Critical Analysis of Porters Diamond Model - Literature review Example

CRITICAL ANALYSIS OF porter’s diamond mODEL 8th December I (Insert hereby declare that the work in this research paper is my own work and any information from outside has been acknowledged Introduction In international business theory, there are various important models that firms and investors can use to undertake an external analysis of a nation. The models can be used by firms that focus on internationalising and defining the best locations that provide opportunities for growth and success. Additionally, the concepts are applied by firms to give insightful information for the location choices that entities have adopted. One of the notable models that are commonly used by organisations is the Diamond model. Diamond model is an economic concept that was developed by Michael Porter. As a model that explains why particular industries are competitive in particular locations, Diamond model looks at clusters, as well as a number of small businesses and other factors where the competitiveness of one firm is related to the performance of other entities locally or regionally. As a major tool that provides analysis for competitiveness, Diamond model incorporates four broad factors. This paper aims at determining the advantages and disadvantages of Diamond Model as a tool for explaining home and host location strategies of international business. The paper will focus on Marks & Spencer (M&S) and Carrefour, UK and France based organisations. Porter’s Diamond concept in explaining home and host location strategies Porter’s Diamond model indicates that the competitive nature of nations is determined by the ability of the industry to upgrade its position and innovation. It indicates that the nation’s ability is also an influencing factor in providing a home base for firms to improve their services in terms of features, technology, and quality (Cavusgil et al, 2014). One of the advantages of the model is that it identifies 4 interrelated factors that create the important national environment where firms are initiated, develop and acquire sustainable competitive advantages. Through the use of Diamond framework, firms are able to undertake necessary research that is useful for internationalisation process. The first factor includes factors of productions that entail land, capital, raw materials and infrastructure among others. In addition, it covers other infrastructures that are not inherited but are developed by a nation for instance skilled labor. Shiue et al (2006) argues that an organisation can achieve competitive advantage due to its ability to create the factors. For example, Carrefour Company, which was initially owned by the family decided to internalise in order to become competitive. This meant that Carrefour needed high amount of capital an aspect that made the company to go public in 1970. In this way, the company generated adequate finance to support its activities. The second concept is demand conditions. This implies the existence of sophisticated and demanding customers that pressurizes firms to create new products that meet the needs of the customers. In their effort to meet customer needs, organisations embark on innovation, an aspect that makes the companies to discover new trends and exceed customer expectations. For example, due to the pressures that consumers placed on Carrefour in 1963, the company created entirely new methods of shopping that entailed provision of its brands under one roof. Additionally, saturated market as well as mature demand according to Porter (1990) is an incentive to innovate. One of the major aspects as to why Carrefour has introduced new stores that are referred to as Carrefour planet, is its effort to meet the needs of the emerging smaller families and single households. The model third factor is presence of various stakeholders such as strong suppliers who are competitive at the global level. It is worth to note that by creating strong and sustainable positive relationship with highly developed clusters in their industries is a way of providing companies with mutual benefit for example exchange of ideas, effective communication systems, support and corporation and problem solving. The companies are also in a position to depend on each other thus increasing their own profits. For example, as the result of stiff competition in 2011, Marks & Spencer pressed its top clothing suppliers to contribute to the company UK store expansion programs that needed £600m (Andrea, 2013). By indicating that the company growth largely depends on the retail sales, the suppliers had no option but to accept the M&S terms. Another example of the impact of suppliers’ relationship took place in 1990s when Marks & Spencer experience damage on its reputation after destroying relationships with its earlier suppliers. This caused the company to switch to low cost suppliers. On its part, Carrefour poor performance in the United States market was due to unfavorable prices from the US suppliers. Porter (1990) indicates that the last factor that is covered by Diamond model is rivalry, structure as well as company strategy. These entail management styles the firm applies, organisational structure, and the level of competition that it is facing domestically. During the internationalisation process, the last Diamond factor indicates whether firms have found a match between the industry they are operating in and their characteristics. For example, Carrefour effective internationalisation of its strategies was based on allowing departmental and store managers to make independent decisions. The manager’s decisions were based on the local markets. However, on its part, Marks & Spencer expansion into European Union failed due to lack of localization of its brands that were only established in Britain. With the stiff competition in the global market, rivalry is one of the most important factors that create a competitive advantage for a firm (Porter, 1990). This is due to the fact that a stiff competition results to innovations as firms embark on improving their brands to face off the rivals. Cavusgil et al (2014) indicates that competition pushes organisations to satisfy non-existing consumer needs in addition to utilising international opportunities. One of the notable companies that have extensively engaged in innovation is Apple with the introduction of iPod Touch, iPhone, iPad, and Apple TV among others. Diamond model accentuates on how companies’ own nations guides them in the process of internalisation. This implies that the model aims at helping firms to identify advantages in their host nation and then exploit them at the global level. For example, M&S rediscovered its advantages at home in 2000 making it to close US and EU stores. This made the company to keep more focus on UK market even though the company has started to expand in other countries in the recent years. On its part, Carrefour differentiated products are first tested in France, the home base before entering foreign markets. A good example of Carrefour product that entered Italy, Spain and Belgium after being tested in France is Carrefour Discount brand. Even though Diamond model does not indicate the influence of governments, it is imperative to note that governments can have impact on trade barriers, taxation, and incentives among others factors. For instance, Carrefour’s expansion in the European Union market was largely affected due to the strict legislations that were enacted for smaller stores in the European region (Shiue et al, 2006). This made Carrefour to adopt new stores format that were costly to implement. In the developing countries, government plays a key role in creating factors such as education and infrastructure, thus impacting on internationalisation process of companies. For example, Carrefour and Marks & Spencer considered the effect of government in their effort to enter China. This is due to the policy that ensures China businesses are protected by the government and it does not allow wholly-owned subsidiaries but rather foreign companies must form joint ventures with Chinese firms. Other events that are considerable since they are not controlled by firms include wars, debt crisis, and the strength of organisation such as EU. For example, based on its non-performance in the past in French market, Marks & Spencer was hesitant to enter the market again. However, in 2013, the company established a new store in Paris but as the result EU problems that time, the store generated disappointing results. The argument now was whether Marks & Spencer internalisation and choice of foreign location in 2013 was appropriate. One of the notable aspects of the model is that it does not consider culture as a triggering factor even though culture is a major issue that defines a country and the way businesses activities are carried on. For instance eating habits impacts the needs of the consumers as well as demand conditions. This implies that when going global, companies must consider the cultural differences. Local firms are therefore advised to apply Hofstede dimension in order to understand the cultural impact (Porter, 1990). According to my view, Diamond model can be used as the initial stage during environmental analysis and this should be followed by competitors’ analysis as well as Porters Five Forces. Conclusion Based on the differences that exist among companies and countries, it is vital to ensure that all considerations including economic factors, social and cultural impacts are noted. However, most of the models lack one aspect or another. For example Porter’s Diamond model does not consider government roles as well as cultural factors. This implies that the framework should be used with other models during internationalising process. However, since it allows an effective avenue of understanding host locations, it is an excellent strategy to start with. References Andrea, F. 2013. M&S asks suppliers to aid store revamps. http://www.ft.com/cms/s/0/411cdee4-edd2-11e0-acc7-00144feab49a.html#axzz3KudYRg7h Cavusgil, S.T., Ghauri, P., Knight, G., and Riesenberger, J. 2014. International Business, Global. New York: Pearson Education Porter, M.1990. The Competitive Advantage of Nations. Harvard Business Reviews, 68(2), pp. 71-95 Shiue, Y., Horng, D. and Yeh, S. 2006. Carrefour’s Global Reach: A Case Study of Its Strategy. The Journal of American Academy of Business. Read More