Five Forces Analysis According to Potters Diamond Model - Essay Example

Porter’s Diamond Model Introduction Success and high performance in the market are central objectives that every organisation or industry seeks to meet. The ability to have control over the market and grab the largest market share is a dream for every business. However, there is stiff competition that has been a huge challenge to any organisations. What many people have asked is how it happens that some industries and businesses in them manage to succeed yet the same type of industry fails in other countries or markets (Forstater, 2007: 191). These are riddles that most people have not been able to solve and a necessity to have foundational model that can help explain the phenomena was raised. Models have been formed to explain what exactly brings the difference. Among the models include Michael Potter’s which posits that there is national competitive advantage that some countries have over others and success rates of industries thus varies. Potter through this theory gives an explanation as to why it is possible to find certain industries fairing pretty well in the highly competitive market while others do not. This paper seeks to holistically explore Potter’s diamond model, analyse its propositions and point out the criticisms and drawbacks identified with it. This will be practically illustrated by examples of various industries in different countries and at the end of it conclusively take a stance whether the model has served to explain performances and characteristics of enterprises in the few major economies. Description of Potter’s Diamond Model While many theories that describe international trade assert that the success of a business in the global framework depends more on national endowment, Potter’s goes ahead to claim that it is possible that these factors can be ‘artificially’ manufactured. Diamond model suggests that an advantage that a country has in the international context largely relies on what it has or is endowed with. Factors of production are vital in the systemic running of a business and any breakdown can hugely affect the performance of a business (Burrow, Kleindl & Everard, and 2008:116). Industries set in regions that have access to raw materials; adequate skilled labour and enough land among others are much more likely to perform better in the international market. For example, the cotton industry may need continued supply of cotton without which the operations will halt or there will be an increase production cost. Technology and skilled manpower are highly needed by all industries or production and overall business activities to thrive. Potter’s diamond theory claims that a country is predisposed to comparative advantage when it has ready materials for production, expertise, access to information, objectives and pressure for innovation (Deardoff and Stern, 2011: 88). Factor Conditions Potter acknowledges the importance of factor conditions such as land, raw materials, skilled manpower and technology. Diamond theory proposes that for organisations to have a competitive advantage, these factor conditions must be created even if they never existed before. A country has the potential of and capacity to generate these factor conditions to have an upper hand in the global arena. In most countries, sometimes the factor conditions are available and unexploited. Businesses are much more likely to innovate more when they realise there are few factors of production vis-à-vis their demand (Reinert, et al., 2009: 388). Demand Conditions Industrial products that meet high demand in the local market are more likely to trigger increased production. When a product receives an overwhelming local market demand, such a product may perform as well in the global market. It is the local response mechanisms that are used as a basis to set global strategies. One can easily predict the response that the same product can receive when taken to the international market unlike the uncertainties created when a product has not sufficiently penetrated the local markets (Shenhar and Dvir, 2007: 66) Related and Supporting Industries Industries are never lone islands. They depend on each other and the activities happening in one industry can directly or indirectly affect the development of another. Raw materials and resources are acquired from other industries and their level of competition among others will determine how much cost the industry spends so as to acquire and receive supply form them. This means that the healthier the other industries are the more advantaged industries that aims at reaching to the global circles of trade are. Positive relations and good environment pave way and predisposes a national industry to great competitive advantage. Auxiliary services that one industry receives from the other are equally essential and all these add up to the bundle of competitive advantage (Porter, 2014: 138). Organisation Strategy, Structure and Rivalry Consequently, the nature, structure and rivalry in the industry can push the organisation into producing products that are much more desirable (Porter, 2014: 144). For example, country that is has active industrial competitors will definitely push companies into investing in technology and producing high quality products. The structure and nature of that particular industry will either influence the business positively or negatively. When firms use strategies and approaches that are well informed and thoroughly investigated, they stand a chance of exploring innovative seas to find new and better ways of operating that would increase their market share (Tallman, 2009: 199). Government The responsibility of the government in this model cannot be overlooked. Through its policy-making and implementation mandate, the government ensures that only goods and services that meet the standards are released into the market. This restricts production of substandard goods that are likely to do poorly in the global market (Gillespie, & Hennessey, 2007: 155). The power it also has in controlling the factors of production such as land, human labour among others enables it regulate and avail these to the companies. It also increases the local competition through discouraging unnecessary direct partnership and cooperation that would otherwise lower rivalry. The government also seeks for international markets on behalf of its local industries. Five Forces Analysis according to Potter’s Diamond Model Potter structured ways in which an industry can be analysed to understand its competitive prowess. There are various items within the industry that can act as tale-tell signs indicating whether the industry is geared towards the right direction in terms competitive strength or not. Rivalry and competition in the industry is a major concern for businesses. Level of competition is measured by the ratio of concentration in that particular market (Porter, 2014: 119). Firms that are in actively competitive industries will therefore find ways to overpower their rivals and gain a competitive advantage (Frederkind, 2010: 100). When the price of a substitute commodity people are likely to abandon the one they had used for an alternative (Schumacher, 2012: 152) This known as threat of substitutes.. Buyer Power is seen in industries in which customers have ‘more say’ than the producers, the pricing power of the products then shifts from the producer to the buyer (Gillespie, & Hennessey, 2011: 201). The thought of another firm having a chance to join the industry is a real nightmare. Some firms may have been already outdone in the competition and allowing more firms to join livens the threat to new entrants. (Kirton, 2009: 128). Depending on the government policies and laws there could be barriers that hinder other firms from entering into the industry. This is advantageous to the already admitted organisations as they are kept away from further competition. Potter’s Diamond Model in Explaining National Business in Japan, China, US, UK and Germany There are several ways in which this model is relevant in explaining the business systems in these world economic giants. The automobile industry is the point of focus. Japan Japan is a country known for its passion for industrial operations. The innovations and inventions that are happening there are driven by the great technological environment (Helpman, 2011: 57). Potter’s model can nest explain the real happenings in Japan’s automobile industry. The five forces as proposed by Potter are clearly seen in Japan automobile industry. The high rate of rivalry and competition that exist in the automobile industry with so many firms producing motorcycles has seen the prices of the products go own. There are no serious barriers of entry into the industry and this has led to a flooding of competitors. The companies therefore have to continually innovate to beat down their competitors. Their performance in the international market has been very high because of the role of overwhelming demands in the local and the general environment. Japan industrial revolution in the past history led to the establishment of myriad support industries that have so far worked to promote the automobile counterpart. This has enabled Japan to produce items that do well in the international market. China Consequently, China’s economy is sustained by the industrial activities in the country. The international market performance is relatively high as well because of the automobile industry (Juan, 2011: 1002). With its command in the local market, the automobiles that China produces do pretty well in the market. Although the population is relatively high, factors of production such as land and labour have been well regulated such that the automobile industry easily access. The government’s emphasis on technological subjects has created a pool of skilled workforce that has improved the industry. High competition has led to remarkable innovations (Baker, 2007: 178). China’s government has recently been seen exploring and making friends with several nations in a bid to find market for its industrial automobile products. This demonstrate the significant role the government has, as explained in Potter’s Model, in promoting its performance on the global space. United States The business system found in US best suits the characteristics presented by Potter of a competitively advantaged nation. First the US may not have all the factors of production by its ability to modify and create them have brought it the developments it enjoys today. Focus on technology and proper training of the labour force has seen US grow economically, better than those countries endowed with these factors (Branes, 2007:107). For example, Ford (automobile company) imports spare parts from Asia but with its improved technologies, it is able to assemble and sell back the vehicles to the same places the spare parts were imported from. This is a justification that an industry, true to Potter’s words, can create factors of production. It has a competitive advantage on the market because of the ability to create factors of production (Simons and Isely, 2010: 560-563). United Kingdom Equally the region has proved high level competitive advantage that can be justifiably explained by Potter’s diamond model. The automobile industry in UK is recognised because of its production of some of the most preferred motor vehicles such as Land rover. One of what has brought UK into the limelight is the stiff local competition. With the enlightenment on technology, most companies have joined the industry. This move has stirred innovation and creation as every company want to beat the other leading to high quality automobiles such as Jaguar, Nissan among others. United Kingdom with great history of industrialization has a big volume of support industries that provide the necessary materials needed for high quality as well as other services. This is consistent with the model which attributes success of international industries to rich industrial backgrounds. (Morschett, Schramm-klein & Zentes, 2010: 101). Germany Germany is undoubtedly the ‘mother’ of automobiles with rich history in earlier inventions that were seen in the ancient times. The country is endowed with skilled who have deep insight in automobile production. This is one of the advantages it has in the international market. Its reputation is also good because of endowment of professionals who make the best quality (Venables, 2006:25). According to Potter’s model, government’s regulation is essential in promoting competitive industries and this has been seen with the German government. The government has regulated the local industries in a way that competition and continued innovation has been progressively achieved. Mercedes Benz Company despite the long history has been kept on toes by its rivals to produce even better products that can do well in the global market. The demand for automobile that exist in Germany is quite phenomenal and can accurately be attributed to its success in the long run operation in the international market. In Germany, over 80 % of the citizens own an automobile and this shows how much big the market is in homeland. For instance, the image the while world gets from the indirect promotion of Mercedes Benz car whenever a German buys one has popularised in the international framework. This shows that having a strong bas at home establishes an industry for global competition. Criticisms of Potter’s Diamond Model Although the theory has had an overwhelming support from various economists and business analysts, a few points of concern have been pointed. The theory has been doubted since Potter’s prediction about Singapore and Korea did not happen like he forecasted. Using his diamond model, he claimed that Singapore has little chance of developing its economy while Korea is best placed to grow. The recent results show the opposite of his claims. Consequently, the model has also been criticised for putting so much focus on those activities happening within the national and no regard to the international market activities (Hollensen, 2013: 133). The approach place a lot of weight on the home activities ignoring other aspects in the global framework. Conclusion In conclusion, Potter’s diamond model has extensively covered and demonstrated much of the characteristics of businesses in major economies in the world such as Japan, China, US, UK and Germany. The first forces of analysis in the model have brought out exactly why some companies are much more likely to do well in the international market than others. The model’s explanation about factor endowment has been practically demonstrated by economies such as Germany and Japan which have certain factors of production readily available. Also the act of creating these factors of production as done with the US is a more advantageous for competition in the global market. The role of government in all the cases mentioned has been found to be significant in promoting industries competition level in the global arena. Local competition is an antecedent to global performance and industries that have succeeded in the international market faced stiff competition back at home. References Baker, K.J. (2007) Economic tsunami: Chinas car industry will sweep away western car makers, Dural, N.S.W., Rosenberg Publishing. Branes, J.M. 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