Michael Porter’s Theory of the National Competitive Advantage of Industries
MichaelMichael Eugene Porter has written over 20 books and other works that had a significant influence on the world of economics. In the 1980s, he published his article Competitive Advantage, which shortly revolutionized the field. However, his fundamental work, The Competitive Advantage of Nations, was published a few years later to become Porter’s most important contribution, as it introduced a new theory that analyzed competitive advantages on an international scale. The purpose of this paper is to discuss the development of Michael Porter’s Theory of the National Competitive Advantage of Industries, also known as the Diamond model.
The work in question was published as an attempt to introduce a new framework that would explain the particularities of certain countries’ markets and allow companies to devise a suitable strategy that would succeed in each case. Porter (1990) argues that a new paradigm is required to understand why, for example, Germany is known for “printing presses, luxury cars, and chemicals,” while Sweden leads in heavy trucks production (p. 1). The author of the theory examined several other developed countries, such as Japan, Switzerland, Italy, and the United States of America. Porter (1990) insists that national productivity is “the only meaningful concept of competitiveness at the national level,” which consists of utilizing the country’s resources to improve the quality of citizens’ lives (p. 6). Therefore, sustainable improvement requires international competition because import allows the countries to specialize in the areas where they are particularly productive.
In fact, thereThere are natural limits to a nation’s productiveness. Porter (1990) states that “no nation can be competitive in everything” (p. 7). The reason for this is that resources are naturally limited, including the labor market, so the available quantity is to be utilized in the most efficient waymost efficiently. At the same time, developed countries’ example demonstrates the tendency of moving less productive activities abroad through international investment as a way to optimize the use of human resources.
When explaining the foundation of his work, Porter refers to several previous theories regarding economic advantages. First of all, Adam Smith introduced the notion of absolute advantage, which implies that a nation should focus on exporting goods “if it is the world’s low-cost producer” (Porter, 1990, p. 11). For example, if a country is abundant in a specific resource, it has the absolute advantage in its trade, as this factor allows to reduce production cost costs to a minimum. However, Smith’s theory is based on the notion that labor is mobile within the country but not internationally. Expanding these ideas, Porter (1990) refers to David Ricardo’s theory of comparative advantage, which recognizes that “market forces will allocate a nation’s resources to those industries where it is relatively more productive” (p. 11). Ricardo’s theory focuses on productivity differences between countries, assuming that all competing nations are equal at technologies but not in their endowments. While the second theory was quite popular, Porter (1990) argues that both absolute and comparative advantages are required for the trade. His own theory provides a deeper insight into the present-day international trade.
The necessity of a new approach is justified by a range of factors that have influenced the world since the beginning of the 20th century. Porter divides these factors into three major categories. Firstly, the world has seen a series of technological breakthroughs since the Second World War. Global implementation of electronics, new materials, and information systems has altered the traditional line between high and low technology areas (Porter, 1990). Secondly, as trade is mostly carried out between advanced economies, their endowments have reached similar levels. Porter (1990) refers to the example of the United States that once held the leading position in qualified labor, which is no longer the case. Lastly, the globalization processes are on the increase, meaning that companies, which compete on a worldwide level, locate their production in many countries, thus taking advantage of low-cost opportunities. Overall, these recent developments have altered the global landscape enough to assume that previous theories need additional improvements to remain relevant.
Porter devised his theory aiming at describing the new reality of economics and trade. He confirms that companies base their competitive advantages in on industries, which are favorable, according to the local environment (Őz, 2019). Porter (1990) distinguished four attributes of such environment: factor conditions, demand conditions, related and supporting industries, as well as the company’s strategy. The first category includes two classifications of factors: basic or advanced, as well as generalized or specialized. According to Porter (1990), a combination of advanced and specialized factors provides a basis for competitive advantage. Next, the author states that home demand plays a more important role in forming advantages than foreign demand. Moreover, demanding customers put enough pressure on companies to instigate qualitative development (Porter, 1990). Simultaneously, related and supporting industries allow a nation’s companies to share experience and technology, thus promoting their sustainable growth. Finally, Porter (1990) believes that, while different firms’ strategies, structures, and rivalry are rarely identical, there are specific patterns that exist on a national level. Furthermore, Porter highlights the significance of such factors as governmental pressure (or lack thereof) and chance. These are the categories that form Porter’s Diamond Framework.
In addition, Porter expanded his theory to the level of the national economic system. He identified four stages of a country’s economic development, comprising factor-driven, investment-driven, innovation-driven, and wealth-driven stages (Őz, 2019). The first three stages imply sustainable growth, the third one being the peak, whereas the wealth-driven stage caused by past success suggests a certain decline, as competitive advantages lose their importance. Overall, this paradigm can be used to describe a range of global economies and demonstrates the natural development of the original theory.
All in all, Porter’s framework introduced a new perspective of international economic relations and trade. He thoroughly studied the experience of the great economic minds of the past, including Adam Smith and David Ricardo, and expanded their theories. This way, Porter’s work serves to reflect the contemporary state of global economics, which was significantly altered by the social and scientific development of the 20th century.
References
Porter, M.E. (1990). Competitive The competitive advantage of nations: Creating and sustaining superior performance. The Free Press.
Őz, Ő. (2019). The Competitive Advantage of Nations: The Case of Turkey: Assessing Porter’s Framework for National Advantage. Routledge.