Porter’s National Diamond Analysis and Environmental Analysis

Discuss about the Global and International Business Contexts Analysis.

After the civil war in Sri Lanka tourism has become one of the largest service sectors it can be also be characterized as one of the emerging sectors as well. An efficient management of the tourism industry along with determining the possibilities of growth at the end ushers the country towards the perspectives of growth as this determines the boom of the industry. The end of the war in the middle of 2009 created thousands of new opportunities in the tourism sector, by opening up the north area of the country for the local and foreign tourists (Mustafa, 2015). The trend of tourism kept on increasing during 2010, with the passage of each month there was almost 30 percent increase in tourism as compared to that in 2009. By the end of the financial year 2010, total increase in tourism sector was accounted to be 49 percent on arrivals (Louca & Suranga, 2015).

The nature of Sri Lanka is physically diverse as it is surrounded by beaches, plains, wild life, rivers, it is considered ad one of the most attractive tourist spots in the world. On the other hand, the country also attracts tourists by its enchanting natural beauty along with the invaluable heritages (Buultjens et al., 2016). Therefore, Sri Lanka can be considered to be a rich country in terms of its natural beauty and heritages. Now to examine the business environment of the country as a consultancy firm, Porters National Diamond Model will be used. This will determine how wise will be the decision for a British Company to invest in the tourism sector of Sri Lanka. This report will also emphasize on the PEST analysis of the country as this helps to determine the success or failure of the strategic framework adopted by the investor and thereby redesign their strategies effectively (Gunarathna et al., 2016).

The Diamond model as developed by Michael Porter helps to determine the key weaknesses of the concerned region by linking up the regional development of the area. The Porter’s Extended Diamond Model is constituted by four determinants and two outside forces that interact in the Diamond Competitive advantage model. At first the National Diamond model was introduced to determine the national advantage of a particular nation (Athukorala & Jayasuriya, 2013). As per the Porter’s National Diamond model, the diamond possesses four determinants in the form of factor conditions, , associated and supportive strategy, demand conditions adopted by the firm as well as the industry, structure and rivalry. These determinants individually as well as a system generates the perspective in which the competitive advantage of a nation is determined.

The Four Determinants of the National Diamond Model

According to Hettiarachchi et al., (2015), the National Diamond model can be used to illustrate the weaknesses and quality of the industry’s microeconomic environment effectively and efficiently. The model ahs been used to select perfect location for opening up a new hotel or resort which will be positioned perfectly to attract tourists. The model has successfully linked the regional development with he Diamond in order to determine the competitiveness. Here, in order to explain the microeconomic environment of this particular region in relation to tourism, the National Diamond model has been developed (Mustapha et al., 2014).

Figure: Porter’s National Diamond Model

(Source: Developed by Author)

This Diamond as explained by Porter is a system of reinforcing forces because the effect of one determinant will affect the other three determinants of the system as well. Advantage of a determinant may affect the advantages or disadvantages of the other determinants as well (Hall & Page, 2012).

These four determinants are described as

Demand Conditions: This factor depicts sophisticated and demanding clients which provide the local firms to initiate innovative upgradation of the offered products and services.

The strategy of the firm, structure along with rivalry: This factor depicts the causes responsible for local or domestic competition. This also generates the reason for which the firms continuously seek to determine the actual need of the customers so as to cater these needs as efficiently as possible (Ariyabandu  et al., 2016).  

Factor Conditions: According to Fernando et al., (2015), this determinant includes the capital and natural resources along with the specialized infrastructures. Furthermore, it states that if a nation possesses more specialized factor compared to the basic level, it will lead to an improvement in the microeconomic environment of that nation.

Industries which are related and supportive: This determinant helps the firms to compete in a uniquely effective and innovative manner. By determining the weaknesses of these four determinants of the National Diamond model the exact location for setting up an international tourist resort can be determined (Suresh & Senthilnathan, 2014).

A number of weaknesses associated with the microeconomic environment of Sri Lanka have been determined which are related to the tourism industry.

• There is a lack of specialized labor resources in the hospitality and tourism industry
• Another strong weakness is that, the most attractive tourist spots are not promoted effectively.
• In the context of accommodation or transportation the infrastructural development is inadequate.

• There is a significant deficit of market innovations and specialized techniques for the promotion of demand by using the local resources. For example, the tea tourism can be promoted by collaborating with the railways and staring a train service through the tea estates.
• Promotion for tourism in this region is significantly low. The advertising activity should be enhanced in both local and foreign aspects, building up a good website or education program development will be able to attract more tourists (Hyndman, 2015).
• The market positioning strategies for the region should be identified properly.

• It can be clearly identified that there is a lack of proper strategy along with vision.
• Entrepreneurs are risk averse that is they are afraid of taking huge risk, this leads to lack of service innovations.
• There is rivalry among the local firms and these are also limited by the tour operators and this also gives rise to monopoly structure.

• Significantly low numbers of supporting or related industries are present as the entrepreneurs are least interested in investing. For example, the opportunity of hiking, biking, golf, bird watching is not present (Adikari, 2013).
• Specialized facility of medication or tourist shopping centers is not present.

Apart from these four determinants there are two outside factors present as well in the Porter’s National Diamond Model which are Government and chance. Government is essential in designing and implementing policy frameworks, development of industries, monitoring, implementation and designing of legal framework, maintaining the standard of products and services, development of infrastructures (Khoshnevis et al., 2015). The end of the civil war in 2009 had created a better chance for tourism in the country. There are also chance factor of tsunami and other related disasters that can affect the tourism in Sri Lanka.

PEST Analysis of Sri Lanka’s Tourism Industry

As per the National Diamond model developed by taking into account the present situations of tourism industry of the concerned country, policies can be designed and recommended for future for regions all across the country. There should be significant development in the infrastructure of the country as this will help to attract more tourists both local and from foreign countries as well. Promotion of tourism of the country should be effective as most of the beautiful places in this country are either undiscovered or unpopular. Therefore, initiatives are taken on the part of the government as well as from the local tourism companies (Champika & Silva, 2015).

Now to analyze the business environment of Sri Lanka more effectively it is quite important to develop a clear understanding about the concept of business environment. Business environment actually comprises of a mix of different forces that affects the operability of a business structure. According to Fernando (2015), the environment of business can be divided into two categories, internal business environment and external environment. The internal environment is controllable by the business and it determines the strengths and weaknesses of the business. The managerial structure, creditworthiness of the organization is sometimes also considered within the internal environment of the business (Mustafa & Santhirasegaram, 2014). On the other hand, external environment can be defined as he environment that is not uncontrollable by the organization. The external environment of an industry or organization is determined by the political, economic, societal and technological factors. As these factors are not controllable the industry should change itself according to the situation of these factors. In this section of the report, the external environment of the tourism industry in Sri Lanka will be analyzed, in order to gain a better insight of the industry so that the British company can make its investments more profitable,

The tool that examines the effect of these factors on the external environment of the industry is popularly known as the PEST analysis.

The political factors can affect the tourism sector widely. Terrorism, civil wars, political backings are some of the major political factors that constitute the political environment of the concerned country. The Board of Investments have started to develop hotels in the eastern and Northern regions of the country by providing a with tax holiday on any project which involves a minimum level of investment of five hundred thousand US dollars (Biller & Nabi, 2013). The government of Sri Lanka is also engaged in developing infrastructures, such as construction of roads, ports and new airports etc. lack of skilled man power, civil war and distracted terrorism are also some political factors that adversely affect the tourism industry of Sri Lanka. The country is also having some relational problem with some countries which can adversely affect the import and export and the tourism industry as well. Therefore, these are the effects that the political factors can impose on the tourism industry (Hilal & Mubarak, 2014).

Recommendations for the Future

The economic factors include tax rates, rate of unemployment, rate of interest etc. these factors affects the industry operations largely. In order to develop the tourism sector, the government of Sri Lanka has developed a five year strategic plan. Some of them are uplifting the foreign exchange earnings from 500 million US dollars to 2.75 billion US dollars by the end of the year 2016 (Robinson et al., 2013). Distribution of the benefits accrued from tourism industry in the society and finally, combining the tourism industry with the real economy.  However, tourism industry creates direct as well as indirect opportunities of employment and therefore lack of skilled labor and poor promotional framework can become a potential threat to the industry.

The societal factors have also affected the tourism industry from a number of aspects. Values, tradition, cultural aspects and beliefs are some of the societal factors that constitute the social environment of the industry (Gupta & Singh, 2013). Sri Lanka possesses a variety of different food culture. It ranges from rice and curry, milk rice, pittu and many more. This is another factor that attracts tourists towards Sri Lanka. Moreover, the country is a traditional and therefore tourists can also have food that belongs to their country as well. This is the key strategy that has been adopted by a number of hotels in the country. Although, there is another factor that attracts the tourists is the art and culture of the country which is based on their religious beliefs (Fernando et al., 2013).

Technological factors play an important role in determining the external environment of the industry. Information, techniques and processes of transforming inputs into outputs of an organization are considered as technological factors. Under the influence of globalization, the use of information technology was increasing in the tourism industry (Fernando et al., 2013). Use of information technology helps the tourism industry to reduced the costs associated with handling of information, increase the speed of information transformation and furthermore, the use of information technology has also enhanced the promotional activity of tourism as well.

Therefore, it is very important to possess proper skills and technologies and involvement in multi-channel strategy for reaching the final consumer rather that depending on the foreign media. Presently, Sri Lanka is engaged in website development and providing high quality services at an affordable price. This will in turn help the tourism sector to make the most of information and communication technology. However, the cyber crime and internet hacking issues could become a potential threat to the industries as most of the hotels are doing their reservations and transactions over the internet (Fernando et al., 2013). In order to overcome this threat latest and improved security system should be used to protect the database from the hackers.

Understanding the Business Environment

These are the factors that influence the external environment of the tourism industry of Sri Lanka. As the external factors cannot be changed the industry should try to adapt to these external factors.

In order to analyze the industrial environment of Sri Lanka it is necessary to acquire a broader knowledge about the industrial framework and the market structure of the country. It is also quite necessary to get acquainted about the investment climate in Sri Lanka (Irudeen & Samaraweera, 2013). As per the empirics provided by the Central Bank of Sri Lanka, the country has achieved a literacy rate of 90% and has become able to supply educated workforce through its primary and secondary education. Therefore, this workforce can be trained to the best in comparison to the other available workforce. These factors combined with the high availability of cheap labor as the rate of unemployment is very high, will benefit the investors (Assaf et al., 2015). This is because the investors will be able to acquire highly productive labor at a cheaper rate and thereby increase their productivity.

As a part of the national economic development policy the country has also implemented incentive schemes for investors. With the passage of time the successive governments of Sri Lanka have also liberalized various aspects in order to smooth the path of foreign investment. After the establishment of Greater Colombo Economic Commission (GCEC) in 1978, the framework of investment incentives were broadened later in 1992 the GCEC were restructured and named as Board of Investment of Sri Lanka (Assaf et al., 2015).

With the objective of improving the policy environment a number of steps have been taken forward. First and foremost among them is permitting the total foreign ownership in all the areas of the economy. Secondly, there are no bindings on the repatriation of income, capital and fees and in the case foreign exchange as well. Thirdly, the constitution of the country guarantees the safety of foreign investment (Assaf & Tsionas, 2015). Next, an efficient and effectively designed legal and legislative framework is established within the economy. It protects the property rights, settlement of disputes caused by the arbitration as well as the company law. Fifth, the country has established a bilateral investment protection agreement with 23 countries and a double tax benefit agreement with 28 countries. Finally, the most important among all is that the applicable incentives as stated in those agreements cannot be changed by the successive governments (Irudeen & Samaraweera, 2013).

External Environment Analysis of Sri Lanka’s Tourism Industry

Now, in order to analyze the industrial environment it is essential to know the objectives of these incentives which are offered to the investors, the primary objective of these incentives is to promote the diversification of the industries and services of Sri Lanka by focusing on enhanced technologies and value addition (Kallesoe & De Alvis, 2016). Secondly, promotion of investments in the large scale projects with special focus on the infrastructural development. Thirdly and finally, exploit the localized opportunities and the comparative advantages of Sri Lanka. Therefore, it can be said that the industrial environment of Sri Lanka is quite favorable for the foreign as well as local investors.

The investors are faced with a number of market entry modes. The decision on determining the way to enter a market can significantly affect the outcome of the investment (Kallesoe & De Alvis, 2016). There are four ways of entering foreign market exporting, licensing, joint venture and foreign direct investment.

The method of exporting simply involves directly selling the domestically produced goods or services in the foreign market. This is a traditional and popular way of expanding the business in another country (Irudeen & Samaraweera, 2013). The advantage of this method is that since the production of the goods does not require tom be produced in the targeted foreign country, there is no need to invest in the foreign production facilities.

Licensing method is also another process of entry in the foreign market. It actually permits a company in the targeted foreign market to use a property of the concerned licensor. The property is mainly intangible such as patent, trademark or advanced production technique. The licensee or the user of the property pays a lump sum amount for this to the licensor.

Another way entering the foreign market is joint venture that is by investing in the foreign market by collaborating with a local organization.

Finally another way to enter into the foreign market is to use Foreign Direct Investment; it provides direct ownership of properties and facilities in the targeted foreign country (Irudeen & Samaraweera, 2013). The foreign direct investment also known as FDI involves direct transfer of resources such as capital, technology as well as human capital. Direct foreign investment may made by acquiring an existing entity in the targeted foreign market or setting up a new enterprise.

The advantages of foreign direct investment are it provides the investor a sharp control over the operations in the foreign country (Kallesoe & De Alvis, 2016). It also provides a better protection of the investor’s capital. Moreover, foreign direct invest in this case of Sri Lanka will help the organization to develop better understanding of the host market and the company will be able to adapt products developed for the market and respond to the market shocks accordingly.

The foreign direct investment will be much more appropriate than the other entry strategies as the government of Sri Lanka is very friendly towards the foreign investors (Kallesoe & De Alvis, 2016). It has also developed a number of policies and incentive schemes for protecting and attracting a significantly large number of investors in the country. Therefore adapting the strategy of foreign direct investment will be appropriate for the investor as this will provide protection and guarantee of profitability.

There are a number of disadvantages as well. The process of foreign direct investment is a costly one. The political and economic factors become more influential on the policy of foreign direct investment.

From the first part of the assignment it is clear that the infrastructural development in Sri Lanka is still inadequate. The country is still lagging far behind the other tourist destinations. Therefore, the investor should go for a proper management of the tourist’s amenities and transport facilities so as to ensure that the tourists do not feel uncomfortable (Lokuhetty et al., 2013). In order to ensure efficient transport facility the organization may provide a complimentary pick up and drop facility from the airport at least up to a certain distance. This will certainly increase the satisfaction level of the customers. Moreover, it has been observed that there is a lack of adventure sports facilities in the concerned region; the organization may also start an organization on its own responsibility (Irudeen & Samaraweera, 2013). This may include jet skiing, hiking at a low altitude or biking etc (Assaf & Tsionas, 2015). In a beautiful place like Sri Lanka it will definitely help to attract more tourists.

Finally, in the case of industrial environment it has also been observed that though the business environment is favorable for the foreign investors, it will not be perfect to adopt any other method rather than FDI. The government of Sri Lanka is very supportive towards the foreign as well as the local investors (Rauf, 2014). However, the investors if adopt export or joint venture policy it may not be beneficial to them. This is because as there are a number of local agencies the competition level will be high and if direct supervision is not present the project will not be profitable.

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