Porters Model of National Competitive Advantage - Essay Example

Porters Model of National Competitive Advantage Introduction A number of studies conducted for the last ten years reveal that outsourcing of information technology permits the companies to decrease their high expenses and boost their productivity (Lall, 2003). Through information technology, the firms are in a position to enjoy the flexibility and as a result enhancing the business performance. USA, China, UK, Japan, and Germany are all experiencing information technology outsourcing growth. IT outsourcing has been around for some time and is significantly affecting these countries’ and the world economy at large (Kearney, 2007). However, it is true that outsourcing IT services offshore brings with it new risks and challenges. The Diamond Porter model is used in this study to determine the competitiveness of IT outsourcing in USA, China, Germany, Japan and UK (Porter, 1979). The model is used to examine the basic industries in the countries (Chambers, 2008). First, the paper discusses the Porter’s Diamond Model critics and pros, detailing on the authenticity of the study. The paper then uses Porter’s Framework to analyse IT Outsourcing industry in China, USA, UK, Germany and Japan. Recommendations and outcomes are discussed at the end of the paper. 2. Background Since Porter’s work was published, about 20 years ago, there has been a multitude of response to his work. Some research studies tallied with his work while others disagreed. However, from the studies, it is evident that some of Porter’s ideas hold while others do not apply in the today’s modern business settings. In his research, Oz (2002) applied Porter’s Diamond Model to monitor the competitive advantage of five industries in Turkey. His findings were tandem with Porter’s ideas. The Turkish customers were demanding and as a result forced the companies to upgrade to meet the demand of the consumers. The intense rivalry in the Turkish domestic market for clothing and glass pushed the companies to be in a position to compete favourably in the international markets. On the other hand, the non-competitive automobile companies in the Turkish market remained non-performers in the international markets. The research confirmed Porter’s theory that a nation’s competitive industry tend to group as one. Wong, Maher, Wang and Long (2001) did a similar research in Taiwan and discovered that Porter’s allegations were right. Porter’s methodology has also been questioned in a number of studies (Rugman and Verbeke, 1993; Rugman and D’Cruz, 1993; Dunning, 1993). Lazonick (1993) questioned the importance of the rivalry in Porter’s work. He was challenging the fact that rivalry alone cannot be a factor to trigger firms to innovate. When a company is faced with a lot of pressure from the commenting firms, the company can decide to imitate or adapt the new technologies instead of innovating. For example, the USA firms faced competition from the foreign countries, the companies can decide to cooperate amongst themselves domestically t beat the rivalry from the foreign countries and use it on a competitive advantage. Anther research by Gray (1991) identified the lack of emphasis on the macroeconomic policies on Porter’s framework, for example, exchange rate. Porter’s Diamond Model was not successful in understanding the fact those micro-economies where companies earn a bigger chunk of their profits outside the home country. The target market Diamond is more lucrative than their domestic Diamond (Rugman and D’Cruz, 1993). Another proposal was made by Rugman and Verbeke (1993) that the North American Diamond is more suitable than a Canadian one because the signing of the Canadian-USA FTA meant that the two nation companies can go to both countries for highly skilled labor and resources to build their factor conditions. The companies from both countries will have to gain the market through benchmarking and competing against one another. 3. Factor Conditions Factor conditions are the company or the country’s values and skills that allow it to compete. The factor conditions are the infrastructure and factors of production required in a given industry. Every country has its stock of factors that makes it do better than the other countries in a given sector. Overall, the factor conditions are the country’s position in terms of production, for example, infrastructure or labor that is required to perform in an industry, in this case, information technology outsourcing. 3.1. Factor conditions in China The information technology industry is huge in China, but new to the local industry. The IT workforce is large and highly educated. The workforce, however, features low skills in English (China Software Industry Association, 2005). MOFCOM is they IT Outsourcing company in China. Besides exploring the huge China market, MOFCOM also dominate the world IT Outsourcing market. 3.2. Factor conditions in U.S. The country has a huge well developed information technology sector featuring a huge and educated workforce. The workforce has low English experience (Gellner, 1980). Key IT Outsourcing company in U.S.A is IBM. US have some of the most influential IT Outsourcing companies in the world. IMB Company outsources to the global market, including China, USA, Japan, Germany and UK. 3.3. Factor conditions in Germany The country has huge and well developed local information technology industry. The IT workforce is moderate and growing at a gradual pace. The workforce, however, features a low level of English skills (Chambers, 2008). ICG Group is the largest German IT Outsourcing firm. Germany is the largest outsourcing company in the European market, coming second after UK. 3.4. Factor conditions in UK The Information technology industry is moderately large. The IT industry is relatively new in the country as compared to the others. The country, however, features highly educated IT. G4S is one of the top UK outsourcing firms. The UK IT Outsourcing companies are highly competitive and outsources even to the complex USA market. High levels of skilled English IT experts and geographical locations also play a role here. UK is the current leading outsourcing country in the entire European market. G4S trains its staff to gain competitiveness in the USA market. 3.5. Factor conditions in Japan The local information technology industry is large and well established. The workforce is moderately educated in English skills. Sony Corp is the leading Japanese IT Outsourcing company. Japan IT Outsourcing firms enjoys proximity to China, Africa, and USA. Japanese Corp is a leader in innovation technology, giving it an advantage and attracting other foreign markets. 4. Demand Conditions According to Porter, demand conditions are the second most important factors that show the nature of the country demand in terms of national competitive advantage. This factor relates to the nature of the home market consumers. The demand conditions are the pressures conditioned on the buyers’ needs about the price, quality, and services from a given industry. 4.1. Demand conditions in China Very sophisticated and large industrial, government and retail sector requiring IT support. The Chinese market is wide and complex, the corporations that emerge successful in the Chinese market perform well in global markets. MOFCOM feature in the global markets, outsourcing to Russia, Africa and USA. 4.2. Demand conditions in U.S. Relatively sophisticated and large industrial, government and retail industry environment that is constantly looking for IT support. IBM provides high quality products that are long lasting to make the customers loyal. IT Outsourcing companies. Since the USA market is sophisticated, the companies are doing perfectly well in the world market. 4.3. Demand conditions in Germany Relatively sophisticated and large retail and industrial environment, which demands technology, support. The German consumers are not proficient in English, the international companies therefore finds it difficult selling to this kind of consumers. The same way, the local German firms find it difficult selling to other countries that does not recognise the German culture. ICG Group. The company does not perform overall well on the global markets., it mostly dominate the European markets. IGC has mastered the special needs of the European market and emphasizes on that to beat its competition. 4.4. Demand conditions in UK Moderate industrial, government and retail sector environment requiring IT support. G4S enjoy the European market because UK provides much similar market to the region, with skilled eloquent English experts. 4.5. Demand conditions in Japan Moderately sophisticated and large industrial, government and retail sector environment, which need IT, support. Sony Corp does better on both the local and international market. The company works together with other USA corporation exchanging technology for demographic benefits to understand the complex USA market. 5. Related and Supporting Industries This is the existence or inexistence in the country of supplier industries and other affiliated industries that compete in the international markets. According to Porter, a strong local rivalry or competition in a nation enhances competition (Businessweek, 2006). He asserts that firms that are competing well in the domestic market are likely to do well too at the global markets. The companys structure and strategy also determine the performance in the global markets. Company size, fragmentation of the market and the structure of the managers are determinants (Brown et al., 2007). 5.1. Related and Supporting Industries in China The country features a well-established telecom industry with a moderately strong sector in IT. The related and supporting sectors provide the firms with an extra advantage to the global competitiveness (Porter, 1979). Being geographically close to the suppliers’ aids in information sharing between the producer and the supplier, which benefits all the organizations (Kearney, 2007). Development of strategic technologies is also additional benefits to competitiveness according to Porte’s Diamond Model. While the Chinese companies are multinational, interestingly, the USA IBM and other firms are camping in China. 5.2. Related and Supporting Industries in U.S The nation has a well-established telecom sector with some growing IT industry. USA has the most advanced IT Outsourcing sector globally. This is attributed to funding by the government and enabled environment for research and development. The USA market is very competitive, only a few international companies are present in this market. 5.3. Related and Supporting Industries in Germany The country has a powerful telecom industry with some developing IT hardware sector. ICG Group. The German market is infested with several multinational companies including the UK, USA and Chinese IT Outsourcing multinational companies. 5.4. Related and Supporting Industries in UK The country has moderately developed IT industry with almost no IT hardware sector. UK market also features a number of USA, German, and other European IT Outsourcing companies. 5.5. Related and Supporting Industries in Japan The country features a moderate telecom industry with minimal IT hardware sector. USA IBM, German ICG and Several Chinese outsourcing firms have presence in Japan. 6. Strategy, Structure, and Rivalry These are the conditions in the country that governs and dictates how organizations are organized, created, and managed (Chambers, 2008). The conditions also show the nature of the local industry/ sector. 6.1. Strategy in China Features several local outsourcing IT companies and a growing number of the IT outsourcing companies. High level of competition in the country. MOFCOM, Oppenheimer Equity Research and IDC and several outsourcing companies together with the international companies have presence in China (Grant, 1991). 6.2. Strategy in U.S Features mostly several small sized Outsourcing IT firms locally and a few big international IT outsourcing companies. The competition level is moderate in the country. IBM, CapGemini, Hewlett-Packard, Accenture, and Genpact do not face much competition from the international market because the USA market is very complex and only very competitive firms compete here. Again, the government gives incentives that make it easy for the domestic companies to do better than the international companies locally. In 2014 IBM was faced with decreasing profits, the company embarked on investing in new strategies including multibillion expenditure on data analysis software, Watson artificial intelligence technology and cloud computing (Dunning, 1995). 6.3. Strategy in Germany Small sized companies struggling to join the global market dominate the Germany market. A number of large IT Outsourcing corporations are gradually going to Germany. There is moderate level of competition in Germany. ICG Group does not face much competition from the local firms. The company also takes advantage of the regional European market. ICG invested in data analysis skills as its 2014 major strategic shift in the market (Dunning, 1995). 6.4. Strategy in UK The country features small sized local IT outsourcing companies. There are also a number of global IT outsourcing firms in the country. The level of competition is low. G4S, Capita, Serco and Atos faces low competition amongst them, but threatened by the international corporations like IBM. G4S settled for corporate social strategy as a way forward for future development (Grant, 1991). 6.5. Strategy in Japan Large multinational IT outsourcing companies dominate the market. There are several big multinational IT outsourcing corporations and a high competition level in the country. Sony Corp had its image dented for poor quality; the company decided to mend its image and settled for corporate strategy and reputation building by offering high quality services (Dunning, 1995). 7. Diamond Model and Characteristics of National Business Understanding National Business System Comparing two companies from different nations is an impractical approach. There are bound to be hidden challenges that cannot be easily understood until the environments under which these companies operate in are understood. The same applies to a national level. In a country, the different environments are the business systems that constitutes of different constitutional factors. A business system can be defines as a distinctive configuration of relations in a hierarchy market which gets institutionalized as relatively successful methods of organizing economic activities in varied institutional environments. Table 2: National Business Systems (Source: Michael, 2015) COUNTRY CHARACTERISTICS COMPARISON State Regulation (Company-state relationship) Social Culture Financial Systems (How Nations get Money) Characteristics of National Business System in China much higher intervention on the economic activities The group is paramount to the individual No long term relations with the lenders Characteristics of National Business System in US weakness of the state as an economic actor: The economic orientation is a liberal market: state has low regulation on business activities individual is more important than the group: there is personal freedom and achievement No long term relations with the lenders Characteristics of National Business System in Germany Country follows bargained corporatism: state have much higher intervention on the economic activities The group is more important than the individual obtain finance by long-term bank loans and cross-investments: Good relations with lenders Characteristics of National Business System in UK Moderate bargained corporatism The UK value individuals same as group Good relations between businesses and lenders Characteristics of National Business System in Japan no bargained corporatism Group is more important than the individual: believer of communitarian cultures obtain finance by long-term cross-investments and bank loans: Good relations with lenders 8. Diamond Model and Performance of National Business System In order to show the national performance of the five countries, the Gross Domestic Products are provided as recorded in 2013 in USD, Trillion. USA is the top performer, followed by China, Japan, Germany then UK. Table 2: National Performance in GDP(Source: World Bank, 2013) Rankings, in terms of National GDP Performance of National Business System in China 9.24 Trillion USD (2013) Performance of National Business System in US 16.77 Trillion USD (2013) Performance of National Business System in Germany 3.73 Trillion (2013) Performance of National Business System in UK 2.678 Trillion USD (2013) Performance of National Business System in Japan 4.92 Trillion USD (2013) 9. Conclusion The paper has analysed various earlier studies investigating into the authenticity of Porter’s Diamond Model. The research has been conducted to verify the whether the Diamond model holds in the IT Outsourcing industry in China, Japan, UK, China and USA (Lazonick, 1993). The paper has successfully used the four Diamond Model characteristics to determine the competitiveness of China, Japan, Germany, UK and USA in the Information Technology outsourcing sector. The research indicated a relationship between the nation’s strategy, structure and rivalry and national competitiveness (Porter, 1979). The findings indicate that high levels of domestic rivalry do make the global companies more competitive (Kearney, 2007). Reference List Businessweek (2006). Major players in outsourcing, Online Extra January 30, 2006. http://images.businessweek.com/ss/06/01/big_outsourcers/index.htm?chan=search Brouthers, K. D., & Brouthers, L. E. (1997). Explaining national competitive advantage for a Small European country: A test of three competing models. International Business Review, 6(1), 53-70. 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