Porter’s Model of National Competitive Advantage

Introduction

Porter’s (1998a) through his Diamond Framework on Competitive Advantage of Nations delivered a message that has made a connection between international economics and the management literatures in strategic management. His CAN theory has given a possibility to implement improved national policies on competitiveness. The fundamental objective of his CAN Diamond Model was to explain the reasons why some countries, social groups and economic institutions prosper and advance more than other countries, and why a number of firms within the nations are more competitive. With reference to social group as a country, he proposed that the purposeful definition of CAN at the country level is the productivity of a nation. Having established the reasoning, Porter argued that a country is an assemblage of industries, hence, its economic performance is evaluated by the competitiveness of industries and the appropriate scale for conducting analysis is the performance of the industry. A country’s industries are defined as those business organizations for which the nation serves a home base.

In current paper, Porter Diamond Model explains the divergences in competitiveness of national industrial organizations and compares economic performance of each country. Porter suggests that the country’s domestic base of a firm plays a significant role in achievement of advantages at the international level. The domestic base offers the significant opportunities that support the firms in achieving competitive advantage in global competition. There are different views offered by two institutions as follows. The economic institute ignores Porter’s concept of nation competitiveness, while the management school of thought supports the concept of competitiveness at a national level.

Current paper examines whether nations compete internationally or not, as claimed by Porter (1998b). The paper also reviews and compares the theories pertaining to the two schools of thought. Undoubtedly, Porter’s Diamond Model has been extensively researched by the management school of thought but its actual contribution to the knowledge in the economic field has never been assessed. Further, the paper also studies Porter’s Diamond Model within the framework of the trade theories. His model supports different economics theories, but adopts a conversational method, which differs from similar methods of many economists. Finally, the paper also examines validity of Porter’s Diamond Model as a theory of the international competitiveness of nations and explains the contribution of the model towards understanding of the international competitiveness of firms (Porter 1999).

Management Theory and the International Competitiveness of Nations

Disappointed by the theories of trade, Porter (1990) formulated a new theory that explains competitive advantage of nations (CAN). He identifies four dimensions of nation’s characteristics, which he has named as “National Diamond.”  His four determinants constitute Diamond Framework, which are: 1) factor conditions, 2) related and support industries, 3) demand conditions, and 4) firm strategy, rivalry and structure. He also suggests two other factors that are chance and government policies, which supports the national competitiveness but are least effective in creating a lasting impact of competitive advantages. He argues that an assemblage of four factors within a country renders an enormous impact on the competitive strength of the business located there. In support of arguments, Porter (1998) explains that cluster formation of home-based companies provides international competitive advantage enabling fastest growth of the country. Such clusters have correlation through vertical integration, such as vendors and buyers or through horizontal integration, such as clients, technology, distribution and marketing channels. Such specialized clusters enable a country to develop business system that leads to economic growth and competitive advantage. The United States software industry and Japan’s auto industry follows Porter’s Diamond Framework in establishing unique business processes, thus, achieving competitive advantage over other industries engaged in similar manufacturing activities all over the world.

Factor condition refers to the country’s production capability based on availability of resources and potential, which are essential to compete in a particular industry, for instance, infrastructure, skills or availability of skilled labour. Such factors at a national level have proved to be advantageous for the nation (Stone & Ranchhod 2006). Each country possesses specific factor conditions, which are more favourable for development of business infrastructure and systems. For instance, Japan and India produce a large number of engineering graduates every year. Consequently, the engineers receive opportunities to work with domestic and foreign manufacturing industries, thus, contributing to nation’s success to a large extent. Porter (2000) further states that the nature does not offer such factors or they are inherited because they can expand fluctuate and change over time.

Demand conditions help in the creation of factor conditions by creating new ways of the innovation and technological advancements in development of products. Porter (2004) emphasizes that nation’s home demand is based on four factors. First is the configuration of customer’s needs and requirements. Second, the buyers will pressurize home companies to provide high standard products at a competitive price due to the awareness of such products in the international markets (Aiginger 2006). For example, Indian families prefer small cars that are fuel efficient, easy to manoeuvre in highly congested traffic and busy roads. Hence, Indian local auto company, Maruti Suzuki Ltd, is maintaining a competitive edge in the market over the last two decades. Another example is Japanese inclination for value space saving items, which enabled national industry to invent compact products, such as small cars, smart phones and laptops, leading the nation to competitive advantage in electronic products. Whereas the United States long stretch of roads have initiated the industry to develop highly efficient large truck engines.

Third, domestic industry will hold an advantage in those market segments that are more demandable at home market. In such nations, the size of the home market is not significant, but the degree to which it encourages companies to innovate and introduce superior products is high. A highly developed domestic market that fulfils all three conditions would support the theory of international competitiveness (Uchida & Cook 2005). Fourth, domestic firms will be able to compete at international level if the clusters of firms in the home country are correlated through horizontal and vertical integration. For instance, Germany has an industrial cluster in pharmaceuticals, India demonstrates a cluster in IT and software industry and the United States in the electrical and electronics industry. The determinant of related and support industry clusters occupies significant place in Porter’s Diamond Model. Porter (1998) argued that industry clusters has become significant source of competitive advantage. The industrial clusters create an environment of enhanced production and innovation. Moreover, such localized clusters can be seen in developed countries, but lacks in developing economies, which restricts productivity and development in them (Ketels 2006).

A fourth determinant of Diamond Framework is strategy, rivalry and structure of a firm. The prime focus is that the infrastructures and strategies of businesses depend heavily on the domestic environment. Besides, there exist systematic differences in the industrial sectors in different nations, which determine the manner in which businesses compete in each economy and achieve competitive advantage. Porter supports that rivalry is the most crucial determinant of competitive advantage of many businesses. He supports the idea that rivalry forces domestic firms to enhance quality, cost competitiveness and innovativeness (Porter 2004). Japanese firm manufacturing Toyota cars and American firm producing Ford cars compete successfully in home and international market. They have introduced effective production processes, such as Just in time, lean production, which maintains the quality and costs, thereby leading to competitive advantage in domestic and international sectors (Frenkel, Koske & Swonke 2003)

The rivalry is extremely high in Japan’s automobile sector with major companies, such as Honda, Nissan, Toyota, Mazda and Suzuki struggle extensively for capturing maximum proportion of the market share. The companies compete intensely in the local and foreign markets. Since there are many automobile producers in Japan, the intensity of local competition demands from all the producers to offer products with superior technologies, and introduce the best management practices for increasing productivity. For example, Japanese companies prefer employing the engineers who have knowledge of management in order to achieve maximum productivity. Whereas the United States automobile sector is represented by two leading automobile produces, such as General Motors and Ford. Hence, the severity of competition is not as strong as in the Japanese domestic market. The absence of domestic competition in the U.S. automobile sector has enabled Japanese auto producers to capture major proportion of market share. Consequently, almost all Japanese auto companies have established manufacturing facilities in the United States.

Analysis of Porter’s Diamond Framework on International Competitive Advantage of Nations

In addition to the four determinants, Porter (1990) suggests another two factors, namely chance and government policy. The chance plays an important role in the development of firms’ competitiveness because it permits industries to improve their competitive position by altering the conditions in accordance to the Diamond Framework. Chance also renders variety of influences on nation’s economy and improves competiveness. For instance, the oil price spike in 2007-2008, helped upgrade Japanese automobile industry. The oil shock resulted in auto industry producing fuel efficient cars with the help of technological improvements (Lockett, Thompson & Morgenstern 2009).

The nation’s government plays a crucial role in the development of industrial sector and renders significant impact on international competition. The state governments can formulate effective polices, for example, by adopting the route of financial liberalization and allowing inflow of private foreign capital for boosting industrial development, thus, strengthening competitive position (Krugman & Obstfeld 2003). The financial liberalization policy of Japan, India, Korea and China have attracted significant amount of FDI in the past two decades, thereby creating success for such economies. Porter (1990) explains that the governments can utilize such advantages by ensuring high standards in performance of products, ethical relationships between government and businesses and encouraging buyers and suppliers to negotiate at a single platform (Budd & Hirmis 2004).

Therefore, the countries can implement Porter’s Diamond Model, which will help in identifying the opportunities and generate advantages from available domestic resources. Each country has abundance of resources. By exploring the resources and combining with opportunities will produce competitive advantage, hence enabling nations to compete in the international market (Garelli 2003). Such factors have helped Japan achieve success in the automobile sector. In the 1980s the Japan achieved labour cost advantages resulted from the availability of domestic skilled labour. The strong network of associated industries, cooperation from vendors and quality conscious customers enabled the Japan to achieve competitive advantage at the global level. Whereas the United States, in the 1970s, focused on software and IT industry due to the federal government policies, availability of skilled labour, in addition to, many US universities introduced advanced IT courses, which resulted in the development of the US software industry.

It is evident from the Porter’s Diamond Model and his views on competition and clusters that they are not concerning patterns of trade and advantages from trade. On contrary, they demonstrate a general method for conducting analysis of country-specific resources, which increase the international competitive advantage of businesses. Thus, Diamond Framework offers the correlation between a firm and the country-specific resources of competitive advantage, which firms usually leverage to achieve international competitive advantage (Porter 2003; Davies & Ellis 2000).

However, country-specific gains are different from comparative advantage because they underline location as a prime source of international competitive advantage for businesses, while comparative advantage underlines the integration of trade between nations (Bernhofen & Brown 2004). For instance, if a nation exports goods of a specific industry, it does not mean that the nation possesses a competitive advantage in that sector. The reason is that the industry is relatively stronger in that economy than other countries. Hence, such kind of industry can attract the productive resources within the nation, irrespective of the relatively productivity, as well as cost of the resources. The underlying fact is that the nation’s productive resources ultimately offer a competitive advantage for the firms. Such statement aligns with the observation of Siggel (2006) that a nation possessing a comparative advantage in exports of specific product is not an absolute evidence of any country advantage.

The example of the software industry of India has to be evaluated with respect to Porter’s Diamond Model (Uchida & Cook 2005). Porter stresses that all four conditions mentioned in the Diamond Model must be strongly present for any given industry to be internationally competitive. Nations exhibiting strongest Diamonds usually establish the highly competitive firms in any industry.

However, the basic essentialities for a firm to be internationally competitive Diamond are absent in the software industry of India, when compared to the United States Diamond. The reasons are as follows: low quality in domestic demand, related and support industries are weak and factor advantages are heavily dependent on basic factors of production. Hence, the Indian software industry is a clear illustration of the weakness of Diamond Model to explain the global success of an industry. Besides factor conditions, other features of the Diamond Model are also weak when compared to the United States Diamond (Dunning 2000).

Conclusion

From a perspective of management school of thought, Porter’s Diamond Model offers a valuable contribution in analysing nations as a useful source of global competitive advantage for business organizations. His framework is based on theoretical descriptions of trade theories and offers logic in reasoning instead of the mathematical framework of many economists. The Diamond Framework is much easier to understand with the application of four Diamonds. It evaluates the international competitiveness of the firms but it cannot be utilized to enhance the competitive advantage of economies. Many economists also agree that Porter’s Framework enhances knowledge of country-specific sources of competitive advantage, resource-based analysis of firms, as well as it helps to understand competitive strategies of a firm to a large extent. Such elements of management theory are helpful in explaining the international competitive advantage of business organizations but not of nations. Further, the paper observes that the Diamond Framework is not a theory and it should be applied for analysing nation’s sources of international competitive advantage so that firms could enhance ability on how to use four Diamonds in their value chain and how to explore resources at domestic and international levels. Finally, the paper concludes that by focusing on the relevance of the Porter’s four Diamonds, the firms can increase value to their applications rather than simply discuss theoretically with respect to the competitive advantage of nations.

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