Modern Business In Comparative Perspective Method

The diamond model and how it explains the national competitive successes

Discuss about the Modern Business in Comparative Perspective Method.

Porter’s ‘Diamond’ concept can be identified as a theory that can be utilized in explaining the competitive advantages of the countries. As mentioned by Negishi (2014) the theory developed by Heckscher-Ohlin about the competitive success of the nations identified that the countries use their resources for being successful in the international business competition. This model failed to answer how the countries do it. Porter’s Diamond model answers this question. However, the model proposed by Porter has been criticised with the arguments of the management school and the economic school. Moreover, many critics have identified that the model can only be applied in the context of the developed economies. However, with many other criticisms it can be considered as another inconclusive theory for analysing the national competitiveness.

As mentioned by Fainshmidt, Smith and Judge (2016) the diamond model of Porter advocates that four different factors (demand conditions, factor conditions, related and supporting industries, and the Firm Strategy, Structure, and Rivalry) in a country determines the competitive stance of a country. Thus, the diamond model is able to identify the causes of major national business projects or the reasons of failures of some others. However, as argued by Shu, Lin and Ye (2013) this model has downplayed a number of crucial factors like the national governmental authority, the FDIs or the role of the MNCs in creating competitiveness or providing inputs into the progress of the national businesses.

As mentioned by Kharub and Sharma (2016) the diamond model has identified that with the domestic demand for an industry, the supporting national infrastructure, existence of local supporting industries and the structure of the firms or the completion in the domestic market serve as the factors of competitive advantage for a country. According to Jambor and Babu (2016) with a huge concentration on the domestic factors, this model of Porter states that the domestic demand provides a scope for the companies to excel in a certain industry and the supporting industries help the companies to flourish. Moreover, Porter has identified that the factor like lack of land has helped the Japanese engineers to exile in manufacturing industry (Porter 2011). Thus, the diamond model identifies the factors those are influential in creating national competitiveness.

However, a number of criticisms have declared the theory of Porter as a mere tautology. As mentioned by Porter (2011) this particular model has made a case study of some economically developed countries has made an analysis of the cause of their development in the industrial and business sectors. This particular model has merely identified how those factors were initiated into the economy; rather it has explained how those factors have influenced the growth of businesses in that particular economy. In the case of Germany, the diamond model of porter has discussed that the strong base of the research and development sector of the country has positively influenced the growth of the chemical industry in Germany. However, the model has missed to identify what has initiated the establishment of the chemical industry or the research and development sector itself. Moreover, as identified by Alexandros and Metaxas (2016) the diamond model of porter has described that the domestic demand of the cameras and the knowledge of the domestic customers about this product in Japan is being helpful for the nation to develop its success in the international camera business. However, the model has not identified what has created this particular pattern of demand within the market of Japan. As discussed by Riasi (2015) while considering the case of France, Porter has also identified the “domestic demand” as the cause of success or quality improvement of the wine industry in France. The model has typically ignored the cause of this demand within that market. Thus, the diamond model has merely stated the factors helped in business growth but it has failed to identify the origin of those factors and how those can be initiated for a market which lacks such factors. By failing to provide any theory about the different factors or demand creation the diamond model has become a mere tautology.

A mere tautology

Moreover, a number of critics have identified the applicability and validity of the diamond model of porter as limited. As mentioned by Wilson (2016) the model is basically a case study of a few economically developed countries and two newly industrial countries, Singapore and Korea. Hence, as mentioned by Riasi (2015) the proposals of the theory is more likely to be applicable or relevant to the economically developed countries.

On the other hand, some empirical contravention of the provided theory of Porter has posed question on its validity for explaining the causes of competitive advantage among the countries. As mentioned by Fainshmidt, Smith and Judge (2016) in the discussion of porter, he has studied eight developed and two newly industrialized countries, Korea and Singapore. With the analysis of porter, he speculated that Korea is going to attain an advanced status of business in coming decades, whereas he has identified Singapore as a factor driven company which is less likely to attain a significant growth as compared to Korea. However, as identified by Tan and Ho (2015) “since the publication of the discussion of Porter, Singapore has been identified as a more successful economy in business than Korea. This empirical difference has raised a doubt regarding the validity of the diamond model for determining a nation’s competitiveness.

As mentioned by Kharub and Sharma (2016) Michel porter has defined that a strong national diamond or “home base” is a prerequisite for being internationally competitive. However, a number of critics have identified that a number of small scale economy that have entered into the international business and being successful, do not necessarily have a national diamond. Rugman and D’Cruz have identified that Canada typically lacks a “strong demand conditions” in its domestic diamond; however the “strong and sophisticated foreign demand from the US diamond” has helped the country to conduct a successful foreign business (Rugman and D’cruz 1993). Rugman and D’Cruz have successfully identified the lack of analysis or the limitation of the diamond model in reference to the foreign assistance.  

On the other hand, as identified by Liargovas and Apostolopoulos (2014) Porter’s lack of concentration on the importance of the multinational activities has limited itself in identifying the cause of growth of export-import business of various countries. The work of Cartwright identified that New Zealand has used the scope of globalization in conducting an export business with more than hundred countries, which has been ignored by the diamond model of Porter (Shu, Lin and Ye 2013). As mentioned by Riasi (2015) “in the case of New Zealand, the Porter model could not explain the success of export-dependent and resource-based industries. Therefore, applications of Porter’s home-based diamond require careful consideration and appropriate modification”.

Empirical contravention

In addition to this, Fainshmidt, Smith and Judge (2016) has identified that the home based focus of the diamond theory identified by Porter ignores the importance of the international countries in developing or improving the competitive stance in a certain nation. In the context of globalization, a domestic market is not necessarily important for many of the companies. As mentioned by Riasi (2015) the deregulation of world economy has opened the opportunity for various companies to operate in a stronger foreign market than its domestic market with less demand. Here the example of the KPO industry in the countries like India or Bangladesh can be cited (Javalgi et al. 2013). As per the Diamond model of Porter, for development of this industry the domestic demand or the supporting industries needed to be assertive or helpful. However, it proved to be wrong in the context of these countries. As discussed by Fainshmidt, Smith and Judge (2016) the growth of this industry in these nations is typically driven by the scopes opened by the globalization, demand in the global market and the “double diamond model”.

As identified by Clifton, Glasmeier and Sheth (2016) a number of countries like Japan, Taiwan, Mexico or India are growing industrially by using their learnt knowledge of technology or market from the countries which took part in the first and second industrial revolution. According to Alice Amsden, while the countries like the USA, the UK or Germany is being successful with product or process innovation, the late developers like Brazil, India, Turkey or South Korea is competing on the basis of low wages, experience in using the technologies and state subsidies. However, the diamond model of Porter has ignored this particular historical dimension in its suggested factors for analysing the national competitiveness.

While identifying the missing dimensions of Porter’s model regarding competitive advantage, it is important to describe the contribution of Chandler in this same factor. As mentioned by Chandler, the “structure follows the strategy”. As described by Takahashi  (2016) the case study of Chandler discusses that depending on the changes in the technological trends and the market demand, the large corporations make changes in their strategies. Now, depending on the demands of the strategy or the new created market trend, he companies make changes in the organizational structure to perfectly use the created market opportunity. With the establishment of the new strategies the companies become able to excel in their production and creating economies of scale which directs them to obtain competitive advantage. As discussed by Galbraith (2014) in the explanation of Chandler, he used the cases of Ford which transformed the car market by utilizing the strategies of Mass production, standardization etc. which also drove GM to introduce the strategy of “diversification of mass produced goods” and multi department hierarchical management. Thus, the car industry of the US got a competitive advantage.

Single diamond vs. Double diamond model

However, the diamond model of Porter has missed the dimension of technological advancement and managerial strategies. As discussed by Fainshmidt, Smith and Judge (2016) Porter’s theory identified the way of national factors influencing competitive advantage, whereas the thesis of Chandler indentified the environmental factors like technology or market need those should be included in the diamond model of Porter. Moreover, Chandler’s thesis has focused on the importance of management or strategies also needed to be included in the dimensions of Porter’s diamond model.

In spite of the broad coverage of the Diamond model of Porter, Van den Bosch and Van Prooijen have identified that the model has failed to integrate the factor called “national culture” which is a significant influencing the business pattern in a certain country (Van Den Bosch and Van Prooijen 1992). As mentioned by Wilson (2016) “Porter himself noted that many aspects of a nation such as attitude towards authority, norms of interpersonal interaction, attitude towards management and social norms influence the way firms are organized and managed”. As identified by Van Den Bosch and Van Prooijen (1992) the culture of high work ethics or high saving rates of the Japanese citizens are influential in their success in a number of business enterprises. Moreover, the Japanese culture or belief of long term employment and incremental growth provides a scope to the domestic companies to specialise. Thus, the cultural aspects of a nation hugely contribute to the competitive advantage of a country.

The role of government:

As mentioned by Fainshmidt, Smith and Judge (2016) one of the greatest frailty of the diamond model of Porter is its failure to include the role of the national governmental authority in shaping desired success of the national industries or companies. As mentioned by Riasi (2015) depending on the polity or the national trade policy the companies become able to operate or excel in a certain industry. A government that follows a capitalist economy is more supportive to the business enterprises than a communist or socialist government. Moreover, as mentioned by Fainshmidt, Smith and Judge (2016) in the world of globalization, the governmental policy about the foreign trades is typically influential in the international success of a domestic company.

Moreover, with an open economic policy the government can collect foreign investment to revitalize a domestic industry or the factor endowments like the labour efficiency or the structural factors like the improvement of the communication or infrastructure or many more. Thus, the diamond mode of porter has failed a major factor to include in within its framework.

Ignorance to the importance of globalization and multinational companies

As mentioned earlier, the diamond model of porter has neglected the impact of globalization or the MNCs in creating competitive advantage for the domestic companies. As mentioned by Riasi (2015) Porter has argued that the FDI is more likely to create an erosion in the market share of the domestic companies. However, little empirical evidences have supported it. In most of the cases the foreign FDIs has revitalised the domestic companies and create competitiveness within them. The recent example of TATA’s takeover to Jaguar can be identified as such an example (Fainshmidt, Smith and Judge 2016).

Conclusion:

Hence, in conclusion it can be said that the diamond model of Michel porter cannot define or analyse the causes of international business success of certain economies exclusively. The model’s over concentration on the domestic circumstances or single “national diamond” has limited the applicability and validity of the model as a standard framework for the explanation of the achievements of major national business systems. As per the above mentioned discussion, it can be said that the model needs to include some other aspects like international business relations, double diamond frames, the cultural factors and the importance of the government as the missing factors for analyzing the cause of the national competitive advantages.

References:

Alexandros, P.N. and Metaxas, T., 2016. “Porter vs Krugman”: History, Analysis and Critique of Regional Competitiveness. Journal of Economics and Political Economy, 3(1), pp.65-80.

Clifton, J., Glasmeier, A. and Sheth, A., 2016. Revisiting development theory: Alice H. Amsden’s impact on the field..

Fainshmidt, S., Smith, A. and Judge, W.Q., 2016. National Competitiveness and Porter’s Diamond Model: The Role of MNE Penetration and Governance Quality. Global Strategy Journal, 6(2), pp.81-104.

Galbraith, J.R., 2014. Designing organizations: strategy, structure, and process at the business unit and enterprise levels. John Wiley & Sons.

Jambor, A. and Babu, S., 2016. Competitiveness: Definitions, Theories and Measurement. In Competitiveness of Global Agriculture (pp. 25-45). Springer International Publishing.

Javalgi, R.R.G., Benoy Joseph, W., Granot, E. and Gross, A.C., 2013. Strategies for sustaining the edge in offshore outsourcing of services: the case of India. Journal of Business & Industrial Marketing, 28(6), pp.475-486.

Kharub, M. and Sharma, R.K., 2016. Investigating the role of porter diamond determinants for competitiveness in MSMEs. International Journal for Quality Research, 1(10), pp.471-486.

Kharub, M. and Sharma, R.K., 2016. Investigating the role of porter diamond determinants for competitiveness in MSMEs. International Journal for Quality Research, 1(10), pp.471-486.

Liargovas, P. and Apostolopoulos, N., 2014. Regional Development And Renewable Energy Enterprises. A Porter’S Diamond Analysis. Theoretical and Practical Research in Economic Fields, 5(1 (9)), p.5.

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Porter, M.E., 2011. Competitive advantage of nations: creating and sustaining superior performance. Simon and Schuster.

Riasi, A., 2015. Competitive advantages of shadow banking industry: An analysis using Porter diamond model. Business Management and Strategy, 6(2), pp.15-27

Rugman, A.M. and D’cruz, J.R., 1993. The” double diamond” model of international competitiveness: The Canadian experience. MIR: Management International Review, pp.17-39.

Shu, Y., Lin, L. and Ye, J., 2013. An Empirical Study on China’s Service Trade Competitiveness-Based on the Diamond Model. Management & Engineering, (13), p.14.

Takahashi, N., 2016. Strategy and Structure Follow Technology. Annals of Business Administrative Science, 15(1), pp.15-27.

Tan, B.S. and Ho, Y.K., 2015. Singapore as an accountancy hub-a Porter’s Diamond perspective. International Journal of Business Competition and Growth, 4(1-2), pp.44-56.

Van Den Bosch, F.A. and Van Prooijen, A.A., 1992. The competitive advantage of European nations: The impact of national culture—a missing element in porter’s analysis?. European Management Journal, 10(2), pp.173-177.

Wilson, P., 2016, May. The Impact of Culture on Cluster Competitiveness: a Revised Diamond Model. In Clusters as a Driving Power of the European Economy (pp. 162-175). Nomos Verlagsgesellschaft mbH & Co. KG.