Porters Diamond of National Competitive Advantage - Case Study Example

Michael Porter’s ‘Diamond’ of National Competitive Advantage Introduction Competitive advantage is one of the major business function all the organizations or the nations are looking for. It is difficult to achieve competitive advantage in the current world because of the heavy competition for making more profit and also to stay in the market. The current market is filled with hundreds of products of same calibre. For example, the current mobile phone market is filled with lot of similar products from different brands. The consumers are actually confused in selecting their products because of the similarities in quality and price. On the other hand, Apple has recently introduced touch screen phone which was a variety in the market and they achieved competitive advantage because of their new product. Same way many automobile manufacturers have already started to think in terms of manufacturing electric cars instead of petroleum cars, anticipating the oil crisis in the near future itself. In other words, the touch screen phones and the electric cars will give the competitive power to such product manufacturers. Globalization has intensified the competition between nations and organizations because of the wide opportunities available in the international market. It is not easy for a company or nation to achieve competitive power easily. They need to focus on certain strategies to achieve competitive power. 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. This paper focuses on the various features of diamond model and its impact on national policies in achieving competitive power. Porter’s Diamond model for national competitive advantage (Krishnamurthy & Ramji, 2007) Firm strategy, structure and rivalry, supporting industries, demand and factor conditions are identified as the four major parameters which can affect the competitive power of a nation or a firm, by Michael Porter. He has explained his theory of competitive advantage of nations with the help of a diamond model as shown in the figure above. Strategy, Structure and Rivalry Strategies are the backbone of an organization or nation. Poor strategies always create problems to the nation or organizations whereas good strategies always improve the competitive advantage. For example, 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 the nation or the government 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 firm plays a vital role in controlling the competitive power. Some of the organizations function in a democratic way whereas others function in an autocratic manner. A third segment of organizations 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 policy making meetings. Such organizations are giving too much importance to the theoretical frameworks, neglecting the practical theories. For example, employees have better skills and knowledge in the production areas, compared to the CEO or the top managers. If the company take some decisions on production matters without seeking any advice from the employees, they may often fall in deep trouble. On the other hand, the employee representative can advice the management on production matters better than anybody else and their participations in the board meetings may help the organization in avoiding unexpected problems and thereby increasing the competitive power. Direct competition impels firms to work for increases 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 act properly. Rivalry is the force required to the organizations to break their inertia. For example, Microsoft enjoys monopoly in the operating system software market. They have no threats from any competitors at present. Computer users across the world forced to pay heavily for the Windows operating systems. Many people suffered a lot because of the Vista version of Windows earlier because of the absence of any other substitute product. On the other hand, if any substitute product, equally competent with Windows was available in the market, Microsoft will never introduce Vista like faulty operating systems in the market. On the other hand in the mobile phone industry rivalry or competition is heavy so that the mobile phone manufacturers forced to invent new products virtually in every month. Related or supporting industries Many people have an illusion that the competitive power of a nation or organization is purely an internal matter. They are forgetting the fact that the collapse of some of the big American organizations has affected many other organizations worldwide. 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. Demand conditions Demand makes an organization or nation more competitive. For example, Japanese products like the vehicles and electronic goods have higher demand in the world market because of higher quality whereas the Chinese products also demanded more by the consumers because of cheaper prices. Both China and Japan have better competitive advantage in the world market because of high demand even though their products have contrasting quality and prices. Factor conditions 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). India is a heavily populated country, blessed with lot of educated and unemployed people. Globalization has opened immense opportunities for the unemployed in India as the American firms started to utilize their skills by outsourcing jobs to India. Moreover many Indians were able to find employment in many of the overseas countries like Middle East, America, and Europe as well. Thus the Indians were able to utilize their skilled labour force for their competitive advantage. Diamond’ model and national policy The governments should encourage change, promote domestic rivalry and stimulate innovation in order to increase their competitive power. No firms can exist in the current business world with traditional business principles and products. It is foolishness to think that a traditional radio or tape recorder may move well in the current market amidst the advanced televisions or computers. Science and technology has developed a lot and so are the business concepts and products. Government should neither stay away nor interfere too much in the policy matters of the organizations in order to increase the competitive power. Complete avoidance of control on organizations by governments may force the organizations to engage in illegal activities to achieve more profits whereas over involvement of government on organizational policy matters will cut down their competing abilities. Governments should act just like a catalyst in chemical reactions, in company matters. In other words, governments should create a supportive environment for the organizations to compete effectively in the domestic and foreign markets. Governmental policies should never create any barriers to the progress of a firm and at the same time government should ensure that the firms are not taking any undue advantages. For example, many of the industries are causing environmental problems. The recycling or safe deposits of the wastes produced by the industries may be an expensive exercise for the firms; but the governments cannot allow such things which are adversely affecting the environment. Under such circumstances, the governments should provide guidance and help to organizations for the safe deposal of industrial wastes. Conclusions Michael Porter’s diamond model for national competitive advantage was successful in defining national competitive power with the help of four parameters; firm strategy, structure and rivalry, supporting industries, demand and factor conditions. Conventional economic theories were rewritten by Michael Porter in order to give them a new face, required for the current world. Change is happening everywhere and business sector is one field where the impacts of change are instantly visible. Governments cannot stay away completely from organizational matters; they should guide the organizations for improving their competitive power. Competitive power of government or the organization depend on the flexibility or adaptation, these entities can exercise with respect to the changes happening in the world. References 1. Diamond Model and Clusters, (2009) Retrieved 20 December 2009 from http://www.12manage.com/methods_porter_diamond_model.html 2. Hosking Patrick and Robertson David, (2009), Dubai in deep water as ripples from debt crisis spread, Retrieved 20 December 2009 from http://business.timesonline.co.uk/tol/business/markets/the_gulf/article6934261.ece 3. Krishnamurthy Praqhlad& Ramji Lavanya, (2007), Porter’s Diamond Model & Clusters, Retrieved 20 December 2009 from http://www.google.co.in/imgres?imgurl=http://1.bp.blogspot.com/_RRH3vmny2gI/Rz9OcQqCw_I/AAAAAAAAAMY/aXdqc__2PhY/s400/picture_porter_diamond.gif&imgrefurl=http://fmcg-marketing.blogspot.com/2007/11/porters-diamond-model-clusters.html&h=270&w=400&sz=56&tbnid=9frl2xHK6EjooM:&tbnh=84&tbnw=124&prev=/images%3Fq%3Dporter%2527s%2Bdiamond%2Bmodel&usg=__mInI2dX6LzSBFEOhQ7Z7PubQt4s=&ei=OTwuS9KhKoHg7APp5bWNBg&sa=X&oi=image_result&resnum=4&ct=image&ved=0CBAQ9QEwAw 4. Porter’s Diamond – Determining Factors of National Advantage,( 2001), Retrieved 20 December 2009 from http://www.themanager.org/pdf/diamond.pdf 5. Quick MBA, (2007), Porter’s diamond of national advantage, Retrieved 20 December 2009 from http://www.quickmba.com/strategy/global/diamond/ Read More