Porter Diamond

Article bySusmita Pathak
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is Porter Diamond Model?

Porter Diamond is a model that emphasizes the competitive advantage of an industry or business that makes it work better than other competitors in a region or country. Also known as the Porter Diamond Theory of National Advantage, the model explains why certain industries thrive in particular nations. Companies use this model to analyze the competitive environment in foreign markets before entering them.

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The model outlines factors that determine the relative strength of entities, which drives them to become better than the rest. Besides some of the attributes that are available and identifiable in the environment itself, businesses have the liberty to create their own strengths to empower their presence and become an entity of national importance.

Key Takeaways

  • Porter Diamond is an economic model describing the factors that give a business an edge over its competitors in a particular region.
  • American academician Michael Eugene Porter developed the Porter Diamond model.
  • It explains how companies with a national competitive advantage continue to enjoy the same in the international markets too.
  • The model is based on a unique framework consisting of four factors— Company Strategy, Structure, and Rivalry; Factor Conditions; Related and Supporting Industries; and Demand Conditions.
  • The role of government and chance also impact the competitive advantage of a business.

Porter Diamond Model Explained

Porter Diamond Model discusses factors and traits of a business that make it more successful than others in a particular region. It enables companies to identify the resources that need to be developed to enhance their performance compared to the rest of the entities dealing in the same category of products and services.

Michael Eugene Porter, an American academician and influential thinker on management and competitiveness, developed the Porter Diamond model. It is an economic model for businesses, especially multinational organizations planning to expand their operations in different markets. The model lets companies identify the key areas to focus on to capture global markets effectively.

With the help of this theory, the business players can understand the reason for certain industries being widespread in particular nations. On this basis, they can analyze their position in the market and thereby implement strategies to compete and excel.

The Porter Diamond theory outlines four main factors that reveal how businesses enjoy a national advantage in the international markets. These attributes make certain nations become more competitive than others for specific industries. For example, Germany is well known for its engineering, while Greece is famous for the tourism services it offers on a global platform.

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Porter Diamond Framework 

The unique Porter Diamond framework consists of four attributes/factors. If all these four factors are favorable, companies will innovate and stay competitive. This domestic competitiveness prepares them to excel in international markets as well. Besides, the role of government and chance or unpredictable external events also influence competitive advantageCompetitive AdvantageCompetitive advantage refers to an advantage availed by a company that has remained successful in outdoing its competitors belonging to the same industry by designing and implementing effective strategies that allow the same in offering quality goods or services, quoting reasonable prices to its customers, maximizing the wealth of its stakeholders and so on and as a result of which the company can make more profits, build a positive brand reputation, make more sales, maximize return on assets, etc.read more.

#1 – Company Structure, Rivalry, and Strategy

This aspect of the theory focuses on the competition in the native markets that businesses have to excel against. The region in which the firms operate determines the structure and strategies to be framed to compete in the home market.

As a result, the strategies differ from nation to nation. For example, Italy, known for its fashionable clothing, will definitely have a different approach than Greece, which emphasizes tourism and related facilities.

In addition, rivalry plays an important role in driving every entity operating in the same sector to improve, innovate, and perform better than each other. Therefore, the businesses have to be consistent. This makes them trustworthy and reliable national companies around the globe in the long run.

#2 – Factor Conditions

Factor conditions include resources available to businesses that help them perform well. The availability of resources could be influenced by the skillset, strategies, infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly.read more, or nature. For example, Italy performs well because of its ability to choose better fabrics; Greece’s tourism market is influenced by the weather, which might keep changing.

The natural resources constitute the basic factors, while the infrastructure, skilled experts, and capital form the advanced factors. A nation develops a real competitive advantage with the development of advanced elements. In contrast, the contribution of basic factors to regional advantage is comparatively lower.

#3 – Demand Conditions

The demand for a particular product or service also plays an essential factor. Porter Diamond model’s third attribute indicates how the increase in demand for an item among local customer boosts the growth of a brand or business.

When customers want a product, businesses strive to improve the quality and live up to their expectations. As a result, they become competent enough to acquire the number one position on the global platform.

Another factor that influences business growth is the complementary services that lend support to the companies of national advantage. For example, the tourism services in Greece would never be the best if the accommodation facilities and food units over there did not support the industry.

#5 – Government

The government also plays a vital role in developing and retaining the competitive advantage by offering a conducive environment for businesses to flourish. This includes developing a robust infrastructure, ensuring fair market practices, developing education institutions, etc.

#6 – Chance

In addition, chance or luck may also contribute to competitive advantage or disadvantage. For instance, unpredictable events like wars, natural disasters, political situations, etc., can positively or negatively impact an industry or nation, creating a competitive advantage or wiping it off.

Example

Let’s consider the following Porter Diamond model example:

The car manufacturing industry of Germany is one of the best examples to be cited here. The economy’s best sector complies with all the attributes and, therefore, strives through global challenges easily. With several competitors in the home market, car manufacturers continuously innovate and excel. As a result, the nation manages to have the best car models. 

Having no speed limits and an aspiration of citizens to have a quality and speedy life encourages the demand for high-speed luxury cars in the nation. Besides, skilled resources like car engineers from globally-recognized German universities give car manufacturers an edge over others. Thus, the demand conditions and factor conditions are all met.

Next, the support from the metal industries that offer the best spare parts to the car manufacturers tends to be the best support system for the national market. Besides, the German government’s support in the form of better infrastructure and educational institutions creates a national competitive advantage for the car industry.

How to use Porter Diamond Model? 

Porter Diamond model is used to identify the business surroundings and act accordingly to become the best. In 1990, in the book “The Competitive Advantage of Nations,” Porter discussed the role of government in stimulating the competitive positioning of an economy on the global platform.

His model, likewise, suggested the methods through which the businesses can excel, be it by enhancing their skilled labor or deploying advanced technology, or introducing the relevant fiscal policyFiscal PolicyFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. read more.

Some of the uses of the Porter Diamond model are as follows:

  • It helps businesses understand the structure and techniques of their rival companies, allowing them to frame their strategies accordingly.
  • Businesses use regional advantages to capture international markets.
  • They value suppliers as they understand the importance of their support.
  • Firms of national importance get to know the power of buyers in enhancing business growth.
  • The model teaches market players to innovate, remain updated, and put in their best efforts to fight the fear of being substituted.

Frequently Asked Questions (FAQs)

What is a Porter Diamond model?

Porter Diamond Model is an economic theory that explains why some companies or nations enjoy a competitive edge in an area. It helps businesses identify the factors that can improve their performance. The model contends that the regional competitive advantage translates to an international advantage in foreign markets.

What are the main components of the Porter Diamond model?

Porter Diamond model has four key factors that determine the competitive advantage of a company or nation:

·         Company Structure, Rivalry, and Strategy
·         Factor Conditions
·         Supporting and Related Industries
·         Demand Conditions

Besides, government and chance or luck also support these factors.

Cite a suitable example to explain the Porter Diamond model.

Belgium is popular for its beer industry. It has more breweries than any other nation. This intensifies rivalry and forces them to innovate and stay competitive. Besides, Belgium has a good supply of raw materials and skilled labor required for beer production. The local demand for beer is also high, and breweries are set up near farms that provide the necessary raw materials. Thus, all Porter model factors are favorable. This gives the beer industry in Belgium a national competitive advantage.

This has been a guide to What is Porter Diamond Model. Check out the Porter diamond theory, its framework, example & factors resulting in national advantage. You can learn more from the following articles – 

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Comments

  1. Aabha Singh says

    I am writing economic project for university about Diamond Porter Model and this article is very helpful. Thank you for explaining the concept so well.

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