This article explains the Porter Diamond Model, developed by strategy guru Michael Porter in a practical way. After reading you will understand the basics of this powerful strategy and competitive advantage analysis tool.
- What is the Porter Diamond Model?
- Porter Diamond Model clusters
- International advantage
- It’s Your Turn
What is the Porter Diamond Model?
The American strategy professor Michael Porter developed an economic model for (small-sized) businesses to help them understand their competitive position in global markets.
This Porter Diamond Model, also known as the Porter Diamond theory of National Advantage, has been given this name because all factors that are important in global business competition resemble the points of a diamond.
Michael Porter assumes that the competitiveness of businesses is related to the performance of other businesses.
Furthermore, other factors are tied together in the value-added chain in a long distance relation or a local or regional context.
Porter Diamond Model clusters
Michael Porter uses the concept of clusters of identical product groups in which there is considerable competitive pressure.
Businesses within clusters usually stimulate each other to increase productivity, foster innovation and improve business results.
Companies operating in such clusters work according to Porter Diamond Model.
In addition, they have the advantage that they can move very well on the international market and that they can maintain their presence and handle international competition. Examples of large clusters are the Swiss watch industry and the Hollywood film industry.
Organisations can use the Porter diamond model to establish how they can translate national advantages into international advantages.
The Porter Diamond Model suggests that the national home base of an organization plays an important role in the creation of advantages on a global scale.
This home base provides basic factors that support an organization, including government support but they can also hinder it from building advantages in global competition.
The determinants that Michael Porter distinguishes are:
1. Factor Conditions
This is the situation in a country relating to production factors like knowledge and infrastructure. These are relevant factors for competitiveness in particular industries.
These factors can be grouped into material resources- human resources (labour costs, qualifications and commitment) – knowledge resources and infrastructure.
But they also include factors like quality of research or liquidity on stock markets and natural resources like climate, minerals, oil and these could be reasons for creating an international competitive position.
2. Related and supporting Industries
The success of a market also depends on the presence of suppliers and related industries within a region. Competitive suppliers reinforce innovation and internationalization.
Besides suppliers, related organizations are of importance too.
If an organization is successful this could be beneficial for related or supporting organizations. They can benefit from each other’s know-how and encourage each other by producing complementary products.
3. Home Demand Conditions
In this determinant the key question is: What reasons are there for a successful market? What is the nature of the market and what is the market size?
There always exists an interaction between economies of scale, transportation costs and the size of the home market.
If a producer can realize sufficient economies of scale, this will offer advantages to other companies to service the market from a single location. In addition the question can be asked: what impact does this have on the pace and direction of innovation and product development?
4. Strategy, Structure and Rivalry
This factor is related to the way in which an organization is organized and managed, its corporate objectives and the measure of rivalry within its own organizational culture.
The Furthermore, it focuses on the conditions in a country that determine where a company will be established.
Cultural aspects play an important role in this.
Regions, provinces and countries may differ greatly from one another and factors like management, working morale and interactions between companies are shaped differently in different cultures.
This could provide both advantages and disadvantages for companies in a certain situation when setting up a company in another country.
According to Michael Porter domestic rivalry and the continuous search for competitive advantage within a nation can help organizations achieve advantages on an international scale.
In addition to the above-mentioned determinants Michael Porter also mentions factors like Government and chance events that influence competition between companies.
Governments can play a powerful role in encouraging the development of industries and companies both at home and abroad. Governments finance and construct infrastructure (roads, airports) and invest in education and healthcare.
Moreover, they can encourage companies to use alternative energy or alternative environmental systems that affect production. This can be effected by granting subsidies or other financial incentives.
6. Chance events
Michael Porter also indicates that in most markets chance plays an important role.
This provides opportunities for innovative companies that are not afraid to start up new operations.
Entrepreneurs usually start their companies in their homeland, without this having any economic advantages, whereas a similar start abroad would provide more opportunities.
A few business analysts set-up a case about Mobile telecommunication.
- Evolving mobile possibilities in relation with Internet.
- Growing number of mobile owners. Mobile usage becomes cheaper and cheaper so it accessible for everybody.
- Upcoming online businesses including App builders.
- Government of county x stimulates Mobile Market regulation.
- Government of county x puts continuous efforts in IT policies.
- IT Workforce is developing and growing.
- Level of Education on mobile and Internet technology is high.
- County x has geographical IT advantages.
Related and supporting industry
- This country is leading in the microchip market.
- There are two countries that are trading partners.
- The government is planning to invest in Mobile R&D and IT development.
- County x is leading in all Mobile & IT related production.
Firm strategy and structure
- Venture firms with high IT technology.
- Firm and small and medium size IT business companies.
- Market competition in Mobile telecommunication.
- Target niche market by continuous development and improvement of Mobile technology.
By using the Porter diamond model, an organization may identify what factors can build advantages at a national level.
The Porter diamond model is therefore often used during internationalisation efforts.
Michael Porter is of the opinion that all factors are decisive for the competitiveness of a company with respect to their foreign competitors.
By considering these factors a company will be better able to formulate a strategic goal.
It’s Your Turn
What do you think? Can you apply the Porter Diamond Model in today’s modern industries and businesses? And if so, how do you use it and what are the general results and learning lessons? Is the basics theory the same or are there new ones?
Share your experience and knowledge in the comments box below.
- Porter, M. E. (2011). Competitive advantage of nations: creating and sustaining superior performance. Simon and Schuster.
- Porter, M. E. (1991). Towards a dynamic theory of strategy. Strategic management journal, 12(S2), 95-117.
- Riasi, A. (2015). Competitive advantages of shadow banking industry: An analysis using Porter diamond model. Business Management and Strategy, 6(2), 15-27.
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