Factor and Demand Conditions That Mould a Nation’s Corporate Strategies

1 January 2017

Does Porter fail to explain how the factor and demand conditions that mould a nation’s corporate strategies, business structures, and industrial clusters are established? What other theories and evidence might assist such an explanation? Porter explains what factor and demand conditions are, but he fails to explain how they are established. He defines then, and explains them in detail, but lack the most important aspect, which is how they are established.

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A theory like this is not of much use without the information about the way one can gain these advantages. Porter is always greatly praised for his great work in the management field and he does deserve some of this praise, but if he doesn’t manage to explain himself fully then maybe he is not as great as many people think. I will be going through Porter’s theory of national competitiveness and the diamond as well as the theory of national clusters. I will also then look at criticisms of Porter including Reich’s global webs and Dicken’s general criticism.

To be able to determine if Porter fails to explain how factors and demand conditions that mould a nation’s corporate strategies, business structures, and industrial clusters are established one first must understand his general theories on national competitiveness which tie in with his diamond. The determinants of national competitiveness and the 4 corners of the diamond are factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry.

Factor conditions are “the nation’s position in factors of production, such as skilled labour or infrastructure, necessary to compete in a given industry. ” (Porter, 1990) Demand conditions are the demand for the certain product or service in the home market. Related and supporting industries relates to the amount of supplier industries within the nation as well as other similar industries that are competitive on the international scale.

Finally, Firm strategy, structure, and rivalry refer to “The conditions in the nation governing how companies are created, organized, and managed, and the nature of domestic rivalry. ” (Porter, 1990) Below you can see Porter’s Diamond with the added aspect of government. It just shows the importance of the government in the development of national competitive advantage and how it has a role in every aspect of the diamond. [pic]

Porter states that these “determinants, individually and as a system, create the context in which a nation’s firms are born and compete: the availability of resources and skills necessary for competitive advantage in an industry; the information that shapes what opportunities are perceived and the directions in which resources and skills are deployed; the goals of the owners, managers and employees that are involved in or carry out competition; and most importantly, the pressure on firms to invest and innovate. ” (Porter, 1990)

Competitive advantage is gained ultimately when the “home environment is the most dynamic and the most challenging. (Porter, 1990) This in turn stimulates the firms to improve and expand their advantages over time. (Porter, 1990) Logically, Porter states that “Nations are most likely to succeed in industries or industry segments where the national “diamond”,…. , is the most favorable. ” (Porter, 1990) Not all firms will necessarily do well if the country has a good diamond. If it is very dynamic it could cause a problem for some firms because they might not all have access to the same skilled works or resources as other firms. In a very dynamic industry it is a kind of first come first serve.

The firms that act quickly will be able to pick up the skilled labour and high quality resources. The firms that do perform well on a national level will then most likely prevail on the international level as well for the reasons just stated, being labour and resources. Another important aspect of nation competitiveness is that only one of the 4 determinants is not enough. For it to be affect for a nation all four are needed but if the nation has one strong determinant it can possibly create advantages in the other 3.

Porter does mention that a nation with only 2 of the determinants, if in a natural resource or low sophisticated technology or skills industry, will still have an advantage, but will not be able to sustain it. These aspect are all key, but probably the most vital two are rivalry and cooperation within the nation. These tie in with Porter’s theory of industry clusters. The idea behind of rivalry and cooperation within a nation is that the rivalry will help drive the firms forward and the cooperation will also elp each firm be more competitive in the global market.

The firm may share ideas of production or new technological revolutions. This information would be shared within an industry cluster. “.. the fundamental source of the domestic industry’s global competitive advantage may well be domestic cooperation that ensures the collectivization of knowledge-a process that gives those individual enterprises within the domestic industry that share knowledge and ability to engage in continuous innovation. (Lazonick, 1991) Industry clusters are “geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions (for example, universities, standards agencies, and trade associations) in particular fields that compete but also cooperate. ” (Porter, 1979)

The importance and role of clusters, from Porter’s point of view is shown in this quote, “ In global competition successful firms compete vigorously at home and pressure each other to improve and innovate. “Only intense domestic rivalry can pressure such behavior. ” (Porter, 1990) Porter also states that, “loss of domestic rivalry is a fry rot that slowly undermines competitive advantage by slowing the pace of innovation and dynamism. ” (Porter, 1990) While Porter is convinced that industry clusters are the way forward he does have competition in the form of Robert Reich. Reich states that the national firm is becoming less important due to globalization.

Reich argues that the globalization of industrial competition has led to a global fragmentation of industry, thus making national industries and the national enterprises within them less and less important entities in attaining and sustaining global competitive advantage. ” (Lazonick, 1991) Porter had his idea of clusters, Reich had a concept call global webs. This is a “creation of a work force than can find high-paid employment in the ‘global webs’ of enterprise that are currently being spun around the world” (Lazonick, 1991) One of the examples Reich uses is that of the U.. A.

He says that “the standard of living of Americans, as well of the citizens of other nations, is coming to depend less on the success of the nation’s core corporations and industries, or even on something called the ‘national economy’ than it is on the worldwide demand for their skills and insights. ” (Reich, 1991) He uses the U. S. A. as an example here but says it is not the only country where this trend is occurring. “The trend is worldwide. National Champions everywhere are becoming global webs with no particular connection to any single nation. (Reich, 1991) Much of these global webs are occurring due to many nations imports and exports. “As American corporations increasingly produce or buy from abroad, and foreign-owned firms increasingly produce or buy from America, the two sets of global webs are coming to resemble each other-regardless of their nominal nationality. ” (Reich, 1991)

As I have mentioned before Porter’s view on this is quite the opposite. “…more open global competition makes the home base more, not less, important. (Porter, 1990) We see here the complete opposing views. Reich argues that increased national competitiveness will increase the need for global webs to be created whilst Porter’s view is that the home only becomes more important. Another person that criticizes Porter is Peter Dicken. There are three main area in which Dicken criticizes Porter. These are the fact that the diamond is to simple, he doesn’t consider the role of the state enough, and he does not take into account the affect of transnationalization of business activity on the diamond. Dicken, 2003)

Dicken explains Porter’s diamond theory as “highly reductionist” by “compressing immense complexity into a simple four-pointed diamond. ” (Dicken, 2003) Dicken does make a very solid point here. What Porter is trying to do is explain the factors of a nations competitiveness in a extremely simple way when the topic, national competitiveness, is not simple at all. “.. underplaying the role of the state in pursuit of national competitiveness” (Dicken, 2003) is a glaring hole in Porter’s analysis.

In the development and sustaining of any nation the state plays a key role. Dicken states, “All states perform a key role in the ways in which their economies operate, although they differ substantially in the specific measures they employ and in the precise ways in which such measures are combined. ” (Dicken, 2003) Porter’s original diamond did not even include government. There is a version of the diamond, which is pictured above, where government is included, but it is on the outside, thus not playing a key role.

The third, and final criticism is that Porter, “neglects the influence of the transnationalization of business activity on national diamonds” (Dicken, 2003) Dicken claims that there is enough evidence to prove the importance of transnationalization but Porter doesn’t take it into account. “There is ample evidence to suggest that the technological and organizational assets of TNC’s my be influenced by the configuration of the diamonds of the foreign countries in which they produce and that this, in turn, may impinge upon the competitiveness of the resources and capabilities in their home countries. (Dicken, 2003)

Porter does have many key ideas and theories and is a well respected management writer but there are also criticisms of him. From Reich to Dicken, they all have some problems with the ideas the Porter proposes especially with Porter’s theory of national competitiveness and his national diamond. Reich’s ideas of global webs counter Porter’s industrial cluster theory whilst Dicken sees many problems with the national diamond. Another key criticism is that Porter claims that factor and demand conditions are vital for a nations national competitiveness but he never states how they are established.

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