The Application of Porter Diamond Framework to the Automobile Production in Germany - Essay Example

Contents Executive summary………………………………………………………………………………3 Introduction………………………………………………………………………………………4 Porters Diamond framework……………………………………………………………………..4 Automobile production in Germany……………………………………………………………..6 The application of porter diamond framework to the Automobile production in Germany…….8 Critical evaluation of porter diamond framework through conducting a literature review that identifies weaknesses or limitations of the framework…………………………………………..10 Limitations of the Porter Diamond framework ………………………………………………….11 Examples used in the application of Porter Diamond framework………………………………15 Conclusion……………………………………………………………………………………….18 References………………………………………………………………………………………19 Executive summary The prosperity of a nation is created but it’s not inherited. The success of a company is determined by its innovativeness and upgrading of its infrastructure. Pressure and challenges are some of the factors that dictate whether a company will have a greater competitive advantage over that of its competitors. However a country’s natural endowments, labour pool, interest rates, currency values as well as the natural economics’ do not determine a country’s success or progress in its operations. Porters Diamond framework is a good framework that is used in analyzing the global competitiveness of an industry. The porter diamond factors of competitive advantages of a nation include; the government, factor conditions, port competition, related and supporting industry as well as the demand conditions that should be applied in all organizations so as to have high competitive advantages over their competitors. However, the framework may not be applied in most organization as it does not incorporate the multinational activities. The introduction of the generalized double diamond model has led to the significant changes within the organization. This framework takes into consideration the multinational activities whereas the porters’ original diamond model takes into account the traditional home-based activities. In addition the porter’s diamond framework makes an explicit connection between the geographical and the international industries therefore the industries can easily access raw materials for their company and can also market their products where they can get market for their produce. Introduction Companies gain competitive advantages through getting involved in the innovative processes within their organizations. The approaches of innovation involve use of the latest technology and gaining knowledge on how to carry out the activities of an organization effectively. The innovation processes are manifested through using new product designs, new production processes, having marketing approaches as well as conducting training campaigns within the organizations. Porter Diamond framework The Porter Diamond framework was initiated by Michael Porter and is used in determining the competitive advantages of a country or a region. According to porter 1990, it states that the competitive advantage of a country is created and sustained by going through a highly localized process. However, the diamond framework determinants of countries or regions do not necessarily contribute to the success of a country. Porter analyzed the factors that contributed to the international companies’ success and why they were successful than other companies .He observed that success was as a result of implementing the porters favorable national diamonds factors. The extended porter diamond factors of competitive advantages of a nation include; the government, factor conditions, port competition, related and supporting industry as well as the demand conditions (Fuss, and Waverman, 2006). These interlinked advanced factors for the competitive advantages for countries or regions in the porters’ diamond framework are; Factor conditions; Porters says that the main factors of production are created but not inherited. The specialized factors of production are capital, skilled labor and infrastructure. The general use of the factors and the non-factors such as the raw materials and unskilled labor can be easily made for a company and therefore do not generate sustained competitive advantage .For the specialized factors heavy sustained investment should be involved.The stock of factors at a given time is less important than the extent that they are upgraded and deployed. The local disadvantage in the factors of production is the force of innovation that is applied within an organization .Adverse conditions such as the labor shortages or the scarce resources, raw materials force the firms to develop new methods and this innovation often leads to the national comparative advantages. The related and supporting industries involve banking and insurance industries that provide a wide variety of specialized financial services. In this case there is spatial proximity of the downstream or the upstream industries, the exchange of information is facilitated and this promotes to a continuous exchange of ideas and innovation. For instance there are more cost effective and innovative inputs when the local industries are competitive. The outcome is strengthened when the supplier are strong global competitors. The government is used in regulating the way the activities are carried out .It may be composed of the local, regional, global and the supranational level. The role of the government is to encourage the management of companies to raise their rate of performance, create factors of production and regulate all the operations of an organization in order to increase the sales revenue of their companies (Fuss, and Waverman, 2006). The other factors that determine the competitive advantages of an industry is the demand conditions that reflect on the relationship that should be practiced within and outside the organization so as to meet the needs of the customers as expected of them. According to Porter, in demand conditions; where there is more demand for goods and services by the customers, there is more pressure within a firm that ensures that they improve on their competitiveness through producing innovative and high quality products. In this case local firms devote more attention to a product than the foreign firms. This leads to a competitive advantage of the local firms when they start exporting a particular product as it leads to its national advantage. A local market which is trend setting helps local firms to have the anticipated the global trends. In firm strategy structure and rivalry; the presence of dynamism has greatly contributed to the direct competition that has led to the increased productivity and innovation in the world. It can also be affected by the local conditions. For instance in Germany, the companies are hierarchical in nature since they are small, they tend to run like the extended families. When a firm is defined by a given strategy, then it helps to determine the industries that will excel in a nation. According to Michael porter, an industry is made attractive by low rivalry .A firm normally prefers also global rivalry when there is high local rivalry. A firm may be forced to move beyond the basic advantages that a home country enjoys such as having a low factor costs by the local rivalries. Automobile production in Germany Germany is one of the major countries that deal with the export and import of motor vehicles in different countries of the world. The economic status of a country is determined by the level of international trade taking place within the country. Germany is involved in different kinds of activities that generate revenue for its economy. It deals with the design, development, manufacture, market and selling of the worlds motor vehicles. It also produces different kinds of motor vehicles such as the BMWS and the % series, VW beetles, golfs, passats and the whole range of the Audis, Mercedes Benzes and the porches. There are some industries that do business with the Germany auto industry such as tire, plastic as well as the metal industries that have contributed to the improved economic growth and development of this country. The Germany auto industry faced the economic recession during the post-ramifications boom of the late 1980s and the early 1990s.The factors that contributed to these ramifications were; sky-high wages and social costs, heavy taxes, inflexible labor practices, long vacations, short work sheet, dwindling domestic demand, unfavorable exchange rate as well as tougher competitions in the market. In the past, the company used to produce goods and services that were of good quality but were not commensurate to the needs of the customers, this contributed to losses within their organization (Fuss, and Waverman, 2006). The industry on the other hand faced challenges due to the imposition of restrictions on exports and imports from other member countries due to quotas and tariffs. After the formation of the European Economic Community, it had 10% of its tariff being scraped which made the trading process to be carried out profitable. In the mid 1960s, the country had made significant sales in the automotive industry although many of the automotive producing industry were angry with their decision which led to imposition of more import controls. This issue led to the decline in sale of automotive industry products in Germany. The government has been in the fore line in ensuring that the company is revived so as to increase its rate of productivity .German Auto company has been recording impressive results such as windfall profits from the export market that could not be realized in the longrun.The stronger market has made the German industry to experience change and show dazzling performance due to the impressive exchange rates. The application of the porter diamond framework to the Automobile production in Germany The automobile production in Germany application of the porters’ diamond factors can improve on the rate of productivity of their companies. In case of the factors or inputs quantity and cost, the management of the company ensures that the natural, human and the capital resources are employed effectively. For instance, more people are employed in the sector so as to ensure that the needs of the customers are met as they arise .In the past, the company did not produce products that were commensurate with those of the customers but currently it has realized that there is a need to setup strategies aimed at meeting the needs of the customers within a stipulated period of time. The effective utilization of the resources that are within the organization therefore can lead to job and wealth creation within the country. The use of production concepts such as the just- in- time that refers to the delivery of parts of assembly plant at a particular point in time are needed and use of the advanced technologies is necessary for coping with the structural and market changes as they occur (Fuss, and Waverman, 2006). The company is currently recruiting more staff after a welcome bonus in the country since there was a high rate of unemployment level in the country. Its suppliers are also being recruited so as to increase the sales revenue of the companies. It was been observed that the company is currently investing over DM 47 billion into the new plant and the products over the last few years. The favorable exchange rate was crucial for its performance which would not have been achieved from the deep seated overhaul of the way the automakers did their business. The high unemployment levels led to the slowdown in the wage increases which led to the adoption of the more flexible work practices. The local context of the industry should encourage its people to invest their resources in different forms of investment and upgrading process. The automobile industry should set up strategies aimed at ensuring that the competitors do not outcompete them from the industry.Approrprate marketing strategies should be used to promote the company’s products since this will ensure the company’s products are marketed well in the industry. The demand conditions of the automobile industry should be sophisticated and demanding for the local customer for whom they can sell their products so as to increase the sales revenue for their organizations. The trade flows of this country are determined by the relative competitiveness in the production process that is carried out in the automotive industry. The automotive productivity levels of the country have now been developing over the past years due to its effectiveness in carrying out its activities in the right way. The management of the automotive industry has been using strong marketing strategies so as to promote their products in the world market. The related and supporting industries of the automobile industry are those that ensure that the suppliers are ready and capable of supplying the necessary facilities and equipment needed within a stipulated period of time. There should be a cluster of products of isolated ones so that the production process is undertaken in the appropriate manner. Factor conditions refer to the means that are employed in an organization in order to provide services to the customers. The basic historical factors involve the natural maritime access and the advanced factors such as technological knowhow. The hinterlands are also important factor conditions that are developed though they should be adjusted on a regular basis so as to meet the needs of the customers as they occur. 2. Critical evaluation of porter diamond framework through conducting a literature review that identifies weaknesses or limitations of the framework The porter diamond framework is a strategy that has been used to create a better understanding of the competitiveness of a nation. The economic theory states that several factors for comparative advantages for countries and regions are land, location, natural resources, labor and local population size. All these factors cannot be influenced or be inherited. Michael porter mentions that industrial growth is never build on these factors because their abundance undermines the competitive advantage. He therefore came up with a concept of the groups of the interconnected firms, related industries, suppliers and institutions that are likely to arise in the specific locations. The competitive advantage of a nation came up as a result of the four interlinked advanced factors and activities in and between companies in these clusters. The governments can actively influence these advanced factors. Limitations of the Porter Diamond framework The limitations of the application of the Porter diamond framework is that it lacks the facilities aimed at recognizing the skills of the people, incentives that can motivate people to acquire new skills, identify new skill development protocols as well as lacks the mechanisms that the new skills acquired can be effectively applied within an organization. Porters’ diamond framework is criticized because it cannot be applied in the world economy. For instance, Porter argues that the clustering of projects by their location can play a significant role in the competitiveness of a country. This principle is not always applicable since the clustering of sectors is not considered to be judgmental and subjective to issues that can be applied within an organization. The porters’ single diamond is not relevant in the small economies since the domestic variable required to carry out these tasks are normally limited. According to Rugan, he criticizes Porters work because when applied in the analysis of the economic status of a country, it may not give a true picture of the way the economy’s activities are carried out. The state is small thus is a tenth of the economic size of the United States of America. Canada relies on the sales made in United States and by the other third triad markets. It has been observed that the United States, diamond is relevant in Canadians multinationals than in the Canada’s own diamond that is almost 70% of the total sales that take place within a region. The Canadian free trade agreement can reinforce this but not so for the Michael porter framework. Another weakness of Porter’s model is that it can not be applied in the Canadians based firms but to multinational firms of small open economies .It is argued that over 90% of the worlds nations cannot be modeled or created according to the Porters Diamond framework. The principle of the Porters Diamond can be applied within an organization but the geographical constituency should be developed on different criterias.In addition the Porter’s single model diamond is not relevant in the small economies because their domestic variables may be limited. For instance in Canada, the integrated North America and the United States the application of the diamond framework is not relevant. These countries found out that the international variables such as the international rivalry and foreign markets are necessary for the competitiveness of the United State software firms (Henry, 2008). The other major conceptual problem with the Porters’ model is that of the narrow definition that he applies to the foreign direct investment (FDI).Porter defines the foreign direct investment as being a valuable factor that can create competitive advantages within an organization. He further on states that the foreign subsidiaries are not sources of competitive advantages thus the inward foreign direct investment are not useful factors when applied within an organization. The foreign subsidiaries are considered to be the importers and this is a source of competitive disadvantage to an organization. The Canadian-based scholars do not agree with this statement as it cannot be applied within their country. They believe that Porter lacks knowledge of the Canadian country which can devalue the application of the core models of Canada. The porter focus on the Canada’s home country diamond cannot be used to explain its competitiveness in the world market. Canada’s clusters are considered to be resource based therefore, have value added to them thus inaccurate to state that the Canadian government as a factor driven economy since this is not applicable to it. The usefulness of the natural resources as stated under the factor conditions under porter diamond framework has also been criticized in the Canadian government since it’s considered to be an old-fashioned and misguided issue within an organization. Porter states that the reliance on natural resources is as bad as the reliance on unskilled labor or simple technology within an organization. Canada has developed a number of mega firms that have turned the comparative advantage in natural resources into proprietary firm specific advantage in the resource processes or planning. The two outside forces of porter do provide very contrasting statements. They are the Government and chance. The government is of critical importance as it influences the home nation’s competitive advantage. For instance, it penalizes firms as it can use tariffs as a direct entry barrier or it can subsidize as an indirect vehicle. Domestic firms should not benefit from the short run competitive advantages. However, a discriminatory Government could distract domestic firms from having long term sustainable competitive advantages.It was noted that the Porter model does not take into consideration the time significance of the multinational activities. The issue of incorporating the multinational activities has been under critical discussion on whether it can be added as a determinant of the porters’ diamond (Henry, 2008). The conclusions made from the issues addressed by the porter diamond framework states that the Canadian home based diamond is a weak strategy which makes the Canadian-based industries unable to perform their activities as per the sustainable global competitive strategies but not as per their resources. Porter however states that the resource based industries fall part in the Canada old economic order that is considered to be a share that does not establish the progressive status of a country. It is believed that he Canada’s diamond should be broken down as well as be upgraded so as to ensure that the Canadians international competitiveness is improved when carrying out its activities. Porters’ policy indicates that he would recommend for establishment of sound decisions to be made within the organizations. These decisions involve the reduction of the budget deficit, upgrading of the workers, management of skills and the improvement of the business-labor government relations. However these policies are considered to be incompatible with analysis of Porter. The incompatibilities results from the application of the home-based analysis in the Canadian industry where as there is a more relevant concept for the Canadian managers of the North American diamond (Henry, 2008). It was suggested by Joe Cruz that companies would become more competitive if the Canadian managers designed strategies that would be used in the United States of America and by the Canadian diamonds. It is therefore paramount to develop benchmarks decisions that are on the North American basis than those on the Canadian basis. The porter view about the multinational succeeding with strong home base strategies is true in United States of America but it cannot be applied in Canada. It has however been observed that the porters views are old-fashioned ,naïve and politically mischevious.They are also considered to be inconsistent with the Canadian support for the free trade agreement, tax reform, constitution reform and the economic, social and political measures of a country. Examples of companies that have applied Porters Diamond framework Germany has the world premier automobiles companies such as the Mercedes Benzes, BMW Porches that have dominated the world market. It has improved infrastructural facilities and its equipment have enabled it to improve on its rate of production over the last couple of years and this is due to the application of porters’ diamond framework factors such as demand conditions. In Related supporting industries factor, the Silicon Valley in the United States of America and the silicon glen in United Kingdom brings out well how these industries support each other. An example of Strategy structure and rivalry is for instance the Japanese automobile industry. The factor conditions, homegrown resources and the highly specialized resources are seen in the Hollywood’s preeminence in the film production ( Schwab, and Porter,2009). Porter examined two industrialized countries such as Korea and Singapore. He noted that the Korean country would have improved economic status while he was pessimistic about the success of Singapore in the future. Singapore is believed to be a factor-based economy that would be reflected at an early stage of its economic development. However, after a thorough study of the country it was revealed that the performance of Singapore showed improvements in its performance than that of the Korean economy. The differences of the performances raised questions about the validity of the porters demand for the nation competitiveness. From earlier analysis carried out, Porter used the diamond model when he was consulting about the governments of New Zealand and that of Canada. The variables of the porters model were however useful in terms of reference when analyzing the nations competitiveness .The weaknesses of the porters work was exclusively focused on the home based concept. Porter did not point out the nature of the multinational activities as well as the New Zealand’s activities. He also did not point out about the successes achieved during the export dependent and the resource based industries. It is from this analysis that the applications of the porter home-based were reviewed in a careful and consistent manner through making the necessary considerations and appropriate modifications. In the porter single home-based diamond approach the capability of a firm to the top of its location has advantages that are fur over those of other nations that are viewed to have a very limited perspective. The double diamond model that was developed by Rugman and Cruz states that the managers are both built upon by the domestic diamonds that are competitive in terms of its survival, profitability, as well as in terms of its growth. However the Rugman and the Cruz North American framework do not fit well for the Canadians and the Singapore. It is from this point that Rugman and Verbeke adopted the generalized double diamond framework to the double diamond framework that has been suitably applied within the small economies. The firms that are from the small companies such as Korea and Singapore have their target resources and markets being in the global context but not in the domestic context. It is from these studies that the nation’s competitiveness depends upon the domestic diamond and partly on the international diamond that is relevant for its firm ( Schwab, and Porter,2009) . In the generalized double diamond model, the natural competitiveness of a country is said to be defined as the capability of a firm to be engaged in the value added activities that are within specific industries so as to have a sustainable added value that can be carried out over a longer period of time. For instance, the sustainable value is added to a specific model may be as a result of both the effort of the domestically owed and the foreign owed firms. In addition, Porter does not involve the foreign activities within his model so that he can be in a position to distinguish between the geographical scope and that of the geographical scope that is within the locus of the competitive advantage. Porter views Singapore as a country that cannot compete effectively in the world market. In contrast Singapore is one of the most successfully companies in the world due to the use of relatively low-cost, well-educated workforce and efficient infrastructure that involves roads,ports,telecommunications,airports and the roads. Singapore locations as well as the use of the skilled labor are not part of the competitive advantages of the country. However the country has been successfully in its operations due to using the inbound and the outbound foreign direct investment (FDI) that has contributed to the growth of the company. The inbound foreign direct investment (FDI) brings about the foreign capital and technology while the outbound foreign direct investment (FDI) allows Singapore to get access to the cheap labor and natural resources of a country. The combination of the domestic and the international determinants significantly contributed to the competitive advantages of Singaporean’s economy. The most important competitive advantage of Korea has been that of the human resource that has been very expensive but well disciplined. However this country has faced severe labor problems due to employment of very cheap and controllable labor. Over the past few years the country recorded imperative results thus resulted to increased wages that motivated the employees to improve on their rate of productivity. It has implemented the use of enhanced production capabilities through using the advanced technologies from the developed countries. The goal of the porters’ diamond is that of explaining the impact of the national conditions on the global competitiveness of the industries.Globalisation is considered to be a challenge and opportunity within an organization thus should be utilized properly so as to increase the sales revenue of an organization ( Schwab, and Porter,2009) . Conclusion Studies conducted have shown that companies can trade well in the international markets through applying all the principles in the porters’ diamond framework. In case of automobile production in Germany its application of the porters’ diamond framework led to its increased sales revenue thus was in a position to carry out its activities profitably. It is therefore important for all organization to implement the framework within their organization as it contributes greater returns. References Best. H. (2001) The new competitive advantage: the renewal of American industry Oxford,England:Oxford University Press. 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