Porter’s Diamond

Over the past 50 years, U.S. foreign trade has increased significantly. In fact, in 2006, the U.S. imported over $2,204,225 (value in millions of dollars) from foreign producers (U.S. Census Bureau, Foreign Trade Division, 2007). As consumers in the United States, we have become familiar the reputations of certain goods based on their country of origin. Some examples include Swiss-made watches, German automobiles, Tulips from Holland, Argentine beef. Michael Porter uses his “Porter’s Diamond” theory to explain why some countries have a comparative advantage in relation to others in specific industries. Porter theorizes that four broad attributes (factor endowments, demand conditions, relating and supporting industries, and firm strategy, structure, and rivalry) of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage (Hill, 2008). The following paragraphs will attempt to explain this theory as it applies to the beef industry in Argentina.

The country of Argentina has historically had a comparative advantage in the beef industry. The first of Porter’s attributes used to explain the theory is factor endowments. Factor endowments consist of a nation’s position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry (Hill, 2008). Two of the basic factors in Argentine beef production are its climate and its extensive grasslands which help contribute to the country’s low cost of production (Carter, 1997). The favorable climate and extensive grasslands not only supported the space for large herds of cattle, but also the fertile land helped to support the farming of grain and corn used to feed the cattle. Another factor endowment, which can be considered a more advanced factor, is the well developed, flexible and transparent livestock marketing system (Carter, 1997). In this case, a open, or transparent marketing system would help to keep prices stable since it discourages and helps prevent hoarding by ranchers who might otherwise have more control over how many cattle enter the market. Another advanced factor endowment is infrastructure, and Buenos Aires is a known freight-handler for the entire region. This helps benefit the beef industry by providing a convenient means to export beef to other countries. All of these endowments together have afforded Argentina a comparative advantage in the beef industry, however, the country’s status could be at risk if natural disasters such as floods, drought or earthquakes destroy its shipping infrastructure or it’s extensive pastures.

The second attribute which contributes to the industry’s success is demand conditions. Demand conditions include the nature of home demand for the industry’s product or service (Hill, 2008). Argentina maintains long history of beef consumption. In fact, “Argentina's beef consumption per capita is almost four times that of Western Europe (70-80 kgs compared to 15-25 kgs)” (Carter, 1997). This domestic demand for beef helps ensure a profitable base business. In addition, the domestic demands helped shape the industry’s product offering and likely drove product differentiation. However, the Argentine’s government’s recent involvement in the industry could put its export future at risk. In 2006, for example, the government banned beef exports, reducing forecasts for the year by 200,000 metric tons, which caused a decline of about 20% in the price of live cattle and Argentina's credibility as a reliable supplier was damaged as export contracts had to be broken (Steiger, 2006). In addition, “the government raised export taxes on beef cuts from 5% to 15% (a 200% increase)” (Steiger, 2006). Although these measures increased domestic cattle supply and allowed for lower domestic beef prices, it caused uncertainty as to the future of the Argentine beef industry world-wide.

The third attribute affecting the Argentine beef industry include relating and supporting industries. Relating and supporting industries are recognized by the presence or absence of supplier industries and related industries that are internationally competitive (Hill, 2008). Innovations in beef distribution domestically such as butcher chain stores and vacuum packing have helped sustain the low cost of Argentine beef (Carter, 1997). By having these supporting industries available domestically, Argentine beef producers can save money by slaughtering, processing and packing cattle for distribution without the risk of increased cost associated with currency exchange. Another supporting industry is agriculture, more specifically corn production. As described by Carlos Steiger,

“An important change in Argentina's cattle sector in the past couple of years has been the utilization of corn as feed. Before, alfalfa pastures were