The porter's Diamond Model contains basic conceptual mistakes that make its propositions inherently flawed. The main flaw is that Porter over generalizes major factors thereby making the model overtly conceptual and thus having very little practical relevance. The model factors and their proposed effects can be challenged according to established economic dictums in the context of current global economic scenario. These limitations have reduced the model's usefulness for government policy makers.
The first and foremost assertion according to the Model's Demand factor is that growth of an economy is dependent upon the success of firms for whom that nation is home base is completely baseless as the world economy has globalized now (Davies and Ellis (2000). In the context of globalization, the success of economies is not restricted to the performance of home based firms only. The demand is not primarily restricted to domestic consumers and can come from other parts of the world too e.g. the demand for Indian software services in US. Secondly the model tries to substitute comparative advantage with competitive advantage which is not the correct approach (Grant (1991). Comparative advantage is related to the trade at national level while competitive advantage pertains to the advantage that a firm has over others within an industry. The demand for Chinese products is not because of the competitive advantage of Chinese firms at home but because of another very important factor i.e. favorable exchange rate. Thirdly, the assertion that the inflow of FDI should be taken as an economy's relative weakness can be refuted in the present global scenario where most of the investment is taking place in the emerging economies e.g. China and India, countries exhibiting the highest growth potential. Similarly, most of the investment is coming from the economies of Europe and US which have been weakened by recession. On empirical grounds, the methodology of research used to corroborate Diamond Model's propositions has been challenged as lacking the merits of a quality research.
The porter model fails to explain and incorporate certain macro factors that are necessary to formulate a complete model. Factors such as exchange rate movements, regulatory provisions, and trade barriers are the important determinants today of a nations productivity and growth prospects. Therefore the model does not serve the purpose of government policy makers very well.
a) In a globalized economy, the cultural aspects are important in defining the success or failure of multinational enterprises. It is important for companies to account for cultural differences when expanding internationally. The role played by certain key dimensions of cultural greatly influences the performance of a firm in distant lands (Cavusgil, Knight and Riesenberger (2008), p 139). Certain cultural values and norms affect the way businesses operate in foreign countries. Some important cultural determinants include values and attitudes, deal versus relationship oriented, manners and customs, perception of time, space and religion. All these different cultural attributes have a bearing on the way a business is conducted and are reflected in the decisions of business managers. For example in eastern culture, collectivism is preferred rather than individualism. Therefore business managers have to think about the collective benefits of the products or services that their firm produces. Religion is one of the most important and sensitive factors (Cavusgil, Knight and Riesenberger (2008), p 142); as businesses should avoid practices that inflict religious sentiments of people e.g. face book's publication of caricatures of a personality held sacred by Muslims. The challenge is that multinational enterprises should try to adapt their business practices to the local culture while keeping alive the strategic thinking and business orientation of the parent company.
b) A firm that is embedded in the local culture has the opportunity to foster economic development by creating more jobs, transferring technology and by contributing to the country's tax revenue. For example, SIEMENS has played a vital role in transferring technology to the local industry in Pakistan. At the same time it employs a large number of workers and has established academic chairs in various Universities' of the country. Firms can also become the reasons of impeding economic growth when they exercise their power to monopolize the industries where they operate. Since, the smaller domestic players can not compete with them; it could result in factory closures and job losses.
a) Sales Revenue = Price /x * no of units of x
Sales Revenue by selling to customer K = 10,000 * 100 = GBP 10, 00,000/-
Sales Revenue by selling to customer B = 20,000 * 200 = GBP 40, 00,000/-
As the revenue from customer B is greater, the company should sell to customer B on the basis of increased sales and considering that no legal contract or obligation with customer K in relation to this sale has already been established. This decision is purely of transactional nature with only short term orientation.
b) If the company breaks the contract after agreeing to sell to customer K, then the company's image will suffer. The following relational consequences will occur with respect to customer K and b:
1- Customer K is new and the company should try to build a good image by honoring its contract. If the company refuses to deliver to K, the customer might even resort to legal action. Since K is well networked, the company might be loosing on future economic benefits that this new relationship might bring. If the company does not refuse but delivers the product late, then the damage could be lessened but the company's image will be tarnished.
2- Customer B is a loyal customer and the company should safeguard its relationship with this customer. However, the customer has placed order at the last minute and the company was not ready for this emergency delivery.
Long term Relational Optimal Decision: The Company should sell 100 pieces to customer K and should offer customer B to buy the remaining 100 pieces at the price at which K has made the purchase. This approach would build good image before customer K while ensuring equal treatment of customer B. Even if customer B does not accept the offer, the company's decision is right as they have focused on a more valuable customer K.
FDI can be helpful in overcoming the financial constraints of Italian fashion districts. Foreign direct investment can help the industry players optimize their supply chain management strategies by managing the financial part of the complexities in the international supply chain (Cerruti and Delbufalo (2010)). The concept of value chain is important in achieving synergies at different points in the supply chain. The FDI will improve the financial power of buyers to offset the problems created by the complex nature of international sourcing. First of all FDI will help improve the buying power of traders directly by enabling them to get timely orders as well as better price. The excess cash can be invested to hedge against the potential losses on foreign exchange exposure while placing orders in different countries. The buyers can negotiate favorable prices and order optimum quantities from suppliers. Secondly, the FDI will improve the currency rate thereby increasing the purchasing power of buyers. The foreign direct investment will reduce the liquidity issues and give the buyers more freedom and choice in making their sourcing decisions. It is imperative that the supplier selection is done through a comprehensive process and selected suppliers are subjected to regular performance appraisals to ensure quality control of the sourced materials.
FDI on the other hand do not help reduce the complex nature of the sourcing transactions, therefore there is no direct correlation between FDI and the corresponding decrease in the complexity of transactions. Since the sourcing is done internationally, transportation costs, excise and custom duties are the most significant costs covered. The fluctuations in the foreign currency rates also pose a direct challenge and affect the buying decisions in terms of time and frequency. The FDI can not eliminate the currency risk completely as fluctuations will continue to take place. The ability to get the best orders at fair price is enabled by the availability of timely and authentic information. The knowledge sharing between both formal and informal sources can help achieve this objective ((Cerruti and Delbufalo (2010)). The FDI does not impact or improve the knowledge sharing between Italian industries and the prospective sellers in different countries around the world. Knowledge sharing or access to relevant and useful information is very important in handling the complexities of sourcing transactions. Proper processes have to be created to communicate with different stakeholders through out the value chain in a timely fashion.