Porters Ideas on National Competitive Advantage - Essay Example

Do Porter’s ideas on national competitive advantage adequately explain the means by which specific nations have achieved economic success? INTRODUCTION Due to the introduction and rapid development of globalization the business executives, policy makers and scholars, at present, have become more concerned about finding a better practicable knowledge of the issues related to the international business and competitive advantage. The globalization has encouraged the search for and recognition of the local and global businesses which are more competitive. This competitive environment has encouraged the firms to be stable and adopt the most appropriate strategy for the benefit of their business and to survive in the industry. Researchers and theorists are continuously striving to realize the distinct characteristics of highly competitive businesses in order to apply those characteristics in the lower profile organizations. Industries and firms are compared, at a global level, in order to evaluate the rankings from the most competitive to less competitive firms. Hence, it may be concluded that the concepts of national and global competitiveness are new concepts in the business world. This paper would discuss the Diamond Model presented by Porter. This paper would further analyze if the model was accurate, correct and applicable under all circumstances (Chandler & Hikino 1990). Do Porter’s ideas on national competitive advantage adequately explain the means by which specific nations have achieved economic success? Porter admits the importance of new trade theories presented by different academics and declares that “A growing literature on the relationship between imperfect competition and trade investigates the role of these and other markets imperfections in determining trade. The basic theme is that virtually every market imperfection creates a rationale for trade even if factor costs are equal across nations” (1990, p, 777). On the other hand, regardless of his positive response for the theories he does not verify these theories as complete and accurate. To share his own knowledge and to contribute in this debate he then proposed his own model. The ‘diamond model’, presented by Porter, for the competitive advantage of nations was designed to understand the factors that may affect the competitive position of a nation in the global market. Porter has described 4 chief factors that collectively create and affect the global competitiveness of a firm in a particular industry. In addition to those 4 key factors, Porter also mentions that the government forces and luck also play their role in national competitive advantage (Smith, Mcsweeney & Fitzgeral 2008). ‘Demand Conditions’ is the first factor of Porter’s diamond model. Demand conditions refer to the domestic demand of the product or service the firm is associated with. Demand conditions do not only include the quantity required by the consumers but also take into account the issues related to the sophistication level of the consumers in a domestic market. It is a common phenomenon that demand of a particular product or service depends on the level of economic development of a country. Demanding consumers play a positive role in the development of the firms. In order to meet the quality criteria and quantity demanded the firm adopts and introduces new techniques to achieve a higher level of efficiency and productivity. The French demand for luxury goods (like cosmetics and fashion) may be taken as an example which developed them into globally competitive. Hence, according to Porter, more demanding consumers in the domestic market eventually lead to a higher level of global competitiveness of the firm (Porter 1990). The second key element of the Porter’s model is ‘factor conditions’. In Porter’s opinion it involves the factors any firm utilizes in its production. Traditional factors of production are also part of ‘factor conditions’ which include land, labor, capital and raw materials which occur in nature. However, he argues that the ‘key’ (specialized) factors (skilled labor, capital and infrastructure) are produced not inherited. Unskilled labor and raw materials (or ‘non-key factors’), in his view, can be attained by any firm and therefore cannot be presented as the factor of producing sustained competitive advantage. The specialized factors require a heavy investment and hence, are not affordable for every firm. As these factors cannot be duplicated easily, they are precious and help to attain competitive advantage. The third element of Porter’s model is ‘related supporting industries’. Here, Porter explains the importance of industries which are directly or indirectly related to a specific industry. He claims that if the supporting industries are more competitive and strong, the focal industry will be more competitive. As these industries are related, they share information, ideas, technologies and services. Hence, the sustainable developments of the auxiliary industries help the core industry achieve competitive position in the global market. The 4th element is the ‘firm strategy, structure and rivalry’. Strategy is the term used to define the proceedings of the firm in order to achieve the preplanned short term and long-term objectives. Growth strategies are expected to achieve a higher competitive position as the internal and external growth of the business is a symptomatic of its health. The strategies of the firm are highly dependant on competition present in the market. The more rivals are present the higher is the risk to lose the consumers. Hence it may be concluded that greater number of rivals in the local market creates a good effect on company’s global competitiveness. He also declares that: “Two additional variables can influence the national system in important ways. These are chance and government.” These factors are included in his model as secondary factors (Porter 1990, 2008). The factors mentioned above are considered to be the specialized elements of Porter’s model of competitive advantage. These factors have the potential to challenge the earlier thoughts about competitive advantage. However, there are certain weaknesses. Considering the first of these secondary factors i.e. chance. In case of Italian tile industry it is questionable if chance played a secondary role in its success. Chance played a major part in the Italian Ceramic industry because it can be said that the energy crisis, in 1973, was the reason of technological advancement might not have occurred regardless of the presence of other factors like domestic rivalry and demanding consumers. The question remains, whether chance played a subsidiary role in case of Italian Ceramic Industry? Porter neglected to explain if the factors involved are created or derived from the general attitude in people’s mind. Porter does not include the people’s attitude as a specialized factor which in real is of paramount importance. The motivation and eagerness in people to work and achieve is significant. Competitive advantage can be achieved by people’s attitude and hence it should be given proper attention. For instance, in case of Germany, the reluctant attitude of people due to the protective welfare system of Government, has led the country towards the stagnation of economic growth. From the case of Germany, it may also be concluded that Government policies and decision play a vital role in placing the country among the most competitive in the world market. The decisions of Government strongly affect its nation and competitive advantage. Hence, government should be placed as a specialized factor rather than an exogenous factor (Porter 2008). An essential component to develop Taiwan’s competitive advantage is the innovation policy, as described by Joseph Shyu and Chia Chiu. ‘Experiences of advanced countries show that the most favorable conditions for innovation include an open and democratic society, a superior national innovation system, and appropriate government intervention’ (Shyu & Chiu, 2002: 369). Porter stresses on the importance of technological innovation. He also agrees with Joseph Shyu and Chia Chiu that innovations help achieving the competitive advantage. On the other hand, Porter failed to explain the role of Government in encouraging innovations. Innovations require a lot of funding and efforts. The failure to develop a new system or technique may risk the whole investment and hence it is considered as hazardous for the business. The profits and losses on innovations are uncertain and hence not affordable for the individual firms. It is therefore required that Government’s policies are made and adopted to facilitate innovations and create competitive advantage. Loan granting, mitigation of taxes, provision of useful information, security of research and its results, promotion of manpower and institutions for technological assistance etc. are included in Taiwan’s current innovation policy. Yet, Taiwan lacks behind in innovation field because of the insufficiency of Government intervention. According to a number of academics the diamond model has some shortcomings. Rugman and Moon claim that the model is not complete because it doesn’t take into account the significance of incorporate multinational activities (International Business Review: 1998). Rugman and Moon propose an addition to Porter’s single diamond model to slot in both national and international variables for the discussion of Singapore and Korea. Singapore and Korea were the two industrialized countries in Porter’s research. In his study Porter predicted that Korea may prosper and achieve and advanced status in the next decade (International Business Review, Rugman & Moon, 1998: 2). On the other hand, Porter foresaw Singapore as an economy which will base on universal and basic features like low-priced labor. However, the results are against his prediction as Singapore is more successful than Korea. From this example of Korea and Singapore it can be concluded that Porter’s diamond model is a sufficient source to examine national competitiveness, however the model have some weak points as it focuses solemnly on the home base. As Rugman and Moon declare “Porter’s narrow view on multinational activities has led him to underestimate the potential of Singapore’s economy” (International Business Review, Rugman & Moon, 1998: 4). Porter’s view judges Singapore as just a production base for foreign corporations. Singapore grabs the attention of these multinational enterprises by providing the fundamental and generated factors like low-waged workers, learned staff and competent infrastructure. Porter does not qualify these primary factors as the key factors of attaining competitive advantage. However, a great deal of improvement and success has been observed in Singapore. This success is noticed greatly as a result of inbound and outbound Foreign Direct Investment. The inbound Foreign Direct investment helps Singapore attract more and more foreign capital and technological advancement whereas the outbound Foreign Direct Investment aids Singapore in achieving the advantages of cheap labor and national resources. All these factors reject the comprehensiveness and correctness of Porter’s model and define some new factors which should have been added to the model. These new factors may be termed as Domestic and International determinants for competitive advantage. This addition would make more sense when there is an increasing trend of multinational corporations. Dunning also recommended to include another exogenous factor i.e. multinational activities (Dunning, 1992). In short, Porter has successfully described the factors which are essential to mould the corporate strategies, industrial cluster and structures of the businesses. But on the other hand, the study reveals that his model is incomplete in order to provide a clear picture of a country which deals more in the international market than just selling to other countries (exporting) from a home base cluster. The increasing trend of multinational corporations and increasing involvement of nations in the international market has made it indispensable to include this factor in the Porter’s Model. The model is not worthless itself but has some weaknesses. If these weaknesses are overcome this model can work effectively in investigating the competitive advantage of nations (Smith, Mcsweeney & Fitzgeral 2008). Conclusion Porter’s theory may be taken as a great contribution in the debate of Competitive advantage. The diamond Model is applicable to analyze the national competitiveness to some extent but it is not applicable in all cases. There is a room for improvement in this model. A number of factors are required to be added in this analysis. Moreover, the examples explained above clearly show the weaknesses and also demand for a modernized model. Porter’s persistent claim that nation’s need to have a strong diamond in their home base in order to achieve competitive advantage is faulty. Government’s role in creating a competitive position is much important and the efforts to create innovations without governments’ intervention is also risky and to some extent unfavorable for the investors. Although there are some weaknesses in Porter’s model, it cannot be qualified as completely ineffective. It still has its importance and it paved way for new ideas and developed interest among the researchers. References CHANDLER, A. D., & HIKINO, T. (1990). Scale and scope: the dynamics of industrial capitalism. Cambridge, Mass, Belknap Press. Chiu, Yi_Chia & Shiyu, Z. Joseph (2002) Innovation policy for developing Taiwan’s competitive advantage, Oxford: Blackwell Publishers. MOON, H. C., RUGMAN, A. M., & VERBEKE, A. (1998). 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