National Business Systems Variations
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Published: Thu, 11 May 2017
In this essay I will explore how Porter’s diamond model explains the variations in national business systems and comparative economic performance and to what extent other ideas and approaches will be required. Porter introduced the diamond model of national competitive advantage (1990) to explain why a number of countries are more competitive than others and why a number of businesses within the countries are more competitive. The model proposes that the national home base of an industry plays an important role in achieving an advantage on a universal scale. This home base contributes the essential factors that will support the organisations in building advantages in global competition. Japan’s automobile industry and US semiconductor industry have both been linked to Porter’s diamond model in creating unique business systems and gaining competitive advantage over other industries.
Porter (1990) identified four determinants in attaining a national competitive advantage he concludes that a combination of the four determinates within a nation has an enormous influence on the competitive strength of the firms located there. Porter (1990) argues that competitive industries take the form of specialised clusters of home based firms. Clusters are correlated through vertical relations such as buyers integrating with suppliers or through horizontal relations through customers, technology, skills, distribution channels etc (Chen et al 2008). These specialised clusters will enable a nation to create business systems which will lead to competitive advantage and economic success.
Factor condition is the nation’s position on factors of production that is necessary to compete in a given industry, for example skilled labour or infrastructure. These national factors often provide initial advantages for the nation. Each nation possesses particular factor conditions that are more favourable. For example, Japan’s large pool of engineers is reflected by the number of engineering graduates. These engineering graduates have been essential to Japan’s success in variety of manufacturing industries. Porter (1990) points out that these factors don’t have to be nature made or inherited.
Home demand conditions can influence the creating of specific factor conditions which can affect the direction of the innovation and advancement of product development. Porter argues (1990) that home demand rests upon three major characteristics. First the mixture of customer’s needs and wants. Second the demanding buyers in the home base will pressure companies into meeting high standards. For example Japanese consumer’s value space-saving gave the nation a lead in compact products and America’s long distances have led to competitive strength in very large truck engines. Third, an industry will have an advantage in market segments which are more important at home than elsewhere. In each of these instances, it is not the size of the home market that is important, but the extent to which it encourages firms to innovate. A large home market which meets all three conditions will be highly supportive of international competitiveness (Davies and Ellis 2000).
A related and supporting industry is when one globally successful manufacturing company can create advantages in other similar manufacturing companies. A nation industries will be better able to compete internationally if there are ‘clusters’ of industries in the home base economy which are linked to each other through vertical or horizontal relationships amongst suppliers, customers and distribution channels. For example Germany has a cluster in chemicals and USA in the semi-conductor industry. Dyer (1994) found in his research that the Japanese network relationships with their suppliers can enable the company to send their workers to assist customers with the work, position the factory near the customers or even invest in physical assets that are customised. This will therefore allow the Japanese’s auto businesses to keep up with the inventory and transportation costs low enabling them to improve the product development. For example Toyota was able to benefit from their production networks as they created assembly factories that are geographically close with their suppliers.
The firm structure, strategy, and rivalry are the conditions governing how businesses are shaped, managed and deal with domestic rivalry in a nation. The cultural factors are important for each nation. For example each country will have different cultural traits in which the business is structured. This will create benefits for each nation and industry. In Japan the automobile industry rivalry is strong, has seven major companies: Toyota, Honda, Nissan, Mitsubishi, Suzuki, Mazda, and Subaru which all fight for the market share. These seven businesses compete intensely in the home nation, and within other nations and markets. Strong domestic competition demands all these businesses to have superior technologies, products, and management practices to compete and survive, for example there is high number of engineers in management that emphasis on improving manufacturing processes. The US has only two main businesses in automobile industry which are Ford and General Motors. The US manufactures have stated that the quality of the automobiles of Japanese cars is better than the US cars. Toyota and other automakers in Japan were able to grab 25% of the US auto market industry while the US home producers for the cars were unable to compete with the Japanese price and on the quality of the product (Buffa 1984).
In addition to the four conditions, Porter (1990) points out two important components which are the role of chance which are important as it allows nations to shift their competitive position and alter the conditions of the diamond model. Chance events have different impacts on nations for example the oil shock helped to upgrade Japanese industry (Porter 1990). The role of the government is an important influence on modern international competition. The governments can put forward the policies a nation should follow to create advantages, enabling the industries in a nation to develop a strong competitive position globally. For example the government policy for Japan and US has created success for these nations. According to Porter (1990) governments can progress the advantages by ensuring there is high potential of product performance, ethical standards, or encouraging reasonability and negotiation between the suppliers and buyers on a domestic level. For example the US governments gave large support in semiconductor industry in focusing on specific products that meet consumer demand for example the missile system in the US national security.
Nations can use Porter’s (1990) diamond model to identify which businesses systems they can build to generate a competitive advantage and compete with others nations globally. The Japanese have considerable advantages in Porters diamond factors. The semiconductor manufacturing and software services are key industries that have contributed greatly to US growth and productivity in the 1970s. Okimoto, Sugana and Weinstein (1984) research found that the US businesses were able to obtain competitive advantage in key industries such as steel, automobiles and consumer electronics. These businesses had the ability to set the standards of each industry, create new technology and control shares of the world market.
The markets and industries that Japan have chosen or created a competitive advantage are the autos, steel, motorcycles, cameras and small appliances. The success of Japanese automobile industry is due to the close relationships with their suppliers. For example both Toyota and Nissan are able to work closely with their supply production network to produce ‘high quality’ cars; this gives the Japanese manufacturers an advantage over the US automakers (Dyer 1994). Research found on Numakura (2004) article has shown that the Japanese automobile companies have greater higher profit margins than the American companies. This is because the Japanese production systems such as Just in time (JIT) and Kaizen have enabled the industry to increase their productivity and cost reduction. Compared to US, rather than having a close relationship, the businesses are more likely to influence their supplier by a number of strategic polices (Buffa 1987). In the 1970s the Japanese had labour cost advantages, strong networks of suppliers, very demanding consumers which enabled them to gain competitive advantage over other nations.
However Porter (1990) underplays the role of history, late development theory, globalisation, culture and managerial enterprise in determining the competitive advantage. As a result of defining the problem incompletely, he offers an incomplete solution (O’ Shaughnessy 1997). This shows other approaches are required to explain various business systems and comparative economic performance in nations.
Gerschenkron (1962) theory on late industrialisation could be another approach to Porter’s theory to explain the economic performance of a nation. The theory shows how Japan as a nation was able to go through a period of rapid growth during 1951-1990 that helped them to compete globally. Japan’s economy boosted after the US declined as in the 1970s the Japanese companies was able to replace the US leaders in key industries. The production and operation management enabled the Japanese industries to become a competitive nation. This was done through their production systems and manufacturing products at a low cost. The Japanese companies were able to do this by offering the consumers good quality products at cheap prices.
Table 1 (Capdevielle & Alvarez 1981) shows a comparative evidence of how US companies’ productivity averaged at 2.7% in 1960 and decreased at -0.3% at 1980. While at the same time Japan averaged a productivity increase of 9.4%, Germany and France productivity also increased at 5.6% and 5.4% (Buffa 1987). The reasons for US decreasing in their productivity growth in industries and their capability to compete globally are due to many reasons. One factor could be the difference of the work ethics values between US and Japan or Germany showing us how culture can also have an effect on the nation’s competitive advantage on various business systems. Bosch and Prooijen (1992) have paid attention to the role of national culture and impact it has on Porter’s diamond. Porter agrees in that national culture is an important determinant in the competitive advantage of nations, but does not include national culture in his descriptive framework of the diamond. National culture has an important impact on relations between related and supporting industries (Bosch and Prooijen 1992) therefore to an extent Porter’s theory doesn’t account how culture is another explanation for the variations in national business systems and comparative economic performance for a nation. For example, Hofstede (1980) found Japan compared to Western and Northern Europe, is a very strong uncertainty avoider. Hofstede (1980) argues that the variations in values between cultures will require the difference organisational responses. The economic environment of a nation can be determined by the cultural values.
Gerschenkron (1962) theory also states that history is important in measuring economic success and performance for a nation. Porter (1990) neglects the role of historical cause in his diamond model. In the case of Germany and Japan for example, there is probably a direct connection between past militarism and the present industrial domination. Militarism has contributed to industrial excellence by creating a tradition of discipline in the labour force for both of these nations. Germany’s and Japan’s competitiveness owes a great deal to its amoral military past (O’ Shaughnessy 1997). Particular historical events can be unique to a country which can determine its character (Saunders et al 1986). The occurrence of invasion and revolution is a shared experience amongst many successful nations in history. O’ Shaughnessy (1997) argues that there are limitations to Porters (1990) methods. For example the diamond conditions emerged from examining the history of 100 industries, but to do this thoroughly histories would have to be written in the form that would allow such analysis. The detail would require the company histories. Neither the references nor the acknowledgements suggest any such documented histories of 100 industries. The four histories quoted from Porter’s are just sketches that illustrate rather than test the theory (O’ Shaughnessy 1997). Chandler (1992) also agrees that the history is important for any organisation and industry. He argues that significant analysis of a business or nation today must be based on the understanding of its past.
Reich (1991) agrees on the concept that Porter theory on national competitiveness (1990) to an extent doesn’t account for various business systems and comparative economic performance. He argues that economic success or performance is due to national purpose rather than national competitiveness. Nation competitiveness depends on globalisation and the ‘skills, training and knowledge’ commanded by its workforce, the key to success is the people of the nation. Reich argues that national industries don’t exist in any meaningful sense, as it is global corporate networks rather than national industries that now dominate economic activity. Resources are placed in those nations offering the best production and marketing advantages. For example Reich (1991) points that US decline in productivity is due to the changes of the world competition structure as by 1980s more than 70% of the products consumed in US had to be competed with similar goods that were produced abroad with standardised production systems. Chandler (1977) stated that a globalised firm can allow other nations to learn and benefit from the same sources of their national competitive advantage. For example in the 1960s, America and other western countries were amazed by the rapid speed of Japan’s growth and how it was able to manage its economy to become a successful competitor in the globe. America and other European nations started to learn from Japanese management structure and operation. However Porter (1990) makes a strong case of the importance of the home country in today’s global economy. Porter argues that by providing a favourable environment for the successful organisations, home countries can play a vital role in wealth creation in the context of international competition.
Chandler (1992) looks at a different perspective to explain the economic performance in nations and the development of business systems. His theory argues that large managerial enterprise had a significant contribution on national competitive advantage through exploitation of economies of scale and scope. Chandler states that in order for large managerial enterprises to gain and keep competitive advantages, top managers must commit to the “three-pronged investment”. This is because these large enterprises have a large market to sell their products to. These large enterprises can create a competitive advantage by producing more at a lower cost with the same outputs. The cost per product is decreased due to mass production and the diversification of the production line. Chandler (1992) explains how the US lost their competitive advantage to the Japanese companies in the semiconductor industry. Chandler (1992) states that many of the US companies in the semiconductor industry such as Intel and Silicon Valley failed to make “long term investments in production, distribution and management” that was important for them to become the first movers in the industry. Chandler (1992) therefore explains how the Japanese companies were able to make the investment that was required from them to become a first mover in the semiconductor industry. This enabled the Japanese companies to develop their organisation ability to quickly demolish the ‘American competitive advantage’.
Overall Porter’s model (1990) of national competitive advantage to an extent does account for the variations in national business systems and comparative economic performance across different nations and industries. However the model doesn’t consider and explain how culture, history, late industrialisation and globalisation can have an impact on the economic success of a nation and the variations of business systems.
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