The Diamond Model of Porter - Essay Example

Porter’s Diamond Model Table of Contents Reference List 12 Introduction The advent of globalization is gradually changing the global business market environment. These firms are increasingly concerned about the growing competitiveness in the industry (Handlechner, 2008). Even though a firm is not engaged in overseas business activities, it has to monitor closely the international business environment, where the activity of other organizations largely influences the business operations of another (Schwab, 2009). With the rapid growth of technological advancement, every firm tries to secure its competitive advantage in order to gain a superior position in the market. However, irrespective of the individual firms, some countries as a whole have achieved a higher competitive position as compared to other firms (Baker, 2007). This paper will shed some light on how the nations achieve competitive advantage by using Porter’s Diamond Model. This model focuses on the determining factors of national competitive advantage. The paper will discuss the issues and loopholes of the Porter’s Diamond Model and how they fail to answer certain circumstantial problems. Background of the Porter’s Diamond Model Porter (1990) explained the competitiveness of a nation based on the four different parameters, which includes; factor conditions, demand conditions, supporting industries and firms’ strategy, structure and rivalry. Porter suggested that the four conditions act as the major determinants of a nation’s competitive position. The four parameters are described below. Factor Conditions: The factor conditions include the production factors of a nation, like human resources and human capital, physical resources, knowledge base, financial strength. The quantity and quality of the available human resources determine the national production capabilities. Demand Conditions: The demand conditions explain the level of demands of products in the home country. The higher level of demand influences the pace of product innovation and improves service quality. Firms’ Strategy structure Rivalry: This parameter suggests how the firms in a country are organized and how they determine the domestic competitiveness. It mostly reflects the organizational cultural trends of the nation. Certain organizational behaviour and pattern of activities provide added advantage to them in terms of other foreign companies. Relating and supporting industries: The presence of other industries influences the competitive position of an organization. The domestic firms can leverage the presence of other industries in order to create competitive advantage. Figure: Porter’s Diamond Model Issues and Debates Porter’s Diamond Model The four parameters of the Diamond model are mostly industry oriented. The diamond model is focused on achieving a competitive advantage in a particular industry. However, in order to distil out the national perspective of the competitive positioning, the attributes of the country’s economic environment, institutional policies needs to be taken into account. Porter (1990) mentioned that the four parameters are capable of interacting with each other and can reinforce each other’s strengths. Bellak and Weiss (1993) explained that the interdependent nature of an industry makes it difficult to be duplicated in any other nation, thereby creating a competitive advantage for the home country. Stopford and Strange (1991) have challenged the Porter’s Diamond Model by stating that it lacks certain macroeconomic policies, thereby eliminating any room for evaluating the influence of multinational trade over the national competitive advantage. Michael Porter conducted his study based on 10 developed countries, which, as a result, limits its usage to developed economies only. Therefore, the Diamond model may be irrelevant under certain conditions of the developing or poor economies. In such situations, the diamond model is irrelevant as it only determines the competitive factors of a developed economy (Oz, 2000). Dunning (1993) also added that the high dependency on the world export shares to assess the international competitive environment is a faulty methodology, as export levels do not give a clear idea of the business environment of a country. The multinational firms also interact with each other in ways other than mere export, such as outsourcing of services. The diamond model also does not discuss the concept of comparative advantage of a firm owing to its ability to outsource its manufacturing to a host country with low labour cost. The diamond model’s success is based on certain assumptions that national competitive position of is somehow dependent on the government intervention. This concept cannot be used as a thumb rule for all nations, as governments of different nations offer a different level of corporate support. Despite the significant influence of the government in forming the competitive advantage, it has not been added as a fifth parameter. Thus, it is mostly unclear from the model that how government’s role is involved. Moreover, certain business activities of a domestic firm do not cause any contribution to the national economy. Activities like outsourcing of services often cause job displacement to the host countries (Woo-Cumings, 1999). Therefore, although a company is performing well but its performance cannot be a determinant of national competitive advantage. The diamond also fails to describe how to meet the four proposed parameters. The diamond model excludes certain exogenous factor such as multinational business activities. Porter (1990) only focused on the activities of the domestic firms and how their interrelation influences the nation’s economy and the market competition in the industry. He failed to mention that apart from the direct overseas trade, activities of foreign firms could also affect the competitiveness of the domestic market. It can influence the domestic consumer behaviour thereby changing the demand trend, hence advantageous for the foreign firms to have a first move in the domestic market, thereby posing a huge challenge to the domestic suppliers. National Competitiveness as a checklist The concept of national competitiveness, as described by Porter (1990), can be described as a mere checklist of results that leads to national advantage. It fails to point out the necessary actions required for achieving the result, i.e. the model does not mention how a nation can achieve the required factor conditions or create the necessary demand conditions to achieve the national competitive advantage. Diamond Model in Light of Late Development Theory Dunning (1993) further argued that the diamond model is a static framework as it does not take into account the growing trend in technological usage and its contribution to the changing business market environment. It as a result gave rise to the concept of double or multiple diamond models that covers all the determinant factors. According to the Late Development theory discussed by Woo-Cumings (1999), the involvement of state in the financing of the industries to boost their development is of vital importance. Due to the rapid development of technology it is difficult for the firms belonging to the poor economies to keep up with the global competitive environment. The financial boost helps them to compete in a global perspective and thereby positively influencing the national economy. Porter downplayed the role of the state The diamond model completely ignored the contribution of the state, because Porter (1990) only focused on the industrial perspective involving firms and their interrelated activities. Therefore, the diamond model downplayed the interrelationship between the state and business industry. The state often invests a significant amount of capital in technological development of a region, which, as a result, increases the national competitive advantage. Country Comparison This section highlights the national competitive advantage of different countries in the automobile sector. In China, the number of automotive companies is relatively high, but most of them are operational only within the national border. Companies like the Great Wall Motors and Beijing Automobile Works operate only within China and have not entered the global market. It suggests that China has low competitive advantage in this industry. However, this can be characterised by a number of setbacks especially in the economy, which would have throbbed and expanded rapidly in the global market when the central localization of its market products was transformed to a modest marketization. The integration of this policy expands the territorial boundaries of the market structure in the region. Moreover, the regulations in the market industry such as the laid down on antitrust unit are charged with the responsibility of handling investigations against foreign competitors, for instance, the pricing motives. In addition, China autos are driven by the profit maximization motive in their economy. Germany is one of the best-known countries in the automotive industry (Nation Master, 2015). German companies like Volkswagen and BMW are best known for their product quality, product design and brand value. Having been marked the Europe’s highest dealer in locomotives, the sector is highly prolific in terms of auto engineering and excellence. It is speeded by the fact that the country manifests greater invention power that is highly required in the automobile industries (VDA 2014). Therefore, Germany has a very high national competitive advantage in the automotive industry. She has devised myriads of strategies to cope with the outgrowing multinational competitive advantage. These includes the existence of many large multinational companies globally which helps in curbing and creating a large marketability of their fast, strong, and innovative services. They also have diploid the system of small and large enterprises with an impressive source of strength creating a multinational link amongst the various nations. This enterprise also deals with the hindrances of mass and overflowing market within the region through a massive control measures (ASME’s Advanced Manufacturing Impact Forum, 2014). Japan also holds a strong position in the automobile industry amounting to a higher percentage in the availability of diverse motor companies whose performance are highly outstanding. Companies like Honda, Toyota and Mitsubishi, are operating in a global perspective. Moreover, Toyota holds the highest market share in global automotive industry, thereby giving Japan the highest level of national competitive advantage, (Dore, R. (1973.) The expansion of automobile industries in Japan was speeded by the government effort majorly in the industrial sector. There were compensational programmes and employment opportunities, creating the world’s­­ largest economic improvement despite the economic crisis that was taking place. The globalization of Japans automobile industry speeded up than the rest of the countries mostly with the introduction of Toyota Motors. As more improvements were laid to expand the marketability of these products in international markets, a number of companies sprung to reach both to the local and the global nation as a whole. It has helped in curbing the monopolistic markets all over the continent mostly due to their overstretched branches. Thus, it had had much competitive advantageous over a number of countries. UK companies like Lotus and Bentley have also gained significant popularity in the global market, but still lag behind the German and Japanese companies in terms of competitive advantage. They have at a upper hand been considered an outsourcing producer of automobiles in these companies due to improved quality of their products and the superb performance of their services, making them be of advantageous in terms of multinational competitiveness. USA, on the other hand, holds a respectable position in the automotive industry owing to the presence of General Motors and Ford thereby giving the nation a significant competitive advantage over others (Le, 2014). Porter’s Diamond Model in Major Economies The Porter’s diamond model was developed based on ten developed countries that were considered to be among the major economies in the world. Their economic potentialities are deemed to be outstanding; thereby they have a direct influence on the global economy. This system of national business economy was characterised by the availability of adequate resources such as land, labour, capital, which essential clusters in the diamond’s model. In order to effectively utilize these resources without un-meaningful depletion and unnecessary misuse, there has to be laid down regulations in various sectors. It might require the involvement of governmental policies for the execution of these rules and regulations. Moreover, the government may also be involved in the national business through the imposition of taxes in the economy. It largely regulates the competitive nature of several industries. In various major economies, the business firms are quite influential in developing the national economy. However, the working environment manifested by these industrial sectors i.e. economic, social, cultural, and political environment usually affects this. Various features of the national economy may also be evidenced due to the coexistence and interrelationships that exist between the government and the market concentration. Therefore, the competitive advantages achieved by a particular firm or industry will mainly influence the competitive position of the nation. They clearly define the motive of any organisations and the future expectations of that particular sector. Therefore, it can be stated that the Porter’s Diamond Model determines the business environment, either internally or externally, of the major economies. (Porter, 1998). Role of Globalization and Multi-National Firms The rapid growth of globalization has allowed multinational firms to gain competitive advantage by leveraging the comparative advantage and economies of scale of the host countries. Globalization has opened up the global business market allowing firms to have access to new technologies from other countries thereby allowing them to develop their own competitive advantage (Adcock, 2010). The location based comparative advantage suggests that certain nations are capable of producing certain goods or service at a lower price than others, thereby giving it a competitive advantage by cost leadership positioning. However, the diamond model does not discuss the impact of globalization on competitive advantage. Although it has shed some light on the firms’ structure and strategies, but has not discussed how they can be achieved. The globalization has allowed multinational enterprises to break out of the limitation of national attributes. They can take the advantage of the entire global business market to ensure their sustainability and future growth (Dunning, 1993). Growing Inward FDI Policies The multinational firms possess the flexibility and financial strength to expand or shift their business to almost any country they want. Despite this fact, the governments are easing out FDI policies to attract foreign firms (Chernev, 2010). It is mostly because they have recognized the positive effect of inward FDI on the national economy. The firms tend to expand their business in places where the trade barriers and entry barriers are much less significant. Therefore, the developing countries compete against each other to attract multinational firms by easing the FDI policies. Conclusion The diamond model of Porter (1990) is limited within the national boundaries, and it has tried to explain the competitive advantage of the domestic firms. However, it has failed to factor in several other parameters that have significantly developed the competitive advantage of a nation. The model mostly talks about the advantage of a nation over other countries, but the parameters discussed by the model are mostly industrial oriented. (Dayal, 2010). The model also does not discuss the impact of the multinational trade and effect of globalization of development of competitive advantage. The model was developed by focusing only on the developed economies thus eliminating its usage in most of the developing countries. Thus, it can be stated that the Diamond Model is mostly irrelevant in the current global business environment, as it fails to explain and suggest solutions to most of the contemporary issues of competitiveness. Reference List Adcock, D., 2010. Marketing: Principles and practice. 4th ed. London, Thousand Oaks CA: Sage Publication Baker, M, 2007. Marketing strategy and management. 6th ed. Basingstoke: Palgrave Macmillan. Bellak, C.J. and Weiss ,A. 1993. A note on the Austrian diamond. Manage Int Rev., 2(33), pp.109 – 18 Boone, L. E. and Kurtz, D. L., 2012. Contemporary Marketing, 7th ed. New York: Kaplan Publishing. P-84 Chernev, A., 2010. Strategic marketing management. 7th ed. Bedford, London: Thomson Learning. Dayal, R., 2010. Marketing Management. 3rd ed. London: Thomson Dobson, P., 2009. Strategic Management: Issues and Cases. 6th ed. New Jersey: John Wiley & Sons Inc. Dunning J. H., 1993. The Globalization of Business, London: Routledge Handlechner, M., 2008. Marketing strategy. 5th ed. Canada: Grin Verlag Hutt, M. D. and Speh, T.W., 2012. Business Marketing Management: B2B, 5th ed. New Delhi: Global Indian Publications Ltd. Kotler, P. and Keller, K.L., 2011. Marketing Management. 14th ed. New Jersey: Prentice Hall. 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