International Business 1

Running Head: INTERNATIONAL BUSINESS

Porter’s National Diamond Analysis

[Name of the Writers]

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 International Business 2

TABEL OF CONTENTS

INTRODUCTION ................................................................................................................................................ 3

PART 1: PORTER’S NATIONAL DIAMOND ANALYSIS ..................................................................................................3

Developing the ‘Diamond’ Framework ................................................................................................................4

PART II: CONTEMPORARY MANAGEMENT ISSUES ....................................................................................................10

1. Crisis Management as an Internal Issue ..................................................................................................10

2. Change in income of Company.................................................................................................................11

PART III: MARKET ENTRY STRATEGY......................................................................................................................12

CONCLUSION .................................................................................................................................................. 13

REFERENCES ................................................................................................................................................... 15
 International Business 3

International Business

Introduction

Porter has undeniably enhanced understanding of competitive advantage with his

published studies in The Competitive Advantage of Nations (1990) and On Competition (1998),

among others. His analytical framework, called the ‘diamond’ captures the major determinates of

competitive advantage of international business (Porter, 1990). Influencing the major

determinates are chance and government. Although Porter has focused his studies on developing

or newly developed nations, the principles may be applied to developing nations, as

demonstrated by Ainslie et al (2005). The core question was whether the principles would apply

to lesser developed countries such as the island nations in the South Africa and particularly

South African food retail industry. In this study we will discuss the Porter’s National Diamond

analysis (PND), two key management issues and the market entry strategy in the selected county

South African business environment to draw a clear conclusion and future recommendations to

the top management of the food retail industry.

Part 1: Porter’s National Diamond Analysis

In this study Porter’s diamond analysis will discuss, which attempts to identify the

sources of international competitive advantage, may be applied to lesser developed island nations

of the South Africa. Porter (1990, 675) stated that the diamond framework may be applied to

lesser developed countries (LDC) where they tend to have a competitive advantage in industries.

In these countries like South Africa, the basic advantage factors are cheap labour, abundant

natural resources, and location advantages which increase their ability for export businesses.
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Exports are sensitive to world market prices, leaving LDCs exposed to exchange rate and

resource cost swings. This problem is intensified when an LDC faces the protectionist policies of

the developed nations. Developed nations place trade restrictions on most of what an LDC does

well: textiles and agriculture. By lifting tariff and non-tariff barriers on these sectors through the

implementation of regional and multilateral trade agreements lesser developed countries may

have the opportunity to develop competitive advantages in certain industries (Ezeala-Harrison

2005).

Porter (1990) has rendered a major service to the global community in identifying many

of the explanatory variables of competitive advantage, which has shaped a new assumption to

understand why a country's success, but in some other industries. His analytical framework,

known as the "diamond", shoots the main determinant factors of competitive advantage. This

framework includes demand conditions, factor conditions, support and related industries,

corporate strategy, structure, and competition. Through a review of literature, the competitive

advantage on production was evaluated by investigating the existence of clusters using Porter’s

diamond theory.

Developing the ‘Diamond’ Framework

Porter (1990) found the answer to why a nation achieves achievement in a specific

industry in the course of four broad characteristics a nation possesses. These attributes shape the

home business setting by which domestic firms participate to support or obstruct the

establishment of competitive advantage. The four broad attributes, or what Porter defined as the

determinants of nation advantage, include: demand conditions, factor conditions, support and

related industries, company strategy, firm structure, and industry rivalry. The four

determinants work both as a system and individually to create the environment in which a South
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Africa’s food retail firms are created and compete to gain and sustain competitive advantage.

Besides the four attributes of nation advantage, Porter (1990) incorporated the functions

performed by the state and probability as issues affecting the proper functioning of the nation

attributes.

The complete framework developed by Porter was presented in Figure 1. Porter termed

the framework the diamond due to the obvious shape of the four determinants that it is a vibrant

arrangement in which all fundamentals interrelate and strengthen every other factor. These

systemic surroundings make it difficult to imitate the precise arrangement of the business in a

different country. In view of the fact that the diamond is a jointly strengthening scheme, the

effect of single determinant is dependent on the condition of the other determinants. Aiginger

(2006) explained that having one favourable determinant in an industry it will not lead to a

competitive advantage unless other determinants can be created to respond. Advantages in one

determinant may create or have a positive effect on other determinants. Nations are most likely

to succeed in an industry where the determinants or the diamond is the most positive. To gain a

complete understanding of the functionality of the diamond, each determinant was examined, as

well as the factors influencing the determinants and the functioning of the diamond as a system.
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Source: Wall et al (2008)

Figure 1: Porter’s diamond framework

Factor conditions: Economists have termed the resources or inputs necessary to produce

a product or service as factors of production, which include land, labour, capital, infrastructure,

and natural resources. Porter (1990) divided factors of production into two basic distinctions,

“the first involved basic and advance factors, where basic factors include natural resources,

weather, position, skilled and semi-skilled labour, and capital of debt (p. 89). Porter (1990)

examined that advance factors, including contemporary digital data communication

infrastructure, such as a university graduate engineers and computer scientists with high

academic qualifications, a complex subject and university research institutions (p. 77).

South African food retail is endowed with basic factors or they require very little

investment to create. These factors tend to be insignificant to the African national competitive

advantage or they prove to be unsustainable. Advanced and sophisticated features are more

important for company’s economic benefits in that they are scarcer due to their creation

demanding huge and continued investments in human and physical capital. While advanced

factors are often built upon basic factors, innovation requires advanced factors that are
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imperative to the design and creation of products and processes. The second distinction among

factors of production is developed on specificity, which Porter broke down into generalized and

specialized factors. Factors such as the thoroughfare system, the supply of debt capital,

motivated employees with college education or pool are also included in generalized factors.

These factors can be utilized in many different industries. Specialized factors occupy barely

skilled workers, road and rail network with precise assets, and information basis in meticulous

areas (Porter, 1990, p. 78).

Demand conditions. Porter (1990) asserted three significant characteristics of

requirements, composition, the dimension and prototype of growth, and the internationalization

of home demand, where the latter two are dependent upon composition of home demand. The

composition of home demand dictates “how firms perceive, interpret, and respond to buyer

needs” (Porter, p. 86). Home demand has important influence on economic benefit, more so than

international demand as its proximity, both physical and cultural, makes it easier and quicker to

monitor and recognize the buyer’s immediate needs and preferences.

The composition and quality of the domestic demand, relates to a certain extent than

amount influential on competitive advantage. More complex and demanding buyers, the greater

the pressure, product quality, features and services of local businesses, as well as enterprises able

to anticipate the needs of the buyer, in order to meet the high standard terms and conditions. The

scale and pattern of growth in domestic demand, with the ingredients, can strengthen its

competitive advantage. Porter (1990) believes that several features of this property include: (a)

the size of the domestic demand, it is able to take advantage of economies of scale, and (B) of

the independent buyer "stimulus entry and speculation in the business reduce the apparent risk

market enterprises will be shut down and limit the bargaining power of the dominant buyer, all
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profits (94), (c) the growth rate of domestic demand, which will lead to greater investment and

technological growth, (d) anticipating buyers needs earlier than foreign rivals, and (e) saturation

of the home market to create strong pressures to thrust along prices, bring in new description,

develop merchandise presentation, and supply other inducements for buyers to reinstate new

versions of old products.

This can happen when African domestic consumers are mobile and travel to other nations

to demand the products from their home market, or when home consumers are multinational

corporations with operations in other nations. Another mechanism of internationalization is

“when domestic needs and desires get transmitted to or inculcated in foreign buyers” (Porter, p.

98). This can occur when foreign travellers use the domestic products or services and take the

demand home.

Related and supporting industries. The presence of supplier industries and other related

industries in a nation is an important determinant of creation and sustainability of competitive

advantage. Porter (1998) stated that internationally competitive domestic suppliers create

advantages in other industries in several ways. The competitive related and supporting industries

can share common technologies, inputs, distribution channels, skills, customers, and even

complementary products, to foster technological spillovers and exchange of information that can

spur innovation and upgrading, and ultimately lead to competitive advantage. According to

Ketels (2006), the distribution of business knowledge would to spread between the business

companies, human resources because they can be shared educational and research organsiations.

When internationally successful related industries are present in a nation, they can create demand

for a complementary product. Porter referred to this as a “pull through effect” (1990, p. 106).

These complementary products provided by firms in the same nation may be more cost effective
 International Business 9

since the firms are used to dealing with their own rather than foreign firms. Lastly, firms from

related industries may feel threatened by new firms wishing to enter the industry putting pressure

on existing firms to improve their own competitive advantage.

Firm strategy, structure, and rivalry: Porter’s fourth determinant of competitive

advantage included the strategies and structures in which organisations are created, planned and

managed, in addition the environment of home rivalry (1990). Porter insisted that the objectives,

planning, and methods of organising industries differ extensively between nations, but distinct

patterns emerge within nations. The argument was made that a good fit should exist between an

industry’s sources of competitive advantage and its structure, and the strategies, structures, and

practices favoured by the national environment.

Government and chance: As shown in Figure 1, the government and chance are added to

the diamond to complete the system. They are not determinants of national competitive

advantage, but do play a vital role in influencing the four determinants. The government can

influence and be influenced by each of the determinants, both positively and negatively, which is

represented by the arrows pointing both ways (Porter, 1990). Each of the determinants is affected

in different manners. The Government's education policies and subsidies also affect factors

conditions. Set of standards and regulations will affect demand conditions and related supporting

industries.

A firm’s strategy, structure, and rivalry can be affected by the government’s involvement

in capital market regulations, tax policies, and antitrust laws. Porter (1990) viewed the

appropriate role of government as one of reinforcing the determinants of national advantage

instead of attempting to create the advantage itself. The role of government is viewed differently

as nation’s progress through successive stages of competitive development. During the early
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stages of development, especially relevant for developing nations, the government has the

greatest direct influence on national advantage. Factor creation is a vital role for the government

at this stage to encourage savings, accumulation of capital, and develop infrastructure and

technology. As a nation develops, the government must shift to an indirect role, always aware of

its influence on the diamond. The tools used in the early stages of development now become

counterproductive, so the government’s role is to create an environment where firms are the

innovators, and the government is the “facilitator, signaller, and prodder” (Porter, p. 672).

Chance, also lying outside of the diamond, plays an important role in influencing

competitive advantage. Some illustrations of chance events include development and innovation,

oil shocks, major changes in world financial markets, and wars. Chance events may alter the

diamond by creating forces that reshape an industry’s structure and allow for discontinuities that

shift an industries competitive advantage.

Part II: Contemporary Management Issues

When we start talking about management issues at South African food retail industry,

there are some very basic internal as well as issues which are increasing the impacts of

management at internal level. There are a large number of contemporary issues in South African

food retail industry; however, here we will discuss the flowing two among them.

1. Crisis Management as an Internal Issue

Crisis process is a threat for the current situation and future of a business, it is very clear

that administrative and organisational structure will require a significant change. During the

crises, organisational stress reaches the top level. On the one hand try to find suitable solutions to
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resolve the crisis, on the other hand, the tension created by uncertainty and running time

pressures negatively influence the management structure of enterprises. Business managers have

to try minimizing damages with precaution actions. To do this the first way is to make a series of

organisational and administrative structure changes. Crisis requires rapid reactions, for this

reason business structure is developed to provide quick decision. Standard decision-making

methods are insufficient to resolve the crisis; these force managers for new decision-making

methods. The important thing is to adapt personally to new environment (Basuroye t al 2003)

For this adoption instead of keeping current values South African food retail industry has

to accept new values. Accurate collection of information, communication, which cannot be

easily settled up well, and psycho-social status of employees are changing the organisations

atmosphere. The atmosphere which is changed will effect significantly communication,

motivation, organisational justice and moral, such as organisational trust and organisational

citizenship (Stone & Ranchhod 2006).

Another issue which may increase the negative effects of crisis is an absence of proper

plan for dealing with crisis, which has to include customers, competitors, vendors, partners, and

credit agencies, various internal and external environmental factors. South African food retail

industry must have crisis plan, in case they can face the reduction of mobility and flexibility.

2. Change in income of Company

There are also some external issues besides the internal issues. Biggest external issue is

change in income of company and rapid price changes. The increase in costs will automatically

come with preventions such as: reduce the number of employees, reduce the social benefits for

employees and loading more work to the existing workers. New law and regulations can also
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increase effects of it. The new taxes, increasing social security contributions, to collapse of the

credit facilities, the new customs legislation can also affect business dramatically(Boatwright et

al 2007).

When Business managers or owners fail to follow international business changes and

when they cannot keep pace with global developments or the country's economic situation, it can

increase negative impacts. If managers of South African food retail industry would not establish

an early warning system by making the internal and external business environment analysis, they

can face it as an another issue in their industry (Siggel 2006).

Part III: Market Entry Strategy

A sound international market entry strategy is becoming gradually more important to the

success of new products. The time interval between the launch of the two important issues of

related to international market entry strategy are undeveloped international launch window of

time (the focus of the country's national launch of the product) and the sequence.

An important decision relating to international market entry strategy is the decision on

the timing of entry into international markets. Two international entry timing strategies are

commonly practiced (Chandrasekaran, Deepa, and Gerard, 2008). A waterfall or sequential

release strategy is one in which the new product enters multiple countries sequentially. A

sprinkler or simultaneous strategy, in contrast, involves almost simultaneous entry into multiple

countries.

Duan, Bin and Andrew (2008) use a competitive game theory framework to examine

simultaneous and sequential strategies and show that sequential entry strategy is appropriate if
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(1) the product has a very long life cycle, (2) the foreign market is small, not innovative, and

characterized by a slow growth rate, and (3) competitors in the foreign market are week.

However, empirical evidence for the success of each of these strategies is mixed. For example,

Chandrasekaran, Deepa, and Gerard (2008) find that the takeoff of a new product category in one

country increases the probability of takeoffs in other countries, suggesting a sequential release

strategy is preferable to a simultaneous release strategy. Duan, Bin and Andrew, (2008) examine

international market entry strategies in terms of market scope and the speed of rollout. They find

that late mover brands that sequentially enter many large international markets show greater

marketing spending efficacy through marketing spillover effect.

Foreign market entry is one of the most important strategic decisions for firms. Managers

should consider cross-country spillover effect when they decide country sequence. Firms can

increase overall performance in foreign countries, so enhance return on investment by taking

advantage of these spillover effects. A firm should launch its products first into countries that are

culturally closer to its home country and countries that are more open. Managers also need to

consider factors such as potential adopters’ familiarity with the new product and cultural fit of

the product with the country when deciding the order of country in the international launch

sequence. They need to carefully consider the determinants of country sequence because they

affect product performance in foreign countries (World Economic Forum, 2008).

Conclusion

To conclude we can say that international business strategy is critical to the success of

some products in several industries. Departing from Porter’s approach allowed focusing on the

possible affects the regional trade agreement had on clustering. Porter’s (1990) viewing of
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international competitiveness of industries through the diamond framework seems to hold for the

lesser developed nations like South African nations.

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