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Firm Strategy, Structure and Rivalry

The strategic decisions of firms have lasting effects on future competitivness, but equally important is industry structure and rivalry between companies. Porter argues that intense competition spurs innovation. The more intense the struggle to survive between domestic companies, the greater is their competitivness. This helps the them to compete against imports and against companies that might develop a production presence in the home market.

International competition is not as intense and motivating. With international competition, there are enough differences between companies and their environments to provide handy excuses to managers who were outperformed by their competitors.

The Diamond as a System. The effect of one point of the diamond system depends on the others. The diamond also is a self-reinforcing system. For example, a high level of rivalry often leads to the formation of unique specialized factors. Domestic rivalry for final goods stimulates the emergence of an industry that provides specialized intermediate goods. Keen domestic competition leads to more sophisticated consumers who come to expect upgrading and innovation.

Government and Chance. Government policies as well as chance events towards industry and export and import regulations can hurt or help competitivness.

The role of government in Porter's Diamond Model is "acting as a catalyst and challenger”. It is to encourage companies to raise their performance, focus on specialized factor creation, stimulate local rivalry. Governments can influence all four of Porter's determinants through a variety of actions such as subsidies, taxes, enforcing strict product standards and antitrust regulations, educational policies that affect the skill level of workers.

Porter emphasizes the role of chance in the model. Random events can either benefit or harm a firm's competitive position. These can be anything like major technological breakthroughs or inventions, acts of war and destruction, or dramatic shifts in exchange rates.

EXERCISES

TOPIC#1.