Critically evaluate Porter’s Diamond of National Competitive Advantage as an aid to understanding national competitiveness.

Table of Contents
Table of Contents 2

1. The diamond model by Michael Porter 3

1.1 Introduction 3

1.2 Diamond model Theory 4

1.2.1 Factor Condition 4

1.2.2 Demand conditions 5

1.2.3 Firm strategy, structure and rivalry 5

1.2.4 Related and supported industries 6

1.2.5 The role of Government 6

1.3 Criticism of the framework 7

1.4 Practical Example 7

1.5 Conclusion 8

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1. The diamond model by Michael Porter

1 1.1 Introduction

According to Recklies (2001), increasingly corporate strategies have to be seen in global context and even if an organization does not plan to import or to export has to look at an international business environment, in which actions of competitors, buyers, sellers, new entrants of providers of substitutes may influence the domestic market and information technology has been reinforcing this trend.

The classical models and theories related to international trade before Michael Porter’s Diamond theory, mainly proposed that the comparative advantage resides in the factors endowments that a country may be fortunate enough to inherit and these factors mainly consisted of land, natural resources, labour and the size of the local population but Porter argued though his diamond model that a nation can create new advanced factor endowments such as skilled labor, a strong technology and knowledge and knowledge base, government support and culture, in short Porter used a diamond shaped diagram as the basis of a framework to illustrate the determinants of national advantage (QuickMBA, 2011).

2 1.2 Diamond model Theory

The diamond model created by Michael Porter for the competitive advantage of nations offers a model that can help understand the competitive position of a nation in global competition and the application of the model also extends to be used for other geographic region (Value Based Management, 2011).

According to Recklies (2001), the Porter’s Diamond Model determines factors of national advantage and it suggests that the national home base of an organization plays an important role in shaping the extent to which it is likely to achieve advantage on a global scale and this home base provides basic factors, which support or hinder organizations from building advantages in global competition. “Porter focus on competition or rivalry is a diversion from traditional economic thinking” has been reported by Stone and Ranchhod (2006).

Porter’s diamond forces have been referred to as being one of the most recent theories that explains the international competitiveness of countries (Peng, 2009). Porter (1990a) has explained his theory as a debate on whether or not countries compete internationally or not and according to Ketel’s (2006), Porter has used more of verbal descriptions of the different trade theories based on logical reasoning instead of the mathematical models that dominated the economic profession.

The four distinguish factors according to Porter are:

1) Factor Condition
2) Firm strategy, structure and rivalry
3) Demand conditions
4) Related and supporting industries

According to Quick MBA (2011), each of the individual points on the diamond as a whole affect four ingredients that lead to a national comparative advantage and these ingredients have been listed as: 1) the availability of resources and skills, 2) information that firms use to decide which opportunity to pursue with those resources and skills, 3) the goals of individuals in companies and 4) the pressure on companies to innovate and invest.

According to Smit (2010), Porter also proposed two other factors in addition to the above mention four and they are government policy and change that support and complement the system of national competitiveness but do not create lasting competitive advantages.

1 1.2.1 Factor Condition

Traditional model of trade theories have defined factor conditions as land, labour and capital but Porter (1990a) in his theory has distinguishes between the following categories: human resources, physical resources, knowledge resources, capital resources and infrastructure and this factor conditions have been further subdivided into basic and advanced factors that can be either general or specialized.

According to Smit (2010), the basic factors such as unskilled labour, raw materials, climatic conditions and water resources are inherited and required little or no new investment to be utilized in the production process and advanced factors are created and upgraded through reinvestment and innovation to specialized factors which according to Porter from the basis for the sustainable competitive advantage of a country.

According to Value Based Management (2011), contrary to the conventional wisdom Porter has argued that the key factors of production have to be created and that they are not inherited and the specialized factors of production are skilled labours, capital and infrastructure and the non-key factors or general use factors, such as unskilled labour and raw materials can be obtained by any company and hence do not generate sustained competitive advantage but somehow the specialized factors involved heavy, sustained investment and thus they are more difficult to duplicate which leads to a competitive advantage as other firms cannot easily duplicate these factors making the factors valuable.

According to Recklies (2001), an example of this is the discussion on the ethics of genetic engineering and cloning that will influence knowledge capital in this field in North America and Europe.

2 1.2.2 Demand conditions

According to Porter (1990a), demand conditions in a country are also perceived as a source of competitive advantage for a country and demand as a factor explaining trade is not new. The first person to introduce demand as a factor was Linder (1961) and he explained intra-industry trade.

According to Smit (2010), Porter has focused on demand difference than on similarities to explain the international competitiveness of countries and according to Porter; it is not only the size of the home that matters, but also the sophistication of home country buyers in short it’s the home demand that shapes how firms perceive, interpret and respond to buyer’s needs.

Porter (1990a, 1998a) has regarded the essential conditions of demand as being a home demand that anticipates and leads international demand, industry segments with a significant share of home demand condition and sophisticated and demanding buyers.

According to Value Based Management (2011), the explanation of demand condition is that the more the demanding the customer in an economy, the greater the pressure facing firms to constantly improve their competitiveness via innovative products, through high quality etc.

3 1.2.3 Firm strategy, structure and rivalry

According to Porter (1990a), the main emphasis of firm strategy, structure and rivalry is that the strategies and structures of firms depend heavily on the national environment and that there are systematic differences in business sectors in different countries that determine the way in which firms compete in each country and ultimately their competitive advantage and Porter identified rivalry as the most critical driver of competitive advantage firms as he believed that domestic rivalry forces firms to be cost competitive, to improve quality and to be innovative.

According to Recklies (2001), “The conditions in a country that determine how companies are established are organized and are managed and that determine the characteristics of domestic competition.

According to Value based Management (2011), the explanation of firm strategy, structure and rivalry is that the world is dominated by dynamic conditions and it is direct competition that impels firms to work for increases in productivity and innovation.

4 1.2.4 Related and supported industries

According to Recklies (2001) the explanation of related and supported industry is “The existence or non-existence of internationally competitive supplying industries and supporting industries”.

According to Porter (1997a, 1998b, 1998c, 2000), he has claimed in his theory that specialization leads to the sticky location advantage that are the true sources of sustainable competitive advantage of countries.

Teece (1996) while explaining Porters theory has said, “The introduction of related and support industry clusters as a separate determinant of national competitive advantage has been viewed as one of the most important contributions of Porter’s Diamond Theory”. While explaining his theories Porter (1998c, 2000) has claimed that it is the external economies of related and support industry clusters, such as networks of specialized input providers, institutions and spill-over effects of local rivalry that became the true source of competitive advantage.

According to Recklies (2001), a typical example of this is the shoe and leather industry in Italy as Italy is not only successful with shoes and leather but with related products and services such as leather working machinery, design etc.

5 1.2.5 The role of Government

According to Porter (2000), the role of government in the diamond model as described is to act as a catalyst and challenger; it is to encourage or even push companies to raise their aspirations and move to higher levels of competitive performance.

According to Value based Management (2011), “The government must encourage companies to raise their performance, stimulate early demand for advanced products, focus on specialized factors creation and to stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations”.

According to Recklies (2001), on the national level the government may consider the polices that they should follow to establish national advantages, which enables industries in their country to develop a strong competitive position globally. Porter in his theory has alos mentioned that the government can foster such advantages by ensuring high expectations of products performance, safety or environmental standards or encouraging vertical co-operation between suppliers and buyers on a domestic level etc (Recklies, 2001).

3 1.3 Criticism of the framework

Many theories have criticized the Porter ‘Diamond Theory’ saying that it as an interactive system comes from two perspectives and this perspectives have been classified as from within the management school (Rugman 1991) and from the economic school (Waverman 1995).

According to Rugman (1990), the management school has suggested that the home diamond focus of Porter does not take the attributes of the home country’s largest trading partner into account and this point is supported by Bellak and Weiss (1993) saying that it is not applicable to most of the world’s smaller nations. The extension of the Porter’s Diamond is to include the attributes of the largest trading partner of the home country (Rugman, 1990).

According to Rugman and Verbeke (1995), the ‘double-diamond’ concept has led to generalized double-diamond and multiple-diamond model approaches which can be viwed as extension of and adjustment to the single-diamond model. Thus somehow the theory concludes from the management school point of view as the countries, like firms, are somehow in competition with one another (Smit, 2010).

Another criticism of the theory is by Waverman (1995) and he says that the diamond model is so general that it tries to explain all aspects of trade and competition but somehow ends up explaining nothing. According to Waverman (1995), “It does not distinguish between hypotheses, theorems, conjectures and facts and thus cannot proceed to prove causality”.

4 1.4 Practical Example

Application of this theory was made to the Japanese Fax Machine Industry by experts and this as an example was taken because the Japanese facsimile industry has illustrated that the diamond model of national advantage in various ways.

The firms in Japan have achieved dominance in the fax machine industry in the following way:-

|Factor Condition |The Japanese firms have a relative high number of electric engineers per capita. |
|Demand Condition |The markets in Japan were very demanding and this was because of the written language. |
|Related and supporting industries |There were large number of related and supporting industries with good technologies and the best |
| |example for this will be the that there are good miniaturized components since there is less space |
| |in Japan. |
|Rivalry |Domestic rivalry in the fax machine industry located in Japan has pushed innovation and this has |
| |resulted in a rapid cost reduction of the machines. |
|Role of Government |The state owned telecom company, NTT has changed its cumbersome approval requirement for each |
| |installation to a more general type approval as an act of government support to the industry. |

(Source: QuickMba, 2011).

The Indian software industry is an example which can explain the theory of comparative advantage.

India appears to be the best location of choice for people, according to Kogut (1997) and the caveat, according to Smit (2010) is said to be India has a comparative advantage in the software industry, this does not imply that a firm that relocatesits software development to India will gain with respect to the international competitiveness in software development.

The industry based in India is more important than that is based in USA and so has attracted the best resources within India and to work in USA as a software engineer is relatively lower paid job compared to the earning potential in the more advanced electronic industry ad for India the pay is high and this attracts only the best resources. This proves that India has a comparative advantage over USA in the software Industry.

5 1.5 Conclusion

Literature review of Porter Diamond Model suggests that it is related to trade and international competition at a country level. The theory suggests that the gain that comes from trade is due to specialization which is due to the comparative advantage or the economies of scale (Smit, 2010). According to Smit (2010), “Comparative advantage arises as a result of country differences and explains inter industry trade, whereas trade between countries in similar industries is explained by internal and external economies of scale”.

References

Porter, M.E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors.New York: Free Press.

Porter, M.E. 1985. Competitive Advantage: Creating and Sustaining Superior Performance.New York: Free Press, London: Collier Macmillan.

Porter, M.E. 1990a. The Competitive Advantage of Nations. New York: Free Press, MacMillan.

Porter, M.E. 1990b. ‘Why nations triumph’, Fortune, 12 March: 94.

Porter, M.E. 1997a. ‘New strategies for inner-city economic development’, Economic Development Quarterly, 11(1): 11–28.

Porter, M.E. 1997b. ‘Location, knowledge creation and competitiveness’, In Monisha, D.(ed.), Proceedings of Academy of Management Symposium on Knowledge Capitalism: Competitiveness Re-evaluated. Boston, MA.

Porter, M.E. 1998a. Competitive Advantage: Creating and Sustaining Superior Performance,with a new introduction. New York: Free Press.

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Ketels, C.H.M. 2006. ‘Michael Porter’s competitiveness framework: recent learnings and new research priorities’, Journal of Industrial Trade and Competition, 6: 63–66.

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Waverman, L. 1995. ‘A critical analysis of Porter’s framework on the competitive advantage of nations’, In Rugman, A., Van den Broeck, J. & Verbeke, A. (eds), Research in Global Strategic Management: Volume V. Beyond the Diamond. Greenwich, CT: JAI Press.

Rugman, A.M. & Verbeke, A. 1993. ‘The double diamond model of internationalcompetitiveness: the Canadian experience’, Management International Review, Special Issue, 33: 17–39.

Rugman, A.M. 1990. Global Corporate Strategy and Trade Policy. London New York: Routledge.

Smit, A. 2010. “The competitive advantage of nations: is Porter’s
Diamond Framework a new theory that explains the international competitiveness of countries?”, Southern African Business Review Volume 14 Number 1, 105

Recklies, D. 2001, “Porter’s Diamond – Determining Factors of National Advantage”, available at: www.themanager.org, accessed on: 18th April 2011.

QuickMBA 2011, “Porter’s Diamond of National Advantage”, available at: www.quickmba.com, accessed on 17th April 2011.

Value Based Management 2011, “Diamond model – Porter on Nations”, available at: www.valuebasedmanagement.net, accessed on 18th April 2011.

Kogut, B. 1997. ‘Regional networks and markets’, In Monisha, D. (ed.), Proceedings of Academy of Management Symposium on Knowledge Capitalism: Competitiveness Reevaluated. Boston, MA.