Discover the diamond-shaped system that establishes relationships between its component factors
Porter’s Diamond Model was designed to facilitate understanding of the competitive advantage that nations or groups possess due to specific factors, and also explain how governments can act as catalysts to improve a country’s position in a globally competitive economic environment.
This diamond-shaped framework explains why specific industries in one nation become internationally competitive, while those in other nations do not. It was created by Michael Porter, considered one of the world’s most influential thinkers in the spheres of management and competitiveness, and founder of the modern strategy field.
Porter’s study into the competitive advantage of nations asserts that no country or territory can be competitive in all sectors of the economy.
According to his assessment, for a country or territory to be competitive in a given sector, it is necessary to achieve a high level of productivity of production factors such as capital and labor. And, for this to happen, a high capacity for innovation is required, whether in terms of product, process or organization.
Porter states that the conditions of production factors represent the essential elements (like necessary capital, technical and scientific knowledge, qualified labor) that determine the competitive differential of companies.
However, for an effective competitive advantage generated by local production to exist, costs, productivity, specialization and quality of production factors are fundamental elements for determining the level of business competitiveness.
Production factors that reach high levels of specialization and quality give rise to competitive advantages of extreme significance for these industries and, when in abundance, can also minimize competitiveness in certain cases.
Naturally, companies that display these elements in their production obtain better results from the influence or pressure they exert on the innovation and strategy adopted. The high quantity or low price of a factor may be a reflection of its qualification or specialization.
Porter distinguishes between factors of production: there are basic factors, which represent local or physical resources (like climate, minerals or energy), human resources (like population, income rate and schooling) and advanced factors, i.e. knowledge, infrastructure and capital resources.
Understanding Porter’s Diamond Model
Traditional economic theory suggests that factors such as land, labor, population size, and natural resources are crucial factors for a nation to gain a competitive advantage.
However, Porter argues that this model represents a rather passive summary of economic potential and that, far from creating growth, the afore-mentioned factors may actually undermine any potential competitive advantage.
Instead, he proposes four alternative characteristics that can accurately predict whether a nation produces organizations that will be competitive on the international stage. A flowchart maker is helpful for organizing your ideas as they pertain to the four stages of Porter’s Diamond Model.
How to apply the four stages of Porter’s Diamond Model?
1. Company strategy, structure and rivalry: this characteristic examines the way companies are structured and managed, including company objectives and the presence of competitive rivalries. These are particularly important because they force companies to innovate, better preparing them for the international market.
2. Factor conditions: these are more basic and refer to unskilled labor, natural resources and infrastructure. However, Porter argues that more advanced factor conditions, such as specialized knowledge and access to capital, are more important for competitive advantage.
3. Demand conditions: demand conditions refer to the level of demand in the industry’s domestic market. Demand creates competition and, in turn, competition spurs innovation. Specific demand conditions may include market size and market sophistication.
4. Related and supporting industries: companies are only as successful as their supply chains. In fact, most rely on alliances and good relationships with suppliers for cost savings that can be passed on to consumers. Nations with high concentrations of large innovative companies operating in close proximity to each other facilitate the spread of innovation.
In addition, governmental intervention and mere chance may complement these four factors.
These stages serve to help businesses understand the structure and techniques of their rival companies, to frame their strategies accordingly and to teach market players to innovate, stay up-to-date and redouble their efforts to avoid obsolescence.
Remaining relevant in a fast-evolving business world is crucial to maintaining and improving one’s market position.
The Porter’s Diamond Model is essential for any organization looking to expand its business presence, assess its standing or break into a new territory – hence the importance of professionals learning how to use this model to their organization’s advantage.