What is the National Diamond?
National Diamond is a theory of competitive advantage developed by Harvard Business School professor Michael E. Porter that is represented visually using a diamond-shaped graphic. The graphic can be used to show the factors that make up an industrialized country's competitive advantage in the global marketplace or the factors that make up a company's competitive advantage within a single country.
- The National Diamond explains the factors that can drive competitive advantage for one national market or economy over another.
- It can be used both to describe the sources of a nation's competitive advantage and path to obtaining such advantage.
- The model can also be used by businesses to help guide and shape strategy regarding how to approach investing and operating in different national markets.
Understanding the National Diamond
The National Diamond is also referred to as the Porter Diamond and its accompanying theory is dubbed the Porter Diamond Theory of National Advantage. It seeks to explain how governments can act as catalysts to improve a country's position in a globally competitive economic environment.
Porter, an expert on economic competitiveness, divides the factors of competitive advantage into four categories, placing one at each point of the diamond. The four categories are firm strategy, structure, and rivalry; related and supporting industries; demand conditions; and factor conditions. His model also recognizes the impact of the institutional environment on competitiveness.
Firm strategy, structure, and rivalry refers to the basic fact that competition leads to businesses finding ways to increase production and to the development of technological innovations. The concentration of market power, degree of competition, and ability of rival firms to enter a nation's market are influential here. This point is related to the forces of competitors and barriers to new market entrants in the Five Forces model.
Related supporting industries refers to upstream and downstream industries that facilitate innovation through exchanging ideas. These can spur innovation depending on the degree of transparency and knowledge transfer. Related supporting industries in the Diamond model correspond to the suppliers and customers who can represent either threats or opportunities in the Five Forces model.
Demand conditions refer to the size and nature of the customer base for products, which also drives innovation and product improvement. Larger, more dynamic consumer markets will demand and stimulate a need to differentiate and innovate, as well as create a greater market scale for businesses.
The final determinant, and the most important one according to Porter's theory, is that of factor conditions. Factor conditions are those elements that Porter believes a country's economy can create for itself, such as a large pool of skilled labor, technological innovation, infrastructure, and capital.
Factor Conditions in National Diamond Theory
The National Diamond suggests that countries can create new factor advantages for themselves, such as a strong technology industry, skilled labor, and government support of a country's economy. Most traditional theories of global economics differ by mentioning elements, or factors, that a country or region inherently possesses or is naturally endowed with, such as land, location, natural resources, labor force, and population size as the primary determinants in a country's comparative economic advantage.
Porter argues that factor conditions are more important in determining a country's comparative advantage than naturally inherited factors, such as land and natural resources. He further suggests that a primary role of government in driving a nation's economy is to encourage and challenge businesses within the country to focus on creation and development of the elements of factor conditions. One way for government to accomplish that goal is to stimulate competition between domestic companies by establishing and enforcing antitrust laws.