University of Chicago
Type of paper: Thesis/Dissertation Chapter
“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.
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