Competitive Advantage and Porters Diamond Theory - Literature review Example

Critically analyze Porter’s Diamond Theory. Apply it to explain the international competitiveness of an industry of your home country.” Theoretical Perspective of Porter’s Diamond Theory The model of Porter’s Diamond Theory attempts to demonstrate the competitive advantage some groups or nations possess due to certain features available to them. The Porter’s Diamond Theory helps economies in improving and analyzing their role in globally competitive field. Conventional economic theories refer location, land, labor, natural resources and population as factors of competitive advantage. The Porter’s Diamond Theory utilizes a more proactive approach in regarding these factors as: Firm’s structure, strategy and rivalry Related supporting activities Demands for products Factor conditions Porter’s Diamond Theory states that countries can become competitive irrespective of the fact whether they possess natural endowment such as natural resources, land or labor or not. Under this theory, the role of government is highly important. Government needs to push and encourage companies and organization to a more competitive level, in this manner, increasing performance and eventually the overall combined benefits. Competitive Advantage and Porter’s Diamond Theory Competitive advantage is that area of expertise of a firm where it outperforms its competitors or more specifically, other nations or countries. Through researches, it has been observed that marketing plays a vital role in building up the competitive advantage of companies. The name ‘Diamond’ has been labeled due to the four factors, which the natural environment conceptualizes. According to Porter’s Diamond Theory, a country can capitalize its competitive advantage in any of the area where it excels other countries. For instance, due to the climate and weather conditions of European countries, Starbucks is very popular among those countries but if the company intends to expand itself in South East Asian countries, then the weather conditions of South East Asia do not permit the company to expand its’ business in these areas. Therefore, European countries have competitive advantage of having cold weather. Another example includes Nike. Nike chose China for manufacturing concerns due to cheap labor and overhead expenditures in lieu of European countries, where overhead expenditures and labor are much higher as compared to China. Therefore, China possesses competitive advantage of having low labor and overhead costs than European Countries. Literature Review Dröge and Neven (2001) stated that it is difficult for agricultural food SMEs to become and stay competitive in this period of globalization. The paper of Dröge and Neven (2001) argues that the holistic diamond model of Porter is superior in investigating the cluster dynamics; here cluster is defined as a homogenous group of firms involved in marketing specific product in a specific location. Dröge and Neven (2001) concluded that despite of the fact that this model has not been tested in most of the developing countries, but those rare researches that have been conducted to validate the diamond model, affirm that the diamond model of Porter is intrinsically better. Rugman and Verbeke (1993) proposed an article to study the interaction between international and national determinants of a country, which leads to competitive success of a country at global level. Rugman and Verbeke (1993) stated that the model can be made even better and therefore, suggested extending the Porter’s Diamond framework and used a variant, i.e. SWOT analysis in order to functionalize the Porter’s Diamond model (Rugman and Verbeke, 1993). Narula (1993) stated that the diamond model of Porter is a static one. The author further stated that it is based just on the subjective analysis of only those countries, which are industries based. Narula (1993) further stated that this model is not applicable for the developed or developing countries. The author highlighted the role of technology in the development of international businesses. To certain extent, the point put forward by Narula (1993) is justifiable since the Diamond model of Porter emphasize only on the industrialized countries and has no significance for the developing or developed countries (Narula, 1993). Hodgetts (1993) examined the ways by which Mexico can be linked to U.S through a double diamond, which is an extended form of Porter’s Diamond Model. The author included the Mexico’s leading clusters i.e. automobiles and petrochemicals in order to study the framework (Hodgetts, 1993). The research of Hodgetts (1993) also highlighted that the Porter’s Model can be modified in order to better capitalize the opportunities in a given nation. Dunning (1993) presented a study and stated that recent volumes of Michael Porter underestimates the substantiality of the globalization of production as well as the competitive advantage for economies. It is due to increased linkages among cross-border activities by multinational entities, which, indirectly or directly, intervene among each of the component of Porter’s Diamond Model. Dunning (1993) focused on how the technological advancement has increased the interdependencies among the national economies (Dunning, 1993) Another study conducted by Rugman and Verbeke (1993) emphasized upon the Porter’s single diamond framework. It focused on how home country’s organization compete at international level. In order to find the competitiveness of home-based MNEs in international market, Rugman and Verbeke (1993) conducted a study for Canadian firms. The author found significant level of competitiveness of home-based MNEs in international market (Rugman and Verbeke, 1993). Cho, Moon and Kim (2008) conducted a study to investigate the impact of dual double diamond model for Country Specific Advantages (CFAs). The results of the study revealed that while assessing CSAs of national economies, dual double diamond and nine-factor model had better explanatory power as compared to porter’s diamond model (Cho, Moon and Kim, 2008). Rugman and D’Cruz (1993) conducted a study to evaluate the international competitiveness of open, small, trading economy such as Canada. The authors took the Porter’s diamond model in order to explain the successful resource based international enterprises of Canada. A double diamond framework was developed to attain the results (Rugman and D’Cruz, 1993). The authors found that competitiveness of Canadian multinational is not much high as compared to other players in the industry. Shubin and Weiping (2003) states that porter’s diamond model provides a new theoretical perspective of analyzing the international organizations in current and future period. Shubin and Weiping (2003) stated that despite of its significance, this model could not be perfectly suitable without any blemish. The model possesses some shortcoming, which has led to an upgrade of this model. These upgrades have been done by Rugman (1993) as ‘double diamond’ and by Moon (2008) as “Dual Double Diamond” and “Generalized Double Diamond Approach”. Chobanyan and Leigh (2006) state that ‘diamond model’ of Porter provides useful basis for formulating policies in order to foster competitiveness. Despite of agreeing with the effectiveness of Porter’s Diamond Model, Chobanyan and Leigh (2006) concluded that the diamond model alone could not be sufficient for stable and long-term economic growth of countries. However, based upon porter’s diamond models, governments can attract foreign direct investment into the nation by making an objective of creating new ‘clusters’ (Chobanyan and Leigh, 2006). Reviewing the above-mentioned researches, it became evident that some authors presented a favorable viewpoint towards Porter’s Diamond Model while other believe that this model can be modified and can be taken to next level since it possesses some limitations. Industry on Porter’s Framework- A case of Indian Shrimp Industry India is the fifth largest producer of shrimps in the world. After China and Thailand, India is considered as the largest producer of aquaculture. India contributes by 49.76% in terms of value and 21.56% in terms of volume to the sector of aquaculture. In India, the current exploitation of shrimp farming constitutes about 16% only however, 1.2 million hectors can be utilized for shrimp farming. In India, farmers of different levels such as marginal and small level own 90% of these farms. One of the major cultured species of India is black tiger prawns. By utilizing Porter’s Diamond Theory, the competitive environment of Indian Shrimp Industry can be evaluated. All the four factors will be evaluated keeping India’ Shrimp Industry in view. Firms’ Structure, Strategies and Rivalry Out of the 500 leading companies of India, only 10 companies are involved in the business of aquaculture. These 10 companies own around 1898 hectares of land. Out of this entire land, shrimp farming owns only 798 hectares. The country utilizes same strategy for global level, which it uses at local level. Instead of that, the country needs to draw a line between the strategies and firm structures utilized at local level and international level. It needs to build a competitive brand, which can sustain among strong international brands. Moreover, it needs to place the top quality product for exports and the lowered quality product must be used within the nation. Factor Conditions Factor conditions refer to those factors of which companies can take full advantage in their nation. For shrimp farming, India has developed an adequate workforce. Moreover, it has also made reasonable developments for this sector. The coastal belt of India consists of around 370 freezing plants. These freezing plants are spread over the entire coastal belt, which helps in storing the seafood. Despite of that, the country needs to establish its infrastructure in order to maintain the quality of processing facilities since a large number of processing is primarily from exports. Among all the shrimp producer countries, India enjoys the presence of very cheap labor. In this regard, the production cost can be easily reduced. Mostly women workers are hired for the processing of seafood, due to their skillful hands, which prevent the seafood from being damaged. These women workers are not trained professionally but once they are brought to the factories, they learn how to work by practicing. The most important factors, which are considered for the flexibility scenario, are labor and development support. These factors facilitates in capitalizing full benefits of the Indian Shrimp Industry since they help in reducing labor cost and development cost. Demand Conditions Europe and U.S are the top most important purchasers as far as exports of seafood are concerned. For a very long time, European markets had been very prominent for making shrimp imports. The consumption of seafood and Shrimp in U.S and the European region is much higher than elsewhere. Japan is second biggest buyer of India’s shrimps. These countries purchase shrimp primarily from Thailand but after Thailand, India is the biggest exporter of shrimps. However, due to lack of technological innovations and strategic planning, India could not compete with Thailand in building up its own distinguished brand. The consumption of seafood especially shrimps are met by mainly these two countries; Thailand and India. However, in the recent years, primarily due to recession, the demand of shrimp at domestic and international level, in European countries has declined considerably. At the end of 2008, the domestic consumption of shrimp rose just by 0.1%, which is too negligible. The recession has influenced the spending pattern of the consumers all over the world. However, after the recession of 2008, European consumers are now being more concerned and calculative about their spending patterns pertaining to basic commodities. Being a highly priced commodity, the purchases of shrimps are more likely to be influenced by change in spending behavior of European consumers. On June 2009, an article on BBC News reported that India’s billion dollar shrimp industry in under threat after the demand from Europe and United States dropped. Black tiger prawns are considered as dollar crop for India since the shrimp farming sector earns around 50% of its earnings by the exports of black tiger prawns to US (BBC News, 2009). Related and Supported Industries As mentioned earlier, out of top 500 leading companies of India, only 10 companies belong to the industry of aquaculture. Therefore, the level of local competitiveness is very low. Due to this factor, it becomes difficult for India to compete at international level where other giant exporter of shrimp such as Thailand, are already present. The country needs to build infrastructure and must bring technological development to this sector in order to make this sector more competitive at international level. Works Cited BBC News (2009). Indian Shrimp Farming Industry. [ONLINE] Available at: http://news.bbc.co.uk/2/hi/business/8085768.stm. [Accessed on: 11 December 2012]. Chobanyan, A. and Leigh, L., (2006). The competitive advantages of nations: Applying the “Diamond” model to Armenial. International Journal of Emerging Markets. 1 (2), pp.147 – 164 Cho, D. S., Moon, H. C. and Kim, M. Y, (2009). Does one size fit all? A dual double diamond approach to country-specific advantages . Asian Business & Management. 8 (1), pp.83-102 Dunning, J. H, (1993). Internationalizing Porters Diamond. MIR: Management International Review. 33 , pp.7-15. Hodgetts, R. M., (1993). Porters Diamond Framework in a Mexican Context. MIR: Management International Review. 33, pp.41-54 Narula, R., (1993). Technology, International Business and Porters "Diamond": Synthesizing a Dynamic Competitive Development Model. MIR: Management International Review. 33, pp.85-107 Neven, D. and Droge, C. L.M., (2001). A Diamond for the Poor? Assessing Porter’s Diamond Model for the Analysis of Agro-Food Clusters in the Developing Countries.. Congress Paper., pp.1-13. Rugman, A. M., and Verbeke, A., (1993). How to operationalize porters diamond of international competitiveness. The International Executive. 35 (4), pp.283-299 Rugman, A. M. and Verbeke, A., (1993). Foreign Subsidiaries and Multinational Strategic Management: An Extension and Correction of Porters Single Diamond Framework. MIR: Management International Review. 33, pp.71-84 Rugman, A. R. and DCruz, J. R., (1993). The "Double Diamond" Model of International Competitiveness: The Canadian Experience. MIR: Management International Review. 33, pp.17-39. Weiping, C. and Shubin, Z., (2003). New Trends of Overseas Competitiveness Theory Blemish and Improvement of Michael Porters Diamond Model. International Economics and Trade Research., pp.2 Read More