Porter's Competitive Advantage of Nations Due to Porter's training as an economist, he felt it was necessary to understand the competitiveness of nations from a microeconomic approach Snowdon and Stonehouse, He was able to take certain knowledge of industrial economics and bridge them with the views of business strategy.
Grant mentioned that a depreciating dollar help the US become more competitive But Porter Snowdon and Stonehouse, disagrees that declining currency values makes a country more competitive, rather the falling wages within that economy signals a lack of competitiveness.
Therefore the ultimate determinant of the productivity of the economy is the productivity of the firms within that economy. What makes firms productive is the sophistication of the firms themselves, how they compete, and also the business environment within which the firms compete. In his work The Competitive Advantage of Nations Porter, , he sought to look at the business environment which can help firms to achieve successively higher levels of achievement and productivity.
He identified four main elements which formed the Diamond. Below is a brief overview of the four main elements and others: Factor Conditions Factors can be basic or advanced, generalized or specialized. A sustainable competitive advantage in a particular industry is created by specialized and advanced factors such as a specific technology for that industry.
Basic and generalized factors are easily replicated and usually inherited not created such as cheap raw materials. A lack of basic resources may force a company to innovate and upgrade while an abundance of basic resources may lead firms to become complacent and inefficient. Demand Conditions The nature of home demand is the key to global success. It is not the size of the home demand but rather its character that makes the difference.
Sophisticated and demanding home buyers helps the firm to see an early picture of buyer needs and satisfying those needs improves the firm competitiveness globally.
A small domestic demand may in fact drive firms to explore foreign markets and pursue a global strategy to overcome any deficiencies in local demand conditions. Related and Supporting Industries These are industries that share common technologies, inputs, distribution channels, customers or activities, or provide products that are complementary.
World class related industries can be sources of ideas, technology, individuals, while supporting industries often deliver the most cost effective or highest quality input. All of these can be advantages in international competition. Close working relationships creates a quick and constant flow of information and a continuing exchange of ideas and innovations between suppliers and end users.
Nations are typically competitive in industries where clusters of related and supporting industries are geographically concentrated, making the interactions closer and more dynamic. It is difficult to have the same level of interaction with foreign companies. The birth and upgrading of new firms and industries that occur in clusters of local industries are less likely to occur if the nation relies heavily on foreign-supplier and related industries.
The social and political environment tends to have a distinct impact on the kinds of industries in which a nation favors. Nations will probably succeed in industries where the strategies, structures and practices favored by the national environment are well suited to competition in the industry. Local rivals provide a powerful stimulus to the creation and persistence of competitive advantage as local rivalries often goes beyond just business competition to become personal. The struggle for market share, talented locals and social status makes domestic rivalries intense.
This is an element which competition with foreign firms seldom produces. Domestic competition automatically cancels any shared advantages that come from being in the same home nation and forces companies to move beyond those current advantages to create more sustainable advantages.
In Porter's view, geographic concentration magnifies the intensity of domestic rivalries. Chance and Government Chance events are discontinuities that allow shifts in competitive position such as technological changes and war. Government intervention such as subsidies and protection offers short term benefits and undermines innovation and dynamism in the industry which only creates more demand for government help.
Government's role should be as a catalyst and challenger to promote domestic rivalry, stimulate innovation and focus on specialized factors creation such as a sound education system, good national infrastructure and healthcare.
The diamond is at its fullest role in the innovation-driven economy Gray, Cluster Porter said that the four elements of the Diamond are most observable and effective in a cluster as it is an efficient productive structure Snowdon and Stonehouse, A cluster is a geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities serving different segments of an industry Porter, Cluster aids in innovation and competitiveness.
Clusters influence competitiveness in several ways. The geographical concentration of firms allows more efficient access to specialized suppliers, information and the workforce. Opportunities for innovation are easier to perceive within clusters Snowdon and Stonehouse, Cluster are like a forum that allows discussions that can be much more pragmatic, focused on the specific problems companies face in a given clusters which policy makers can then address more appropriately.
Critique On Porter's Competitive Advantage of Nations In the two decades since Porter's work was published, there were many varied responses to his ideas on how nations should compete. Some findings validated his work while others refuted several of his ideas. Oz , used Porter's framework to study the competitive advantage of five Turkish industries.
His findings generally confirmed Porter's ideas. The demanding Turkish customers in glass and leather clothing industries forced firms to upgrade. Intense domestic rivalry in Turkish construction and leather clothes industries has made those firms internationally competitive while the uncompetitive Turkish automobile industry has led to uncompetitive firms. The Turkish glass and leather clothing industries confirm Porter's hypotheses that competitive industries of a nation tend to cluster together.
There has been a barrage of criticism on Porter's work ranging from questioning the originality of the framework Dunning, Grant, Gray, Rugman and D'Cruz, to the heavy dependence on world export shares as a measure of international competitiveness Cartwright, Grant, Rugman and D'Cruz, The importance of rivalry was challenged by Lazonick who argued that rivalry alone cannot spur firms to innovate.
Faced with too much pressure from competitors, the firm may well choose to adapt and imitate rather than innovate. As evident from the challenges US firms faced from foreign competitors, co-operation between US firms rather than domestic rivalry is needed to prevent decline in competitive advantages relative to foreign competitors. Gray noted Porter's lack of focus on macroeconomic policies such as exchange rate but as Ketels points out, Argentina did improved many of her macroeconomic policies but the microeconomic foundations of the country did not improve and productivity remained weak.
Macroeconomic policies alone cannot compensate for the lack of microeconomic foundations and will ultimately prove unsustainable. I shall delve into these two concepts which points out fundamental flaws in Porter's work. Porter's Diamond concept has an almost exclusive focus on the home base Moon, Rugman and Verbeke, The home base is perceived as the place where the competitive advantages of a nation can be derived from Porter, Brouthers and Brouthers finds that "for small countries the Double-Diamond and Multiple-Diamond methods of calculating a country's competitive advantage are superior to Porter's Single-Diamond method.
Porter's Diamond failed to understand that for small, open trading economies where firms earn the majority of their revenues outside their home country, the Diamond of their target markets is more relevant than their own home Diamond Rugman and D'Cruz, Rugman and Verbeke proposed that the North American Diamond is more relevant than a Canadian one since the signing of the US-Canada FTA meant that both US and Canadian firms can go to both country for resources and highly skilled labor to make up their factor conditions.
Firms on both sides will have to benchmark and compete against each other to gain market share. Even supply and related industries are converging due to cross border supply chains. Foreign capital and technology can be brought into an industry through inbound FDI while outbound FDI allows an industry to gain access to cheap labour and natural resources as evident in the case of Singapore Moon, Rugman and Verbeke, , this is an area which Porter's home Diamond concept did not see. Domestic firms are not better at improving economic progress than foreign owned firms as shown from the example of Singapore Dunning, Moon, Rugman and Verbeke, Multi-National Enterprises MNEs activity in an industry or country does varies over time Dunning, and that will influence the elements of the Diamond.
These intricate global webs was articulated by Reich when he said that the key competitive advantage of a nation are the skills and cumulative learning of its work force. Industries may rise and fall, corporations, both local and foreign, can come and go but as long as the skilled labour is around, another source can fill the void and the economy will still run. Almost all factor conditions such as capital, technology and raw materials are internationally mobile nowadays except the nation's workforce.
Industries are no longer the competitive base for a nation, it is the skilled workforce underpinning the success of industries. Reich's argument that it is the skilled workforce that will attract successful companies to come to a nation has shifted the focus of National Competitiveness from financial and physical capital to human capital. Missing Dimensions in Porter's Work Despite the broad coverage in Porter's work, there was a critical dimension missing which was the influence of national culture as pointed out by Van den Bosch and Van Prooijen Porter himself noted that many aspects of a nation such as attitude towards authority, norms of interpersonal interaction, attitude towards management and social norms influence the way firms are organized and managed Porter, Many of such social and political aspects of a nation originate from the national culture.
How national culture influence competitiveness through the Diamond was a key issue not explored by Porter in his work. Although Porter in his response to Van den Bosch and Van Prooijen said that cultural changes occurs very slowly and while culture can foster certain competitive advantages in an industry, it may become negative in another industry.
In this regard, the benefits of culture can be said to be seen in the context of a specific industry. However certain positive traits fostered by culture such as the strong work ethics and high saving rates of the Japanese are generally good across all industries and such positive traits could and should come under a general education program administered by governments wanting to improve their national competitiveness.
Porter also mentioned that firms structure and strategy such as the Japanese preference for close and long-lasting supplier relationships in the automobile industry is due to economic circumstances, not culture. This is incorrect. Whitley points out that Japanese cultural preferences for long term employment and incremental growth within a particular sector leads businesses to specialize.
Specialization increases the interdependence of enterprises and so the need to co-ordinate activities and strategies to reduce uncertainty. Whitley further describe that while the social ties and obligation of Chinese and Korean tends to rest on basic background characteristics, Japanese social ties and obligation tends to more idiosyncratic and situation specific thus allowing Japanese to build strong bonds with different groups of people with different backgrounds.
These cultural factors are some of the reasons for the formation of Japanese business system of Kereitsu. Conclusion Major academics such as Dunning and Rugman has built on and extended Porter's Diamond concept.
However, it is clear that they have not completely refuted his theory and has merely pointed out that his work is incomplete as there are still many merits to how his Diamond concept explains national competitiveness.
Porter's bottoms-ups approach by seeking to improve the microeconomic foundations of a nation through the Diamond concept Snowdon and Stonehouse, appears to extend only to mature, manufacturing based economies but cannot be replicated to resource-based and less mature economies Yetton, Craig, Davis and Hilmer, With expert contributors from a range of disciplines including strategic management, economic development, economic geography, and planning, this book assesses the contribution Michael Porter has made to these respective disciplines.
Skip to content. It has also transformed thinking and action in states, cities, companies, and even entire regions such as Central America. Based on research in ten leading trading nations, The Competitive Advantage of Nations offers the first theory of competitiveness based on the causes of the productivity with which companies compete.
Porter shows how traditional comparative advantages such as natural resources and pools of labor have been superseded as sources of prosperity, and how broad macroeconomic accounts of competitiveness are insufficient. His ideas and personal involvement have shaped strategy in countries as diverse as the Netherlands, Portugal, Taiwan, Costa Rica, and India, and regions such as Massachusetts, California, and the Basque country.
Her research presents a new approach to evaluate the competitiveness of the Turkish economy, given that alternative studies usually focus on factors like exchange rates and the cost of labour and raw materials as the determinants of competitive advantage. The author begins her book by providing an evaluation of the diamond framework linked to the debate created by the publication of The Competitive Advantage of Nations. She then identifies the pattern of advantage in Turkey by specifying the internationally competitive industries and clusters.
This is followed by a detailed examination of the five Turkish industry case studies - glass, construction, leather clothes, automobile and flat steel industries. The findings are generally supportive of Porter. The results suggest, however, several major areas in the framework - especially domestic rivalry and the role of government - where one or more of the Turkish cases question Porter's hypothesises.
The book ends with the implications of the study for the sources of competitive advantage in general and for the Turkish economy in particular. Porter and his diamond framework are both unquestionably influential. Improvements upon it forwarded in this book will be of use to academic readers as well as strategic planners and policy makers.
At work, at home and as members of society, our generation has an opportunity - to be part of the obligation - and an exciting solution in restoring the balance.
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