The Four Attributes of Michael Porters Diamond of National Competitive Advantage - Assignment Example

Question 1a: The Four Attributes of Michael Porter’s ‘Diamond’ of National Competitive Advantage. Inventors of early technologies used for the commercial production of first cars, televisions or pianos were not Japanese. For almost a century companies in European countries and US dominated markets for these products. By the end of 20th century Japanese cars, televisions and pianos are among the best selling products in the US and Europe. Today Japan’s Toyota and Honda compete favorably with England’s Land Rover, German’s Mercedes Benz, Sweden’s Volvo and US Ford. Why? This is the ‘why’ in a practical question Michael Porter devoted his time to answer: “Why particular countries succeed in particular industries?” Porter (1990) showed that the success of a nation in a competitive international market system depends on four broad attributes. These attributes individually and systemically constitute the diamond of national competitive advantage. Factor Conditions The factors used in classical economic theories to explain absolute advantage (as in the case of Adam Smith) and comparative advantage of nations (by David Ricardo) were capital, labor, natural resources, land and infrastructure. Porter proved that these ‘basic factors’ were not adequate to constitute competitive advantage for nations. Rather these basic factors are transformed into ‘key’ specialized factors through heavy and sustained investment (118). Hence factors that constitute advantage are created by nations rather than inherited and competitive advantage of nations depends on the extent they create factors. Holland’s investment in horticultural research creates the scientific base for its leading position in the exportation of lowers. Absence or relative abundance of one or more basic factors that may constitute competitive disadvantage to other nations may serve as catalyst for innovation and change necessary for creating other key factors. Japan’s competitive advantage in automobile industry is good example. Japan, “an island nation with no natural resources”, invested heavily in human capital hence creating the key factor (skilled labor and scientific base) needed to gain competitive advantage in hi-tech and iron and steel-based automobile industry out of basic factor (labor). Also, the ability of Japanese companies, faced with intense local rivalry and a mature economy, to eliminate labor factor in the production of consumer electronics gave it an edge in the international market. It introduced automation which eventually cut down the cost of labor in the production process. Conversely, US companies outsourced labor intensive aspect of production of the same products to Asian countries, where labor is relatively cheaper (119). Demand Conditions The composition and character of domestic markets constitute competitive advantage for companies by creating demand-propelled innovations and change. Nations with sophisticated and demanding domestic buyers push companies to produce high standard goods sand services in order to meet their changing taste. The more sophisticated and demanding the buyers in the domestic market the greater the pressure companies face to continually improve their competitiveness (120). Also the prevailing condition or values in a nation can push companies to respond by innovating affordable and value-friendly products and services. This therefore means that the size of domestic market has less influence than the character of the market in shaping the future of successful companies as they produce for export. In line with this argument, nations that export their values and taste through conventional and non-conventional (social and political) marketing can sustain their domestic demand-spurred competitive advantage in the international market. For example, US credit card companies do not only capitalize on universality of the nation’s currency to gain competitive advantage but desire of Americans for convenience copied by the rest of the world (120). Fig. 1: The Diamond of National Advantage Related Supporting Industries Companies gain competitive advantage where there exist internationally competitive related and supporting industries. Spatial proximity of forwardly and backwardly linked industries enhances the efficiency of input suppliers in terms of time, quality and vogue. Proximity enhances continuous communication between related companies. Information and ideas are exchanged thus compelling both companies (suppliers and users of their products) to be innovative in improving the quality of their products. The effect of related supporting companies is most where these companies are internationally competitive. They foot wear industries in Italy benefit from constant interaction with internationally competitive related leather producing companies through constant exchange of ideas. The footwear companies will through this interaction have insights into latest styles in vogue in the international market, and how to use suitable textures and colors create newer styles (121). Firm Strategy, Structure and Rivalry The size and structure of companies are pivotal in determining the success of the companies. In a broader sense, nations gain competitive advantage in industries where governments successfully shaping the set of managerial patterns and organizational structures that make companies in the industries thrive. The customized managerial style and organizational structure favored in Italy, for instance, is the small sized family-managed companies. Though small in size and non-sophisticated in management Italian companies have gained competitive advantage in footwear, lighting, furniture and packaging machines industries. In contrast, internationally competitive German companies have large and hierarchical management and organizational structures and practices. These companies need highly skilled managerial and technical personnel. They also require good scientific and technology base to thrive (123). Therefore, unlike in Italy, the government in Germany will have to invest in human capital development to get the highly skilled labor needed in these companies. Also, companies will have to invest systematically in R & D to be able to sustain their competitive advantages. Apart from size and structure of companies, Porter also showed that the type of goals companies and individuals set and the strategies employed to achieve these goals help companies in gaining and sustaining competitive advantage. Individual and organizational goals as well as strategies are reflective of a nation’s capital market and prevailing compensation practices, both of which are shaped significantly by governments. Companies that enjoy long-term shareholders investment, as in the case of banks in Germany and Switzerland, can favorably provide their customers long term facilities for financing R & D and acquisition of capital intensive machineries. The management of these banks will do these without recourse to concerns for low return on investment by shareholders. This is not the case in the US, where management teams of companies have to grapple with investors’ penchant for short-term return on investment which is reflective of the share appreciation in the capital market (124). Similarly, compensation packages and practices go a long way in determining how successful companies are in carving their niches in the international market. To get the best brains and hands, companies have to devise attractive compensation and motivation packages. US companies have an edge in aggressive talent hunt. This explains the competitive advantage US companies have in relatively new industries like biotechnology and software, both of which depend on highly skilled and well motivated personnel. While companies strive to hunt for talents governments will have to invest and encourage investments in human capital development that will produce these talents and/or provide exceptional avenues for achievement of career goals of talents. Besides, governments have to strategically and concertedly invest to keep industries citizens aspire to work for alive and kicking. In essence, the government must proactively guard its heritage. This is very important because as Porter showed, nations gain competitive advantage in industries that citizens believe brought their national heroes to limelight. This is the case in the banking, watch and pharmaceuticals industries in Switzerland; agriculture and defense industries in Israel; fashion and cosmetics industries in France; and footwear and interiors industries in Italy. Finally, Porter argues that local rivalry is the most powerful stimulus to gaining and sustaining competitive advantage (124). It has a powerful stimulating effect on all other attributes he identified. Local rivalry pushes companies to be innovative and strive to improve on their performances. Unlike foreign rivalry which is confined to economic and business competition, local rivalry spurs competition at personal levels. Companies do not only compete for market by lowering costs, improving quality or introducing new products and services. They compete also for talents, technical excellence and what Porter terms ‘bragging rights’. They do this by constantly upgrading their sources of competitive advantages and aiming to gain sustainable advantages. In the end local rivalry spurs companies to compete for foreign market. It impels companies in a particular industry to increase productivity and innovation so as to stay afloat in a world plagued by dynamic innovations. Thus the local rivalry between Fox and Warner and that between Intel and Microsoft give US companies competitive advantage in media and software industries respectively. In the same vein, rivalry between Hoffman-La Roche, Sandoz and others gives Switzerland an edge in the pharmaceutical industries. In the automobile industry, rivalries between giants like Toyota and Honda, between Volkswagen and Mercedes, and between Ford and GM make Japan, Germany and US dominant. Question 1b: How might the four attributes impact upon the content of National Policy? Porter developed the “Diamond Model” to help us understand national competitiveness in a global market. The Diamond model is empirical evidence that reminds company managers and policy makers that “national prosperity is created, not inherited” (113). Competitive advantage, necessary for prosperity, is “created and sustained through a highly localized process” (113)—pinned on “innovation” and “change” (117)—and influenced by external factors such values, cultures, economic structures, institutions and histories of nations. Therefore Porter’s diamond has roles for both companies and governments (113). While company focus on the localized processes governments have a role in making companies successful in the global market. Given the critical role of governments Porter (1990, 129-132) suggested the following: 1. Governments to focus of factor creation 2. Avoid interfering in factor and currency markets 3. Enforcement of strict product, safety and environmental standard 4. Limitation of direct cooperation among industry rivals 5. Promotion of goals that promote sustained investment 6. Deregulation of competition 7. Enforcement of strong anti trust policies 8. Rejection of managed trade From the above suggestions, it can be argued that Porter assigned a modest role for the government in the economy and particularly in creating industry-specific enabling environment that fosters competitive advantage of companies. The role of the government is, according to Porter, "acting as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance …" (128). He abhors direct participation of government in production or overburdened regulation. He also discourages laissez faire attitudes of governments, in its strictest sense. The major role of governments is therefore in creating environment that allows companies to gain competitive advantage. This implies making policies that encourage companies to raise their performances, stimulate early demand for advanced products, direct their energies and resources in creating specialized factors and stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations. It also requires strategic and massive investment in human capital development, physical infrastructure and incentivization (not subsidization) of factor creation and production process. Although Porter made these suggestions, the role of governments differs depending on the stage of development in the country. The role given to government in transition economies (as in East Europe, Russia and China) will be different from those given to governments in budding economies (as in India, Latin America and East Asia) or stagnated economies (like in Africa). The roles of government in these three categories will be sharply contrasted from the roles of government in developed economies of Asia, Europe and America. For whichever category, government policies must be able to restructure the economy in order to create the attributes of the diamond. This will require creating for fundamental factors (education, basic national infrastructure, nationally concerned research), and influencing specialized factors that give companies competitive advantage (advanced industrial training, academy - industry links, trade activities, quality control, high standards). No matter what policies must aim to promote rivalry, stimulate free entry to the market and protect intellectual property rights by implementing anti trust policies. There must also be great deal of work in stimulating early demand for advanced products by influencing change in values that create favorable demand conditions. This essentially means breaking away from the past and charting a course based on free market values and cultures. Reference Porter, Michael. The Competitive Advantage of Nations....1990. Read More