Diamond Model in International Business Strategy | Free Essay Example

Diamond Model in International Business Strategy

Words: 1939
Topic: Business & Economics

Nowadays it is evident that home and host location strategies in the international system have to be considered within the global context and the current international environment. The changing world sets principally new challenges in front of the business strategy planning and targeting (Cavusgil, Ghauri, Knight, & Riesenberger 2014). The notion of international competitiveness has been widely discussed by business analysts at all the levels. The examination of business performance requires a consistent explanation of the phenomenon why some countries manage to be significantly more successful in a particular field than the others. It is, therefore, necessary to determine the model capable of revealing the reasons for economic domination of specific national industries. One of the models that try to do it was introduced by Michael Porter. His concept implies explaining the high competitive competence of certain industries by the favorable home conditions existing in the countries. Nevertheless, some analysts point out numerous drawbacks of such approach on the basis of its narrow contextual method and relative objectiveness (Astarlioglu 2012). Thus, the extent to what the Porter’s Diamond Model explains home and host location strategies of international business is still debated.

The Porter’s Diamond Model was initially worked out as an integral part of the company’s performance analysis and an efficient tool for successful strategy planning. When formulating the key postulates of the concept Michael Porter tried to explain a particular phenomenon. First of all, he made an attempt to determine the motives of a country’s high competitiveness in selected industry. In other words, Porter was interested why some countries would be significantly more successful in producing, for example, cars or electronics. Secondly, he wanted to find out the reasonable grounds for those cases when one country becomes a home of several world leaders. On the whole, the key Porter’s concern was the question of international competitive dominance (Porters Diamond Model 2012). In order to answer these questions, Porter suggests considering the problem in accordance with the four principal factors that represent the corners of the diamond, determining, in fact, the model’s name. These factors are assumed to be ‘“factor conditions “, “demand conditions”, “firm strategy, structure and competition” and “the presence of related and supporting industries”’ (Bakan & Doğan 2012, p.442). In further words, according to the Porter’s Diamond Model some countries initially have more beneficial conditions for the development of certain industry.

This favorable environment can be represented by rich natural resources, sufficient economic support, the presence of relevant high-qualified staff, well-developed infrastructure or a unique concept of production techniques. As Porter points out, those countries that lack some of the necessary conditions are more likely to apply the innovative approach in order to compensate their unfavorable position. Among all the determinant factors mentioned, Michael Porter puts a particular emphasis on the demand conditions as one of the most important for providing a successful company’s performance. He explains that an industry cannot establish itself as a global competitor unless there is a sufficiently high demand for the services it offers in the home country (Porter’s Diamond Model – Determining Factors of National Advantage n.d).

One should note that the described theory is both actively supported and severly criticized. The main argument of the Porter’s Diamond Model’s critics is that the concept was worked out on the basis of the examination of such developed countries as the USA, Japan, Germany, Switzerland, Sweden and others. Therefore, it is doubted whether the same model can be applied to explaining the experience of developing economies (Recklies 2001). Moreover, the suggested model is mainly focused on explaining the specificity of manufactures’ and banks’ activity, thus, the question arises whether it can equally explain the phenomenon of companies of the provision service character (Markus n.d.). Furthermore, Porter’s emphasis on the prevalent determinant power of the home conditions tends to exclude the presence of the exogenous factors that are likely to have a strong influence on the company’s performance. The underestimation of external forces provokes a lot of criticism on the part of business analysts. Finally, one of the principal disadvantages of the discussed approach is its complete disregard for the role of the corporate management policy. Thence, Michael Porter denies the fact that wise pursued strategy enables a company to reach prominent results even if the basic conditions are not as favorable as one would expect.

In spite of the fact that one of the key disadvantages of the Porter’s Diamond Model are defined as its focus on the developed countries and manufacture specificity, there have been numerous attempts to apply this approach to the study of different fields. Thus, Davis Neven and Cornelia Dröge (n.d.) made an attempt to employ Porter’s approach to analyzing agro-food clusters within the framework of developing countries. The Porter’s Diamond Model was applied along with the Collective Efficiency Model and the Flexible Specialization Concept. The researchers point out that the Porter’s model proved to be highly efficient in explaining the nature of productivity dynamics of the companies. They also claim that the model established itself as the most useful tool for detecting the existing frictions in comparison with other models applied. On the whole Neven and Droge make a conclusion that the Porter’s Diamond Model can be successfully applied to the explanation of the developing countries’ phenomenon at least in the field of agro-food clusters. They notify numerous advantages that make this model principally different from the others, such as a process-focused approach that other models lack. Therefore, according to this research it is most reasonable to perform the company’s performance assessment using the Porter’s Diamond Model along with the Collective Efficiency approach. In this case, the researcher is apt to reach the all-round objective data analysis (Neven & Dröge n.d.).

Another explicit example of applying the Porter’s Diamond Model to explaining home and host location strategies of international business was presented by Di Wu (2006) in his research paper where the analytic tries to analyze the competitive competence of Chinese automobile industry within the Porter’s Diamond concept. The researcher motivates his choice of the model by the existing questions he planned to analyze – the estimation of the competitiveness level of the Chinese auto industry and the government’s influence on these industries’ performance. As we already know, the Porter’s Diamond Model implies both the aspect in the list of the principal conditions determining the industries’ performance. The research performs consideration of both of general auto field’s characteristics and the description of particular company cases, including Toyota Motor and Ford. The researcher points out that the Porter’s Diamond approach is easily applied to the cases of these companies. Basing on the example of Toyota Motor he proves the reasonability of the assumption that home environment is a determinant factor for developing the competitive competence of an industry. Indeed, the conditions under which Toyota Motors took its first steps seem to be highly favorable taking into account sufficient government investment and the abundance of high qualified staff.

The second example represented by the Ford’s company case make Wu (2006) presume that Porter’s Diamond Model is consistent enough in it’s emphasizing the role of the inner demand level. However, he also notes the relativeness of this argument as in the case of China the home market is undoubtedly the biggest market as well. The researcher also admits the validity of critical argument basing on the Porter’s Diamond Model’s neglecting the role of FDI’s impact on the company’s performance. The study has proved that both on Toyota Motor’s and Ford’s cases a thorough consideration of the FDI factor was vital for understanding the competitive competence of the studied companies. The globalization aspect the impact of which is also evidently underestimated by the Porter’s Diamond conception proved to be of more significance that the model suggests (Wu 2006). Nevertheless, on the whole, this research provides the evidence of the possibility of applying the Porter’s Diamond Model’s to the analysis of specific firm case instead of providing only the general national competitiveness estimation, as it is frequently suggested (Smit 2010).

A peculiar case of applying the Porter’s Diamond Model is described by Sardi and Fetscherin (2009) that performed a detailed analysis comparing the automotive industries of China, India, and South Korea. On the contrary to the previously described works, this research seems to be the most appropriate case for employing the Porter’s Diamond Model as it is performed within several countries which is particularly beneficial for estimating a competitive competence. As well as the mentioned research of the similar character, Sardi and Fetscherin (2009), likewise, point out the reasonability of the Porter’s Diamond Model in the way of emphasizing home environment as the principal determinant power of the company’s progress. They take the side of Michael Porter making a special emphasis on the labor resources playing a significant role in the development of the competitive competence. As the research shows, Chinese high-productive forces make the country stand far in front of its rivals India and South Korea. Its innovative efforts also perform a large contribution to the competitive image that fully coincides with the main Porter’s ideas. Meanwhile, a thorough analysis of the collected data makes the researchers come to a curious conclusion.

As far as Sardi and Fetscherin (2009) assume they have sufficient evidence for the model’s inefficiency, they suggest introducing a similar model that would base on the same principals; however, it would be slightly transformed to the advantage. Thus, they offer to create a so-called Double Diamond Model that would take a more precise consideration of the governmental factor and the external conditions’ influence. Moreover, they presume that it would be highly favorable if the new advanced Diamond Model included such factor examination as management policy and strategy. According to their research, it has turned out that the management performance is of considerable importance for the development of the company’s competitive competence. As far as this criterion is completely ignored in the Porter’s Diamond Model, they consider it reasonable to improve the model’s initial structure (Sardy & Fetscherin 2009).

Analyzing the information discussed above, one can suggest that the Porter’s Diamond Model can provide a reasonable explanation of the home and host location strategies of international business on several conditions. First of all, it will be more productive if applied to the analysis of cases within the framework of the advanced countries. If researchers are eager to employ this model in assessing the developing countries’ performance they should select the industries that are relatively similar all-around the world (Peng 2014). Secondly, despite the fact that this model is often criticized for being too general, the statistics shows that the Porter’s Diamond Model can be successfully applied both to the analysis of industrial clusters and particular firms and companies. Moreover, the question’s careful consideration has pointed out that the model is most efficiently used in case it is supported by other theoretical concepts such as the Collective Efficiency Model and the Flexible Specialization Concept. The application of supportive tools can compensate the drawbacks of the Porter’s Diamonds concept that does not pay enough attention to the aspects of corporate management and external factors. Finally, as the practice shows, a researcher can employ the Porter’s Diamond Model’s concept both entirely and partially. It means the examination of a particular phenomenon can require the implication of several Porter’s postulates and the extending of the existing frameworks of the model to the advantage of the researcher. In either case, modern business analytics requires the development of the new approaches and techniques capable of explaining the current business phenomena with the consideration of their peculiarities and the recently appeared specificity (Frynas & Mellahi 2011).

Reference List

Astarlioglu, M 2012, ‘Moderating Effect of Porter’s Diamond Framework Between

Firm Strategies and Export Performance: A Conceptual Model’, Journal of Social Sciences, vol. 3, no. 2, pp. 35-64.

Bakan, I & Doğan, IF 2012, ‘Competitiveness of the Industries Based on the Porter’s Diamond Model: an Empirical Study’, International Journal of Research and Reviews in Applied Sciences, vol. 1, no. 3, pp. 441-455.

Cavusgil, ST, Ghauri, P, Knight, G, & Riesenberger, J 2014, International Business, Pearson Education, New Jersey.

Frynas, JG & Mellahi, K 2011, Global strategic management, Oxford University Press, New York.

Markus, G n.d., Measuring company level competitiveness in Porter’s Diamond model framework, Web.

Neven, D & Dröge, C n.d., A Diamond for the Poor? Assessing Porter’s Diamond Model for the Analysis of Agro-Food Clusters in the Developing Countries, Web.

Peng, MW 2014, Global business, Cengage Learning, Mason.

Porter’s Diamond ModelDetermining Factors of National Advantage n.d., Web.

Porters Diamond Model 2012, Web.

Recklies, D 2001, Porter’s Diamond – Determining Factors of National Advantage, Web.

Sardy, M & Fetscherin, M 2009, ‘A Double Diamond Comparison of the

Automotive Industry of China, India, and South Korea’, Rollins Scholarship, vol. 1, no. 1, pp. 1-14.

Smit, AJ 2010, ‘The Competitive Advantage of Nations: is Porter’s Diamond Framework a New Theory that Explains the International Competitiveness of Countries?’, Southern African Business Review, vol. 14, no. 1, pp. 105-130.

Wu, D 2006, Analyzing China’s Automobile Industry Competitiveness Through Porter’s Diamond Model, Web.