Diamond Concept as a Tool for Measuring Competitive
Advantage for Nations
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Porter’s five forces were formulated by Michael E. Porter as a framework to analyze industry and business strategy. He posits that countries, just like companies, compete in the international markets for their fair share. According to Davis and Ellis (2000), the focus on competition is diversion from traditional economic thinking. Unlike the previous theories that only work on one or two dimensions, Porter’s theory connects firms, industries and nations.
He put forward two propositions after carrying out studies in different nations. The first one is that the competitive advantage of a nation’s industries is determined by the configuration of four broad attributes. They are referred to as the home base. These are factor conditions, demand conditions, related and supporting industries and firm strategy, structure and rivalry.
To be successful, a firm needs an adequate supply of factors in its home base. Demand conditions in the home base affect an industry’s ability to compete internationally through three mechanisms. It must have an advantage in the market segments, which are more important at home than elsewhere. Sophisticated and demanding buyers lead companies into meeting high standards. For example, Japanese consumers value space saving hence a leader in the range of compact products while in the US the long distances have led to competitive strength in very large truck engines (Berger & Lester, 1997).
A nation’s industries gain if the need of its buyers at home anticipates the need of buyers abroad. This gives it a lead in learning how to meet those needs. For example, the Japanese government forced manufacturers to...
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As strategy consultants of McCormick & Associates, we use Porters Five Forces Model as a framework when making a qualitative evaluation of a firm's strategic position (Appendix 1.2). These five forces determine the competitive intensity and therefore attractiveness of a market. These forces affect the ability of a company to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the market place.
There are two reasons why a firm may perform well in an industry, either 1) the industry is attractive to any firm 2) the firm is better and outperforms it’s rivals. Porter’s theory therefore can be used to discover the markets that are attractive to firms or, in those which aren’t breaking down the five forces so a strategy for success can be developed. In general the firm with be more profitable if each of the forces is low, that is to say there is a low threat of new firms entering, if buyers and suppliers have little power over the firm, if there is a low threat from substitute products and if competitive rivalry is low.
The U.S. industries have been outsourcing manufacturing for several decades now. U.S. companies thought they were reducing costs by outsourcing development, manufacturing, and process-engineering abilities. Consequently, U.S. corporations’ knowledge, skilled workers, and supply chain, which are the necessities to producing advanced products, have vanished. For example, almost all notebook computers, cell phones, and handheld devices, which were once created in the U.S., are now designed in Asia. When a major U.S. company outsource, it pressures their rivals to do the same thing. They also lose the expertise of process engineering, which would interact with manufacturing on a daily basis. Minor companies and skilled workers go to where the jobs and knowledge networks are no matter where they are geographically in the world. This decline of trade in the U.S. has caused a negative chain reaction to their suppliers of sophisticated materials, tools, production equipment, and components. U.S. industries do not have a way of coming up with new ideas for the next generation of high-tech products...
In determining the competitive intensity and attractiveness of the market, Porter’s five forces is a framework that would help analyze the manufacturing industry of Lincoln Electric and observe the external and internal environmental factors that influence business strategy development for companies within the industry. The five forces are assumed to determine competitive power in a business situation in which these five forces are Supplier Power, Bargaining Power, Competitive Rivalry, Threat of Substitution, and Threat of New Entry.
Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry.
Porter’s competitive forces model includes five forces that need to be analysed. These forces include the intensity of rivalry from traditional competitors, threat of new market entrants, threat of substitute products and services, bargaining power of customers and bargaining power of suppliers (Laudon & Laudon, 2007). See diagram below;
In a world of free trade, growing competition and accessibility to foreign markets, the need for methodical market analysis and assumptions is steadily rising in today’s business environment. It is just a normal way of thinking to primarily intent to eliminate the financial before entering a new and foreign market. This suggests that enterprises have to develop an overall strategy for their business in order to gain competitive advantage and consequently market share. With the words of Michael E. Porter, professor at Harvard University and leading authority on competitive strategy, this desirable market success is indirectly linked to the individual structure of a market. The unique structure of a single market influences the strategic behaviour and the development of a competitive strategy within a firm. The competitive strategy finally decides whether a company performs successfully on the market or not. Referring to this interpretation of business success, M. E. Porter established his five forces framework that enables directives to gather useful information about the business environment and the competitive forces in industries.
During the 1990s, Japan has been exposed to one of the most difficult structural transition periods in its post-war history, in terms of social and economic conditions. There have been two major changes: one is a substantial decline in economic growth in real terms, and the other is a changing social structure characterized by the declining birth rate and the ageing population. Under the pressure of changes in the economic environment caused by globalization and innovations in information technology, Japanese business corporations are forced to adapt to the new situation. While companies faced with fierce international competition, it became more critical to understand the basic knowledge of complicated legal, cultural, economic, and social issues. Engaging in international trade also requires attention to international regulations, international business planning, international market research, funding, distribution and other areas that must be considered separately from domestic business issues. The paper suggests some of the basic tools that can apply to solve the problem or to bring the business opportunity to fruition in today's Japanese business environment
By 1960, Matsushita’s product line ranged from TV sets to electric ovens and this broad product line ensured a constant stream of sales for the company. In addition, market sales became glaringly obvious for Matsushita, and were able to adapt to the trends of the market, and due to this, Matsushita were able to quickly create and market similar existing products. Ironically, Matsushita were also the first Japanese company to adopt a divisional structure, generating internal competition between each division that was to yield new, innovative products. However, Matsushita were also aware of market differences between the different countries they operated in, and they combated this by implementing ‘Operation Localization’, a method of multinational flexbility (Kogut and Kulatilaka, 1994). Operation Localization was effective as it replaced managers in key positions with local nationals who understood the market better than their
Porter's five forces analysis is an industry analysis model developed by Michael E. Porter as a tool for developing business strategies to become or stay competitive in an industry or marketplace as per (Braze, 2013).
At the core of Porter’s theory is the idea that in order to be successful in the global marketplace, firms must first have a strong ‘home base’ to start launch from. Once this condition is established the firm will be able to engage in exports and FDIs ...
Porter, M. E., 1999. The Five Forces that Shape Competitive Strategy. Harvard business review, p. 80.
Porter 5 forces analysis is a framework for business management developed by Michael Porter in 1979. It uses concepts developed in Industrial Organization economics to derive 5 forces that determine the attractiveness of a market. It is also known as FFF, Fullerton's Five Forces. Porter referred to these forces as the microenvironment, to contrast it with the more general term macro-environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace. The first force is called bargaining power of customers, the second is the bargaining power of suppliers, the third on is the threat of new entrants, the fourth one is the threat of substitute products, all in which influence the fifth force, the level of competition in an industry.
Currently in the global environment, there is a strong sense of competition that must be achieved through better performance, almost all firms are competing in international markets due to the reduction in barriers for capital and tariffs. With the new changes in both communication and technology, the consequences faced are that production processes are no longer within national boundaries but spread across (Debrah & Smith, 2002).