The Porters Diamond Model Management Essay

Some may argue that institutions play a heavy role on businesses making international capacity decisions however like all opinions there is always another side to it. With research and investigations we can weigh the impact of institutions in these decisions and discover the other factors that may affect a company’s decision to globally expand. In this report I have found that institutions do affect these company decisions however formal and informal institutions affect them in different ways. Thus I have investigated some recommendations for firms to use as they may fall into some institutional stumbling blocks.

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Introduction

When trying to globally expand, firms have to consider many problems or factors that could affect whether they are successful in doing so or not. Formal and informal institutions both can affect the entrance of a firm however a firms position in the industry can also do this. Analysing a firm’s strengths, weaknesses, opportunities ad threats (SWOT Analysis) I will endeavour to explore how these factors alongside competitive advantages and institutional inputs play a role on interational capacity decisions.

Methodology

Methods used to carry out this research:

Journal articles

Diagrams

Journal Articles

I used journal articles as they are a very useful way of getting examples to back up my views of this report discussion. This is useful because theories are followed by real case examples which is useful to the reader as they are able to put theory into practice.

Diagrams

Theses are my useful way of explaining how some of the theory links. For example, SWOT analysis; rather than it being four meanings, with the use of diagram, they become four meanings that interlink with one another.

Findings/Discussion

4.1 Institutions

Every country has a number of institutions which influence the choices that firms make in international capacity decision making. Mike W. Peng defines institutions as humanly devised constraints that structure human interaction (Peng, 2009). Their ultimate role is to reduce uncertainty and they do this through arms length transactions, institutional transactions and relational contracting. They come in two categories, formal and informal. Formal institutions are laws, regulations and rules and informal institutions are norms, culture and ethics or in other words the rules of the game. So for example, the Chinese law disallowing foreign companies to publish books on their own (Peng 2009). However, the informal ‘rules of the game’ are sometimes that a foreign company can pay a Chinese company to have it under their published name or that they will as a result of this receive a proportion of the profit the book makes.

However I believe that culture is not a factor strong enough to affect business performance. The journal of international business studies state that “regression results failed to provide statistical relationships between cultural distance and entry mode choice, international diversification and Multinational Enterprise performance” (Journal of International Business Studies, 2005). So from this research we can see that although institutions can affect a firms international capacity decisions, in particularly informal institutions do not always have a hands on impact if any impact at all.

Porter’s Diamond Model

This research had me wondering why some countries such as China and Japan dominate industries in different countries whilst some other countries struggle to do so. In my investigation of this matter I came across Porter’s Diamond which was founded in 1990 when he wanted to find out why some nations do so well in achieving international success for example Japan in the automobile industry (Shimokawa, 2010). Neither the theory of comparative advantage or the Heckscher Ohlin theory can properly explain this thus Porter came up with his diamond theory. His research landed him to the theory that suggests that there are nations have four broad attributes that ‘shape the environment in which local firms compete’ (Hill, 2013). These four attributes are illustrated in the diagram below.

(businessmate.org accessed on 20/11/2012)

4.2.1 Factor conditions-

We must note the difference between basic and advanced factors. Advanced factors give us a competitve advantage as they are a product of investment by governments, companies and individuals. A nations advanced factors can be upgraded by government investments of improving the overall skill and knowledge of the population through methods such as investing in higher education (Hill, 2013). An example is Japan’s large number of engineers that have importantly contributed to the success in many of their manufacturing industries http://europa.eu/rapid/press-release_MEMO-12-204_en.htm).

4.2.2 Firm Strategy, Structure and Rivalry-

His research goes on to stating that management ideologies characterise nations and this determines whether or not they are able to build a competitive advantage nationally. Japan and Germany have many engineers in top management of their firms which has contributed to the improvements made on manufacturing processes and production designs. He continued with a constrast of the United States many financial experienced people at the top end of management in their firms which has led to neglection in the improvement of manufacturing processes and product design (Hill, 2013).

4.2.3 Demand Conditions-

Demand is a large factor in the success of a firm’s international capacity success and this is made a point in Porter’s diamond. Porter notes that nation whos consumers are not demanding is nation where the firms fail in gaining competitive advantage. By consumers being demanding, firms are urged to increase their standards or quality and service leading to an increase in innovation. This enables them to broaden their target market globally and become a real competitior in the industry (http://www.fundinguniverse.com/company-histories/nokia-corporation-history/).

4.2.4 Related and Supporting Industries

Lastly, Porter notes that the presence of suppliers and related industry is important in the accomplishment of having a national advantage. By having a firm for instance in the United States in the industry of semiconductors brings a technological advantage to the firm in the industry of personal computers and other tecnically advanced products (Hill, 2013). Rather than the personal computer firms having to develop their own technology, they can use that which was developed or used by the industry of semiconductors.

Competitive Advantage

Expanding on Porter’s Diamond theory, my fndings directed me to the theory of competitive advantage and a few examples to go with it. The firms that came to mind when analysing competitive advantage were KFC, Apple and Primark so I sought to investigate these companies.

All firms seek to have a competitive advantage over the other firms in the industry by ‘offering consumers greater value, either through lower prices or by providing more benefits that justify higher prices’ (Kotler et al, 2008). A few examples are the following: KFC has a competitive advantage over other suppliers of fried chicken as they have a unique taste to their chicken which no one can copy (Abhinav Sharma’ Blog), thus providing more benefits in justification of their higher prices. Whereas, if one were to buy chicken from a regular chicken and chip shop, they are very likely to taste the same or similar to one another. Apple, in particular the iPhone 5 has a competitive advantage against other mobile phone producers for example Samsung because it has a unique software exclusive to the phone 5 and other Apple products. It offers the consumer more in the form of an update of ‘Siri’ the mobile’s robot, its own replicate of Google maps, accessibility- making it user friendly to a wider audience of people including those with disabilities and many other updated and new features (www.apple.com). Primark has a competitive advantage against other firms in the clothing industry because they sell clothes at a lower price but still up-to-date with the latest fashion trends. The last example is the Global Strategy textbook published by Cengage Learning. They had a huge competitive advantage against other global strategic textbooks. This was that they were the only textbook to be successfully translated into Chinese languages as they had the only translator who was successfully able to do this.

SWOT Analysis

SWOT analysis makes it possible for firms to assess the strengths, weaknesses, opportunities and threats of their product or group of products. It is ‘a distillation of the findings of the internal and external audits which draws attention to the critical organizational strengths, weaknesses, opportunities and threats facing the company’ (Kotler et al, 2008). Strengths and Weaknesses are seen as a Resource based view which means that it counts for internal matters in the firm. Whilst Opportunities and Threats are Industry based views thus they count for external matters i.e. competition outside the firm.

Strengths (S)

· A distinctive competence?

· Well thought of by stake holders ?

· An acknowlegded academic leader?

· Well conceived operational strategies?

· Location advantages?

· Insulated from competitive pressures?

Weaknesses (W)

· No clear strategic direction

· Obsolete facilities?

· Weak Image?

· Falling beind in R&D?

· Competitive disadvantages?

· Vulnerable to competitive pressure?

Opportunities (O)

· Faster market growth?

· Vertical integration?

· Serve additional customer groups?

· Enter new market or segments?

· Add complementary courses or services?

Threats (T)

· Likely entry of new competitiors?

· Adverse government policies?

· Adverse demographic changes?

· Vulnerability to recession and business cycles?

The above table lists some examples of strengths, weaknesses, opportunities and threats from the Managerial Auditing Journal (Managerial Auditing Journal, Volume 15, issue 8).

6.1 SWOT Analysis of Wal-Mart

Strengths

Wal-Mart is a well known supermarket because they are the world’s largest retailer and has had much success in capacity building (Walmart 2012 Annual Report). They have expanded into many different countries but out of all of these, the United States has the largest proportion of Wal-Mart stores (money.cnn.com). Their competitive advantages and equally their strengths, are that they benefit from selling their produce at low prices, they have highly efficient operations and logistics and information systems.

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Opportunities

Mexico did not have large food stores where consumers can go and buy the majority of their groceries from, therefore they were buying from multiple small shops (Hill, 2013). This was seen as an opportunity to Wal-Mart in the Mexican industry, so they set out to expand into Mexico with their large shops. Having the resources and economies of scale to be able to sell goods at such cheap prices is a major opportunity that Wal-Mart took advantage of when going to enter different countries. The lower class citizens of Mexico would have been more appealed to buying from Wal-Mart simply because it is cheaper than their usually shopping choices. However, the lower class do not make up the majority of citizens and not all of them would be likely to automatically change where and how they shop because of the entrance of Wal-Mart into the industry.

Weaknesses

However on expanding into Mexico some of their weaknesses were uncovered due to the culture of the Mexican people. When they started trading in the United States they had a problem of not being able to adapt to the American way of shopping which was buying from small shops rather than this big supermarket. Nevertheless, from 1950, they were able to overcome this problem by gradually changing the culture into buying from Wal-Mart’s supermarkets (Hill, 2013). The Mexican culture is very similar; people do not tend to buy in bulk, rather they have their select shops from which they purchase certain goods. For example they preferred to buy fresh produce such as meat from local shops. As a result of this, Wal-Mart’s way of shopping did not suit the culture and unlike the case in America, they were unable to change their shopping culture. So this was in-turn their weakness; they could not adapt to all shopping cultures (Hill, 2013). Another weakness was the location of the Wal-Mart stores. As a result of the shopping culture, people are not used to travelling far to go food shopping so where the Wal-Mart stores were located were not convenient for all domestic shoppers.

Threats

Surprisingly, the threats imposed on Wal-Mart were from the small businesses that people were buying their selected few goods from. They were a huge threat because of the informal institution of culture which was a strong part of the Mexican people. Regardless of Wal-Mart being a large and very successful business, they were blocked by culture from successfully entering and accomplishing global expansion into Mexico. The smaller firms had the advantage of having customer loyalty from the Mexican people for years which is not something that a new and very culturally different business could come a steal.

6.2 SWOT Analysis of Japanese Pharmaceutical Firms

Strengths

Japanese has a large base of pharmaceutical companies with over fifteen firms. One of their most popular firms is Takeda which is now ranked as the top over Pfizer. Seeing as they are so successful, they had an increase of sales by 2.7% between 2008 and 2012 and they spent on average 326.04 billions of yen a year between 2008 and 2012 (www.takeda.com). Around the world they have affiliates in 71 countries and employ over 30,000 workers (ww.takeda.co.uk). It is clear to see that growth and international expansion shouldn’t be much of a problem for Takeda!

Weaknesses

Despite this huge advantage of having this majorly advantageous pharmaceutical company in their ownership, the companies in Japan themselves are not world famous and this is due to the formal institutions of rules and regulations in Japan. The health care system in Japan just simply do not reward innovative new drugs (Peng, 2009). The way in which this happens blocks these firms from expansion, whether that be domestically or globally. The prices of drugs produced in Japan are negotiated with the Ministry of health, labour and welfare and once set, are forbidden to change by law and the only way they do change is if they fall. Due to the lack of income that these firms attain, they have less money to spend on research and development and on the grounds that they will not receive any extra credit for invention or innovation of new drugs, the incentive to do so is very low. Instead, Japan relies on licensing Western drugs making the country reliant on the western world (Peng 2009).

Opportunities

Western companies are now beginning to prefer selling their drugs on their own in Japan without the help of any Japanese institutions. This could act as an opportunity for Japanese pharmaceutical firms boost their research and development and increase their International Capacity. In addition, because of the success of Takeda, they are able to expand and have a large base in Japan. They are currently ranked as the second to the top Pharmaceutical company in the world. To maintain this place they ,must boost their research and development; in 2009 they spent 296.4 billion yen on R&D, 2010 was 288.9 billion yen and 2011 was 281.9 billion yen (www.takeda.com). This shows a steady decrease, however this opportunity can give a ride to research and development helping Japanese Pharmaceutical firms to expand and eventually globally.

Threats

Pharmaceutical firms in Japan face threats from two main sources: the formal institutions in their country and competition from Pfizer-the world’s largest Pharmaceutical Company (www.ihs.com). Firstly, if the government Minister of health, labour and Welfare do not see a problem with Western pharmaceutical firms selling on their own in Japan, the pathway for Japan firms is closed. It has been a norm that pharmaceutical companies in Japan are not heavily significant so for the government to change it abruptly could put pressure on these firms. For this reason, they would be more inclined to form a deal with the existing companies that sell their products.

Pfizer is a very strong company and with this comes serious competition for those in the same industry including Takeda. They operate in 180 countries around the world which is twice the number of Takeda. For Japanese firms to ensure they have a steady hand in this industry in Japan, they will need to invest more into research and development so as to be strong leaders in Japan and on a global scale.

6.3 SWOT Analysis of IKEA

Strengths

IKEA has many strengths that has enabled them to become the worlds most successful retailer. They have 301 stores globally in 41 countries (www.ikea.com). As they are very well known and evidently impressive to customers, they have the advantage of large and wide scale customer loyalty. They have on average 410 million shoppers a year. They are a number of reasons why customers are loyal to IKEA and these begin with their low prices. The benefit of economies of scale is that companies are able to produce a large number of goods for a lower price that firms without economies of scale (Griffiths et al, 2011). Secondly, they practice good customer service skills which encourage customers to return to their stores knowing that they will have a good shopping experience.

Weaknesses

As IKEA is a Swedish founded company therefore the Swedish culture is rather European. This forms a cultural problem when trying to expand into other countries. IKEA encountered this problem when expanding into the United States in the early 1990’s in the form of items not matching the American norm (Hill, 2013). For example IKEA measured their beds in centimeters whereas Americans use the king, queen and twin size methods. Cups were too small Americans tend to put a lot of ice in their drinks and sofas were not big enough. Coming into a different and very strongly cultured country makes it harder for new firms to succeed with their own culture. Therefore IKEA resulted in changing their way of doing things and making products to fit with the American way of life (Hill, 2013). This has resulted in an increase in sales.

Opportunities

Seeing the success in America, it led to IKEA now expanding their capacity to China. Like America, their store appeal greatly to the Chinese people in the way that it is laid out like typical Chinese style apartments with a balcony section which adheres for the apartment designs. They also located their stores in high resided areas as it is not a large popularity of Chinese citizens that own cars so it is important for the stores to be easily accessible for all. IKEA also saw the opportunity to appeal to middle class people who look for high quality items at a low price. So because of this they have ordered their stores in a way that the customer has to walk around the whole department to get to the exit or the tills whilst on their way seeing many items which may tempt them to purchase more than they originally intended on.

Threats

The major threat to IKEA would have been when they first expanded into say the United States. Companies more well known and trusted by the American people would have had the advantage over IKEA before they changed their strategy to fit to the culture. Besides that, other threats include, new entrants into the industries that IKEA adhere to such as home ware: beds, wardrobes etc. For example, I recently purchased some wardrobes from IKEA as they were a company I trusted and had positive experiences with in the past. However, I was disappointed with the service and the quality of the goods I purchased and as a result I returned the items and purchased from Homebase where I was much more satisfied. From this experience I can now say that Homebase is a strong competitor to IKEA with regards to homeware.

7. The UK Government

There are other ways in which institutions influence a firms international capacity decisions. The UK government for instance has many methods of doing so. These include the Employment Policy, Regional Policy, Inflation Policy, Education and Training Policy, Taxation Policy, International Policy and by establishing the ‘rules of the game’ (http://businesscasestudies.co.uk). The Employment Policy can help companies to find suitable employers to help expand their firm which coincides with the Education and Training Policy which make potential employees knowledgeable and skilled for companies to employ. For firms that wish to expand into the UK, the Inflation Policy helps them to be able to do so with the risk of sudden high prices for instance if they wanted to purchase a property to begin their international capacity building. The International Policy directly helps domestic firms with International capacity building as it promotes trade and encourages selling of British goods abroad.

8. Conclusion

To conclude it is fair to say that this research supports my view that institutions can have a range of effects on firms trying to exceed their capacity. These impacts can be positive and negative. In the case of Wal-Mart and the Japanese Pharmaceutical companies, it turned out to be negative but in the case of IKEA, they used it to their advantage and indeed increase their international capacity. However my view also extends to the fact that it is not insitutions alone that affect a company’s international capacity decisions but it is also their competitive advantages and position in the global market.

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