Competitive Advantage of Australia Based on the Diamond Model - Term Paper Example

Competitive Advantage of Australia Based on the Diamond Model Executive Summary The theory of competitive advantage is a theory introduced by MichaelPorter in the early 1980s and 1990s. The theory is best represented through a diamond model that represents the four determinants of competitiveness of nations: factor conditions, demand conditions, firm competition structure, and support industries. Porter’s diamond model has been applied to Australia at least twice. First, by Porter himself in 2002 and, second, by Nipe et al. (2010). Both works produced important insights on Australian national competitiveness. Competitive Advantage of Australia Based on the Diamond Model I. Framework for Assessment Michael Porter’s Competitive Advantage of Nations Porter (1990) was one of Michael Porter’s earliest articulations of the theory of competitive advantage among nations.1 Porter identified four determinants of the competitive advantage among nations. The determinants are illustrated in Figure 1. Figure 1. Determinants of national competitive advantage according to Porter Source: Porter (1990, p. 78) The four determinants of competitive advantage among nations are factor conditions, demand conditions, related and supporting industries, and firm strategy/structure/rivalry. According to Porter (1990, p. 78), factor conditions refer to the “nation’s position in factors of production, such as skilled labour or infrastructure, necessary to compete in a given industry.” Demand conditions refer to the “nature of home market demand for the industry’s product or service” (Porter 1990, p. 78). Related and supporting industry pertains to “the presence or absence in the nation of supplier industries and other related industries that are internationally competitive” (Porter 1990, p. 78). Firm strategy, structure, and rivalry refers to “the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic industry” (Porter 1990, p. 78). In a highly simplified expression, one can paraphrase Porter (1990) to mean that the determinants of competitive advantage among nations are the overall productive capacities of nations, magnitude of demand and profile of demand, support industries, and industry organization and competition profile. In the literature, Porter’s articulation of the determinants of competitiveness among nations or national competitiveness is known as the diamond model (Neven and Droge 2000, 4). Neven and Droge (2000, abstract) claimed that the diamond model has been ignored in industry cluster research in developing countries but the two authors argued that this is not justified and that “Porter’s more holistic diamond model is superior in explaining cluster dynamics.” Yetton et al. (1992) revealed, however, that Michael’s Porter’s, The Competitive Advantage of Nations (1990, p. 89), has been “one of the most widely read and recognized works on management and national competitiveness in Australia, as well as in many other countries.” However, Yetton et al. (1992, p. 118) criticized Porter’s book because “Porter has not articulated a theory of national competitive advantage” but rather a theory on the competitive advantage of firms and industries within nations. Further, Yetton et al. (1992, p. 118) argued that Porter has not proven his theory, either in the original nor subsequent studies. According to Yetton et al. (1992, p. 118), Porter’s theory is incomplete in two ways: it does not adequately deal with the dynamics or how successful firms emerge and what might be done to encourage success. Notwithstanding the Yetton et al. (1992) critique, Snowdown and Stonehouse (2006, p. 163) has credited Porter for having “pioneered the use of economic analysis to investigate important issues relating to “competitiveness” at the firm, industry, and national level.” For Snowdown and Stonehouse (2006,p. 163), Porter is “widely regarded as one of the world’s leading authorities” on competitiveness. II. Australia in 2002-2003 Porter had two works that assessed Australia’s competitive advantage using his diamond model. One of the two works was a set of Powerpoint Slides that focused on Australia’s competitive advantage. In this discussion, the material is indicated as Porter (2002). Porter’s other work that touched Australia’s competitive advantage was one on the competitive advantage of the United Kingdom. In the process of discussing UK competitive advantage, Porter discussed Australia’s competitive advantage in Porter (2003). In Porter (2002), Porter identified through a tool reproduced as Figure 2 in this work that one of Australia’s competitive advantages lies in its high GDP per capita in US dollar terms as well as in its high grow rate of real GDP growth per capita during the period 1990 to 2000. All these indicate Australia’s competitiveness based on the “factor conditions” aspect of the diamond model. Figure 2. Economic performance in GDP per capita: Australia and select advanced economies Source: Porter (2002, Slide 4) based on World Trade Organization data Using a measure called the “microeconomic competitiveness index”, Porter revealed through a tool reproduced as Figure 3 in this work that Australia is highly competitive based on the “microeconomic competitiveness measure” and implied that his explains why Australia also belongs to the countries with the highest GDP per capita in year 2000 depicted in the earlier figure, Figure 2. Figure 3. Competitiveness and GDP per capita in 2000. Source: Porter (2002, Slide 8) Productivity among countries, who are members of Organization of Economic Cooperation and Development, when measured in terms of total productivity, has been consistently high in Australia unlike in the other OECD countries of the world. As shown by Figure 4, Australia is in the centre of the graph, implying that among the OECD countries, Australia is only the OECD country in which total factor productivity is high during the period 1990-98 as well as in 1995-97. According to Porter (2002, Slide 19), what makes the Australia’s achievement most amazing during is that Australia has continued to maintain its high productivity despite the Asian Crisis that started in mid-1997. Figure 4. Labor force utilization and productivity: Australia and select advanced economies Source: Porter (2003, p. 9) based on OECD 2001 and IMF 2003 data Following Porter 1990 (p. 78) and based on Figure 1 at the beginning of this work, Porter (2002) assessed competitive advantage in terms of (1) factor conditions, (2) context for firm strategy and rivalry, (3) relative demand conditions, and (4) related supporting industries. In terms of factor conditions, Porter pointed out that Australia’s competitive advantage lies in high international ranking in cellular phone communication network, judicial independence, quality schools, quality of road infrastructure, internet access, availability of venture capital, ease of administrative burden for business start-ups, police protection, and adequacy of legal recourse (2002, Slide 24). Porter said that Australia’s competitive disadvantage categorised as factor conditions lie in her lacklustre international rank in local equity market access, telephone infrastructure, availability of scientists and engineers, patents per capita, railroad infrastructure, quality of math and science education, university and industry research, ease of loan access, quality of public schools, and air transport infrastructure quality (2002, Slide 24). In terms of context for firm strategy and rivalry, Porter pointed out that the competitive advantages of Australia lie in the effectiveness of anti-trust policy, efficacy or corporate boards, hidden trade barrier liberalization, extent of locally based competitors, and extent of distortive government subsidies (Porter 2002, Slide 25). The competitive disadvantages of Australia’s context for firm strategy and rivalry lie in the intensity of local competition, cooperation in labour-employer relations, favouritism in government decisions, decentralization of corporate activity, and intellectual property protection. In terms of relative demand conditions, Porter said that Australia’s competitive advantages have been in consumer adoption of latest consumer products and presence of demanding regulatory standards (Porter 2002, Slide 27). According to Porter, Australia’s competitive disadvantage in the area of relative demand conditions are in government procurement of advanced technology products, buyer sophistication, stringency of environmental regulations, and laws relating to information (2002, Slide 27). Porter (2002, Slide 37) failed to find a competitive advantage in Australia’s related and supporting industries but found that Australia’s competitive disadvantages in the category are in the availability of process machinery locally, availability of components and parts locally, extent of product and process collaboration, local supplier quality, state of cluster development, and local supplier quality. Porter identified four key challenges facing Australia (2002, Slide 22): 1. Corporate failures and company relocations have shaken investor confidence in Australia. 2. Australia’s innovative performance is low based on international standards. 3. There are only a few clusters in Australia that are relatively well-developed. 4. Government has no clear vision for the succeeding stages in economic development. Meanwhile, Australia’s unique competitive advantages lie in its unique endowments that provide Australia a base from which to develop industry clusters; unique history that allows the country to serve as a bridge among Asia, North America, and Europe; and geography that provides opportunities for Australia to service “sophisticated demands related to remoteness” (Porter 2002, p. 60). III. Post-2003 Australia and Industry Clusters Porter emphasised that “the appropriate definition of competitiveness is productivity” (2002, Slide 5). Yet, at the same time, Porter said, “competitiveness ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition” (2002, Slide 7). This implies that for Porter, productivity leads to competitiveness as competitiveness leads to productivity. Porter (2002, Slide 5) pointed out that productivity “depends both on the value of products and services (e.g., uniqueness, quality) as well as the efficiency with which they are produced.” Porter (2002, Slide 5) pointed out that “productivity in a nation or region is a reflection of what domestic and foreign firms choose to do in that location” and “the location of ownership is secondary for national prosperity”. Further, Porter said, “the productivity of ‘local’ industries is of fundamental importance to competitiveness’, not just of traded industries (Porter 2002, Slide 5). For those who are thinking of using the exchange rate as a tool to boost exports, Porter (2002, Slide 5) has this important advice: “devaluation does not make a country more ‘competitive’”. Porter stressed that competitive nations or regions are those that compete in offering “the most productive environment for business” (2002, Slide 5). With regard to promoting competitiveness, Porter (2002, Slide 5) said, “The public and private sectors play different but interrelated roles in creating a productive economy”. Porter (2002, Slide 6) depicted the relationship among innovation, productivity or competitiveness, and prosperity in the manner described by Figure 5: Figure 5. Relation among innovation, productivity or competitiveness, and innovation Source: Porter (2002, Slide 6) In Michael Porter’s 2002 articulation, innovation brings about productivity leading to competitiveness that in turn lead to prosperity. For Porter (2002, Slide 7), “a sound macroeconomic, political, legal, and social context creates the potential for competitiveness, but it is not sufficient. According to Porter (2002, Slide 2), there are internal and external sources of firm success. The internal sources of firm success refer to competitive advantage “that resides solely inside a company or its industry” while the external sources of a firm’s competitiveness “resides in the locations at which a company’s business units are based” (Porter 2002, Slide 2). A firm’s internal sources of success “depends primarily on company choices” while external sources of success depends on company cluster participation (Porter 2002, Slide 2). Meanwhile, according to Porter (1990, p. 86), the effect of the dynamics of the four determinants of competitiveness in a particular setting is the promotion of a cluster of industries reflecting the competitive advantage of a particular nation. In 2008, Michael Porter found that one of Australia’s competitive industry clusters lie in the country’s renewable energy sector. In 2010, Nipe et al. (2010) identified the South Australian wine industry as one of Australia’s competitive clusters. Nipe et al. (2010) is especially interesting because the material produced an analysis of Australia’s competitiveness ala Michael Porter. Nipe et al. (2010) rearticulated and applied Porter’s diamond analysis on Australia in a manner depicted by Figure 6. Figure 6. Porter’s diamond analysis as applied by Nipe et al. (2010) Source: Nipe et al. (2010, p. 5) Following Porter (1990), Nipe et al. (2010) applied a diamond analysis for Australia that employed a look into factor conditions, firm strategy and rivalry analysis, demand conditions, and a survey of related and supporting industries. Nipe et al. (2010) found that with regard to factor conditions, Australia has a relative ease to start a business, a robust banking system, a good availability of venture capital, and a strong roads network. However, Australia is weak in educational programming, has limited scientists and engineers, weak telecom networks and infrastructure, and limited weak rail and ports. With regard to firm strategy and rivalry, Nipe et al. (2010) has found that Australia has a comparatively efficient government regulation and robust intellectual property rights protection laws. However, Australia has a poor history of labour relations, declining productivity, and rigidity of employment (Nipe et al. 2010). On the matter of demand conditions, Australia has a sophisticated consumer market and progressive regulatory standards (Nipe et al. 2010). However, Australia has an ineffective government procurement practices and limited success in information and communication technology (Nipe et al. 2010). Finally, with regard to related and supporting industries, Australia has a good mass of suppliers and specialized research and training programs (Nipe et al., 2010). However, Australia has poor clusters policy, a poor collaboration of cluster, and a poor state of cluster development. Thus, as shown by Nipe et al. (2010), Porter’s diamond analysis when used properly can provide a good analysis and overview of a country’s potentials. Further, a theory need not be decisively be proven by data, it enough that theory identifies the main variables to look at in assessing the prospects for country competitiveness. Porter’s diamond model appear to adequately identify what the important variables and, interpreted non-dogmatically, Porter’s diamond analysis cover the economic, political, cultural, and other variables that can affect country competitiveness, especially the variables that matter most. What can probably demonstrate Australia’s competitiveness are the reports and assessment on the relative resilience of Australia during the ongoing world financial crisis that started in 2007. The study of Fry (2009) of the Australian National University testifies to the ability of Australia to withstand the crisis and on her ability to overcome the crisis unscathed and relatively free from the troubles that plague the United States and many countries of Europe. According to a news report from Moneyweek, Australia has declared as early as 2009 that the financial crisis had been over even as many countries have remained vulnerable to the crisis up to now. Even Marxist writer Hillier reluctantly recognized Australian resilience to the global crisis (2010, p. 59). The World Economic Forum Global Risk Report of 2010 identified Australia as a developed country with one of the lowest risks of retrenchment (p. 11). IV. Conclusion and Summary Statements Applying Porter’s diamond model on Australia has already been used by Porter (2002) and Nipe et al. (2010) and they both led to useful insights on Australia’s competitiveness advantage. Although Yetton et al. (1992) has criticized the model for being inadequate as a theory, perhaps the better way to appreciate Porter’s analysis is via an assessment of whether the use of the model can lead us to make sense of data and arrive at useful analysis. On both criteria, the works of Porter (2002) and Nipe et al. (2010) have been instructive in showing the usefulness of the Porter diamond. In particular, based on Nipe et al. (2010), Australia’s competitive advantage lies in the relative ease of starting a business, a robust banking system, efficient government regulation, robust intellectual property rights protection, progressive regulatory standards, and good mass of suppliers. References Fry, R., 2009. Australian resilience during the global financial crisis. The Australian National University. Available from: http://www.frbatlanta.org/news/CONFEREN/09risk/Fry.pdf [Accessed 19 November 2010]. Hillier, B., 2010. Australia’s resilience during the crisis, 2007-2009. Marxist Intervention, 2, 59-77. Moneyweek, 9 October 2009. Australia declares the financial crisis over. Available from: http://www.moneyweek.com/news-and-charts/economics/economics-australia-declares-the-financial-crisis-over-45602.aspx [Accessed 19 November 2010]. Nipe, A., York, A., Hogan, D., Faull, J., and Baki, Y., 2010. The South Australian wine cluster: Microeconomics of competitiveness. Harvard Business School. Neven, D. and Droge, C., 2000. A diamond for the poor? Assessing Porter’s demand model for the analysis of agro-food clusters in the developing countries. Michigan, United States: Michigan State University. Porter, M., 1990. The competitive advantage of nations. Harvard Business Review, March-April, 73-91. Porter, M., 2002. Australian competitiveness. Powerpoint Slide Presentation. Sydney, Australia: IIR Leading Minds Conference, 1 August. Porter, M., 2003. UK competitiveness: moving to the next stage. DTI Economics Paper No. 3. UK Department of Trade and Industry: Economic & Social Research Council. Porter, M., 2008. The Australian renewable energy cluster: Microeconomics of competitiveness. Harvard Business School. Snowdon, B. and Stonehouse, G., 2006. Competitiveness in a globalised world: Michael Porter on the microeconomic foundations of the competitiveness of nations, regions, and firms. Journal of International Business Studies, 37, 163-175. World Economic Forum, 2010. Global risks 2010. Geneva: World Economic Forum. Yetton, P., Craig, J., Davis, J., and Hilmer, F., 1992. Are diamonds a country’s best friend? A critique of Porter’s theory of national competitiveness as applied to Canada, New Zealand and Australia. Australian Journal of Management, 17 (1), 89-119. Read More