Porter’s Diamond – Determining Factors of Advantage

Porter's Diamond – Determining Factors of Advantage

Introduction

In the recent years, several corporate strategies have been seen in the global context. A company has to look at the international environment, even if it does not have any plan to import or export directly. It needs to look at the action of buyers, sellers, competitors and new entrants that may influence the domestic market.

With every passing year, the competition between different companies is expected to become very intense. For consumers, it creates a downward pressure on prices. However, for business owners, there is a strong need for increasing the efficiency and output of employees, deployment of resources and innovation. In order to deploy their resources in an effective manner, it becomes essential for companies to know about how the global competition is likely to impact their efforts.

One should remember that the impact of global competition varies from one country to the other. Understanding the variation between the global competitions is the key subject of Porter’s Diamond. This topic may seem to be ideal for conference halls and boardrooms of large companies. However, if we see at the other side, we will find that it is crucial for all organizations to think about ways to succeed in this competitive world, regardless of its size and Porter’s Diamond helps them to do so successfully.

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History of Porter’s Diamond

The Diamond Model developed by Michael Porter is an economic model which describes why some industries become competitive in a particular location. The model was later expanded by other scholars of the industry. The approach looks like a cluster with multiple small-scale industries where one company is rated to the other in a competitive manner.

Analyzing Porter’s Diamond

Porter made his analysis in two steps. In the first step, successful industries are mapped in 10 trading nations. In the second step, the history of competition is examined to clarify the dynamic process that created competitive advantage. The basic method in this process is analyzing the history, which is classified into six factors in Porter’s Diamond. The following six factors are considered as the key tools to analyze the competitiveness.

Factor conditions – Factor Conditions are the physical resources, capital resources, human resources and infrastructure that are specific for an industry. These factors are very important for competitiveness and can be created to compensate the disadvantages of other factors. This can be further explained as a country creates its own factors, such as skilled resources with a great technological base.

The stock of these factors is less important than the extent to which they are deployed. Negative conditions such as scarce raw materials, labor shortages, etc compel the companies to develop new and innovative methods. The innovation of new methods leads to the comparative advantage of the nation.

Home demand conditions – The demand conditions describe the state of home demand for a variety of products as well as services produced in a particular country. The demand conditions have a severe impact on the pace and direction of product development. According to Porter’s Diamond, the demand condition is determined by 3 factors – 1) The mechanism that transmits the preferences to foreign markets 2) Their mixture and 3) their growth rate. The country can achieve national advantage if the demand at the domestic market gives a clear signal of demands to domestic suppliers compared to foreign suppliers. Compared to the foreign markets, the domestic markets have a great influence on the ability of an organization to know the needs of the customers.

Related and supporting industries – The related industries can generate inputs that are essential for innovation and product development. The supporting industries provide a cost-effective input as well as participate in upgrading process. This helps other companies in the chain to innovate new methods of product development.

The supplying industries will reinforce internationalization in industries at later stages in the system. These are the industries that coordinate the activities in the chain together. For instance, India has high quality labor compared to any other country and it is expected that it will have sufficient workforce till 2050.

For example, Sweden’s global superiority in paper industries is supported by a network of several industries, such as packing industry, chemical industry, conveyor systems, and wood processing industry and so on. Many of these industries have achieved top positions in the global platform.

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Firm strategy, rivalry and structure – This is the fourth factor that determines the competitiveness. The way in which companies are created and managed is important for success. Local conditions affect the strategy of the firm as it helps to determine the type of industries in which the firm can excel.

According to Porter’s Diamond Model, low rivalry makes the industry attractive. However, more local rivalry is better in the long run as it puts pressure on the firm to develop innovative products. High local rivalry results in reduced global rivalry.

Government – Government can have a significant impact on the organization. It can influence each of the four determinants of competitiveness. The government can influence the supply conditions of key factors, demand conditions, competition between the firms and other factors.

The government intervenes with the local, regional and national market. The role of government is to stimulate early demand for products, focus on creating specialized factor in order to encourage companies develop their business and so on.

Chances – Chances are the events that happen with the control or knowledge of the firm. They create discontinuities in which some gain and some lose. Unexpected events and actions are described in Chances factor.

In a Nutshell

This model was developed by Porter by understanding the work culture of ten developed countries of the world. There is ample evidence that the Diamond Model is influenced by factors outside home country. However, the key focus of Diamond Model is on the home country rather than the foreign markets that have been targeted. According to Porter, a careful choice of target is necessary to make sure that a firm has the desired core competences for success.

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