Efficiency of the Diamond Model by Porter - Essay Example

Porter’s “Diamond” Model Introduction The diamond model was proposed by Michael Porter in his book The Competitive Advantages of Nations to describe the competitive advantage of globally leading industries in different countries. This economic model is really effective to explain why particular industries are placed in a competitive position in particular locations. It is evident that national prosperity is created through demanding local customers, strong domestic rivals, and aggressive domestic suppliers. An industry’s potential to innovate and upgrade is a key factor determining the competitiveness of a nation. Intensity of global competition is very high today mainly due to the fast growth of emerging economies like China, India, and Brazil. Alliances of emerging economies like BRICS play a significant role in influencing the competitiveness of national economies. This paper will analyse to what extent the Porter’s diamond model is effective in achieving its stated objectives giving particular focus to concepts of industry clusters, diamond model, and emerging nations. An overview of cluster and emerging nations According to traditional economic theories, the major factors affecting the competitive advantage of regions or nations were land, location, natural resources, labour, and the population size. As none of these factors can be influenced by external forces, people had believed that national prosperity was passive or inherited and hence nothing could be done to improve the situation. However, Porter argued that sustained industrial growth is not depended on these basic inherited factors. In order to replace this traditional misconception, Porter introduced a concept called industry cluster, which represents a group of interconnected firms, suppliers, and related industries in a particular location. He stated that competitive advantage of nations is determined by four interlinked economic factors existing in such industry clusters. The theorist also suggested that these economic factors can be significantly influenced by strong technological and knowledge base, government support, skilled workforce, and culture. According to a report by the Economist Intelligence Unit (2011), “there are few economic development policies as popular as clusters”. Recognising the importance of clusters, today countries, regions, and even cities strive to develop a network of complementary and competitive firms. The recent global financial crisis substantially increased the significance of clusters. The report also says that locating firms in the same place does not constitute clusters unless there is effective collaboration between firms, suppliers, and related industries (Ibid). Government has an important role to play in enhancing the cluster development. It is to be noted that talent and innovation are two vital factors influencing the development of successful clusters. Referring to the industrial district theory, Alberti (n.d.) says that industry clusters represent a fundamental basis for the economy. The author continues that this economic model is inevitably vital to achieve sustainable economic growth of a region and to improve the overall competitive advantage of nations. Emerging economies like China and India can greatly benefit from the concept of industry clusters as it would be difficult for these countries to promote the growth of the economy as a whole. Porter’s diamond model According to Porter (2001), the diamond model is comprised of four attributes “that individually and as a system constitutes the diamond of national advantage”. These attributes are factors conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry. Factor conditions represent the nation’s position in terms of production. More clearly, the factor conditions may include human capital, physical and knowledge resources, capital resources, and infrastructure. Porter says that specialized resources are often specifically important for an industry to improve its competitiveness. Similarly demand conditions indicate the nature of domestic demand for the industry’s products or services. It is clear that increased domestic demand would force firms to come up with frequent innovations and to develop more advanced products and services than those of competitors to gain a competitive edge over their market rivals. Porter (1990) points out that the presence of supporting industries/supplier industries and other related industries that are globally competitive can greatly influence the competitiveness of an industry. These supporting industries can produce cost-effective inputs and also engage in the upgrading process to stimulate firms to make terrific innovations (Ibid). Finally the way companies are created, organised, and managed is an important determinant of success. The nature of domestic rivalry is also a key factor influencing success because the presence of intense domestic rivalry will certainly force companies to innovate faster to improve competitiveness. Effectiveness of diamond model While analysing the effectiveness of the Porter’s diamond model, it seems that this economic model can assist regulators to frame potential policies to enhance the nation’s competitiveness. As Porter pointed out, government policies can considerably influence the attributes of the diamonds model. Therefore, this model can be an economic indicator for governments to explain the competitive advantages of their industries by implementing favourable economic policies. To illustrate, it is clear that lower income taxes can boost consumer demand, which in turn generates higher sales and profits. Based on this framework, governments may invest heavily in education to develop a skilled workforce which is inevitable for companies to deal with R&D activities successfully. In addition, it is better for companies to know that close proximity to supporting industries is an effective way to cut down input costs and thereby to improve profits. Finally, this theoretical framework is also helpful for companies to understand that a competitive industry structure is vital to survive tougher competition in a global business environment. A good understanding of the economic factors that affect the competitiveness of industries or nation is beneficial for regulators and industrialists to explain the market conditions that bring competitive advantages. However, the diamond model cannot be considered as an effective framework to explain the competitive advantage of globally leading industries worldwide. Even Porter could not explain this economic model successfully. In his book The Competitive Advantage of Nations, Porter studied two newly industrialised countries, Korea and Singapore. Porter was optimistic about the economic future of the Korea, and he claimed that this country would attain the true advanced status in the following decade. In contrast, Porter was pessimistic about the future of Singapore economy and he opined that Singapore might remain only a factor-driven economy, which indicates and early phase of economic growth. However, it is obvious that Singapore has been dominating over Korea in terms of economic growth since the publication of Porter’s book. This false prediction raises some serious questions about the feasibility of the diamond model in explaining a nation’s competitiveness A widely criticised weakness of Porter’s diamond model is that its exclusive focus on the ‘home base’ concept. Porter used this economic model when consulting with New Zealand and Canadian governments. Rugman (1991) indicates that Porter failed to properly take the nature of multinational activities into account in the case of Canada whereas his model did not succeed in explaining the success of resource-based and export-oriented industries in the case of New Zealand. According to the diamond model, a company’s chances of taking the location advantages of other nations are extremely limited. However, it is not the case in the modern world because globalisation eliminated cross border barriers and hence companies are free to operate in any country without location troubles. Rugman has introduced a new approach called double diamond model to address the limitation of the Porter’s diamond model. With the turn of the 21st century, the global business environment and the financial market notably changed and therefore the Porter’s diamond model. Conclusion From the above discussion, it is clear that national prosperity is not inherited but created. Traditional factors including land, location, natural resources, labour, and the population size have little influence on determining the competitive advantages of an industry. Porter’s diamond model suggests four interlinked economic factors, including factors conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry to determine the competitiveness of a nation. Porter introduced a new concept called industry cluster to well explain the competitive advantage of an industry. However, the diamond model is not much effective to explain the competitive advantage of globally leading industries in different countries. References Albeit, F. (n.d.). ‘The concept of industrial district: main contributions’. The Economist Intelligence Unit Limited. 2011. “Fostering innovation-led clusters: A review of leading global practices A report from the Economist Intelligence Unit”. Porter, M. 1990. ‘The competitive advantage of nations’. Harvard Business Review. 73-93. Rugman, A.M. 1991. ‘Diamond in the rough’. Business Quarterly, 55(3): 61–64. Read More