Professor Michael Porter’s (1990) work on Competitive Advantage of Nations is to a great extent influential yet tendentious (Davies and Ellis, 2000) which evoked considerable interest and eager debates that were met with contrasting views. This essay will find out why so much emphasis was placed on the diamond framework by concluding the concept of Porter’s Diamond alongside his theory and framework, and lastly the academic criticism this model has attracted.
Porter’s Competitive Advantage of Nations
Porter’s “national diamond” which recognized 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 a conqueror in all industries and eventually exhibiting weakened results, nations can reach global competitiveness by concentrating firstly on the industrial sectors, which offer the ideal possibility of success (Porter, 1990).
Godfrey (2015) states that factor conditions are the nation’s key position in factors of production—skilled labour or infrastructure, required to engage in a particular industry. These conditions can additionally 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). According to Porter (1990), the outcome of an all-out effort instead of succeeded by nations are known as advanced factors, and they are the most irreplaceable production factors in today’s knowledge economy.
According to Porter (1990), home demand is distinct by three key characteristics—the instruments that transport domestic liking to foreign markets; their scope and growth rate, and their mixture (mix of customers’ needs and wants). The pace and disposition of development and transformation by a nation’s firms can be constructed by demand conditions inside a nation. It is the disposition of the home demand rather than the size that bring about a change. Home demand conditions impact the forming of a certain factor conditions and are the key to global prosperity.
Related and Supporting Industries
The existence or absenteeism in the nation of an internationally competitive supplier and related industries is a crucial factor (Porter, 1990). Advantages may be directed by an internationally successful industry to other in supporting or complementing industries. Internationally competitive supplier industries in a nation assist businesses to perceive new possibilities and capabilities to register advanced technical knowledge, 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 emphasis on businesses to revolutionize and invest, that emerge from aggressive domestic competitiveness; and a match involving the objectives of the workers, managers and owners and the sources of competitive advantage in a specific industry (Huggins and Izushi, 2011/2012). Geographic concentration—in Porter’s (1990) view, enhances the intensity of domestic competitiveness. The disposition of domestic competitiveness and rivalries has an elementary influence on the global competitiveness of a nation’s organization.
Chance and Government
Chance events create discontinuities that permit shifts in competitive position (Christensen, 2015). 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, unforeseen oil price rises, and revolutions). Short-term benefits provided through protection and subsidies from government intervention only generate an additional request for government aid in the industry. The government has insufficient power to generate advantages on its own despite the fact that it can increase the odds of acquiring a competitive advantage.
According to Porter (1990), a cluster refers to a geographically proximate cluster of affiliated establishments and interlocked 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 distinct in a cluster (Snowdon and Stonehouse, 2006). Cluster effect competitiveness in various ways which enhance innovation and competitiveness. Through the geographical concentration of businesses, more efficient access to the workforce, data, and specialized suppliers are permitted.
In accordance with Michael Porter’s work of competitive advantage alongside the ‘diamond’ concept and his point of view regarding how nations should compete, there were diverse reactions. Numerous biographers have scrutinized his hypothesis 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 biographers, 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.
Porter’s Diamond failed to recognize 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). 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 professed 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 remarkably. 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).
According to Reich (1990) and Waverman (1995), the diamond and its four corners are so extensive and so general that it tries to recount all characteristics 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).
Critics argued that the significance of geographic proximity might be more restricted than proposed and has been overemphasized in the model (Penttinen, 1994), partially caused by the geographical scale of production which differs amongst industries and is bound to cross national borders and not fixed (Jacobs, 1995). 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. 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. Daly (1993), in correspond with Eilon (1990), Gray (1991) and Waverman (1995), adopted the market share interpretation 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. For an instance, due to the favourable exchange rates policy and low wages, China was able to benefit and gain a cost advantage proposition and by managing new commodity in their home country, they can enlarge their capacity.
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.
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