that are largely influenced on exploiting short-term business return on ventures. As a result, the US automobile industry has lost its competitive advantage with Japan continually strengthening in this industry (Guy 2009). In additions to the four determinants forming the diamond, Porter includes two additional factors that are vital in dictating the direction of competitive advantage. The two factors may not be as significant as the four determinants, but they are equally influential. These include the government policy and the chance. Government policies such as enforcement of firm product standards give the products of local industries a competitive advantage in the global market. However, Constricting and shielding policies can weaken the prospects of a company’s industries in the global front. Chance can also give a competitive advantage in some instances. For instance, US prohibition policies on liquor, propelled the rise of the liquor industry in Canada. This is an illustration of the two factors; that is the chance and government. Occurrences of chance are those out of the control of industries, such as pure inventions. Chance plays as the vital aspect of tilting competitive advantage in many industries. On the other hand, Governments fundamental in implementing policies that has the effect on the entire diamond structure through either discouraging or promoting competitive advantage (Cullinane 2005) Case study of Japanese Fax Machine Industry The influence of Porter’s national competitive theory can be studied using the Japanese facsimile industry as a case study. Using the four determinants, the dominance of Japanese firms in this industry can be explained. Japanese factor conditions. The huge human resource of electrical engineers per capita gives Japan a competitive advantage in factor conditions. In addition is the Japanese demand condition. The local market of Japan was very demanding as a result of civilisation and acquisition of reading and writing skills. Moreover, the big sum of related and supporting industries that had decent technology contributed to the diamond’s competitive advantage in Japan’s Fax Machine Industry. Local firm characteristics resulted from domestic rivalry that propelled innovation leading to fast cost reductions in Japan’s Fax Machine Industry. The support of Japanese Government through the state-owned telecom company transformed its involving approval requirements for each installation to a favourable common type approval. Conclusion The key aspect of Porter’s diamond system is the impact that point has on the others. Therefore the points in the diamond are dependent on each other. To illustrate this, where the point of factor conditions is disadvantaged local industries will find it hard to innovate until competitive rivalry occurs. Porter’s national competitive advantage model can be used by industries in recognizing the policies they need to adopt that are acceptable on the domestic markets and pleasant in international markets. Governments, on the other hand, should implement policies that encourage national competitive advantages to enable the local industries strong competitive positions globally. References Fitzgerald, R., MCsweeney, B., & Smith, C. (2008). Remaking management between global and local. Cambridge, Cambridge University Press. Guy, F. (2009). The global environment of business. Oxford, Oxford University Press. Dicken, P. (2003). Global shift: reshaping the global economic map in the 21st century. London [u.a.], SAGE. Cullinane, K. (2005). Shipping Economics. Burlington, Elsevier. Cho, D. S., & Moon, H. C. (2000). From Adam Smith To Michael Porter Evolution of Competitiveness Theory. Singapore, World Scientific. http://public.eblib.com/choice/publicfullrecord.aspx?p=183723. Read More