3.4.2 Theory of competitive advantage: The Porter diamond
Michael Porter has during the last 25 years been one of the outstanding gurus of management. His theory of competitive advantage is challenging because much of it appears to go 'against the grain' of earlier theories. Two of his assertions illustrate this point.
- For an industry to flourish, domestic rivalry is nearly always necessary.
- Much of Japan 's success can be traced to the country's economic disadvantages.
As you read the relevant section in Hill (2005), note the essential features of the four 'attributes' which are at the four points of Porter's diamond, namely:
- Factor endowments
These are the essence of the Heckscher-Ohlin theory, but Porter distinguishes:- basic factors - natural resources, demographics, climate and location, and
- advanced factors - communications, location, skilled labour, research and technological know-how.
- Demand conditions
Home demand shapes the product. Sophisticated and demanding consumers pressure local firms to make high quality products. Japan 's camera industry is the archetype of this. - Related and supporting industries
The network of suppliers and related industries which are internationally competitive has an spill-over effect. We see this in industry 'clusters' such as the German textile sector which includes manufacturers of high quality cotton, wool and synthetic fibres, sewing machine needles and textile machinery. - Firm strategy, structure and rivalry
Two points are relevant for this attribute:- The quality of management. Porter notes that firms in the two outstanding post World War II 'economic miracles' - Germany and Japan - are dominated by engineers, unlike US companies which are usually headed by people with financial or marketing backgrounds.
- Domestic rivalry, which creates pressures to innovate, improve quality, reduce costs and invest in upgrading facilities.
Before summarising, read what Hill (2005) says about product life-cycle theory, first-movers and Porter's theory of competitive advantage. In addition, two further readings are included: the first describes Australia as being a mercantilist nation and raises the implications of having a comparative advantage or competitive advantage in relation to trade; the second and related reading is useful because it critically examines Ricardo's theory of comparative advantage in the current deregulated globalised world of international trade. Both these readings will help set the scene for the arguments for free trade and removal of protectionism discussed further in Part B of this chapter.
In your text
Hill 2005, Chapter 4, pp. 159-172.
Reading 3.1
James, D. 2000, 'The end of trade', Business Review Weekly ,
25 August, pp. 88-90.Reading 3.2
James, D. 2000, 'The free-trade fantasy', Business Review Weekly ,
17 December, pp. 44-48.
Previous Page