Porters Force for Competitive Advantage - Essay Example

Porter’s Force for Competitive Advantage Introduction Porter’s diamond model of competitive advantage for a business is one tool that is used by the businesses decision makers to take a stand on the performance of business in a specific market. The model derives an idea for the business about its performance in a particular economy in contrast to its competitors in the same market. The economy of the nations across the globe serves as the benchmark to ascertain the relative strength and performance of a business. The Porter’s model of competitive advantage would be critically analyzed to find how beneficial it is in determining the characteristics and performance of business processes in different major economies. A comparative analysis of the systems followed by businesses of various economies to gain edge is evaluated from Porter’s competitive advantage view. Theory of Porter’s Force for Competitive Advantage The diamond model of economy for nations aims to derive the reasons that analyze the aspects of what makes a cluster of business competitive from a particular nation over others. The model’s approach to identify the cluster of small industries where their competence has a direct correlation with the performance of other businesses in the same economy, along with other factors, adds value chain to the process. The advantages can be from consumer-business relationship or local market context, giving it an edge over similar businesses in offshore markets. The various elements of the model is as in the figure below, that shows the business elements and suggests the underlying factors boosting the affectivity of the competence. Further, Rugman and Verbeke (1993) suggested that the factors affecting the competence are related with each other and existing market environment. The four distinct determinants of the model have great influence on the strengths of the business located therein. The vertical relationships of buyers’ intelligence and suppliers are correlated horizontally with technology, skills, distribution challenge etc. Figure: The Porter’s Diamond Model (Source: Ingram, 1991, p. 44) The use of the model in the process gives the overview of the industry in terms of competition in the industry. Pressman (1991) observed that the respective Government identifies these clusters to support and promote them as a source of economic growth. Factor Conditions: The position of a business as production capacity, skill manpower availability, infrastructure, legal frameworks etc aided by the government agencies determines the factor conditions. The conditions would determine the performance and ease of doing business in a particular economy. For an example the Chinese manpower is in plenty however the skill level is low, Japan on the other hand produces qualified engineers for innovation driven industrial processes, US and UK have the infrastructure to motivate skill ad industry oriented education infrastructure. Therefore the factor in different nations for education infrastructure and policy determines its industrial skill sets as the example infers. Demand Conditions: The condition of demand is very much dependent on the customers in an economy. The more demanding the consumer, the more are the efforts spend by a business or the sector to achieve the desired output, preferred by consumers. This pressure to succeed in the economy makes the firms competitive and prone to innovation to create differentiation to improve competitiveness in quality and product attributes. The Japanese, Korean and even Taiwan as the major electronic goods manufacturer at very cost efficient processes. This was the net result of its competitive advantage where the internal consumers in those nations wanted more out of each penny spent. Nevertheless, the export focus of electronic goods was another where these nations ventured out for US and European markets. For product safety, Swedish giants like Volvo, AGA, Atlas developed more safer products due to its national demands for safer product, giving this aspect an edge when compared in Global context. Related Supporting Industries: The supply chain for any business is dependent upon various sources and alibi or supporting firms. Therefore the more the quality of competence of the related and supporting business the more is the pressure on the business to improve. Rugman and D’Cruz, (1993) argued that the process initiates innovation and internalization of value systems in the industry. One example is the US, French and UK defence industry where the ancillary producers brought in revolutionary product offerings, innovations and aspects in outputs making the sector very attractive to other economies like India, Australia, Brazil to purchase from them their defence requirements. Firm Strategy, Rivalry and Structure: The structure of the firm in a particular economy is dependent upon the specifics of regulation in a nation. These conditions determine the way of managing, establishing and demonstrating the competence of one business over others. The UK or US education industries had always been a favourite destination for students perusing higher education. The internal competence of home grown education systems and intellectual properties was the key behind the success story. Same goes for the Information technology where the extreme competition added with innovator were aimed at consumer’s ease and satisfaction This has given the world great innovations like Oracle, Apple, Google etc those were evolved due to the pressing conditions of consumer’s demand globally (Hbr.org, 2009). The Government: The government in this case would be the legal, political, socio-cultural effects on a business that have its source in the government policies and attitude. The tools of controlling the business practices and identification of improvement inputs is governed, identified and executed by the government, based on which the business condition in the chosen economy is determined. Hence it can be said that the growth impetus or catalyst of business is provided by the government to provide the needed aspirations to increase the competence level. The economy and policy settings to initiated future market oriented education and skill development is now a trend well observed in the emerging markets. Indian, UK, US, German governments are giving technology skill competence a added look to have a innovation driven, competence value creation. The internal consumers or the micro economy of these nations were primary to create differentiated future with its policy application (Hbr.org, 2009). Therefore the competence of an economy is elaborated by the model to give the reader an idea about the productivity for competence development over traditional labour and resource availability. So the governing strategies have a direct relation with the growth and development of a sector in an economy where it gets all the required support and aid to prosper (O’Shaughnessy, 1997). Further, the clusters are correlated via vertical relations such as buyer’s integrating with suppliers and in horizontal way through customers, technology, skills, distribution channels etc. The Automobile industry of Korea and China to counter Japanese expansion of European and US-Canada markets is one to site where the supply chain with best value offerings is chosen. Therefore the skill and resource sharing is done to achieve edge, evidently to counter competitive factors of the markets. Key Point 1: Effect on Global Businesses and Industry In such a case, the example of Japan may be taken where the manufacturing boost was effectively supported by the government’s policy to produce a pool of skilled engineers to support the industry (Ingram, 1991). Germany for another instance gives the renewable energy source a great deal of support both from research innovation to infrastructural support which helped it to become the largest renewable power generator in the globe. The United States have a policy that makes the sourcing of wood for plywood production to be sourced from responsible sources, to ensure their buying habits do not harm the depleting rain forest resources of the globe (Miller, 1990). The regulatory body established thereby certifies the sourcing of such raw material for their plywood industry insisting ply manufacturers source wood, responsibly. The consumer of plywood in the US is aware and concerned about the issue and gives the certification a great value. This has made the businesses to implement steps in its process to ensure sourcing to let consumers have a good perception about their products. Colombia Hardwood Product of the US used this differentiator for their market. This lead to a major process change in the US ply manufacturing sector (Hawaii.edu, 2013)1. Therefore the market demand conditions shapes the development and innovation aspects of business. The first of aspect that business incorporates in such strategies are the demands of the consumers. The second factor is that the demanding consumer of a specific market drives the firm to achieve higher quality and standards to stay ahead of the competitors. Hence, the business can create a market segment for itself at home, giving it the third advantage. Porter (1995) opined that this internal dynamics in an economy makes the businesses operating in it very viable to success in the international markets. Further, Hofstede (1980) suggested that a business gains competitive advantage in the international market where the cluster of such industries are present in the ‘home base’ market, providing a vertical or horizontal relationships adding value to the supply chain. The tale of Japan shows the presence of Toyota, Mazda, Honda, Mitsubishi, Nissan etc at home are engaged in fierce competition, giving their processes prone to new innovation for better outputs that also reflects in its international market ventures. The business of automobile at home (Japan) developed technologies to overcome each other in product quality. The management practices too have a huge number of engineers focusing on process improvement is also common in these businesses. This phenomenon affected the US market that has two distinct manufacturers as General Motors and Ford, thus the competition was far lesser in the US market to Japanese Automobile. The very competitive Japanese auto manufacturer used this opportunity to enter the US market for their space. Since the home market for them (Japan) was already under perfect competition, so the new market venture was the one choice that these Japanese market identified and used it for survival. Key Point 2: Role of the Government Governments of different nations are responsible for legislation formulation and administration of the laws. The influence of the government is vital in formulation of business laws that have the capacity to make or break the business abilities. The regulations that help a sector in business grow, ensures that the oligopoly makes the outputs have higher value in offerings (Diebold and Porter, 1990). Creating advantages, enabling the industries in a nation to develop a strong competitive position, the governments can put forward the policies which allow such to happen in a specific economy. Davies. and Ellis, (2000) noted that the combination of labour cost advantage, strong network of suppliers, consumer’s culture to expect more, fuelled the factor for the growth and improvement in Japanese automobile sector. De-Man, (1994) observed that the policy of education, training, automation improvement in an economy is much aligned to the policy adopted by the Norms of Government that shapes the core competitive advantage. However, Ingram (1991) argued that Porter’s model underplays the role of history and cultural dimensions of a nation in determining competitive advantage. Automobile industry of China employs a labour intensive manufacturing process along with Technology use for few steps in production line. This is due to the socialist structures of Governance followed by Chinese. Japan and Germany however, prefers individualist innovation with greater use of technology for cost reduction and bulk production is shorter period of time. In US the role of Government was greatly debated when it had to bail out General Motors as it was loosing its ground to Japanese manufacturer due to various reasons like technology use, labour cost, supply chain disruptions, increasing affinity of consumers towards the trend of more mileage per unit of fuel consumed etc. The business failed to understand it and failed in context of market share and revenue. The role of Government in this case was important to bail the industry out with financial assistance (Hbr.org, 2013). The Other Aspect: Effects of National Culture To evaluate the competence of the model, it is imperative to determine the cultural aspect of an economy. The Hofstede’s model classifies cultures in five distinct groups based upon their lifestyle and social interactions. These cultural aspects of a nation play a distinct role in business environment and have effects on the national performance of the sector. The role of a national culture on interpersonal relationship is immense as it has a direct effect on inter personal relationships which have its own perils. The Hofstede’s Model theory and its representation are as below (Jacobs and De-Jong 1992). The Hofstede’s Model of Cultural Dimensions (Source: Krugman, 1994. p. 44) This cultural dimension of business in various economies is one aspect that has been omitted in the Porter’s model. The culture which has the tendency of uncertainty avoidance, the consumers tends to stick with their choices and have little affinity to shift and change. Chinese society has high uncertainty avoidance tendencies compared to the US society, as per the model. Thus the business in China needs to give the employees security of job over the US firms. This phenomenon is not well established for a business and economy along with its effects is not well established in the Porter’s model (Liu and Song, 1997). The masculinity of an economy determines the workforce selection criteria where a bias towards the opposite gender may take place reflecting inequality of intellectual resources. The atmosphere of innovation and new process experimentation may affect the way of performance, created by power distance where each have clearly defined role thus gives very little chance for employees to venture in out of the box idea generation (Hodgetts, 1993). The long term orientation of a culture gives the business the needed patience to establish itself in a market and in the opposite side it may create a culture of slow reaction to changes in the market dynamics. The team work or ability to perform together in a group is inherited from a cultural exposure. The individualistic cultures very often do not promote group activity and tends to work alone. Productivity and interpersonal relationship between the people gets affected in such a case. Porter’s model does not consider these cultural dimensions while evaluating the national competence. Rather, the focus of the model is on wealth creation of business in international context from competitive economic performance (Jelinek, 1992). The automobile industry is one example when the cultural differences studied with production technique adoption shows the correlation. The model from Porter also fails to explain the competence of small economies with free market economy (Metcalfe, 1991, Lau, L. 1994). The example of Canada can be used to suggest the competence it acquired over the years after the US-Canada free trade agreement. The model allows business from the US and Canada work jointly as one unit. The US businesses works in tandem with Canadian businesses giving it the scope to develop needed competence to match the US consumers. This process has boosted the internal production and quality strengths for Canada. Further, the Foreign Direct Investments (FDI) outwards is viewed healthy by Porter while the inward flow is suggested to be a threat to economy. However, for Canada it does not hold truth as all the investments in the economy have US and Canada participation. This on the contrary, has made the Canadian firms develop global competitiveness and with time has consolidated its position, globally. The same is true for Korea and China relationships to challenge the growing Japanese automobile industry where the partnering nations are using one another’s resources to counter the growing Japanese influence in Global automobile sector. Another point to consider is, for a nation to control or dominate an industry entirely, is difficult in a global perspective. For example, Japan makes outstanding automobiles, but this does not stop other nations as UK or Germany from competing in the global automobile sector. Nevertheless, the idea of how the national business systems are working in competitive style is a vague concept in the researcher’s view as it do not suggest or specify a benchmark to determine the quantitative value of competence. The effect of culture on globalization and impact of the same on economic success of a nation too remains unexplained in the model of Porter. Firm’s strategy, countries internal rivalry conditions, structure of economy are all interrelated in the creation of value that drives the micro economy for a macroeconomic competence. Conclusion The Porter’s forces in a market are the determinant to estimate the success or failure of a business. The relationships of market environments on the four distinct factors have varied impact on the business strengths. However the importance of the home market for a business is of enormous importance as it has the ability to groom the business to stay competitive. The consumer’s demands matched with offerings makes a business successful, opening the doors to innovation, change and improvements. This not only makes the domestic market face perfect competition but also enables the business to have the virtue and ability to develop itself in the international markets; the example of the Automobile industry states the story briefly. Nevertheless, the model has its limitations as it remains silent on the effects of history and culture on business, in a particular nation. The role of government in encouraging the domestic production or sector development have a long standing effect which builds a strong presence at home and thus gains the needed confidence to venture into foreign economy. The support at home helps the business to have a strong support at home which helps it to add value to its international ventures. Reference List Davies, H. and Ellis, P., 2000. Porter's Competitive Advantage of Nations: Time For The Final Judgment? 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