Porters Model of National Competitive Advantage - Literature review Example

Porter’s Model of National Competitive Advantage Porter’s Model of National Competitive Advantage The most contentiousand discussed themes has been the competitiveness of nations. It may be impossible to a sole and central definition of competitiveness on the macro-economic levels. Unfortunately, a ‘handful’ of economists across the globe regard the concept of national competitiveness as boloney. Consequently, it had been very difficult to find out ways of measuring the competitive ability of different countries. Several diverse definitions of competitiveness could be mentioned, and there would be several indices for measuring it. Fortunately, Michael Porter came up with a model known as “diamond model.” The Porter’s diamond model elucidates the variations in “national business systems,” as well as “comparative economic performance” for different nations, and to what extent other approaches and ideas will be obligatory (Porter, 1990, pp. 473). Porter thereby introduced the “diamond model of national competitive advantage” in order to explain the reasons why a number of nations are more competitive than others, and reasons why several businesses or industries would be more competitive. Using industrialexamples from five economies: China, U.S.A, Japan, Germany, and the U.K, this paper expounds on the significance of the Porter’s model of national competitive advantage. Through this model, the paper explains the characteristics and performances of diverse business systems of such major economies. In its interpretation, Porter’s model identifies four basic sets or components concerning diverse regional-level competitiveness. We thereby regard the Porter’s diamond model as a pertinent hypothetical basis for measuring industrial levels of competitiveness from diverse points of view. Owing to its vibrant structure, it is quite easy to identify the questions of business and economic research that are analogous to different edges (Grant, 1991, pp. 546). The stimulator of regional competitiveness, alongside preconditions are the positive agglomeration effects created by industries operating in a certain area, hence influencing both the industries and their associates. The model proposed that the national home-base of an industry plays a vital role in the achievement of competitive advantage on a global scale. Such home-base contributes to the crucial factors, which support organizations in building advantages on a global competition (Dunning, 1992, pp. 159). Porter’s National Diamond framework or model resulted from the study of comparative advantage patterns amongst some of the most industrialized nations. The framework works to integrate lots of Porter’s previous works in his competitive “five forces” theory, competitive advantage theory, as well as value chain framework into a consolidated model that considers the sources of competitive advantage obtainable from the national context (Dunning, 1992, pp. 137). Therefore, the model can be used in the analysis of a firm’s ability to function within a national market, and in the analysis of the ability of national markets to compete within the international markets. Porter’s model recognizes four central economic pillars: (i) factor conditions, (ii) demand conditions, (iii) firm structure, strategy and rivalry, and (iv) related and supporting industries. Here, a nation must undertake the analysis of the viability of its competitive advantage, particularly within the international markets (Porter, 1990, pp. 526). The diamond model is also a useful tool in the comparative analysis, whereby it is used to recognize which country or particular firm is suitable for expanding into the international market platform. Two of the above-mentioned pillars focus on the national macro-economic environments in order to determine whether the demand is prevalent alongside the factors need for production (Oz, 2002, pp. 511). The third pillar focuses on the explicit relationship relationships that the supporting industries hold with particular firms, industries, or nations under the study. Finally, the fourth pillar looks at the strategic purposes of a firm (micro-economics), such as the firm’s strategies, taking into considerations the industrial rivalry and structure (Grant, 1991, pp. 538). See Fig. 1 bellow: Figure 1: Porter’s Diamond Model. Basically, Porter’s National Competitive Advantage (NCA) is an evaluation of how competitively nations participate within the international markets (Cartwright, 1993, pp. 64). Porter thereby presented this diamond-shaped diagram in order to outline the framework of four core factors that are capable of modifying four basic ingredients for a more competitive advantage. The four ingredients include the availability of resources, individuals’ goals within a company, information used by the company for deciding on which opportunities to pursue, and the investment and innovation pressure on companies (O’Shaughnessy, 1996, pp. 18). In the national diamond model, Factor Conditions refers to the general array of factors, which make a nation more competitive. Such factors may be anything from material resources and human resources to the national infrastructure (Porter, 1990, pp. 395). Even though a nation may hold an abundance of factor conditions, such and lush vegetation and low-cost labor, the utilization of these factors is more vital than their existence. As well, when a nation undergoes any factor shortage, it will use its innovations to make up for it, thereby leading to an increase in national competitive advantage. For instance, Japan is a very small country as compared to other world economies, hence it lacks sufficient land to fit its agricultural and other production activities. However, in order to make up for this shortfall and become competitive within the international markets (Clark, 1991, pp. 119), Japan exploits its wealth of human resources in order to become a global technology leader. Demand Conditions elucidate the home demands for specific products and services that belong to a particular industry. Home or local demands are determined by an assortment of factors, which include a company’s growth rate and capacity (Daly, 1993, pp. 129), customer wants and needs, as well as the tools utilized in the sharing of domestic preferences within foreign markets (Clark, 1991, pp. 120). Demand conditions are essential because a national competitive advantage would likely arise when domestic demands outweigh foreign demands. This is because the companies will tend to allocate more time for the development of products and services that are on higher local demand rather than foreign demand. For instance, in the U.S. mobile technology industry, supposing there is a high domestic demand for iPhones, the Apple Company will be more than willing to work and improve its designs, thus perform better not only in the U.S. market, but also within the international markets (Davidson, 1991, pp. pp. 58). With regards to the Firm Strategy, Structure, and Rivalry, the organization, establishment, and management of domestic or local companies determine the domestic competitiveness, leading to fluctuations in national competitive advantage (NCA). Dunning (1993, pp. 9) reveals that this is the platform upon which several nations’ industries differ owing to the variations in cultural norms from one nation to another. Family-owned business or companies with family business structures commonly behave differently, as opposed to the public owned companies when it comes to domestic and international competitions (Daniels & Lee, 1994, pp. 196). Moreover, local or domestic rivalry is exceptionally advantageous to the NCA since the high local rivalry is likely to spur new innovations and improvements in overall productivity, thus promoting national competitive advantage (Dunning, 1992, pp. 148). For instance, the smartphone market rivalry between Androids and iPhones is considered to be healthy since it continuously instills the urge for new innovations on either sides. This makes both the companies to emerge the principal players, providing the United States with a high ranking NCA. Finally, with regards to the “Related and Supporting Industries,” a country would have more national competitive advantage when its internationally competing supply industries are prosperous (Volos, 2000, pp. 94). This will lead to the nation’s prosperity in its related and supporting industries. The victory of competitive supply industries will thereby promote globalization and innovation by other diligently related industries (Daniels& Lee, 1994, pp. 202). For instance, the success of the “automobile industry” will not only benefit the industries of its related suppliers, such as leather, rubber, and metal industries, but also other industries that are directly associated to automobiles, such as the car insurance industry. The other two supportive elements of the Porter’s diamond model include Chance and the Government. Chance delineates the occurrence of events that are external and out of control by a firm. According to Volos (2000, pp. 89), they are particularly essential to the model since they create discontinuities within which various firms gain competitive positions while others lose. On the other hand, the government can possibly influence each of the aforementioned determinants of competitiveness. Elaborately, the government is capable of influencing the supply conditions for key production factors, home-market demand conditions, as well as competitions amongst diverse firms (Volos, 2000, pp. 97). Moreover, government interventions can possibly occur at regional, local, national, and international levels. The figure below shows the additional two elements of Porter’s diamond model (see Fig. 2). Figure 2: Modified Porter’s Diamond Model According to Chia (1994, pp. 63), classical theories of international trade suggest that comparative advantage of nations reside upon the factor endowments, which a nation may be lucky enough to inherit. These factor endowments include natural resources, land, labor, and the local population size. Nevertheless, Michael Porter argued that a country is capable of creating its new advanced factor endowments including skilled labor, strong knowledge base and technology, culture, and government support (Elion, 1990, pp. 3). His diamond shaped model serves as a basic framework for illustrating the determinants of national advantage. This model presents the national playing fields, which nations establish for their industries. Through his diamond model, Porter affirms that national prosperity is not inherited, but created. It does not emanate from a country’s natural endowments, labor pool, interest rates, nor currency value as the classical economics insists (Clark, 1991, pp. 118). A country’s competitiveness is dependent upon the capacity or capability of its industries to innovate and upgrade. Industries may gain advantage against the globe’s best competitors simply because of pressure and challenges. As a result, they will benefit from having robust domestic rivals, demanding local customers, and aggressive home-based suppliers. In the contemporary world of increasing global competition, countries have become more important than ever before. Since the basis of national competition has extremely shifted to the assimilation and creation of knowledge, the roles of nations have equally grown (Chia, 1994, pp. 53). Competitive advantage is thereby created and sustained via highly localized processes. As a result, the disparities in national economic structures, values, culture, histories, and institutions all contribute to the competitive success. Alternatively, there are prominent differences in the competitiveness patterns in every nation; no country can or will remain competitive every industry or most industries. Eventually, nations tend to succeed in particular industries since their home environments are more forward-looking, challenging, and dynamic or vibrant than others (Dunning, 1993, pp. 14). The adapted Porter’s diamond model study reveals a rapid development of the China’s Heavy Truck Industry. The Chinese heavy truck industry has witnessed an exceptional flourish since 2009, and has been attracting the interests of an augmenting number of western heavy-truck companies, which currently conduct or involve in business activities (Cho, 1994, pp. 47). Nonetheless, diverse industrial environments have resulted into different situations including the government policies, as well as the buying habits by the local companies, and international competitors (Oughton, 1997, pp. 492). A number of research and analysis highlight the government’s influence as a vital factor of impact on the Chinese heavy truck industry through a sequence of policies. Alternatively, it may be of a substantial impact if international heavy-truck corporations can be able to observe the policies and political transformations when setting up their market strategies in China (Grant, 1991, pp. 541). The Chinese government sets up the major targets for economic growth, public service, environment, resources, economic structure, population and people’s lives. In order to re-orient the pace of economic developments and maintain steady economic growth, the Chinese government pays a great attention to the market reactions, development of trucks that operate on new energy sources, environmental protection, as well as taxation and fee reforms. The table below shows the detailed policies and their impacts. Time Policy Effects 2004 Reduction of vehicle tolls on the opinion of charge standards Enhanced highway safeguard safety 2005 Vehicle compression ignition, gas ignition engine type, and car emission limits on emissions and measurement techniques Emission reduction and energy conservation 2007 Chinese vehicle industry: Eleventh five-year plan development planning Proposal of self-directed automobile innovations 2009 State administration on fuel taxation Price guard on heavy truck upgrades 2010 Automotive Industry Development Policy. Industrial structure enhancement and technology promotion. Table 1: Detailed Policies In related and support industries, the heavy truck industry holds a close relationship with the infrastructural industry. Therefore, it relates to the transport and logistics, alongside commercial vehicle (Cho, 1994, pp. 50). Road construction has thereby been introduced as an associate of infrastructural requisite for the development of the heavy truck industry. A number of small-scale local enterprises and several large state-owned manufacturers form the structure of the Chinese heavy truck industry (Dunning, 1993, pp. 12). The industry swiftly developed over half a decade, thereby becoming the largest heavy truck market controller worldwide by 2009. FAW and DFAC thereby became the market dominators within the heavy truck market. However, other foreign heavy truck companies have also entered into the Chinese market, including Benz, Man, IVESCO, Volvo, Daimler, Caterpillar, and SCANIA. Germany’s global success of high-technology industries is fascinating. Mechanical Engineering is one of the German’s largest and most crucial branches of high-technology industries, with approximately one million employees (Dunning, 1995, pp. 231). The industry is characterized by individual manufacturing or production of small series and its strong orientation towards consumer or customer requests. According to the German Engineers Association, the Mechanical Engineering branch is the most innovative among other branches. The industry’s innovations thereby lead to development and improvements of mechanical products (Schwab& Porter, 2004, pp. 59). Another reason for the German’s Mechanical Engineering industry competitive excellence relies on its ability to create consumer specific solutions out of new innovations and technologies (Howard & Paul, 2000, pp. 197). This help the industry fulfil their customers’ demands in relations to quality, flexibility, and precision. Germany is thereby a highly developed nation that gains a lot of money from the production and exportation of mechanical products to other countries that are in high demand for quality machines. The German government intervenes through laws that protect new innovations and inventions from being copied by competitors (Cartwright, 1993, pp. 56). This creates a platform for strong competition among companies that are technological rivals, thereby resulting into more inventions and technical solutions for machines. The resultant is an improved international competitiveness for the mechanical engineering sector. One of the supporting industries to the Mechanical Engineering industry is the Steel Production Industry. The major steel producer in Germany is located at Ruhr Valley within the Northwestern Germany. The steady steel production and supply thereby easily avails the materials required by the Mechanical Engineering Industry for its production (Volos, 2000, pp. 92). The Japanese Fax Machine Industry is also a good example that illustrates the theory of Porter’s diamond of national advantage. The industry managed to attain its dominance due to a number of factors: (i) Factor conditions; Japan had a relatively higher number of electrical engineers per-capita. (ii) Demand conditions (O’Shaughnessy, 1996, pp. 13); Japanese market was in high demand due to the Japan’s written language. (iii) Great domestic rivalry within Japan’s Fax Machine Industry pushed for innovations, which later resulted to swift reduction in production cost. (vi) There was a great number of related and supporting industries in Japan, with better technologies, such as the good miniaturized elements since Japan had less space. (v) Japanese government support, such as the establishment of the state-owned telecom company lead to changes in the initial cumbersome requirements for the approval of each installation, into a more general approval type (Dunning, 1995, pp. 226). Porter’s diamond model of competitive advantage has been used to evaluate the performance of the UK’s higher education institutions. As a result, the departments of science, mathematics, and geography were seen to have greater levels of competitiveness than other disciplines within the UK. These disciplines were seen to have great proportions of the UK’s departmental investment and innovation-driven stage (Brown& Geoff, 1990, pp. 27). This was with regards to high local demands for knowledge and innovations in the technological and manufacturing fields. The four components of the diamond model thereby leads to a continuous innovation and upgrading of the UK’’s knowledge wealth. One of the most related and supportive industry are the research institutions. These institutions rely on the UK’s higher learning institutions for knowledge and power for their new findings. The UK government greatly values higher learning education and hence has come up with a number of policies, which creates platforms for competition among higher-learning institutions. This competitive rivalry thereby results to more innovations and demand for knowledge (Daly, 1993, pp. 121). A number of scholars currently seek for further education within the UK’s higher learning institutions, hence showing how competitive the country’s higher learning institutions are, compared to other countries’ institutions. In his famous book, “The Competitive Advantage of Nations,” Porter conducted studies on eight developed nations, alongside two newly industrialized nations (Howard & Paul, 2000, pp. 189). The two newly industrialized nations were Singapore and Korea. He is highly optimistic on the future economy of Korea, arguing that Korea may hit its real advanced status just in a decade. On the contrary, Porter reveals his despairs on Singapore, arguing that Singapore will always remain a factor driven economy. However, since the publication of his book, Korea has been less successful than Singapore. This scenario thereby raises a critical question regarding the validity of his diamond model of national competitiveness, hence the weakness of Porter’s Diamond theory (Brown& Geoff, 1990, pp. 29). In conclusion, Porter’s national competitive advantage framework or diamond model, is a perfect model for illustrating the distinctions in “national business systems,” as well as “comparative economic performances” for different nations, and to what extent other approaches and ideas are obligatory. Porter initiated the “Diamond Model of National Competitive Advantage” in order to explain the reasons why a number of nations are more competitive than others, and reasons why several businesses or industries would be more competitive (Brown& Geoff, 1990, pp. 25). The model encompasses four basic elements including the factor conditions, demand conditions, the firm structure, strategy, and opposition, in addition to the connected industries. These elements alongside government policies and chance events jointly impact on a nation’s competitive advantage within the global markets (Dunning, 1995, pp. 228). Therefore, Porter’s diamond model has been useful in elaborating the reasons for the success of certain world economies for nations such as China, Japan, U.S., Germany, and the UK. References Brown, G. & Geoff, M. (1990). The competitive advantage of nations by Porter, Michael E. London Review of Books, 12(7), pp. 25-30. Cartwright, W. R. (1993). Multiple linked “diamonds” and the international competitiveness of export-dependent industries: The New Zealand Experience. Management International Review, 2, pp. 55-70. Chia, S. Y. (1994). Trade, industry and government: The development of organizational capabilities in Singapore. 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(2004).The global competitiveness report 2003-2004:World Economic Forum, Geneva, Switzerland, 2004.New York, NY:OxfordUniversity Press. Volos, F. (2000). The automotive supply chain organization: Global trends and perspectives. Cambridge, MA: Massachusetts Institute of Technology. Read More