Porter's Model of National Competitive Advantage - Essay Example

? Porter’s model of national competitive advantage What are the strengths and limitations of Porter’s model of national competitive advantage in explaining the comparative nature and achievements of national business systems? Introduction A number of classical theories in international trade suggest that the element of comparative advantage dwells in the feature endowments that a nation may be lucky enough to come by. These factor endowments may include features such as land, labor, natural resources, as well as, the magnitude of the local populace. In his model, Michael E. Porter makes an argument that a nation can fashion new highly developed factor endowments such as a strong technology, skilled labor, knowledge base, culture, and government support. Porter made use of a diamond shaped illustration to be the basis of his framework to show the determinants of national advantage. The diamond representation symbolizes the national playing field where countries can establish for their industries. Porter's Diamond of National Advantage Corporate strategies are ever increasing and thus have to be observed from a global context. This is because, even when an organization has no plans to import or to export commodities directly, the management staff has to gaze at the international business environment, where the actions of buyers, sellers, competitors, and new entrants of providers of alternatives may have an impact on the domestic market. Through this trend, information technology can be reinforced. Michael Porter’s model that allows for the analyzing of why some countries are more aggressive than others are, and the reason why some industries within countries are more aggressive than the way others are. All this is written in the book he published titled “The Competitive Advantage of Nations”. From the insight revealed in his writings, his representation of determining factors in national advantage has come to be known as Porters Diamond. This model proposes that the nationalized home base of a business plays a considerable role in determining the scope to which it is expected to achieve a competitive advantage on an international level. This home base presents basic factors that may support or hinder businesses from creating advantages in international competition (Held and McGrew 2001). Michael Porter makes out four determinants. These are: Factor Conditions When it comes to factor conditions, a country can create its own essential factors such as skilled labour and a strong technological base. It should be noted that the reserve of these features at a given time is not as much important than the degree that they are improved and implemented. Local demerits in features of production drive better innovation. Unfavorable circumstances such as labor shortages or inadequate raw materials may force organizations to come up with new methods, and this originality often goes ahead to a national comparative advantage. Demand Conditions There are situations when the market for a certain product is bigger locally when compared to foreign markets. In this situation, the local organizations give more attention to that commodity than foreign organizations do, thus leading to the element of competitive advantage as soon as the local organizations start exporting the commodity in question. From this understanding, it becomes clear that when there is a high demand in the local market for a particular commodity, a national advantage results. In the spirit of good business, a strong, trendsetting local market can help local organizations look forward to global trends (Salvatore, 2002). Related and Supporting Industries In every industrial process there are always supporting and related industries. This leads to the element of competition between these industries. In the local setting, supporting industries are sometimes competitive, and thus organizations enjoy additional innovative and cost effective inputs. The suppliers get an additional advantage if their businesses are set up in a global scale, thus strengthening their effect. Firm Strategy, Structure, and Rivalry Different organizations support and implement different strategies that are best suited for their business dealings. Some of these strategies are affected by the local conditions exhibited in these specific regions. An example can be seen in the mode in which companies in Germany are inclined to be hierarchical. On the other hand, companies in Italy are often smaller which makes their management to be more in the liking of an extended family. These strategies and structures help determine what type of industry that the organizations in a country can excel. The smaller number of competitors in an industry makes the industry more attractive. This is because the many industries are crowded thus leading to smaller profits. On the other hand, when it comes to improvement and innovation, it is better to have more rivalry because it puts more pressure on organizations to produce better commodities. When there is a higher sense of local rivalry, the rivalry experienced in the global scene is minimized. Rivalry in the local scene forces organizations to go beyond the basic merits that the residing country may benefit from. One of the benefits included in this package is the element of low factor cost. Analysis of Porter’s Model Porter’s model is a straightforward tool that supports premeditated comprehension where power lies within a business position. It may also help in understanding both the strength of an organizations present competitive position, in addition to, the strength of certain positions where a company is looking to enter upon. Despite the fact that this framework focuses on business concerns more willingly than public policy, it also stresses on extended competition for its value rather than focusing only on competition among accessible rivals, and the straightforwardness of its application. This has inspired many companies, as well as, business schooling institutions to adopt its use (Ruttan, 2001). When there is a clear understanding of where the power lies, it will allow a company to take reasonable advantage of its strengths, perk up weaknesses, and circumvent taking wrong steps. Consequently, to affect this planning tool efficiently, it is imperative to understand the state of affairs and to look at all of the forces independently. When carrying out an analysis of Porter’s model, it is required that one brainstorms all significant factors for the company’s market condition, and then verify against the factors given for each force in the model. As soon as one had identified the favorable and unfavorable elements in the performance of the company, as well as, its attractiveness in the industry, it is vital that one analyses the situation and examines the effect of these elements. Porter’s model is static in nature while, on the other hand, the competition being experienced in the surrounding environment is constantly changing. In order to provide an opportunity where organizations will be able to identify the strengths of their position, as well as, their ability to realize a sustained amount of profit in the industry, these organizations have to think about how each of these elements affect the organization (Porter, 1998). Limitations Just like in other models that try to explain the foundation of international competitiveness, the model suggested by Porter has its limitations. Porter’s diamond model is not without fault as it has come under some heavy criticism given that when Mr. Porter formulated the model over three decades ago. The conditions that were employed in international business at the time are very different from the ones exhibited today. The internet did not exist in the manner that we know it today. The type of outsourcing of manufacturing in order to lower costs by the Triad group held by Europe, USA, and Japan, as well as, the emerging low cost locations of South East Asia were still in their early stage of development. A giant leap was taken by the BRIC economies that comprise of Brazil, China, India, and Russia in order to claim the status of chief world producing economies. In retrospect, the essential role of the state to ensure the expansion and competitiveness of newly industrializing nations is underplayed in Porter’s model. Governments in many newly industrializing nations targeted specific industry sectors that include automobiles, ship building, and personal computers. Through this they actively promoted the progress of competitive advantage using export promotion policies (Kippenberger, 1998). While constructing the diamond model, Mr. Porter did not foresee the responsibility of the multinational companies as key sources of technology transfer to latecomer organizations in the newly industrializing nations. In addition, the model does not have much to say about the function of public and private partnerships as a basis of competitive advantage in such nations. The diamond model’s inability to explain the growth and expansion of some successful industries for instance Indian software, points towards a weaknesses in the model. India, as a developing nation lacked a lot of the local bequest thought crucial for the development of an elevated technology industry with products such as software engineering. The Role of the Government The state government has the role of supporting companies in order to lift up their performance. This can be done by implementing strict product standards that are to be utilized in the manufucture of the goods that they set out to manufacture. Governments motivate organizations towards early demand for superior products in order to ensure that the commodities that they produce are accepted in their specific markets. State governments also encourage local rivalry in industries by restraining direct cooperation, as well as, enforcing antitrust regulations to organizations. These antitrust laws are meant to open the market in industries for other competitors in order to avoid the creation of monopolies. The creation of monopolies could lead to the stagnation of markets thus preventing other organizations from engaging in what is considered as healthy competition (Aiginger, 2006). In Mr. Porter’s model, the role of the government has not been well cited within the objective of creating competitive advantage at a national level. His model does not employ the use of the roles played by the government despite its importance when it comes to the development of industrialization, as well as creating national competitiveness. This may be because the government does not necessarily fit into the diamond model. This model has been designed to be implemented by firms in order to create their own strategies to be used in building their businesses. The role of the government can have either a constructive or a negative effect on the model that Mr. Porter created, thus he saw not to place chance within the model by eliminating the element of probability within the model. Factor Conditions and Demand In terms of factor conditions and demand, their importance arises when one is looking at the condition of their creation. They are largely inputs that are required in order to bring about competition. They include things such as capital, land, natural resources, infrastructure, and labour. Different nations are bequeathed with different factors, which they employ in the roles of competitive advantage. The firms situated in different countries use the factors that are accessible to them in these countries to make their mark in the market. It is noticeable that stock factors are of lesser importance than the charge to which these factors are applied (Dunning, 2000). Demand is not purely national it its creation because demand can extend outside the boundaries of a country. This is seen in the aspect of international business. If demand was only restricted to the national level, then there would be no more international trade. It is of the utmost importance that domestic rivalry exists among different competitors, as well as, supporting industries. This is the only challenge that can make them create advanced products that can be presented to international markets. Globalization Globalization is the effort implemented by all the nations in the world in order to create a solitary market where all the nations across the world will be able to take part in international trade in a manner that is competitive, but provides a fair and healthy sense of competition. The globalization process comes to play within Mr. Porter’s model because the model was created in order to enhance international trade. Globalization has everything to do with international trade and communication. The globalization process can play a vital role when it comes to international trade because it a major aspect when creating a situation where nations come together to indulge in trade (Ezeala-Harrison, 2005). On the other hand, the globalization process does not give room for individual countries to analyze their progress within the global market as their efforts will be linked to those realized by the rest of the world. Individual nations need to know and understand how to define their individual national strategies in order to develop within the international market. Through this, they will know how their competitiveness has an impact on the economic system of the world. It has been noted that developing countries continue to suffer as the industrialized countries go on sustaining national competitiveness. Elite organizations that are found in developing countries seek to survive and reap personal benefits, and at the same time are becoming ideologically and culturally dependent. This is instead of creating sound economic institutional reforms and policies that are in line with the national interest (Hill, 2009). Though Mr. Porter’s model has been well received in the international community, a debate has also been stimulated by scholars about the same. Some argue that Porter does not take into account the globalization of economic activities. Foreign direct investments have important effects on the aspect of national competitiveness that is not effectively addressed in the features – rivalry, firm strategy and structure. Organizations engage in “across the border” activities in order to take advantage of its own specific ownership merits. These merits may have initially been founded on the diamond model, but their competitive resources are at the moment largely multi-nationalized. Multinational Enterprises are organizations that have possession of and are in control of subsidiaries in more than one nation. The home base of a multinational enterprise is the original country where it has its headquarters. The other countries where the multinational enterprise has spread its businesses are commonly referred to as host countries. Foreign Direct Investments These are presented as vital aspects of globalization strategies and policies in many organizations. They are a priority concern for many countries, especially the developing countries. Foreign direct investments coming into the country are more likely to introduce newer resources and technologies into a country. When it comes to smaller and medium sized companies, the foreign direct investment strategies provide an opportunity for them to become a little bit more involved in international business doings (Root, 2001). Without a doubt, foreign investors might bring in merits originating from their home base as some of their assets might have ownership-specific merits. Some of these scholars suggest that each feature of the diamond model is connected to multinational activities, related and supporting industries, and demand conditions, in addition to, rivalry, strategy and structure. It has also been distinguished that foreign direct investments can manipulate factor conditions. Countries compete to attract foreign direct investments because they can lead to an increase in capital through the relative increase in imports and exports that will be realized with this venture. An increase in the amount of foreign direct investments will lead to the creation of employment opportunities thus providing the populace of a country more wages. A direct investment into a developing nation can lead to the advancement in technology, as well as, managerial skills that can be used to develop a nation. Investing into a developing nation will ensure the weakening of the domestic monopolies this leading to healthier competition within relative industries. References Aiginger, K. (2006). ‘Competitiveness: from a dangerous obsession to a welfare creating ability with positive externalities’, Journal of Industrial Trade and Competition, 6: 63–66. Dunning, J.H. (2000). ‘Regions, globalization, and the knowledge economy: the issues stated’, In Dunning, J.H. (ed.), Regions, Globalization, and the Knowledge-Based Economy. Oxford: Oxford University Press. Ezeala-Harrison, F. (2005). ‘On the competing notions of international competitiveness’, Advances in Competitiveness Research, 13(1): 80. Held D., and McGrew A. (2003). “Governing globalization”. Polity Press. Cambridge. Hill, C.W.L. 2009. International Business: Competing in the Global Market Place. New York: McGraw-Hill Irwin. Kippenberger, T. (1998). Strategy according to Michael Porter. The Antidote, Vol. 3 Issue 6. Porter, M. (1998). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press. New York Root, F.R. 2001. Entry Strategies for International Markets. Lexington, MA: Lexington Books. Ruttan, V.W. (2001). “Technology, Growth, and Development: An Induced Innovation Perspective”. Oxford University Press. New York. Salvatore, D. 2002. International Economics, 3rd edition. New York: Macmillan. Read More