The Environments of Industry in the United States and European Union - Case Study Example

Introduction This paper is to advise a US firm to enter EU. In this of analysis we must take into account the strengths and weaknesses of Porter's Diamond. The environments of Industry in US and EU are taken into consideration and the firm has to take decision about it. When Macro situation is taken into consideration, both the areas had sophisticated customers who make an industry thrive and be competent in producing goods required. As both the areas mentioned are having same type of market; the size of the market, percentage of mark-up, the need for horizontal expansion of the firm, the extent of horizontal expansion in US need to be taken into consideration to take a decision in entering EU. The strategic conditions, demand conditions, strategic structure and competition, supporting industries of both countries needed to be weighed to enter into a new market. Some propositions in Diamond are double edged. For instance when competition is taken into consideration, the firm thrives and will be competent when it wins over the competitors in the rivalry. But the looser is also was in the same environment and the rivalry did not help the company as it does to the winning company. This tells us that the utilisation and reinforcing of the forces and circumstances mentioned in the diamond is the crux of the situation concerned. So the firm has to decide what type of rivalry it can face and win over it. When coming to supporting industries, the presence of them really make company competitive and reduction of expenditure on transportation can be made possible. But this is the common advantage for all identical industries in that area or zone. Another point of concern is that Porter's views are for developed economies and firms only. (Because he did not mention about the areas having no sophisticated customers and about MNC s dealing with different atmospheres or environments of Industry.) When the firm is facing a different type of market (also containing sophisticated customers) it should have a strategy to cope up with the different type of marketing environment. Strengths and Weaknesses of Porter's Diamond The Porter's Diamond consists of conditions which demand competence, conditions which drive the management to move forward, supporting and related industries and structure, planning and competition. In case of factor conditions consists of labour, land, natural resources, capital and infrastructure. Here the argument of Porter is that the conditions must be created according to the need of the company. The labour must be transformed into skilled labour. The capital must be substantial and in the case of natural resources the firm must have access to the fore most quality resources. If the firm is not successful reforming labour into skilled one, did not utilise the capital properly or did not garner it from the public in a time bound manner, then the strength of the factor conditions turns into weakness. The company's strength lies in making the general factors specialised. This involves investing more money and managing it well. So here the strength of the factor conditions lies in managing capital, labour and natural resources in a productive way. When there is any labour shortage, the company should manage to work with less labour and more technology. Here technological advancement which needs more capital comes to the fore. The managing of technology needs some good technicians and managers, though less in number to make it strength. If not it turns to be a weakness. When considering about lack of land and resources, the industry of Japan is making utmost use of technology to overcome the crisis of lack of natural resources. Here the weakness is transformed into strength. On the other hand in the present the US based firm has existence in the area of having more resources and is moving to the area of substantial resources. So it should have a strategy to make use of them to enhance productivity. When it decides not to move out of US it can think of exporting its goods to that country. But when it thinks of moving out of the US, the export business regarding to the area the company moving is lost and more capital is needed to build required infrastructure there. This compels the company to produce more and to capture the local market (the market to which the firm is moving). When this is done it is strength, if not can be termed as weakness. The demand conditions also make a firm competitive according to the Porter. When the customers demand more quality the company is compelled to do so. In the course of satisfying customers it should produce more quality goods and thus enhances its competence. This competence of the company can be used to expand the firm both horizontally and vertically. When considering in entering to EU, it can be considered as the market of equal demanding. This enables the company to make use of the experience in producing quality goods in US to meet the demand in EU country it enters. If a US based watch manufacturing company wants to gain from the demand conditions it should move to Switzerland as the people there demand more quality for watches because they are used up to watches of utmost quality. Diagram showing Porter' Diamond adapted from Value based management.net The third condition is about related and supporting industries. This phenomenon is observed in US in areas like Silicon Valley and Detroit. The presence of those types of industries enables the firm to outsource time consuming production of some materials to the related or supported industries. This saves more time to the company and gives a free hand in planning to bring the product in time into the market. The location of the firm in the cluster of supporting and related industries is having its own strengths and weaknesses. As it was utilised in the above manner it can be considered as strength. But the situation is having its own weaknesses too. When the company outsource its work to the supported or related industries the knowledge about Technology Company using (if it is innovative) will be leaked. The company should have a time bound plan to cope up with this type of situation as it should have continuous innovation to over come the disadvantage caused due to the leakage of the technology. That is the firm must have R&D to innovate technology in time that is before the competitors bring the products used leaked technology into the market. In this case it is strength and in its opposite context it turns to be a weakness. So the company should decide and be capable of innovating its technology from time to time if it decides to utilise the services of the related and supporting industries. So when the firm decides to enter EU it should think about the upgrading of the technology continuously if it moots of using the services of related industries in that area to speed up the production process. If the US based firm is an automobile company it is suggested to move to Germany, if it was a wine producing company it is suggested of move to France and in case of Watch manufacturing company it can move to Switzerland to make use of services of support and related industries services in that country. In case of planning, structure and competition let us consider planning first. In planning the capital markets and the choices of personnel comes to the fore. The capital markets are capable of affecting the strategy of the firm. When we consider the US based firm, one can assume that it was accustomed to short run outlook of the US capital market. In general the Europe's capital markets are based on long run outlook. So the company should select the country having short run outlook or it should prepare for the planning based on long run outlook. In short term outlook the investment is termed for short time returns; that is the returns are seen soon. But in long run market the returns are seen after a long period but in substantial amounts. If the US based firm seeking entry into EU is a pharmaceutical company, it can choose Switzerland as the country has a long run outlook suited for Pharmaceutical Industry. If the firm is a machines and Tools Company it can choose Britain, as it was the country having short term outlook and the machines and tools industry has less competition in UK. (Here the demand condition was ignored and the capital outlook is considered.) When it comes to the structure, it varies from industry to industry. The structure of Information technology industry is different from automobile industry. Similarly in some countries hierarchical systems are prevailing and in some countries the managements are family run. The US is having a more liberal industrial system of practising good HR methods and conflict resolving structure. The firm seeking entry into EU should be prepared to practice hierarchical management system, which comprises managers from technical background. This enables the company to innovate technology fast and in time. Considering the case of competition, Porter's argument is that it enhances the quality of goods produced and competence of the company. It can be seen in the industry of Japan, but it is not up to that extent in other industrial countries. But it can be seen in US also up to a reasonable extent like the competition between Microsoft and other IT firms. So if the US based firm is a Watch manufacturing company it should enter Switzerland, if it is a wine company it should enter France, if it is a automobile company it should foray into Germany to make use of the competition to enhance the quality of its products. Conclusion of the analysis When the Porter's diamond was constituted as a system, it was self imposing and double edged. Each point put forth by Porter has both strengths and weaknesses depending on the environment. It is the ability of the company to make it strength or to transform into weakness. The system of Diamond encourages clustering of industries. This increases competition resulting in enhancement of quality and makes the goods cost effective and even makes possible to utilise the services of support industries. This in turn makes company more effective as it has to maintain its profit percentage in a cost effective market. This means the survival of fittest. Porter describes the positive end of each context the company faces and each aspect it considers. When the US based firm entry into EU is considered, the major draw back the company has to over come is that about the change in capital market which makes it disable to utilise the services of local related and supporting industries as it was coming from a market of short term out look to long term outlook. This can be over come by two ways. 1. To invest in the country having short term outlook or 2 to adopt a strategy to utilise the benefits of long term out look by using the local (EU country) managing talent and even by utilising the services of the local supporting industries. Another thing to be considered is that the vertical and horizontal size of the company. By trying to enter EU the company is making effort to expand horizontally. It means that it wants to be an MNC. The Porter's propositions suit less for MNC s. But if the model was applied separately for each country the company follows identical strategies for the identical economies and different strategies for different economies, it can gain strength by using Porter's Model. References: The referencing is done in following manner of Harvard referencing. Author Name, Year of publication, Title, Publisher, information of edition if available, type of media, date retrieved, website name. 1. 1. Michael Porter, 1991, Towards a dynamic theory of strategy, Sloan-School-of-Management, electronic, 22-08-06, http://ocw.mit.edu/NR/rdonlyres/Sloan-School-of-Management/15-902Fall-2005/C6F3690E-EDBB-4084-8A6C-2128D3A0107D/0/dyn_theo_strat.pdf#search=%22strengths%20and%20weaknesses%20of%20Porter%E2%80%99s%20Diamond%22 2. Christian von Lbke and Peter Reger, 2006, Challenges of Competitiveness, Federal Republic of Germany, ,electronic, 22-08-06, http://www.gtzpromis.or.id/PEL/PACA/Bagian%201.pdf#search=%22strengths%20and%20weaknesses%20of%20Porter%E2%80%99s%20Diamond%22 3. Hitesh Jain, 2005, Medical and Assistive Technology Cluster Analysis: An Assesment of Critical Success Factors, VISTA, ,Electronic, 22-08-06, https://www.htx.ca/HTX/DesktopModules/Links/..%5C..%5CFiles%5CLocalDocuments%5CMAT%20Technology%20Cluster%20Analysis-An%20Assessment%20of%20Critical%20Success%20Factors.DOC 4. Business environments team, 2003, Note on analysing the business environments, Global Markets, ,Electronic, 22-08-06, http://ocw.mit.edu/NR/rdonlyres/Sloan-School-of-Management/15-224Global-Markets--National-Politics-and-the-Competitive-Advantage-of-FirmsSpring2003/C35D7043-4456-4A23-BF62 2E8C425DEFEB/0/analyzingbusinessenv.pdf#search=%22strengths%20and%20weaknesses%20of%20Porter%E2%80%99s%20Diamond%22 5. Value based management team, 2006, Diamond model- Porter on nations, Value based management.net, ,electronic, 23-08-06, http://www.valuebasedmanagement.net/methods_porter_diamond_model.html Read More