In the business and economics world, having a competitive advantage to nations and industries on a global scale is very important. One key model that has captured so much attention in this respect is that of Porter's Diamond Model. It is sometimes referred to as Porter's Diamond Framework or the Diamond Theory. It was Michael Porter who developed this framework in 1990, giving us insight into factors determining national competitiveness, that is, why certain industries tend to thrive better in specific countries. This blog tries to go through all the concepts of Porter's Diamond Model, its main factors, and the way it explains competitive advantage at a national and industry level. Now, discuss how firms may apply the model in practice for detecting and monitoring shifts in their competitive advantages.
The Porter's Diamond Model is the strategic economic framework meant to explain why some countries can compete in certain industries worldwide and others cannot. It hypothesizes four interrelated factors as the base on which the competitiveness of which country will be or not be. For this reason, it is called "the Diamond Model.".
The Porter's Diamond Model surpasses all the various traditional economic theories that are based only on labor, capital, and natural resources by stepping one step further into consideration beyond all those factors of influence that affect the competitive advantage in an industry.
Porter's Diamond Framework comprises four major elements contributing to national competitive advantage. These factors are divided into the following:
In Porter's Diamond Model, Factor Conditions are the national factors within a country that can be exploited to attain a competitive advantage. These factors embrace basic factors such as land, labor, and natural resources; and advanced factors like infrastructure, technological know-how, and skilled labor. Porter's diamond model of competitive advantage offers a lot of benefits in today’s world.
Natural resources, climate, and geophysical location are some of the basic factors that might seem relevant. However, on their own, these cannot lead to long-term sustainable competitiveness. Countries with only a basic factor advantage tend to lose competitiveness in the long run.
More advanced factors, such as an educated workforce, up-to-date infrastructure, and technological innovativeness, are far more important drivers of long-term competitiveness. For instance, countries like Japan and Germany are infamous for strong investments in education and technological progress and then take the lead in automobile and electronics manufacturing.
Porter puts across the fact that countries that put their futures into high-quality factor conditions are likely to succeed in the world. Therefore, factor conditions influence the way industries evolve and compete abroad.
Demand Conditions form the second part of Porter's Diamond Model. This refers to the nature and size of the domestic market for a good or service. Companies face rigorous and sophisticated local demand and are forced to innovate and improve their product.
For example, the demand for high-quality, energy-efficient electronics and automobiles made Japan interested in world-class companies such as Toyota, Sony, and Panasonic. It forces the companies to innovate more and be agile as well as efficient in responding to such needs. This in turn prepares them not enough to compete in the international markets.
A competitive environment is influenced by domestic demand that forces companies to innovate and improve. If domestic consumers are knowledgeable and exacting, firms must better product quality and performance to stay ahead of competitors.
Related and Supporting Industries are industries that provide inputs or complementary products to the focal industry. The existence of internationally competitive supplier industries or related industries improves the competitiveness of firms.
For example, the drivers of Italy's competitive advantage in high-end clothing are enhanced by a highly competitive leather and textile sector at the global level. For Germany, a segment of its automotive companies will find easy access to suppliers while also enhancing innovation because companies have cooperation and higher overall competitiveness where all other related sectors are of a high standard. Strong inter-industry relationships lead to innovation, collaboration, and efficiency, hence making the firms more competitive globally.
The fourth factor within Porter's Diamond Model is Firm Strategy, Structure, and Rivalry. This aspect deals with how firms are structured and managed and how the competition functions in the home market.
Porter finds that high domestic rivalry is an important source of firm competitiveness. Those firms that face a highly competitive environment at the domestic level will innovate more, achieve more systematic efficiencies, and develop better products. The strong internal competition nations tend to produce firms that are better prepared to withstand international competition.
For instance, the higher competition the German automobile firms, notably BMW, Audi, and Mercedes-Benz, experience forces them to continually upgrade their technology, performance, and style. This competition forced these companies to become leaders in luxury cars across the globe.
Even though Porter's Diamond Framework features four primary factors, government, and chance are equally vital elements in determining national competitiveness.
Government policies can be put in place to support education, infrastructure, innovation, or competitive markets that could affect all of the four factors. Governments also create an environment that makes firms keep improving and innovating and, therefore, directly affects national competitiveness.
Chance events are beyond the control of the firms and can be discoveries, sudden technological breakthroughs, or even geopolitical changes, which can alter the balance in industries. In the meantime, although unpredictable, chance events may cause either opportunity for growth or threats to firms when it becomes more competitive and their rivals begin to take away the market share.
Here are a few examples:
The German automotive industry is one of the clearest examples of Porter's Diamond Model in action. Here, in all the aspects of the diamond framework, Germany stands out as an exception.
Factor Conditions: Germany has a very highly capable labor force, a cutting-edge technological infrastructure, and also culture of excellent engineering.
Demand Conditions: Customers here love good quality, precision-engineered cars that make companies such as BMW, Mercedes Benz, and Volkswagen continuously innovate to please the demand.
Related and Supporting Industries: The automobile industry is supported by the world's finest machinery, engineering, and chemical industries, which provide inputs needed for its production.
Firm Strategy, Structure, and Rivalry: Aggressive competition among German automobile companies has forced incessant innovation and high performance, which has made Germany a global leader in the automotive industry.
The success of Silicon Valley as a global technology hub can be explained by Porter's Diamond Model as well:
Factor Conditions: Silicon Valley is strongly supported by advanced technological conditions, research universities such as Stanford, and an excellent labor pool.
Demand Conditions: The intense adoption of technology among both consumers and firms in the United States has continuously spurred innovation in tech products and services.
Related and Supporting Industries: A strong presence of venture capital firms; and tech startups including established companies like Google, Apple, and Facebook make it a very lively ecosystem.
Firm Strategy, Structure, and Rivalry: The high rivalry in the tech companies leads to innovative results with high technological change rates, which helps Silicon Valley to be on top of the world's tech industry.
The Porter's Diamond Model offers a comprehensive framework to explain the reasons behind the prosperity of some industries in specific countries. By considering the Factor Conditions, Demand Conditions, Related and Supporting Industries, and Firm Strategy, Structure, and Rivalry, businesses can know what is the source of competitive advantage. If you want to enrol in a competitive advantage course, it will polish your skills.Don't forget to join the British academy for training and development.