General

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

December 19, 2022 Albert Roy 0 Comments How the Porter's Diamond model explains a nation's competitive advantage?, Porter’s Diamond Model: Why Some Nations Are Competitive and Others Are Not

The Theory of National Competitive Advantage of Sectors, often known as Michael Porter’s Diamond Model, is a framework in the form of a diamond that aims to explain why certain industries inside a given country may be competitive globally while others may not. And why are certain businesses in particular nations able to innovate consistently while others may not? Porter contends that a company’s ability to compete on a global scale is largely dependent on a network of location advantages that specific sectors of the economy in various countries enjoy. These location advantages include: Firm Strategy, Structure and Rivalry; Factor Conditions; Demand Conditions; and Related and Supporting Industries. If these circumstances are favourable, they compel domestic businesses to constantly innovate and improve. When competing against the biggest rivals in the world on a global scale, the competition that will follow from this is beneficial and even vital. The role of the government and chance are two elements that are often included in this model, and this article will describe the four basic components and incorporate them. Together, they provide the national framework in which businesses are created and taught how to compete.

Firm Strategy, Structure and Rivalry

The national environment in which businesses operate has a significant impact on how such businesses are founded, run, and managed. It also has an impact on their strategy and internal organisation. Domestic competition also helps organisations build distinctive and long-lasting strengths and competencies, which is essential for global competitiveness. Companies are increasingly compelled to innovate and improve as domestic competition becomes fiercer in order to preserve their competitive edge. This will ultimately benefit businesses when they compete on a global scale. This is well shown by the fierce competition between Nissan, Honda, Toyota, Suzuki, Mitsubishi, and Subaru in the Japanese car sector. They are now better equipped to compete in overseas markets as well because of their own intense home competition.

Factor Conditions

The available natural, financial, and human resources are referred to as the factor conditions of a particular nation. Some nations, for instance, have an abundance of natural resources, like oil (Saudi Arabia). This explains why Saudi Arabia is among the world’s top oil exporters. By “human resources,” we imply circumstances that were made possible by human activity, such as a skilled work force, sound infrastructure, and a solid scientific foundation. In contrast to previously existing “natural” factor circumstances, Porter claims that these “made” factor conditions are particularly significant. It is crucial that these circumstances caused by the generated element be continuously improved via the growth of abilities and the production of new information. The existence of world-class institutions that first develop specialized elements and then continuously endeavour to update them leads in competitive advantage. Thus, nations prosper in sectors of the economy where factor creation is especially strong.

Demand Conditions

The degree to which industries inside a country are advantageous is heavily influenced by domestic demand. A bigger market brings with it additional difficulties, but it also offers chances for improvement as a business. Local clients’ complex demand circumstances also encourage business expansion, innovation, and quality improvement. Companies are propelled to reach new heights by the demands of a demanding home market, and they may even obtain early insights into the wants of clients from other countries. Thus, nations gain a competitive edge in industries where local consumers provide businesses with a clearer or earlier picture of emerging consumer needs and where a demanding consumer base forces businesses to innovate more quickly and achieve more sustainable competitive advantages than their international competitors.

Related and Supporting Industries

The basis for the main industry’s success is provided by the existence of associated and supporting industries. Companies often rely on alliances and partnerships with other businesses in order to provide value for consumers and become more competitive, as we have seen with the Value Net. By providing faster feedback, higher-quality, and more effective inputs, suppliers, in particular, are essential to fostering innovation. When these suppliers are global rivals themselves, it is best for a nation’s businesses. Strong linked and supporting sectors that aid local enterprises in becoming internationally competitive may sometimes only be developed after years (or even decades) of arduous labour and financial commitment. But once these elements are in place, the whole country or area often benefits from their existence. This is evident, for instance, in Silicon Valley, where a variety of digital start-ups and industry heavyweights have gathered to exchange ideas and promote innovation.

Government

Porter’s Diamond Model describes the government’s position as “a catalyst and challenger” at the same time. Porter opposes a free market where the government lets the “invisible hand” run the show in the economy. Porter, however, disagrees that the government is a crucial aid to and backer of business. Governments cannot establish sectors that are competitive; only businesses can achieve it. Governments should instead support and exert pressure on businesses to boost their goals and reach even greater levels of competitiveness. This can be achieved by boosting early demand for cutting-edge products (demand factors), concentrating on the creation of specialized factors like infrastructure, the educational system, and the health sector (factor conditions), fostering domestic competition by enforcing antitrust laws, and promoting change. Thus, the government may support the growth of the four aforementioned variables in a manner that should be advantageous to the sectors in a particular nation.

Chance

Despite the fact that Porter didn’t initially include chance or luck in his writings, the Diamond Model often accounts for the probability that outside factors like war and natural catastrophes would either harm or assist a nation or sector. It also includes chance occurrences, such as the location and timing of major scientific advances. The government or particular businesses have no influence over these occurrences. For instance, the increased border security brought on by the terrorist events of September 11, 2001, reduced the amount of import trade from Mexico, which had a significant effect on Mexican exporters. The discontinuities brought about by chance might benefit some businesses while hurting others. While some businesses could lose ground in the marketplace, others might benefit. Even if you cannot influence these aspects, you should nevertheless keep an eye on them so you can adjust as needed to the shifting market circumstances.

Porter Diamond Model in Sum

Why certain sectors in particular nations are so much more developed and competitive than industries everywhere on the earth is explained by Porter’s Diamond Model of National Advantage. It essentially encapsulates the geographic benefits Dunning mentions in his Eclectic paradigm (also known as OLI framework). Therefore, the Diamond Model might be used to analyse international markets for possible entrance or to decide on foreign direct investment. The PESTEL analysis and Porter’s Five Forces should also be used to analyse the microenvironment and the industry, respectively.

How the Porter Diamond Works

A graphic that resembles a diamond’s four points is used to visually illustrate the Porter Diamond. The four points stand for the four interconnected criteria Porter theorizes are key elements in determining national comparative advantage. These four elements are: company strategy, structure, and competition; associated supporting industries; demand conditions; and element conditions.

These may be compared in some respects to the five forces that make up Porter’s Five Forces model of corporate strategy.

The fundamental truth that competition drives organizations to discover methods to enhance output and produce technical advancements is referenced by firm strategy, structure, and rivalry. Influential factors in this regard include the degree of rivalry, the concentration of market power, and the capacity of competing companies to join a market.

This idea relates to the Five Forces model’s forces of rivals and obstacles to new market entrants.

Upstream and downstream sectors that encourage innovation via knowledge exchange are referred to as related supporting industries. Depending on the level of openness and information transmission, they might encourage innovation. The suppliers and consumers that might represent either threats or opportunities in the Five Forces model are corresponding related supporting industries in the Diamond model.

Demand circumstances, which influence innovation and product development, relate to the size and makeup of the client base for goods. Greater market size for firms will naturally result from larger, more dynamic consumer markets, which will also demand and encourage the need to innovate and distinguish.

Frequently Asked Questions (FAQs)

What is a Porter Diamond model?

An economic theory called the Porter Diamond Model explains why certain countries or businesses have an advantage over others in a given market. It aids companies in identifying the variables that might enhance performance. According to the approach, a regional competitive advantage converts into a global advantage in international marketplaces.