Porter's Diamond Of Competitive Advantage

Porter's Diamond Of Competitive Advantage

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Since its publication in 1990, Michael Porter's book The Competitive Advantage of Nations has attracted much consideration. The main analytical tool of the book is the diamond of competitive advantage (figure 1). This model is based on four country specific "determinants" and two external variables. Porter's four determinants and two outside forces interact in a "diamond" of competitive advantage, with the nature of a country's international competitiveness depending upon the type and quality of these interactions. However, because it is fundamentally a home-based model of international competitiveness, the diamond theory is criticized by many international business scholars. Dunning , and Rugman ¬, ¬¬ point out that the influence on competitiveness of two-way foreign direct investment (FDI) and foreign government influence and interference on trade and investment have been neglected. Rugman and Collinson have also evaluated the model and identified eight areas for comment. This essay will look at Rugman and Collinson's criticisms of Porter's model, focussing on three major areas: the role of FDI, foreign government influence and Multi National Enterprises (MNEs), before looking at developments to Porters diamond with country specific examples.

The eight areas identified for comment and evaluation namely: the model is limited by being based on ten countries, which are either industrialised or a member of a triad; the Government is of critical importance, and has been neglected by Porter; chance although critical, is difficult to predict or guard against; Porter's model must be applied in terms of company-specific considerations and not in terms of national advantages; Porter delineates only four distinct stages of national competitive development; Porter contends that only outward FDI is valuable in creating competitive advantage, and inbound foreign investment is never the solution to a nation's competitive problems; reliance on natural resources is viewed by Porter as insufficient to create worldwide competitive stature; the model does not adequately address the role of MNEs.

FDI tends to focus on opportunities in the same continental region. This often reflects attempts by multinationals to build up regional networks starting near their home base. A major conceptual problem with Porter's model is due to the narrow definition he applies to FDI. Porter defines only outward FDI as being "valuable in creating competitive advantage" and that inward FDI is "not entirely healthy" . He also states that foreign subsidiaries are importers, and that this is a source of comparative disadvantage .

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All of these statements are questionable and have long been refuted by Canadian-based scholars, e.g Safarian , Rugman and Crookell . They have demonstrated that the research and development undertaken by foreign-owned firms is not significantly different from that of Canadian owned firms. Rugman shows that the largest 20 U.S subsidiaries in Canada export virtually as much as they import .

Competitive advantage is also influenced by the home nation's government and its policies. It can employ subsidies as an indirect vehicle for penalizing foreign firms, or conversely use tariffs as a direct entry barrier to penalize them. However, the problem with government actions such as these is that they can backfire and end up creating a "sheltered" domestic industry that is unable to compete in the worldwide market. For example using Porter's diamond on states, whilst under Communist rule, would have potentially found them to be highly competitive internationally, however due to government restrictions on foreign competition, inferior products were produced. This resulted in the home nations firms being unable to compete successfully in many products once restrictions were lifted.

Researchers such as Dunning have suggested including multinational activity as a third outside variable. There is good reason to question whether MNE activity is covered in the "firm strategy, structure, and rivalry" determinant. The same rivalry determinant can both include multinationality for global industries yet exclude it for multidomestic industries. For example, Nestle earns 95 percent of its sales outside Switzerland. Thus the Swiss diamond of competitive advantage is less relevant than that of foreign countries in shaping the contribution of Nestle to the home economy. This is true not only for Switzerland but for 95 percent of the world's nations.

Rugman's critique is that Porter's views are conditioned and limited by his training and employment as a US academic, in the wealthiest country in the world. For firms in economically small countries, such as Canada or Mexico, the implications of Porter's diamond are devastating. Alan Rugman and Alain Verbeke's key insight was that firms from these countries could access a regional diamond, from a trade agreement such as NAFTA or the E.C. This resulted in the "double diamond" being created to better analyse competitiveness (see Figure 2). Rugman's critique of Porter's diamond appears to have been successful as Porter has since admitted that firms can have multiple home bases.

Figure 2

Rugman and D'Cruz have demonstrated that Canada's international competitiveness is not explained by the Porter home country diamond. They show that substantial modifications of the Porter framework are required to analyse the nature of Canada's foreign-owned firms and institutional arrangements, such as the Canada-U.S. Free Trade Agreement. This arrangement suggests that the Canadian diamond need to be considered jointly with the U.S. diamond, i.e. that Canadian managers need to operate in this "double diamond" framework. Indeed, Rugman and D'Cruz propose that a "North American diamond" be used by Canadian managers and policy makers to improve Canada's international competitiveness.

Mexico's economic future is closely linked to that of the United States and, through NAFTA, North America. When analysed in terms of Porter's diamond some of the country's strategic clusters have already developed world-wide competitive strength. During the 1990s the petroleum and automotive clusters proved to be highly competitive. As in its automotive success, this development is less a result of technological prowess as it will be the country's favourable factor conditions, related and supporting industries, demand conditions, and the structure and rivalry of firms. As before, Mexico will find that it can link its diamond framework with that of the United States and in the process become a worldwide competitor in many other areas.

The primary advantage of using the double diamond is that it forces business and government leaders to think about management strategy and public policy in a different way. No longer is the domestic diamond the unit of analysis, as in Porter's single diamond framework. The proper perspective now becomes that of identifying successful and potentially viable "strategic clusters" of industries within the nation and to examine their linkages and performance across the double diamond.
It has been demonstrated that each country needs to set its own home-country diamond against the relevant "triad" diamond. In general, most Asia-Pacific nations e.g. South Korea and Taiwan will set theirs against Japan's. Canada, Mexico, Latin America and most Caribbean countries will consider theirs against the U.S. diamond. Finally European nations such as Finland outside of the E.C. will set theirs against the E.C. diamond. Porter did not recognise that there was an E.C diamond, instead treating the member states as independent nations. In the study for Canada, Porter put his entire focus upon the manner in which the firms in home country "clusters" develop competitive advantages from relevant elements of the home country diamond and use this as a base to become successful in global business. This thinking is potentially correct for large "triad" nations or blocks like the United States, Japan, and the E.C. It also explains special cases such as South Korea, which had a low wage, high-tech, export-led development strategy.
The home base diamond analysis, however, is incorrect for small, open economies such as Canada, Finland, and New Zealand. These countries are highly interdependent with one or more of the triad blocks. They are characterised by two way flows of trade and investment. Porter's diamond is also inaccurate for smaller nations such as Denmark, which is in the E.C.; or Switzerland which is in EFTA. These E.C.-related countries harbour firms who have secured access to the large "triad" market of the E.C. The continuing enlargement of the European Union membership is continually changing Porter's diamond analysis for these countries.

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