Michael Porter’s Diamond

The diamond model of Michael Porter for the Competitive Advantage of Nations offers a model that helps to understand the competitive position of a nation in global competition.

Economic theory usually mentions some factors for comparative advantage for regions or countries which include land, location, natural resources, labor and local population size.

These factor endowments can’t really be influenced, so they constitute a rather passive view towards national economic opportunities. Porter attributes sustained industrial growth to a concept of clusters or groups or interconnected firms, suppliers, related industries, and institutions that arise in particular locations and believes that an abundance of factor endowments actually undermines competitive advantage. Porter’s competitive advantage of nations has been the outcome of four interlinked advanced factors and activities that occur with these companies and clusters. Porter also believes that these factors can be influenced in a pro-active way by government.

Porter’s diamond framework consists of interlinked advanced factors for competitive advantage including:

• Factor Conditions

• Demand Conditions

• Related and Supporting Industries

• Firm Strategy, Structure and Rivalry All influenced by government and chance events.

3.1.1 Factor Conditions

Factor conditions refers to inputs that are used as factors of production, such as labor, land, natural resources, capital and infrastructure. Porter argues however that key factors of production are created and not inherited. Specialized factors of production are capital, skilled labor and infrastructure. Specialized factors involve heavy, sustained investment which is difficult to duplicate and leads to a competitive advantage. Non key factors or more general factors which include unskilled labor and raw materials can be obtained by any company and therefore they do not constitute sustained competitive advantage.

Porter believes a lack of resources can actually lead a society to become more competitive as an abundance generates waste and scarcity generates an innovative mindset.

Demand conditions according to Porter, argues that a sophisticated domestic market is an important element to producing competitiveness. Firms that are in a society with a sophisticated domestic market are likely to sell superior products because the market demands higher quality and the close proximity to such consumers enables the firm to better understand the needs and desires of the customers. If a nations discriminating values manages to spread to other countries then the local firms will become competitive in the global market.

Related and supporting industries are important to the competitiveness of firms, these include suppliers and related industries. This usually occurs at regional level as opposed to national level. Competitors that locate in the same area are known as clusters or agglomeration, there are advantages and disadvantages to locating in a cluster.

Advantages include the potential technology knowledge spillovers, an association of a region on the part of consumers with a product and high quality and therefore some market power or an association of a region on the part of applicable labor force.

Disadvantages include the potential poaching of your employees by rival companies and the increase in competition that may result in possibly decreasing profits or mark-ups.

Strategy compromises of capital markets and individuals career choices. Capital markets affect the strategy of firms as some countries have capital markets that work on the basis of a long-run outlook, while others have a short-run outlook. Industries vary in how long they consider the long-run to be. However countries with a short-run outlook tend to be more competitive in industries where investment is short-term whereas countries with a long-run outlook will tend to be more competitive in industries where investment is long term. Individual’s career choices are based on their decisions regarding opportunities and prestige. A country will be competitive in an industry whose key personnel hold positions that are considered prestigious.

Structure is based on the best management styles among industries, some countries may be oriented toward a particular style of management and those countries will tend to be more competitive in industries where that style of management is suited.

Rivalry comes from the idea that intense competition encourages innovation.

Competition is intense in regions where companies compete vigorously in most industries, while international competition is not as intense and motivating, international competition withholds enough differences between companies and their environments to provide excuses to managers who were outperformed by their competitors.

The government plays an important role in Porter’s diamond model and Porter argues that there are some things that governments do that they shouldn’t and other things that they do not do but should. Governments can influence all four of Porter’s determinants through a variety of actions such as subsidies to firms either directly through money or indirectly through infrastructure, tax codes applicable to corporations, business or property ownership, educational policies that affect the skill level of workers, the development of specialized factor creation and enforcing tough standards. This creates a clarity about which industries they are choosing to help innovate and what methods they will use, and which industries that they are not helping.

The diamond system as a whole creates a system where all elements are self-reinforcing.

Strong domestic competition leads to more sophisticated consumers who come to expect upgrading and innovation and can create specialized intermediate goods in an industry or

society. There is an element of chance in the model where random events can either benefit or harm a firms competitive position, these can be anything like major technological breakthroughs or inventions, acts of was or destruction or dramatic shifts in exchange rates.