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Discursive essay about Porter's Diamond Model
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To what extent is Porter’s Diamond a useful concept in explaining the home
and host locations of international businesses?
(Discursive Essay)
Iliyana Stareva
Word count: 2000
Turnitin score: 11%
In international business theory there are a number of useful models for the external
environment analysis of specific countries. These methods can be applied by
companies that aim to internationalise and so to define the right location(s) abroad in
terms of institutional as well as cultural fit and success opportunities.
Correspondingly, concepts like this also provide insightful information for explaining
the location choices which organisations have already made. One such framework is
the so called Diamond Model introduced by Michael Porter in 1990. This essay tries
to determine its advantages and disadvantages as a tool for the examination of firm’s
home and host location decisions by focusing on two major MNEs: the world’s
second-largest high-street retailer – French Carrefour1 and UK’s famous Marks &
Spencer2.
Porter’s Diamond Model (1990: 73) argues that “nation’s competitiveness depends
on the capacity of its industry to innovate and upgrade” and therefore is determined
by a nation’s level of productivity. From an organisational perspective this means that
national competitive advantage depends on the nation’s ability to provide a home
base for companies to sustainably improve their products and services in terms of
quality, features, technology and so to successfully compete in highly productive
industries internationally. Hence, the advantage of the framework is that it identifies
four important, interrelated factors that create and illustrate the essential national
environment where companies are born, grow and build sustainable competitive
advantages (Porter, 1990: 78). The concept is then quite useful for companies to
1 Ca. 9500 stores in 32 countries across Europe, Latin America, Asia (ca. 4580 in France) (http://www.carrefour.com/) 2 Ca. 1150 stores in 44 countries across Europe, Middle East, Asia (ca. 700 in the UK) (http://www.marksandspencer.com/)
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perform the necessary research and identify which countries would be most suitable
for internationalisation.
The first determinant, factor conditions, are the factors of production such as land,
raw materials, capital, infrastructure etc., that are not inherited, but developed and
improved by a nation – e.g. skilled labour (Porter, 1990: 79). Thus, sustaining
competitive advantage depends on the factor creation ability. For instance, Carrefour
was originally family-owned but when it decided to internationalise, a high amount of
capital was needed so it went public in 1970 to support itself financially (Shiue, Horng
and Yeh, 2006: 2).
The second driver is demand conditions, i.e. the existence of sophisticated and
demanding customers that pressure companies to create new products to meet
growing buyers’ needs (Porter, 1990: 82). Thus, organisations discover new trends
and exceed customer expectations by innovating. This is indeed the case of
Carrefour when pioneering in 1963 the hypermarket concept creating an entirely new
way of shopping where customers can buy everything from groceries and clothing to
electronics under one roof (Verdict, 2010). Furthermore, mature demand and
saturated markets should rather be an incentive to innovate. Again in Carrefour’s
case, because of the growing number of single households and smaller families,
which results into a “smaller shopping basket” and a reduced reliance on
hypermarkets, the retailer has now introduced its new stores – Carrefour Planet3,
(Verdict, 2010: 4).
Related and supporting industries are the next factor, which represents the presence
of e.g. capable suppliers, also competitive on a global scale (Porter, 1990: 82).
Establishing good relationships with partners within highly developed clusters of
industries provides companies with some significant mutual benefits such as better
and faster information and communication, cooperation and support, know-how and
exchange of ideas. Those industries are very much dependent on each other
throughout the whole supply chain for mutual profit realisation. For instance, due to
strong competition, M&S has recently pressed suppliers to a 1.25% turnover
contribution with the group claiming that their growth mainly depends on retail sales
and so suppliers do not really have a choice but to accept those terms (Financial
3 Carrefour Planet – multi-specialty grocery store similar in size and products format as the hypermarket, but more departmentalised (Verdict, 2010: 10)
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Times, 2011). Or, when M&S switched to low-cost providers in the late 1990s and
basically destroyed its long-term relationships with previous suppliers, it damaged its
reputation enormously (Mellahi, Jackson and Sparks, 2002: 23). Another example
that illustrates the importance of related industries is Carrefour’s failure in the US
because it was unable to get favourable prices from suppliers and to keep its low-
cost margin (Shiue, Y., Horngand Yeh, 2006: 5).
The last part of the diamond is firm strategy, structure and rivalry, i.e. the choice of
organisational structure and management style and the nature of domestic
competition (Porter, 1990: 82). In the internationalisation process this determinant
indicates if companies have found a fit between their own characteristics and those
of the industry they have entered. Here Carrefour’s winning international strategy is
namely decentralisation by letting store managers to make their own decisions
according to local markets and traditions (Cambra-Fierro and Ruiz-Benítez, 2011:
151). In the late 1990s M&S’s EU expansion failed because the company was
implementing its tried and tested in the UK strategy with a strong emphasis on a
British brand and no localisation (Free Case Study, 2011). Further, rivalry is arguably
the most important factor in the creation of competitive advantage, because a
stronger competition has powerful stimulating and learning effects for innovations.
Hence, rivalry is seen as positive, because it pushes organisations to anticipate
trends and satisfy non-existing needs yet as well as to seek new international
opportunities. A good example here is Apple’s iPhone, iPod and iPad.
In addition, the model puts emphasis on how home locations affect companies to
grow and develop competitive advantages, i.e. how the own nation ‘prepares’ them
for internationalisation. Hence, the diamond helps to identify home-based
advantages and then to exploit them abroad. Some may also need to redefine,
rediscover their core competences at home as it is in the example of M&S, that
withdrew all its EU and US stores in the beginning of the new millennium to focus on
its core market, the UK, but has recently started an expansion again (Collier, 2007).
France as a home base has proved to be a very good place to prepare Carrefour to
expand in similar markets such as Brazil, Spain etc. This might explain the fact that
new or differentiated products are usually introduced and tested first at home. For
instance, Carrefour Discount brand was originally developed for the French market,
but now successfully expands to Belgium, Italy and Spain (Verdict, 2010: 19).
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On the other hand, the diamond does not include the influence of governments and
chance even though they are discussed in Porter’s book. Nevertheless, governments
can influence all other factors through e.g. regulations, trade barriers, incentives etc.
For example, in many European countries government legislation for smaller stores
very much affected Carrefour’s EU expansion so that it had to come up with a new
store format (Verdict, 2010: 4). Especially in emerging economies nowadays
governments play a significant role in factor creation (e.g. infrastructure, health care,
education) and can influence the internationalisation process of organisations. For
instance, this factor was certainly considered by both M&S and Carrefour in China
because for its nation’s business protection the government hardly allows wholly-
owned subsidiaries, but MNEs must rather form a joint venture with a Chinese
company, which is basically the only way of entering the Chinese market.
Furthermore, chance events such as wars are a considerable factor too because
they cannot be controlled by companies. Another current unpredicted event is the
debt crisis in Europe and the rather weak European Union which now has an
enormous impact on businesses. For instance, after years of non-presence in the
French market because of past failure, M&S opened a store in Paris this November
with rather disappointing results (Peacock, 2011). This could be due to the current
problems of the EU. So, it is questionable whether M&S has chosen the right
moment to internationalise, but also the right location.
Moreover, the framework does not really consider culture as a driver. Culture though
is probably one of the most important factors that define a nation and its way of doing
business. Demand conditions and customer needs are very much impacted by
culture such as for example food habits (e.g. fast food in the US). Cultural
implications and differences need to be considered when going abroad to see if there
is a possibility of transferring identified needs at home or if localisation is needed. For
the understanding of cultural impacts, Hofstede’s dimensions4 could be used. An
example here would be Carrefour’s decision to first expand into culturally similar
locations such as Belgium, Spain and Brazil (Frynas and Mellahi, 2011) which
according to Hofstede’s dimensions have very similar scores.
4 www.geert-hofstede.com
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Consequently I think that for the understanding and choice of home and host location
the model should only be a starting point of the environmental analysis, i.e. a
research on a macro level, but it should then be followed by a more thorough
research on a meso (e.g. competitor analysis, Porter’s Five Forces) and micro (e.g.
value chain analysis, cultural analysis) level (Hollensen, 2011: 104). Even though
such researches are very costly and time-consuming, they are necessary for making
the right decision because location is crucial for international success. If not, a failure
because of a wrong location would be even more costly as in the case of M&S when
it closed all its stores in the US. That is why additional models should be used to
gather more in-depth and purposeful information on exact needs and industry
characteristics in order to explain what is behind organisational location decisions.
In conclusion, no model can be perfect and in fact, no model actually is simply
because countries and companies differ fundamentally and no generalisation is
possible. All environmental analysis frameworks have missing considerations. What
matters from a company’s perspective however is the combination of the right
models that best fit to its own needs and capabilities for sufficient results. Porter’s
Diamond Model alone is not enough for fully making or explaining the decision where
to internationalise. It is however an excellent starting point because it provides the
basic selection criteria for understanding home and host locations and how to build
and exploit competitive advantages.
References:
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Cambra-Fierro, J. and Ruiz-Benítez, R., 2011. Notion for the successful management
of the supply chain: learning with Carrefour in Spain and Carrefour in China.
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Collier, N., 2007. Marks and Spencer. In: Johnson, G., Scholes, K. and Whittington,
R., 2008. Exploring Corporate Strategy: Text and Cases. 8th ed. Harlow:
Pearson Education Limited. pp. 831-839.
Financial Times, 2011. Suppliers feel the pinch as retailers seek better terms. 21
November 2011.
Free Case Study, 2011. Case Study on Marks and Spencer. [online] 22 February
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<http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/
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Shiue, Y., Horng, D. and Yeh, S., 2006. Carrefour’s Global Reach: A Case Study of
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