Porter’s Diamond Model: Why Some Nations Are Competitive And Others Are Not

Michael Porter’s Diamond Model (also known as the Theory of National Competitive Advantage of Industries) is a diamond-shaped framework that focuses on explaining why certain industries within a particular nation are competitive internationally, whereas others might not. And why is it that certain companies in certain countries are capable of consistent innovation, whereas others might not? Porter argues that any company’s ability to compete in the international arena is based mainly on an interrelated set of location advantages that certain industries in different nations posses, namely: Firm Strategy, Structure and Rivalry; Factor Conditions; Demand Conditions; and Related and Supporting Industries. If these conditions are favorable, it forces domestic companies to continiously innovate and upgrade. The competitiveness that will result from this, is helpful and even necessary when going internationally and battling the world’s largest competitors. This article will explain the four main components and include two components that are often included in this model: the role of the Government and Chance. Together they form the national environment in which companies are born and learn how to compete.

Figure 1: Porter’s Diamond Model of National Competitive Advantage

Firm Strategy, Structure and Rivalry

The national context in which companies operate largely determines how companies are created, organized and managed: it affects their strategy and how they structure themselves. Moreover, domestic rivalry is instrumental to international competitiveness, since it forces companies to develop unique and sustainable strenghts and capabilities. The more intense domestic rivalry is, the more companies are being pushed to innovate and improve in order to maintain their competitive advantage. In the end, this will only help companies when entering the international arena. A good example for this is the Japanese automobile industry with intense rivalry between players such as Nissan, Honda, Toyota, Suzuki, Mitsubishi and Subaru. Because of their own fierce domestic competition, they have become able to more easily compete in foreign markets as well.

Factor Conditions

Factor conditions in a certain country refer to the natural, capital and human resources available. Some countries are for example very rich in natural resources such as oil for example (Saudi Arabia). This explains why Saudi Arabia is one of the largest exporters of oil worldwide. With human resources, we mean created factor conditions such as a skilled labor force, good infrastructure and a scientific knowlegde base. Porter argues that especially these ‘created’ factor conditions are important opposed to ‘natural’ factor conditions that are already present. It is important that these created factor conditions are continiously upgraded through the development of skills and the creation of new knowledge. Competitive advantage results from the presence of world-class institutions that first create specialized factors and then continually work to upgrade them. Nations thus succeed in industries where they are particularly good at factor creation.

Demand Conditions

The home demand largely affects how favorable industries within a certain nation are. A larger market means more challenges, but also creates opportunities to grow and become better as a company. The presence of sophisticated demand conditions from local customers also pushes companies to grow, innovate and improve quality. Striving to satisfy a demanding domestic market propels companies to scale new heights and possibly gain early insights into the future needs of customers across borders. Nations thus gain competitive advantage in industries where the local customers give companies a clearer or earlier picture of emerging buyer needs, and where demanding customers pressure companies to innovate faster and achieve more sustainable competitive advantages than their foreign rivals.

Related and Supporting Industries

The presence of related and supporting industries provides the foundation on which the focal industry can excel. As we have seen with the Value Net, companies are often dependent on alliances and partnerships with other companies in order to create additional value for customers and become more competitive. Especially suppliers are crucial to enhancing innovation through more efficient and higher-quality inputs, timely feedback and short lines of communication. A nation’s companies benefit most when these suppliers themselves are, in fact, global competitors. It can often take years (or even decades) of hard work and investments to create strong related and supporting industries that assist domestic companies to become globally competitive. However, once these factors are in place, the entire region or nation can often benefit from its presence. We can for example see this in Silicon Valley, where all kinds of tech-giants and tech-start-ups are clustered in order to share ideas and stimulate innovation.

Government

The role of the government in Porter’s Diamond Model is described as both ‘a catalyst and challenger‘. Porter doesn’t believe in a free market where the government leaves everything in the economy up to ‘the invisible hand’. However, Porter doesn’t see the government as an essential helper and supporter of industries either. Governments cannot create competitive industries; only companies can do that. Rather, governments should encourage and push companies to raise their aspirations and move to even higher levels of competitiveness. This can be done by stimulating early demand for advanced products (demand factors); focusing on specialized factor creations such as infrastructure, the education system and the health sector (factor conditions); promoting domestic rivalry by enforcing anti-trust laws; and encouraging change. The government can thus assist the development of the four aforementioned factors in the way that should benefit the industries in a certain country.

Chance

Even though Porter originally didn’t write anything about chance or luck in his papers, the role of chance is often included in the Diamond Model as the likelihood that external events such as war and natural disasters can negatively affect or benefit a country or industry. However, it also includes random events such as where and when fundamental scientific breakthroughs occur. These events are beyond the control of the government or individual companies. For instance, the heightened border security, resulting from the September 11 terrorist attacks on the US undermined import traffic volumes from Mexico, which has had a large impact on Mexican exporters. The discontinuities created by chance may lead to advantages for some and disadvantages for other companies. Some firms may gain competitive positions, while others may lose. While these factors cannot be changed, they should at least be monitored so you can make decisions as necessary to adapt to changing market conditions.

Figure 2: Porter’s Diamond Model factors

Porter Diamond Model In Sum

Porter’s Diamond Model of National Advantage explains why some industries in some countries are so much more developed and competitive compared to industries elsewhere on the planet. It basically sums up the location advantages that Dunning is referring to in his Eclectic paradigm (also known as OLI framework). The Diamond Model could therefore be used when analyzing foreign markets for potential entry or when making Foreign Direct Investment decisions. It is advised to also conduct a macro-environment analysis and an industry analysis by using PESTEL Analysis and Porter’s Five Forces respectively.

Further Reading:

• Porter, M.E. (1990). The Competitive Advantage Of Nations. Harvard Business Review
• Grant, R.M. (1991). Porter’s Competitive Advantage Of Nations: An Assesement. Strategic Management Journal
• Smit, A.J. (2010). The Competitive Advantage Of Nations: Is Porter’s Diamond Framework A New Theory That Explains The International Competitiveness Of Countries? Southern African Business Review
• Harvard Business Review: https://hbr.org/1990/03/the-competitive-advantage-of-nations