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To what extent is Porter’s Diamond a useful concept in explaining the home and host locations of international businesses?

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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

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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2 advantages (Porter, 1990: 78). The concept is then quite useful for companies to 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

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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3 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 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

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4 instance, Carrefour Discount brand was originally developed for the French market, but now successfully expands to Belgium, Italy and Spain (Verdict, 2010: 19).

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

4

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5 locations such as Belgium, Spain and Brazil (Frynas and Mellahi, 2011) which according to Hofstede‟s dimensions have very similar scores.

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.

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6 References:

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.

Supply Chain Management: An International Journal, [e-journal] 16(2), pp.

148-154. Available through: Emerald Database [Accessed 24 November 2011].

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 2011. Available at: <http://freecasestudy.wordpress.com/2011/02/22/sample-case-study-marks-spencer/> [Accessed 2 December 2011].

Frynas, J.G. and Mellahi, K. 2011. Internationalization of a French retailer-Carrefour. In: Frynas, J.G. and Mellahi, K. 2011. Global Strategic Management. 2nd ed. New York: OUP Oxford. Ch. 5, pp. 148-149. [online] Available at:

<http://www.oup.com/uk/orc/bin/9780199543939/frynasmellahi2e_ch05.pdf> [Accessed 2 December 2011].

Hollensen, S., 2011. Global marketing. 5th ed. Harlow: FT Prentice Hall.

Mellahi, K., Jackson, P. and Sparks, L., 2002. An Exploratory Study into Failure in Successful Organizations: The Case of Marks & Spencer. British Journal of

Management, [e-journal] 13, pp. 15-29. Available through: EBSCOhost

Database [Accessed 24 November 2011].

Peacock, L., 2011. Marks & Spencer's Bostock 'very disappointed' over reports she is in talks to quit. The Telegraph, [online] Available at:

<http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8912575/ Marks-and-Spencers-Bostock-very-disappointed-over-reports-she-is-in-talks-to-quit.html> [Accessed 24 November 2011].

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7 Porter, M., 1990. The Competitive Advantage of Nations. Harvard Business Reviews,

68(2), pp. 73-93.

Shiue, Y., Horng, D. and Yeh, S., 2006. Carrefour‟s Global Reach: A Case Study of Its Strategy. The Journal of American Academy of Business, [e-journal] 9(1), pp. 171-175. Available through: EBSCOhost Database [Accessed 24 November 2011].

Verdict, 2010. Retail Innovation Case Study: Carrefour: Hypermarket Reinvention. Datamonitor plc. Available through: EBSCOhost Database [Accessed 24 November 2011].

References

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