In business, the competition will bite you if you keep running; if you stand still, they will swallow you.
It is impossible to keep talking about sustainability and fair trade without talking about Porter’s diamond model. In this blog I am committed to find new ways to apply economic law to sustainability models, so good social and environmental behavior can makes economic sense, and competition, trade barriers, and supply and demand are part of any economic environment.
Economic growth is linked with economic competitiveness, and there are three different approaches to measure it: the factor model, assessment of trade performance, and assessment of productivity. The first approach identifies critical success areas and compares the performance of different entities/economies in each area; the World Competitiveness Report is a perfect example. The second approach measure efforts to improve the inputs and indicators of outputs. The third approach use cost-based indicators to measure performance.
Professor Michael Porter uses the three approaches in formulating his competitiveness model. For Porter, the key question is why some firms in some nations achieve international success while others fail. He analyses why some industries tend to form clusters (Hollywood, Silicon Valley in USA; Bay Street, Ottawa Valley in Canada) and he conclude that nations do not compete between them, rather, it is the firms within a country than must be competitive.
Porter presents a four-factor model that he calls ‘the diamond’ and asses each component quantitatively and qualitatively:
Porter includes also two more factors: chance and the impact of government.
Factor conditions are divided between basic (human and physical capital, available general knowledge, infrastructure) and advanced (specialized knowledge). They are also divided between generalized and specialized.
Demand conditions are the market characteristics of a given industry, e.g. large versus small markets, scale economics, and quality of demand of domestic market.
Related and supporting industries are the complex industrial economies, with its network of suppliers integrating the production chains. For Porter, the relation between supplier and company is of capital importance.
Strategy – Structure – Rivalry address the company inner and outer environment. There is no ‘best’ managerial style, but there is a ‘better adapted’ to the company’s circumstances managerial style. Porter stress the importance of strategic goals and the company approach to risk. The domestic rivalry ensures the development of sophisticated and specialized sector; it is only natural that Porter opposes the creation of monopolies, as they inhibit the development of international competitive firms.
Porter believes the Government is not part of the diamond, but has the role of facilitator. He acknowledges that chance is a factor in the development of companies, since war, technological breakthroughs, and other factors can influence the competitiveness of any organization.
We will use this and Porter’s Five Forces Model later analysing Fair Trade and sustainability.