What is Porter’s Diamond Model of National Advantage? –

By Trader Pit

July 9, 2021


In the 1930s, the Harvard economist and political scientist William Arthur Porter developed the concept of national advantage, which he described as the measure of a nation’s ability to benefit from the natural resource endowments of its geographical location. National advantage can be expressed as the total income that a country produces relative to the country’s national income. The national advantage is a measure of how much a country would benefit if its industries were located in a different country.

The crucial factor in a nation’s ability to produce and export goods is its economy’s productivity—how much value per unit of input are we able to produce. And the key to productivity is the organisation and process of production. This is where the concept of the diamond model comes in.

Porter’s diamond model has its origins in the work of Michael Porter, who first published information about this economic model in his book Competitive Advantage of Nations (1990). This simple but effective model attempts to explain why a country tends to be more competitive in a particular sector than others. This book also attempts to address the problem of business innovation, which may be more beneficial in one country and impossible in another.

Porter’s diamond model, also known as the theory of national advantage, is used by various economic institutions to calculate the external competitive environment. This analysis helps to understand the relative strength of one company to another. Through the analysis of the external environment, it is also possible to decipher the reasons for the industrial advantage of certain firms in a particular location or region. Simply put, Porter’s diamond model attempts to answer the following fundamental questions:

  • Why is it that one country is the most competitive in a particular sector?

According to Porter’s model, this nation develops into a home. For example China, where mobile phones are made, Germany, where cars are made, etc.

  • How do firms in a particular country or region obtain the benefits of a competitive economy in a particular sector?

Porter’s Diamond Pattern

The answers to the above questions lie in the determinants identified by Porter that create competitive advantage, as mentioned above. The four determinants in Porter’s diamond model are:

– Factor conditions:

Factor conditions refer to the different types of resources that may or may not be present in a country. The tools can be divided into two categories: basic and advanced. Among the most important are useful natural resources and the availability of unskilled labour. Advanced or established resources include specialisation, expertise and experience, availability of capital, infrastructure, etc.

For Porter, natural resources are less important than created resources. Competitive advantages arise in those countries and in certain industries that are able to create these advanced and specialised factors.

– Conditions for the requirement:

Demand conditions always talk about domestic demand, which affects the success of a particular industry in a particular state. The high domestic demand for manufactured goods in their home countries creates a large market for them and thus opportunities for growth.

More demands inevitably mean more challenges, but these challenges drive companies to innovate and improve. Market size, market growth rate, etc. are indicators of housing demand.

– Related and auxiliary industries

According to Porter, the degree of success of an industry can be linked to the success of related and supporting industries. In today’s economy, the role of suppliers is essential. These suppliers help to stimulate innovation processes by providing resources – technical and other types of support.

Recently, the startup boom has led to a revival. These startups have entered into numerous mergers with various industry giants, which has helped them create a competitive advantage.

– Business strategy, structure, and competition

The internal environment in which a company is formed determines how companies are created and structured. A number of factors – political, economic and social – can influence this structuring of the enterprise. This structuring will form the basis for the development of a business strategy.

The degree of competition between firms in a particular sector within a country is characterized by internal rivalry. The more intense the internal rivalry, the more it drives companies to innovate, improve and compete globally. A perfect example is the internal rivalry in the automotive industry between different Japanese companies such as Toyota, Nissan, Honda, etc.

Also read : Porter’s Five Forces for competitive analysis – what do you need to know?

Additional determinants

In addition to the above four main determinants, there are two other determinants that influence the creation of competitive advantage in a given country. These two determining factors are:

– Government:

Government plays an important role in the success of a business or company. It is the government that provides the technical and financial support for business growth. The government is described as an enabler and challenger.

Porter believes that the market should not be in invisible hands, but that the state should regulate it to encourage the emergence of advanced factors, leading to the development of competitive advantages. Government policies, investment in infrastructure, financing, etc. are some of the ways governments help increase demand for housing. – are some of the ways governments help increase the demand for housing.

– Happiness:

The role of chance was not originally addressed by Porter, but was included in the Diamond Model because chance events such as scientific breakthroughs, natural disasters or wars can occur and affect established competitive positions in society.

Debriefing

In summary, the six determinants mentioned above in the national context – factor conditions, demand conditions, related and supporting industries, business strategy, structure and rivalry, government and luck – can accelerate or slow down the success rate of a given firm in a given industry in a given country.

This success can lead to domestic demand, which in turn leads to increased competitiveness in the global market, creating a competitive advantage for a particular company.

 

Short note
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Critique of Porter’s Diamond Model

Discrediting Porter’s diamond model will not justify his contribution, but we cannot ignore the criticism that his theory of competitive advantage has generated.

Some critics point out that the list of internal determinants is limited because there may be many other factors that could be listed. Other arguments point to the avoidance of taking externalities into account. The emphasis was more on the internal image and less on the global level.

Some authors even point out that this diamond theory is not universal, but rather limited, since it was based on a study of only ten developed countries. It is therefore no exaggeration to state that Porter’s diamond model is largely applicable to the developed countries studied.

Finally, the disadvantages of applying the model only to physical products and not to services were pointed out. The model does not consider how it would apply to the service sector of the economy.

Frequently Asked Questions

What is Porter’s Diamond framework?

Porter’s Diamond framework is a framework for analyzing the five main factors that determine the profitability of a business. The five factors are: 1. Cost Leadership 2. Differentiation 3. Focus 4. Sustainability 5. Network Effects The framework is a tool for analyzing the factors that determine the profitability of a business.

What are the four characteristics of porters diamond model please explain?

The four characteristics of the Porter’s diamond model are the following: The diamond is a graph with two axes, one for the value of the stock and the other for the value of the option. The value of the stock is represented by the horizontal axis and the value of the option is represented by the vertical axis. The stock and option are plotted on the graph in such a way that the value of the stock is always lower than the value of the option. The stock is plotted on the left side of the graph and the option is plotted on the right side of the graph.

What is Porter’s theory of competitive advantage?

Porter’s theory of competitive advantage is that companies can gain a competitive advantage by creating a unique value proposition that is difficult for competitors to replicate.

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About the author

Trader Pit

A yogi who like Finance and Technology. I have been in Indian Stock market for over 12 years now as financial analyst, portfolio manager, trader. Now, I focus on Yoga, Financial Education & Long term investing. 

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