Business world is getting complicated day by day . Companies want to do business like participating in the competition for profit or market share. We are now at globalisation era where a local company is to compete with international company (Daniels et al, 2007). Challenge for marketing strategy is to find a method of earn a sustainable competitive advantage over the other competing firms and products in a market. According to porter (1990) innovation and upgrading capacity of a specific country’s industry is the indicator of a nation’s competitiveness.
Challenges and pressures bring companies competitive advantage over the world’s best competitors.. As the base of competition creating more digestion of knowledge. Competitive advantage is built through a highly localized process. Competitive success depends on national values, economic structures, culture, histories and institutions. Every country has remarkable differences in the patterns or nature of competitive. Ultimately, nations succeed in particular industries because of positive environment most forward-looking, challenging and dynamic. This report will evaluate some significant factors and explores egarding advantages of porters diamond mode which is very crucial for any organizations competitive performances. In addition to, this report will clearly determinant about how government can help to the company’s performance and other activities with actions. After that, it will unambiguously investigate with relation to the automobile industry of Mexico by applying porters diamond model with obvious explanation and examples. Overall, to conclude for this report, it studies as to porters diamond model and how it works on a particular organization to improve their functions and activities.
BACKGROUND OF PORTER’S DIAMOND MODEL Michael Porter (1990) formulated the diamond model of competitive advantage which relates to classical theories of international trade. According to him a nations competitive advantage is dependent on its factor endowments which include land, labour, natural resources and the local population. Porter stated that a nation can create advanced factor endowments such as skilled workforce, strong knowledge base, advanced technology, government intervention in the form of support and aids and a strong culture.
This was illustrated in the form of a diamond representing the grounds established by countries for their industries. When this theory was formulated in the eighteenth and nineteenth century, lower skills met the requirements. Hence natural resources and factors of production (Porter, 1990) were sufficient for nations to gain additional leverage. With the passage of time leading to globalisation of markets and innovation in the technological area there was a shift away from sole dependence on natural endowments. Source: Adapted from Porter, M.
E (1990) The Competitive Advantage of Nations THE DIAMOND MODEL EXPLAINED As demonstrated by the figure above, there are four elements which lead to a nations competitive advantage. These include: * Availability of natural resource and enriched skills base * Information regarding opportunities that maybe pursued using the resources and skills * Individual goals in line with organizational goals * Pressure on companies for innovation and investment According to Porter’s model, there are 4 determinants of national advantage as described below: 1.
Factor Conditions – This refers to the fact that a country creates its own resource, skill and technological base; in other words to the factors of production such as land, labour, capital and infrastructure etc. According to Porter (1990, p. 13) the specialized factors, mainly skilled labour, capital and infrastructure have to be created and not inherited. He also stated that general factors, mainly unskilled labour and raw materials are easy to acquire and cannot lead to sustainable competitive advantage.
Specialized factors are difficult to replicate but require significant amount of investment. Certain disadvantage in factors of production compels innovation which often leads to national comparative advantage. Hence Porter (1998) distinguished the basic and advanced factors. 2. Demand Conditions – This refers to the nature of local demand of an industry’s products and services. Both aspects of demand, quality and quantity are to be considered on an equal note. This is particularly true in cases where local demand of a product is higher than that in foreign markets.
In such cases companies devote more effort and investment to that particular product to gain a competitive advantage which often leads to firms commencing export of that product. This also refers to increasing buyer pressure on requirement for high quality and service in industries. This pressure on industries compels them to enhance standard to the level that allows them to compete on an international scale. This is related to a sophisticated domestic market as it leads to firms producing superior quality products which also enable local firms to remain competitive in the global market. . Related and Supporting Industries – Porter (1998) stated that a set of strong related and supporting industries is an important factor in determining advantage of firms. This means that firms are likely to enjoy economies of scale and innovation when local supporting industries including suppliers themselves are competitive on a global scale. This is also related to clustering or agglomeration where competitors including upstream and downstream industries are located in the same area. There are potential advantages of agglomeration which include: * Technology transfer or spill-over Market power derived from association with customers * Association with a region for applicable labour force. 4. Firm strategy, structure and rivalry – This refers to national conditions which determine the creation of organizations and the extent of rivalry on the domestic front. Porter (1999) stated that local conditions affected firm strategy and low rivalry enhanced industry attractiveness. Even though low rivalry is highly preferable at the initial stage, increased rivalry over the long-time is preferred as it implicitly exerts pressure on companies for continuous improvement and innovation.
High local rivalry is deemed to lead to less rivalry on a global scale. Moreover local rivalry allows firms to extend beyond fundamental advantages that maybe accrued to the home country, mostly low factor costs. In terms of strategy it has been stated that domestic capital markets exert a profound influence. Capital markets tend to vary between short-term outlooks as opposed to long-term outlooks and countries such as US which has short-run outlook focused at short-term investments are likely to be more competitive.
Countries with long-run outlooks are likely to competitive in terms of long-term investments. It is also stated that a country is likely to be competitive if its key personnel are holding prestigious and influential positions. Structure of firms and management style varies among industries. Countries are oriented towards certain management styles and are likely to succeed in industries which suit that management style. Germany for instance has strong hierarchical structures consisting of managers with technical expertise opposed to Italy which has small family based businesses.
Firm rivalry is dependent on competition as it incites innovation. There are two additional variables in the diamond which are as follows: * Chance events – these refer to occurrences beyond the firms locus of control. This mostly refers to disruptive incidents or developments which are external to the firm and beyond the control of governments as well. However this allows new players to tap into opportunities due to the change in the industry structure. Examples of such events include rapid innovation, unexpected rise in fuel prices, instability resulting from wars and natural disasters. Role of Government: The role of the government according to Porter (1999) is to encourage organizations to enhance performance through the enforcement of laws to maintain standard of products. The government at the same time also stimulates demand for advanced products and focus on the creation of specialized products. At the same time the government stimulates positive local rivalry to enhance quality in a bid to align local industries with global organizations.
In terms of the policies the choice of the government can influence all four determinants stated above. Government policies are aimed at industries in which there are factors of national advantage which are further reinforced by the government. The government can enhance the chances of gaining competitive advantage but is unable to create any off its own accord. Porter (1999) stated “Governments proper role is as a catalyst and challenger; it is to encourage – or even push – companies to raise their aspirations and move to higher levels of competitive performance”.
Government can influence all four determinants with actions such as: * Providing subsidies to firms, directly through financial grants or indirectly through infrastructural development * Application of tax codes to businesses or corporations * Implementation of education policies that enhance skills base of workers * Creation of specialized factor and enforcing strict regulations for maintaining standards THE AUTOMOBILE INDUSTRY OF MEXICO AS CASE STUDY FOR PORTER’S DIAMOND I have chosen Mexico to study the implications of Porter’s model for a number of reasons.
First of all this is due to Mexico being a part of NAFTA regional block and due the amount of FDI channelled in from U. S. A. Moreover Mexico has a major presence of foreign owned MNE’s in the automobile industry which has proved to be most successful after 10 years of NAFTA. Mexico, a big country of 760,000 square miles area is situated north of United states of America is federal constitutional republic in North America. it is a country of thirteenth largest independent nations which give this a position of fifth largest country in the Americas. orld eleventh populous country where about 113 million people live and most of them are Spanish speaking . Mexico was a upper-middle income country and first Latin American member of the organisation for economic co-operation and development OECD.
Mexican economy closely related to north American free trade agreement (NAFTA) because of its export capability to America and Canada . Mexico is a most affected country which is affected by 2008 recession . soon after they start changing their status and hold the position of 11th for purchasing power and 13th of largest world economy. here is changes coming in infrastructure and the tax including labour laws . some government challenging the situation and upgrading everything and reducing income inequality. The modern industry and service sectors are developing rapidly by the economy, with increasing privet ownership. Administration has extended competition in telecommunications, ports, electricity generation, railroads, natural gas distribution and airports, with the goal of upgrading infrastructure. Almost 90% Mexican trade is under the free trade agreements (FTAs) over 40 countries as some of European Union countries, Asia and mostly South and Central America.
North American Free Trade Agreement (NAFTA) signed by United State, Canada and Mexico in 1992 which brig effective change in Mexican FTA in 1994. In 2006, the Mexican exports increased up to 90%. Recently, the Congress of the Union approved important tax, pension and judicial reforms, and reform to the oil industry is currently being debated. In Mexico, the automobile industry has a major significance for the country’s competitiveness. This industry is reliant on advanced technology compared to other industries which are reliant on natural endowments or labour intensive work.
As the automobile industry was high-tech it promoted industrialization, spurred innovation and stimulated the development of a skilled workforce. I will analyze this industry in terms of all four determinants to evaluate Mexico comparative advantage, if any. 1. Factor Conditions – The initial factors that made Mexico an attractive destination for automobile companies were cheap labour, cheap raw materials, skilled workers, less collective bargaining power of workers due to few unions and easy access to a potential market in the U.
S and Latin America (IILSEN, 2003). Other than skilled workforce, the remaining can be attributed to basic factor endowments. However the automobile MNEs had benefited from the fact that Mexico had comparative advantage in the steel industry over other countries as raw materials were substantially cheaper (CECIC, 2002). When Mexico resorted to free trade, there was significant development in industrial infrastructure (Middlebrook and Zepeda, 2003, p. 20). In turn the labour productivity and efficiency improved by a great margin.
There was also a substantial effect of the FDI channelled into the infrastructure of Mexico. Until the 80’s the exports constituted primary goods such as vegetables, fruit and coffee only but there was a huge shift from the 90’s with only two primary goods making it to the top of the list. Transportation infrastructure has also benefited Mexico to a great extent. There are significant number of well-developed highways connecting the North and South American Markets and the ports for markets in Europe and Asia.
Porter (1990) also stated the need for advanced factors under factor conditions such as the development of research institutions for continuous improvement in technology and productivity. Porter (1990) stated that the government should lead in the early phases of research and development. Henceforth it was evident that there was an evolution of factor conditions ranging from basic factors to advanced factors. This is also evident in the presence of skilled engineers and technicians resulting in high productivity. The NAFTA has resulted in significant FDI inflow which has also taken Mexico to the height of a successful export platform. . Demand conditions – As I have taken the automobile industry as the basis for this study, it is necessary to analyse the trends of domestic and foreign market to find out whether local pressure forced the industry to innovate and compete on a global basis or whether it was the result of external pressure. Prior to NAFTA, 60% of the units produced were for the local market only. After the NAFTA agreement, production shot up by roughly 80%, the foreign markets were the main target as domestic market declined after the crisis of 1994.
Moreover as the Mexican market was open, it attracted significant import in this sector. However the imports constituted of expensive brands meaning that it was targeted at the upper tier of the economic hierarchy. As of 1995, four different kinds of cars were demanded my Mexican customers – small, midsize, luxury, and sport. From the trend it was evident that the small size local segment pressured for better quality cars which were cheaper. When the economy opened up under NAFTA, luxury brands such as BMW, Land Rover, Jaguar, Audi and Mercedes cars started coming in through imports (IILSEN, 2003).
Prior to NAFTA, the models produced for local markets were old and different that the ones for sophisticated markets. However, by 1998, the quality of cars for export was the same as that of domestic markets meaning that the level of sophistication was enhanced (Ramirez De la O, 2002). The industry has a history of 50 years which is characterized by an evolution from non-sophisticated models to a great degree of sophistication, mostly over the last 10 years. Moreover there has been increasing pressure form US markets for enhancement of quality in production.
Henceforth the demand conditions have led to competitiveness for this industry. 3. Firm Strategy, Structure, and Rivalry – Initial facilities pre-NAFTA was simple assembly plants which required workers with basic level of skills. However along with increase of the manufacturing plants, there has been significant modernization as well as automation in the industry. Change in manufacturing strategies due to increasing competitiveness led to technological innovation (Brown, 2000). Initially the market was divided among Ford, Chrysler and GM but when the market opened up there were many more competitors.
Over the last decade the industry has been characterized by intense rivalry and competition which has led to lower prices and higher quality in even small and midsize segments. Porter (1990) stated three kinds of FDI motivations to enter the host country namely market access, resource based sourcing and shift of core decisions. After NAFTA, the assembly plants were converted to manufacturing plants thereby depicting the fact that there was a massive transformation in terms of technological innovation and the degree of sophistication involved which also translated to the development f a skilled workforce. The intense competition among car manufacturers in Mexico along with increase in imports has stimulated intense rivalry in the industry. These factors along with competition in the U. S market have pressured the automobile MNEs to upgrade technology and improve the productivity of their companies. Thereby it can be concluded that competitive rivalry is a source of competitiveness for the automobile industry of Mexico. 4. Related and supporting industries – The automobile industry of Mexico follows the same structure in the supply chain as the rest of the World.
Thereby in line with the Japanese method of production, the car assemblers outsource all components to the suppliers (Gereffi, 2003). The foreign-owned auto suppliers established strong grounds in Mexico due to positive consequences as a result of NAFTA. There was clear agreement that more than 50% of parts used to manufacture automobile must be made in Mexico itself (Chamber and Smith, 2002). All companies irrespective of the brand were compelled to adhere to these regulations. From the records it is evident that majority of suppliers in Mexico work on a global scale.
Moreover local suppliers resorted to collaborative agreements with global companies after the enactment of NAFTA. This led to the acquisition of high tech equipment and expertise. 5. Role of the government – The current positioning of the industry can mostly be attributed to government legislation and enactment of free-trade agreements. Privatization, property rights and rules governing FDI have spurred an increase of foreign investment in Mexico. This can diagnosed in 4 stages – * Initial stage – This was targeted at meeting domestic needs through simple assembly plants. Car prices were controlled by the government. Second phase stage –The Import Substitution model implemented by the government led to development of indigenous industries. FDI was restricted to a certain fraction. * After the 70’s the country faced trade deficit and problems with capital equipment. At this stage the government focused on developing the export market and foreign ownership was only allowed if they exported (Brown, 2000). * The last stage involved Mexico going into GATT and the enactment of the NAFTA. Imports were allowed and markets were opened to car assemblers (Brown, 2000). Mexico was allowed to import cars without any duty tariffs.
This in turn stimulated technological innovation and high production standards as the industry was then characterized by severe competition. Hence it can be concluded that the influence of the government has been very significant not only in terms of enhancing productivity in the industry but also through implementation of tax rules, labour regulations and custom duties (Ramirez De la O, 2002). CONCLUSION In line with Porter’s model, it can therefore be concluded that there are intermediate phases leading to the final stage leading from the development of native industries all the way to opening up free trade to boost competitiveness.
