Michael Porter's Concept of Diamond - Case Study Example

Michael Porter’s concept of ‘Diamond’ as a tool for analysing the competitive advantage of nations Introduction The growth of a nation or an organization depends on tits competitive advantages in the market. Some organizations or nations may have monopoly in some areas which they may use to increase their competitive power. For example, America is the strongest country on earth at present and they are using their military and economical power for increasing their competitive power on global issues. At the time of writing this paper, America and its allies succeeded in getting the permission from United Nations for establishing a no fly zone over Libya. Moreover, America succeeded in getting the UN permission in attacking Iraq and Afghanistan as part of war on terror strategies. America was able to convince United Nations on all these issues because of their superior competitive power. Globalization has intensified the competition between nations and organizations because of the huge opportunities available in the international market at present. Competitive power of a nation or organization depends on many parameters. Former Harvard university professor Michael Porter and his associates have identified four different parameters for achieving competitive power which is known as Porter’s diamond model for national competitive advantage. “Porters diamond model suggests that there are inherent reasons why some nations, and industries within nations, are more competitive than others on a global scale” (What is Michael Porters Diamond Model?, 2010). Porter identified; Firm strategy, structure and rivalry, supporting industries, demand and factor conditions as the four major parameters which can affect the competitive power of a nation or a firm (Diamond model-Michael Porter, 2011). He was able to put all these parameters in a diamond shape as illustrated in the diagram given below. This paper analyses various features of diamond model and its role in achieving competitive power. Porter’s Diamond model for national competitive advantage (Martin & Porter, 2000) Strategy, Structure and Rivalry Strategies can make or break a nation. Poor strategies will never help a nation in increasing their competitive power whereas better strategies always helpful increasing the growth or competitive power of a nation. For example, when globalization initially entered the global arena, China distanced themselves from it because of their concerns about some hidden agenda at the back drop of globalization by capitalist countries. China and America were engaged in fierce rivalry before the introduction of globalization because of the different political ideologies prevailing in these countries. Most of the American and Chinese strategies before globalization were aimed at destabilization or destruction of their opponent. However, globalization forced them to change their strategies and currently America is one of the largest trading partners of China. Both China and America succeeded in increasing their competitive power in global market because of the changes they implemented in their strategies even though the political system and rivalry remains the same. India is another country which succeeded in achieving better competing power as a result of changes in strategies. In 1990’s India made lot of reformations in the economic circle in order to attract more foreign direct investment. They have made some changes in their foreign polices also in order to gain more competitive power in the global market. Earlier, India was more polarised towards former Soviet Union in strategic and military cooperation. But India changed their strategies immediately after the destruction of Soviet Union and they established closer ties with Untied States in order to gain more competitive power. India has realized that the political structure in India and America are almost the same and it is easy for them to establish smooth business relationships with America. Thus America became a prominent trade partner for India at present. Millions of American jobs were currently outsourced to India as part of their increased economic cooperation. Thus India and America succeeded in increasing their competitive power in the global market with the help of suitable strategies. Liberalization and privatization are the essential requirements for reaping the benefits of globalization. It is difficult for a government to spend all the revenues earned by them for the infrastructure developments alone. On the other hand, private participation in the public utility sector will relieve a nation from much of their responsibilities in these sectors and they can focus more on other areas of development which will increase their competitive power. Structure of the nation or organization plays a vital role in controlling the competitive power. Some of the countries may have communist administration whereas some other may have democratic administration. Same way some organization may adopt democratic management styles whereas some others may adopt autocratic management styles. A third segment of organizations may follow hierarchical model. “German companies mostly follow hierarchical model whereas Italian companies adopt extended family structure” (Quick MBA, 2007). Some of the firms never allow the employee participation in their decision making because of the peculiarities of the structure of the firm. Employees may have better skills and knowledge in the production areas, compared to the CEO or the top managers and if the company seek the advices of the workers on production matters, they can improve their production efficiency further. Thus, with the increased cooperation of the workers in policy making, organizations can increase their competitive power. “Direct competition impels firms to work for increased productivity and innovation”(Diamond Model and Clusters, 2009). Rivalry always acts as a tonic for the organizations to boost their performances. In the absence of strong competition, a nation or firm may not develop properly. Rivalry is the motivating force required to the organizations and the nations to break their inertia. For example, Microsoft and Apple Inc are currently engaged in fierce battle for dominance across the global consumer electronics market. Apple surpassed Microsoft recently in market capitalization and achieved the second spot in the world, just behind Exxon Mobile. Google is another company which is creating problems to Microsoft’s monopoly in the computer market. In order to regain their lost supremacy and to counter the threats, Microsoft is currently planning to establish business tie up with Yahoo and Amazon.com. In short, rivalry acted as a motivating factor for Microsoft to increase their competitive power. It should be remembered that in the absence of any rivalry, Microsoft might not establish any tie ups with other firms. In the national circle, America is strengthening their tie up with India at present in order to counter the threat from China. China and India are the most rapidly developing economies in the world at present. Many people believe that China may surpass America in the recent future itself. America knows it very well and they are currently strengthening their cooperation with China’s arch rival India. In short, rivalry between nations and organizations will force them to increase their competitive power. Related or supporting industries Supporting industries can produce inputs which are important for innovation and internationalization. For example, Microsoft was able to maintain their supremacy in the operating system market because of their tie up with Intel. Intel, the microprocessor chip manufacturers is making chips suitable for running Microsoft’s’ operating systems. Intel is not making chips suitable for Apple computers. On the other hand, Apple makes use of Motorola processors in their computers. In short, supporting industries play an important role in increasing or decreasing the competitive power of an organization. In India tire industry is growing day by day because of the increased production of natural rubber. Rubber is the most important raw material needed for tire production. Lot of small scale rubber industries are working in India as supporting industries to the tire industry. These supporting industries help tire manufacturers in the making of tubes, treads, beads etc. Supporting industries thus provide cost-effective inputs and they participate in the upgrading process and thereby increase the competitive power of an organization. The recent financial crisis in Dubai has affected many financial institutions in UK and Europe. Dubai world, the worst affected firm in Dubai has reportedly taken loans from these overseas institutions. “The Treasury, the Bank of England and the Financial Services Authority were monitoring events closely and are demanding figures from UK banks on their loan exposures to Dubai” (Hosking and Robertson, 2009). It is evident from the above examples that the related or supporting industries also can play a vital role in determining the competitive power of an organization or nation. Moreover, it should be remembered that Abu Dhabi came forward for the rescue of Dubai in their crisis situations. Japan is currently facing stiff challenges as a result of the recent damage caused by earthquakes and tsunami. Japan is one the verge of total destruction again because of the damages caused not only to their economy, but also the nuclear reactors. Even the neighboring countries including America are currently under the radiation threat from Japan. In short, Japan cannot handle this issue independently; international community should help Japan in increasing or regaining their competitive power. Demand conditions Demand makes an organization or nation more competitive. For example, Japanese automobiles and electronic goods have higher demand in the world market because of higher quality. On the other hand Chinese products also have more demand in the global market, not because of quality, but because of cheaper price. In short, quality and cheaper price are two parameters which increase or decrease the demand and competitive power of a nation or organization. Demand in the home market can help organizations to create competitive advantage through innovation. Maruti was the prominent car manufacturer in India and they almost monopolized the small segment car market in India. In order to counter the threats from Maruti, India’s automobile manufacturer TATA group recently unveiled the world’s cheapest car priced only $ 2000. Ten million bookings were received by the TATA group from India itself, for their NANO car in the initial month itself. Currently, TATA is planning to export this car to the international market. Factor conditions Human resources, physical resources, knowledge resources, capital resources and infrastructure etc are the various factors which control the competitive power of a nation or organization. For example, India is the second most populated country in the world. In other words, India has immense human resource potentials. Earlier, economists argued that India and China cannot develop properly if they fail to control the population growth. To the utmost surprise of these economists, India and China were able to develop more rapidly than some of the other prominent nations in the world, only because of their human resources. America and European countries are currently facing immense manpower shortages whereas India and China like countries are helping America like countries in filling this manpower shortage gaps. India and China were able to streamline their huge human resources to increase their competitive power. Outsourcing industries grown significantly in India because of the availability of immense computer professionals in India whereas China was able to produce more goods and to reduce the price of their goods with the help of their huge human resources. “The situation in a country regarding production factors, like skilled labour, infrastructure, etc., which are relevant for competition in particular industries” (Porter’s Diamond – Determining Factors of National Advantage, 2001, p.1). Globalization has opened immense opportunities for the unemployed people in India and China as the American firms started to utilize their skills by outsourcing jobs to India and China like countries. Moreover many of the Indians and Chinese were able to find employment in overseas countries like Middle East, America, and Europe as well. Thus, both the countries succeeded in increasing their competitive power with the help of judicious exploitation of their factor conditions such as human resources. Conclusions Michael Porter and his associates succeeded in defining competitive power of a nation with the help of a diamond model of competitive power. Porter identified; firm strategy, structure and rivalry, supporting industries, demand and factor conditions as the four major factors which controls the competitive power of a nation or organization. Many of the traditional economic theories with respect to the growth and competitive power of a nation were rewritten after the introduction of Porter’s diamond model. References 1. Diamond Model and Clusters, (2009) . [Online] Available at: http://www.12manage.com/methods_porter_diamond_model.html [Accessed on 22 March 2011] 2. Diamond model-Michael Porter, (2011). [Online] Available at: http://www.valuebasedmanagement.net/methods_porter_diamond_model.html [Accessed on 22 March 2011] 3. Hosking P and Robertson D., (2009), Dubai in deep water as ripples from debt crisis spread, . [Online] Available at: http://business.timesonline.co.uk/tol/business/markets/the_gulf/article6934261.ece [Accessed on 22 March 2011] 4. Martin L.M & Porter M.E, (2000). CANADIAN COMPETITIVENESS: Nine Years after the Crossroads. [Online] Available at: http://www.rotman.utoronto.ca/research/competitive.htm [Accessed on 22 March 2011] 5. Porter’s Diamond – Determining Factors of National Advantage,( 2001), [Online] Available at: http://www.themanager.org/pdf/diamond.pdf [Accessed on 22 March 2011] 6. Quick MBA, (2007), Porter’s diamond of national advantage, . [Online] Available at: http://www.quickmba.com/strategy/global/diamond/ [Accessed on 22 March 2011] 7. What is Michael Porters Diamond Model?,( 2010) [Online] Available at: http://www.businessmate.org/Article.php?ArtikelId=49 [Accessed on 22 March 2011] Read More