2010

Porter s Diamond Model Application in Global Automotive Industry
TERM PAPER OF GLOBAL STRATEGIC MANAGEMENT
Michael Porter's Theory of the Competitive Advantage of Nations is commonly referred to as Porter's Diamond, as it comprises 4 key elements that lead to national competitiveness. This paper empirically tests Porter's theory. 50 automotive companies in the automotive industry headquartered in 8 different nations comprise the sample. The results illustrate that the global automotive industry does in fact support Porter's model that defines national competitive advantage. Relationships that exhibit statistical significance are in the expected directions. Applicability of the model and extensions of this research are discussed.

Sandeep Singh MBA International Reg# 10900177

global supply and demand. rising standards of living across the globe. with the hope of replicating them in organizations with lower profiles. including international trade. much data and information exist about the auto industry.. global competitiveness and automotive manufacturing in the form of research hypotheses. economists. In so doing. it will evaluate the applicability of one of the seminal models in the area of national competitiveness. where industries and firms are compared on a global scale to see which are the most competitive. Practitioners and academics alike have tried to qualify and quantify those characteristics that are present in highly competitive international businesses. It incorporates many facets of both disciplines. including the rapid rate of technology innovation and dissemination. has led to the acknowledgement of and search for firms that are both nationally and globally competitive. industry level analysis and competing for the future. decreasing barriers to trade and the rise of enterprises from big. Thus the topics of national competitiveness and global competitiveness have become new additions to the business lexicon.INTRODUCTION With the globalization of most industries in the latter half of the twentieth century. The research has resulted in numerous rankings. After much research most would 2 . Hamel and Prahalad reinforced the concepts of core competencies. levels of competition within industries and strategies utilized by competitors. This trend has many causal factors. Because it is so dominant in the minds of businesspeople. public policy makers and scholars in recent years.S. LITERATURE REVIEW One could argue that the topic of global competitiveness occurs at the cross roads between international economics and strategic management. Specifically. This. This paper will bring together the ideas of worldwide rivalry. Nowhere has this been more evident than in the automotive market. Michael Porter's Diamond Model of National Competitiveness will be empirically tested using the global automotive market. U. countries and businesses seem to attach special meaning to their ranking within this industry. the topics of international businesses and competitive advantage have received much attention from business executives. industry structures. Because it is such a universal product and one that has significant national brand recognition and image status connotations. In recent years. government officials and consumers. in conjunction with the rise of global competitors from all parts of the world. emerging markets that were formerly considered non-players on the global stage. European and Japanese dominance in many industries has been challenged.

no universally accepted definition of global competitiveness exists in the literature. All three concepts are captured in the measure of global competitiveness used herein. none created a model to assess competitiveness. Demand conditions describe the level of domestic demand that a firm faces. The model is depicted as a diamond. In light of this fact.e. just as Porter does. Demand conditions depend both on the quantity of demand as well as the sophistication level of consumers in a home market. quantities of demand drive firms to higher levels of efficiency and productivity. Although not illustrated in the formal model. demand conditions are associated with a country's level of economic development. Caves (1982) discussed the practice of firms transferring knowledge gained in one country to another. cost competitiveness and productivity. The first of the four elements is known as demand conditions. If done correctly. Figure 1 depicts the model. He noted that utilizing the right mix of factors of production would lead to probable success. Some examples are the French preference for luxury goods (i. where the four forces jointly constitute a firm's global competitiveness in a given industry. Thus. Porter's model includes four key elements. Hymer's idea that firms have specific competitive advantages that allow them to overcome the liability of foreignness is similar to Porter's concept of firm-specific advantages that lead to global competitiveness. this paper attempts to provide some empirical evidence for Porter's Model of the Competitive Advantage of Nations. Very demanding consumers create an awareness in firms that causes them to focus on the needs and preferences of the consumer base. cosmetics 3 . Porter's model indicates that a primary source of competition for firms in a given industry comes from domestic demand. the Fortune Global 500 Ranking. While each of these men made great contributions. very few studies have actually tested the concept of national competitiveness based on the model. Porter also acknowledges the role that governmental forces and luck can play in national competitive advantage. Also. this process could offset costs associated with startup in those same countries. The disagreement on the definition is likely due to the multifaceted nature of the construct. high levels of demand in a nation would drive the firms in that industry to become globally competitive. Generally. Many of Porter's (1990) ideas were shared by earlier scholars. Yet still today. which are similar to Porter's advanced factors.agree that we can say that global competitiveness in the aggregate for a nation is not equivalent to global competitiveness at the individual firm level. Corden states that there are three major areas of national competitiveness: sectoral or industry competitiveness. While Porter's theory is generally accepted. Vernon's early product life cycle attributed national competitiveness to a nation's technology and capabilities. The Diamond is one of the few models in international business research that illustrates what comprises national competitiveness within a given industry.

water systems and telecommunications. knowledge resources. These factors provide needed inputs and systems that businesses use to gain competitive advantages over their rivals. firms would have to expend their own resources to provide such structures for commerce and transactions. banking and watchmaking). including basic infrastructure systems such as roads. such as entrepreneurship and innovation. Other factors of production can include manmade structures that facilitate commerce. labor. The second element of the model is known as factor conditions. factor conditions include any factors of production that a firm uses in its businesses. 4 . According to Porter. capital and also naturally occurring raw materials. Other factors are those that are specific to the firm. Porter classifies these factors into five major categories: human resources. physical resources. The more advanced these factors are. such as land. we expect that: Hypothesis 2: More advanced factor conditions in the home market will positively impact a firm's global competitiveness. Therefore. These include the traditional factors of production. capital resources and infrastructure.and fashion) and the Swiss insistence upon precision (i. we expect that: Hypothesis 1: More demanding consumers in the home market will positively impact a firm's global competitiveness. Without them.e. the more they will enhance the success of businesses located in the country. Still other factors would be educational and legal systems. Therefore.

labor.e. Thus. Very demanding consumers create an awareness in firms that causes them to focus on the needs and preferences of the consumer base. Some examples are the French preference for luxury goods (i. Also. Other factors are those that are specific to the firm. Generally. banking and watchmaking). high levels of demand in a nation would drive the firms in that industry to become globally competitive. including basic infrastructure systems such as roads. Other factors of production can include manmade structures that facilitate commerce. Demand conditions describe the level of domestic demand that a firm faces. Porter's model indicates that a primary source of competition for firms in a given industry comes from domestic demand. quantities of demand drive firms to higher levels of efficiency and productivity. factor conditions include any factors of production that a firm uses in its businesses.e. Still other factors would be educational and legal 5 . Demand conditions depend both on the quantity of demand as well as the sophistication level of consumers in a home market. such as entrepreneurship and innovation. The second element of the model is known as factor conditions. According to Porter. such as land. demand conditions are associated with a country's level of economic development. we expect that: Hypothesis 1: More demanding consumers in the home market will positively impact a firm's global competitiveness. water systems and telecommunications. capital and also naturally occurring raw materials.The first of the four elements is known as demand conditions. Therefore. These include the traditional factors of production. cosmetics and fashion) and the Swiss insistence upon precision (i.

This could be heated. differentiation. the use of state of the art technologies or globally progressive human resource practices in the related industries would likely mean that the focal industry is also using such techniques. firms would have to expend their own resources to provide such structures for commerce and transactions. However. Other common strategies include growth. Rivalry indicates both the number of players and the level of competition among firms in an industry. or global or domestic. A more crowded structure would indicate multilevel competition and therefore greater competitiveness. which will add value for the end consumer. Strategy describes the types of actions firms utilize to achieve both long-range and short-range goals. Growth strategies would be associated with higher competitiveness because the ability to pursue growth internally or externally would be indicative of overall business health. Firm strategy. supporting industries that exhibit unique practices will create competitive advantages for the firms they serve. the stronger the focal industry will be. the more they will enhance the success of businesses located in the country. The third element of the model is known as related and supporting industries. maintenance or restructuring activities. Therefore. This point on the diamond refers to several key strategic factors that characterize a firm. which would lead to a competitive advantage in the marketplace. Porter classifies these factors into five major categories: human resources. capital resources and infrastructure. This aspect of the model includes the importance of enterprises that indirectly or directly affect a given industry. mid-range.systems. structure and rivalry is the fourth element in the model. physical resources. competitive or monopolistic. The more advanced these factors are. These are often either low-cost. non-rivalrous or 6 . For example. Therefore. Structure refers to the industry composition. focus strategies or some combination thereof. contractors or even outsourcing ventures. Without them. These most often encompass suppliers or distributors that serve the industry at hand. we expect that: Hypothesis 3: Strong and dynamic related and supporting industries in a firm's home market will positively impact the firm's global competitiveness. Similarly. This describes the degree to which an industry is concentrated or dispersed. The model proposes that the stronger these industries are. they could also include consulting companies. knowledge resources. Porter describes these ancillary businesses needed by firms as related and supporting industries. The underlying assumption is that highly competitive supporting industries will drive the focal industry to be more competitive. These factors provide needed inputs and systems that businesses use to gain competitive advantages over their rivals. we expect that: Hypothesis 2: More advanced factor conditions in the home market will positively impact a firm's global competitiveness.

S. the number of patents the firm had established with the U. total revenues were calculated for each of the 9 industries.204. South Korea had I company out of the 11 on the list within petroleum refining. Similar aggregate sales measures have been used by Shrader et al. Therefore. Each of the 9 industries was summarized and given a total score for each nation. Related and supporting industries were identified for the automotive industry from the Fortune list of global industries. a greater number of firm actions as well as a greater number of competitor responses in the focal industry lead to greater competitiveness of the firm. This is considered to be a more advanced indicator than the number of telephone lines and has been utilized by other researchers (Bandyopadhyay. Porter states that advanced factors are more significant than basic ones and specialized factors are more relevant than general ones. U. Greater rivalry in an industry would lead a firm to higher levels of competitiveness visa vis its rivals.811 million. These were oil and gas. 2001). This company had revenues of $33. electronics. For the year 2001. Rivalry is thought to be the most comprehensive of the three factors. Patent Office as of the year 2001 was combined with the number of internet hosts in an equally weighted equation to create a the composite score for factor conditions. patent filings were used. chemicals. The competitive advantage of firms is usually based on these types of factors. For example. and each nation's percentage of total revenues was determined from each industry. mining and crude oil production. the number of internet hosts per 1.811 or .000 people in the headquarters location of the focal firm was used as a proxy for communications infrastructure. Secondly. insurance. They have been used to assess technological innovation in the international business literature research (Bresman. metals.0274 for petroleum refining. Porter's concepts of physical infrastructure and knowledge resources were used.somewhere in between. (2000) and Autio et al. (2000). Total petroleum refining revenues were $1. To capture both advanced and specialized factors. as it often indicates the underlying strategy and structure of the competitors. This construct was also computed using a composite score. Thus. building materials and glass. Here. 7 . banks and petroleum refining.S. First. we expect that: Hypothesis 4: Greater rivalry within a firm's home market will positively impact the firm's global competitiveness Factor conditions include naturally occurring factor endowments as well as man-made ones.204. 1999). This score was used as the measure for related and supporting industries.008 million.008/1. South Korea therefore received a score of 33. Birkinshaw and Nobel.

Khanna and Palepu. 2000). similar testing the model using the banking industry confirmed the positive relationship between demand conditions and firm performance and the positive relationship between factor conditions and firm performance. Hoskisson and Kim. the structure of the industry was ascertained by using a count measure. it would be impossible to include every such item. the data here support the assertion that strong. In the future. where acquisition activity received a score of +2. acquisition and divestiture activity for the firms in the sample. as few studies have achieved this result in the international business literature. 2 and 3. It is customary for most. we can expect the constructs to be refined and solidified. Not every construct incorporates every concept from the theory.Firm strategy. The findings here show very strong support for Hypotheses 1. First. A few comments are in order about the operationalizations of the constructs. through the development of this stream of research. high-end automotive producers choose to introduce their products in these markets to satisfy the most 8 . if not all. merger activity received a score of +1. First. DISCUSSION AND CONCLUSION This study provides empirical evidence in support of Porter's model describing the Competitive Advantage of Nations. so it received a score of Count measures such as these have been used by other scholars to indicate levels of activity by firms (Hitt. Japan has 9 companies listed within the top 50. structure and rivalry indicates strategic actions taken by the players in an industry as well as the amount and type of competition within an industry. Instead. These two scores were transformed to percentages. there is anecdotal evidence from Japan. Certainly. the facets of the diamond had to be constructed. thus influencing performance to a large degree in both models. This is noteworthy. With such multifaceted constructs. For example. This study is considered exploratory research. demanding consumers in a country will serve to increase that country's national competitiveness. structure and rivalry. Similar ranking scales have been used by Elsbach (1994) and Burpitt and Rondinelli (1998). Then. weighted equally and combined to create firm scores for strategy. This construct was also measured using a composite score to incorporate multiple elements of the concept. no change in the scope of activity resulted in a score of 0 and divestment activity received a score of -l. This is noteworthy. In addition. Germany and the United States to substantiate this. In fact. 1997. this parameter estimate was more than twice as large as the next estimator. Industry structure was calculated as the number of domestically headquartered competitors within a country. These results reflect positively on this specification of the model. firm strategy was assessed by evaluating the three year period 1999-2001 for merger. As such. A Likert scale of -1 to +2 was used. as previous iterations of this research yielded similar results using different operationalizations. this analysis incorporates the most comprehensive and assessable items within the four elements of the model.

This underscores the importance of related and supporting industries in the context of global competitiveness. structure. the lack of evidence for Hypothesis 4 is noteworthy.demanding customers in the world. Secondly. rubber and chemical industries over the 20th century has also supported this finding. Perhaps this may be due to the fact that those firms operating in a highly competitive atmosphere spend most of their efforts fending off domestic competitors and therefore are unable to expend efforts on globalization. This finding bolsters this claim and provides evidence for firms that may relocate their businesses to become more competitive. and so domestic industry structure is irrelevant. glass. Without a network. Additionally. as many developed nations committed to an advanced business infrastructure and an emphasis on innovation through the development of proprietary intellectual property have been those with leaders in the field of automotives. firms can not hope to be worldwide leaders. Linked businesses in South Korean chaebols and Japanese keiretsu have been a large factor in the success of these firms globally. Or. This finding points to the need to 9 . This is significant and should be considered by nations trying to improve or maintain their global rankings in business. this parameter estimate was the second largest and the most statistically significant. This finding may indicate that high levels of domestic rivalry do not necessarily make global firms more competitive. 2003). rivalry and national competitiveness was indicated by the data. Historically. Thus there may be a separation of global and domestic competitors. factor conditions. structure and rivalry is not represented accurately. Advanced factors are the combined result of private business innovations and concerted governmental efforts to improve and maintain underlying infrastructures. it may be that global competitors do not waste time in highly-rivalrous domestic industries. The United States' emphasis on building the tire. this result has been true. No relationship between firm strategy. there is automotive industry research to support these results (Boudette. An alternate explanation here is the possibility that strategy. It points to the need for companies and governments to encourage and support ancillary industries to enhance global competitiveness. Finally. It might also mean that domestic industry structure does not play a large role in firm competitiveness. do positively influence national competitiveness in the automotive industry. In both models. perhaps because factor conditions are indirectly related to firm success. steel. possibly due to the fact that industries today are largely global. as expected. This finding gives support to the argument that governments can and do play a large role in their own industrial global competitiveness. The issue of strong related and supporting industries advancing and strengthening primary industries has historically been true for the automotive industry. This estimator had the smallest impact on performance for both the revenues and the assets model.

It may be possible to model this factor and to include it in future work. location and chance could be highly beneficial to firms with this recognition. Such additional research will lead to new theoretical models describing the dynamic international business climate of today. Further evidence from other industries will lend additional verification of the model as one of the building blocks of international business research.html#axzz15intB772 http://www.reconceptualize this construct to better incorporate firm strategy into the model. The global winners in the future will be those that learn from those that have come before them and such models will help facilitate that process. Governments no doubt play a substantial role in a firm's rise to worldwide competitiveness. It represents the stochastic element within the model. governments are indirectly included in all four tips of the diamond through their administration of regulation.emeraldinsight. In summary.valuebasedmanagement.wikipedia. legal proceedings and infrastructures. Works Cited http://en. Porter obviously saw how the impacts of timing. Certain aspects of the data do not accord to the model precisely. While not an explicit part of the model.com/journals. Porter's model depicting the Competitive Advantage of Nations is illustrated quite well by the global automotive industry.org/wiki/Diamond_model findarticles. Porter's consideration of the impacts that governmental forces and luck have on global competitiveness should be addressed. Thus.com/6865-michael-porters-diamond-theory-its-application. It is highly unlikely that firm strategy and rivalry are unrelated to firm performance.net/methods_porter_diamond_model.html http://www.com http://www. This possibility should be investigated in future research.htm?articleid=1793379&show=html 10 . Luck is essentially the wild card factor that would be difficult to identify and operationalize.citehr. They may be more clearly defined in future editions of the model. but the model does identify the key elements of national competitive advantage which lead to global competitiveness among leading automotive manufacturers around the world. capturing the strategic actions of a firm would most likely lead to a revealing link between strategy and performance.

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