Critical Factors in Porters Model of National Competitive Advantage - Essay Example

Porters model of national competitive advantage Contents Contents i)Introduction 2 Discussion 3 ii)Key Questions 3 iii)National Competitiveness 5 iv)Lack of historical dimension 6 v)Reasons for the model downplaying role of state 7 vi)Demand and factor conditions 8 vii) Conclusion 10 References 11 i) Introduction The emerging trends of globalization make it difficult for companies to compete efficiently. Cross border activities with the support of transportation and communication technologies have developed a demand towards self-assessment. The companies are now focused towards accomplishing long term objectives so as to ensure high market share. Sustainable competitive position is basically observed through sector specific and firm specific strategies. Competitive strategies designed by firms outline their competitive position in the market place. Porter’s diamond model was basically designed to evaluate competitiveness of companies. There are some critical factors within this model such as demand and factor conditions, firm’s strategy, competition and structure, chance factors, supporting and related industries, and government intervention. Porter’s model of national competitiveness is regarded as an appropriate framework for evaluating firm’s competitive position. On the contrary, this model is not considered as a suitable framework from economist’s perspective. It is stated as a model that helps to determine competitive position of a company rather than a country or nation. This study would reveal real world scenarios where Porters model was beneficial enough to analyze competitive position of nations. The study has been divided into various subsections where theoretical model will be elaborated along with its application on nations. Discussion ii) Key Questions Michael Porter designed a new model to analyze the reason behind firms belonging to specific nations happen to design better strategies in comparison to other firms. Porter took into consideration ten countries such as UK, Germany, USA, South Korea, Japan, Italy, Denmark, Sweden, Singapore and Switzerland (Davies and Ellis, 2000). The main objective for designing this model was to identify why some regions possesses competitive advantage compared to rest. Diamond model was designed by Michael Porter was to predict sector’s or country’s competitive advantage. This particular model has been elaborated in figure1. Figure 1: Porters Diamond Model (Source: Oz, 2002) As per figure1, this model helps in designing a structure required for achieving competitive position in a sector. The factors of this model play a significant role in context of achieving competitiveness for long-term (Smit, 2010). All the factors represented within diamond model are determinants of sectors. These factors encompass skills and assets which are important for competitive advantage of an industry. It even consists of information that provides guidance on effective management of assets or skills, and facilitates wide array of market opportunities. National diamond mainly outlines some determinants which describes competitive position of a nation (Thompson, 2004). However there are key issues rising in context of Porter’s Diamond model. Competitive advantage is not nation specific but to certain extent it is possessed by companies. Only firms are able to sustain their overall competitive advantage. Many argue that fundamentals as described in Diamond Model need to be taken into consideration by firms at initial stage. Company’s operations cannot be totally aligned with these fundamentals or nation’s competitive advantage (Aiginger, 2006). There is a high need for incorporating innovation within organizational system. Innovation eventually results due to challenges and external pressure. Some arguments even states that leadership plays a major role in identifying route of competitive advantage and then proceeding towards its implementation (Barney, 2002). All these arguments can be analyzed through taking examples of economies and companies. However national diamond and nation’s competitive advantage have a strong correlation from past many years. iii) National Competitiveness National competitiveness is not just a theoretical framework but it is a common factor observed in many major economies. Economic activities do contribute towards competitive advantage of nations but determinants of Porter’s model also are equally important. National environment supports and permits a faster collection of skills and assets. Companies at times gain competitive advantage due to commitment and greater effort (Bernhofen and Brown, 2004). On the contrary, net operations of different companies efficiently contribute towards development of nation’s competitive advantage. China is known for its technological advancements but it is facilitated through large number of technology based firms (Budd and Hirmis, 2004). Competitive advantage of nations is enhanced through operations of multinational firms. Factor conditions state that nation’s encompass elements which are solely responsible for business trade. Trade flow is determined through factors of natural resources, land, production, infrastructure, labor and capital. In any advanced economy such as United States, Germany, Britain, etc., nation is not witnessed to inherit but it is solely responsible for development of production factors like human resources and skilled workforce (Davies and Ellis, 2000). It can be argued that companies do not create competitive advantage of nations but it is interior capabilities of nations which help to strengthen company’s operations. For instance, Germany is known for its base of research and development. This is not only initiated by companies operating in this region but can be denoted as one of the factor conditions (Ezeala-Harrison, 2005). On the contrary, China’s competitive advantage lies within its large base of cheap labour. Availability of cheap labour supports companies to efficiently perform their overall business operations. Diamond model is not just a theoretical framework but can be applied on real time circumstances (Fendel and Frenkel, 2005). Demand conditions as per the model increases home market demand and appears to be a source through which nations gain competitive advantage. A faster rate of innovation and increased buyer’s demand enhances competencies of a nation in comparison to other foreign rivals. iv) Lack of historical dimension Late development theory comprises of economic issues and its associated long term impacts. Porter’s Diamond model describes competitive advantage to be a major factor retained by nations. Late development theory is applicable for those countries which have been developed lately. The model proposed by Michael Porter is centred towards highlighting those determinants that play a major role in competitive advantage. However this model deals with current scenario of competitive market place (Grilo and Koopman, 2006). Michael Porter had framed this model in order to highlight major competencies possessed by nations that can contribute towards firm’s growth and success. There was lack of historical dimensions within this framework and these are related to development of many countries. Economic dimensions clearly states that certain countries were developed due to emerging companies. In such scenario, companies form the major competitive advantage for nation’s long term growth. Late development theory has evidences provided by economic historians. Macro-economic ideas which are present in late development theory are not included in Diamond model of Michael Porter. Finance and money matter should be a major part of the diamond model since it highlights importance of competitive advantage (Hill, 2009). These characteristics are not encompassed within Diamond Model because economic theories contradict the logic applied by Michael Porter. Historical dimension is not present within this model and it tends to weaken the base of competitive advantage (Rugman, Van den Broeck and Verbeke, 2006). To be more precise Diamond model should take into consideration historical facts along with competitive scenarios faced by companies. Economic history would provide a wider scope for firms to analyze the impact of economy on company’s operations. It can even help to determine the importance of demand and factor conditions in context of present and historical conditions of economy (Ketels, 2006). On the other hand, model cannot be standardized for all circumstances since emerging economies usually do not comprise of similar competitive advantages in comparison to developed nations. This factor is an area of concern for this model since it has been standardized without incorporating any historical dimension. v) Reasons for the model downplaying role of state The diamond model is mainly analyzed with respect to developed countries. Historical dimensions described in late development theory are ignored in Porter’s Diamond model. National cultural element is also not highlighted in this model. Porter has downplayed the state’s role, which forms one of the most important influential forces in terms of national competitiveness. The author has stated that national competitiveness cannot be encouraged through multinational firms and role of state (Krugman, 2006). Diamond model hence can be utilized in some developed countries. Different patterns formed by factors denote the level of national competitiveness. For instance, China belongs to list of late developed countries and comprises of skilled workforce. This factor is not observed within developed economies such as United States, Japan, Germany, etc. In context of automobile industry, Japan is highly competitive due to its strong base of research and development. Whereas China gains maximum advantage due to its massive workforce (Levitt, 2003). This factor helps to attract MNEs and FDI in the country. Porter has ignored the fact that government plays a critical role in framing such competitive advantage. Government develops strategies to increase competitive advantage of a nation. This factor has been ignored since it forms a part of late development theory. Role of government is observed in context of specific industry mainly in late developed countries (Peng, 2009). The diamond model encompasses four factors which are correlated with one another. Role of state is an external force and has no direct relation with factors described by Michael Porter. In overall context it indicates that Porter designed this model as a standard for all economies. This framework however was more inclined towards developed economies where state of role is negligible. As per the model national competitiveness is an aspect which is incorporated within economies and is not contributed by any other external element. Hence Porter has not given much importance to role of government while designing this framework on national competitiveness. vi) Demand and factor conditions The factor and demand conditions put across by Porter in Diamond Model cannot be stated as truly national. In current scenario, MNE’s are focused towards expanding their operations across the globe. This reduces work load of government in terms of designing strategies for attracting FDI. When global competency is increased by MNE’s it effectively contribute towards national competitiveness of host country. Canadian exporters are often observed to exhibit similar pattern in their trend of business operations. All the determinants of the model are not taken into consideration simultaneously. It is either two external variables adopted by industries or those four conditions of the diamond (Root, 2001). Demand and factor conditions are also applicable for regions outside home country. There are companies in real world scenario who have enhanced economic conditions of home country through operating globally. National competitiveness can also be achieved by trading with various other regions. MNE’s long term objectives are not fully accomplished with the support of national competitiveness. It can be stated as their resources or skills that facilitate achieving long term objectives and goals (Salvatore, 2002). Canada has described its industries into different categories like resource based, innovation driven, market accessed, etc. In such situation, diamond model does not hold relevance for Canada since there are no diamonds. According to economic scenario of Canada it does not encompass any such industrial patterns. Hence diamond model is inappropriate for many economies across the globe. The factors mentioned in this model cannot be standardized for all industries or nationals. Japan, United States and European countries are strongly aligned with factor and conditions proposed in Porter’s Diamond model (Siggel, 2006). On the contrary, Canada maintains its competitive advantage on basis of completely distinguishable factors. Globalization also is a contributing element towards such competitive advantage. To a great extent globalization plays a significant role for creating competitive advantage of nations. It has eventually influenced industries to expand their operations into different regions. vii) Conclusion As per this study, Porter’s Diamond model comprises of critical elements that helps to enhance success and growth of industries. Porter in this framework clearly stated that national competitiveness is a key element for company’s long term success. However objectives of this model have been strongly argued outlining that diamond model is not applicable for all nations. There are countries which have gained competitive advantage through widespread operations of companies. It has been a key factor for development of a country and set its position high amongst other nations. Canada and China are some countries who are not aligned with factors outlined in Diamond Model of Michael Porter. These countries are listed amongst late developed countries. In such scenario national competitiveness is achieved through effective contribution made by domestic firms. China in its initial stage of development did not have educational facilities and it eventually gave rise to a base of skilled workers. This massive workforce is a major competitive advantage of the nation. It is an inimitable factor that is not observed in other economies such as Europe, US, etc. Hence Porter’s model is not convincing enough in context of elaborating national competitiveness. References Aiginger, K., 2006. 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