Management Paper

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 Porter’s model and the notion of national competitiveness. 2

Weaknesses of Porter’s model of national competitive advantage. 3

Failure to elaborate properly on the notion of national competitiveness. 3

Tautological arguments. 4

Failure to address the role played by the state in establishing national competitiveness. 5

The role of multinational enterprises. 5

Conclusions. 6

References. 7

Introduction

The model of national competitive advantage, also known as Porter’s Diamond, was developed by Michael Porter. In this model, Porter  sought to find out why differences exist in different countries as far as competitiveness is concerned. Furthermore, he was interested in finding our why certain industries were more competitive in some countries and not in others. In developing this model, Porter put into consideration the fact that corporate strategies were increasingly being mapped into the contemporary globalized environment. Indeed, there is need for management theorists to put into consideration today’s international business environment where domestic market is being significantly influenced by the actions of buyers, sellers, and competitors in foreign countries.

However, the most fundamental problem with Porter’s model is that it is not convincing. There are many problems with Porter’s arguments regarding the way national business systems function. These arguments seem to constitute a mere checklist and not a theory. Another problem is that Porter fails to provide a historical dimension in assessing the validity of his arguments. Moreover, it is evident that the state continues to play a crucial role in influencing the direction to be taken as far as national competitive advantage is concerned. Porter seems to downplay this role. Paradoxically, Porter goes on to argue that conditions of factor and demand first and foremost tend to be a representation of national trends as far as competitiveness is concerned. The aim of this paper is examine Porter’s model and to expound on its various weaknesses.

Overview of Porter’s model and the notion of national competitiveness

            The gist of Porter’s model is that the national home base of an organization greatly influences the extent to which that organization will achieve competitive advantage within the global marketplace. Porter (1998) argues that the national home base is a source of critical factors that may either render support or act as a hindrance for organizations in their quest for advantages in the global competition. To support this argument, Porter (1998) highlights four determinants of this national competitive advantage; namely home demand conditions; factor conditions; related and supporting industries; and firm strategy, rivalry, and structure.

            According to Porter (1998), home demand conditions greatly influence all factor conditions. For instance, aspects of innovation and product development have an influence on all other conditions necessary for the achievement of competitive advantage. The direction of innovation is critical in determining how organizations position themselves in the global competition. Home demand is greatly shaped by a specific mix of customers’ needs and wants. This mix varies from one country to the other. Other factors influencing this demand include rate of growth and channels of mapping domestic preferences into the global market. The rate of growth typically varies from one country to the other. In Porter’s view, clear signals need to be sent to foreign competitors as far as domestic demand is concerned. This will lead to the establishment of greater national advantages.

            Factor conditions are discussed in relation to the situation of a country with regard to factors of production. These factors must be put into consideration for competitive advantage to be achieved in particular industries. Porter discusses these factors on the basis of five categories: human resources, knowledge resources, material resources, infrastructure, and capital resources. Each country has its own unique set of combinations of these factors of production. From this uniqueness, initial advantages are provided. This implies that every country posses its own peculiar set of initial advantages that give it a competitive edge in the international marketplace.

            With regard to supporting and related industries, Porter addresses the issue of the existence of internationally competitive corporate entities that provide organizational support. The view taken in this model is that whenever an industry becomes internationally successful, it creates advantages for many supporting industries. For example, supplying industries get opportunities for the reinforcement of internalization because of the sense of continuity that the successful industries provide. Similarly, related industries get numerous opportunities for coordinating crucial activities in efforts to enhance the value chain.

            Regarding firm strategy and rivalry, Porter indicates that differences exist in the procedures set up by different countries as far as the establishment, regulation, and management of business organizations is concerned. These differences greatly determine how competition shapes up within the domestic market. Moreover, different countries have different cultures. These cultures influence the way businesses are run. Additionally, different cultures naturally bestow different advantages upon particular domestic markets. These advantages can be discerned through variations in the way companies interact, the morale of employees, and the strategies used in establishing various management structures.

            Evidently, different countries of the world tend to “put their best foot forward” by building on different aspects, including capital resources, infrastructure, deregulation of labor markets, and stock market liquidity (Porter, 1998). The rationale for doing this is to establish competitive advantage within the global environment. On this basis, it is possible for different countries to be put in particular categories on the basis of the competitive advantages that they share. For instance, low-cost countries have low labor costs. Such considerations influenced Michael Porter to develop the model of national competitive advantage, also known as Porter’s Diamond.

Weaknesses of Porter’s model of national competitive advantage

Failure to elaborate properly on the notion of national competitiveness

            One of the major weaknesses of Porter’s model is its failure to elaborate properly on the notion of national competitiveness.  This is a major weakness because this notion is supposed to form the foundation of the theory in its entirety. For the most part, Porter seems to be prescribing the things that should be done for a nation to achieve impressive economic performance. Porter uses different arguments to explain how competitive advantage can be achieved in the international market.

In most instances, these explanations are not satisfactory. In other cases, the conditions prescribed for national competitive advantage to be achieved are mutually exclusive. The theory fails to explain how the conditions necessary for the achievement of national competitive advantage may have been achieved in the first place. Some scholars argue that Porter should have explained whether the national competitiveness in particular industries could have been achieved because of the activities of various companies within those industries (Davies, 2000; Dunleavy, 2010; O’Shaughnessy, 2000; Clancy, 2001). The gist of this criticism is that Porter should have explained not just the existing factor conditions but also the various weaknesses encountered in domestic markets. Moreover, he ought to have addressed the question of how different countries turn these weaknesses into new opportunities for global competitiveness.

Moreover, the phenomenon of competitiveness as more complex than the way Porter portrays it. For instance, demand and supply forces always have far-reaching implications on how countries gain competitive advantage both within the domestic market and in the global context. Porter’s model is largely incompatible with core aspects of demand and supply theory (Clancy, 2001). In such a situation, the model lacks the much needed empirical evidence for supporting various assertions.

Tautological arguments

Furthermore, in the absence of empirical evidence, Porter’s model is tautological. The notion of competitive advantage has not been properly defined for purposes of theory development. Instead, Porter uses different, sometimes conflicting ideas, to describe it. For instance, according to this model, the main reason why companies succeed is because of the existence of factors that make such success possible. However, the model does not offer an in-depth analysis of the efforts that companies make to ensure that all the appropriate conditions necessary for the achievement of advantageous competitive factors have been put in place. This is a serious omission given that in today’s fast-paced global environment, economic conditions are changing drastically. It is particularly important to note that many such changes have occurred since the model was first developed. In this way, the model is not adaptable to changing economic conditions. This makes the model seem inappropriate as a source of crucial information for decision-making by companies.  

More importantly, some of the strategies that the model recommends are mutually exclusive. This weakness arises because Porter does not differentiate between differentiation and focus strategies (Clancy, 2001). For this reason, many corporate entities are reluctant to integrate the recommendations of the model into their business strategies. Most of these weaknesses have been highlighted by the economic school. In contrast, the management school has always embraced the model. The only position that is acceptable to the economic school is one in which the Porter’s Diamond is viewed not as a theory but rather a framework for explaining the notion of international competitiveness of firms.

            Within the economic school, critics state that it is not proper to argue that as time goes, countries are being compelled to operate and compete in increasingly tough global market. This assertion is often made by those who support Porter’s model. The impression created is that there is a need for high-value sectors to be established to create jobs and forge new business-government partnerships (Grant, 1991). However, the critics point out that in the context of national economies, such arguments do not seem to hold any truth.  The simple reason offered for this criticism is that in the strictest sense, firms are the ones that enter into global competition and not countries. In the view of the economic school, countries endeavor to engage in trade as a “positive-sum” game (Krugman, 1994). In such a situation, there is no empirical evidence to show that today’s companies are operating in an increasingly tough global marketplace.

Failure to address the role played by the state in establishing national competitiveness

Furthermore, Porter’s model does not give much attention to the role that states play in building national competitiveness. Yet national governments contribute significantly to the competitiveness of domestic firms in the global marketplace. In some countries such as China, the most strategically-important corporations are state-owned. In such countries, national competitiveness is intricately intertwined with the policies, strategies, and day-to-day operations of national governments.

Still on the role of the state, it is obvious that the decisions and operations of domestic governments impact significantly upon the determinants of Porter’s model (Porter, 1995). This influence is evident through measures involving establishment of standards, enforcement of regulations, and introduction of subsidies (Porter, 1995). These issues have not been addressed in Porter’s model. An analysis of these issues is necessary in order to determine the extent to which the state influences national competitive advantage. For instance, in some instances, governments choose to provide subsidies to particular industries for strategic reasons. Such decisions may not necessarily be in the interest of the establishment of national competitive advantage. There is a need for the model to dwell a lot on the extent to which the decisions of different governments contribute to the creation of national competitive advantage for domestic industries.

            The model seems most suited to developed countries. When developing this model, Porter (1998) carried out an analysis of only ten countries. No analysis was made on the performance of industries operating in developing countries as far as national competitiveness is concerned. Similarly, the theory did not provide the much-needed historical dimension. Through a historical analysis, it would have been easy for differences to be highlighted as far as the development of competitiveness in developed and developing countries is concerned.

Additionally, through a historical analysis, it would have been easy for scholars to examine how the relative performance of various countries has been influenced by geographical, industrial, and historical circumstances. Whichever way one looks at the model, the historical dimension will always remain a crucial component as long as the global economic environment continues to change at a fast pace. For instance, it would be important to determine whether the successful national economies of the 1970s continue to rely on the same national competitive advantages for success in today’s economic environment.

The role of multinational enterprises

Another criticism of Porter’s model is its failure to address satisfactorily the role that multinational enterprises play in determining competitive advantage at the national level. It is not true that an explanation for the advantages that specific multinational companies enjoy could be based on the competitive advantages present in their home countries. The truth is that the advantages enjoyed by these multinational enterprises are derived from the national diamond that exists in several countries rather than just in the home country. To correct this anomaly, Porter may have to introduce the notion of “multiple diamond” to explain the competitive advantage of multinational enterprises (Berger, 2008).

Indeed, the failure to put into consideration the competitive advantages that exist outside the national boundaries constitutes one of the most serious weaknesses of Porter’s model. Porter assumes that firms always focus on developing competitiveness within their home countries before venturing into the global marketplace through FDI (foreign direct investment). In reality, this is not always the case. Multinational companies which have already been engaging in FDI benefit by engaging in value-added activities from different locations as well as through common governance. Moreover, some advantages are only to be found in the destination countries, such that they cannot be transferred to the home country.

Conclusions

            In conclusion, Porter’s model of national competitive advantage has made significant contributions to our understanding of the way nations position themselves in the contemporary global marketplace. One of these contributions is made through an in-depth analysis of the four determinants of national competitiveness. However, the model has some weaknesses that have formed the basis of criticism by scholars, particularly those from the economic school.

            In summary, the model fails to elaborate properly on the notion of national competitiveness. It also fails to give much attention to the role that states play in building national competitiveness. In essence, it seems most suited to developed countries. Moreover, Porter assumes that factor and demand conditions are not purely national; this is untrue. Finally, the model downplays the role that multinational enterprises play in the creation of national competitiveness.

References

Berger, T. (2008). Concepts of National Competitiveness. Journal of International Business and Economy, Vol. 9, No. 1, pp. 91-111.

Clancy, P. (2001). Industry Clusters in Ireland: An Application of Porter’s Model of National Competitive Advantage to Three Sectors. European Planning Studies Vol. 9, No. 1, 7-28.

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.

Dunleavy, J. (2010). Analyzing Competitive Options for SME’s using Porter’s Competitive Advantage Model. John Wiley & Sons, Boston.

Grant, R. (1991). Porter’s ‘competitive advantage of nations’: An assessment. Strategic Management Journal. Vol. 12, No. 7, pp. 535–548.

Krugman, P. (1994). Competitiveness: A dangerous obsession. Foreign Affairs, Vol. 4, No. 2, pp. 47-69.

O’Shaughnessy, N. (2000). Michael Porter’s revisited. Management Decision, Vol. 34, No.6, pp.12-20.

Porter, M. (1995). Toward a New Conception of the Environment-Competitiveness Relationship. The Journal of Economic Perspectives, Vol. 9, No. 4, pp. 97-118.

Porter, M. (1998). Competitive advantage of nations. Free press, New York.

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