Critiquing Porters Diamond Model - Essay Example

Management Introduction Porter’s model of national competitive advantage alternatively called Porter’s model of diamond have become a significant topic of discussion in the management literature and can be considered as an alternative to the economic theory of comparative advantage. Ever since the book “Competitive Advantage of Nations: Creating and Sustaining Superior Performance” was published by Porter it has been subjected to mixed reviews as one group of researchers had stated that the book did not use the correct set of assumptions and methodology while the supporters had argued that the claims made by Porter were invalid. Supporters also argued that the model of national competitive advantage had been able to integrate multiple disclipines. One of the major points of conflicts between Porter’s hypothesis and economic theory is the concepts of comparative and competitive advantage (Smit, 2010). The purpose of this paper is to analyze whether the national competitive advantage developed by Porter is a convincing framework in the contemporary era. This paper uses empirical studies as an example to explore the claims that were made by Porter. Porter’s Diamond Model Factor Conditions: The use of factor conditions in the framework developed by Porter was an attempt to include the natural conditions that has been described by economists and it embraced factors like land, labour and capital. In addition to the existing factors Porter had included quality of human resources, physical infrastructure and knowledge base of the economy. Effective deployment of factors guarantees that productivity would be maximized (Pietrzak and Klug, 2007). Demand Conditions: This describes the nature of demand that is being faced in the domestic market. Porter (1990) had argued that if the local market is very demanding then the quality of products improve. Related and Supporting Industries: This is a measure of industrial conglomeration around a base industry which is actually an example of symbiotic relationship. A network of efficient suppliers located near the major industry is in a better position to understand the need of the companies and improve the product quality (Porter, 1990). Firm Strategy and Rivalry: This factor points out to the difference in the management culture of the countries. According to Porter (1990) every country has developed its own style of management (Pietrzak and Klug, 2007). Government and Chance: Government refers to the support that is provided by the government organizations in helping to develop all the other forces. Chance on the other hand is a representation of the external factors which cannot be controlled by a company like shifts in the financial markets (Pietrzak and Klug, 2007). Critiquing Porter’s Diamond Model A strong critique of Porter’s model was presented by Beije and Nuys (1995) who had pointed out that the model developed by Porter was not precise, did not have determinism and predictive ability. According to the study made by Warr (1994) the countries who try to replace their comparative advantage with competitive advantage do the same based on a false assumption. It was pointed out that if developing countries tried to mix their comparative advantage with their competitive advantage then it is more likely that they will focus on producing products for which their resource base is not correct. This in turn undermined the effort of the developing countries. Researchers like Waverman (1995) have challenged Porter who had claimed that exchange rates and wages in an economy cannot determine the level of its competitiveness. Critiques of Porter had claimed that exchange rate are major determinants of a country’s export growth and share in global trade (Krugman, 2009). The eclectic paradigm proposed by Dunning (1993 cited in Dunning, 2000) can also be considered as a direct criticism of the Diamond framework proposed by Porter. This is because Porter was content that the ability of a country to compete in the global economy based on the strength of the diamond framework. However, Dunning (2000) showed that majority of multinational firms (MNE) acquires their assets from foreign locations and in this case interaction of Porter’s diamond forces cannot be considered as a source of competition (Davies and Ellis, 2000). Despite the controversies regarding the model of Porter it is undeniable that the four forces described by Porter namely demand conditions, factor conditions, related and supporting industries and firm strategies are helpful in explaining the business characterisitcs in nations. Formation of core competencies and the concept of industrial clustering have formed the benchmark of a number of industries in the contemporary era (Rosenfield, 1997). Extending Porter’s Diamond Model to emerging countries Porter’s model of national competitive advantage can be relevant to explain the competitive advantage of a number of economies. The main argument established by Porter was that nations must allocate their resources in an optimal way so that they can minimize the competitive disadvantage. This section provides an empirical example of different countries and the ways in which certain industries have developed national competitive advantage in the global economy. The case of Ireland can be treated as a classic example where the model developed by Porter is highly commendable. Hardware industry in Ireland is largely affected by forces described by Porter. For the hardware industry there is a supply of both low skilled and high skilled labour at a reasonable cost, good presence of physical infrastructure and competitive structure of corporate taxes. All of these can be clubbed into firm conditions as described by Porter (Van den Bulcke, Verbeke and Yuan, 2009). In regard to the demand condition it can be mentioned that though the domestic market is very small yet the strong association of Ireland with the European Union have provided it a large market extending from Africa to Middle East which provides a demand boost. In terms of the related and supporting industries in Ireland it has been found that strong manufacturing culture in the hardware industry provides strong linkages (Clancy, et al., 2001). All of these combined factors have enhanced the strength of Ireland’s hardware sector providing it with a competitive advantage (Clancy, et al., 2001). The research of Moon, Rugman and Verbeke (1998) had shown that the original model that was developed by Porter may not be exactly suitable to describe the nature of business in the contemporary business scenario but little modification of the model can be done to explain competitive advantage of Korea and Singapore. They had used the double diamond model to understand the competitive mechanism in both countries. Their research had shown that the small size of the Korea and Singapore made it difficult for them to survive on domestic demand for which they were largely depended on international demand. It has also been found that the case of international rivalry is very strong for the economies (Rugman and Verbeke, 1998). However, Porter had observed that domestic rivalry is more important than international rivalry. This logic may hold true for large economies but it is not true for countries like Korea and Singapore. In terms of supporting structure of industries too there is a heavy reliance on international businesses. More recently the works of Kuah and Day (2005) has shown that the banking industry of Singapore can be explained by using Porter’s diamond model. Based on the research it has been found that the factor specific conditions of Singapore have been greatly modified by the policies that are taken by the government. The government have framed policies that fostered the development of a productive workforce based on foreign immigration. The significant amount of expertise required for the all round functioning of the financial sector have been developed carefully over the years by focusing on the development of human capital. Improvements in labour productivity were extremely high for Singapore. The financial services sector of Singapore was poorly developed throughout the period of 80’s and 90’s. Over time the robust growth of the economy had clearly improved the domestic demand in the economy. Industrial conglomeration was the strongest factor that had contributed to the development of sound financial system in Singapore. Advancement of information technology has acted as a great support for the growth in the financial sector. IT services had greatly helped in improving the efficacy of the financial sector as a whole and the economy prospered. The strategy that has been adopted by the major players of the financial sector in the country has been shaped by the forces that have been taken up by the government (Kuah and Day, 2005). During the period of 1999-2004 the Singaporean government had liberalized the financial sector of the economy to a great extent by inviting foreign banks like HSBC, Citibank and other foreign banks to operate in the country. Following this process has greatly increased the level of competition within the banking industry and the domestic players have improved their efficiency over time. Customers now have multiple options regarding choice of their banking services. Initially they were only dependent on few players operating in the domestic economy. In case of India the application of Porter’s diamond framework is quite robust. For instance, the automobile industry in India can be considered as an example which has achieved great degree of competitiveness based on the association of four forces. In terms of the factor conditions it can be stated that the government of India have made heavy investments over the decade to improve the system of education in the country to create a productive workforce that can be easily employed by the players in the automobile industry (Iyer, LaPlaca and Sharma, 2006). Regarding the demand condition, it can be said that the economy of India is a vast one with very high population. The proportion of middle-class in the country is growing and these people have rising disposable income. Consequently, the demand for cars is on a rise. The domestic economy acts as a major market for the retailers. Automobile companies in India like Tata Motors have taken opportunity of this thriving market. Their recent product, Tata Nano, a low-priced car has been very popular in the Indian market. The car had reached record sales in the first year of its production owing to its price efficiency (Hill and Jones, 2007). In terms of the related and supporting industries it has been found that the success of companies depends on the extent to which the existing suppliers improve the quality of their raw materials. In case of the Indian automobile industry it has been found that the support industries for automobile are mainly found in the Southern part of the country which supplies good quality products to the assembly lines (Dögl, Holtbrügge and Schuster, 2012). Strong competition among the suppliers keeps the prices within control, contributing to the overall effectiveness of the industry. In case of the Indian firms like Tata it has been found that great emphasis is provided on appointing engineers to ensure product quality is not compromised. This has helped the Tata group to create a good brand name in the market (Braithwaite and Drahos, 2000). Finally, Saudi Arabia can be considered as a country which has established high level of national competitive advantage and Porter’s diamond framework is a good theoretical way to explain development of the coubntry. Saudi Arabia has developed its competitive advantage over the years mainly with the help that it has received from the government (Jasimuddin, 2001). The government has created a business atmosphere by creating favourable tax policies, developing the capital market and creating an overall business environment. The resources acquired from oil have helped the country to achieve this. Saudi Arabia has used the surplus it has acquired from oil industry to funnel funds in other industries like the manufacturing, food and beverages and textiles. The changing Dynamics Though Porter’s model of competitive advantage has been found to be empirically true in a number of cases, recent trends that have emerged in the global economy has made it difficult to resort to the styles of management that has been described by Porter. Porter had not considered the subtle differences that had been present for the economies. For instance, the U.S. management style that has been described as maximization of financial profits is very different from the social market structure of Germany (Donaldson and Dunfee, 1994). However, the research that was conducted by Albert (1991 cited in Aktouf, 2004) had revealed that it is actually very difficult to generalize the economies because the attitude of the shareholders is very different. Companies in the U.S.A. are largely financed by speculation and those in Japan and Germany are financed by Market Speculations. The recent collapse of the Wall Street and the adverse financial crisis has seriously shaken the styles of corporate governance in the U.S. On the other hand successful investments, sustainable practices, maintaining a good quality workforce has become the priority of organizations (Epstein and Buhovac, 2014). Additionally, the management styles in most of the multinational companies in Japan which were largely dominated by suppliers holding each other’s share. In current scenario this style is more like a burden as the effectiveness of cross-holdings is outdated (S. Kim and S. Kim, 2009). Most of the industries in Japan that once had competitive advantage like steel sector and railways have lost their edge, a premise on which Porter had established competitive advantage of Japan. Therefore, the management styles or the fourth factor that was described by Porter has become very blurred. A dynamic approach is required towards management of organization and it has become imperative to follow a management practice that is sustainable. It has been observed that shareholders have become very demanding and the excessive reliance of the business enterprises on the capital market have made it important for organizations to depend on information in a timely manner (Davis, Lukomnik and Pitt-Watson, 2006). Transparency and sustainability has now become the source of competitive advantage for companies and all major enterprises ranging from oil companies like British Petroleum to FMCG companies like Unilever to retail stores like Tesco are managing their relationships with stakeholders to invoke confidence (Dahlsrud, 2006). Governments of the European countries and developing economies like China are all focusing on reduction of toxic elements used in production to promote environmental sustainability. Another problem that raises concern regarding the validity of Porter’s model is to consider the issue of FDI. As stated by Porter, only FDI outflows contribute to growth of nations but FDI inflows are not good. Latin American Nations like Brazil have created a very large market for consumers, improved labour and infrastructure and this has in turn helped in the domestic producers of the economy to develop their product quality and competition (Casanova and Kassum, 2013). Conclusion The case of national competitive advantage over comparative advantage, an idea created by Porter has both been a source of debate and discussion. A discussion in this topic reveals that the traditional competitive model described by Porter using the developed countries can also be extended to certain other developing countries as well. The case of Ireland, India, Singapore, Korea and Saudi Arabia has revealed that Porter’s model of national competitive advantage is still relevant to explain competitiveness of these nations. All of these nations have developed their competitive advantage over time and provides a thriving climate both for domestic and international businesses. However, there are certain aspects of Porter’s model that is not relevant in present case. For instance, the management styles that have been described by Porter for specific countries are no longer valid in the present organizational structures. The financial crisis of 2008 has revealed that excessive speculation can be extremely dangerous. Companies are now focusing on sustainability rather than short-term benefits. Therefore, the debate is likely to continue and a direct answer establishing the relevance of the Porter’s model is unlikely to emerge. Reference List Aktouf, O., 2004. The false expectations of Michael Porters strategic management framework. Revista Universidad & Empresa, 6(6), pp.9-41. Braithwaite, J. and Drahos, P., 2000. Global business regulation. Cambridge: Cambridge University Press. Casanova, L. and Kassum, J., 2013. Brazilian emerging multinationals: In Search of a Second Wind. [pdf] INSEAD. Available at: [Accessed 20 November 2014]. 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