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 knowledge 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 continuously 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.
Basis Absolute advantage Comparative Advantage

The ability of the country to produce

The ability of a country to produce more
Definition goods with the same amount of resources than good better than another country with
another country
the same amount of resources

1. Trade is not mutually beneficial

1. Trade is mutually beneficial
Benefits 2. Benefits the Country with absolute
2.Benefits of both the countries
advantage

The absolute cost of producing goods impacts The opportunity cost of producing goo
Cost
if the country has an absolute advantage ds impact the Country’s comparative advantage

Economic nature It is not mutual and reciprocal It is mutual and reciprocal