Home and Host Location Strategies in International Business - Assignment Example

International business strategy: discursive essay “To what extent Porters Diamond is a useful concept in explaining home and host location strategiesof international business?” Introduction Globalization, facilitated with the development of Information Technologies, has provided many countries and domestic companies with the opportunities of developing business internationally and even globally. The country’s/nation’s status in the world trade depends significantly on the competitiveness of specific industries and sectors. In order to explain the achievement of a firm’s competitive and country’s industrial advantage, Porter has developed specific model, known as “Porter’s Diamond Model” (Zhang and London, 2013). The aim of this discursive essay is to provide a detailed description of the theories of the Porters Diamond concept and to apply these theories to two international companies in order to analyze to what extent Porters Diamond is a useful concept in explaining home and host location strategies of the firms. The last section of the essay is a concluding section, based on the key findings/arguments of the research and case study materials. Porters Diamond – overview of the model There exist many different theories, indices, models and concepts for analyzing and assessing industrial/firms’ competitiveness (Zhang and London, 2013). One of such models is known to be the National Diamond model, developed by Michael Porter in 1990, in order to analyze the competitive advantage of nations. Thus, the author made an attempt to explain why specific industries tend to be competitive or more competitive in particular locations (Zhang and London, 2013). The model is comprised of six broad factors, also named the “Home-Diamond”, which include: (1) factor conditions, (2) demand conditions, (3) presence of related and supporting industries, (4) firm strategy, structure and rivalry; (5) government influence; and (6) chance (Brouthers & Brouthers, 1997). The first factor of conditions is a determinant of the nation’s factors of production, which might enable the nation to gain competitive advantage in specific sectors or industries (Brouthers & Brouthers, 1997) Production performance here depends on the resources available, among which are natural resources, capital resources, human resources, knowledge resources, and infrastructure (Zhang and London, 2013). The second factor of demand conditions refers to the domestic demand of a good or service and implies the scales, growth, sophistication, and other demand characteristics for these goods/services (Brouthers & Brouthers, 1997; Zhang and London, 2013). The third factor, presence of related and supporting industries implies that there can be developed a preponderant network (Zhang and London, 2013). This network canprovide a competitive advantage to the home country as a result of additional developments (new technologies, innovation, cost reduction, etc.) (Brouthers & Brouthers, 1997). Firm strategy, structure and rivalry is the fourth determinant, which implies that organization’s strategy and managerial capabilities combined with an intense rivalry in home country can be of advantage in some industries (Brouthers & Brouthers, 1997). Strategic planning and effective goal setting and management are important sources of firm’s competitiveness. The fifth factor is the government influence, which might help the companies to develop a competitive advantage of certain industries in home countries (through laws, subsidies, tariffs, etc.). And finally, the sixth factor is a chance factor, which is based on the market opportunities (Brouthers & Brouthers, 1997). These opportunities include: inventions in new technology and basic science, sudden increases in production costs, innovations, significant changes in exchange rates, war, changes in consumer’s preferences, and other market trends, etc.) (Zhang and London, 2013). Criticisms of the model However, in addition to the benefits and advantages of this model, the experts have also given extensive criticisms of the Porter’s Diamond model (Zhang and London, 2013). One of the major criticisms was referred to the lack of clear definitions and mathematical analysis methods for key determinants. Another criticism was based on the argument of the lack of formal model construction (Zhang and London, 2013). Another criticism was based on the idea that the model can be hardly applied to small countries, where competitive advantage can be derived from several “Diamonds” existing outside the home country (Rugman, 1911, cited by Brouthers & Brouthers, 1997). One of the examples of country with small economy is New Zealand, the country where industries are highly dependent on export and are resource-based. In case if there will be no international market export-dependent industries cannot develop continuously (Zhang and London, 2013:101). Also, the Porter’s Diamond model fails to take into account sustainability aspects, where the focus is made not only on economic benefits, but environmental and community impact as (Zhang and London, 2013). Case studies’ analysis In order to analyze to what extent Porters Diamond is a useful concept in explaining home and host location strategies of the businesses there were chosen two companies operating in apparel retail industry in India: Pantaloons and Shopper’s Stop. Factor conditions are differentiated between the basic and advanced factors. While the basic factors include location of the home country, national resources, and demographics, advanced factors include such “sophisticated” factors as research facilities, communication infrastructure, and human skills (Sang-Eun Byun, 2011). India is an attractive destination for manufacturing because of its human resources due to huge population and low cost but skilled manpower in textile sector (Sang-Eun Byun, 2011). Moreover, such advanced factors as specialized skills of labor force also make this industry more competitive on the market. Physical resources related to the Indian apparel industry include land. Availability and cost of this resource plays an important role when the decision about entry strategy and location is made. The availability of land in India in major big cities such as Delhi, Chennai, Bangalore and Kolkata is decreasing, while the cost for real estate for retail business is increasing (Sang-Eun Byun, 2011). Also, land is the subject of multiple government regulations and restrictions in India. Thus, local businesses might have greater competitive advantage due to this physical factor. In terms of knowledge resources, India lacks seasoned retail professionals, as before trade liberalization in 2006, not many Indians were willing to attain relevant education/qualification. However, since 2006 the situation has been changing continuously due to increase demand for trained retail professionals (Sang-Eun Byun, 2011). Many Indians banks and other financial institutions have increased loans and credit for retail sector, thus increasing the availability of capital resources for business development (Sang-Eun Byun, 2011). Infrastructure resources in India are not as good as in the developed countries, and therefore, posed significant barriers to entry the Indian market. Some other infrastructure challenges include problems with transport, water, power, and sewage. For apparel industry this factors might have negative effect as the companies might fails to meet delivery deadlines that are critical in fast-fashioned and seasonal industry (Sang-Eun Byun, 2011). Thus, infrastructure factor in India might significantly decrease the competitiveness of apparel retail sector in India. The second criterion of Porter’s Diamond Model is demand conditions. Demand condition in India is characterized by a youthful population, rising disposable income and swelling middle class, geographic and demographic diversity (Sang-Eun Byun, 2011). Related and supported supporting industries in apparel industry are textile and IT sectors. The textile industry in India is one of the major sectors in the country. Its strength and continuous growth at an average rate of 20 percent per year indicates the country has extremely strong competitive national advantage on the global market. While technology obsolescence has significantly limited this strength, the IT infrastructure in India is undergoing significant growth and improvement. This factor is more likely to increase the competitive advantage of the apparel industry in India via introduction of efficient and cost-effective supply chain solutions (Sang-Eun Byun, 2011). In terms of company’s strategy, both retailers Shopper’s Shop and Pantaloon have strong management, efficient supply chains and wide geographical coverage (Sang-Eun Byun, 2011; Shopper’sstop.com, 2014; Pantaloons.com, 2014). The Indian government is an important player in the Indian apparel retail industry. There were introduced simpler and more transparent taxation policies and trade policies (Sang-Eun Byun, 2011). This has made apparel and textile industry more competitive on the market. Conclusion The paper has analyzed the competitiveness of India’s retail apparel industry factor conditions according to the Porter’s criteria. While the framework of six determinants offered by Porter does help to gain better understanding of the local environment in the home country and to evaluate the competitive strengths and advantages available, it might not be sufficient enough in order to explain home and host location strategies of international businesses. The model fails to take into account sustainability aspects, where the focus is made not only on economic benefits, but environmental and community impact as well (Zhang & London 2013). However, the model still helps to draw a general picture of the country’s/firm’s competitiveness and market trends. References: Brouthers K, & Brouthers L. (1997). Explaining National Competitive Advantage for a Small European Country: a test of three competing models. Journalo Business Review, vol.6(1), pp.53-70. Sang‐Eun Byun, M. (2011) "Accessing opportunities in apparel retail sectors in India: Porters diamond approach", Journal of Fashion Marketing and Management: An International Journal, Vol. 15 (2), pp.194 – 210. Shoppersstop.com (2014). Retrieved 10 December 2014, from http://www.shoppersstop.com/ Pantaloons.com (2014). Pantaloons. Retrieved 10 December 2014, from http://pantaloons.com/# Zhang P, & London K. (2013),"Towards an internationalized sustainable industrial competitiveness model", Competitiveness Review: An International Business Journal, Vol. 23 (2), pp. 95 – 113. Read More