Porter also discuss about the clusters in the article. The diamond creates an environment that promotes clusters of competitive industries. Competitive industries are not scattered without a reason throughout the economy, but are usually linked together through vertical (buyer – seller) or horizontal (common customers, technology, channels) relationships. They usually tend to be concentrated on geographically. Porter says that once the cluster forms, the whole group of industries becomes mutually supporting and the benefits flow forward, backward and horizontally in the cluster.
At the end of the article Porter focuses on company agenda. He says that competitive advantage arises from leadership that harnesses and amplifies the forces in the diamond to promote innovation and upgrading. Porter gives some examples of company policies that will support that effort.
At the first he advises companies to create pressure for innovation. He says that company should seek out the pressure and challenge, not avoid them. Second policy that Porter introduces is to seek out the most capable competitors as motivators. Porter explains that by saying that to motivate organizational change, capable competitors and respected rivals can be seen a common enemy. The third policy introduced is to establish early-warning systems. According to the article early-warning signals can be translated into early-mover advantages. The fourth policy includes the improvement the national diamond. Porter says that a part of a company’s responsibility is to play an active role in forming clusters and to work with its home-nation buyers, suppliers, and channels to help them upgrade and extend their competitive advantages. Porter’s fifth policy in the article welcomes domestic rivalry. According to author, to compete globally, a company needs capable domestic rivals and strong domestic rivalry. The sixth policy advises company to globalize in order to tap selective advantages in other nations. Porter says that adopting a global perspective is important to creating competitive advantage, but relying on foreign activities that supplant domestic capabilities is always a second-best solution. Porter continues and says that the aim should be to upgrade home-base capabilities so that foreign activities are selective and supplemental only to over-all competitive advantage. The seventh issue discussed is the use of alliances. Porter advises companies to use alliances only selectively. He says that alliances produce significant costs and these costs ultimately make most alliances short-term transitional devices, rather than long-term relationships. The last policy introduced advice multinational companies to locate the home base to support competitive advantage. According to the article, among the most important decisions for multinational companies is the nation in which to locate the home base for each distinct business. This is based on an argument, in which it is said that a company can have different home bases for different businesses or segments.
The article ends with a part in which Porter discuss about the role of the leadership. He says that today’s competitive realities demand leadership. According to the author, leaders believe in change; they energize their organizations to innovate continuously; they recognize the importance of their home country as integral to their competitive success and work to upgrade it.
2.2 Porter’s Competitive Advantage by Nations: an assessment of Robert Grant
In the article, Porter’s competitive advantage of nations: an assessment, Grant assesses Porter’s book competitive advantage of nations. The point of this article was to analyse what new Porter’s work has to add to the theory of international economics and strategic management. Grant thinks that Porter’s book bridges the gab between strategic management and international economics while contributing substantially on both. He also says that the book broadens the scope of the theory of competitive strategy to encompass both the international dimension and the dynamic context of competition. He founds Porter’s work to be notable because it broadly analyses the national level influences on firms’ and nations’ competitive performance on international level. Porter’s book contrasts with recent work of international trade area, but is in line with the traditional theory. Most import is Porter’s emphasis upon dynamic determinants of competitive advantage particularly through innovation and investment in more complex factors of production. Porter’s analytical framework provides a cogent explanation of competitive advantage within different industries and countries and also brings together the tree important levels: the firm, the industry and the nation.
According to Grant the breadth and relevance of Porter’s theory do not come costless. The ambitious theoretical and empirical sweep of the analysis has been achieved at the expense of precision and determinacy. For example the concept upgrading of competitive advantage is ill-defined and the element of the diamond and their relationships are indeterminate. Grant thinks that in this analyse there is a general failure to perfectly reconcile micro-level analysis of competitive advantage of firms and industries with macro-level analysis of national development and prosperity (e.g. inconsistency in defining and measuring competitive advantage at industry and national level).
Grant thinks that the result is a theory, which is gloriously rich but hopelessly intractable and there are shortcomings both in theory, exposition and empirical analysis. The key weakness is that predictions are hard to do based on Porter’s theory. Grant also claims that the empirical data has been chosen selectively and interpreted subjectively
2.3 Internationalising Porter’s Diamond by John Dunning
This article Internationalising Porter’s Diamond argues that Porter underestimates the significance of the globalization of production and markets in his work about competitive advantage of nations. Dunning says that there is increasing interaction and networking cross-borders. He argues that the cross-border value added activities by multinational companies have influence indirectly and directly on each of the components of the diamond of national competitive advantage. In the article Dunning tries to analyse how globalization of economic activity affects the competitive advantages of individual nation. The article also explores the nature and form of networking and how recent technological developments and regional interactions have increased the interdependence of economic activity between the leading industrial nations in the world.
Dunning thinks that the significance of globalization for individual country will depend on how important international transactions are (compared to national transactions), the kinds of assets and products are traded and the modality of international economic involvement. He distinguishes six features of the global economy, which are the following: 1. In global economy value generating assets are increasingly taking the form of created assets (e.g. human capital). The competitive advantages of countries are coming to depend on the countries’ ability to effectively use and increase these assets. 2. These assets are intangible and firm or ownership specific and do not belong to country. 3. The role of multinational enterprises (MNEs) is increasing. This is because it is in the interest of domestic domicile firms to use the created assets and to generate new assets in a foreign country, or to acquire assets e.g. by acquisition or alliance, by using foreign domiciled firms. 4. Increasing part of the assets of firms of a particular country is either acquired from or are located in another country. The crowing cross-border networking through strategic alliances, international subcontracting and other cooperative arrangements is further undermining the concept of national firm specific diamonds. 5. The role of government needs to be re-evaluated as a result of globalization of the world economy. 6. Increasing competition between countries over the same resources and markets.
Considering these points almost all the factors in on Porter’s domestic diamond have to be reconsidered. The pattern of the diamonds of countries will differ according to the extent and form of the involvement of the country in question in the global economy. Dunning argues that Porter put too little emphasise on the international influence and underestimated the influence of the MNEs. Dunning suggests that the national diamond should be replaced with supernational diamond because of the increasing integration between countries. In this case, national political borders become meaningless and the competitive advantage of a country can be influenced by factors outside a country’s home diamond. The principle is the same, but the geographical constituency has to be established on different criteria when taking about the supernational diamond.
2.4 The Double Diamond Model of International Competitiveness: The Canadian Experience by Alan Rugman and Joseph D’Cruz
The point of view in this article is that Porter’s diamond framework explains the success of US, Japanese, and EC-based multinational corporations, but it is not applicable to small, open, trading economies. Rugman and D'Cruz show that Porter’s home country diamond does not explain Canada’s international competitiveness. Also some other researchers have noticed this problem when trying to apply Porter’s model to e.g. New Zealand, and Korea. Rugman and D'Cruz argue that the over 90 % of the world’s nations potentially cannot be modelled by the Porter diamond.
The authors suggest that substantial modifications of the Porter framework are required to analyze the nature of Canada's successful resource-based multinationals, foreign subsidiaries and institutional arrangements, such as the Canada-US Free Trade Agreement. In order to do this Rugman and D'Cruz present a new “double diamond” framework. In this model Rugman and D'Cruz propose that since Canada in already economically highly integrated with U.S., it should use “The North American” diamond when trying to determine or improve Canada’s international competitiveness. This means that Canadians should view the U.S. market as a home market, not just an export market. Canadian owned multinationals have competitive advantages derived from attributes of the U.S. or other foreign diamonds, rather than the Canadian diamond alone. It is also said in the article that each country needs to set its own home-country diamond against the relevant triad diamond. In general, most Asia-Pacific nations will set theirs against Japan. Canada, Mexico, Latin America, and most Caribbean countries will consider theirs against the US diamond. European nations outside of the EC will set theirs against the EC.
The authors also criticise that the elements used in Porter model are hardly new or unexpected. The only contribution is bringing them together. Rugman and D'Cruz criticise the data and how it is presented. The main points were Porter flaws according to Rugman and D'Cruz is the narrow definition that he applies to foreign direct investments (FDI) and the flawed understanding of the nature of two way FDI (ignoring the role of inbound foreign direct investment). They also criticise how Porter handles imports and exports and multinational activities. According to them their double diamond framework would treat these above-mentioned attributes more correctly.
2.5 Porter’s Competitive Advantage revisited by Nicholas J. O´Shaughnessy
The article, Porter’s Competitive Advantage revisited, written by Nicholas J. O´Shaughnessy gives new views to Porter’s book Competitive Advantage of Nations. The author agrees on some issues with Porter but he also presents criticism.
According to O´Shaughnessy, the key criticism of Porter is his inattention to the cultural dimension, which the author sees as a significant omission. The author argues that Porter ´s work is overly facile in its willingness to fall in with the national stereotypes without the type of empirical support necessary for statistical generalization. In the article O´Shaughnessy sarcastically says that Porter views national culture as changeless artifact. He continues by saying that even though Porter credit national culture with certain amount of explanatory power; Porter tends to avoid discussing it in any depth. O´Shaughnessy also discovers that the role of history in a specific country is neglected.
The second significant criticism covers developing countries. O´Shaughnessy says in the article that Porter’s arguments are formed almost entirely with reference to developed countries. The author argues that, for instance, university education is not very significant factor in countries where most of the population is illiterate. He continues by addressing that the real problems in developing countries are located in politics and culture.
The third point of criticism is the role of government. The author argues that in the Porter’s work lacks of specificity. While some contributors to competitive advantage e.g. university research are well defined, Porter disregards others. From O´Shaughnessy point of view it seems that Porter wants to remove government from direct arbitrament in industry as far as possible. He also thinks that Porter seems to ignore the nature of the many political imperatives that lead away from state spending on key “factors” that might have aided in the creation of competitive advantage. As an example of this O´Shaughnessy uses agriculture, which is in many cases heavily subsidized directly from government and indirectly by customers. He argues that governments are often pressured by lobby groups. That is a reason why governments are sometimes incapable of making the strategic choices necessary to support and sustain competitive advantage.
O´Shaughnessy sees that Porter’s book is a significant piece of work, but it also has its limitations. According to the author of the article the subject is so extensive that it cannot be covered in one book. He also says that the criticism of Porter’s book is not that Porter has made an error, but that his thesis is incomplete. O´Shaughnessy is worried that any populist universalist explanation is accepted uncritically and applied mechanically. He thinks Porter’s view encourages the belief that problems are soluble exclusively through economic policy measures. O´Shaughnessy wants to reverse that view by emphasizing the role of history, politics and culture in determing competitive advantage.
2.6 Assessing Porter’s framework for national advantage: the case of Turkey by Özlem Öz
Öz’s study applies Porter’s diamond framework in order to identify the competitive advantage of Turkey. The objective in the article is to apply the diamond model to a developing country (Turkey) and determine whether the diamond can be used to analyse the sources of advantage or disadvantages in an uncompetitive industry. (Both of these areas in Porter’s model have been heavily criticised.) The article also aims to analyse the competitive structure of the Turkish industry. In the article Öz also goes thoroughly through the criticisms that Porter’s model has faced.
Öz’s review of literature reveals that Porter’s model has been criticised among all of the following aspects: lack of formal analytical modelling, originality of the framework, not paying enough attention to modern trade theory and the national culture, methodology (heavy dependence on world export shares as a measure of international competitiveness, inadequate treatment of the relatively less competitive industries, treatment of multinational and foreign direct investment), the categories of the diamond and the role of government.
In the article Öz has selected few cluster, both competitive and uncompetitive, in Turkey and examines these cluster by using the diamond framework. The findings are generally supportive to Porter and the findings can be explained through Porters diamond. However, the results suggest some major areas in the Porter’s framework where one or more of the Turkish case studies contradict Porter hypothesis. These areas are domestic rivalry and the role of government. For example the Turkish glass and steel industries have no domestic rivalry and still the industries are internationally competitive. Also the role of Turkish government has been quite direct when these above mentioned industries are in question.
Öz raises a question, based on his study, weather or not some industries are better explained by the diamond. He carefully suggests that it is possible that the diamond framework could work better when we analyse industries that are closer being perfectly competitive. As some other scholars also Öz finds Porter’s treatment of MNE and FDI inadequate.
In summary, most of Öz’s findings support Porter’s framework. His study also shows that, at least in this case, the framework can be applied to developing countries and it can be successful in explaining the sources of disadvantage in a relatively uncompetitive industry.
3 Synthesis
3.1 Overview
Our goal in this article review is to analyse Michael Porter’s article Competitive Advantage of Nations by comparing it to the articles, which have been written after Porter’s work was published. These articles on the other hand agree with Porter view, but also heavy criticism has been brought out. Most of the articles are based on Porter’s book Competitive Advantage of Nations, which has much wider perspective to the issue than the article that Porter has written about the same topic. That is the reason why in this synthesis we could not analyse so deeply all the issues that other authors have dealt with.
In general this topic is very wide and this framework “Competitive Advantage of Nations” combines several topics that Porter has searched in his previous work. In the book Porter has thoroughly analysed all the aspects of his framework and because the topic is so wide the book has grown up to over 800 pages. For example the areas that are explained in the book, but not analysed in the article are foreign direct investments (FDI) and multinational enterprises (MNE). These areas are heavily criticised in compared articles, but because we did not have possibility to familiarize with the original view of Porter, we do not dissect it in our synthesis.
All the authors of reviewed articles agree with the fact that Porter’s work is significant in some extent, but they all find some issues, which need improvements. In our opinion, Porter’s work is significant indeed, but we also found several points that should be reconsidered.
3.2 Diamond of National Advantage
Competitive advantage of nation consists of several different factors. There are many different theories in this area starting from traditional macro-economicaltrade theories, going all the way to modern views of competitive advantage of nations. As Porter says there are four country-specific determinants: factor conditions, demand conditions, related and supporting industries and firm strategy, structure and rivalry. These four determinants affect each other and work together so that, according to Porter, they build the diamond of competitive advantage. There are also two external factors: change and government, which have significant affects on four determinants and that way they influence the way how the model works.
We think that the fourth determinant (firm strategy, structure and rivalry), comparing it with three others, is not very consistent. It contains several different issues concerning both firm’s external and internal factors. It gives the impression that in the last category all the issues that have not fit anywhere else have been put there and they do not build a logical entirety. Some authors have also pointed out the same issue.
Without doubts government has a role in the nation’ s competitive advantage. The problem is that different authors see government’s role several ways. Porter thinks that government should be supporting to create the environment, which encourages firms to gain competitive advantage. He says that government should avoid subsidiaries, protection and arranged mergers. According to Porter the role of government should be more indirect than direct. Nowadays it seems like, countries want to protect their producers and markets in several ways, even though, for instance European Union as well as other free trade unions, speak for free trade. Free trade seems to have its pros and cons. It increases the wealth of the nations, but it can be problematic for some industries. For example, in Finland without subsidiaries Finnish agriculture may not survive in international competition. Another example is Turkey, where government has had direct and active role in supporting the flat steel and glass industry, which seem to be competitive worldwide.
Change has an important role in developing the competitive advantage. This is due of the fact, that change forces companies to innovate and make continuous improvements. From this point of view, we can assume that only the countries that are capable to keep up with the changes or even better; to “create” changes are internationally competitive.
3.3 Model Modifications
Porter’ s model seems to cover several issues affecting competitive advantage of nations. However it seems that there are also some other factors outside the model that have significant impacts to competitive advantage. These factors include e.g. globalisation, cultural aspects and history of the nation.
Globalisation is introduced by several authors. They think that competitive advantage cannot be defined merely on the basis of national factors. National competitive advantage is founded more and more on international environment. For instance, according to Dunning, national diamond should be replaced with supernational diamond, because of the increasing integration between countries. Also multinational companies and alliances have effect to competitive advantage. Finnish firms, can, for instance, acquire assets from other country. Also the issue of integration between independent countries is problematic, when we discuss Porter’s model. For instance, can we say that rivalry in Finland effects more to a Finnish firm than rivalry in European Union? Or has European Union any effect to Finland’ s competitive advantage at all?
Globalisation also gives new perspective to government’ s role. In this integrated world, country is not able to decide on every issue influencing itself. Many decisions influencing Finland are made in Brussels these days so Finland does not have power to decide on every issue concerning factor condition directly.
Another huge omission in Porter’ s model is the lack of cultural aspects. Porter has made several assumptions about certain people. He has stereotyped nationalities: Germans are efficient, Swiss are precise and Italians are great designers. Culture is much more than just traditional stereotypes and it changes over time. Cultures cannot be ranked and they cannot be valued only on the basis of economical standards. The values of human beings come from the cultural background and history of the country. These aspects determine which issues in a country are being emphasized and admired. For instance, Germans and Japans have faced militarism in the past. That may have created discipline labour force and highly technical demands industries. These aspects can be seen as competitive advantage of these nations.
3.4 Conclusion
When we think about the factors that affect competitive advantage of nation, inevitable conclusion is that the model becomes wide and complex. After Porter has published his work of “National Diamond”, several authors have proposed that new determinants should be added to the model. The reason for that is that the effects of the determinants in Porter’ s model and the relationships between them are not black-and-white. Some of the effects are self-explanatory and there are several exceptions in many cases. This arises the question how well Porter’s model or any other model altogether can be applied to all situations.
There have been attempts to apply the model in the practise in several countries. In some cases the model works and gives good framework when trying to determinate competitive advantage of some nations, but in some other cases it seems to fail in this attempt. For instance, developing countries are not taken into account in Porter’ s research. O’Shaughnessy (1996) argues in his article that Porter’ s model is specific to the West. On the other hand, there is a recent study where Porter’s model has been quite successfully adapted to explain competitive advantage of developing country (Turkey). The study shows that Porter’ s model can be applied to analyse the sources of advantages or disadvantages in an uncompetitive industry. As a conclusion, we can say that the model’ s ability to analyse competitive advantage of nation is case-specific. There is indeed a need for wider empirical research, before we can be sure that using this kind of model can assure competitive advantage for nations.
REFERENCES
Dunning, J. 1993. Internationalizing Porter’s Diamond. Management International Review. Vol.33, Second Quarter, s.7-15
Grant, R. 1991. Porter’s Competitive Advantage of Nations: an assessment. Strategic Management Journal. Vol.12, Issue 7, s.535-548
O´Shaughnessy N. 1996. Michael Porter’s Competitive Advantage revisited. Management Decision. Vol. 36, Issue 6, s.12-20
Porter, M.1990. Competitive Advantage of Nations. Harvard Business Review. Vol.68, Issue 2, s.73-93
Rugman, A. & D´Cruz, J. 1993. The “Double Diamond” Model of International Competitiveness: The Canadian Experience. Management International Review. Vol. 33, Second Quarter, s.17-39
Öz, Ö. 2002. Assessing Porter’s framework for national advantage: the case of Turkey. Journal of Business Research. Vol.55, s.509-515
