Question:

How convincing is Porter’s model of national competitive advantage in explaining the workings and achievements of major national business systems? What are the weaknesses in his arguments?

Answer:

Contents

Introduction. 2

Overview of the concepts of national competitiveness and the Porter’s Diamond. 2

Critique of Porter’s model of national competitive advantage. 5

The tautology of the concept of national competitiveness. 5

Lack of the historical dimension supplied by the Late Development Theory. 7

The role of the state. 8

Factor and demand conditions are not purely national 9

Conclusion. 9

References. 11

 

Introduction

Michael Porter proposed a model for investigating why some countries remain more competitive compared to others and why some industries within specific countries retain a higher level of competitiveness compared to others. The model is commonly referred to as Porter’s Diamond. This model was developed in the context of a situation where corporate strategies are increasingly mapped into a global context. In such a context, management must assess the prevailing international environment, where the actions of buyers, sellers, competitors, and new entrants easily exert influence on the domestic market.

However, Porter’s model of national competitive advantage is not convincing, particularly with regard to the explanations offered on the working and achievements of major national business systems. One of the weaknesses of is that Porter’s arguments on national competitiveness are not presented in the context of a theory but rather a checklist that seems tautological. Secondly, the historical dimension is lacking in the Porter’s Diamond. The other weaknesses are discernible in the way Porter downplays the role played by the state in influencing national competitive advantage as well as the presupposition that factor and demand conditions are first and foremost of a national nature. This paper sets out to provide a critique of Porter’s model of national competitive advantage by highlighting these weaknesses.

Overview of the concepts of national competitiveness and the Porter’s Diamond

            In the Diamond, Porter suggests the extent to which an organization is likely to achieve competitive advantage within the global platform is largely influenced by the organization’s national home base. According to Porter, the national home base provides the basic factors that may either hinder or support business organizations from establishing advantages within the global competition. He identifies four determinants of national competitive advantage; namely firm strategy, rivalry, and structure; related and supporting industries; home demand conditions; and factor conditions.

In the first dimension, that of firm strategy, structure, and rivalry, Porter points out that there are numerous conditions in each country that greatly determine the procedures for establishing, organizing, and managing business organizations. These conditions are presumed to determine the nature of competition in the domestic market. In this context, cultural factors have a crucial role to play. These different conditions bring about differences in the way factors like interactions among companies, working morale, and management structures are shaped. Porter argues that domestic rivalry as companies seek to establish competitive advantage at the national level can provide organization with excellent bases for establishing such advantage on a global scale.

Regarding the second dimension, that of related and supporting industries, the key issue is on whether supplying and supporting industries that are internationally competitive exist. The model proposes that the emergence of an internationally successful industry easily leads to the establishment of advantages within various related or supporting industries. During later stages within the value system, competitive supplying industries end up reinforcing innovation and internalization within the successful industries. On the other hand, related industries coordinate important activities within the value chain. They also provide complementary products, for example hardware and software components. Another example is that of shoe and leather industries.

In the third dimension, home demand conditions are said to have an influence on the way various factor conditions shape up. A case in point is the way direction and pace of innovation as well as the process of product of development. in Porter’s view, the main characteristics that determine home demand include the mix of the needs and wants of customers, scope and rate of growth, and the mechanisms for transmitting domestic preferences into the international market. Porter argues that greater national advantages can be achieved through the establishment of clearer signals of trends in demand to domestic suppliers compared to the signals sent to foreign competitors.

The last dimension is factor conditions, which entail the country’s situation with regard to production factors such as labor, infrastructure, and entrepreneurship. These factors are relevant for the achievement of competitive advantage in particular industries. Porter classifies these factors into material resources, human resources, capital resources, knowledge resources, and infrastructure. In Porter’s view, the factor conditions vary from one country to the other, and they provide the initial advantages. The implication here is that each country therefore has its own distinct set of initial advantages that it can readily present to the global marketplace.

Indeed, various countries build on their infrastructure, capital resources, liquidity of stock markets, and deregulation within the labor markets to establish competitive advantage at the global level. For example, countries with low labor costs are commonly referred to as low-cost countries. Another example is that of countries with a start-up culture such as the US, which have managed to develop this competitive advantage because of the existence of a thriving venture capital market.

Critique of Porter’s model of national competitive advantage

The tautology of the concept of national competitiveness

One of the biggest weaknesses of the Porter’s Diamond is that it does not provide an analysis of national competitiveness in the context of a theory. Instead of being developed as a theory, the model is simply a tautological checklist. For instance, Porter puts most emphasis on arguments indicating that if a nation performs certain activities well, it will perform well economically. Different arguments are used to drive the same argument on national competitiveness and competitive advantage in the international market.

A case in point is the argument that German chemical companies succeed primarily because of the country’s research and development base. The model does not explain where this base came from in the first place. It would be imperative for Porter to explain whether this base was established because of the operations of the chemical companies. In other words, the argument made in the model for the existence of global competitive advantage should go beyond the existence of specific factor conditions, particularly in instances where the factor conditions have not always existed like in the case of chemical companies in Germany.

The model oversimplifies concepts relating to competitiveness at both the national and international level. For instance, in the case of chemical companies, it would have been important for Porter to carry out an analysis of the theories of demand and supply that have played a determining role in propelling the country to a position of competitive advantage in the industry. In this regard, the model lacks sufficient empirical evidence to support its claims.

The model is also considered a tautology because of Porter’s failure to provide a proper definition of the concept of competitive advantage. In Porter’s view, companies become successful because there are certain factors that pave way for this success. However, he does not provide sufficient analysis of the measures that companies put in place to create business conditions that facilitate the attainment of advantageous competitive factors. Such analysis is critical, particularly considering that economic conditions have been changing rapidly since the time when Porters ideas were developed during the late 1970s. In the absence of such analysis, most firms may regard the ideas as irrelevant as a basis for decision making today.

In one of the criticisms of Porter’s Diamond, focus is on the concept of “resource-based approach” (Davies, 2000). Proponents of this approach point out that several internal or “intrinsic” factors that determine the competitiveness of a firm (Davies, 2000). Some of these factors include worker morale, corporate culture, integration of production skills, corporate-wide technologies, management leadership, and team communication. In light of the fast-changing economic environment, some of the new dimensions suggested as replacements for Porter’s Diamond include globalization, digitization, and deregulation. The main defining symbol of digitization is the internet and the introduction of electronic financial transactions. In globalization, the main indicator is the establishment of worldwide communications and distribution logistics. As for deregulation, the most significant outcome is the decline in the influence of national governments over many industries.

At times, Porter’s Diamond recommends several mutually exclusive strategies for businesses to implement to achieve international competitive advantage and success. This is an indication of failure on the part of Michael Porter to distinguish between focus and differentiation strategies. In such a situation, it becomes impossible for his recommendations to be implemented in the corporate world.

The model of national competitive advantages is normally supported by the management school while the economic school has always rejected it. The only aspect that seems to bring these two schools of thought to consensus is the assertion that the Porter’s Diamond is not a theory for explaining countries’ competitiveness but rather a comprehensive framework for enhancing our understanding of firm’s international competitiveness.

Critics in the economic school also point out to the fallacy of arguing that countries compete in an even tougher global marketplace, hence the need to establish high-value sectors capable of creating jobs as well as forging new partnerships between business and government (Reich, 1993). According to the critics, such a statement is meaningless when applied in the context of national economies because countries never enter into international competition. Unlike firms, which compete with specific rivals globally, countries conduct trade as a “positive-sum game. In this regard, the competitiveness of a country is determined primarily by its absolute productivity level as opposed to international competitive rankings.

Lack of the historical dimension supplied by the Late Development Theory

The Diamond model is considered too abstract as well as one that can only be applied to developed countries, which have always neglected the historical dimensions presented in the late development theory. Porter based his model on a study of only ten nations. The model failed to capture aspects of national competitiveness of industries in less developed countries. By neglecting the late development theory, Porter’s model essentially lacked the historical dimension.

The historical dimension is important because it encompasses the various industrial, geographical, and historical characteristics affecting relative economic performance of nations. Historical differences have direct, far-reaching economic implications on the way output is generated from any resource base.  Therefore, it is crucial not to neglect the historical dimension the way this model does.

The role of the state

In Porter’s Diamond model, the role of the state in national competitive advantage has been downplayed. National governments still have a crucial role to play in particular industries, particularly in late developed countries. In such countries, some of the financial institutions and business enterprises tend to be state-owned. For example, in China, a late developed country, most large industries are continually reliant on the government on assistance.

The government plays a critical role in Porter’s Diamond model, Porter argues that government sometimes do things that they should not do. Moreover, they fail to do things that they ought to do. The model identifies the role of government as that of characterizing and challenging industries to build national competitiveness.

However, Porter fails to explain the implications of the government’s influence on all the four determinants of the model through measures in the form of subsidies, tax codes, educational policies, and the enforcement of tough standards. For instance, educational policies have a direct influence on the workers’ skill level. The problem is that through such actions, it becomes clear which specific industries that governments are seeking to help achieve innovation. Porter’s diamond model fails to provide a framework for determining which methods governments should use to select industries that will bring the biggest national competitive advantage. This creates serious theoretical questions whenever the states happen to select the wrong industries. 

Factor and demand conditions are not purely national

Porter articulates his ideas relating to factor conditions in a way that is contrary to conventional wisdom. He argues that the so-called “specialized factors” of production have to be created and not inherited (Rugman, 1993). He also argues that they have to be created at a purely national level. The specialized factors identified in the model include skilled labor, infrastructure, and capital. In contrast, general use or “non-key” factors such as raw materials and unskilled labor, can be achieved by company, hence the conclusion that they do not bring about any sustained competitive advantage. However, as most economists would readily point out, the reality of the matter is that heavy, sustained investment is required for even the specialized factors to generate any sustainable competitive advantage.

In Canada, it is evident that when multinational enterprises (MNEs) set out to improve their global efficiency and competence, their activities in some of the determinants bring about meaningful contributions to the competitiveness of the host nation in the long run (Reich, 1993; Rugman, 1993). The same case applies to Hong Kong, where the impact of global webs and the international economy play out to undermine the importance of national competitive advantage as stipulated in the Porter’s diamond, mainly in favor of foreign direct investment (FDI) (Redding, 1994). This creates the impression that the Porter’s diamonds are nowhere in sight in Canada and Hong Kong.

Conclusion

            In conclusion, Porter’s Diamond model has several weaknesses. The most crucial indication among critics is that it is not a model but a framework for enhancing our understanding of firm’s international competitiveness. Even as a framework, however, the model suffers from the problem of tautology. The model also lacks an appropriate historical dimension, supplied in part by the late development theory. Lastly, Porter downplays the role played by the state in the establishment of national competitive advantage.

 

References

Davies, H. (2000). Porter’s Competitive Advantage Of Nations: Time For The Final Judgment? Journal of Management Studies, Vol. 37, No. 8, pp. 1189–1214.

Redding, S. (1994). Competitive Advantage in the Context of Hong Kong. Asia Pacific Business Review, Vol. 1, No. 1, pp. 71-89.

Reich, R. (1993). Foreign Subsidiaries and Multinational Strategic Management: An Extension and Correction of Porter’s Single Diamond Framework. Management International Review. Vol. 33, No. 2, pp. 71-84

Rugman, A. (1993). The “Double Diamond” Model of International Competitiveness: The Canadian Experience. Management International Review. Vol. 33, No. 2, pp. 17-39.