Trade Relationships

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From ancient times, people try to develop trade relationships between each other to make a profit and to exchange different products. This concept is still working in present times between nations, industries, companies and firms. Many firms become multinational organizations to widen the range of products, sphere of activity, trading area, and to attract new customers, investors, to gain bigger market share and make more income. It is normal business process for each company, but not all companies can be successful and competitive on the market. Some of them are more competitive, some are less. According to Michael Porter (1990), it depends on many factors. And all these factors were described in his famous book which is called The Competitive Advantage of Nations (1990).

The theory he tried to explain in the book is called Porter's Diamond. It describes the factors determining the national competitive advantage and what makes nations, industries, and companies competitive on domestic and foreign markets. It is more important for the companies which do not plan to import or export directly, but wish to become multinational companies. In such cases, management of the firms looks at an international business environment.

At the beginning of internationalization process, every company deals with different challenges when entering into international market, such as competition from abroad, asset movement, exchange rate fluctuations, different types of risk, etc. That's why it is important to clear understand the basic determinants of competitive advantage. Porter's Diamond consists of the following:

There are 4 major factors and one of the most important is Factor Endowments/Conditions. It means which position the nation has in factors of production as labour, capital or infrastructure. It is important determinant because it helps to understand how the nation can compete in given industry. All the factors can be divided on basic such as natural resources, location, infrastructure and advance as technology, communication, skilled labour force, capital resources. These factors create the basic set for competitive advantage, but all of them might be developed or changed. For example, national factor endowments may be shaped through different technological progress, political initiatives, etc. Any changes may lead to the wide range of factors which may influence (increase/decrease) competitive advantage of nation. For the company becoming multinational organization it is significant to determine the optimal set of conditions to determine possibilities for engaging into international market.

Demand Conditions. Demand for particular product on local market is one of the most significant factors determining competitive advantage. Demand conditions are characterized by customers' requirements and needs, how fast it changes and what move the preferences of the customers from local market to domestic one. The higher the local demand, the higher the possibility that this product will be demanded in international market. Many firms achieve competitive advantage due to internationalization of demand on domestic market, when foreign customers are more preferable if such customers may help to develop foreign demand. It creates capability for the company to enter the international trade. But home demand helps more to define customers' needs and wants than foreign market does. For example, Japanese camera industry and German car industry is really influenced by its discerning local consumers (Source: [Last accessed 18 February 2010]).

Related and Supporting Industries. Well-developed internationally competitive related industries are very important for national competitive advantage. One successful industry may lead to advantages in other supporting industries. It is applicable to complementing industries such as hardware and software industry in USA, car and spares industry in Japan or shoes and leather industry in Italy. For example, Italy is not only one of the most successful countries with shoes and leather areas, but also with related goods and services such as leather working machinery, design, etc (Source: [Last accessed 18 February 2010]). Internationally competitive and successful industries within one country are combined into clusters/groups which may be useful for each other through cost-effective inputs, exchange of information, innovation, upgrading.

Firm Strategy, Structure and Rivalry. Different countries with different business sectors have different characteristics which are important elements of competitive advantage. These characteristics include structures, strategies, goals and objectives, how company is organized and managed. Goals and objectives of each firm are influenced by structures of ownership, management and control. For example, family businesses in Italy are successful in design-oriented industries such as fashion industry, interior design where responsiveness and flexibility makes the competition. But firms of engineering industry need strong hierarchical control due to high reliability and excellent performance is needed to be successful and competitive as in Japan or Germany. Another issue is nature of rivalry. If the company has strong domestic competition, it will be better able to compete with other firms on the market. The best example is Japanese camera or car industry where high domestic competition leads to internationalization of the companies.

In addition to Porter's Diamonds, government policies play significant role in development of nation's competitive advantage. For example, government policy may influence on demand through different laws on rivalry, product standards or stimulate demand for advances products on early stages. Chance is another issue, and it may lead to changes in positions of competing companies by crushing advantages of old firms and giving opportunities to new ones (Source: [Last accessed 18 February 2010]).

Determinants are comprised into the complex system which is always developing. One determinants influence on other during all time. The level of interaction between all determinants defines the possibility of nation to be internationally successful. The interaction can be seen in the following chain: demand conditions created by successful industries support the development of related industries, and if new firms enter the market it lead to rivalry and competition among firms in domestic market and clustering. Clusters may help the companies to increase its productivity, develop innovation and lead to faster new business developments. Clusters can be in different forms among companies producing different products across value-added chains or among organizations manufacturing similar products at different stages of the same chain. The best examples of cluster in the world are banking industry in London and New York, film in Mumbai and Hollywood, etc. In such case, geographical aspect is important (Source: [Last accessed 18 February 2010]).

The Porter's Diamond can be used in every sphere to detect if the company has any opportunities to be internationally successful. For example, top managers of the firms can use this model during the process of internationalization to determine if the domestic market can support successful internationalization effort or in which country to invest money. Also this model may help entrepreneurs to make a decision where to start their joint ventures in future which will be successful and profitable. Government can use it to create best supporting policy framework for a given industries.


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