Porter's Diamond Model in International Business | Free Essay Example

Porter’s Diamond Model in International Business

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Topic: Business & Economics
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Strategies of International Business

The diamond model of Michael Porter is the framework that helps to assess a competitive advantage of a given industry within a particular nation to determine whether this industry can provide organizations that want to compete at the international level with favorable conditions to do this. Therefore, Porter’s approach is rather useful for companies, which want to internationalize and that is why need to choose an appropriate location in countries abroad. Additionally, it can also explain and justify the location choices that have already been made by firms.

This paper examines the usefulness of the diamond model in explaining home and host location strategies and reveals the benefits and drawbacks of this model, using as an example strategies of such large international businesses as Swedish-based IKEA, the organization selling furniture, and H&M, the company that sells clothes for men, women, and children.

Porter’s model is usually depicted as a diamond diagram, where four major elements are presented. To identify those four elements, which determine the nation’s competitive advantage at an industry level, Michael Porter has examined a hundred of industries in ten different countries (Morschett, Schramm-Klein & Zentes 2015, p. 177). So, the four attributes that contribute to the diamond model are factor conditions, demand conditions, related and supporting industries and firm strategy, structure and rivalry.

The first driver, factor conditions, can be divided into two subgroups, containing basic and advanced elements (Morschett, Schramm-Klein & Zentes 2015, p. 177). The first subgroup includes the factors that have been inherited by a nation, for instance, land, raw materials, climate, capital, demographics, infrastructure, and so forth. The subgroup of advanced factors refers to more sophisticated attributes that can only be created and improved, not inherited. Those factors are nation’s knowledge resources, skilled labor force, communication systems, etc. As Morschett, Schramm-Klein and Zentes (2015) state, advanced factor conditions have the most significant influence on the nation’s competitive advantage.

That can be explained by the fact that not all nations have strongly competitive basic conditions. However, advanced attributes can always be developed, as well as regularly upgraded and improved, through training and innovation and with the help of investments made my individuals, organizations or the government. Therefore, well-developed advanced factor conditions can compensate the lack of basic ones. In other words, an ability to adapt to existing conditions and develop something new and unique is more important that the quality of those existing conditions.

Example strategies IKEA and H&M

Let us see how important it is with an example of IKEA. Considering the infrastructure in Sweden, the home country of IKEA, it was decided to locate IKEA stores and warehouses in the suburbs, near the main roads (Hill & Jones 2011, p. 94). That is how too expensive city center locations were avoided, and people still could easily reach IKEA stores. To make the shopping process more convenient for the customers, the company developed large and spacious parking lots, free for every visitor. Due to this, people can drive to IKEA stores, buy all the furniture they need and then transport it to their houses by cars.

However, in China, for example, resources, capital, and infrastructure are different, and the majority of people use public transport. Considering this, it was decided to locate IKEA stores in China near public transport stops and offer delivery services instead of huge parking lots (Hill & Jones 2011, p. 94). Additionally, IKEA focuses on employees’ skills and invests much in developing those. For example, the central concept of IKEA is promoted as typically Swedish (The IKEA Concept: Typically Swedish 2015).

To work in the organization, employees have to understand Scandinavian culture and values, know the company’s strategy and the range of products. Therefore, knowledge resources and high-skilled employees are one of the core values of the organization. With this in mind, it can be concluded that IKEA relies on advanced factor conditions much more than on basic ones, and due to that, it is able to adapt to various environments.

The second determinant of the diamond model refers to demand conditions, the nature and size of customer’s demand for products or services of a particular industry within a certain nation. The more demanding the customers are, the more pressure it puts on organizations to meet their requirement (Morschett, Schramm-Klein & Zentes 2015, p. 177). Consequently, companies get an incentive to innovate, improve their efficiency, and upgrade the quality of their products and services, which finally creates a competitive advantage. Hence, companies that adapt to their customers’ demand are more successful within both home and host markets.

Although the necessity to adjust to customers’ needs and desires is important in both home and host markets, within the host ones it is crucial. Swedish company H&M, which specializes in selling clothes, has one main global strategy – to provide buyers with the products of high quality and low prices. Still, although the range of product the stores offer is universal and mostly the same in all countries where this brand is presented, the customization is regularly needed. The clothes for H&M stores in different countries are selected from the full range of products according to what is appropriate for a particular location (Haberberg & Rieple 2008, p. 624).

For example, after the opening of H&M stores in China, the company found out that they needed to make ‘sizes and styles right’, as Vivian Chen, China marketing manager at H&M, said. (Madden 2012, para. 5). What does it mean? Everything is simple – what is appropriate in one country, turns out to be completely unacceptable in another. For instance, nobody in China will ever buy a green hat that is present among the range of H&M products since the words ‘wearing a green hat’ in this country mean being a cuckold (Madden 2012, para. 6).

Another example is a summer dress with white flowers depicted on it – flowers of white color in China are widely associated with death (Madden 2012, para. 6). If the organization ignores these details, it is fraught with material losses, since such kind of products simply will not be sold out, and the deterioration of brand reputation because people may see it as a sign of disrespect. If the organization considers these issues, it contributes to its competitive advantage.

Related and supporting industries constitute the third factor that contributes to Porter’s model. It represents the importance of capable suppliers available within the same nation and also competitive at the international level. According to Morschett, Schramm-Klein and Zentes (2015, p.178), such a ‘geographical concentration of companies, suppliers and supporting firms’ is called an industrial cluster and brings mutual benefits for all parties involved. Indeed, such kind of partnership provides better communication, cooperation, and support to all sides since partners can share their ideas with each other and contribute to the common cause. Moreover, if companies that expand their activity to host locations start the partnership with local suppliers it significantly reduces the costs of manufacture.

For example, H&M does not have its own factories (From idea to store: Production process n.d.). Instead of this, the organization cooperates with almost a thousand of independent suppliers around the world, the majority of which are located in different parts of Europe and Asia (From idea to store: Production process n.d.). In addition to suppliers, the organization always searches for designers and tries to collaborate with models and famous people in every country where a new store opens. This strategy helps greatly with the company’s promotion and advertisement.

A very similar approach is used by IKEA as well. Although IKEA is famous all over the world due to its high-quality products for an affordable price, its low prices turn out to be not so impressive in China. Because of a common practice of discount models used in this country, IKEA has to reduce prices for its products as well. Such kind of reductions can be up to 70 percent below the product’s real price. To be able to do this and meet the customers’ demands without compromising the profits, IKEA has found many local suppliers and, a large percentage of production is now entrusted to those (Hill & Jones 2011, p. 94). For the same reason, the organization tries to minimize the transportation of goods by air.

Finally, the last factor of the diamond model refers to the firm strategy, structure and rivalry. In other words, it addresses the organizational culture and structure, the way the company works and manages employees and the level of competition within a domestic market. The last factor of Porter’s model helps to understand if the organization has found a balance between its own characteristics and those of a particular industry it operates in. As for the strategy and structure, companies can win on the global scale if, locating their affiliates in host markets, they decentralize and let managers in countries abroad make their own decision. Besides, employees also appreciate if the organization is not rigid and provides flexibility. As for the competition in a domestic market, it is essential since it stimulates the organization to innovate and improve its strategies, which, in its turn, contributes to the competitive advantage.

IKEA is a prime example of the organization with the structure and strategy appropriate for the international level and welcomed worldwide. It is non-bureaucratic and non-hierarchic. Bureaucracy in IKEA is fought at every level and in every country. For example, in 2009, IKEA said that it would suspend its expansion in Russia because of high levels of bureaucracy in this country (IKEA fed up with Russia’s Bureaucracy 2009). IKEA provides managers with an opportunity to make decisions and gives employees the flexibility they need. IKEA workers are provided with health care plans, paid time off, assistance in career development, meals, free coffee and tea, uniforms, and even 15% discounts (Your IKEA benefits n.d.).

Finally, what is the most important, IKEA remains loyal to its values regardless of a particular store or a country. As for the rivals, in the 1950s, when IKEA tried to enter the market it was hard to do this since the industry was dominated by small retailers and the barriers for new entrants were high (Hill & Jones 2011, p. 90). However, that fact only stimulated the company to find a solution, and by outsourcing the majority of its production and finding long-term suppliers, IKEA reduced the costs of production and finally managed to enter the market.

Nevertheless, although the diamond model contains crucial success factors, many people are convinced that some element there are missing. First of all, the model does not pay attention to the role of government, which should be considered since different countries regulate business and trade in their own ways. Second of all, the influence of change events is not included as one of the model’s factors. To the group of change events, such situations as economic recessions, crises, wars and others can be referred. However, as Reinert et al. (2010, p. 210) state, Porter has discussed these factors and admitted their significant influence. Still, he has not added them to his model since they work ‘through the four main determinants of the diamond’ rather than create additional parts of the model as fifth and sixth factors.

Additionally, the model says nothing about the national culture, even though culture is one of the most influential factors that define the way of doing business in a particular country. However, Porter’s model includes the demand factor, which is determined by customers’ needs and interests. Hence, the national culture issue refers to this category and do not create a separate one. As the proof, a phrase ‘wearing a green hat’ in China refers to a cuckold, while Swedish people, for example, have nothing against green hats (Madden 2012, para. 6). The same is true about white flowers, which should not be depicted on clothes since they are associated with death in China (Madden 2012, para. 6). All of these are manifestations of a particular culture, and taking into account customers’ needs and demands, the organizations can address the cultural issue as well.

Finally, while focusing on domestic competition, the diamond model does not address competitors that exist at the international level and the possibility of new entrants. Still, it is impossible for one model to consider every possible issue, which is why for a complete picture, other business theories and models should be used. For example, the lack of the analysis of competitors can be compensated with the help of Porter’s five forces model. It assesses the risks of entry by potential competitors, the bargaining power of buyers, the bargaining power of suppliers, and the threat of substitutes (Hill & Jones 2011, p. 57).

Conclusion

To conclude, the diamond model of Michael Porter is useful for determining and explaining both home and host location strategies of international businesses. Porter’s approach critically addresses many important factors, which every organization should take into consideration before starting a new business or expanding an existing one abroad. However, some elements are still missing, and to compensate the lack of those, other international business models should be used. For instance, Porter’s five forces model helps to assess the risks and threats connected with potential competitors, buyers, suppliers, and substitutes. Nevertheless, the diamond model indeed is a good starting point.

Reference List

From idea to store: Production process n.d. Web.

Haberberg, A. & Rieple., A 2008, Strategic Management: Theory and Application, Oxford University Press, Oxford, New York.

Hill, C. & Jones, G. 2011, Essentials of Strategic Management, 3rd edn, Thomson South-Western, Mason, Ohio.

IKEA fed up with Russia’s Bureaucracy 2009. Web.

Madden, N. 2012, With Vivian Chen, H&M Is Adapting Western Fast-Fashion for China. Web.

Morschett, D., Schramm-Klein, H. & Zentes, J. 2015, Strategic International Management: Text and Cases, 3rd edn, Springer Gabler, Wiesbaden, Germany.

Reinert, K. A., Rajan, R. S., Glass, A. J. & Davis, L. S. 2010, The Princeton Encyclopedia of the World Economy, Princeton University Press, Princeton, New Jersey.

The IKEA Concept: Typically Swedish 2015. Web.

Your IKEA benefits n.d. Web.