Porters Diamond Model on National Business Systems - Literature review Example

Porter’s Diamond Model on National Business Systems Introduction As a model, the Porter’s Diamond, helps in terms of analysing and improving a nation’s performance in a competitive global market. In regard to the conventional economic theories, the factors that influence competitive advantage include the factors of production such as land, human resource and the natural resources. Further, traditional economic concepts also consider the location of a business as a determinant for competitive advantage. However, this approach is more proactive in that it considers factors that include a company’s strategy its structure and competition. This approach further looks at the factors that increase a product’s demand. In addition, in terms of identifying competitive advantage, the Diamond Model also considers the existence of supporting industries and factor conditions. In essence, this Model attempts to demonstrate how nations or business systems can gain a competitive edge regardless of the non-existence of resources to improve productivity. On another note, governments rely on this model to encourage firms to be more competitive and in turn, improve the performance and the benefits a nation can gain by having a competitive advantage. As reiterated by Grant (1991, p.535), industrial development in any country is not sustainable depending solely on the factors of production endowed in a country. In essence, their abundance according to Grant (1991, p.538), has a negative effect on a nation’s competitive advantage. This paper explores Porter’s Model in regard to whether it impacts positively or negatively on national business systems with a focus on China automobile industry. Porter’s Diamond Model in relation to national business systems Different nations have different national characteristics, and as such, countries need to identify where they can succeed with a business venture. This means that, nations need to assess where they have an advantage business wise and develop internationally from that point. However, there is a disagreement among scholars in regard to the applicability of this Model in the developing countries. The competitive advantage of any nation in regard to success with business systems does not depend on the resources a country has, but a strategy that differentiates a nation’s business systems and provides a comparative competitive advantage. Consequently, other than a country having the natural resources and other factors of production, there is need for interconnected and advanced factors between a nation’s business systems. This involves looking at factors that promote production such as the available infrastructure or inputs used in production. While a country may boast of abundant human resources, what is critical to consider in terms of achieving success with national business systems is the skills (Rugman & Verbeke 93, p.283). In addition, a nation’s natural resources and its competitive advantage depend on improving the quality and cost of such resources. In order to gain a competitive advantage, it is important to implement new advanced factors in the business environment that includes advancement in technology, improving skills among the lab or force and government support for the local industry. Further, capital is another factor for businesses to achieve competitive advantage by applying the Porter’s Diamond Model. This needs nations to improve on savings and the structure of capital market (Rugman & Verbeke 93, p.288). Since the global market has embraced liberalisation, foreign firms compete for a share of market with local firms or industries. As a result, where a demand for a product locally improves, then the business systems locally also needs to improve on quality of products offered to the buyers. This plays an important role in improving the local based products in foreign markets. Where there is a high demand locally, this is an opportunity for growth, quality improvement and innovativeness by the local industries. For example, the Japanese local consumers have developed a trend of demanding for electronics and electrical gadgets compared to the western nations. This probably explains Japan’s success in electrical and electronic industry. Further importance in terms of achieving success with this Model, relate to an improvement by local suppliers and supporting industries. This improvement involves a network where industries in the same sector compliment one another’s activities. In essence, this improves the competitiveness of local based firms. For example, the shoe industry in Italy boast of related firms that helps to improve the competitive nature of Italian shoe business both locally and internationally (Davies & Ellis 2000, p.1189). In any nation, it is important for businesses to capitalize on the opportunities that create a competitive advantage. For instance, a fierce competition among local based businesses improves innovation and productivity in general. As a result, the improvement also impacts positively on a country’s competitiveness. In addition, a concerted effort in both local and international competition contributes to local firms joining the foreign market to expand their business prospects. On the other hand, the government policies play an important role in influencing a nation’s competitive advantage. In regard to the Porter’s Model, the government policies can impact on factor conditions as a result of implementing subsidiary policies or capital market policies. The government further, has an influence on conditions related to domestic demand in terms of implementing the required standards that target customer needs. There are also laws put in place such as tax laws which impacts on the supporting industries and organisation’s structure and strategy. However, it is important to note that an economy that is market oriented is more efficient compared to a market under the control of the government (Davies & Ellis 2000, p.1190). Conversely, it is important to note that joint ventures encouraged by a government that targets competitive firms globally helps in transferring technology and thus improving the productivity of locally based firms. Countries should further exploit chances that can improve competitive advantage such as pure inventions and shifts in terms of demand in foreign markets. This in essence has a role in altering competitive advantage in most business sectors. As explained by Grant (1991, p. 542), emphasis is needed in promoting innovation and taking chance of the presenting opportunities in the global market. Porter’s Diamond Model also emphasise the need to establish trade associations that helps in creating strong capacities considered to enhance competitiveness. For instance, businesses in collaboration are more innovative compared to firms focusing on individualism. This is because working in a cluster enhances communication and improves knowledge base for managers of various business entities (Davies & Ellis 2000, p.1206). Analysis of China’s automobile industry using Porter’s Diamond Model In the 1950s most businesses in China were under the auspices of the government and resources were managed by the central government. However, meeting the domestic demand for products became a problem because of lack of resources and inexperience in propelling economic development. In such a situation, the country was forced to rely on imports particularly products that required advanced technology to produce. This further created a trade deficit for the China government in regard to the international business. As a result, the government was forced to introduce a number of measures meant to improve local based production. However, while giving freedom to various industries, the government maintained a protectionist policy on industries it considered important to the country such as the automobile industry. The new policies worked by improving domestic production and bringing in FDI; however, the country still experienced problems in regard to its business systems. This is because, as the government continued to protect certain industries, these industries became more dependent on subsidies thus; reducing their competitive level internationally (Barclay & Gray 2001, p.333). The country also had a poor standard infrastructure that did not meet the required global standards thus; limiting the ability of most of China industries in terms of improving production and efficiency. As a result of a need to for FDI to propel economic development in the initial stages, the government realized the need to invite MNEs who were interested in joining the Chinese domestic market. This took place in the form of joint ventures that assisted in terms of transferring knowledge. In essence, this new policy revolutionized China’s motor industry as a result of contributing to the establishment of three large automobile manufacturers in China. In addition, the local based parts suppliers were able to work with these industries and other automobile assemblers in the global arena. Since China is a new entrant in the free market economy, numerous changes have to take place in the country’s industry structure. This involves embracing reforms politically and economically so as to conform to the required global standards in regard to international trade. On the other hand, a major issue in analysing China’s automobile industry involves a look at the impact of the government. The government’s power in controlling aspects of business is one of the facets in Porter’s model that sheds light on how such power affects an emerging economy’s competitiveness. The automobile industry in China plays an important role in China’s economic development as a result of attracting prospective investors both locally and internationally (Barclay & Gray 2001, p.352). As a result of a decline in the sales for automobile globally, the global leaders in car making that include the General Motors from USA, are looking for automobile markets with potential such as China. Compared to the U.S or Western Europe, the Chinese automobile market is not saturated. The domestic sales of cars in China have continued to grow; however, this growth has not improved China’s level of competitiveness in the global market. The local demand has risen as a result of improved infrastructure, a reduced protectionist policies and China’s entry to WTO. In terms of factor conditions, China’s government has improved its investment on the necessary infrastructure so as to eliminate the problems associated with low infrastructure. For instance, the government has invested in transport projects thus increasing demand for motor vehicles locally. Further, the improvement in infrastructure also improves efficiency in regard to the existing supply chain. On the other hand, since technology and other important skills are transferred to China by foreign partners from North America and Europe, this plays a role in improving the competitiveness of China’s labour market (Agarwal & Wu 2004, p.279). A continued investment in R&D also plays a role in improving an industry’s competitiveness in the global market (Barragan 2005, p.36). However, investment in R&D by China’s automobile industry is still low compared to the leading motor vehicle assemblers in the global arena. In essence, the country needs to improve R&D in areas such as improving design capabilities to gain a competitive edge globally. Another factor condition, relates to stabilising the country’s financial market and make funds available for investment. The reduction of controlling power by China government in regard to the capital market has ensured there is capital freedom in the motor vehicle industry in China (Eun & Lee 2002, p.7). Considering demand conditions, China still has a huge demand locally for automobile as a result of the rising population of middle class citizens. In addition, the consumer demand for vehicles in China can improve when concessions are made in regard to tax reductions and other restrictions associated with the car market in China. In essence, the demand for cars in China is on the rise and this provides the country with a competitive advantage in the global auto industry market. In addition, supporting firms dealing in automobile sales domestically are embracing new strategies that enhance competitiveness across China and even extends to searching for market in Inland China (London & Hart 2004, p.356). When it comes to related and supporting industries, an increased production in the auto industry also contributes to an improved supply chain. This includes the emergence of multinational part suppliers who collaborates with the domestic suppliers to meet the demands from auto assemblers. Improving domestic car making in China, has also focused on standardizing domestic supply network. However, while the auto industry recognizes the need to improve related and supporting industries, the local suppliers lack competitive advantage. As such, there is need to focus on economy of scale and improve in terms of R&D (London & Hart 2004, p.361). Conversely, in terms of Firm Strategy, Structure and Rivalry, it is clear that leading automobile industries have invested heavily in the emerging markets. This has improved production and improved the standards of China’s manufacturing plants. As a strategy, leading firms are not only attracted to sales they are likely to generate, but also the low cost of production. China embraces the need to establish business groups within the motor vehicle industry. This in turn helps to concentrate foreign investment that plays a role in establishing a competitive advantage for China’s automakers (Zhang & London 2013, p.98). In regard to adapting to new markets, automakers inside China are considering the implementation of strategies that is similar among the leading firms in the country. This includes expanding operations globally and launching models concurrently across different locations globally, while maintaining similar standards. In addition, due to the importance placed on design, and other factors that include improving customer relationship, most assemblers have decided to engage in associations that facilitate connections to financial institutions, suppliers, researchers and customers. This explains the reason for automobile firms in China creating business groups. In addition, Chinese firm collaborating with other auto firms outside China plays a role in improving technology and skills required in managing the automobile industry. In essence, a strategy in improving competitive advantage of China’s auto industries involves engaging in joint ventures with foreign automakers. However, while relying on foreign partners, it is important to emphasise local based R&D capabilities (Stejskal & Hajek 2012, p.345). Conclusion While there are traditional economic concepts to enable a country gain a competitive advantage, Porter’s Diamond Model ensures that a country utilises its resource base more efficiently. The Porter’s Model relates to the achievements of most business systems as evident with the China’s automobile industry. This model in essence, enables emerging economies to improve the use of their nation’s resources to gain a competitive advantage in the global market. In essence, emerging and developing countries can capitalise on the skills and experiences of foreign partners to improve their domestic market. This provides the local market with impetus to expand into the international market. References Agarwal, J., & Wu, T 2004, ‘China’s entry to WTO: global marketing issues, impact, and implications for China’, International Marketing Review, Vol. 21, no. 3, pp. 279-300. Barclay, L. A., & Gray, S. J 2001, ‘Upgrading the diamond of developing countries through inward FDI:The case of four MNEs in the information service industry of Barbados’, Management International Review, Vol.41, no.4, pp. 333-356. Barragan, S 2005, Assessing the power of Porter’s diamond model in the automobile industry in Mexico after ten years of NAFTA. Unpublished master thesis, University of Lethbridge, Canada. 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