Porters Model of National Competitive Advantage - Essay Example

Topic: Porters Model Porter’s model illustrates how the national home foundation of an organization contributes to its success in accomplishing advantage in global competition. This factor may promote of obstruct and business from building competition on an international range. Porter states that there are four elements that are all interlinked to determine the chances of a nation succeeding in international competition. The first one is Firm Strategy, Structure and Rivalry, which refers to how domestic cultures, competition and rules guiding the business structure determine the progress of a company in international competition. The second is demand conditions that refer to the nature of the market in the home country. The third element is related supporting industries that stand for whether there are other industries within the nation which supply the same commodity or service internationally. The forth is factor conditions, which refers to the nations endowment in factors of production. These four are found in Porter’s Diamond Model and are all linked together signifying their interrelation. In this model, the government acts as the catalyst of the elements in the model. National prosperity is created, and it does not just happen because a country is endowed with natural resources, human labor or the value of its currency. As much as each country has it own unique and beneficial features when it comes to gaining or achieving national competitive advantage, the individuals in that country have to put effort so as to be successful. If not so, the resources will be left unused, and someone from a different country might come around and utilize all these resources. The competitiveness of a nation relays on the ability of its industry to be inventive and innovative. The reason why companies gain advantage against great global competitors is the challenge they face as well as pressure to perform. This comes as a result of the presence of tough homeland rivals to keep them on their toes (Porter 1992). Great demand from local clientele also contributes to this success. Most of the companies that have achieved to maintain their position as great international competitors are there because of local factors within their nation’s history, culture, and structure of their economies. There are outstanding differences in the national values and the characteristics of each nation. This is what limits countries to be competitive in many industries at once. Countries prosper in certain industries due to their home setting being advanced, vibrant and testing. So that Porter could come to his conclusion about his approach, he conducted a four-year study in some of the leading world economies among them Japan and Germany. Porter and his researchers studied these economies in two parts. The first study was according to industrial success according to statistics. The second was studying the history of the competition in various industries so as to understand how these nations achieved the economic, competitive advantage. However, this approach is defective even though it is currently accepted by both businesses and nations. There should be new guidelines on great economies have achieved economic advantage that do not rely on traditional ideologies. The true foundations of competitive advantage are deeply misunderstood (Cartwright 1993). This approach will only provide short-term results which mean that if successful economies such as Japan pursued the idea, they would by no means accomplish valid and proficient competitive advantage. Countries that have globally achieved leadership use tactics that are totally different from each other. On the other hand, the fundamental methods of operation are similar. Porter did not seem to give much importance to the role of the government in contributing to a nation becoming a competitive advantage. In a national or global economy, the role of government is to catalyze or challenge the company to raise their goals. Competitive advantage is also influenced by the home nations government and its policies. It can indirectly employ subsidies so that it can use them for fining overseas companies, or on the other hand use taxes as a direct entrance blockade to fine them. The problem is however with government actions. The problem with plans such as these is that they can go contrary to the plan and end up creating a secluded domestic industry that is not capable of competing in the worldwide market. For example using Porters diamond on states, at the same time as when under Communist rule, would have potentially established that they were highly competitive internationally. All these factors would work in favour of the nation that the government is in control of (Ketels 2006). Therefore, the responsibility of the government in contributing to the rise of a nation into one that has global competitive advantages is great. However as a result of government limits on foreign competition, substandard products were created. This resulted in the home nations firms being unable to compete profitably in many products once restrictions were lifted. They were not aware of the international market which can be pretty risky. They had been used to working in a secure environment. At the same time, a government cannot create industries that are competitive. However, it can govern the direction of a company but the ones that remain effective are those that provide a good environment for the companies. In order for a government to pay a proper supportive role to their companies, they have focus on the specialized factors. The government has a major responsibility (Lazonick). However; it is generally making efforts at creation of factors that rarely produce competitive advantage. Strategies such as the establishment of specialized programs for apprenticeship and research efforts in the universities can contribute to setting up the factors that will lead to competitive advantage. Countries have actually risen to the international competitive standards by reaching that point due to their innovativeness. Some of them used new technologies and techniques. They were able to identify something that was not present in the market and was required by the people and provided it. Others took up on old ideas that were taken lightly in the past and invested in developing them. Some economies grow to the range of global competitive advantage through perceiving a totally different market opportunity that was completely ignored. The Japanese for example maximized on creation of small appliances which were ignored by other major economies as they did not envision such in the industry bringing in substantial profits. There are various methods of executing innovation (Grants 1991). It can be seen in the improvement of a product, or in a new design of the product, in a different approach when marketing or even a new method of manner of training. Having information is crucial to the procedure of innovation and upgrading. This is because this information is not at the disposal of rival companies, or they are not looking for it. This knowledge may come from research investments or research in the market. Mostly, the information comes from looking in appropriate places and being open as well as putting in an effort without blindly making assumptions. This explains why most innovators come from different countries or regions. It may even come from a new industry that has a founder who has a totally non-traditional background or one whose ideologies were not taken seriously back where they are from. This also differs with Porter’s theory that as it does not explain how these industries thrive and are accepted in other nations when they have not first been implemented in their homeland. New innovators from other regions have the ability to view things from a different perspective and see opportunities that others have not (Print 2000). They are also not too reluctant to act on these opportunities and hence end up becoming successful innovators. After accompany acquires competitive advantage through a particular innovation, it can only sustain its position through unrelenting upgrades. Here, the company operates to beat itself each time with a better version of the previous one. This is because a competing company can easily be overshadowed if it stops improving on or upgrading on their commodity. An example of this is how Germany competitors are now gaining ground via developing more distinguished products. The art of invention and innovation should not stop once and the firm becomes international. It needs to keep rebranding and marketing so that it can capture international market attention. This is one way of ensuring they stay in the market (Porter 1990). Robert Reich seems to be in agreement with the ideologies of Porter, but there are those who feel there is flaw with Porters theory of National Competitive Advantage. Globalization has its own advantages in different countries. It is better to take on a global perspective than a competitive perspective. This way, one will not be too eager to keep anticipating the results. As a step at a time will ensure that the company establishes a solid foundation. Everything is a gradual step which requires patience and delivering, Innovating to offset local factor disadvantages is better than outsourcing; developing domestic suppliers, and buyers are better than relying solely on foreign ones. Unless the critical underpinnings of competitiveness are present at home, companies will not sustain competitive advantage, in the long run (Gray 1991). The aim should be to upgrade home-base capabilities so that foreign activities are selective and supplemental only to overall competitive advantage. Paul Krugman tends to differ with Porters theory and his description of states to be in competition. According to him, nations are not the same as firms. He argues that while corporations can go out of business, a country can never go out of business. Even though a nation may not be happy with its economy’s performance, they have no well-defined bottom line. On the other hand, Krugman believes that international trade is not a zero-sum game. If a nation’s economy does well, then it should not be at the expense of another nation. On a different note, Krugman says that the empirical evidence does not support the concept of Porter. He states that the major economies of the world are not in any competition at all. As much as the rivalry will always be there, countries that grow faster will see a rise in their political rank (Krugman 1994). Krugman’s claims words have led to significant debate and there in a chance that the policy makers heed his warnings. Porter did not seem to give much importance to the role of the government in contributing to a nation becoming a competitive advantage. In a national or global economy, the role of government is to catalyse or challenge the company to raise their goals. Competitive advantage is also influenced by the home nations government and its policies. It can indirectly employ subsidies so that it can use them for fining overseas companies, or on the other hand use taxes as a direct entrance blockade to fine them. The problem is however with government actions. The problem with plans such as these is that they can go contrary to the plan and end up creating a secluded domestic industry that is not capable of competing in the worldwide market (Dunning 1993). For example using Porters diamond on states, at the same time as when under Communist rule, would have potentially established that they were highly competitive internationally. However as a result of government limits on foreign competition, substandard products were created. This resulted in the home nations firms being unable to compete profitably in many products once restrictions were lifted. A government cannot create industries that are competitive. However, it can govern the direction of a company but the ones that remain effective are those that provide a good environment for the companies. In order for a government to pay a proper supportive role to their companies, they have focus on the specialized factors. The government has a major responsibility. However; it is generally making efforts at creation of factors that rarely produce competitive advantage (Davies 2000). Strategies such as the establishment of specialized programs for apprenticeship and research efforts in the universities can contribute to setting up the factors that will lead to competitive advantage. Another critique of Porters ideology is Rugman, who feels that they are limits and inured by being trained and later employed as a United States Academic which is among the richest nations worldwide. For companies in economically small nations, for example, Canada or Mexico, the connotation of Porters diamond is upsetting. Alan Rugman and Alain Verbekes major point was that firms from these countries could access a regional diamond, from a trade agreement such as NAFTA or the E.C. as a result, the "double diamond" invented to advance analyses competitiveness (Rugman 1998). Rugmans critique of Porters diamond appears to have been successful as Porter has since admitted that firms can have multiple home bases. Rugman and DCruz have recognized that the global competitiveness in Canada is not clarified by the Porter diamond. They demonstrate that great alteration of the Porter structures is needed to examine the character of Canadas foreign-owned cooperation and organization planning, for example, the Canada-U.S. Free Trade Agreement. This agreement proposes that the Canadian diamond required being properly thought-out in cooperation with the United States diamond this only goes to show that Canadian executives require functioning in this "double diamond" framework. Indeed, Rugman and DCruz suggest that a "North American diamond" be used by Canadian managers and policy makers to improve Canadas international competitiveness (Dunning 2001). FDI seems to be inclined to centre its attention on openings in the same continental area. This often echoes that there are multinationals who are attempting to build up local networks initially near their home base. A major conceptual problem with Porters model is due to the narrow definition he applies to FDI. Porter defines only outward FDI as being "valuable in creating competitive advantage" and that inward FDI is "not entirely healthy". He also states that foreign subsidiaries are importers and that this is a source of comparative disadvantage. All of these statements are questionable and have long been refuted by Canadian-based scholars, for example, Safarian, Rugman, and Crookell. They have demonstrated that the research and development undertaken by foreign-owned firms are not significantly different from that of Canadian-owned firms ((Rugman 1998). Rugman shows that the largest 20 U.S subsidiaries in Canada export virtually as much as they import. Although Porter in his response to Van den Bosch and Van Prooijen said that cultural changes occur very slowly and while culture can foster certain competitive advantages in an industry, it may become negative in another industry. In this regard, the benefits of culture can be said to be seen in the context of a specific industry (Ketels 2006). However certain positive traits fostered by culture such as the strong work ethics and high saving rates of the Japanese are generally good across all industries and such positive traits could and should come under a general education program administered by governments wanting to improve their national competitiveness. Porter also mentioned that firm’s structure and strategy such as the Japanese preference for close and long-lasting supplier relationships in the automobile industry is due to economic circumstances, not culture. This is incorrect. Whitley points out that Japanese cultural preferences for long-term employment and incremental growth within a particular sector leads businesses to specialize. Specialization increases the interdependence of enterprises and so the need to co-ordinate activities and strategies to reduce uncertainty. Whitley further describe that while the social ties and obligation of Chinese and Korean tends to rest on basic background characteristics, Japanese social ties and obligation tends to more idiosyncratic and situation specific thus allowing Japanese to build strong bonds with different groups of people with different backgrounds (Reinert 1995). These cultural factors are some of the reasons for the formation of Japanese business system of Kereitsu. In conclusion, there are some great facts in Porters theory that do relate to the current world. The one factor that differs is the will to undertake the challenge and actualize the opportunity envisioned. The current competition requires management. Leaders continue to prompt those who are innovative within their nations, as well as the companies present to embrace change. Policies have been put in place to regulate the types of businesses carried out but also the amount of revenue earned by the government from international entrepreneurial activities. Domestic rivalry is still being encouraged as in its own way it does motivate companies to expand and provide the best products so as to stay in business. In the end, the economy of a nation becoming one of the global competitive advantage nations would have a great impact on the shift of that country’s economy. It would be wonderful if leaders continued to urge the companies in their countries to push harder and keep aiming higher. References Porter, M. (1992). A Note on Culture and Competitive Advantage: Response to van den Boschand van Prooijen. European Management Journal, 10(2), 178. Reich, R. B. (1990). WHO IS US-Across the United States, you can hear calls for us to revitalizeour national competitiveness. Harvard Business Review, 68(1), 53-64. Reinert, E. S. (1995). Competitiveness and its predecessors a 500-year cross-national perspective. Structural change and economic dynamics, 6(1), 23-42. Rugman, A. M. (1992). Porter takes the wrong turn. Business Quarterly, 56(3), 59-64. Rugman, A. M., & Dcruz, J. R. (1993). The" double diamond" model of international competitiveness: The Canadian experience. MIR: Management International Review, 17-39. Rugman, A. M., & Verbeke, A. (1993). Foreign subsidiaries and multinational strategic management: an extension and correction of Porters single diamond framework. MIR: Management International Review, 71-84 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. Cartwright, W. R. (1993). Multiple linked" diamonds" and the international competitiveness of export-dependent industries: The New Zealand experience. MIR: Management International Review, 55-70. Chang Moon, H., Rugman, A. M., & Verbeke, A. (1998). A generalized double diamond approach to the global competitiveness of Korea and Singapore. International Business Review, 7(2), 135-150. Davies, H., & Ellis, P. (2000). Porter’s competitive advantage of nations: time for the final judgment? Journal of management studies, 37(8), 1189-1214. Dunning, J. H. (1993). Internationalizing Porters diamond. MIR: Management International Review, 7-15. Dunning, J. H. (2001). The eclectic (OLI) paradigm of international production: past, present and future. International journal of the economics of business, 8(2), 173-190. Ketels, C. H. (2006). Michael Porters competitiveness framework recent learnings and new research priorities. Journal of Industry, Competition and Trade, 6(2), 115-136. Krugman, P. (1994). Competitiveness: a dangerous obsession. Foreign affairs, 28-44. Lazonick, W. (1993). Industry clusters versus global webs: organizational capabilities in the American economy. Industrial and Corporate Change, 2(1), 1-24. Grant, R. (1991). Porters competitive advantage of nations an assessment. Strategic Management Journal, 12(7), 535-548. Gray, H. (1991). International competitiveness: a review article. The International Trade Journal, 5(4), 503-517. Öz, Ö. (2002). Assessing Porters framework for national advantage: the case of Turkey. Journal of Business Research, 55(6), 509-515. Porter, Michael E. (1990) the competitive advantage of nations. New York: Free Press. Print. Porter, M. E. (2000). Location, competition, and economic development: Local clusters in a global economy. Economic development quarterly, 14(1), 15-34 Read More