Porters Model of National Competitive Advantage - Essay Example

Porter’s Model of National Competitive Advantage Introduction: Micheal Porter- A Harvard’s professor, his model of national competitive advantage is one of the highest acclaimed works in the world which answers many questions about the economics and managerial sciences. He presented this model in his book ‘The Competitive Advantage of Nations’ in 1990 in which he discussed the reasons why some nations, social groups and economic institutions advances than others. His work focused on the collective competitive advantages of the firms in the nation rather than the performance of the individual firms. The orientation of his work is positive rather normative focusing on the international patterns of competitive advantage. He developed this model by combining theories in the fields of strategies to compete and international economics and performed an inductive and deductive analysis. Porter’s model was a result of the analysis and the study of 100 industries in 10 countries which included counties from Europe, Asia and America, regarding their competitive performance. His work showed how industrial competiveness with a different insight can be incorporated in company’s strategy. Porter used strategic management theories and analyzed them with international trade and economy. (GRANT. 1991; CAVUSGIL, KNIGHT & RIESENBERGER. 2008) The Theory: The book emphasizes on the fact that the national competitiveness is determined by the firms rather than the nations. The theory suggests that the influence the nation has on the competitiveness of the firms depends on the firm’s competitive success that the environment built over time. The nation acts as a ‘home base’ for the firms, these home base helps in developing the firm’s strategy, culture, character of its management, the availability and quality of resources, technology and helps it in establishing prior to its expansion internationally as the firms grow domestically before they plan their expansion internationally. The theory basically analyses the characteristics, rather four variables of national environment which are the basis of competitive advantage and determines firm’s ability to compete and sustain itself in international markets. The Porter referred these variables as ‘National Diamond’. These four variables are firm’s strategy structure and rivalry, factor conditions, demand conditions and related and supporting industries. The description of these factors is detailed below: 1. Firm’s Strategy, Structure and Rivalry: This refers to the nature and extent of domestic rivalry in an industry and conditions in a nation that influences firm’s establishment, management, organization and execution. Porter highlighted the characteristics that determine the patterns of competitive advantage in an industry; these characteristics are firm’s strategies, managerial practice, individual behavior, structures and goals etc. For example some Italy firms are leading design-intensive firms of the world in furniture, textile and fashion; their flexibility and adaptation of new trends are an important source of competition. Domestic rivalry and creation of competitive advantage are closely related, the firms are pressurized to innovate, improve and cut costs if there is extensive competition in the industry. The firms not only compete for market share and customers but also for human resource, technological leadership, excellence in product design and quality etc. The rivalry and competition between the domestic firms is more intense than with the foreign firms because they compete from one common national platform therefore domestic rivalry can play a crucial role in promoting competitive advantage. The examples of such intense domestic competitions can be seen in Japanese electronic and automobile markets which because of the domestic rivalry have gained an edge over the international market. 2. Factor Conditions: This refers to the nation’s position in availability of factors of production like land, labour, capital, natural resources, technology, know-how, entrepreneurship etc. This theory lied at the heart of traditional theories of international competitive advantages. Porter attempted to reshape the focus on these factors and analyzed the characteristics of these factors, their creation and their relationship with the competitiveness of the firm. He further characterized them as basic factors and advanced factors. Basic factors like natural resources and demographics can give an edge initially but they are even strengthen more by advanced factors which includes technology, infrastructure, communication etc which are the result of investments by people and are the most significant for competitive advantage. Every nation has factors that help in determining the nature of it national competitive advantage for example; Germany’s human resource with vast technical skills gave it a competitive edge in engineering industry similarly China’s lack of technical skills is making the government invest in this area. India on other hand has low-paid workers which made it gain a competitive edge in IT industry etc. 3. Demand Conditions: Demand conditions are the level and nature of demand that’s exists in home markets for specific products and services, Porter emphasized on the role of home demand in the competitive advantage as the firms closely focuses on the needs of their closest customers which are the domestic customers. These customers help the firm shape its strategies and differentiation attributes making them to improve. The highly demanding customer’s presence pressures firms to innovate rapidly. For example home demand of German car industry, Japanese camera industry and USA’s pharmaceutical industries have provided it the demand conditions which helped it to compete in the international market. 4. Related and Supporting Industries: One of the interesting areas of findings of Porter’s work is the tendency of successful industries and firms within each country that can be grouped and categorized as related or supporting industries for each other. It refers to the presence of cluster of competitors and complimentary firms that excel in particular industry. If a firm operates in many related and supporting industries it can benefit in many ways like economies of scale, access to better inputs, knowledge and information synergies etc. In this way economies that are external to an industry are internalized. For example Silicon Valley in US is the best place in the world to launch computer software as there are many firms and workers that deal in software industry present there. Similarly in Germany, the textile and apparel sector forms a cluster of industry which can support and benefit each other. As advances factors of production are the most critical ones for the competitive advantage many firms seek to gain economies in knowledge sharing, information and skills from related industries cluster. (GRANT. 1991; CAVUSGIL, KNIGHT & RIESENBERGER. 2008; TALLMAN. 2009; REINERT, RAJAN, GLASS & DAVIS. 2009; ZHOU. 2011) In addition to these four factors that shapes up the competitive environment, Porter emphasized on other two separate factors that have an additional influence over the competitive environment of a nation. Firstly the role played by the chance events such as shift in exchange rates, inventions, sudden rise in cost, political conditions etc. the second is the role played by the governmental policies. These both factors can have either a positive or a negative influence over the industry. Governmental policies have greatly influenced the competitive environment of nations in many countries recently. Porter saw the government intervention as working through the four main factors rather considering it a fifth factor. (REINERT, RAJAN, GLASS & DAVIS. 2009) Strengths and Limitations/ Criticisms of Theory: Porter’s theory provides an analytical view and analysis of the factors and variable that can influence a firm’s or industries competitive performance. It can be used to analyze recent contributions that the firm has done at the national and firm level in its competitive environment. This theory further gives insight into the determinants of national competitive advantage and its performance. The theory further introduced a dynamic approach to the analysis of the competition in a nation, these dynamics analysis led to the consideration of factors like role of innovation and upgradation is order to sustain competitive advantage. His theory even analyzed the international competitive performance in areas of trade and direct investment both, as both of them are closely related and can be treated as substitute due to their nature of occurrence therefore Porter did not distinguished the two in his theory. (GRANT. 1991) Porter’s work has been criticized and supported on many grounds by various works done afterwards. Porter’s model discusses about the firm-specific, industry specific and country specific factors that can impact on the national competitiveness, the strength of this model lay in this fact that it incorporated industry into this model thus integrated microscopic and macroscopic aspects of competitiveness. Since this model was a result of the research on 10 developed nations which passed through the industrial revolution, it focused and provided benefits to advanced nations only. How ever there are more than 150 counties in the world who are in the stage of developing or are still categorized as under developed. For such countries a model was required which not just emphasizes on the resources that the nation has but should have provided solution about who should create these resources and how. One of the key criticisms that Porter faced in his work was the ignorance towards cultures. Porter viewed national culture as a constant artefact, though the national psyche can have validity, the national cultures is changeable, for example his fixed assumptions regarding a certain nation like German being hardworking, Japanese being technically sound can change. Porter did mention culture but did not explain it in depth, rather providing a list of industries in which a particular nation excelled he should have focused on entity of the nation culture. Secondly, Porter even ignored the quality of corporate leadership which is one of the critical elements of nation’s competitive advantage by which countries like Japan and Korea have benefited. Thirdly Porter even neglected the historical reasons that could cause one nation and its industry to be supreme than other today. For example, Germany and Japan’s industrial excellence today can be linked down to their past militarism. Similarly in many countries of the world their pasts are the results of their success of backwardness in the industries today which Porter failed to address. Further Porter did not put enough emphasis on the role of government, that is how government can contribute in the creation of competitive advantage and what are the factors that causes and forces that deviates the state from spending on key factors that can create competitive advantage. The model has been even criticized on the basis that it fails to take into account the role of multinational corporations in determining the national competitive advantage. The main criticism is that the multinationals derive their advantages from many countries not just the home base in which Porter’s work focuses. (CHO. 1998; NICHOLAS J. O'SHAUGHNESSY. 1996; REINERT, RAJAN, GLASS & DAVIS. 2009) Lessons and Focuses of Theory: Porter in his work put focus on many areas and provided solutions and ways in which nations can develop the competitive advantage. For this his focus was on factors like education, training, financing etc. Porter highlighted that excellence in state education, university researches, vocational training have benefited nations like Sweden, Germany and can play a very important role in development of any nation. He suggested that companies should involve themselves in stable financing and should plan for long term rather fulfilling in the giving periodic returns to the shareholders for example in Japan the ownership of companies is usually held by institutions and do not focus on trading shares. Further he suggested that the company can adopt either low cost strategy or differentiation strategy to compete in the market, a differentiation strategy is a mature strategy that can help a fir move forward. His emphasis has been on clustering industries which can pool in economies and can compete internationally, however this clustering can let down all the industries together too. Further, investment in automation and engineering is necessary to compete in the international market. Porter suggests that the government’s policies towards development, infrastructure, education, collaboration, investment and competition can greatly help and influence the shaping of industries for competitive advantages. (NICHOLAS J. O'SHAUGHNESSY. 1996; TALLMAN. 2009) The Dynamics and Economic Development of Nations: Porter suggests that to gain the competitiveness the presence of four factors are important as they operate interdependently, their interaction give rise to many complex dynamics which indicates the level of national success this interaction between the factors and the national environment can create. For e.g. due to high domestic rivalry the local firms compete aggressively and invest in product innovation, improvements in processes, labour skills etc and at the same time the domestic rivalry is influenced by the factors of production and further sets the level of competition in the market by facilitating new entrants, availability of resources etc. The interaction between factors is greatly influenced by industrial clustering that is the linkages between vertical and horizontal industries that can pool in for the creation of advanced factors like technology, skills, information, communication etc, which are essentials to move ahead. This clustering can gear up the competition as the supplier industry can easily enter the market due to increased demand conditions, increasing the domestic rivalry. Therefore tight clustering of successful industries was seen in nations like Sweden, Denmark and Singapore etc. the geographical presence is also a factor that could influence the interaction of four sides of diamond, for e.g. presence in one locality accelerates innovation, investment and development. (GRANT. 1991) Porter discussed how a nation can achieve economic development by competitive advantage and how the nations differ in prosperity and growth. He explained that the nations can prosper economically by ‘upgrading’ their competitive advantage which can be done by maintaining sustained competitive advantage by innovation and investment in advanced factors of production. Discussing at the macro level these enhances labour’s productivity which results in increase in real income per head of the population. Additionally, upgrading of the competitive advantages changes the structure of the firms and industries. As the firm develops through technology and capital it loses its competitive position due to price-sensitiveness, which forces them to move towards differentiated strategies and they shift many technological activities overseas for cost reduction and within their home bases the focus is on the activities which require high level skills and technology. (GRANT. 1991) The greatest outcome of Porter’s work was the emphasis and a shift in the thinking that the national competitive advantage isn’t achieved by the storing of natural resources. The inherited national factors can help to a certain extent only, however the nation can built and create is own new advantages by creating factor conditions that they assume are important for their success. The public sector and government can invest and employ their resources in education and capital formation, in this way any country can create its own factors for economic prosperity. The nations can achieve this by developing a proactive national industrial policy which usually works in collaboration with private industries to develop particular industries and sectors in the nation. Countries like Japan, South Korea and Singapore have managed successful implementation of the national industrial policies. (CAVUSGIL, KNIGHT & RIESENBERGER. 2008) Theory and the Competitive Strategies: Strategy would decide how the firms will compete with its rival and how to gain a competitive advantage over the. Competitive advantage on the other hand will focus on the selection of strategy the firm will choose on the basis of its internal and external factors. In a domestic industry the firm faces the same competition and the competitive advantage can be gained by focusing on internal factors only. However in the international market the conditions are different and the emphasis is more on the strategical issues. Even in the international markets, the firm’s four factors of national competitive advantage continue to influence firm’s potential to succeed as well as its strategy to operate in an international market. The firm’s resource availability is influenced by national variables of factor conditions and related and supporting industries while the other two factors of home demand condition and rivalry influences its success within immediate market. (GRANT. 1991) Porters work laid emphasis on speedy exploitation of environmental changes, national factors which promote innovation, local demand and rivalry. Further he also pointed out the need of specific managerial actions that are required by a firm for competitive advantage. The whole theory if summarized can be resulted in two recommendations of information and innovation; by increased interaction with buyers, suppliers and related industries the firm can exchange information and knowledge within the cluster of industries and by focusing on customers which have different and peculiar demands along with compliance with highest regulatory standards and performance levels, the firm can innovate and compete on differentiation strategies. (GRANT. 1991) Conclusion: Porter presented his book on the competitive advantage of nations in which he revealed and discussed about issues like why one nation progresses and other don’t. He justified this by presenting a four factor model, also known as Porter’s Diamond in which he discussed the factors that influences a nation’s competitive advantage through its firms and industries. His theory is seen as one of the most useful work in this area and at the same time has been criticized on many grounds. He also presented his model in relation to local industries and firms as well as how it would work in internationalization strategy. Porter provided the suggestions and areas on which if a firm, industry and government can focus to sustain and create competitive advantage internationally. Bibliography REINERT, K. A., RAJAN, R. S., GLASS, A. J., & DAVIS, L. S. (2009). The Princeton encyclopedia of the world economy. Princeton, Princeton University Press. TALLMAN, S. (2009). Global strategy: Global dimensions of strategy. Oxford, Wiley-Blackwell. ZHOU, Q. (2011). Advances in applied economics, business and development International Symposium, ISAEBD 2011, Dalian, China, August 6-7, 2011, Proceedings. Part II. Berlin, Springer. NICHOLAS J. O'SHAUGHNESSY. (1996). Michael Porter's Competitive Advantage revisited. Management Decision. 34, 12. CAVUSGIL, S. T., KNIGHT, G. A., & RIESENBERGER, J. R. (2008). International business: strategy, management, and the new realities. Upper saddle River, N.J., Pearson Prentice Hall. GRANT, R. M. (1991). Porter’s Competitive Advantage of Nations’: As assessment. Strategic Management Journal. Vol 12, 535-548. CHO, D. S. (1998). From National Competitiveness to Bloc and Global Competitive. Journal of Global Competitiveness. Read More