Our goal in this article review is to analyse Michael Porter’s article Competitive Advantage of Nations by comparing it to the articles, which have been written after Porter’s work was published. These articles on the other hand agree with Porter view, but also heavy criticism has been brought out. Most of the articles are based on Porter’s book Competitive Advantage of Nations, which has much wider perspective to the issue than the article that Porter has written about the same topic.
That is the reason why in this synthesis we could not analyse so deeply all the issues that other authors have dealt with. In general this topic is very wide and this framework “Competitive Advantage of Nations” combines several topics that Porter has searched in his previous work. In the book Porter has thoroughly analysed all the aspects of his framework and because the topic is so wide the book has grown up to over 800 pages. For example the areas that are explained in the book, but not analysed in the article are foreign direct investments (FDI) and multinational enterprises (MNE).
These areas are heavily criticised in compared articles, but because we did not have possibility to familiarize with the original view of Porter, we do not dissect it in our synthesis. All the authors of reviewed articles agree with the fact that Porter’s work is significant in some extent, but they all find some issues, which need improvements. In our opinion, Porter’s work is significant indeed, but we also found several points that should be reconsidered.
Diamond of National Advantage
Competitive advantage of nation consists of several different factors. There are many different theories in this area starting from traditional macro-economicaltrade theories, going all the way to modern views of competitive advantage of nations. As Porter says there are four country-specific determinants: factor conditions, demand conditions, related and supporting industries and firm strategy, structure and rivalry. These four determinants affect each other and work together so that, according to Porter, they build the diamond of competitive advantage.
There are also two external factors: change and government, which have significant affects on four determinants and that way they influence the way how the model works. We think that the fourth determinant (firm strategy, structure and rivalry), comparing it with three others, is not very consistent. It contains several different issues concerning both firm’s external and internal factors. It gives the impression that in the last category all the issues that have not fit anywhere else have been put there and they do not build a logical entirety. Some authors have also pointed out the same issue.
Without doubts government has a role in the nation’ s competitive advantage. The problem is that different authors see government’s role several ways. Porter thinks that government should be supporting to create the environment, which encourages firms to gain competitive advantage. He says that government should avoid subsidiaries, protection and arranged mergers. According to Porter the role of government should be more indirect than direct. Nowadays it seems like, countries want to protect their producers and markets in several ways, even though, for instance European Union as well as other free trade unions, speak for free trade.
Free trade seems to have its pros and cons. It increases the wealth of the nations, but it can be problematic for some industries. For example, in Finland without subsidiaries Finnish agriculture may not survive in international competition. Another example is Turkey, where government has had direct and active role in supporting the flat steel and glass industry, which seem to be competitive worldwide. Change has an important role in developing the competitive advantage. This is due of the fact, that change forces companies to innovate and make continuous improvements.
From this point of view, we can assume that only the countries that are capable to keep up with the changes or even better; to “create” changes are internationally competitive. 3. 3 Model Modifications Porter’ s model seems to cover several issues affecting competitive advantage of nations. However it seems that there are also some other factors outside the model that have significant impacts to competitive advantage. These factors include e. g. globalisation, cultural aspects and history of the nation. Globalisation is introduced by several authors.
They think that competitive advantage cannot be defined merely on the basis of national factors. National competitive advantage is founded more and more on international environment. For instance, according to Dunning, national diamond should be replaced with supernational diamond, because of the increasing integration between countries. Also multinational companies and alliances have effect to competitive advantage. Finnish firms, can, for instance, acquire assets from other country. Also the issue of integration between independent countries is problematic, when we discuss Porter’s model.
For instance, can we say that rivalry in Finland effects more to a Finnish firm than rivalry in European Union? Or has European Union any effect to Finland’ s competitive advantage at all? Globalisation also gives new perspective to government’ s role. In this integrated world, country is not able to decide on every issue influencing itself. Many decisions influencing Finland are made in Brussels these days so Finland does not have power to decide on every issue concerning factor condition directly. Another huge omission in Porter’ s model is the lack of cultural aspects.
Porter has made several assumptions about certain people. He has stereotyped nationalities: Germans are efficient, Swiss are precise and Italians are great designers. Culture is much more than just traditional stereotypes and it changes over time. Cultures cannot be ranked and they cannot be valued only on the basis of economical standards. The values of human beings come from the cultural background and history of the country. These aspects determine which issues in a country are being emphasized and admired.
For instance, Germans and Japans have faced militarism in the past. That may have created discipline labour force and highly technical demands industries. These aspects can be seen as competitive advantage of these nations. 3. 4 Conclusion When we think about the factors that affect competitive advantage of nation, inevitable conclusion is that the model becomes wide and complex. After Porter has published his work of “National Diamond”, several authors have proposed that new determinants should be added to the model.
The reason for that is that the effects of the determinants in Porter’ s model and the relationships between them are not black-and-white. Some of the effects are self-explanatory and there are several exceptions in many cases. This arises the question how well Porter’s model or any other model altogether can be applied to all situations. There have been attempts to apply the model in the practise in several countries. In some cases the model works and gives good framework when trying to determinate competitive advantage of some nations, but in some other cases it seems to fail in this attempt.
For instance, developing countries are not taken into account in Porter’ s research. O’Shaughnessy (1996) argues in his article that Porter’ s model is specific to the West. On the other hand, there is a recent study where Porter’s model has been quite successfully adapted to explain competitive advantage of developing country (Turkey). The study shows that Porter’ s model can be applied to analyse the sources of advantages or disadvantages in an uncompetitive industry.
As a conclusion, we can say that the model’ s ability to analyse competitive advantage of nation is case-specific. There is indeed a need for wider empirical research, before we can be sure that using this kind of model can assure competitive advantage for nations.
Dunning, J. 1993. Internationalizing Porter’s Diamond. Management International Review. Vol. 33, Second Quarter, s. 7-15 Grant, R. 1991. Porter’s Competitive Advantage of Nations: an assessment. Strategic Management Journal. Vol. 12, Issue 7, s. 535-548