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Porter’s “Diamond” Framework Essay

“A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade”. Discuss using Porter’s “diamond” framework.

Increasingly, corporate strategies have to be seen in a global context. Even if an organization does not plan to import or to export directly, management has to look at an international business environment, in which actions of competitors, buyers, sellers, new entrants of providers of substitutes may influence the domestic market. Information technology is reinforcing this trend. Michael Porter introduced a model that allows analyzing why some nations are more competitive than others are, and why some industries within nations are more competitive than others are, in his book The Competitive Advantage of Nations.

This model of determining factors of national advantage has become known as Porters Diamond framework. Four attributes of a nation comprise Porter’s “Diamond” of national advantage. They are: factor conditions, demand conditions, related and supporting industries, and domestic rivalry. This essay will explain the reasons that Japan achieves one of the most prominent and largest automotive industries with the tools of diamond framework.

Factor Endowment

Factor conditions refers to inputs used as factors of production – such as labour, land, natural resources, capital and infrastructure. This sounds similar to standard economic theory, but Porter argues that the “key” factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labour, capital and infrastructure. The spread of higher education in Japan provide a large number of skilled workers, engineers, designers for car companies. Specialized factors involve heavy, sustained investment are difficult to duplicate. This leads to a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable.

The unique technology of Li-ion remains Japanese hybrid car high comparatives. Porter argues that a lack of resources often actually helps countries to become competitive which can be called selected factor disadvantage. Abundance generates waste and scarcity generates an innovative mindset. Such countries are forced to innovate to overcome their problem of scarce resources. Japan has high priced land and so its factory space is at a premium. The limitation of area leads to car manufacturers innovate the just-in-time inventory techniques and the first compact cars in the world. Besides, lack of oil has impelled the innovation of hybrid cars.

Demand Conditions

Michael Porter argues that a sophisticated domestic market is an important element to producing competitiveness. Firms that face a sophisticated domestic market are likely to sell superior products because the market demands high quality and a close proximity to such consumers enables the firm to better understand the needs and desires of the customers. If the nation’s discriminating values spread to other countries, then the local firms will be competitive in the global market. One example is the Japanese car industry. The Japanese are sophisticated car consumers. These consumers force and help Japanese automobile manufacturers to produce high quality cars.

Related and Supporting Industries

Porter also argues that a set of strong related and supporting industries is important to the competitiveness of firms. This usually occurs at a regional level as opposed to a national level. Examples include Silicon valley in the U.S and Italy (leather-shoes-other leather goods industry).

On the other hand, when local supporting industries are competitive, firm enjoy more cost effective and innovative inputs. Upstream manufacturers such as Bridgestone, as one of the world biggiest tyre producer……

Firm Strategy, Structure and Rivalry
Strategy
Capital Markets

Domestic capital markets affect the strategy of firms. Some countries� capital markets have a long-run outlook, while others have a short-run outlook. Industries vary in how long the long-run is. Countries with a short-run outlook (like the U.S.) will tend to be more competitive in industries where investment is short-term (like the computer industry). Countries with a long run outlook (like Switzerland) will tend to be more competitive in industries where investment is long term (like the pharmaceutical industry).

– Individuals Career Choices

Individuals base their career decisions on opportunities and prestige. A country will be competitive in an industry whose key personnel hold positions that are considered prestigious. Does this appear to hold in the U.S. and Canada? What are the most prestigious occupations? What about Asia? What about developing countries?

Structure

Porter argues that the best management styles vary among industries. Some countries may be oriented toward a particular style of management. Those countries will tend to be more competitive in industries for which that style of management is suited. For example, Germany tends to have hierarchical management structures composed of managers with strong technical backgrounds and Italy has smaller, family-run firms.

Rivalry

Porter argues that intense competition spurs innovation. Competition is particularly fierce in Japan, where many companies compete vigorously in car industry. For example, Toyota,Honda,Nissan…International competition is not as intense and motivating. With international competition, there are enough differences between companies and their environments to provide handy excuses to managers who were outperformed by their competitors.

Chance and the government are the two external variables that influence the four determinants of the diamond model. From porter’s point of view, Chance events (Porter 1990) can “create discontinuities that allow shifts in competitive position.” while Government is the one which could benefits or adversely affects the four determinants of national advantage in an industry.


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