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Analysing Porters Diamond Framework In Modern Industries

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Published: Mon, 5 Dec 2016

Since the publication of Porter’s book, The Competitive Advantage of Nations in 1990, it has attracted considerations from other scholars. Porter used the Diamond model as a theoretical framework for analyzing the national competitiveness, explaining “Why do some social groups, economic institutions, and nations advance and prosper?” Although Porter’s Diamond framework has had extensive research and discussion by other scholars, it has also subjected to many doubts and criticism.

The diamond model has been founded as too abstract and is only applicable to developed countries which neglected historical dimensions of the late development theory. It also gave too little attention on the impact of national culture as well as downplays the role of the state while it is one of the most influential factors that contribute toward the national competitiveness.

Queries have been raised whether factor and demand conditions are transnational or purely national.

The essay will assess the idea about diamond model and the Competitive Advantage of Nations in detail and argue that Porter’s Diamond model does not provides a satisfactory solution to the explain the reason of a nation that achieves international success in a particular industry. Different views of scholars will be employed to highlight the arguments, empirical evidences of industries among the five big countries would be discussed and relevant theories will be cited to support the findings.

Principle

The primary objective of the book is to explain that “the influence of the nation on the international competitive performance of firms occurs through the way in which a firm’s proximate environment shapes its competitive success over time” (Porter 1990 p.29). Also, the level of economic development and national competitiveness of a country is not only related to the political environment and the whole economic conditions, the home base play an important role. Porter has analyzed that the firms are principle actors rather than the nations and states that “competitive advantage is created and sustained through a highly localized process.”

Porter ‘s theory of national competitive advantage, the Diamond model has been developed as a tool through studying of a hundred industries among ten nations to analyze the reasons that a nation could achieve international success in a particular industry. He believes that the ability of a country to gain competitive advantage and become success in a particular industry depends on four national determinants of competitive advantage in a particular industry:

1) Factor conditions which include both basic and advanced factors such as human, physical, knowledge and capital resources as well as infrastructure while advanced factors are the most significant for the competitive advantage

2) Demand conditions, Porter place particular emphasis on the structure of demand in the home market and the role of home demand in providing the impetus for “upgrading” competitive advantage.

3¼‰related and supporting industries. This refers to the clustering of suppliers, knowledge-input institutions and end-users in close proximity which stimulate innovation and increase competitiveness.

4¼‰firm strategy, structure and rivalry. It includes” the way in which firm are managed and chose to compete.” Domestic rivalry is effective in competitive advantage upgrading which gives pressure to the firms to improve on the aspects of quality, innovation and controlling cost.

Chance and the government are the two external variables that influence the four determinants of the diamond model. From porter’s point of view, Chance events (Porter 1990) can “create discontinuities that allow shifts in competitive position.” while Government is the one which could benefits or adversely affects the four determinants of national advantage in an industry.

The diamond model is shown below:

(Wikipedia)

Example of Pharmacheutical industry

Porter’s first application of the diamond approach has been commended and criticized (Rugman 1991; Dunning 1993; Cho 1994; Brouthers, Brouthers 1997; Moon et al. 1998) as its diamond model has an exclusive focus on the “home base” concept, which leads to failure to incorporate the effects of multinational activities in his model. The success Germany is because of R&D base in the pharmaceutical industry, but the base is mostly come from the outward FDI which is more the multinational activities rather than the “home base”.

According to Gambardella (2000) “The competitive advantages of pharmaceutical industry are R&D and innovative competencies, marketing and distribution capabilities.” Other determinant factors such as financial system, government regulation, education, private businesses and demand etc. are all influences an industry and companies’ success.

Local competitors of multinationals are usually smaller companies specialized in sales of non R&D intensive drugs (Gambardella, 2000).

For example, pharmaceutical companies’ operations consist mostly of manufacturing and distribution. The demand for pharmaceutical is low in China comparing to Germany, UK, USA and Japan. Refers to European statistics, pharmaceuticals companies in European countries are much more labour intensive than the US and Japanese ones. The US and Japanese companies are more rely on capital and R&D While contrasting the share of valued added on total production value, there are much higher for US and Japan companies than the European countries.US and European companies always compete on the level of new product development. Where Germany has a strong base of R&D and skill labor force , it has the 3rd largest is the largest pharmaceutical company in the world , Bayer which accounted for the, which working across 50 different nations. They have invested heavily in U.S. markets and continue to seek new product markets. They has also put a lot of effort for investing the new drugs which they outsourced about 5.3 billion Euros in chemicals to India and investing in R&D in China’s agriculture industry with spending more than 100million Euros.As for the UK, it lags behind in innovation in comparison to countries such as the United States. Pfizer, the largest pharmaceutical companies in the world where are GSK is a British one. Pfizer has a competitive advantage over GSK in the British markets because of its marketing superiority, patenting and high level of R&D operations .

In comparison the pharmaceutical industry in the US, UK , Germany and China, Bayer has invested aggressively in research and development and it ranks highly among American companies Bayers’ powerful position in the pharmaceutical industry due to the high level of Germany’s education which supplied the human capital as well as skilled labor force that are necessary in this highly competitive industry.

Although the evidence above illustrates that the German success is due to the reason on the strong R&D base in the example pharmaceutical industry, the base is mostly come from the outward FDI which Porter has not regards this as an important factor toward the contribution of competitive advantage.

Example of Automobile Industry

Furthermore, Cho (1994) have criticized Porter’s discussion about the role of state and MNEs in the theory of national competitive advantage and argues that diamond theory proposed by Porter is limited to the used in developing countries, and emphasis that the different of Human resources in a group and between the different factors and material factors in the patterns are different, will affect the national competitiveness.

This comes to an example of the automobile industry. For instance, China is a late developed countries which has a lower level of education and therefore leads to a more unskilled labor force comparing to the other developed countries such as US, UK, Germany and Japan. In the automobile industry,

Firms’ in Japan such as Toyota has the highest expenditure on R&D and innovation where China is much less competitive in terms of innovation in high technology sectors .The main competitive advantage of automobile industry in China is the massive workforce and cheap labor cost in comparison with Japan , US and the European countries, as well as attracting the FDI and MNEs, it increases the national competitiveness.

On the other hand, given the fact that Porter has downplayed the role of the Government in the theory of the national competitive advantage,

Government still plays an important role in a particular industry of an country especially for the late developed countries. For instance, since the enterprise and financial institution are almost state owned, China is the country that most of the large industries continue relying on the assistant of Government.

The example of the Chinese industry shows the fact that the importance of government power as well as the contribution of MNEs in China’s automobile industry. Porter has been ignores the Late development theory and gave too little consideration to the role of the state. The diamond model would not be applicable for the less developed countries as a tool to analyze the national competitive advantage such as China.

Moreover, Bosch and Prooijen(1992) were also proposed that the Diamond model has neglected the impact of national culture on the competitive advantage of nations. This focus on a broad range of subjects within the field of management: management style( Lindvist, 1988),human resources management(Schneider,1988) , motivation theory, (Hofstede,1980)learning curves(Hayes and Allinson,1988), technology transfers( Kedia and Bhagat,1988) and marketing strategy( Tse et al., 1988. The pointed out that “In countries with less need for uncertainty avoidance, relations are much loose and hesitation to change in smaller.” In the example of automobile industry of Japan and European countries, Japanese firms would design the parts together with the suppliers and the car makers whereas the European firms made a new car without any assistant from the suppliers. This illustrates the uncertainty avoider and shows that the national culture has an important impact on these relations.

Against the Diamond model : Evidence of Canada

However, Dunning’s (1980) argue that when large MNEs seek to improve their global competence and efficiency (when a home nation does not have all sources of competitive advantage), their activities in some or all of the determinants do contribute to a host nation’s competitiveness in the long run.

The successful Canadian exporters show a similar pattern, summarised in

Porter (1991a, p.140 Figure 5.1). The twenty-five industries are taking into account either the four main conditions, or the two external variables.

There were 25 industries that are group into four additional categories for Canada: resource-based, market-access based, innovation-driven and other.

The conclusion is drawn as “The basic application of the theory captured shows that Canada has no diamonds. And either Canada is in dire economic straits because it lacks these industry patterns, or the diamond does not apply to all national economies. As a result, the empirical tests results have against the Porter’s diamond theory which Porter has “cautionary comments about complacency, and the probable negative effects of the lack of diamonds are simply assertions.”

In the role of international economy of Canada, it contains the competitive advantages in the aspect of trading comparing to the European countries ,US, UK ,Japan who has strong base of diamond model. Canada also ranks the top three in the exports sectors . In order for a company to be successful within their industry ,they must improve the level of R&D such as, attracting MNEs and FDI, investing abroad in labour skills and technology, consequently, as the seen it are hardly that any competitive advantages are purely national. As MNEs start investing in different industry in Canada, it would gain more competitive advantage through which makes the industries become globalization.

Conclusion

In conclusion, Porter’s diamond framework has been extensively discussed and broadly used among nations and industries. However, its actual contribution of analyzing the national competitive advantage has not been clarified. From the above evidences, it indicates that there has been inconsistence between the industry evidences among the countries and Porter’s theory of Diamond model.As Porter states that firms must actively improve their home base in order to upgrading the determinant and gain national competitiveness. However, in the example of pharmaceutical industry, Germany’s success due to the mature R&D base of the industries where the R&D base are mostly depends on the FDI and Government that Porter does not put much attention on.

Moreover, Since Porter’s study of diamond model is only based on ten nations, it does not provide a satisfactory answer to the national competiveness of the industry for less developed countries. In the case study of the pharmaceutical industries, Porter has neglected the Late Development Theory which is not applicable to the countries such as China.

On the other hand, the impact of national culture is one of the missing elements in Porter’s analysis that would be a factor which influences the national competitiveness. Porter has also gave too litter consideration on the aspect of the Government role and participation of the MNEs where the example of automobile industries indicates that both the Government and MNEs has a lot of impacts in the national competiveness.

Another disagreement with Porter is that the factors and demands conditions are not purely national. The data from the example shows that Canada has achieved a good standard of the role of international economy. Although industries in Canada does not have a strong diamond structure as Porter required to contain substantial national competitive advantage, it attracts foreign direct investment and reach high level of exports. These all help the Canadian industries to set up the “global webs” and become globalization.

As there are underlying questions and problems of Porter’s Diamond framework. Other scholars’ new theories such as Double Diamond Model (Rugman 1991) and Nine-Factor Model (Cho 1994) are suggested to adjust the missing dimensions in Porter’s analysis. This will explains the reason that some nations could achieve success in particular industry in detail and the models could be used to assess competitive advantage of the national environment in more accurate way which also help the industry as a whole to enhance the international competitiveness.


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