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Making Sense Of Strategy: Porters Diamond Model

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Question:

Discuss about the Making Sense of Strategy for Porter’s Diamond Model.

 

Answer:

Introduction

Competitiveness refers to the ability or performance of an organization, sector or country to supply products and services in relation with other firms, sectors or countries. The application of Porter’s Diamond model of National Advantage helps in assessing, comparing and contrasting the competitiveness of Saudi Arabia to that of China. Further, using China as a benchmark, recommendations are provided for improving the competitive advantage of Saudi Arabia (Fainshmidt, Smith and Judge 2016).

According to Zhang and London (2013), diamond of National Advantage is a framework created by Michael Porter in which a country can create endowments such as advanced technology, skilled labour, government support and wide knowledge base. BRICS is an acronym for five emerging national economies namely Brazil, Russia, India, China and South Africa. There are four determinants of national competitive advantage.

Firstly, factor conditions are the resources such as skilled labour, infrastructure and technological base that are the factors of production. In China, the workers are mostly college-educated. The country relies on cheap labour as they mainly export to countries such as Hong Kong, Japan, Korea and the USA. The low-cost skilled employees with necessary experience, aptitude and proficiency help China to compete in the global market. China is slowly undertaking and has minimized the gap between their technological approach and global advanced level. China invests in massive infrastructure which makes the economy reliable with roads, telecommunications and electricity (Newman, Thanacoody and Hui 2011). These factors make China a highly competitive nation in the business value chain. According to Jones and Omran (2015), about 85% of the workers are low-skilled in Saudi Arabia. The country mostly depends on imported labour force and is a home for over 10.4 million expatriates (Jones and Omran 2015). This makes the labour costly in the country in comparison with China, which is cheaper in China. Further, Saudi Arabia is one of the countries which is investing in technological development for achieving its long-term vision and competitive advantage. There are significant opportunities in the infrastructural projects for road, rail and telecommunications. Like China, Saudi Arabia is trying to minimize the competitive gap through investments in factor determinants (Al-Otaibi et al. 2015)

Secondly, demand conditions are the level of home market demand for a particular product or service. China exports several products such as machinery, rubber, textile, minerals and electronic products. The demand from the USA, European Union, North America, Hong Kong and various other countries. However, the economic slowdown has reduced the demand for steel, coal and other metals. China imports plastic materials, transport equipment, fuel materials and chemical products as they are heavily demanded in the home market (Pi and Curran 2016). Saudi Arabia has the largest reserve of natural gas that adds to the competitiveness of the country. Further, other products such as foodstuffs, chemicals, textiles and other equipments are mainly imported by the country as it is heavily demanded by the residents. However, in the recent years, the competitive advantage obtained from oil reserves is declining. The oil revenue is declining as it is a non-renewable source of energy which is depleting with time. This is poor in comparison with China as the country experiences increase in steel trade. The ambitions set by Saudi Arabia are claimed unrealistic due to lack of infrastructure, poor planning and manpower (Cook 2016).

Thirdly, related and supporting industries helps the firm enjoy greater cost advantage and innovative inputs. The supporting industries cover tools, machines, components, parts, logistics, distribution, insurance and various other services which emphasize the manufacture of finished products. The supporting industries in China add to the advantage of cheap labour, large market and mass production. The sales in China have increased exponentially due to the privatization of distribution channels. The organizations are conducting marketing activities beyond their cities for meeting increased demand. The Chinese government invests in building a logistics infrastructure but the limit on truck sizes at certain points of day act as hindrance for logistics optimization. However, there is a scope for decentralizing the distribution networks for streamlining the processes (Liu, Lovely and Ondrich 2012). On the other hand, Saudi Arabia serves as an opportunity as well as a challenge for foreign businesses. There are various marketing regions in the country which is beneficial for different regions. Saudi Arabia does not practice much of direct marketing. There are not many facilities such as home delivery or postal insurance. In comparison with China, it is observed that Saudi needs to develop the related and supporting industries. There is a need to increase private sector participation in the economic development. There are isolated industries more than the clustered ones in Saudi Arabia in comparison with China (Rahman et al. 2012).

 

Lastly, firm strategy, structure and rivalry are important determinant of competitiveness in which the companies determine the nature of domestic rivalry. The domestic strategy plays a crucial role in influencing the strategy of the firms. The management structure is different for all industries. The presence of strong rivals help in improving quality, create product innovations and lower the costs. China provides several opportunities to the multinational companies for economic development. The local players in the Chinese market have a great stage to offer intense competition to the global players. The local players are continually improving the quality of the products. Not only quality, but the suppliers offer cheaper products made by the domestic companies (Brekelmans 2013). In Saudi Arabia, the government plays a crucial role as the oil economies play a central role. The management structure is based on hierarchical lines with strong power held by the seniors. However, in case on China, the join-venture strategy is found the most appropriate to do business and develop good relations with the country. Saudi Arabia businesses require significant time an effort to build strong business relationships (Liu, Lovely and Ondrich 2012).

Overall, it is observed that Saudi Arabia is one of the wealthiest nations in the world. The main product exported in Saudi Arabia is oil where the government supports free trade economy. Saudi Arabia is the natural choice for all the investors in energy-based industries. The government offer high standard of living and financial incentives to the expatriate and other professionals from across the world. However, there is a need to adopt a few strategies that would help the country in enhancing global competitive advantage (Ramli and Twaha 2015).

As a strategy and policy advisor, China is used as a benchmark for developing and improving the competitive advantage of Saudi Arabia. Firstly, capital control policy may be levied by the government in which the foreign capital is limited for inflow or outflow from the domestic economy. Capital must be enabled for the most efficient places. As Saudi Arabia has the highest oil reserves, capital can enable both investors and stakeholders. The economy can also diversify its production base through technological advantage. The real exchange rate pressures shall help in controlling capital inflow. Competition can be increased by investment subsidies and grants. New product development can be made. The low interest rate in the country shall also encourage investment. Tax relief on investments shall enable people to make greater investments (Chang, Liu and Spiegel 2015).

Secondly, foreign direct investment can also offer a certain degree of control in the invested funds. As Saudi Arabia has free trade, like China, the country must establish joint venture firms where the ratio of ownership is divided. The public money can be used to educate people, prepare skilful workers and develop corporate finance. FDI strategy can be used to attract the national institutions to promote investment. For achieving such objectives, the country needs a diversity and variety in advertising, telemarketing and trade fairs. The related and supporting industries need to be developed as seen in case of china for effective capacity building (Chang, Liu and Spiegel 2015).

Thirdly, protectionist policy may be applied for restraining trade between states. Several methods such as restrictive quotas, tariffs on imported goods and others as in case of China may be applied. Saudi Arabia is a member of several global trade organizations who have signed free trade agreements with Singapore and few other countries. With the application of trade policies such as tariffs and quotas shall help the reduction in imports. The higher price of imported products shall enable the companies to manufacture and devise technologies to manufacture products in their own country (Tirado et al. 2013).

Lastly, antitrust and competition policies may be adopted by Saudi Arabia for innovation and dynamic improvement. Antitrust policy in Saudi Arabia shall help in maintaining efficacies. The policy shall help the firms and industries from exerting undue control in the market that would encourage anti-competitive behaviour. Not only domestic rivals, but the foreign companies such a Scottish Power, British Gas, Eon and others shall not be unfairly treated (Tirado et al. 2013).

Conclusively, the strategies can help Saudi Arabia in improving the competitive advantage by keeping China as a benchmark. The shortcomings stated in the industrial structure for competitiveness can be minimized by using the above policies.

 

References

Al-Otaibi, F., Faleh Alharbi, M. and Almeleehan, A., 2015. Effect of Total Quality Management Practices Factors on the Competitiveness: Evidence from Saudi Arabia. International Journal of Business and Management, 10(5).

Brekelmans, M., 2013. Global industrial firms face domestic rivals head on | CER. [online] Chinaeconomicreview.com. Available at: <https://www.chinaeconomicreview.com/china-manufacturing-global-domestic> [Accessed 9 Nov. 2016].

Chang, C., Liu, Z. and Spiegel, M., 2015. Capital controls and optimal Chinese monetary policy. Journal of Monetary Economics, 74(1), pp.1-15.

Cook, J., 2016. The Huge Challenges Ahead For Saudi Arabia’s Oil Reforms. [online] The Huffington Post. Available at: <https://www.huffingtonpost.com/entry/saudi-arabia-economic-reform-plan_us_571fbfb4e4b0b49df6a95e52> [Accessed 8 Nov. 2016].

Fainshmidt, S., Smith, A. and Judge, W., 2016. National Competitiveness and Porter's Diamond Model: The Role of MNE Penetration and Governance Quality. Global Strategy Journal, 6(2), pp.81-104.

Jones, R. and Omran, A., 2015. Saudi Arabia Puts Squeeze on Foreign Workers. [online] WSJ. Available at: <https://www.wsj.com/articles/saudi-arabia-puts-squeeze-on-foreign-workers-1425683630> [Accessed 8 Nov. 2016].

Liu, X., Lovely, M. and Ondrich, J., 2012. Does Final Market Demand Elasticity Influence the Location of Export Processing? Evidence from Multinational Decisions in China. The World Economy, 36(5), pp.509-536.

Newman, A., Thanacoody, R. and Hui, W., 2011. The impact of employee perceptions of training on organizational commitment and turnover intentions: a study of multinationals in the Chinese service sector. The International Journal of Human Resource Management, 22(8), pp.1765-1787.

Pi, X. and Curran, E., 2016. China’s Exports Jump Most in a Year, Boosting Growth Outlook. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/news/articles/2016-04-13/china-s-exports-rebounded-in-march-boosting-growth-outlook> [Accessed 8 Nov. 2016].

Rahman, F., Rehman, S. and Abdul-Majeed, M., 2012. Overview of energy storage systems for storing electricity from renewable energy sources in Saudi Arabia. Renewable and Sustainable Energy Reviews, 16(1), pp.274-283.

Ramli, M. and Twaha, S., 2015. Analysis of renewable energy feed-in tariffs in selected regions of the globe: Lessons for Saudi Arabia. Renewable and Sustainable Energy Reviews, 45(1), pp.649-661.

Tirado, D., Pons, J., Paluzie, E. and Martínez-Galarraga, J., 2013. Trade policy and wage gradients: evidence from a protectionist turn. Cliometrica, 7(3), pp.295-318.

Zhang, P. and London, K., 2013. Towards an internationalized sustainable industrial competitiveness model. Competitiveness Review, 23(2), pp.95-113.

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