Background of the Porters Diamond Model - Essay Example

Porter’s Diamond Model Table of Contents Introduction 3 Background of the Porter’s Diamond Model 3 Issues and Debates Porter’s Diamond Model 5 National Competitiveness as a checklist 6 Diamond Model in Light of Late Development Theory 7 Country Comparison 7 Porter’s Diamond Model in Major Economies 8 Role of Globalization and Multi National Firms 8 Growing Inward FDI policies 9 Conclusion 9 Reference List 10 Introduction The advent of globalization is gradually changing the global business market environment. The firms are increasingly concerned about the growing competitiveness in industry (Handlechner, 2008). Even though a firm is not engaged in overseas business activities, it has to closely monitor the international business environment, where the activity of other organizations largely influences the business operations of another (Schwab, 2009). With the rapid growth of technological advancement, every firm tries to secure its own competitive advantage in order to gain a superior position in the market. However, irrespective of the individual firms, some countries as a whole have achieved a higher competitive position than the others (Baker, 2007). This paper will shed some light on how the nations achieve competitive advantage by using Porter’s Diamond model. This model focuses on the determining factors of national competitive advantage. The paper will discuss about the issues and loop holes of the Porter’s diamond Model and how they fail to answer certain circumstantial problems. Background of the Porter’s Diamond Model Porter (1990) explained the competitiveness of a nation based on the four different parameters, which are factor conditions, demand conditions, supporting or related industries and firms’ strategy, structure and rivalry. Porter suggested that these four conditions act as the major determinants of a nation’s competitive position. The four parameters are described below. Factor Conditions: The factor conditions include the production factors of a nation, like human resources and human capital, physical resources, knowledge base, financial strength. The quantity and quality of the available human resources determine the national production capabilities. Demand Conditions: The demand conditions explain the level of demands of products in the home country. The higher level of demand influences the pace of product innovation and improves service quality. Firms’ Strategy structure Rivalry: This parameter suggests how the firms in a country are organized and how they determine the domestic competitiveness. This mostly reflects the organizational cultural trends of the nation. Certain organizational behaviour and pattern of activities provide added advantage to them in terms of other foreign companies. Relating and supporting industries: The presence of other industries influences the competitive position of an organization. The presence of other industries can be leveraged by the domestic firms in order to create competitive advantage. Figure: Porter’s Diamond Model Source: (Porter, 1990) Issues and Debates Porter’s Diamond Model The four parameters of the Diamond model although acts as a determinant of national competitive advantage, are mostly industry oriented. The diamond model is focused on achieving a competitive advantage in a particular industry. However, in order to distil out the national perspective of the competitive positioning, the attributes like the country’s economic environment, institutional policies needs to be taken into account. The diamond model however did not mention any particular influence of the national attributes. Porter (1990) mentioned that the four parameters are capable of interacting with each other and can reinforce each other’s strengths. Bellak and Weiss (1993) explained that the interdependent nature of an industry makes it difficult to be duplicated in any other nation, thereby creating a competitive advantage for the home country. Stopford and Strange (1991) have challenged the Porter’s Diamond model by stating that it lacks certain macroeconomic policies, lacks clear definition of the determinant factors that leads towards the four proposed parameters. The model also did not considered the modern trade theory, thereby eliminating any room for evaluating the influence of multinational trade over the national competitive advantage. Michael Porter conducted his study based on 10 developed countries, which as a result limits its usage to developed economies only. Therefore the Diamond model may be irrelevant under certain conditions of the developing or poor economies. In those countries, the nature of competition is mostly on the grounds of low cost production and offering lower price. In such situations the diamond model is irrelevant as it only determines the competitive factors of a developed economy (Oz, 2000). Dunning (1993) also added that the high dependency on the world export shares to assess the international competitive environment is a faulty methodology, as export levels does not give a clear idea of the business environment of a country. The multinational firms also interact with each other in ways other than mere export, such as outsourcing of services. The diamond model also does not discuss about the concept of comparative advantage of a firm owing to its ability to outsource its manufacturing to a host country with low labour cost. The diamond model’s success is based on certain assumptions that national competitive position of is somehow dependent on the government intervention. This concept cannot be used as a thumb rule for all nations, as governments of different nations offers different level of corporate support. Despite of the significant influence of the government in forming the competitive advantage it has not been added as a fifth parameter. Thus it is mostly unclear from the model that how government’s role is involved. Moreover, certain business activities of a domestic firm do not cause any contribution to the national economy. Activities like outsourcing of services often cause job displacement to the host countries (Woo-Cumings, 1999). Therefore although a company is performing well but its performance cannot be a determinant for national competitive advantage. The diamond also fails to describe how to meet the four proposed parameters. Thus a firm which seeks to follow the diamond model does not get a clear idea of activities which will push it towards achieving a competitive advantage. The diamond model relates the international competitiveness with the domestic rivalry, which in some cases are irrelevant, as these two types of competitions arise from two different sources and requires different approaches to face them. The diamond model also excludes certain exogenous factor that contributes to the national competitive position of a country, such as multinational business activities. Porter (1990) only focused on the activities of the domestic firms and how their interrelation influences the nation’s economy and the market competition in the industry. He failed to mention that apart from the direct overseas trade, activities of foreign firms can also affect the competiveness of the domestic market. It can influence the domestic consumer behaviour thereby changing the demand trend. This as a result, can make it difficult for the domestic suppliers to meet the changing demand of the local customers. Thus it can act as an advantage for the foreign firms to have a first mover advantage in the domestic market, thereby posing a huge challenge to the domestic suppliers. National Competitiveness as a checklist The concept of national competitiveness as described by Porter (1990) can be described as a mere checklist of final results that leads to national advantage. It fails to point out the necessary actions required for achieving the final result, i.e. the model does not mention how a nation can achieve the required factor conditions or create the necessary demand conditions to achieve the national competitive advantage. Diamond Model in Light of Late Development Theory Dunning (1993) further argued that the diamond model is a static framework as it does not take into account the growing trend in technological usage and its contribution to the changing business market environment. This as a result gave rise to the concept of double or multiple diamond models that covers all the determinant factors. According to the Late Development theory discussed by Woo-Cumings (1999), the involvement of state in the financing of the industries to boost their development is of vital importance. Due to the rapid development of technology it is difficult for the firms belonging to the poor economies to keep up with the global competitive environment. The financial boost helps them to compete in a global perspective and thereby positively influencing the national economy. Porter downplayed the role of state The diamond model completely ignored the contribution of the state, because Porter (1990) only focused on the industrial perspective involving firms and their interrelated activities. Therefore, the diamond model downplayed the interrelationship between the state and business industry. The state often invests significant amount of capital in technological development of a region, which as a result increases the national competitive advantage. Country Comparison This section highlights the national competitive advantage of different countries in the automobile sector. In China the number of automotive companies is fairly high, but most of them are operational only within the national border. Companies like the Great Wall Motors, and Beijing automobile works operate only within china and has not entered the global market. This suggests that China has low competitive advantage in this industry. Germany is one of the best known countries in the automotive industry (Nation master, 2015). German companies like Volkswagen and BMW are best known for their product quality, product design and brand value. Therefore, Germany has a very high national competitive advantage in the automotive industry. Japan also holds a strong position in the industry. Companies like Honda, Toyota and Mitsubishi are operating in a global perspective. Moreover, Toyota holds the highest market share in global automotive industry, thereby giving Japan the highest level of national competitive advantage. UK companies like Lotus and Bentley have also gained significant popularity in the global market, but still lags behind the German and Japanese companies in terms competitive advantage. USA on the other hand holds respectable position in automotive industry owing to the presence of General Motors and Ford thereby giving the nation a significant competitive advantage over others (Le, 2014). Porter’s Diamond Model in Major Economies The Porter’s diamond model was developed based on ten developed countries which are considered to be the major economies in the world. In the major economies the business firms are quite influential in developing the national economy. Therefore, the competitive advantages achieved by a particular firm or industry will essentially influence the competitive position of the nation. The four parameters of the diamond model are clearly based on the industrial perspective and describes the market determinates like presence of demand, presence of resources, etc. Therefore it can be stated that the Porter’s Diamond model is relevantly describes the business environment of the major economies (Porter, M., 1998). Role of Globalization and Multi National Firms The rapid growth of globalization has allowed multinational firms to gain competitive advantage by leveraging the comparative advantage and economies of scale of the host countries. Globalization has opened up the global business market allowing firms to have access to new technologies from other countries thereby allowing them to develop their own competitive advantage (Adcock, 2010). The location based comparative advantage suggests that certain nations are capable of producing certain goods or service at a lower price than others, thereby giving it a competitive advantage by cost leadership positioning (Boone and Kurtz, 2012; Stopford and Strange, 1991). However, the diamond model does not discuss about the impact of globalization on competitive advantage. Although it has shed some light on the firms’ structure and strategies, but has not discussed how they can be achieved. The globalization has allowed multinational enterprises to break out of the limitation of national attributes. They can take the advantage of the entire global business market to ensure sustainability and future growth (Dunning, 1993). Growing Inward FDI policies The multinational firms possess the flexibility and financial strength to expand or shift their business to almost any country they want. Despite of this fact the governments are easing out FDI policies to attract foreign firms (Chernev, 2010). This is mostly because they have recognized the positive effect of inward FDI on the national economy. The firms tend to expand their business in places where the trade barriers and entry barriers are much less significant. Therefore the developing countries compete against each other to attract multinational firms by easing the FDI policies. Conclusion The diamond model of Porter (1990) is limited within the national boundaries and it has tried to explain the competitive advantage of the domestic firms. However, it has failed to factor in several other parameters that have significantly developed the competitive advantage of a nation. The model mostly talks about the advantage of a nation over other countries, but the parameters discussed by the model are mostly industry oriented. Thus in order to make relevant connection, certain exogenous factors needs to be included like state and government interventions (Dayal, 2010). The model also does not discuss about the impact of the multinational trade and effect of globalization of development of competitive advantage. The model was developed by focusing only on the developed economies thus eliminating its usage in most of the developing countries. Thus it can be stated that the Diamond Model is mostly irrelevant in the current global business environment, as it fails to explain and suggest solutions to most of the contemporary issues of competitiveness. Reference List Adcock, D., 2010. Marketing: Principles and practice. 4th ed. London, Thousand Oaks CA: Sage Publication Baker, M, 2007. Marketing strategy and management. 6th ed. Basingstoke: Palgrave Macmillan. Bellak, C.J. and Weiss ,A. 1993. A note on the Austrian diamond. Manage Int Rev., 2(33), pp.109 – 18 Boone, L. E. and Kurtz, D. L., 2012. 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