Porter's Diamond is a framework developed by Michael Porter to explain the competitive advantage some countries and industries have over others. It suggests that the home country environment can be a major factor in determining a firm's international competitive advantage, and it consists of four main components: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry. Factor conditions include the availability of resources, technology, and skills; demand conditions involve the presence of sophisticated and demanding customers; related and supporting industries refer to the presence of local suppliers, inputs, and complementary products; and firm strategy, structure, and rivalry look at the competition within an industry, the presence of local firms, and the culture of the firms.
Example of Porter's Diamond
- The automobile industry in Japan: Japan has a competitive advantage in the automobile industry due to its factor conditions, such as a well-developed infrastructure, availability of high-quality raw materials, and well-educated and highly skilled labor force. Additionally, Japan benefits from strong related and supporting industries such as parts suppliers, research and development firms, and local service providers. Furthermore, the presence of strong competitors such as Toyota and Honda, as well as a culture of cooperation between firms and the government, fuel Japan's competitive advantage.
- The technology sector in the US: The US has a competitive advantage in the technology sector thanks to its factor conditions such as access to a highly educated workforce, well-developed infrastructure, and access to capital. Additionally, the presence of large technology companies such as Apple and Microsoft, as well as venture capital firms and other related and supporting industries, give the US a competitive edge. Furthermore, the presence of strong rivals such as Google and Amazon, as well as the culture of innovation and risk-taking, furthers the US's competitive advantage in the technology sector.
When to use porter diamond
Porter's Diamond is a useful tool for understanding the competitive advantages that countries and industries have and can be used in a variety of applications. It can provide insights into a firm's international strategy and help to identify potential areas for improvement. Specifically, it can be used to:
- Analyze the international competitiveness of a firm's home country and industry
- Examine the sources of a firm's competitive advantage
- Compare the competitive advantages of different countries and industries
- Determine which strategies a firm should pursue in order to gain a competitive advantage
- Develop a firm's international strategy
- Identify potential areas for improvement within a firm's industry or home country.
Advantages of porter diamond
Porter's Diamond is a useful tool for analyzing firms' competitive advantages in international markets, as it looks at the way a country's environment affects the firm's ability to compete. The advantages of Porter's Diamond include:
- It provides a comprehensive analysis of the factors affecting competitiveness, as it looks at multiple aspects of the environment, such as factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry.
- It can help companies identify potential sources of competitive advantages and weaknesses that can be addressed in order to improve the firm’s performance.
- It allows companies to better understand the competitive landscape in different countries, allowing them to make more informed decisions about entering new markets.
- It can be used to identify areas for improvement and inform strategies for gaining a competitive edge in international markets.
Limitations of porter diamond
- The Porter Diamond does not take into account external factors such as foreign direct investment (FDI) and the global economy that can have an impact on the competitiveness of a nation or industry.
- The framework does not consider how the state of the global economy can influence the competitive advantage of a country or industry.
- The model does not account for the effects of international trade agreements, which can have a large influence on the competitive advantage of certain nations.
- The Porter Diamond also fails to address the role of government regulations in influencing the competitive advantage of a nation or industry.
- The framework does not take into account how global market forces, such as changing consumer preferences, can affect the competitiveness of a nation or industry.
- The Porter Diamond does not provide an explanation for how new entrants into an industry or nation can affect the competitive advantage of an existing player.
- The model does not explain how changes in technology can affect the competitive advantage of a nation or industry.
In addition to Porter's Diamond, there are other approaches that can be used to explain a country or industry's competitive advantage. These include:
- The Resource-Based View of the Firm (RBV) which looks at a firm's resources and capabilities to create sustainable competitive advantage.
- National Innovation Systems which considers the institutional environment, such as the level of education, research and development, technology transfer, and incentives for innovation.
- Cluster Theory which looks at the external environment and suggests that geographic proximity can be beneficial for firms in terms of knowledge sharing, access to resources and economies of scale.
- National Competitive Advantage which looks at the interaction between the political, economic and social environment and the context in which firms operate.
- Global Value Chain Analysis which looks at the production process of firms in the global economy and how their strategies and decisions can impact their competitive advantage.
In summary, there are a variety of different theories and frameworks that can be used to explain a country or industry's competitive advantage. Porter's Diamond is just one of these approaches and it highlights the importance of the home country environment in driving competitive advantage.
- Kharub, M., & Sharma, R. K. (2016). Investigating the role of porter diamond determinants for competitiveness in MSMEs. International Journal for Quality Research, 10(3), 471-486.
- Tsiligiris, V. (2018). An adapted Porter Diamond Model for the evaluation of transnational education host countries. International Journal of Educational Management.