Porters Diamond Essay

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Porters Diamond Essay
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  • University/College:
    University of Chicago

  • Type of paper: Thesis/Dissertation Chapter

  • Words: 1726

  • Pages: 7

Porters Diamond

“Critically discuss to what extent Porter’s Diamond is a useful concept in explaining home and host location strategies of international business? Illustrate your answer with references to at least two case companies”

The main aim of International business is to build and sustain competitiveness for economic value creation in both domestic and overseas markets (Besanko et al. 2007). Internalisation business theory however has a variety of models that can identify the environmental analysis of specific countries. These models are used for companies to internationalise and find the right location(s) overseas by taking; institutional, cultural fit and success opportunities into consideration. These models also give in-depth information on locations that the companies have chosen. A very well-known framework is the Porter’s Diamond which was found by Michael Porter in 1990. This report will discuss the advantages and disadvantages to determine a company’s home and host location decision by analysing two high street retailers – French E.Leclerc and UK’s Sainsbury’s. Porter’s Diamond Model (1990: 73 ) states that nation’s competiveness depends on the capacity of its industry to innovate and upgrade this however depends on the productivity level of the nation. From a company’s point of view a national competitive advantage means that it would have to depend on the nation to implement a home base to improve their existing products and services such as; technology, features, quality as well as being able to compete with international industries. Therefore, the advantage of this model is that it identifies the four factors that develop the essential national environment where companies are born, grow and as mentioned above sustain competitive advantage (Porter,1990:78). The idea of this model is useful because it allows organisations to carry out the necessary research and identify which countries would be good enough to internationalise. As you can see from the Porters Diamond diagram the first factor is the factor condition, this factor is about production such as land, raw materials, capital infrastructure etc. these are not inherited, but developed and improved by a nation for instance skilled labour (Porter, 1990:79). In order to sustain competitive advantage it will depend on the factor creation ability. For instance, E.Leclerc started as a small rented warehouse “Leclerc established a chain of outlets across the country, single-handedly changing the landscape of shopping in France”(www.independent.co.uk) Abstracted from Keith Points

The second factor is demand condition this is the existence of sophisticated and demanding customers that pressure companies to develop new products that meets the increasing buyer’s needs (Porter, 1990:82). Thus, companies set a strong trend and surpass buyer’s expectations by innovating. This actually was the case of Leclerc when pioneering in 1956 the “hypermarket” concept allowing customers to buy “from groceries and petrol to clothing and jewellery as well as holidays, all at competitive prices” ( www.independent.co.uk). However, mature demand and saturated markets should be an encouragement to innovate. According to Retail Detail, last year French consumers’ purchasing power declined for the first time in three decades (www.anxietyindex.com). Leclerc took this into consideration and introduced a comparison website, app and in-store devices to prove its lowest price claims; “We are the least expensive”. The following factor is related and supporting industries, which represents the presence of e.g. capable supplies, also competitive on a global scale (Porter,1990:82). This means that companies are as strong as its business environment. Without strong suppliers it can become very hard for a firm to compete at a competitive level. However it’s not just strong supplies but also the communication, coordination and the combined development that makes them competitive. Nevertheless those industries rely on each other during the whole of the supply chain for their profits. For example Sainsbury’s has put Pepsi back on the shelves due to tough negotiation between suppliers and retailers according to Financial Times 2011, this was because of the higher prices demand of the supplier. This shows that communication may mean tough negotiation between retailers and suppliers in order to stay competitive.

The last factor is firm strategies, structure and rivalry. This factor determines the organisational structure, style of managers and the domestic competition (Porter, 1990:82). On an internalisation point of view this factor depends if the characteristics of the company matches the industry they have entered. E.Leclerc operates as an ambidextrous organization. Their strategy is to make employees feel and act like “owners” of the organization yet own no stock; the whole organization behaves like one big family yet is a money-making machine (www.strategy-business.com). Sainsbury’s owned a chain in US and Egypt but like other UK retailers they failed to expand due to the arrogance and poor preparation, failing to understand the surprising differences between US and British shoppers (The Guardian 2012). On the other hand, rivalry should be seen as positive as it creates competitive advantage, it pushes organisations to visualise trends and satisfy non-existing needs while also seeking new international opportunities. A great example would be Apple it’s iPhone, iPad etc. Looking at this model it highlights how home locations influences companies to grow and develop competitive advantage as mentioned their own nation gets them “ready” for internalisation. Hence why the Porters Diamond helps you recognise the home-based advantages before applying them overseas. In addition companies may sometimes have to step back and reconsider their core competences at home as it is an example of Sainsbury exiting the countries in US and Egypt and focused on opening programme for its small-store “convenience” division in the UK (The Telegraph 2010).

France as a home base has proved to E.Leclerc a good place to get them “ready” to expand to similar markets such as Spain, Portugal etc. This shows that it’s very beneficial for an organisation to test its new or differential products at home first. For example Leclerc After 50 years of bringing lower prices to the French consumer, has now successfully expanded to Spain, Portugal and Italy Leclerc now hopes to be able to do the same for the rest of the world(www.fundinguniverse.com). Moreover the Diamond does not really discuss the power of the government even though they are mentioned in Porter’s book. However, the government can play a big part in all of the factors through e.g. regulations, trade barriers etc. For example new law introduced on the French retail scene effectively ended one of Leclerc’s favourite practices by prohibiting stores from taking losses on some of their items according to Association des Centres Distributeurs. Government should be taken into serious consideration as they play a big role in factor creation e.g. education, healthcare etc., as this could influence the internalisation process of company. Sainsbury’s now have a team to look into opening a chain in China said The Telegraph(2010) and E.Leclerc both defiantly have to consider the government for its nations business protection and competitive advantage because in order to join the Chinese market they must first joint venture with a Chinese company as they are not really keen on wholly owned subsidiaries according to Journal of World Business.

Nevertheless the Diamond should add culture as a driver; because that has a massive impact on the way a business operates as well as it defines the nation. For example in the model the demand condition and on customer’s needs are mainly influenced by culture like McDonald’s in India is has only vegetarian food options as they believe vegetarian societies are more harmonious and sustainable (Vivek Vaidya). So culture differenced should be considered when going overseas in order to see if the needs at home can be transferred overseas or localisation is needed. A great tool to use is Hofstede’s dimension, an illustration of that would be E.Leclerc expanding to countries such as Spain, Portugal and Italy as they are culturally similar locations and they had similar scores on Hofstede’s dimension. This proves that culture has a massive impact on host locations. To conclude this, in order to understand whether to choose a home or host location Porters Diamond Model should only be an offset of the environmental analysis like it should look into; macro, meso and micro level and use analysis like Porter’s Five Forces, cultural analysis etc. (Hollensen, 2011: 104). Yet it can be very costly and time consuming but these should be essential steps to take because making the right decision of location is crucial for international success. Failure could occur if these steps are not taken seriously and it would be even more expensive as in the case of Sainsbury having to close down its chains in US and Egypt. This is why other models should be combined to gather more information on needs and industry characteristics so they can know what’s behind the company’s decision on location. However no model can be exact just based on the fact that countries and companies change and a generalisation is hard to tell. Environmental analysis tends to have missing considerations. Nevertheless what’s really important is that companies should choose the right models that fit their needs and capabilities for good results. Porters Diamond however has not got enough factors to make a company decide where it should internationalise. In saying that it’s a very good starting point to provide basic selection criteria in recognising home and host locations as well as achieving competitive advantage.

References:
http://anxietyindex.com/2013/07/frances-leclerc-backs-price-claims-with-website-app-and-in-store-devices/ http://unctad.org/en/docs/iteiitv1n1a6_en.pdf
http://vivekvaidya.com/why-so-many-indians-are-vegetarians-2/ http://www.ft.com/cms/s/0/cb83415e-3a04-11e0-a441-00144feabdc0.html#axzz2lgrTUOqs7 http://www.fundinguniverse.com/company-histories/association-des-centres-distributeurs-e-leclerc-history/ http://www.independent.co.uk/news/obituaries/edouard-leclerc-businessman-who-built-a-shopping-empire-8160892.html http://www.referenceforbusiness.com/history2/48/Association-des-Centres-Distributeurs-E-Leclerc.html http://www.strategy-business.com/article/03306?tid=27782251&pg=all http://www.theguardian.com/business/2012/dec/09/fresh-not-easy-tesco-british-failure-america http://www.utdallas.edu/~mikepeng/documents/Peng12JWB_SunRenYan_47_4-16.pdf Journal of World BusinessnVolume 47, Issue 1, January 2012, Pages 4–16 Focus on China Special Section http://usjmba.blogspot.co.uk/2012/05/porters-diamond.html

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Porter’s Diamond Essay

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Porter’s Diamond Essay
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  • University/College:
    University of Arkansas System

  • Type of paper: Thesis/Dissertation Chapter

  • Words: 1924

  • Pages: 8

Porter’s Diamond

Nowadays, the global economy is developing faster and faster. Many countries start to pay much attention to the international competitiveness. More and more people start to research how to build up the high competitiveness in international industry. And some scholars put forward some theories to support the international industry. For example the Michael Porter diamond Model. First of all, this paper is going to introduce the Michael Porter diamond theory. Secondly, analyse this theory in details and discuss what the usefulness and defect are for the international industry.

Thirdly, this paper is going to explore the how this theory is going in Chinese construction industry. At last, this paper is going to make a conclusion and give some suggestion for the Michael Porter diamond Model theory. The introduction of the Michael Porter diamond Model The Michael Porter diamond Model was put forward by Professor Michael Porter, who is working in the American Harvard Business School. Porter’s diamond model is used to analyse why some industries in a country has the strong competitiveness in the world. Michael thinks that if a country’s industry got the high competitiveness, it depends on four factors (Grant, 1991).

Factor conditions, demand conditions, related and supporting industries and firm strategy, structure and rivalry. The first factor conditions can be divided into the primary factors of production and advanced factors of production. The former means natural resources, climate and geographic location. The latter means artificial higher technology. The second demand conditions mean domestic demand structure and the international market pressure. The third are related and supporting industries. It means the competitive industries are not independent, they are supplied and supported by upstream.

The forth are firm strategy, structure and rivalry. It means the way in which companies are created, set goals and are managed is important for success. In the pressure of competition, the enterprise is going to innovate in order to upgrade competitiveness. In addition, there are two variables in this theory: the government and chance. These two factors also have a large affect the international competitiveness of a country’s industry (Porter, 1990). The chance is uncontrollable, at the same time, the government’s policy is important as well. So Potter thinks these six factors are affecting a country’s international industrial competition.

The usefulness and defect of Porter’s diamond theory Porter’s diamond system is a dynamic system (Cho, 1994). It emphasized the factors of the creative ability in competitive industries are more important than simple elements (Porter, 1990). In the first of the factor, factor conditions, compare with other comparative advantage theories, porter’s diamond theory does not put forward any innovation. However, this theory analysed factor conditions more specifically. It separated factor conditions on primary factors and advanced factors (Davies & Ellis 2000). Primary factors included in natural resources, climate and unskilled workers.

Advanced factors included in modern communication facilities, higher education manpower, knowledge system, proprietary technology, and university research institutes. In Most industrial competitive advantages, the primary factors are in the decline, at the same time, the created and professional senior elements are more important than natural primary factors (Grant, 1991). If enterprises want to obtain a high level of competitive advantage, it has to depend on advanced factors. On the other hand, in the potter’s diamond model, each factor influences each other in the process of ascension in competitive advantage.

Potter diamond theory, the strategic structure of the enterprise will be influenced by the related and support industries factors, when the related industries and support industry changes, the strategic structure will be affected (Moon, HC & Peery, Jr. , NS, 1995). On the other hand, when the factors of production and the domestic demand factors changes, the industry’s structure and strategy will also be affected and consequently changes. When these factors influence with each other, the government also played a key role in porter’s diamond theory.

The government makes the related policy to protect the related industries and prevent excessive monopoly, and to maintain competition between industries (Rugman & D’Cruz 1993). In addition, government’s regulation can improve production factors, such as infrastructure construction, to maintain a normal and stable development for the industries and its supporting, related industries. On the other hand, the government also can manufacture opportunities. Accidental opportunities factors can influence the production factors and demand factors changes in the whole industry (Narula, R 1993).

Therefore, Porter’s diamond model theory is a dynamic system. If one of the factors changed, the other factors are going to be changed. Therefore, The Porter Diamond Theory is a unique competition theory; it broke the other traditional theory. The Porter Diamond Theory is a unique competition theory; it broke the other traditional theory. It goes with a dynamic structure to analyze a country’s industrial competitiveness. Porter’s Diamond Model, which bridges the gap between strategic management and international economies, features a huge progress in the development of management theories (Grant 1991).

The Porter Diamond Theory strengthens the relationship between corporate strategy and international competitiveness. It expounded the relationship between the six factors and international competitiveness. Another major breakthrough of porter’s diamond theory is it elaborated the government is an important factor for competition advantage. Government’s policy decides enterprise development strategies and protects enterprise’s development. This allows establishing a partnership between the government and enterprises (Krugman, PR, 1994).

Porter’s diamond theory is a new method to understand the competitiveness of a country and regional. Now it has become an indispensable part of international business thinking. however, the porter’s diamond model theory still got defect. After many scholars research, the porter’s diamond model theory is truly suit for the developed and big countries. Especially, it is in America, UK and somewhere else. However, if apply it in some small countries or developing countries, it will not be so good. Some countries, they got small scale economy, they only rely on exporting and resource industry.

They do not have any technology elements. How they create their competitive advantage. According to porter said:” we have shied away from the industry which highly depends on natural resources. ”(Porter, 1990) therefore, for these countries, the porter’s diamond model theory does not give a good method to analyse. The application of this theory in Chinese construction industry The first is the factor conditions. To potter’s point of view of China’s construction industry, the primary factor is more abundant, the construction market is lack of advanced factors.

China has plenty of cheap labour resources, these primary factors help Chinese construction industry develop rapidly in the past 30 years. It is also the main competitiveness of Chinese enterprises in international market (Moore, T, 2012). However, on the other hand, Chinese contractors in the international market competition, is lack of proficient that get the knowledge of international market rules. In the senior elements of technical system and proprietary standards, China’s construction industry in the past practice of the domestic market has accumulated a lot of new technology.

It starts to get more competitiveness in international market. However, compare with western countries, the technology of Chinese construction industry is still difficult to get high competitive advantage in the international market (Jacobson, C, 2011). The second is the demand conditions, in Chinese construction industry, the building speed and efficiency got the high competitive advantage. Because in the Chinese construction market, most of the developers are strict with the building speed and efficiency. It Makes Chinese construction enterprises in the construction organization and speed has a strong implementation capacity.

However, the Chinese domestic construction market is in a vigorous situation, most of the Chinese developers focus on the domestic construction market. It makes the Chinese construction market cannot adapt to the rules and requirements in international construction market (Jin, B, Li, G & Chen, Z, 2007). on the other hand, Chinese construction is still weak at designing and procurement, even enterprises got highly competitive advantage in domestic market, cannot adapt well to the needs of the international market.

The third is related and supporting industries, Chinese construction industry directly related industries, including design consulting, construction materials, electrical and mechanical equipment, construction machinery and professional contracting. These industries only have a strong competitive advantage in the domestic market, in international market, these industries generally lack of international competitive advantage. These industries are restricted by business model, norms and cultural. Some related industries, they lack of international certificate (Jin, B, Li, G & Chen, Z, 2007).

The forth is firm strategy, structure and rivalry. At present, in China, mismanagement of the company, the system is unreasonable and unclear strategy is widespread. Although Chinese construction market is very competitive, this high intensity competition does not bring any new management and new technology to demotic market. So In terms of internationalization, Chinese construction company strategy, structure and competition are difficult to adapt to the requirements of the international market competition (Jin, B, Li, G & Chen, Z, 2007).

The fifth is chance. Chinese construction market has a lot of opportunity. As a big and developing country, Although Chinese construction industry reflects lack of international competitiveness in other factors, but China is one of the fastest growing countries in the world at present. China definitely got more chances and space than other developed countries. Now, more and more overseas countries invest in China, Chinese construction industry is developing very fast to get a high international competitive advantage. The sixth is government.

Chinese construction industry is more subject to government influence. Current building management system in China is relatively backward; it is not only far away from the objective laws of the construction project, also does not help the industry develop the international competitive advantage (Wei, HK & Wu, LX, 2002). In addition, the Chinese government protect domestic market really hard, the government isolates foreign markets from domestic, domestic contractors is difficult to feel the competitive pressure from foreign contractors.

This will affect the competitiveness of the construction industry in China (Wei, HK & Wu, LX 2002). Conclusion Porter’s diamond theory is a new method to understand the competitiveness of a country and regional. Now it has become an indispensable part of international business thinking. This article explained the basic principles of the Porter Diamond Theory, as well as analyzed the interaction between each factor of the Porter Diamond Theory and analyzed the usefulness and defect of this theory.

Potter diamond theory is able to analyze a country’s international competitive advantage very well; however, it also ignores a number of important factors. In some small countries or developing countries, Porter’s Diamond Theory will reflect a lot of inadequacies. The Porter Diamond Theory is a very unique and very advanced theory, but the theory is incomplete and needs to be improved. After this, the article use the Porter Diamond Theory to the construction industry in China, analyzed the current situation of Chinese construction industry and the advantages and disadvantages in international competition.

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