Essay on Diamond Concept Model by Michael Porter

2021-05-28 19:27:04
7 pages
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Carnegie Mellon University
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Essay
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Introduction

The Diamond concept model by Michael Porter is an economic model that explains the competitive advantage of nations (Porter 1990). Porter's diamond concept contradicts classical theories of international trade which argued that a countries competitive advantage of a nation depends on factor endowment that a state inherits or is gifted by nature (Grant 1991). Such factors include; land, labor, population size and natural resources. However, according to Porter's Diamond concept a country can improve its competitive advantage by creating its new advanced factor endowments. It can do so by investing highly in getting skilled labor, powerful technology, government support, high-level knowledge base and positive culture (Porter 1990).

Porter's diamond concept has since been studied and expanded by many scholars. The model helps us understand why some nations achieve success and competitive advantage in a particular industry as compared to other countries or as compared to other industries in the same nation. The model has also reached a universal application despite some arguments on its weaknesses and flaws. However, Porter's diamond model is faced with a controversial argument from various scholars in the 1990s after Porter developed it. Some scholars praised the concept saying that it was rich in information and useful theoretical framework which reflected the 20th-century economies (Van den Bosch and Van Prooijen 1992). Others criticized the model arguing that it is not convincing and that it is full of logical flaws and that it lacks empirical and historical evidence to support its main arguments. This paper will evaluate the porter's diamond model critically with the aim of determining if it convincingly explains the achievements of major national business systems, or are their weaknesses, theoretically and empirically in his argument. To determine whether or not Porter offers a convincing argument on the competitive advantage or achievement of major national business systems (industries) this paper will start by introducing the diamond concept and later discuss it main factors and how it can be applied. After giving an overview of porters diamond concept this paper will also examine criticism directed to it and conclude by giving an argument on whether it convincingly explains the achievement of the large national systems.

Overview of porters diamond model/concept

Porters diamond model was explained for the first time in 1990 in his book titled The competitive advantage of nations (Porter 1990). In this book and using the Diamond concept Porter explained the theory of why some industries are satisfied or highly competitive in particular countries/ locations as compared to others. To study competitive advantage, Porter looked at successful industries in the ten most important trading nations across the world. He also studies the history of competition in particular industries with the intention of analyzing the dynamic process through which competitive advantage is created. As a result, Porter came up with six factors that form Porter's diamond concept and which are the key tools for analyzing industry and nations competitive advantage. These tools include 1) factor conditions, 2) Demand conditions, 3) related and supporting industries, 4) firm strategy, structure and rivalry (Porter 2011).

Factor condition

Porter says that a nation can create its important factors that will make it achieve competitive advantage over time. Such factors include skilled labor and technological base. Therefore major national business systems, industries and large companies in a country can develop such factors in pursuit of the nation achieving competitive advantage. For instance, major national business systems can invest in improving the skilled labor to ensure industries have highly experienced, knowledgeable and informed employees required for business success both locally and internationally. Porter also argued that a nation can improve many factors including infrastructure, education, research, sources of raw materials and technological factors among others (Grant 1991). The quantity or level of availability of factors at a given time is not as on towards contributing to future competitive advantage as the extent to which major national business systems works towards improving, upgrading and deploying them (Lecuyer 2006). For example, a nation like Israel which naturally is a desert has become competitive in supplying agricultural products like fruits because its major business systems in the agricultural industry invested in irrigation technology and infrastructure. According to Porter adverse conditions facing factors like inadequate and unskilled human resources, scarce raw materials and other local disadvantages force major national business systems to become innovative and as a result lead to nation/ industry competitive advantage.

Domestic demand condition

According to Porter when there is high demand for a product in the local market national business systems tend to concentrate its attention to producing it more than foreign firms do. This condition creates a country/nation that has a high demand for local products rather than foreign ones and offers support to local firms so that they achieve global exportation advantage. When firms concentrate on producing products with high local demand eventually, they achieve the capacity to produce even more supply to export to other countries (Rugman and D'Cruz 1993). Domestic demand condition helps an industry gain a national competitive advantage in industries that important locally. The local demand force business systems within a national to innovate grow and improve thus achieving high standards. For example, America has high local demand for long distance transport. As a result, Americas business systems in this industry have employed innovation and technological advancement to manufacture and gain an advantage in large truck engines. Local buyers oversea the global trends and force the firms to produce more and export to satisfy global demand through exportation thus helping the nation's industry grow and gain a competitive advantage across the world. Porters diamond concept says that for firms to be successful in the global markets they must have high domestic demand (strong home base). This provides a base for firms to venture and start launch with the aim of satisfying local or home demand. This condition will set the basis on which the firms will grow, become expertise and engage successfully in exports and FDIs because of the national competitive advantage that the country will have.

Firms structure, strategy and rivalry

Organizational structure tends to vary in different countries whereby you find that majority of companies in a particular nation adopt a given structure. The kind of structure in a country can lead to a country having improved competitive advantage compared to other nations. For example in a nation like Germany, most firms adopt the hierarchical structure, and this condition has led to the success of many companies. This condition varies in another country like Italy where companies do not tend to adopt hierarchical structure but rather are run in a way that resembles extended families (Recklies 2015). These structures work for different industries and as a result, the structure that majority of firms tend to adopt determines the type of industries that a nation can excel in and have a national competitive advantage. This is because the structure has the power to determine employee motivation, organizational culture, management style, strategic management and implementation among other conditions related to a strategy which determines the industry that a nation can excel and have a competitive advantage compared to other nations. Local rivalry among firms in a particular industry forces firms operating in it to get more creative, innovative and improve to become successful. As a result, these firms design its operations beyond basic national advantages like availability or raw materials and low-cost factors to match their standards with the global marketplace. Consequently, the firms compete globally and led to high national competitive advantage. According to Porter local rivalry pressures companies to improve their operation by being innovative, cutting costs and improving quality (Van den Bosch 1994). Therefore rivalry may be termed as a critical factor and driver of nations industry competitive advantage.

Related and supporting industries

According to Porters diamond model country that has strong domestic supporting industries has high competitive advantage as compared to one whose local industries are supported by foreign firms/ suppliers (Reich 1990). This is because if local supporting industries are strong, well established and competitive local firms will enjoy cost effective and innovative supply of materials, inputs and support services. This will be more so if the supporting firms/ suppliers have strong global presence because nations industries will not experience shortage of supplies, inputs, support services and will therefore engage successfully in global market ventures such as FDIs and exports among others. For example, Germany has a high competitive advantage in the chemical and metal-working industry. These industries have been able to succeed, grow, innovate and venture into global markets as a result of support from effective transportation and printing industry which provide support.

Evaluating porters diamond concept

I would say that porters diamond model is convincing enough in its explanation about national competitive advantage. This is because in his explanation Porter explains with examples and illustrations how major national business systems help their country to achieve a high competitive advantage in particular industries. His arguments do not theoretically and empirically demonstrate their weaknesses but rather how they dealt or should deal with the key tools to lead to the competitive advantage of their national industries. According to Porter the diamond concept works as a system (In Weresa 2014). The effect of one point in regards to nations competitive advantage depends on the others. The four determinants discussed in the section above must operate as a system because individually they will not contribute to a lasting competitive advantage of a nation. Firms need to follow porters diamond concept as it will provide an opportunity for them to identify factors that need to be implemented for them to achieve a high domestic competitive advantage. In this process, the nation itself will develop and implement policies that support firms and lead to the high local competitive advantage of the major business systems within the country and consequently the nation will have a competitive advantage over other nations.

In developing the diamond, concept porter studies the characteristics of the national environment. Through his study, Porter came up with the four sets of determinants which he argued help a company to determine the factors and conditions it will base its operations to achieve competitive advantage. According to Porter, a firm must first achieve competitive advantage domestically before venturing into global markets (Reich 1990). Porter's diamond concept is highly convincing and applicable. For instance, let us take an example of Japan and analyze how it came to achieve a high competitive advantage in the fax machine industry in the 19th and 20th century. The country had created an environment to improve the factor...

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