Porters Diamond Model

Background

Michael Porters “The Diamond Model” was published in 1990 in his book ”The Competitive Advantage of Nations”.

It’s a model that can help us understand why a nation becomes the home base for successful international competitors in a particular industry and other nations don’t.

He argues, that the old theories – made by Adam Smith and David Ricardo – is not sufficient to explain competitiveness between technology advantage nations of today

About the model

In Porters Diamond model there are four broad determinants responsible for such diversity. They mark the playing field for the nations industries. These determinants are

•Factor conditions

•Demand conditions

•Relating and supporting industries

•Firm strategy, structure and rivalry. 

The model also points out, that there are two determinants that influence the four main determinants:

Governmental policy and

the role of chance of events. 

Definition of each determinant 

Factor conditions – the factors most important to competitive advantage in industries in advanced economies, are not inherited but are created within a nation.

Advanced and basic factors. 

Advanced factors of production are skilled labor, knowledge, capital and infrastructure. Basic factors, such as unskilled labor and raw materials, can be obtained by any company and dont generate competitive advantage.

The second distinction is between

Specialized and Generalized factors.

Specialized factors involve narrowly skilled personnel, infrastructure with specific properties, knowledge bases in particular fields, and other factors with relevance to a limited range or even to just a single industry.

Demand conditions. 

The main factor is home demand conditions which have influence in nearly every industry.

The composition of home demand shapes how firms perceive, interpret, and respond to buyer needs.

Nations gain competitive advantage in industries where the home demand gives local firms a clearer or earlier picture of buyer needs than foreign rivals can have.

Related and supporting industries.

The presence of internationally competitive supplier industries in a nation creates advantages in downstream industries.

It gives efficient, early, rapid, and sometimes prefential access to the most cost-effective inputs.

The benefit of Home-based suppliers is in the process of innovation and upgrading.

Firms gain quick access to information, to new ideas and insights, and to supplier innovations.

Firm strategy, structure and rivalry

Many aspects of a nation, too numerous to generalize, influence the ways in which firms are organized and managed. 

Some of the most important aspects are attitudes toward authority, norms of interpersonal interaction, attitudes of workers toward management and vice versa, social norms of individualistic or group behavior, and professional standards.

These in turn grow out of the educational system, social and religious history, family structures, and many other unique national conditions.

Governmental policy - it influences all the four determinants through various regulatory/deregulatory measures. 

Policies implemented without consideration of how they influence the entire system of determinants are as likely to undermine national advantage as enhance.

Government effects factor conditions in many ways. Among the most important roles of government is creating and upgrading factors, whether they are skilled human resources, basis scientific knowledge or infrastructure. 

Demand conditions. Government procurement can be a positive force for upgrading national competitive advantage if they provide early demand for advanced new sophisticated products or services from local firms.

Criticism

Porter feels that sizeable domestic demand must be present for attaining competitive advantage But there are industries that have flourished because of demand from foreign consumers. 

Nevertheless, these limitations do not undermine the significance of Porter’s national competitive advantage theory – especially in advanced industries placed in advanced countries