Porter Diamond Model: Advantages And Disadvantages For International Business Strategy Essay.

Describe the International Business Strategy.

Porter Diamond Model and its Four Key Determinants

There are several different theories and models that helps the business to understand their competitive position and analyse their external environment in the international markets. One of them is the Porter Diamond Model, which is also known as Porter Diamond Theory of National Advantage and Porters double diamond model (Wilson 2016). However, there are several business researchers and scholars who find this model to be not so useful concept in explaining home and host location strategies for the international companies. This paper shall elaborate on why this is the situation by determining both the advantages and the disadvantages of this model for the examination of the home and the host locations by highlighting the case of Marks & Spencer of United Kingdom and Adidas of Germany.  

Porter Diamond Model has been developed by Michael porter who claims that the competitiveness of a business is linked with the business performance. It is to note that he have used the concept of clusters of the similar groups of product in developing the Porter Diamond Model. In this product groups, there are some considerable competitive pressure (Ortega-Colomer, Molina-Morales and Fernandez 2016). The businesses within such clusters stimulate one another for increasing their productivity and fostering the innovation as well as improving the results of the business. With the same, they also have the advantage of moving well on the international boundaries as well as maintaining their presence and handling the international competition there (Fang et al. 2018). One of the best examples of such large clusters is the Hollywood film industry. However, it is to note that according to the Porter Diamond Model, the competitiveness of the nation is based on the potential of its industry to upgrade and innovate itself and therefore it is determined by the productivity level of the nation (E. Dobbs 2014). Considering the same from the organisational perspective, it simply means that the national competitive advantage of a company is based on the ability of the nation to supply it technology, quality and features for successfully competing in the highly productive industries globally (Kharub and Sharma 2017). Therefore, the significant advantage of Porter Diamond Model is that it identifies a total of four key determinants that are interrelated with each other and create an important national environment when the firms are born, develop, grow and build their sustainable competitive edge. These four determinants are- a) factor conditions, b) related and supporting industries, c) home demand conditions and d) strategy, structure and rivalry (Konsolas 2017).

According to Camagni (2017), factor conditions refer to the situation in a nation that is related to the factors of production such as the infrastructure and knowledge. These are some of the most appropriate elements for the competitiveness in some specific industries. However, these can be structured into different knowledge resources; material resources such as the human resources like qualifications, commitment and the labour cost; and infrastructure. For example, Adidas was initially a private company but when it decided to expand itself in international market, high amount of capital resource was necessary for it to go public for supporting itself financially. However, it is also to mention that they also comprise of the liquidity on the stock market and the quality of the research as well as the natural resources such as minerals, climate and oil which be the reasons for the creation of international competitive edge for a company.

Advantages of Porter Diamond Model for International Business Strategy

The next determinant is that of the related and the supporting industries. It is to note that the success of any market depend on the presences of the potential suppliers and the other related industries within a particular area. It is the suppliers whose competitiveness reinforce the internalisation and innovation. Along with this, the other related organisations are important as well. The success of the company is beneficial for the other related organisations and they can benefit from the know-how of one another and could also encourage one another by means of production of complementary products (Fang et al. 2018). One of the best example to consider in this context is that of Marks & Spencer, which, because of strong competitive market, has pressed its suppliers to about 1.25 percent turnover contribution with the group that claim their growth on the basis of retail sales. Therefore, the suppliers do not have any other option other than accepting the terms.

The third determinant of Porter Diamond Model is the home demand conditions. In this determinant, the key question is- what are the reasons that are there for a successful market? What is the nature of the very market? What is the size of the market? It is to note that there is always an existence of an interaction in between the cost of transportation, the size of the home market as well as the economies of the scale (Huttasin, Mommaas and Knippenberg 2015). This provides several advantages to the other firms to service the market from one location. For instance, Adidas after splitting from Puma created a new way of shopping where the customer can buy everything from footwear, accessories and apparel from different top brands like Reebok, Runtastic etc.

The fourth determinant is that of the strategy, structure and rivalry. It is linked to the manner by means of which a company is managed and organised, its organisational objectives as well as the measure of the level of competitiveness or rivalry in its own organisational culture. It emphasize on the conditions in a nation which determines where it would be formed (Fainshmidt, Smith and Judge 2016). It is also to mention in this context that the cultural aspects of the country in which the company is planning to expand its business plays a very crucial part in this. The regions, countries and provinces might differ greatly from each other. For example, in the late 1990s, the Europe expansion of Marks & Spencer had failed due to the fact that the company was implementing its tries and tested UK strategy with a powerful emphasis on no localisation and British brand (Notteboom and de Langen 2015). With the same, the factors like the working morale, the level of interactions in between the companies and the management process are also shaped in different ways in different cultures. This could offer both advantages and disadvantages for the firms in different situation during the setting up of the company in other nation. As per Michael Porter, continuous search of competitive advantage and the domestic rivalry within a country could help an organisation to attain advantages on global scale.

Disadvantages of Porter Diamond Model for International Business Strategy

The Porter Diamond Model helps an organisation to identify the factors that could build advantages in national context. It emphasis on how the home locations influence the firms in the process of their growth and development of competitive edge, for example, how their home nation prepares them for the process of internationalisation (Fainshmidt, Smith and Judge 2016). Therefore, it is to state that the Porter’s diamond model helps the firms in identifying the home-based advantages and then in exploiting them in the foreign markets. According to Michael Porter, all the above mentioned determinants are very conclusive for the competitiveness of a firm in regard to its foreign competitors. By taking into consideration all these determinants, a firm would be better able for formulating one strategic goal. There are several companies who may find the necessity of redefining and rediscovering their core competencies at the home country such as Marks and Spencer. Markers and Spencer is one of those companies, which have withdrawn all its US and EU stores in the starting of the new millennium for focusing on its key market- the United Kingdom. However, it has very recently started an expansion once again.

However, although the model has different advantages of its own for the internationalisation of companies in international borders, there are several disadvantages of it as well. These disadvantages proves that it is not that useful concept in explaining home and host location strategies of international companies (Tsiligiris 2018). It is to note that this model does not mention the influence of governments and the opportunities, although they are taken into consideration in Michael Porter’s book. Government has a very strong influence on every company, whether it be in national boundaries or international one. Factors such as trade barriers, incentives and governmental regulations etc. affects the business operation of each and every company, especially in the emerging economies (Deresky 2017). The government plays a significant role in the emerging economies in this contemporary world and it also plays a key role in factor creations such as infrastructure, education and health care. With the same, it also can have a strong impact on the process of internationalisation of different companies. For example, for the part of Marks and Spencer, they can consider this factor in its expansion in China as for the business protection of its nation, the government hardly permit the use of wholly owned subsidiaries. It should engage itself in joint venturing with the Chinese companies that is the only way to enter into the Chinese market. It is also to state that this model does not consider culture as one of the significant drivers, although it is one of the most significant factors that determine a country as well as its way of conducting business. As per Hwang and Seo (2016), culture influence both the needs of the customers as well as the demand conditions such as the food habits of the customers. For instance, the customers in United States prefer fast food a lot. With the same, it is also to state that cultural differences and cultural implications is required to be taken into consideration while expanding business in foreign countries to see whether or not there is any possibility of the transformation of identifies needs at home or whether localisation is necessary. In order to assess the cultural impacts, the companies could make use of Hofstede’s dimensions.

Case Studies: Marks & Spencer and Adidas

It is also to mention that for a clear understanding of the host and home location, this model is just a starting point of the environmental analysis. It should be followed by a much more thorough research on the meso level such as the Porter’s five forces and the competitor analysis. Although, these are time consuming and costly, they are indeed very necessary for the making of right decision (Jarungkitkul and Sukcharoensin 2016). This is because location is very important for a successful international expansion. Hence, more additional models needs to use for gathering a more in-depth and more purposeful information.

Hence, from the above analysis, it is to conclude that Porter’s Diamond model, though include almost every significant determinants in the analysis of the competitive position and external environment for a company, is not that useful concept in explaining home and host location strategies of international companies. It is basically used by the companies for internationalising and for defining the correct location in abroad in regard to institutional and cultural fit along with various different opportunities for success but is not very advantageous for the foreign companies to gather knowledge on the location strategies as it does not consider culture and government as the influential determinants.   

References:

Camagni, R., 2017. Regional competitiveness: towards a concept of territorial capital. In Seminal Studies in Regional and Urban Economics (pp. 115-131). Springer, Cham.

Deresky, H., 2017. International management: Managing across borders and cultures. Pearson Education India.

Dobbs, M., 2014. Guidelines for applying Porter's five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), pp.32-45.

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

Fang, K., Zhou, Y., Wang, S., Ye, R. and Guo, S., 2018. Assessing national renewable energy competitiveness of the G20: A revised Porter's Diamond Model. Renewable and Sustainable Energy Reviews, 93, pp.719-731.

Huttasin, N., Mommaas, H. and Knippenberg, L., 2015. TOWARDS TOURISM DEVELOPMENT OF THE ISAN REGION, NORTHEASTERN THAILAND. International Journal of Asia-Pacific Studies, 11.

Hwang, J. and Seo, S., 2016. A critical review of research on customer experience management: Theoretical, methodological and cultural perspectives. International Journal of Contemporary Hospitality Management, 28(10), pp.2218-2246.

Jarungkitkul, W. and Sukcharoensin, S., 2016. Benchmarking the competitiveness of the ASEAN 5 equity markets: An application of Porter’s diamond model. Benchmarking: An International Journal, 23(5), pp.1312-1340.

Kharub, M. and Sharma, R., 2017. Comparative analyses of competitive advantage using Porter diamond model (the case of MSMEs in Himachal Pradesh). Competitiveness Review: An International Business Journal, 27(2), pp.132-160.

Konsolas, I., 2017. The competitive advantage of Greece: an application of Porter's diamond. Routledge.

Notteboom, T.E. and de Langen, P.W., 2015. Container port competition in Europe. In Handbook of Ocean Container Transport Logistics (pp. 75-95). Springer, Cham.

Ortega-Colomer, F.J., Molina-Morales, F.X. and Fernández de Lucio, I., 2016. Discussing the concepts of cluster and industrial district. Journal of technology management & innovation, 11(2), pp.139-147.

Tsiligiris, V., 2018. An adapted Porter Diamond Model for the evaluation of transnational education host countries. International Journal of Educational Management, 32(2), pp.210-226.

Wilson, P., 2016, May. The Impact of Culture on Cluster Competitiveness: a Revised Diamond Model. In Clusters as a Driving Power of the European Economy (pp. 162-175). Nomos Verlagsgesellschaft mbH & Co. KG.