Porter Diamond Model

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 favourable, it forces domestic companies to continuously 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.

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 strengths 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.

Porter Diamond Model In Today’s World

China- As the world’s second largest economy with the largest market for most products
and services, its large footprint in global trade, its large foreign reserves and its huge strides
in developing cutting edge technology, there is no way that the global economy can ignore its
impact. From infrastructure development, power plants, semiconductors, solar panels, EVs
and battery technology, mobile payment systems, AI and 5G technology, China appears to
have built a competitive advantage in many industries in a relatively short span of time.

Japanese Automobile- To sustain a competitive advantage is to upgrade it— to move to

more sophisticated types. This is precisely what Japanese auto-makers have done. They
initially penetrated foreign markets with small, inexpensive compact cars of adequate quality
and competed on the basis of lower labor costs. Even while their labor-cost advantage
persisted, however, the Japanese companies were upgrading. They invested aggressively to
build large modern plants to reap economies of scale. Then they became innovators in
process technology, pioneering just-in-time production and a host of other quality and
productivity practices. These process improvements led to better product quality, better repair
records, and better customer-satisfaction ratings than foreign competitors had. Most recently,
Japanese automakers have advanced to the vanguard of product technology and are
introducing new, premium brand names to compete with the world’s most prestigious
passenger cars.