Porters Model of National Competitive Advantage - Essay Example

Porters Model of National Competitive Advantage Introduction Corporate and business strategies are increasingly viewed upon as global strategies. Even if an organization does not choose to participate in the global economy, managers are required to understand the business need and objectives from a global perspective so as to remain competitive. For such reasons, understanding the circumstances existing in the international business environment is seen to be of growing importance. The economies where the firms are highly competitive and tend to influence the international business systems are seen to evolve strongly. For such reasons, it is seen that few economies emerge competitive and more successful than others. Classical theories relating to global trade suggests that competitive advantages arise out of mainly the factor endowments which nations possess. Factor endowments are mainly related to land, labour, minerals, population size and other naturally existing resources. Classical theorists believe that the more the resources or factor endowments held by nations, the greater is the competitive advantages. Accordingly, it is believed that the nations which are most successful possess greater factor advantages. However, overtime a number of theories have evolved in the area of factors which leads towards some economies to emerge as more successful and competitive than others. In the current paper, the Porter’s model of national competitive advantage has been vividly analysed. The objective of the paper is to understand the relevance of the theory in context to different nations, industries and businesses. More emphasis is put upon national comparison. The analysis has been conducted on the basis of appropriate theories, cases and evidences (Clancy, et al., 2001). Discussion Key Theories Michael E Porter’s model for national advantage is derived out of a number of aspects as shown in the following figure: Figure: Determinants of national competitive advantage by Porter (Source: Harvard Business Review, 2015) Porter states that factor advantages can arise from a number of aspects. These can be the presence of strong technology, skilled labour, knowledge and talent, culture of the nation and support received from the government. Each of the elements identified by Porter in their diamond shaped model has been vividly discussed as follows: Factor Conditions Factor conditions mainly include the knowledge base, skill existing amongst the labour force and the extent of technological innovation. Factor conditions may also include the special assets which are held by a nation which are not present in others and deliver it with competitive advantages such as the presence of crude oil, minerals or other naturally existing resources. In case of labour and technology factors, the stock of resource existing at any given time is given less importance than the level to which they are upgraded and utilized. This indicates that technology and labour resources are not of immense value if they are not upgraded as per the changes in the economy. When there are shortages in the resources, nations develop a tendency to invest in innovation and develop ways in which the shortages can be overcome. Hence, it is presumed that it is local disadvantages which lead to innovation and thereby develop advantages in the economy (Furman, Porter and Stern, 2002). Demand Conditions Demand conditions existing in a nation affect the strategy followed by firms for producing different products and services. If the local demand for a given product is larger indigenously than in the foreign markets, then local firm have a greater incentive to manufacture it. Competitive advantage then gets created when the local firms begin to export the products to foreign nations. Therefore, when the local markets are more demanding greater number of products are developed indigenously leading to massive nation advantages in the global economy. In this manner, local demand conditions and firms facilitates in developing a strong global trend. This notion can be held true for many of the developed nations such as Japan and the U.S. Most of the developed nations of the world owe their success to the fact that the internal demand conditions have remained adequately high leading towards firms to produce more (Davies and Ellis, 2000). Related and supporting industries Cost advantages and innovativeness gets affected when support industries are strongly developed. Hence firms are not required to depend upon external firms for acquiring supplies. Indigenous firms themselves are able to support the primary and secondary industries. The strong development of the supporting industries facilitates them into emerging as strong competitors in the global economy. It is normally seen that support industries grow when there exists adequate talent and skills amongst the mass. The existence of supporting firms facilitates efficient and optimal utilization of resources as well. When supporting firms are not well developed, reliance on external organization becomes high. As a result, import values expand, reducing the indigenous competitive advantages. Such disadvantages are faced by a number of developing nations where due to lack of resources, dependency upon other nations for enhancing individual production is immense. Therefore competitive advantages are lost (Porter, 2000). Firm structure, strategy and rivalry Rivalry existing amongst local firms pushes them towards developing innovative abilities and emerges as strong competitors. Due to increase in the rivalry, firms try to maximize their resource utilization abilities. There is an extra push and impetus which drive firms towards developing new products and services and achieve competitive advantages. Similarly, the strategies and the structure of working existing in the firms facilitate the development of cordial and motivating work cultures which leads towards enhanced productivity (Porter and Stern, 2001). The factors present in Porters model for national advantage are interrelated. This means that the innovativeness and competitive advantages will be less developed if there is few number of factors conditions. Similarly, the ability to compete and generate rivalry depends upon the existence of support firms, demand condition and access to resources. Therefore it can be stated that when the interaction of the elements are stronger, it leads to the emergence of some nations as more competitive than others. Porter’s model of competitive advantage for nations clearly states that competitive advantages are created, not acquired. Many nations have different types of natural endowments, however not all of them have emerged into becoming a strong nation. How effectively nations use their resources so as to derive benefits determine how efficient they are. Based on Porter’s theory it can be deduced that a nation’s potency to be successful depends upon how effectively its firms can innovate and create new market opportunities. Most organizations grow because they can sustain against global competition, challenge and pressure. The presence of strong rivals internally, efficient suppliers and high demand from the local customers are factors which lead towards the success of different organizations. Modern age globalised economy requires nations to develop their knowledge base. It is basically the talent and the knowledge pool existing in a nation which leads to their emergence as a strong power (Porter and Cunningham, 2004). Much of the debate in respect to the national advantage is centred on the aspect of how different the factors are viewed upon. The Ricardian theory of competitive advantage states that labour is the prime factor due to which nations either emerge strongly or remain weak (Buhalis, 2000). The theory also suggest that nations which specialize in manufacturing those products which other nations have less competency to produce, lead them towards attaining competitive national advantages. However, this theory may be held wrong as it is seen that most nations overtime develop different types of competencies for enhancing their productive capacities and ease their dependency upon other nations. In contrary to the Ricardian theory, neoclassical economists had stated that focusing on a single factor of production, which is labour, cannot alone lead a nation towards achieving competitive advantages. The neoclassical approach is seen to be in support of many of the aspects pointed out by Porter. The approach sates that monopolistic economies have a stronger changes to succeed and specializations needs to be based upon the resources and the demand existing in the nation for different products. Ricardo’s assumptions in respect to a nations development of competitive advantages was considered to be unrealistic from many perspectives. Other trade and international theories are considered to be more helpful for determining the success of a nation in the international economy (Carmel, 2003). Key Arguments and Comparisons In this section of the paper, efforts have been made towards applying Porters model to different nation and understanding its relevance. The nations are reviewed on the basis of the model suggested by Porter and the elements discussed there in. Germany Germany is held as one of the strongest economies in the current globalised environment. The nation derives its strength from the following intrinsic aspects: 1) Home market is highly demanding and insists upon quality products. 2) High level of education, skills and motivation amongst the workforce which leads to a motivated and confident workforce. 3) Strong political and economic environment 4) Low entry barriers and establishment of trade policies which foster growth. 5) High investments in research and development which aid better technology products and services. The lack of abundant presence of important resources had forced the organizations to develop innovative ways to produce products and services. The nation of Germany depends upon the abilities of its workforce to achieve success. Germans are famous for developing quality products and services out of limited resources and their efficient usage. The nation is not abundant in natural resources and most of their strong industries such as automobile and chemical industry are not based on natural endowments, but upon the strong presence of knowledge and industrial expertise. Due to such reasons, much importance is given by the nation for the education and training of the young mass. This facilitates the development of a highly skilled and motivated workforce who has the capability to steer the economy of the nation towards success. Therefore it can be stated that human capital is one of the most important and the strongest resources held by Germany (Fahy, 2002). A unique quality of the German economy is that their economic strength arises out of small to medium sized organizations. These organizations empower the exports and thereby provide massive revenue and employment opportunities in the nation. The commanding presence of such nations is in the sector of chemicals. The labour management techniques of the nation are also efficient. Managers and employees consider each other as social partners. There are less agitation between the labourers and the management in firms of the nation, symbolizing that the nation has sound union and labour policies. Even though Germany is a strong economy, it also suffers from some weakness. These are essentially, slow acceptance towards changing global economic environment, slow per capital income, and decreasing shares in industries of the world. However, through enhanced outsourcing and development of strong international business ties, Germany is trying to overcome such issues (Smit, 2010). The U.S The American economy steadily grows at an average rate of 3 to 4 percent annually. The primary reason for the strong economic growth is due to the presence of substantial demand for different types of goods and services. The rapid urbanization of even small towns and the development of a strong system of flow of goods and services have facilitated such a growth (Carayannis, Alexander and Ioannidis, 2000). The American economic system is relatively closed. As a result, even when the economy is slow from the growth perspective, it does not cause many negative impacts. Most economic theorists such as Murmann (2003) have stated that the strong revival of the U.S economy post recession period was due to enhanced productive capacity. The economy concentrated upon ensuring that their primary industries are strongly established and remain less dependent upon the growth of other economies. Also it was observed that the spending of consumers had increased rapidly post the economic crisis. As the primary sector was emerging strongly, their supporting industries also began to grow and expand. This created numerous job opportunities, leading to enhancement of the spending power of consumers. It was also observed that the exports in technology and finished products were also high and consistently growing since the last five years. There also has been a significant improvement in the existence of talent and skills in the nation. This had led the nations firms to remain less dependent upon foreign expertise and knowledge (Hedman and Kalling, 2003). Resolution Based on Discussion It is difficult to state one particular strategy or model which leads to the success of an organization in the international context. Different nations based on their resource conditions and competencies have developed differentiated strategies which have facilitated them to achieve success. However, it can be stated that even through different nations follow differentiated strategies, their approach towards achieving leadership and competitive advantages are seen to remain fundamentally the same. From the above examples of the nations of U.S and Germany, it can be deduced that fundamentally the success of both the nations lie in the aspect of innovation (Murmann, 2003). Through innovation, the U.S has developed technologies and systems of production which reduces their dependency upon foreign nations. The same is applicable for Germany. As innovation and research related activities are exhaustively carried out, new economic avenues for revenue generation are recognized and employment opportunities gets created (Lundvall, 2010). This increases the ability of the masses to gain access to quality products and services, which enhances the value of the society. Another import area which both the nation is seen to focus on is the development of the competencies of the young generation through education and training. The fact that existence of strong talent pool leads to specialization of industries can also be held true for Japan. Japan’s high growth in the sector of manufacturing is primarily due to the existence of a large number of engineers. The analysis of the U.S economy also fundamentally proves that the existence of strong demand conditions lead towards the development of indigenous industries which have a strong impact upon the economy. This indirectly also fosters the supporting industries. Another essential factor of gaining competitive advantage is the ability of nations to change in accordance with the international economy. This facilitates in identifying new economic opportunity and taking advantage of the shortage of resources existing in other nations (Kotabe and Murray, 2004). Conclusion Porter’s national advantage model can be effectively utilized to understand the reasons why some nations are able to emerge as strong economies. Of the elements present in the model, it can be stated that demand conditions, factor conditions and firm structure wand rivalry are the most important. These factors tied up with innovative skills and the ability of organizations to rapidly change is what makes organizations successful in the global economy. Modern economists believe that in addition to the factors mentioned by Porter, government support and leadership abilities also play an essential role in developing the economic conditions of a nation. Industries depend heavily upon the financial and corporate regulations set by government authorities. Therefore, it is observed that nations which have a sound political structure have greater chances of becoming successful. This notion however should be supported by a variety of conditions such as the existence of skilled labour, efficient organizations and dedication towards innovation. Reference list Buhalis, D., 2000. Marketing the competitive destination of the future. Tourism management, 21(1), pp. 97-116. Carayannis, E. G., Alexander, J. and Ioannidis, A., 2000. 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