Criticisms of Porter’s Diamond Analysis

INTRODUCTION

The book, “The Competitive Advantage of Nations”, shows how Michael Porter studied ten developed countries and 100 industries in order to answer questions concerning the national competitive advantage which he found to be inadequately explained by the Heckscher-Ohlin theory and the theory of comparative advantage. (Hill, 2009, p. 189).

These questions include:

• “Why are some nations more successful than others in international competition? ”
• “Why does a nation achieve international success in a particular industry?

1. Factor conditions/endowments: a nation’s factors of production such as skilled labour and infrastructure are essential in its competitiveness.
2. Demand conditions: the characters of domestic market demand for the industry’s product or service.
3. Related and supporting industries: the presence or absence of internationally competitive supplier industries and related industries within the nation.
4. Firm strategy, structure and rivalry: the nature of domestic competition and the conditions that determine how companies are created, organized and managed. Porter also mentioned two additional factors that can have an impact on the national diamond.
5. Government: Government can either positively or negatively influence each of the four attributes by its choice of policy.
6. Chance: Industry structure can be reshaped by unforeseen events which create opportunity for firms within nations or otherwise.

However, there are several criticisms on the book and the model itself: Firstly, the length of the book is too long and complex to be used by managers (Rugman, 1991, p. 61). Secondly, by using reference from 16 industry clusters in 10 developed countries, some doubt has been raised in his methodology as the range of sample is not wide and detailed enough to make it relevant to other nations (Rugman, 1991).

Finally, Porter’s diamond model itself has been criticized for its imperfect view as it neglects some critical issues and also, it has not been subjected to detailed empirical testing (O’Shaughnessy, 1996, p. 19). The model’s application is flawed especially due to lack of depth in culture, history and multinational activity.

MAIN CRITICISM

METHODOLOGY

In his book, Porter tried to develop an empirically-relevant theory through the use of deductive and inductive analysis. The choice of nations itself was criticized as the only reason for these countries to have stronger diamonds compared to others is because of their comparative advantage or their internal and external economies of scale (Smit, 2010, p. 123). By focusing on the industrialized nations, Porter was able to provide an insight for nations that want to improve the competitive advantage through innovation but it offers little insight for other economies (Yetton, Craig, Davis, ; Hilmer, 1992, p. 90).

Furthermore, the relationships amongst these factors of the diamond model are very complicated due to the interaction of a wide range of variables to a point that these factors seem to overlap each other. As a consequence, it is not clear why the diamond is not represented as a triangle or a pentagon (Grant, 1991, p. 542).

In addition, due to the broad scope Porter tried to cover, it is not surprising that the book fell short in theory, exposition and empirical research. The concepts and theories are not well developed as Porter interpreted them differently throughout his work to fit in the model’s concept.

For example, Porter uses the phrase of “upgrading” with different interpretations throughout his book. The theoretical relationship is unclear and is supported by selectively chosen data. As a result, while the theory can be applied qualitatively, its predictive validity is questionable (Grant, 1991, p. 548).

CULTURE

Although Porter briefly mentions the cultural aspect by stating “Cultural factors are important as they shape the environment facing firms; they work though the determinants, not in isolation from them” (Porter, 1990, p. 29), he does not elaborate on the impact that culture has on the competitive advantage of a nation (van den Bosch ; van Prooijen, 1992, p. 176).

The national culture, as part of the national environment, influences competitive advantage. Therefore it is not possible to describe the national environment as Porter did in his model without including national culture (Van den Bosch ; Van Prooijen, 1992, p. 175). Both authors think that “(… ) the so called national diamond, in fact rests on national culture” (Van den Bosch ; Van Prooijen, 1992, p. 76). Cultural differences can affect every determinant of Porter’s diamond (van Prooijen, 1991).

To explain this argument Hofstede’s model (1980) with its four dimensions of national culture is applied to Porter’s diamond (Van den Bosch ; Van Prooijen, 1992, p. 175). The third dimension “strong or weak uncertainty avoidance” affects Porter’s determinant “Related and supporting industries”. An example for this is the strong difference in “uncertainty avoidance” between Japan and Western countries.

While Japan has a high “uncertainty avoidance” which leads to long-term relationship between supplier and car manufacturer in the automobile industry, Germany’s low “uncertainty avoidance” leads to rather short-term relationships (Van den Bosch ; Van Prooijen, 1992, p. 175). Although there is no empirical research for a national culture’s impact on the competitive advantage of a nation yet, the success of industries might be based on national culture (O’Shaughnessy, 1996). Therefore, culture should not be seen as a changeless factor. It is always present, and it influences everybody in a society, which should be put into consideration (O’Shaughnessy, 1996, p. 13).

HISTORY

Porter did not pay attention to the historical dimension of different countries. Accumulated historical memories and events do affect the behavioural concerns while trying to obtain and sustain a competitive advantage (O’Shaughnessy, 1996, p. 15). For example, in Germany and Japan, we can see how past militarism is really connected with present industrial dominance. The discipline and the high demanding requirements observed years go in these nations have resulted in a constant pursuit of superiority and supremacy (O’Shaughnessy, 1996, p. 15).

In other cases, the historical difficulties that many countries encountered have contributed to a higher degree of motivation and entrepreneurial spirit. For instance, Taiwan, South Korea, Singapore and Hong Kong have been created as a consequence of anti-communist reaction (O’Shaughnessy, 1996, p. 15). In addition, historical patterns may also be helpful in order to obtain competitive advantages.

Hence, the prolongation of the same political party during sustained periods could benefit the state. This government continuity will result in a stable context, which will help businesses to make decisions within a coherent and uniform policy. For example, Social Democrats governed Sweden for 40 years (1936-1976).

MULTINATIONAL ACTIVITIES

By focusing solely on the ‘Home Base’ concept, Porter’s work further reveals its lack of focus on the nature of multinational activities, which include both Outward and Inward Foreign Direct Investment (FDI).

Porter’s view on inward FDI reveals a branch plant mentality, which believes that foreign firms in a host country are simply duplicates of parent companies; thereby not contributing to the development of competitive advantages of the host country. This mentality has prevented him to see the foreign capital and technology inbound FDI brings with it to create sustainable value added advantage for resources-based firms in Canada (Rugman, 1991, p. 73). In addition, another problem arises in the model when Porter does not focus on the impact of multinational activity.

Many countries with small domestic market have overcome its disadvantages by gaining access into the triad markets. Perhaps deep and consistent understanding of multinational activities of different industries in a country is needed for the model to properly work (Rugman, 1991, p. 74).

APPLICATION

Due to the limitations of the methodology he applied, the relevance of the model to countries is questionable. Porter’s argument is built based on the data collected from developed countries, which make it irrelevant to 90% of the world’s nation (Rugman, 1991, p. 4). Furthermore, the model does not apply on certain resource-based developed countries such as, Canada, Australia, and New Zealand, due to the fact that the industry clusters in Porter’s book are manufacturing-based.

The choice of only manufacturing-based economies makes it hard for the model to offer useful insights for resource-based economies such as Canada, whose competitive advantage is dependent on the US, or multi-domestic economies such as Australia (Yetton, Craig, Davis, & Hilmer, 1992, p. 90).

Porter also assumed that when firms strife to achieve competitive advantage within an industry it would automatically lead to national productivity and prosperity. This is usually not the case. For example, in the US in 1985, the dollar depreciation coupled with the real wage erosion led to competitiveness in some industries but not necessarily the growth in US productivity and living standards (Grant, 1991, p. 542).

Despite Porter’s effort in finding a general solution for policy makers and industry groups, his theory fails to demonstrate its application at a national level to many different nations. This could be a result of lack of proof in his finding as well as the narrow scopes of his methodology (Yetton, Craig, Davis, & Hilmer, 1992, p. 118).

CONCLUSION

Although culture and history have been neglected, methodology and multinational activity have been considered as the major criticisms of Porter’s diamond. However, one cannot deny the contribution of Porter’s work in extending the theories of international trade to explain competitive advantage among countries (Grant, 1991, p. 548).

Despite being criticized by many scholars, some realized the importance of Porter’s work on critical aspects needed for the establishment of national competitive advantage for firms. As a result, some of them were encouraged to extend the national diamond to the double diamond to include multinational activities and the nine factors diamond to make it applicable to less developed countries. (Cho & Moon, 2000, pp. 115-143) To sum up, the achievement of the book has far outweighed its shortcomings.

Therefore, one has to appreciate the usefulness and value it has added to international competitive advantage theories. The model itself is considered as a useful framework for the study of strategic management.

BIBLIOGRAPHY

1. Porter’s Competitive Advanatge of Nations: An Assessment. Strategic Management Journal , 12, 535-548. Hill, C. W. (2009).
2. International Business: competing in the global marketplace (7th Edition ed. ). Boston: McGraw-Hill Irwin. O’Shaughnessy, N. J. (1996).
3. Michael Porter’s Competitive Advantage revisited. Management Decision , 34 (6), pp. 12-20. Porter, M. E. (1990).
4. The Competitive Advantage of Nations. London: Macmillan. Rugman, A. M. (1991).