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Evaluation of Porter’s Diamond Model for International Companies’ Locations

2131 words (9 pages) Essay in International Business

08/02/20 International Business Reference this

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Critically discuss to what extent Porter’s Diamond Model is/isn’t a useful concept in explaining home and host location strategies of international companies? Illustrate your answer with reference to at least one case company of your own choice.”

In the globalisation era, we observed an increment of multinational corporations as well as small businesses that aim to internationalize. Those, in order to be successful in their internationalization process, try to find abroad a location that fits them the most institutionally, culturally and opportunities wise. To make this happen, MNCs uses home and host location strategies which reflect to international business theories through different models. Those models assess external environment analysis of a specific country and explain the concepts used behind the chosen location. Out of the many useful models explaining location strategies used by international companies, this essay will focalise on the Diamond Model and discuss whether is a useful concept for international firms to pursue the best entry mode and furthermore argue the advantages and disadvantages through the examination of a real case example such as the multinational IKEA.

The Diamond Model was introduced in the book ‘The Competitive Advantage of Nations’ by Michael Porter in 1990, explaining the national competitive advantage. “Competitive advantage refers to assets and capabilities of a company that are difficult for competitors to imitate. Such advantages help the firm enter and succeed in foreign markets. These capabilities take various forms such as specific knowledge, competencies, innovativeness, superior strategies, or close relationships with suppliers” (Cavusgil et all, p 144-145). To explain the competitive advantage, Porter argues why some firms are better to differentiate products and sources, and why some nations are firm’s desirable home base for competing in a specific industry. In fact, what leads to global success is the selection of a strong home base that often provides the basis for innovation. Ultimately, the innovation refers to technological aspects as well as on new skills which following promotes upgrades and productivity (Porter, 1990). Hence, the home base explains why certain nations are able of consistent innovation in some industries and to do so, the Diamond framework uses four determinant as useful tool for companies when performing researches to apply to their internationalization process.

The first determinant is ‘factor conditions’. It relates to productions’ factors that are necessary to compete in a specific industry, such as natural resources, quality and quantity of labor, capital, land and infrastructure. A competitive advantage in this case raise from the ability of a nation to create and improve those factors of production as highly specialized to the industry requirement. These factors are not inherited and needs a continue innovation, upgrade and investment in order to be hard to be imitated by foreign rivals (Porter, 1990). For instance, IKEA competitive advantage is given by three home base factors of production: human resource, knowledge and infrastructure. The first two factors are based on cultural identities which are hard to be copied by foreign competitors as part of different cultural context. Employees are required to adapt to IKEAs’ Swedish culture and values through available training programs (Ikea 2018). Also, culture and values shapes the brand’s knowledge that tries to spread the preferences of Swedish design across the world. Another key factor of their success is the IKEA’s understanding the infrastructure development that changed customers’ shopping habits. In fact, the increase of people owning private cars has made IKEA revise the warehouse location. They now located near the main roads outside the city center as more accessible for customers. Although those factors come from the home base location, IKEA applies strategies based around culture and values also in their host countries. An example is seen in their latest opening in India, where they sent employees for six months abroad to Almhult and London to be trained on the IKEA concept (Umld 2017). However, other production factors such as capita and physical assets are not part of home base competitive advantage as they are outsourced to their parent company.

The second determinant is ‘demand conditions’. It refers to the sophistication of the home market demand that lead firms to create related industry’s products or services (Porter, 1990). The demand comes from several market niches that gives to the firm an idea of the emerging buyer needs and expectations. Thus, the competitive advantage it is given by the presence of the sophisticated demand and the will to anticipate foreign competitors, which pressures firms to respond to those needs by creating new trends, thinking few years ahead on what customers will need and start to develop a product or by innovating their existing product or services present in a saturated market. Although, a given nation’s market might have different values from other nations so the demand condition could not be transferable. A given nation’s firm can only anticipate trends globally if their home values are spread across the world for example through media or political influence, which will result in increasing their competitive advantage and market growth. For instance, IKEA have faced a large customer demand for inexpensive furniture and have seen an overwhelming customer response on their opening days. They have also included small surveys for customers to receive feedback on their product, service and eventual suggestions for improvements, which helped them to keep their customers satisfied and opened the need to expand into new markets (Ikea 2018). This determinant has been seen initially in the home base and following replicated in all their host countries.

The third determinant is ‘related and supporting industries’. It relates to the presence of suppliers or competitors of a related industry that are also globally competitive (Porter, 1990). The presence of a home based internationally competitive supplier creates advantages to the specific industry and firm, thanks to the close relationship which eventually results in efficiency of information flow, speed of process and cost-effective inputs. Having a supplier that is competitive on a global scale and not only on a domestic market gives benefits firstly in terms of not being dependent on a sole industry and so exposed to risks in relation to the economy. Secondly, facing foreign competition puts them in the position of constantly providing innovation and better performance. For instance, IKEA’s competitive advantage comes from the host location as they outsource most of their production due to manufactures and retailers’ cartels impairing the Swedish furniture industry back in the 50’s. Although, the industry structure was not supportive for IKEA, they turned those entry barriers into an advantage by finding new ways of doing business (Bartlett et all, 1990). They build long term relationships with suppliers and manufacturers mainly in Europe and Asia through bindings over large volumes of orders that made them agree on set price and quality.

The fourth and last determinant is ‘firm strategy, structure and rivalry’. It relates to the nature of domestic rivalry, and the context that determine how a nation’s firms are created, organized, and managed (Porter, 1990). The competitive advantage in this determinant comes from the good fit of the firms’ characteristics and the selected location or industry entered. Also, rivalry creates competitive advantage as it is a stimulus to persist with improvements and innovation. This is because a domestic rivalry push firms to pursue better quality and innovate their products, services and processes to be more competitive. Another consideration needs to be made on how firms are created, organized, and managed and this could be looked more closely into the company goals, which ultimately reflects on how employees are compensated. The compensation subsequently motivates an individual to work and increase their skills and competencies, which again leads to acquire competitive advantage for the firm by catching talented individuals before their rivalries. For instance, IKEA management structure is non-hierarchical as the Swedish society is characterized by equality. The organization is based on an informal style that can be seen in terms of uniform and way to approach managers, in fact they use IKEAs core values in each activity and problem solving which translate into employees identifying themselves with managers and company’s objectives (Björk 2000). This home based managerial informal style results in competitive advantage when comes to customer service as they have higher customer’s satisfaction and experience compare to organizations that use formal rules. Another key factor is the importance of domestic rivalry presence, in fact there are many Swedish retailers internationally successful such as H&M. IKEAs initial success was given by the cartel that made the company to rethink different strategies from to the traditional furniture firms that made the owner Ingvar Kamprad to dare to be different and continue pushing for creativeness in their furniture trends (Björk 2000).

The diamond model then explain how company growth is affected by the home location, developing their competitive advantage to then exploit it abroad. Sweden proved to be a great home location to prepare IKEA to expand, initially within similar market in the Scandinavian regions and following to the rest of Europe, America and Asia (Frynas and Mellahi, 2011). Although are not included in the framework, in the same book Porter discuss about the influence of chance and government. Governments indeed can have influence through their regulations and trade barriers on the firm’s internationalisation process, especially in emerging economies. An example for IKEA was in India where government support the campaign ‘Made in India’ which restricts import to 70% and the rest 30% is required to be locally produced (Kazmin 2018). Moreover, chance events are uncontrollable and unpredictable factors by organisations. IKEA faced a positive influence by chance events such as the Second World War and the rise of private cars. As a matter of fact, it represented the IKEAs birth and the positioning in the Swedish market by providing cheaper furniture to majority of the population that could not afford the post-war expensive furniture as well as giving them the opportunity to take home what they have purchased with their own car. Beside wars, another event that could worsen company’s expansion and growth are economic crisis.

Furthermore, the model does not consider culture as important factor when internationalising. Beyond doubt, culture impacts customer needs, demand condition and the way of doing business. When assessing the localisation process, consideration need to be taken around cultural implications and differences and for this a helpful tool is behind the Hofstede’s dimension theory, which could be an example on explaining why IKEA first expanded to Norway as per the Hofstede’s dimension score are culturally similar (Hosftede, 2001). Consequently, I think that for assessing home and host location strategies, the Diamond model is useful as a starting point for an environmental analysing, but a deeper research should be conducted on a macro and micro level (Hollensen, 2011).

In conclusion, Porter’s Diamond model is a useful tool for companies looking to expand as gives the basic understanding of home and host locations criteria and how to exploit competitive advantage, but is not enough to be used on his own to make decisions on where to internationalize. Although no model can be perfect in explaining and guiding location strategies, but a combination of models that best fits companies, will help them to gather more in depth information on a specific industry and nation to better assess locations decisions and best entry mode.

References

  • Kazmin, A. (2018) Ikea’s expansion into India, Financial times. (Accessed on 8 December 2018). https://www.ft.com/content/b55a6821-a03a-41e5-8f17-54ce33ab2d3c
  • Bartlett, C. A. and Nanda, A. (1990) Ingvar Kamprad and IKEA, Harvard Business School case
  • Björk, S. (2000) IKEA – Entreprenøren – Forretningsideen – Kulturen. Index Publishing AS, Oslo
  • Cavusgil, S.T., Ghauri, P., Knight, G., and Riesenberger, J. (2014) International Business, Global Edition 3e, Pearson Education
  • Frynas, J.G. and Mellahi, K. (2011) Global Strategic Management, 2nd Edition, Oxford University Press
  • Hofstede, G. (2001) Culture’s Consequences. London: Sage Publications. 2nd ed.
  • Hollensen, S., 2011. Global marketing. 5th ed. Harlow: FT Prentice Hall.
  • Ikea Group: 2018 (Accessed on 8 December 2018)
  • https://www.ikea.com/ms/en_JP/about_ikea/facts_and_figures/ikea_group_stores/index.html
  • Porter, M., 1990. The Competitive Advantage of Nations. Harvard Business Reviews.
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