Porters Diamond Model - Essay Example

?Evaluate Porter’s concept of the ‘diamond’ as a tool for analyzing the competitive advantage of nations, assessing its theoretical coherence and empirical support. Table of Contents Evaluate Porter’s concept of the ‘diamond’ as a tool for analyzing the competitive advantage of nations, assessing its theoretical coherence and empirical support. 1 Table of Contents 2 Introduction 3 Porter’s Diamond Model 4 Factor Conditions 5 Demand Conditions 6 Firm Structure, Strategy and Rivalry 7 Related and Supporting Industries 8 The Role of Chance 10 Role of State 11 Conclusions 12 References 14 Bibliography 15 Introduction Competition among nations is an age old traditions that has been in place since the early Greeks and Romans. Nations have competed for resources or to establish their supremacy over others. Historical evidence for this can be traced to the age old rivalry of England and Scotland to the present day rivalry between USA and the Soviet Union in the cold war. However in the present context nations are fighting over the aspect of economic power which is the backbone for success to a nation. An economic might implies a strong nation with enough resources to sustain its population or to maintain a strong military power. The case of United States of America is a classic example in this regard. The nation has the unique status of being the sole economic and military superpower of the world. There have been numerous theories to suggest as to what may be the possible reasons for such supremacy. It has been widely stated that the prosperity of a nation is built and generated over a period of time rather than being acquired. Michel Porter (1990) also stated that the prosperity and success of a nation is not created by virtue of its physical resources which are a far critique from the laws of economics. Alternatively it has been argued that the competitive advantage and prosperity of a nation in the modern world depends on the ability of the nation to constantly develop and create new ideas which are distinct from the others (Porter, 1990, p.73). The case of Japan is a classic example in this regard, as it has emerged as one of the world’s mort prosperous and successful nations without having access to key resources. A deeper analysis into the success story of Japan reveals the innovativeness of its business organizations to deliver more value to the products. This value results in creating economic value and goodwill. Numerous examples of innovation can be traced to the nation including success story of organizations like Honda, Toyota and Sony which have created a competitive advantage and have carved a niche for themselves as well as the nation of their origin. Innovativeness of the nation is also reflected from the fact that successful management techniques like Kaizen which have become the standards for present day business organizations (Ankli, n.d., p.233). The present study would analyse the competitive advantage of China in its pursuit of being and economic and military superpower. The choice of the nation assumes significance considering the fact that it is the fastest growing economy of the world. The growth of this nation has largely been attributed to the skill set of its large labour force which offers a supply of cheap labour. The nation has emerged as a hub for manufacturing with almost every major organization having its manufacturing facility in the nation. Another important aspect apart from the labour force is that of government policies. The liberalisation policy of the nation along with the unique application of the aspect of Special Economic Zones has transformed the nation into the fastest growing economy of the world having an annual GDP growth of approximately 8.7 percent as of 2009 which is being valued at approximately 4.814 trillion US dollars as of 2009 (US Department of State, 2010). The following sections would try to analyse the competitiveness of the nation on the basis of the Diamond model proposed by Porter as well as a comparative analysis with other nations. Porter’s Diamond Model Michael Porter proposed a model to highlight the competitiveness of nations. This model was stated as Porter’s Diamond Model which is based on four factors namely, Factor conditions, demand based conditions, strategy and intensity of competition and finally the other related and support based industries (Walker, 2003, p.174). The figure below shows the Diamond model of Porter for assessing competitive advantage. Figure 1: Porter’s Diamond Model (Source: Ganne & Lecler, 2009, p.32) The importance of the model lies in the fact that these factors help in determining the competitive advantage of nations in supporting their industries. Factor Conditions Factor conditions as outlined by Porter’s model include a nation’s status in specific areas such as labour force, infrastructure, macro economic conditions etc. China is the largest populated nation of the world having a population of approximately 1,336,718,015 individuals as of 2011. The nation has a labour force comprising of approximately 819.35 million as of 2010 (CIA, 2011). However in spite of the advantages of having a large population, critics have also pointed out that population is not a critical factor for success of the nations. The example of Japan, UK clearly indicate that even in the absence of a large population or access to resources as is the case with Japan, nations can achieve competitive excellence. It has also been observed that nations like Bangladesh which have a high density of population have not been able to provide even the basic infrastructure to its citizens. Infrastructure of a nation has wide implications on the nation’s competitive advantage. Infrastructure projects not only create a good impression but also enhance investments and boosts consumption. Dubai is a shining example in this regard; the city has made rapid developments in infrastructure and has emerged as a global tourist destination. These factors highlight the importance of the factor resources for ensuring a nation’s competitiveness. However it can also be concluded that the key to success lies in innovation which is the backbone of success for nations. Demand Conditions Demand conditions include the consumer demand for the products of industry and services. Domestic demand for goods and services reduces the risk of indigenous industries for a nation. Presently most of the products developed in China have their markets based across US and Europe. However, with the large population base and rise in disposable income domestic demand for goods and services is expected to grow in China for the forthcoming years (Bijian, n.d., p.3). The case of India is a shining example where domestic demand has created competitive advantage of the nation. Most of the products and services produced in India are meant for the Indian consumers in the domestic market. The indigenous demand for goods and services meant lesser reliance on the foreign markets. This helped the nation to sustain favourable growth even during times of global recession when the consumption declined in the Western nations. This was one of the reasons as to why the nation was still able to maintain the growth momentum during adverse years. Firm Structure, Strategy and Rivalry As the name suggests this aspect of the diamond framework relates to the extent of rivalry among firms and a nation’s competence. Government has a major role as the competitive forces are largely determined by the competitive laws and antitrust policies which are direct impacts of government decisions. Figure 2: Extent of Rivalry of Firms and Competitive Advantage of Nations (Source: Porter-a, 2001, p.7) China faced a reduction in demand for goods and services during the period of 1970- 1980’s. The government proposed policies that led to the growth of consumer industry in India. The government policies also included aspects which boosted the participation of non-government organizations. The government allowed the firms to sell the excess products at rates which were over the market rates. This led to a flurry of investments by major organizations which enhanced the competition. The impact of these policies led to greater industrial output, reduction in prices, and abolition of monopolistic competition which led to development of the economy of the nation as a whole. A stark contrast can be noted from the example of Brazil where the Latin American nation protected its industries from competition which led to the indigenous industries remaining in a stage of infancy. Lack of competition did not allow the firms to excel in their operations thus reducing the output and the growth of the economy (United Nations Conference on Trade and Development, 2009, p.11). Related and Supporting Industries Related and support industries mainly constitute the suppliers who supply components to the larger industries. These ancillary units generally determine the innovativeness of the industry as they form the original equipment manufacturers. This is one aspect that has a negative impact on China’s competitiveness. The suppliers in China mainly derive profit by virtue of low cost which is in turn also low in aspects of quality. This is perhaps the reason as to why many toys manufactured in China are banned by Western nations as they are low in quality and are manufactured from cheap stuffs which are injurious to health. A sharp contrast can be found in the footwear industry of Italy where the suppliers are largely innovative and lay stress on quality. Global excellence in their business processes imparts a competitive advantage to the footwear manufacturers which leads to national competence (Porter, 1990, p.82-83). Following are some of the debates, issues and criticism with regards to the competitive advantage of nations and the national diamond. Porter’s works on competitiveness of nations have been successful in influencing the strategic thinking, business performance analysis and economic development of nations widely. A large number of his cases have provided insight into several regions’ competitiveness. In fact his theories have been used largely for identifying and analysing the competitive advantage of regions. However, several criticisms have also been raised against his model. Criticisms have primarily emerged on account of Ohmae (1996), argues that “regions are replacing nations as the engines of economic growth” (Stimson, Stough & Roberts, 2006, p.208). Carnoy (1993), have also pointed out that globalisation necessarily means that the multinational firms and organisations are operating largely out of the realm of the state. He primarily wants to emphasise on the fact companies can create competitive advantage in a region by making alliances with another region in order to leverage its competitive strengths and overcome its competitive weaknesses. However, this does not necessarily mean that the nation state is no longer competitive. The nation state can significantly influence the environment of the places where the multinational firms choose to operate. This is especially with regards to the location and the scale of production and investment (Stimson, Stough & Roberts, 2006, p.208). Another aspect of the model concerns the sustainability of competitive advantage of firms. It is not sufficient for a firm to attain competitive advantage; it is also required to sustain it by the process of upgrading and widening. Factors leading to competitive advantage are also required for sustaining that advantage. This includes making investments in institutions undertaking research and development and generating new ideas; demand composition, extent of domestic rivalry and the extent of interaction between different factors of the diamond (Reinert, Rajan, Davis & Glass, 2009, p.211). Another major criticism levelled against the model is that it fails it is not able to adequately address the role played by multinational organisations in determining the national competitive advantage. Dunning (1993) has argued that it was a mistake to consider the advantages of companies on the basis of their home country’s competitive advantage. The multinational companies may derive competitive advantage from the national diamond prevailing in the other countries as well, not only from the home country. In other words the weakness of the model revolves concentrates on the fact that the advantages of firms can be developed only till the time they engage in the foreign direct investments which can then be transferred to the other branches. This fact ignores the fact that multinational companies already engaging themselves in FDIs enjoy from having value added activities in multiple locations and from having a common governance (Reinert, Rajan, Davis & Glass, 2009, p.211). The Role of Chance Chance implies conditions or factors that are beyond the control of business organizations or national governments (Bian, 2001, p.41). These factors are generally external based events or happenings which are not included in the purview of national governments. This includes new inventions, technological breakthroughs, war between nations, economic crisis like recessions etc. The aspects are known to change the structure of an entire industry segment or even the national economic parameters. Chance events also play a major role in the factor conditions of an economy. An example in this regard is the impact of economic recession on the economic development of nations. The economic downturn led to downfall of many large corporations including giants like Lehman Brothers; bear Sterns etc which were once considered to be industry benchmarks. Nations like Japan, USA which are economic superpowers showed negative growth rates. This had widespread implications on the overall economy as credit markets shrunk which prevented expansion plans of the business organizations. The cyclical chain of events led to a fall in disposable income levels which reduced the consumptions levels in the society. Firms faced situations of excess supply over weak demands. This led to a series of price cuts which led to dip in profit margins. The spiralling effects of all these aspects affected each of the components of Porter’s Diamond model. Events like war also cause widespread damage to the economy of a nation. This is evident after the World War 2 which resulted in devastating effects on the economies of nations like Germany, UK etc. Role of State The role of state includes the role of government in shaping policies that govern the growth and development of a nation. The role of government is largely has drawn the attention of many critiques. A particular school of thought states that it is actually the government that determines the development of a nation. They see the role of the government as a central point in the competitiveness of nations. The government according to these individuals formulates policies that directly affect the demand and supply dynamics of the nation. However critics also state the role of invisible hand and the notion of free markets which largely underplays the role of the state in analysing the competitive advantage of nations (Porter, 1990, p.87). In case of China both the aspects of the critiques holds considerable importance. China’s growth has been largely fuelled by the liberalisation policy that has been adopted by the government (Wu, 2004, p.10). Much of the economic growth of the nation is contributed by the foreign manufacturing industries which have been set up on the Special Economic Zones (SEZ). These SEZ’s have been attributed with the growth story of China are a direct consequence of the role of government. The government has played the role of an initiator which is in sharp contrast with the views of Porter who largely ignores the aspect of government’s role in shaping the economic development and competitiveness of a nation. The case of Japan however reflects contradictory views; in this case the government largely plays the role of a facilitator as it believes that competiveness of the nation is largely related to the efficiency of business organizations. Government just acts as an initiator or a facilitator to enhance the competitiveness of the organizations. This is reflected from the large scale innovations shown by organizations like Toyota, Sony etc which have generated competitive advantage for the nation (Porter, 1990, p.87). There has been extensive debate on the extent to which government intervention has been successful in enhancing the competitive advantage of a region. Advocates explain the situation citing examples of Japan and Korea where government has proved to be extremely useful. However, the policy has failed miserably in the Western European Governments. The same policy did not work for the electronics’ industry in Europe (Reinert, Rajan, Davis & Glass, 2009, p.210). Conclusions The analysis of the aspect of national competitiveness is a very broad term and includes diverse areas. National competence is a function that includes all the major stakeholders including a nation’s access to natural resources, government policies as well as role of individual institutions. Nations like Japan have shown the world as to how nations can achieve competitiveness by innovations without having any access to natural resources. The case of China in particular is of considerable importance considering the fact that the nation’s development can be linked to all these factors. The rapid strides made by China can be linked to government policies as well as the access to a large resource base which has made it the manufacturing hub of the world. However a deeper analysis also reveals that the nation scores poorly on aspects of innovation and quality standards. The key to success however lies in a critical amalgamation of skill sets, innovations as well as government policies that would help a nation to derive competitive excellence. Innovations supported by government policies can do wonders for a nation even if the nation does not have access to a large resource base. However the role of resources cannot be downplayed as it is highly critical in shaping the development and competence of a nation. Hence a critical mix of these factors would surely ensure a sustainable competitive advantage for a nation. 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