Introduction factors of production (e.g. skilled labour

Introduction

Professor Michael Porter’s work on Competitive Advantage of Nations is greatly influential yet tendentious (Davies and Ellis, 2000) which evoked considerable interest and eager debates that were met with contrasting views. This essay will discuss the concept of Porter’s Diamond alongside his theory and framework, accompanied by the academic criticism this model has attracted to find out why so much emphasis was placed on the diamond framework.

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Porter’s Competitive Advantage of Nations

Porter’s “national diamond” which identifies a set of six factors—factor conditions; demand conditions; related and supporting industries; and firm strategy, structure and rivalry; chance and government; and cluster (Davies and Ellis, 2000)—is a framework to analyze why some nations and industries are more competitive than others (Lynn and Wang, 2013). Instead of striving to the become conqueror in all industries and eventually exhibiting disheartening results, nations can reach global competitiveness by concentrating firstly on the industrial sectors, which offer the ideal possibility of success (Porter, 1990).

 

Factor Conditions

Factor conditions are the nation’s key position in factors of production (e.g. skilled labour or infrastructure), required to engage in a particular industry (Godfrey, 2015). These conditions can furthermore be split into two groups—basic factors (e.g. climate, natural resources and location); and advanced factors (e.g. graduate engineers and, information and communications infrastructure). Advanced factors are the outcome of a concentrated effort instead of inherited by nations, and they are the most irreplaceable production factors in today’s knowledge economy (Porter, 1990).

 

Demand Conditions

According to Porter (1990), home demand is decided by three key characteristics—the tools that transport domestic preferences to foreign markets; their scope and growth rate, and their mixture (mix of customers’ needs and wants). The pace and character of development and transformation by a nation’s firms can be created by demand conditions inside a nation. It is the character of the home demand rather than the size that makes a difference. Home demand conditions impact the forming of a particular factor conditions and are the key to global prosperity.

 

Related and Supporting Industries

The existence or absenteeism in the nation of globally competitive supplier and related industries is a crucial factor. Advantages may be ushered by one globally successful industry to other in supporting or corresponding industries. Globally competitive supplier industries in a nation assist firms to recognize new opportunities and technique to register advanced technology, frequently through existing coordination instead of just supplying early, efficient, swift and sometimes advantageous entrance to the most cost-effective inputs.

 

Firm Strategy, Structure and Rivalry

Firm strategy, structure and rivalry involved the stress on organizations to innovate and invest, which emerge from aggressive domestic competitiveness; and a match between the objectives of the workers, managers and owners and the sources of competitive advantage in a specific industry (Huggins and Izushi, 2011/2012). The disposition of domestic competitiveness and rivalries has an elementary influence on the global competitiveness of a nation’s organization. Geographic concentration—in Porter’s (1990) view, enhances the intensity of domestic competitiveness.

 

Chance and Government

Chance events are discontinuities that permit shifts in competitive position. Unconventional establishments allowed in new players who take advantages of the opportunities surfacing from a reshaped industry framework, which are outside the control of governments and organizations (e.g. wars, radical innovations, unexpected oil price rises, and revolutions). Short-term benefits provided through protection and subsidies from government intervention only generates an additional request for government aid in the industry. The government has insufficient power to generate advantages on its own although it can increase the odds of acquiring a competitive advantage.

 

Cluster

According to Porter (2000), a cluster refers to a geographically proximate group of affiliated establishments and interconnected corporations in a specific field, connected by complementarities and commonness serving individual segments of an industry. From Porter’s view, the four elements of the Diamond is a coherent productive structure, which is the most efficient and noticeable in a cluster (Snowdon and Stonehouse, 2006). Cluster impact competitiveness in various ways which boost competitiveness and innovation. More efficient access to the workforce, information, and specialized suppliers are permitted through the geographical concentration of businesses.

 

Criticism

In accordance with Michael Porter’s work of competitive advantage alongside the ‘diamond’ concept and his thoughts regarding how nations ought to compete, there were varied responses. Numerous authors have scrutinized his thesis and disprove a number of his ideas. Porter’s diamond model does not include international business activity in the form of multinational enterprises (MNEs). This absence has been criticized by numerous authors, of whom Dunning appears to have best apprehended the key ideas.

According to (Dunning, 2001), MNEs activities in a nation or business do differ over time, in which it will affect the elements of the Diamond. The capabilities of MNEs could be affected by the positioning of diamonds of the foreign nations in which they manufacture, which could ultimately impact the capabilities of the home countries and competitiveness of the resources (Dunning, 1993). According to Dunning, the domestic influences on the diamond should be deemed as only an exceptional case of the global influences which is the other way around from Porter’s, as he is left with the perception that Porter regards the global influences on the diamond as an ‘add-on’ to the domestic influences.

As quoted from Brouthers and Brouthers (1997), “the Double-Diamond and Multiple-Diamond methods of calculating a country’s competitive advantage are superior to Porter’s Single-Diamond method” for small countries. Porter’s Diamond failed to apprehend that for small, open trading economies, their own home Diamond is less relevant than the Diamond of their target markets, as businesses earn most of their revenues outside their home country (Rugman and D’Cruz, 1993).

Porter claimed that domestic firms experience a procedure of market share destruction and decrease due to the lack of ability to safeguard their own markets, in which inbound foreign direct investment (FDI) does not increase domestic competition exceptionally. However, China’s present-day development deduced that the country’s success has been accredited to inward FDI—according to Liu and Song (1997), who adopted Dunning’s (1995) extension of the Porter model, which adds ‘multinational business activity’ as a factor of competitive advantage. A further disagreement of Porter framework is concerned with his belief that outward FDI is an indication of competitive strength in a country’s industry whereas inward investment suggests that ‘the procedure of competitive up-grading is not completely healthy’ (CAN, p. 671).

Critics argued that the significance of geographic vicinity might be more restricted than proposed and has been overemphasized in the model (Penttinen, 1994), partially due to the geographical scale of production which differs amongst industries and is bound to cross national borders and not fixed (Jacobs, 1995). According to Reich (1990) and Waverman (1995), the diamond and its four corners are so extensive and so general that it tries to describe all features of competition and trade, and incorporate everything which might contribute to success, but ends up recognizing almost nothing of importance and explaining nothing. In contrary to Porter’s theory, the nation state no longer represents the base for a MNEs or business, and there are no specific grounds on why a multinational require a home base. National clusters have already evolved into transnational ones—where firms can source factors, seek related and supporting industries, and meet demand and rivalry in “clusters” that cross national borders (Rugman, 1992, 1993).

As mentioned by Krugman (1991), it is stated that countries do not compete globally as they are not like firms, rivalling with competitors in the global market place. Daly (1993), in common with Eilon (1990), Gray (1991) and Waverman (1995), adopted the market share illustration of competitiveness, and has applied export shares as the dependent variable, backing by Porter’s own practice. They refute Porter’s opinion that wages and exchange rates and are insignificant in the determination of competitiveness and found proof to back up the idea that export shares are affected by exchange labour costs. Developing countries can disregard all four stages illustrated by Porter as they can mimic or bring in the business system and technology which thus far exists in other developed nations. For an instance, due to the favourable exchange rates policy and low wages, China was able to benefit and gain a cost advantage strategy and expand their capacity by managing new products in their home country.

 

Conclusion

To conclude, the six attributes of Porter’s Diamond either obstruct or promote the forming of competitive advantages of nations, firms and clusters. All conditions need to be existent and beneficial for an industry within a country to achieve global dominance. Developments in national economies have a very powerful impact on a firms’ competitiveness, and there is no competitive national economy without competitive firms, there is very little connection between the two (economics and firms) lines of research (Chikan, 2008). According to Krugman (1994), countries, however, “do not go out of business”, which makes the whole idea of national competitiveness “elusive”. The obsession with competitiveness is both undesirable and dangerous, and competitiveness is an insignificant word when administered to national economies.