Porter's Diamond - Case Study Example

Introduction Companies thrive on competitive advantage and when we speak of successful companies we tend to look for competencies that are drivers ofcompetitive advantage. This is a narrow view and a broader observation will encompass the country wherein the company, along with its rivals besides other support industries as well as its buyers also plays a vital role in posing challenges that the company will have to face and respond to become competitive. Porter (1985) said that competitive advantage drives the companies. In 1990 Porter chose a wider scope to declare that it is the nation or country that becomes competitive due to certain factors, described as the Diamond, and that the companies that thrive and flourish in such countries use these Diamond factors to become competitive. The importance of a nation in competitiveness can be better appreciated when we understand that the external environments have a decisive role in defining the company strategy. These factors described as the five forces by Porter (1985) and improved upon with a sixth force by Wheelen and Hunger (2002), amply demonstrate that a company has to adapt itself to these external factors as it cannot control them. To this add the PESTEL factors that are even more dominant in determining policy and strategies that impact the company. Looking at the larger perspective, the competencies of the nation overshadow the competencies of the individual company that necessarily has to factor in these environments to devise its own strategy. Although it is possible that some exceptional venture can defy this logic, yet this is the substantial fact that cannot be denied. It is these national competencies that are the drivers of the competitive advantage of the companies of that nation in varying degrees according to their own individual competencies. Let us define competencies further. When products or services are rare, have value, are difficult to imitate and the institutions of the state are capable of managing these competencies, competitive advantage is established on a national scale. On the individual scale the first three criteria remain the same but the fourth institution is replaced by skilled managers and workers who have the ability to use the other three factors to develop a competitive edge over rivals. Literature Review There are several theories about what constitutes the competencies and what factors were considered important as environmental as understood or advocated by different practitioners. Mercantilism is a 16th century theory that symbolizes gold as wealth and propagates that exports should be subsidized to meet competition and imports should be penalized with tariffs to protect home industry. This severely limits the benefits and is a zero sum game. (Miller, David., eds,. 1987). The Absolute advantage theory was originated by Adam Smith, the father of modern Economics, and he proposed that one should produce in a place where one can be most efficient and should trade where production is marked by inefficiency. By and large this theory is in practice today. (Smith. Adam, 1776) and remains as the underlying principle in a broader sense. The Comparative Advantage theory states that production should be decided on basis of relative advantage and if advantage is unavailable one should import rather than produce even if efficiency is more than that of the exporting nation. (Ricardo. David 1817). More recently Paul Krugman (1979) projected in his Market Imperfection theory that the company gains from its vantage point of specialization and economies of scale and having the first mover advantage takes centre stage with the assistance of the government. However all theories have a common thread. They believe that it is the resources of a country; labour, capital, skills, economic manoeuvrings and the likes of these that are the competencies of a nation that percolate down to its companies. Porter (1990) differed with this and stated that competencies are not an inheritance of resources but the development of capabilities by facing the absence of these resources. For him the challenge of not having resources is the fundamental factor that develops the competencies of the nation and as a result delivers the competitive advantage. Michael Porter (1990) put forward the Diamond Theory in which he stated that four conditions or four corners of a Diamond is what determine national competitive advantage. They are (1) Firm Strategy, Structure and Rivalry; (2) Factor Conditions; (3) Demand Conditions and (4) Related Support Industries. Briefly the firm is structured to build, develop and use competencies to produce products and services that achieve competitive advantage through competitive strategies in the face of intense rivalry. Factors like the national policies on economic and political ambitions of the nation create certain specific advantages (these are the Ownership, Locational, and Internalization advantages as described by Dunning 1993) and these help in creating sustainable competitive advantage. Demand conditions are a result of the requirements of an eager and aware consumer which leads the companies to innovate in order to obtain customer satisfaction. The support industries create the supply side threats and opportunities that lead to efficient supply chain management which again contributes to competitive advantage. Porter has made another interesting observation. According to him competencies are dependant on how firms innovate. Any competency can be imitated over a period of time and to remain competent and to have sustainable competitive advantage a company needs to constantly upgrade its existing product quality and output or to modify its features to keep its attraction or to innovate and produce a new product which can either be a distinct extension the old product or a totally new idea by itself. It is this cycle of invention and innovation that finally offers sustainable advantage. It is not to be forgotten at any point that national competencies are evolved by governments and its institutions in the larger interest of its population hence they will constantly be influencing the company competency and challenging it. It is the facing and meeting of this challenge that will result in the appearance of the competitive edge that the company looks for survival and growth. The application of this theory is different with each nation. In the larger divide of developed and under-developed countries, the first mentioned are competent due to their superior knowledge which comprises of both technical knowledge and the skills of its manpower that has had the benefit of better education as well as exposure in working environments. The emergence of Trans National Corporations (TNC) has offered widening opportunities to companies to expand their area of operation to take advantage of these competencies. Since the developed countries already have competencies there exists a larger degree of free trade and not many regulations are imposed on the TNC by the nation. The under-developed countries on the other hand are yet to achieve competencies to match the level of the developed ones. They can be and are overwhelmed by the superiority of the TNC, or the competency of the other nations, hence the have a peculiar problem. If they allow a free run to the TNC, their own industry will become a puppet in the hands of the TNC and the local industry will remain a subsidiary and will not develop its own competencies. As a result the nation will not develop any further and will remain subservient. This can be seen in many African countries that are entirely dependant on the TNC power and have little or no say in their eventual development. If they impose barriers through protectionist policies they are like to suffer still as the TNC will refuse to offer new technology and the nation will not gain anything in this case too. Often the under-developed countries find a middle route by adopting some interventionist policies through its economic institutions that offer some protection to local industry, impose some restrictions on TNC and above all lay the groundwork for higher education for its masses and R&D opportunities for its industry. This kind of interventions finally leads to innovations and skills that help in developing competencies which in turn create sustainable competitive advantage for the nations as well as the companies working in its environments. Analysis It is easier to understand the above statements through examination of some of the nations both developed and under-developed. Denmark and Switzerland are both highly developed economies with liberal outlooks and least interventionist policies. The companies that work under these environments are highly competitive and have developed competencies based on innovation and skill. Denmark has developed a highly profitable industry of cut flowers and has dominated the world scene through industries dealing in this product. They have extensive R&D facilities that constantly innovate and thus continue to be world leaders. Switzerland has developed engineering and medical industries that work on same principles. Japan has no natural resources and imports everything to manufacture and export as it has little home consumption. But it has a highly educated and skilled population that is very demanding as buyers and dedicated as workers. The innovative qualities and production competencies have catapulted them to the top of the manufacturing and trading abilities. Their idea of innovation is based on the product being made to lead demand and the innovation of the Walkman is an outstanding example. But in South Korea the government felt that it has to be protectionist of its infant industry and enforced laws to promote giant cheobols and forced the TNC, specifically the Japanese, to pass on their superior technical know how to them. They literarily nurtured these nascent industries and brought reforms and liberalisation much later. In India the government first chose to be protectionist and started liberalising when sufficient infrastructure, physical as well as human capital, was developed and has commenced getting competitive edge in the world especially in Information Technologies. Innovations Elsewhere in this paper it has been stated that innovations result in sustained competitive advantage. In the global environment an under-developed nation is subjected to pressures from the TNC of a developed nation to accept its technologies and is susceptible to its terms that are motivated by profit alone. This may not be entirely suitable in the long run as the TNC is inclined to take advantage of the host country only in self interest is always ready to move on to better opportunities elsewhere leaving the host country in the middle of a transition. Normally under-developed host countries devise regulations through its institutions to ensure that this does not happen and the TNC is committed to accept this as precondition to their entry. Through such regulatory policies nations ensure that a fertile ground is eventually prepared for domestic industries to upgrade themselves and develop competencies that lead to innovations (Unctad Report 1999). Toyota Motors have a reputation for its innovative capabilities and extensively uses its engineering and management personnel to innovate products for host countries. It has never allowed an R&D centre outside Japan without manning it with Japanese employees. However in South Korea it was forced by law to pass on its know-how to the cheobols on the strength of which the South Korean motor car industry took off and is now challenging its mentor with innovations and is successfully sustaining competitive advantage the world over. Indeed learning from this the Thai government forced an R&D centre from Toyota manned for the first time by local engineers. As a result the Thai innovation was the Toyota Innova, a mini-van that became the rage in the Asian markets. The nation thus helped the local company in its innovative effort through its regulatory policy. Similarly regulating Foreign Direct Investments (FDI) in India has resulted in establishment of several R&D centres all over the country by several TNCs and has resulted in extending and widening the knowledge base of its companies. This further proves that nations have an important role in creation of conditions and infrastructure for innovations for its resident companies that capitalize on this factor for sustainable competitive advantage. Conclusions The crux of the matter is that it is becoming clearer to practitioners that national capabilities that are developed through national policies, whether interventionists or not, are the real drivers of competencies that lead to sustainable competitive advantages. As a stand alone the company cannot become competitive just because it is innovative. The company is forced to take into account the external factors that are determined by the nation and it uses these factors into account to devise strategy for developing competencies that lead to innovations. In some cases the nations also help the industry along its way to achieve both competencies and sustainable advantages. Innovations are the foundations of sustainable advantages and the nation has to be equally involved in creating its national competencies that finally help the company to become innovative. Bibliography Dunning, J. (1993) Multinational Enterprises and the Global Economy. New York: Addison-Wesley. Krugman, P. R. (1979), “Increasing Returns, Monopolistic Competition, and International Trade.” Journal of International Economics, 9(4): 469-479 Miller, David., et al., eds, (1987), Heckscher, E F., Mercantilism (London, 1935); The Blackwell Encyclopaedia of Political Thought, Oxford. Porter, M. E., (1980) Competitive Advantage. New York: Free Press: Porter, M.E. (1985) "Competitive Advantage", The Free Press, New York, Porter, Michael.  (1990). The Competitive Advantage of Nations.  New York:  Basic Books.  Ricardo. David., (1817).The principles of political economy and taxation Smith. Adam., (1776) The Wealth of Nations, London Unctad Report (1999) Wheelen, Thomas L. & Hunger, J. David., (2002), Strategic Management and Business Policy, Prentice Hall. Read More