The Porters Diamond Model - Essay Example

Porters Model Introduction The national competitive advantage model introduced by Michael Porter allows the analysis of how different nations gain a competitive edge over other countries. In addition, the model provides an insight regarding how various industries within a country appear more competitive in comparison to other industries. In this sense, Porters Diamond asserts that, the national home base of a company is critical in establishing a competitive edge in a global context (Porter 1990). This is because, home base provides an organisation with the basic factors that can either support or deter an organisation from gaining a competitive advantage in the global business arena. Across the globe, the Porters model is used by organisations to identify ways that assist to cement competitive advantage locally and gain an edge in terms of competition in a global context (Porter 1990). On another note, governments also play an important role in building a national competitive advantage. This involves implementing policies that ensure industries within a country build national advantage that can challenge the competition on a global front (Porter 1990). This paper explores how Porters Diamond Model can explain the characteristics and performance of business systems of major economies. The porter’s Diamond Model According to Porter (1990), the Diamond Model consists of four determinants that help to gain national competitive advantage and they include: Factor conditions Factor conditions include the factors of production that a home country can use in gaining competitive advantage. Such factor conditions include, for instance, human capital, raw material, infrastructure, knowledge and capital resources. In a given country, the availability of a skilled workforce is critical to enhancing the performance of various business ventures (Porter 1990). Similarly, the availability of raw material is critical in cutting the costs related to production by various home based industries. On the other hand, capital resources are needed by firms to fast track their growth in a competitive business environment. Further, both legal and physical infrastructures are necessary to ensure firms in a given country function efficiently. Legal infrastructure in this sense includes policies and programmes implemented by a particular government while physical infrastructure may include transport and communications systems (Porter 1990). On this note, each country possesses certain factor conditions that they can exploit to realise a competitive edge on the global front. In addition, factor conditions in a given country are necessary in terms of exploring opportunities that can be optimised using the available resources. However, it is also important to note that, heavy regulations to extent affect a country’s ability to access certain markets. Conversely, a country that invests in infrastructure development is in a position to change its industry structure in terms of attracting new demand and supply of resources (Porter 1998). Demand conditions Demand conditions relate to the home based demand for products or services that a country produces. According to the Porters Model, a larger local demand for products or services means that the home-grown firms are focusing on certain products or services on a large scale compared to foreign firms (Porter 1990). For example, increased local demand for a particular product or service such as information technology is responsible for the shift from traditional industries to knowledge-based industries (Porter 1998). Moreover, high demand in the home market plays a role in driving entrepreneurial mind-set associated with recognising opportunities. In this regard, customer demand is critical in recognising opportunities both locally and in the international front. Overall, the nations that focus on obtaining information related to certain market demands are in a better position to identify the ideal entrepreneurial opportunities compared to countries that lack knowledge or information on market demands (Porter 1998). Related and Supporting Industries As a determinant factor for national competitive advantage, related and supporting industries enhance the coordination of business activities (Porter 1990). On the same note, the strength of related and supporting industries in a country also helps to drive an entrepreneurial mind-set associated with recognising opportunities. Furthermore, when home-grown supporting industries have a competitive edge, new entrants continue to emerge and help in the formation of clusters (Lazonick 1993). As a result of accessibility to information and improved relations between buyers and sellers, companies can develop cost effective and innovative products. The formation of clusters for related and supporting industries is also important, for instance, in facilitating technology transfer and innovation. The strength of related and supporting industries in a country also play a role in creating horizontal and vertical links within industries (Lazonick 1993). Firma strategy, structure and rivalry In various countries, the organisation structure and management systems are critical to achieving national competitiveness. As such, it is important for firms to establish their capabilities in the industry segment that they appear to be competitive (Krugman 1994b). For example, some countries such as Germany focus on systematic, highly technical processes and hierarchical organisational structure that derive strength from engineering oriented fields. Conversely, rivalry also tends to strengthen home demand, and depending on dynamic capabilities of an organisation’s structure, strategy and rivalry, entrepreneurial mind-set for recognising opportunities can thrive (Krugman 1994b). In this sense, dynamic capabilities refer to, for example, product development and strategy that allow an organisation to improve its performance in the market niche. Consequently, the more organisations rely on certain capabilities such as strategy and structure established over time, the more they are likely to recognise new opportunities (Krugman 1994a). A comparison of the characteristics and performance of national business systems of UK, Germany, United States, Japan and China Most countries tend to specialise in specific industries because of the national business systems embraced by different countries (Blackford, 2008). While some countries embrace a communitarian oriented business systems, others adopt a more individualist approach to business. In addition, knowledge also plays a role in the nature of specific industries established by different countries (Blackford 2008). Conversely, the available literature on competitive advantage reiterates that communitarian business systems have a competitive edge particularly in the long-term relationships that allow the retention of knowledge within a firm or corporate group (Blackford 2008). However, the individualistic business systems have a competitive edge in industries that focuses on flexible and short term relationships that avoids the retention of knowledge within a firm. Such business systems are important where there is need to speed up the re-allocation of knowledge (Blackford 2008). On the same note, industry specialisation is more common in developed economies such as US, Germany, UK, Japan and China (Lane & Probert 2009). For instance, the United States is more inclined to two groups of industries that include the hi-tech industries and services industries. Today, the leading IT companies globally are based in the United States. However, the United States appears to be weak when it comes to manufacturing industries that include electronics, for example. As a result, U.S is the leading importer of machine tools globally. The country also leads in the import of passenger cars (Lane & Probert 2009). At present, a larger percentage of automobile sold in the United States are imported. On the other hand, Japan has a strong manufacturing background compared to the United States and mainly specialise on miniaturised products such as consumer electronics and automobiles (Whittaker & Deakin 2009). While the United States is the leading importer of automobiles, Japan, on the other hand, is the leading automobile and machine tools exporter. Japan’s service industry is not also well established compared to the United States service industry (Whittaker & Deakin 2009). Germany on its part has a similar profile to Japan in terms of competitive advantage. Its strength exists in the manufacturing industries that mainly focus on mechanical engineering (Geppert, Matten, & Williams 2002). On the same note, Germany mainly specialises in the manufacture of machines, luxury cars and chemical. Similar to Japan, Germany’s service industry is also weaker compared to that of the United States. However, the country is leading when it comes to the export of machines. With regard to the UK, its competitive advantage is almost similar to the United States profile because of its strength in the service industry. Similar to the United States, UK is also weaker in the manufacturing industries that include machines, automobile and consumer electronics (Geppert et al. 2002). With regard to finance, London holds the leading centre of international finance globally, and most of the reputable financial firms in the global front originate from UK (Andera 2007). Furthermore, the largest advertising agencies also trace their origin in Britain and the country has the top ranked advertisement agency in the world. UK also has a competitive edge in the pharmaceutical industries in terms of holding the larger market share after America, Japan, Germany and China (Andera 2007). Further, UK is also engaged in the export of machines tools but at a less quantity compared to Germany. With regard to the automobile industry, UK lags behind other major economies because, at present, UK does not have a major home based automobile manufacturer (Andera 2007). As an emerging economy that is experiencing staggering growth, China specialises in both hi-tech and the manufacturing industries (Alpermann 2010). Similar to Japan, China is also a leader in the export of automobile and consumer electronics. The country also is weaker when it comes to the services industry (Madar 2009). However, compared to other countries, China has the advantage in terms of access to cheap labour and availability of raw materials ideal for cutting down the production costs. As a result, some companies from advanced nations such as the United States have relocated their production plants to China. However, the policies on trade implemented by the government ensure that the local companies form a partnership with foreign firms (Madar 2009). This allows Chinese firms to gain skills and experience from the foreign firms and in turn improves China’s national competitive advantage (Cooke 2008). This is because, as the local companies learn the technical skills from a foreign firm, they invest more in improving R&D capabilities. Because China needs the technical knowledge of the foreign firms, a reciprocal relationship is created where China also allows foreign firms to venture into it vast local market (Cooke 2008). Compared to other major economies, China is increasingly becoming the manufacturing hub for various manufacturing firms from the Western world. Today, more machinery and equipment are exported to the United States from China as evident in figure 1 (Luca 2011). Fig 1: China’s export of machinery and equipment to the United States A comparison of the performance of the automobile industry in U.S, Germany, UK, Japan and China The manufacture of automobiles in the early years converged in the United States, Europe and Japan; however, because of international competition, other new entrants such as China also emerged (Dicken 2003). In the early years, the performance of Japanese automobile industry was higher compared to the U.S, UK, Germany and China (Coffey 2006). On another note, the performance gap that exists between the UK and Japanese automobile industry, for instance, include different manufacturing practices and organisation structure (Rajah, Sadoi, & Busser 2008). However, both countries in the early years tried to emulate the practices of the Ford Company from the United States (Lazonick 1993). In addition, in the early years, the automobile industry in Japan thrived because of automobile manufacture for both domestic use and global export. In the year 2012, the statistics for automobile manufacture in Japan stood at 9.9million (Witt & Redding 2013). In terms of sales, the United States is considered to hold the largest market for car sales followed by China, Japan, Germany and UK respectively (Cooney 2007). On another note, Japan is considered to have the most competitive domestic market for automobiles. This is because; some of the leading producers in automobile industry are based in Japan. As a result of a competitive domestic market, the automobile producers are motivated to continue improving automobile technologies (Freyssenet, Shimizu, & Volpato 2003). Conversely, China has a policy that enforces strong regulations on foreign automobile companies. As such, foreign firms are required to form partnerships with the local automobile firms, for example, Shanghai VW Automotive (Cooke 2008). With regard to Germany, their automobiles are easily transported for sale in other European Union member countries (Andera 2007). Further, foreign companies also operate in Germany and include automobile firms such as Ford. With regard to automotive engineering, Germany manufactures outstanding automobiles that include, for example, BMW, Mercedes and Audi (Andera 2007). In essence, the competitive advantage in the automobile industry in the five countries is influenced by a number of factors that include demand, production cost, quality and the selling price (Andera 2007). The weaknesses of Diamond Model This model has weaknesses in terms of only focusing on developed economies and ignores how underdeveloped economies can gain national competitive advantage. Further, there is no evidence regarding the assertion that FDI impacts negatively on domestic competition because of the inability of home-based firms to defend their local market (Krugman, 1994a). The role played by the multinational companies is also not addressed adequately concerning the establishment of national competitive advantage. There is also a focus on external rather than internal factors as key influencers of developing national competitive advantage (Krugman, 1994a). The model also ignores the impact of service industries in the establishment of a competitive advantage. The focus on the rivalry alone cannot drive companies to innovate because pressure can also force a company to imitate or adapt instead of embracing innovation (Krugman, 1994b). Conclusion The nature of the global business competition is stiff and nations needs to develop strategies to help home-grown industries to thrive both locally and internationally. As such, the national competitive advantage plays an important role in ensuring that home based industries gain competitive advantage in the global front. Further, maintaining a competitive advantage requires nations to identify the entrepreneurial opportunity by relying on the determinant factors developed, for instance, in the porter’s model. This ensures that a country takes advantage of its opportunities to gain a competitive edge in the global front. For instance, China has managed to gain a national competitive advantage over other countries because of a focus on recognising opportunities both locally and in the global market. References Alpermann, B., 2010. Chinas Cotton Industry: Economic Transformation and State Capacity, Routledge, London. 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