Porters Diamond Model - Assignment Example

INTRODUCTION Michael Porter’s theory of competitive advantage explains how countries become the best in producing various products. The theory of competitive advantage underlines four factors that are known as the diamond; these factors include national demand, competition, related industries, and availability of factors. Porter postulates that countries that combine these factors are the ones that achieve competitive advantage. Although the diamond model explains largely about a country’s source of competitive advantage, this model has weaknesses that make it insufficient in explaining competitive advantage. Theorists such as Krugman, Chandler, and Rugman have developed theories that eliminate the weaknesses of the diamond model. BODY (QUESTION 1 & QUESTION 2) – I THINK BOTH CAN USE According to Porter, he argues that the success of a nation is dependent on the prosperity of its firms. The nation acts as home base essential for an organization’s economic growth and provides competitive advantages. Porter uses the Diamond concept in determining economic growth rate of a nation. The Diamond concept offers a concept of understanding firms and their management of resources. It also gives the competitive advantages of different businesses in a nation. The Porter’s Diamond concept revolves around four microeconomic attributes that determine the economic success of organizations in a nation. The first attribute is the factor condition, which is crucial to organizations growth. This attribute helps in improving cluster structure. The cluster structure involves the relation between customer, skill, technology, and distribution of products. These clusters are vital in attaining economic success at a national level. – example ? The Italian tile industry gained competitive advantage because of the cluster structure of the business. Organizations in the industry relate well with customers and they have workers who have essential skills of producing the product. The industry has also succeeded because of the use of the kiln technology, which helps in minimizing the cost of energy used to produce tiles. The industry developed this technology after the oil crisis of the 1980s, which motivated companies to develop new ways of remaining competitive. The second attribute is demand conditions, which concerns with home market nature such as home demand influence. The home demand can be affected by customer’s wants and needs (e.g local demand of product). The domestic demand plays a significant role in shaping an organization’s innovativeness and ability to upgrade, which are vital in determining breakthrough of the organization in the national market. – example? The wine producing industry in France has developed because of high demand for the product by local citizens. French citizen’s demand for wine forces organizations in the industry to produce high quality wine and this has led to the high competitiveness of this industry. In fact, France is a leading producer and exporter of wine in the world. The third attribute is the structure, the strategy, and the rivalry of firms. Different countries have different structure and strategy based on economic policies and cultural factors. Moreover, the competitiveness of local firms within a nation is crucial determining economic success. Porter argues that competitive between companies provide more innovations which are essential to attaining economic success, and enable to penetrate the international market. - example? Switzerland has competitive advantage in producing pharmaceutical products because of high competition between firms in the industry. The main competing organizations in the pharmaceutical industry in the company include Ciba-Geigy, Hoffman-La-Roche, and Sandoz. The high rivalry that exists among these companies has enabled them to become efficient in productions, and this has led to a high share of exports of Pharmaceuticals in Switzerland. Germany, on the other hand, has acquired competitive advantage in producing chemical products because of the structure of organizations in the country. Germany’s organizations have technical structures that enable them to become efficient in the production process. The fourth attribute is presence of related and supporting industries, which concerned how economic success of one company causes a similar increment in another company. This attribute offers a useful approach to analyzing business systems. – example? Italy has succeeded in producing high quality footwear because of the close proximity of companies operating in the industry. Footwear manufacturers open their businesses in the same location with leather producers. This enables the organizations to minimize the cost of inputs and to get latest information as it arises. This has enabled Italy to become a leading exporter of footwear products in the world. IMPORTANT!!!! When answering the questions be sure to use: Comparisons across nations ( UK, US, Germany, Japan and China – and whenever necessary, use other nations such as Brazil, India, Russia and South Korea), industries (choose at least two industries with relevant examples), companies and business functions; Analysis of the relationship between business systems and national economic performance; Insight into both long-term and contemporary trends. Answer each question with reference to at least two countries (see above), but preferably more, even if only one country is cited in the question. A proper balance between theory and evidence and the relevant use of national, industry or corporate examples in each answer is a must in order to answer the question. Porter’s ‘Diamond’ concept weaknesses or drawbacks – theoretically and empirically explain Starting with “However” However, …. Point 1 However, Rugman argues that Porter’s diamond has a major weakness of failing to include external factors in the diamond model. According to Rugman, the competitive advantage of some countries may be explained using factors that are derived from outside the country. The theorist specifically argues that Porter’s diamond model ignores the effect of trade agreements. Rugman argues that countries such as Canada and Mexico derive their competitive advantage from Canada-United States Free Trade Agreement and North American Free Trade Area respectively. These trade agreements determine the future competitiveness of Canada and Mexico. Rugman, therefore, developed the double diamond theory that has exogenous factors such as FDI and trade agreements to correct the weaknesses in Porter’s diamond model. Point 2 However, Krugman argues that Porter’s diamond model has failed in postulating that governments of various countries aim at competing with one another. In his New Trade Theory, Krugman argues that not all governments aim at competing with others; states may gain competitive advantage originating from other factors. For example, China’s export market has become successful because of the export rate regime and export policies in the country, and not because it competes with other states. Krugman also argues that countries may not necessarily gain competitive advantage by utilizing the four pillars. Organizations and states may also acquire competitive advantage by being the first ones to invest in an industry. This means that such organizations gain monopoly power when they penetrate the market, and this power enables them to eliminate competitors from the industry. For example, Japan has a competitive advantage in producing automobiles because it invested in this industry early. Consumers trust automobiles from this country because of the length of time it has been in business. Therefore, early entry in an industry may also lead to competitiveness of a company or a country. Point 3 However, the Late Development Theory developed by Chandler also argues that the diamond model has failed to show how states may skip the four pillars of diamond model and acquire competitive advantage. According to Chandler, some countries may fail to use the four factors of the diamond model and still acquire competitive advantage. For example, United States is the leading producer of high quality toys in the world. However, China has copied the United State’s technology and it is now able to produce high quantities of toys at a cheaper price than the US. The end result is that the US imports toys from China even if they are of a lower quality than the ones it can produce within its borders. Chandler therefore argues that Porter’s diamond theory would explain this situation as a high competitive advantage for China; while in reality it is not because China does not make use of any of the four pillars to produce and export toys. ** EACH POINTS SHOULD BE DESCRIBED AND PROVIDED EXAMPLES ** IMPORTANT!!!! When answering the questions be sure to use: Comparisons across nations ( UK, US, Germany, Japan and China – and whenever necessary, use other nations such as Brazil, India, Russia and South Korea), industries (choose at least two industries with relevant examples), companies and business functions; Analysis of the relationship between business systems and national economic performance; Insight into both long-term and contemporary trends. Answer each question with reference to at least two countries (see above), but preferably more, even if only one country is cited in the question. A proper balance between theory and evidence and the relevant use of national, industry or corporate examples in each answer is a must in order to answer the question. CONCLUSION Porter’s diamond model explains how organizations and countries may gain competitive advantage by utilizing their resources, competitiveness, related industries, and national demand. The theory, for example, indicates that high local demand may motivate organizations in a country to produce high quality products. Although the model has successfully explained the success of various industries, the theory has weaknesses that make it unreliable when used alone. For example, Rugman argues that the hypothesis ignores the effect of foreign trade agreements in explaining competitiveness. Rugman developed an alternative model known as double diamond theory that incorporates exogenous factors, which Porter’s model has ignored. Read More