What is the Porter Diamond?
The Porter Diamond, properly referred to as the Porter Diamond Theory of National Advantage, is a model that is designed to help understand the competitive advantage that nations or groups possess due to certain factors available to them, and to explain how governments can act as catalysts to improve a country's position in a globally competitive economic environment. The model was created by Michael Porter, a recognized authority on corporate strategy and economic competition, and founder of the Institute for Strategy and Competitiveness at the Harvard Business School. It is a proactive economic theory, rather than one that simply quantifies competitive advantages that a country or region may have. The Porter Diamond is also referred to as "Porter's Diamond" or the "Diamond Model."
- Porter's Diamond model 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 Porter Diamond
The Porter 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, such as land, location, natural resources, labor, and population size as the primary determinants in a country's competitive economic advantage. Another application of the Porter Diamond is in corporate strategy, to use as a framework to analyze the relative merits of investing and operating in various national markets.
The Importance of Factor Conditions
The Porter Diamond is visually represented by a diagram that resembles the four points of a diamond. The four points represent four interrelated determinants that Porter theorizes as the deciding factors of national comparative economic advantage. These four factors are firm strategy, structure and rivalry; related supporting industries; demand conditions; and factor conditions. These can in some ways also be thought of as analogous to the eponymous forces of Porter's Five Forces model of business strategy.
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 nations 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 simply 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.
For example, Japan has developed a competitive global economic presence beyond the country's inherent resources, in part by producing a very high number of engineers that have helped drive technological innovation by Japanese industries.
Porter argues that the elements of factor conditions are more important in determining a country's competitive 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 anti-trust laws.