Wednesday 3 November 2010

Porter : “Firms, not individual nations, compete in international markets"


In the international arena, it is the firms that compete and not the nations. Yet the attributes of the domestic nation plays a significant role in the success of an organization in the international arena. The firm’s capacity to be innovative in technology and methods is shaped by its home base. It is the home base from where firms ultimately emanate its competitive advantage which it must sustain. Firms ultimately gain its competitive advantage by having an effective coalition of the national circumstances and the strategy of the organization. The circumstances of the nation build an environment where organizations can gain international competitive advantages, however, it depends on the firm whether it grabs the opportunity to gain competitive advantage or not (Hollensen, 2007, p. 98).

Internationalization of any business should be based on some inimitable and sustainable competitive advantages. MNEs face a number of challenges when it enters a new market compared to existing home competitors who normally possesses better knowledge of the market, relationships that are already established with domestic consumers, powerful supply chains etc. Therefore, MNEs must possess inimitable competitive advantages to mitigate such challenges. A good example is that of Wal-Mart. Wal-Mart has been doing well in several Asian markets but was unable to repeat such success in Germany and therefore was forced to pull out in 2006 from Germany’s matured market. This happened after nearly 10 years of poor performance. The primary reason for Wal-Mart’s disappointment in Germany was its lack of major competitive advantage over the domestic retailers unlike most Asian markets. The national sources of competitive advantage available to domestic retailers are substantial and hard to imitate for incoming MNEs. Countries often become associated with specific types of enduring competitive advantage. For instance, the Swiss have a competitive advantage in private banking. Similarly, the north Italians possesses a competitive advantage in production of leather and furr fashion goods. (Johnson et al, 2008, p. 300).

Porter (1990) introduced the Diamond model which helps in explaining why some countries tend to have distinctive sustainable competitive advantages in some industries. Porter’s Diamond model indicates that there are four interacting determinants which are country specific and two variables which are external that determines distinctive competitive advantages (Giroud, 2003, p. 33). They are as follows:

Factor conditions: Factor conditions can be described as the factors of productions used to generate products and services (i.e. land, labour, capital). A nation must upgrade its factor condition on a regular basis to maintain its competitive advantage (Rugman et al, 2006, p. 17). According to Hollensen (2007, p. 99), factors with least degree of mobility create the most enduring competitive advantages for nations. For example, climate which has no mobility is an important source of competitive advantage for nations. Countries such as Finland can never be a major producer of citrus fruits because of unfavourable climate conditions and therefore it is difficult to overcome such competitive advantages. On the other hand, capital which has a high degree of mobility is not seen as a stable competitive advantage for nations (Hollensen, 2007, p. 99).

Demand conditions: Demand conditions in the diamond model can be described as the characteristics of the home demand for the output of the industry (Egan, 1995, p. 15). According to Porter (1990), this element of demand conditions may be considered the strongest single factor since it determines the character and rate of progress and innovation of a country’s organizations (Egan, 1995, p. 15). There are three important elements of home demand. They are the size and pattern in which the domestic demand grows, the constituents of the home demand and the processes by which home preferences are disseminated to foreign markets. The competitive advantage is determined by quality and not the quantity of the home demand. Therefore, nations in which the home demand is responsive, powerful, ascertain and critical gain advantage as such home demand leads to competitive dynamism that challenges the way in which organisations attitude towards “quality, range of options offered and rate of innovations” (Egan, 1995, p. 15).

Adapted from Porter’s Diamond model: Determinants of National Competitive Advantage (Porter, 2008, p. 183)

Related and Supporting Industries: This element of the diamond model refers to related and mutually supporting industries that form local ‘clusters’. These regionally based industries are a significant source for competitive advantages as they make personal interaction easier, reduce transportation costs for intermediate goods, enables technical and marketing co-operation and provides for scale economies. In many cases, clustering also helps to attract skilled labour to an area to serve the core industry (Hollensen, 2007, p. 100). A good example of such clustering of related industries is that of Northern Italy where leather footwear industry and other related industries such as leather working equipments industry and leather designers create a regional cluster, thus benefiting each other. Another good example is that of Silicon Valley in United States which forms a regional cluster for software, hardware and other technology related industries to each other’s mutual benefit (Johnson et al, 2008, p. 301).

Firm Strategy, Structure and Rivalry: The last element of the Diamond model by Porter (1990) refers to the conditions under which organizations are formed, managed and the attributes of rivalry in the home market. There should be a match between the sources of competitive advantage, strategies and practices that in favour by the environment of the nation. The presence of fierce domestic competition is also an important source of competitive advantage as it encourages the firms in the industry to be less dependent on basic factor advantages. Domestic rivalry keeps the whole industry active, competitive and efficient (Phisalaphong, 2004, p. 39). Swiss pharmaceuticals industry is a classic example that validates the above point. The strong domestic competition in the country among pharmaceutical companies has made the Swiss pharmaceutical industry very strong (Johnson et al, 2008, p. 302).

Porter also indicates that in addition to the above determinants of international competitive advantage, there are two factors that influence the ‘diamond’ system. They are: chance and government.

Chance: Chance events are the events that are largely out of control of firms and have little to do with the circumstances in a nation. Such event lead to discontinuities that changes the industry structure significantly and radically. Some of the examples of ‘chance’ events are wars, inventions, oil shocks etc. Such events may reshape the structure of the industry and therefore may alter the competitive position of firms.

Government: According to Porter (1990), governments of nations can influence each of the four factors of the diamond model that determine the international competitive advantages. He argues that governments play an important role in encouraging development of industries within their countries which can become global players. Governments also affect the factors of production by financing and building infrastructure, constructing road, airports, improving education and health care and supporting use of alternative energy. A good example of such a governmental influence is that of India, where the government targeted software industry as a growth area by liberalising industrial and investment policy which resulted in Indian gaining an competitive advantage in delivering economical IT solutions (Hollensen, 2009, p.76-7).

The above determinants of international competitive advantage depend on each other. For instance, if the suppliers can provide a company with low-cost inputs and new innovative ideas (related and supporting industries) but has no real rivalry and does not require improving quality, the company will finally lose its competitive advantage. Of the above determinants, domestic rivalry and geographic clustering more important than other determinants of competitive advantage (Rugman et al, 2006, p.19).


The determinants discussed above leads to the creation of an environment in the nation in which companies are born easily and they learn how to survive the competition on a global level. These determinants affect the ingredients required for achieving international competitive success such as the availability of resources and skills, information that helps recognize opportunities, right directions to deploy skills and to build pressure on organizations to invest and come up with new innovations. Such a national environment enables and enhances fast paced accumulation of important assets and skills and these helps companies to gain competitive advantage. Furthermore, companies also gain competitive advantage in such a national environment as it enables better information on product and process needs and pressurizes companies to innovate and invest (Porter, 2008, p. 182-3).

Therefore, we conclude that the determinants of national competitive advantage help companies to maintain their economic competitiveness by helping them recognizing the boundaries in which they can capitalize on their domestic advantages to build significant competitive advantage in comparison to other organizations on an international platform. Companies should determine the sources of national competitive advantage on which it can base its individual sources of advantage before framing an internationalization strategy. This can help companies maintain their competitiveness and be successful in international markets as seen in the case of Heineken, who have capitalized on the nature of the local market of Netherlands by globalizing early on (Johnson et al, 2008, p.302).

References and Bibliography:


  1. Egan, C. (1995) Creating organizational advantage, Butterworth-Heinemann, p. 15.
  2. Giroud, A. (2003) Transnational corporations, technology and economic development: backward linkages and knowledge transfer in South East Asia, Edward Elgar Publishing, p. 33.
  3. Hollensen, S. (2007) Global marketing: a decision-oriented approach, 4th ed., Pearson Education, p. 98-100.
  4. Hollensen, S. (2009) Essentials of Global Marketing, Pearson Education, p. 76-77.
  5. Johnson, G., Scholes, K., and Whittington, R. (2008) Exploring corporate strategy: text and cases, 8th ed. Pearson Education, p. 300-302.
  6. Phisalaphong, R. (2004) The impact of economic integration programs on inward foreign direct investment, Rozenburg Publishers, p. 39.
  7. Porter, M.E. (2008) On Competition, Harvard Business Press, p. 182-182.
  8. Porter, M.E. (1990) The Competitive Advantage of Nations, Harvard Business Press.
  9. Rugman, A.M., Collinson, S. and Hodgetts, R.M. (2006) International Business, Vol 13, Pearson Education, p. 17-19.