Introduction:
We live in a highly globalised world where the companies not just compete with one another at the national level but have competition globally too. Michael Porter through his Competitive Advantage of Nations theory discusses why some companies of one nation have the presence and compete globally while other companies do not. Michael Porter is an American academician who specialized in the fields of business strategy and economics and his theories like the National Competitive Advantage Theory has been of great use for the governments and businesses alike. Porter through his theory of competitive advantage has tried to explain how by the interplay of certain factors nationally, certain companies perform better than some other companies globally. This theory is explained by Porter with the help of a diamond structure. It has a dual advantage at helping to understand the reasons behind the competitive advantage that a company has over the others while also revealing a path that a company might take in order to achieve that advantage over the other companies.
The Competitive Advantage Theory
The Competitive Advantage Theory is a theory which differs in its approach from many other economic theories of more or less the similar kind. The traditional theories mostly focus on the factors like the land, location, natural resources, the size of a population etc. in explaining why a company is doing better or worse in relation to other companies. This theory explains how the interplay of four main determinants: factor conditions, demand conditions, related and supported industries and firm structure, strategy and rivalry form a diamond structure which provides leverage to certain companies over the others. These four determinants are shown in a diamond structure and hence this theory is often called as Porter’s Diamond. Apart from the four core determinants, there is the inclusion of two more determinants i.e. Government and Chance which play a defining role in the company having an advantage.
Porter in his study, tried to explain by the help of the analysis of ten nations. In those ten nations, he explained why few companies based in a particular nation achieved leverage over other rival companies at the international level in a particular type of industry. He explained in a very meticulous way how certain economic causes along with the governmental and policy factors create a type of atmosphere which becomes conducive for a company to flourish.
Porter’s study was conducted mostly on the first world countries which rank very high on various economic indexes like those of Europe and North America and South-East Asia viz. United States, United Kingdom, Denmark, Germany, Italy, Switzerland, Sweden, Singapore and South Korea. Upon the detailed analysis of the different industries and a very intricate study of different companies, it was found that factor conditions, demand conditions, related and supported industries and firm structure, strategy and rivalry are the core reasons which lead a company to be successful at the international level[1]. It was also very rightly pointed out by Porter that it the factors which he found out were the reasons for the success of a particular kind of company or industry from a country only and is not true for all the industries that a country has to offer[2].
Out of these factors, the firm, strategy and rivalry factor refers to the latest and innovative methods that a company thinks of and implements and how it does in the market with relation to the other rival companies and how these rivalries and the entry of new competitors propel a company even further towards success. The related and supported industries help a company by way of the exchange of different ideas that help a company grow and if the flow of the knowledge transfer is just and transparent then it can lead to improvement, modernization and novelty for an industry. The demand conditions which form one of the corners of the Porter’s Diamond points toward the customer base and the bigger and more inclusive the customer base will be, the more will the company feel the need for innovation and the more the company will flourish
Diamond of National Advantage – The Determining Factors[3]
It has been observed by Porter that, whenever an industry is provided with the conducive environment nationally, then it helps a company gain competitive leverage over the other companies. Due to the quick-wittedness and the ability to adapt and accordingly working for the accumulation of the resources and requisite skills, a company does well. The way in which those resources are put to use and the ideals and ambitions of the company heads and the management of the company plays a decisive role. The most important role though is played by the need for innovation and the necessity to remain relevant to the changing times in order to survive in a competitive environment.
1. The Factor Conditions
According to Porter the most important factors which form the foundation of a developed economic structure are not inherited but are rather created and these factors then help the industry in achieving greater heights nationally as well as internationally. Porter denies the importance which dates back to Adam Smith and Ricardo which is given to factors of production like- labour, land, natural resources, capital, infrastructure etc. and he rather thinks that the factors like- skilled human resources or a scientific base hold greater significance. According to him the resources which are possessed by a nation lose their importance if they are not efficiently created, improved and further positioned in the industries.
The basic resources like land, labour and natural resources are of lesser importance in knowledge-intensive industries. Those nations are successful internationally which focus their attention on creating factors. The highly specialized workforce and scientific assistance help companies more than the high-school or college-level workforce with no scientific background. Innovation and up-gradation are advised by Porter, in the absence of land, labour and workforce, this can prove beneficial to get an advantage over the competitors. For example, Switzerland turned its disadvantage into an advantage when after World War II it faced a labour shortage, it focused its attention to upgrading of the labour productivity by various methods and sought more viable markets.
2. Demand Conditions
According to Porter, those companies have a competitive advantage at the global level which has such domestic markets which provide a clear or prior idea about the demands or the consumer needs. The consumers of a country to which a company belong when demand a particular product then such pressure leads to innovation at a faster pace and helps to achieve leverage at the international level. The globalization has thus not lessened the domestic demand of a product but has rather increased its value. A company has an advantage over its competitors internationally, if the domestic consumers are sophisticated and ask for sophisticated products as this, in turn, makes the companies to respond with highly innovative, technologically advanced and more sophisticated goods.
Another decisive factor under this head is the adaptation and inclusion of the global trends by the companies. The US fast food companies have been so successful internationally because they have been quick at spreading their need for convenience to the world and their tastes globally. The trends and tastes travel fast through media, political means, by intermingling with foreigners of different nations.
3. Related and Supporting Industries
Another important factor which has been pointed out by Porter is that the availability of supporting and related companies help the companies to compete internationally and thus if the supporting companies of a particular product are themselves sophisticated and highly responsive to change and are open to innovation then the resulting product of industry will itself be a highly sophisticated one. For example- The Italian gold and silver jewellery companies are the world leaders in that field, the reason being that the Italian companies which deal with manufacturing of jewellery-making and precious-metal recycling machinery are themselves trailblazers and are the two-thirds supplier of these types of machinery at the world level themselves.
The related and supporting Industries can be of great help when they themselves are highly innovative and ultra-modern. If there is a close relationship between the companies and the modes of communication are open and the flow of information, ideas and innovation between the suppliers and the consumers is there then it can lead to quicker innovation and upgrading of the products.
The flow of information and ideas between the related companies and the main companies can help a great deal and thus opens the door for more innovative and latest ideas and thus novelty is brought in the end-products.
4. Firm Strategy, Structure and Rivalry
The conditions which prevail at the national level help to determine what will be the position of the company internationally. These national factors highly influence the kind of management and organization a company will have and the rivalry at home can be another crucial aspect. There exist different types of managerial structures in different countries, Italian businesses are usually run like extended families, the German managerial structure is very hierarchical and the top executives come from technical fields. Thus, when companies with different managerial systems come together, there is competition. Another important factor due to which some countries have an advantage over the others is the goals that are set by the individuals and companies of that nation and this, in turn, is reflective of the domestic capital markets.
Companies have a greater advantage when more investment is made in R&D and innovations and a moderate level of returns are there. The US is an example where there is a large scope for risk capital and trading takes place of the various public companies at a wider scale. The attitude of the individuals of a nation towards work and their work ethics and skills also are a decisive factor. According to Porter, “Outstanding talent is a scarce resource in any nation.” Countries are competitive with regard to the activities on which the people are highly dependent or are in awe of. The most important and determining factor though remains the rivalry among different companies over a particular end-product. For example- The rivalry between the different pharmaceutical companies in the small country of Switzerland has made it the world leader in pharmaceuticals. Similarly, the local rivalry between the different techniques and software companies in the USA has made it the global leader and provider in the field.
5. Other Factors
Apart from the factors discussed above, the Government plays a very important role. It plans and implements various schemes and policies which can help a company to grow. The role of the government becomes extremely important and can be the biggest supporter or aide in helping a company flourish. According to many thinkers, it is the “free market” policy of the governments, which helps the companies to grow. Another important factor is the Company Agenda, this helps a company great deal, the agenda of the company defines if it would propel forward by innovating. The attitude of the company towards new challenges and pressures and how it copes with them define the success or failure at the international level. The Role of Leadership is another crucial factor; the leadership must be such that it puts the company first and is ready to deal with any challenge or difficulty. Many leaders focus their attention on just dealing with governmental policies and appeasing the political actors in the search of stability and end up winning the title of a “statesmen” themselves[4].
Conclusion
The world we live in has become more and more complex and therefore the companies face many challenges not just on the domestic front but internationally too. The rise in the competition and why some companies do well than others is very meticulously explained by Michael Porter and hence the National Competitive Advantage theory has been of great assistance in explaining that to governments and businesses. It puts down many new factors which account for the better performance of some companies over the others. This theory explains in a very lucid manner the domestic as well as international factors which can influence a company’s standing internationally. This theory is very farsighted and remains true for certain companies belonging to particular nations even after thirty years of it being.
References:
[1] https://hbr.org/1990/03/the-competitive-advantage-of-nations
[2]https://www.investopedia.com/terms/p/porter-diamond.asp
[3] https://hbr.org/1990/03/the-competitive-advantage-of-nations
[4] https://hbr.org/1990/03/the-competitive-advantage-of-nations
0 Comments