Introduction (say what are you going to write in this answer. You may mention the main sections you are going to have in your answer [such as 'theoretical discussions', 'critical discussions']

- “The contribution by Porter (1990) on the competitive advantage of nations has led to an extensive discussion among academics and practitioners on the sources of international competitiveness (Grant, 1991; Gray, 1991). However, in order to understand why so much emphasis is placed on the diamond framework in the management literature, this essay will discuss Porter’s concept of the Diamond and the factors that contribute to the development of national competitive advantage. This paper will begin with a theoretical approach followed by the reception of different authors and schools of thoughts who disagreed with his management thinking, and then goes on to consider empirical issues which have arisen subsequently, followed by a conclusion.”

Theoretical Discussions (explain the 'main theory' [such as 'Late/Early industrialization', 'Managerial enterprise', 'Weber's theory about impacts of culture'] in this question)

- “Porter’s theory of national competitive advantage is based upon a study of the characteristics of the national environment which identifies four sets of variables, and an additional two, which influences a company’s ability to establish and maintain competitive advantage within international markets. These interacting determinants are: factor conditions; demand conditions; related and supporting industries; and firm strategy, structure and rivalry and form what Porter refers to as the “national diamond.” The four main determinants can also be understood as the availability of resources to various industries, the information used in deciding which opportunities to pursue for the company, the goals of individuals in companies, and the innovation and investment pressure on companies. His theory begins from individual industries and builds up to the economy as a whole. Since firms and not nations compete in international markets, understanding the way firms create and sustain competitive advantage is the key to explaining what role the nation plays in the process. Therefore, the essence of his argument is that “the home nation influences the ability of its firms to succeed in particular industries”. Given this interdependence, it appears that in order to draw conclusions on the competitiveness of the particular industry, consideration of the different facets of the competitive diamond of the whole nation is needed.
- [Sketch Porter’s Diamond Diagram]

- Factor conditions, this comprises land, labor, capital and infrastructure. These are a mixture of the given factors, which are fundamental to competitive advantage. However, these factors are not inherited but are actually built within the nation, which typically varies from different economies and industries. Consequently, countries will be successful only in those industries where usually more than one factor condition will be in their favour. An example being Japan where there is an abundance of skilled labor and technological expertise. These factors can be anything from human resources and material resources to infrastructure and the quality of research at universities. Although a nation may have an abundance of factor conditions (example - low-cost labor and lush vegetation), the usage of these factors is more important than their mere existence. Likewise, when a nation lacks a factor, they use innovation to make up for it, which usually leads to an increase in NCA. For example, Japan is a small nation that lacks enough land fit for agriculture; in order to make up for this and become more competitive in the international markets, Japan has exploited its wealth of human resources to become a global leader in technology.
- The demand conditions within the home base affect a sector’s capability to vie internationally through three mechanisms. First, an industry will have a competitive advantage in areas which are more important at home than elsewhere (e.g. ). Second, the demanding buyers within the home base force companies to achieve high standards (Japanese workforce value space-saving, giving Japan a lead in compact products, nevertheless, America’s long distances areas have led to competitive advantage in very large truck engines; p. 89). And third, a nation’s industries will grow if producers at home foresee the wants of buyers in other countries, in so doing, giving it an advantage in learning how to meet those requirements. (Japanese and government and buyers forced companies to make energy-saving products prior to energy costs becoming more important). Demand conditions in the home market can help companies create a competitive advantage, when sophisticated home market buyers pressure firms to innovate faster and to create more advanced products than those of competitors. Demand conditions are important because an NCA will arise when domestic demand outweighs foreign demand, since companies tend to devote more time to developing products that are in demand locally rather than abroad. For example, if there is a high demand for the iPhone in the U.S., Apple will be more willing to work on improving its design and thus do better in not only the U.S. market, but the international market as well.
- Related and support industries - In this case, the tendency for the successful industries in every country is grouped into ‘clusters’, which represents an environment in where innovation, operating productivity and learning can flourish. One such cluster, for example, is Silicon Valley, which has a cluster in information and communications technology firms, and Germany which has clusters in chemicals, metal-working, transportation and printing. The success of competitive supplying industries will promote innovation and globalization of other closely related industries. For example, the success of the automobile industry not only benefits the industries of its suppliers (e.g. metal, leather, rubber), but also industries that are directly linked to automobiles (e.g. car insurance).
- The last determinant is firm strategy, structure and rivalry. According to Porter, rivalry is critically important in pressuring companies to innovate, cut costs, and to improve quality. He identifies rivalry as the most important driver of competitive advantage of a country’s industry. The establishment, organization, and management of local companies determine domestic competition and leads to the fluctuation of NCA. This is where many nations’ companies differ due to the cultural variances from one country to the next. Companies that are family-owned or have a family-business structure will behave differently than publicly quoted companies when it comes to local and international competition. Furthermore, local rivalry is incredibly advantageous to NCA; this is because high local rivalry spurs innovation and improvement, and thus promotes a national competitive advantage. For example, the rivalry between iPhones and Androids in the smartphone market is healthy because this incites innovation on either side and makes both companies key players in providing the U.S. with a high-ranking NCA.
- In addition to the four conditions, Porter (1990) points out two important components which are the role of chance are occurrences that have little to do with circumstances in a nation and are often largely outside the power of firms (and often the national government) to influence. Examples of such chance events include the following: acts of pure invention; significant shifts in financial market and exchange rates; political decisions by foreign government and wars; surges of world or regional demand. Chance events are important because they create discontinuities that allow shifts in competitive position. They can nullify the advantages of previously established competitors and create the potential that the new nation’s firm can supplant them to achieve competitive advantage in response to new and different conditions. An example is the advent in microelectronics was important in neutralizing in American and German dominance in numerous electromechanically based industries (Porter 1990).
- The role of the government is an important influence on modern international competition. The governments can put forward the policies a nation should follow to create advantages, enabling the industries in a nation to develop a strong competitive position globally. For example certain government policy for Japan and US has created success for these nations. According to Porter (1990) governments can progress the advantages by ensuring there is high potential of product performance, ethical standards, or encouraging reasonability and negotiation between the suppliers and buyers on a domestic level. For example the US governments gave large support in the semiconductor industry in focusing on specific products that meet consumer demand for example the missile system in the US national security. Governments can influence and be influenced by each of the four determinants either positively or negatively. Factor conditions are affected through subsidies, policies toward the capital markets, policies towards education and the like.

Critical Analytical Discussions (discuss weaknesses of your 'main theory' in this question; mention opinions of those scholars that criticize the 'main theory')

- ***Porter (1980) neglects the role of historical cause in his diamond model. In the case of Germany and Japan for example, there is probably a direct connection between past militarism and the present industrial domination. Militarism has contributed to industrial excellence by creating a tradition of discipline in the labor force for both of these nations. Germany's and Japan’s competitiveness owes a great deal to its amoral military past (O’ Shaughnessy 1997). Particular historical events can be unique to a country which can determine its character (Saunders et al 1986). The occurrence of invasion and revolution is a shared experience amongst many successful nations in history. Olsen (1982) argument implies that countries that have had democratic freedom of organization without invasion in the past will suffer the most from growth repressing organizations. Nevertheless Porters diamond model (1990) didn’t consider how the history of a nation has an effect on competitive advantage of nations.
- ***Krugman (1994) criticized Porter’s diamond model and described the claim that competition within nations as ‘a dangerous obsession’ and argues against Porter’s diamond model. The main points to his argument are that: nations are not like firms and the concept of national competitiveness is vague. International trade is not a zero-sum game for example Krugman (1994) points that major industrial countries sell products that compete with each other but are in fact each other’s main export and each other’s main suppliers of imports. If the European economy does well this is not at the expense of US.
- ***On the whole Krugman (1994) states that competitiveness is a meaningless word when applied to national economies and the obsession with competitiveness is both wrong and dangerous. It could result in wasteful spending of government money, could lead to trade wars, and could result in bad public policy on a spectrum of important issues. Dicken (1994) also agrees with Krugman’s arguments and criticizes Porter’s national competitive advantage model. He states that the theory is highly reductionism in compressing complexity into a simple ‘diamond’ model. It minimizes the role of the state in pursuit of national competitiveness and doesn’t explain how to achieve the four determinates.
- Reich (1991) argues that the concept of national competitiveness explained by Porter (1990) must be revisited; he argues that economic success is due to national purpose rather than national competitiveness. Nation competitiveness depends on globalization and the ‘skills, training and knowledge’ commanded by its workforce, the key to success is the people of the nation. Reich argues that national industries don’t exist in any meaningful sense, as it is global corporate networks rather than national industries that now dominate economic activity. Resources are placed in those nations offering the best production and marketing advantages. However Porter (1990) makes a strong case of the importance of the home country in today’s global economy. Porter argues that by providing a favorable environment for the successful organizations, home countries can play a vital role in wealth creation in the context of international competition, showing the variations of business systems and comparative economic performance.
- Another claim is that an industry’s ‘competitiveness’ depends upon the strength of the diamond in its ‘home base. So, if for example, the question will be ‘what are the requirements for a successful environment?’ the answer will be ‘a strong diamond’. However, if a theory concerning a specific aspect is to be beneficial it must enlighten which circumstances are which. Competitive advantage of nations does not provide this kind of clarification; as well it does not even try to identify the required conditions for strength in each single corner of the diamond. As Reich (1990a) mentioned, this four corners, supplemented by government and chance, are so broad that they include everything which might contribute to success, thereby identifying almost nothing significant.

Empirical Discussions (in this section, you need to compare 2-5 countries [among China, USA, Japan, UK, or Germany ONLY] by providing examples from real companies from one industry to support or to criticize the 'main theory' in this question)

- Porter’s first application of the diamond approach has been commended and criticized as its diamond model has an exclusive focus on the “home base” concept, which leads to failure to incorporate the effects of multinational activities in his model. The success Germany is because of the R&D base in the pharmaceutical industry, but the base is mostly come from the outward FDI which is more the multinational activities rather than the “home base”. According to Gambardella (2000) “The competitive advantages of pharmaceutical industry are R&D and innovative competencies, marketing and distribution capabilities.” Other determinant factors such as financial system, government regulation, education, private businesses and demand are all influences on an industry and companies’ success. Local competitors of multinationals are usually smaller companies specialized in sales of non R&D intensive drugs (Gambardella, 2000). For example, pharmaceutical companies’ operations consist mostly of manufacturing and distribution. The demand for pharmaceuticals is low in China compared to Germany, UK, USA and Japan. With reference to European statistics, pharmaceuticals companies in Europe are much more labor intensive than the US and Japanese ones. The US and Japanese companies are rely more on capital and R&D. In contrasting the share of value added on total production value, it is much higher for US and Japan companies than the European countries. U.S. and European companies always compete on the level of new product development. Where Germany has a strong base of R&D and skilled labor force, it has the 3rd largest pharmaceutical company in the world, Bayer, which operates across 50 different nations. They have invested heavily in U.S. markets and continue to seek new product markets. They have also put a lot of effort for investing the new drugs which they outsourced about 5.3 billion Euros in chemicals to India and investing in R&D in China’s agriculture industry with spending of more than 100 million Euros. As for the UK, it lags behind in innovation in comparison to countries such as the United States. Pfizer, the largest pharmaceutical companies in the world. Pfizer has a competitive advantage over GSK (UK pharmaceutical firm) in the British markets because of its marketing superiority, patenting and high level of R&D operations. In comparison the pharmaceutical industry in the US, UK, Germany and China, Bayer has invested aggressively in research and development and it ranks highly among American companies Bayers' powerful position in the pharmaceutical industry is due to the high level of Germany's education which supplied the human capital as well as skilled labor force that are necessary in this highly competitive industry. Although the evidence above illustrates that the German success is due to the strong R&D base in the pharmaceutical industry, the home base is mostly supported from the outward FDI which Porter does not regard as an important factor toward the contribution of competitive advantage.

Conclusions (in one paragraph, try, to summarize, your answer to this question)
- To conclude, Michael Porter’s competitive advantage along with its four determinants of diamond theory can be described as a general framework for analyzing country sources of advantage that enhance its international competitive advantage. While this study is widely used nowadays by many successful companies and governments in order to create a competitive advantage strategy, however different authors and schools of thought criticize his work. As a checklist through this essay, we can see that most of his criticism was related to the role of government, location and culture. Nevertheless, the differences between different developing countries are strong enough to advocate that specific features of the diamond, such as the demand conditions, might be more important in one stage of a country's development than in other. Therefore, Porter’s work should be used as a tool for analyzing competitive advantage of country sources. This is due to enhance the ability of managers to make informed decisions on how to configure the value chain, but not to rely entirely on his study.
- Overall Porter's model (1990) of national competitive advantage to an extent does account for the variations in national business systems and comparative economic performance across different nations and industries. However the model doesn't consider and explain how culture, history, late industrialization and globalization can have an impact on the economic success of a nation and the variations of business systems.
Referencing:
(Porter, 1990) (Fitzgerald, 2008) (Buchanan, 2010) (Dicken, 2011)
Works Cited
Buchanan. (2010). Organizational Behaviour. Lombarda: Pearson.
Dicken, P. (2011). Global Shift: Mapping the Changing Contours of the World Economy. London: SAGE.
Fitzgerald, R. (2008). Modern Business in Comparative Perspective. London: University of London Press.
Porter, M. E. (1990). Determinants of National Competitive Advantage. The Competitive Advantage of Nations, 63.