International business

1. Theory of National Competitive Advantage
or
Diamond Model

2. National Competitive Advantage or Diamond Model
• Michael Porter’s Diamond Model (also known as the Theory of
National Competitive Advantage of Industries) is a diamond-shaped
framework that focuses on explaining why certain industries within
a particular nation are competitive internationally, whereas others
might not.
• And why is it that certain companies in certain countries are
capable of consistent innovation, whereas others might not?
• any company’s ability to compete in the international arena is
based mainly on an interrelated set of location advantages that
certain industries in different nations posses, namely: Firm
Strategy, Structure and Rivalry; Factor Conditions; Demand
Conditions; and Related and Supporting Industries.

4. Firm Strategy, Structure and Rivalry
• national context in which companies operate largely determines
how companies are created, organized and managed.
• domestic rivalry is instrumental to international competitiveness,
since it forces companies to develop unique and sustainable
strenghts and capabilities.
• The more intense domestic rivalry is, the more companies are
being pushed to innovate and improve in order to maintain their
competitive advantage.
• example for this is the Japanese automobile industry with intense
rivalry between players such as Nissan, Honda, Toyota, Suzuki,
Mitsubishi and Subaru.

5. Factor Conditions
• Factor conditions in a certain country refer to the natural, capital and
human resources available.
• Some countries are for example very rich in natural resources such as oil
for example (Saudi Arabia). This explains why Saudi Arabia is one of the
largest exporters of oil worldwide.
• With human resources, we mean created factor conditions such as a
skilled labor force, good infrastructure and a scientific knowlegde base.
• Porter argues that especially these ‘created’ factor conditions are
important opposed to ‘natural’ factor conditions that are already
present. It is important that these created factor conditions are
continiously upgraded through the development of skills and the
creation of new knowledge

6. Demand Conditions
• home demand largely affects how favorable industries within a certain
nation are. A larger market means more challenges, but also creates
opportunities to grow and become better as a company.
• The presence of sophisticated demand conditions from local customers
also pushes companies to grow, innovate and improve quality. Striving
to satisfy a demanding domestic market propels companies to scale new
heights and possibly gain early insights into the future needs of
customers across borders.
• Nations thus gain competitive advantage in industries where the local
customers give companies a clearer or earlier picture of emerging buyer
needs, and where demanding customers pressure companies to innovate
faster and achieve more sustainable competitive advantages than their
foreign rivals.

7. Related and Supporting Industries
•The presence of related and supporting industries provides
the foundation on which the focal industry can excel.
•Especially suppliers are crucial to enhancing innovation
through more efficient and higher-quality inputs, timely
feedback and short lines of communication.
•A nation’s companies benefit most when these suppliers
themselves are, in fact, global competitors.

8. Government
• The role of the government in Porter’s Diamond Model is described as both ‘a
catalyst and challenger‘.
• Porter doesn’t believe in a free market where the government leaves
everything in the economy up to ‘the invisible hand’.
• governments should encourage and push companies to raise their
aspirations and move to even higher levels of competitiveness.
• can be done by stimulating early demand for advanced products (demand
factors); focusing on specialized factor creations such as infrastructure, the
education system and the health sector (factor conditions); promoting
domestic rivalry by enforcing anti-trust laws; and encouraging change.
•Chance: The discontinuities created by chance may lead to advantages for
some and disadvantages for other companies.

9. New Trade Theory
• New trade theory is an economic model given by Paul Krugman to
explain international trade and globalization using the economies of
scale, network effects, and first-mover advantage.
• It explained the reason for extensive trade between similar
countries, developing economies’ low industrialization, and giant
multinational companies’ monopolistic nature.
• The main advantage of this theory lies in the globalization of trade,
and the disadvantage lies in the development of monopolistic
tendencies of giant corporations globally.
• The main differences between new and old trade theories have
been the returns of scale, fixed technology, and perfect competition,
which gets supported by the old theory and rejected by the new
theory.

10. Economies Of Scale
•Under this aspect, goods per unit cost gets reduced when
they get produced in huge volumes. It gets aided by IT
technology, automobiles, and large-scale production
machines.
• Domestic firms do not use it because of low demand, but
when the demand for goods from foreign countries gets
highly high, economies of scale reduce the cost of
production per unit.
• Every country has a specific industry with such capability and
can lower the cost of production by increasing the variety of
goods.

11. First-Mover Advantage
It attributes to the fact that the earlier a firm gets into
producing certain goods, the more economical and strategic
benefit it gets over the late entrants.
It happens because early entrants’ low-cost structures
develop into giant firms like NOKIA.

12. Network Effects
It states that their value increases with increased users of products. An example
includes the internet.
Assumptions
• With specializations of firms, they increase their economies of scale.
• Learning by doing has excellent effects on productivity.
• First-mover advantage allows new competitors.
• The government’s role in industrialization becomes significant.
• Economies of scale become a key to stopping new entrants and turning firms
into monopolies.
• Product differentiation and product specialization become essential in the
growth of a firm.