Porter’s Diamond Model is a diamond-shaped framework that explains why specific industries in a nation become internationally competitive while those in other nations do not. The model was first published in Michael Porter’s 1990 book The Competitive Advantage of Nations. This framework looks at the firm strategy, structure/rivalry, factor conditions, demand conditions, and related and supporting industries.
Traditional economic theory suggests that factors such as land, labor, population size, and natural resources are crucial factors in a nation gaining a competitive advantage.
However, Michael Porter argued that this model was a rather passive summary of economic potential and that far from creating sustained growth, the aforementioned factors may undermine any potential competitive advantage.
Instead, he proposed that four other characteristics could accurately predict whether a nation produced organizations that were competitive on the international stage.
These four characteristics give Porter’s model the diamond shape for which it is known, and they are explained in the next section.
The four characteristics of Porter’s Diamond Model
1. Firm Strategy, Structure, and Rivalry
This characteristic encompasses how companies are structured and managed.
It also includes company objectives and the presence of competitive rivalries, if applicable.
Rivalry is particularly important because it forces companies to innovate, better preparing them for the international market.
German auto manufacturers BMW, Mercedes-Benz, and Audi would not have become globally successful brands without the intense competition they face inside their native Germany.
2. Factor conditions
Factor conditions are more basic and refer to unskilled labor, natural resources, and infrastructure.
However, Porter argued that more advanced factor conditions such as skilled and specialist knowledge and access to capital were more important to competitive advantage.
3. Demand conditions
Demand conditions refer to the level of demand in the home market of industry.
Demand creates competition and in turn, competition creates innovation.
Specific demand conditions may include market size and market sophistication.
4. Related and supporting industries
Most large companies are only as successful as their supply chains.
Indeed, most are dependent on alliances and good relationships with suppliers to make cost savings that can be passed to consumers.
Nations with high concentrations of large, innovative companies that operate close to each other facilitate the spread of innovation.
For example, the cluster of tech companies in Silicon Valley, California, facilitates innovation because of the proximity of innovative and often supportive companies.
Criticisms of Porter’s Diamond Model
Given that Porter’s Model assesses competition in the relatively broad context of nations, it has been subject to criticism.
Criticisms include:
Scope – when the model was developed in 1990, it included just 10 developed countries. As a result, it has limited relevance to second or third-world nations.
Contradictory evidence – there is a wealth of evidence to suggest that the competitiveness of a nation has many external influences that Porter does not account for.
Industry selective – Porter’s original analysis focused on the banking sector, consultancy firms, and manufacturers. Some academics have questioned whether the model is at all relevant to the many large and influential global service companies such as McDonald’s.
Porter’s Diamond model examples
Below is a look at how Porter’s Diamond model can be applied to some well-known companies.
Apple
Apple has a business model that is broken down between products and services. Apple generated over $365 billion in revenues in 2021, of which $191.9 came from the iPhone sales, $35.2 came from Mac sales, $38.3 came from accessories and wearables (AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch, and accessories), $31.86 billion came from iPad sales, and $68.4 billion came from services.
Firm Strategy, Structure, and Rivalry – Apple was founded in arguably the most innovative and entrepreneurial country in the world, with early rivals such as IBM, Xerox, Commodore, and Tandy all competing for a slice of the emerging consumer electronics market. Today, Apple’s business strategy consists of hardware expertise, superior design, enhanced customer experience, and the integrated Apple ecosystem.
Factor conditions – Apple is based in Silicon Valley, California, so the company has access to a vast, skilled workforce. However, most product assembly occurs in China where labor is cheaper.
Demand conditions – the company enjoys significant demand for its innovative technology products around the world. Provided the company can continue to execute its strategy, this demand is likely to be sustained.
Related and supporting industries – as noted earlier, Apple benefits from the increased collaboration that occurs between related companies in Silicon Valley. Apple also has a simple but effective supply chain, purchasing components from suppliers and then shipping them to China for assembly. It works with a small number of key suppliers, which means it can facilitate better relationships with each.
BMW
Firm Strategy, Structure, and Rivalry – BMW has several domestic and international rivals with similar brand equity and prestige. In the local German market, the company is using a strategy that combines market relevance, research and development, and competitive services. It also manufactures vehicles consumers can relate to on an emotional level.
Factor conditions – BMW benefits from a robust German automotive industry that comprises a specialist workforce, world-class infrastructure, and market-leading research and development. German students benefit from a holistic education system where apprenticeships are undertaken in conjunction with vocational training to produce well-rounded automotive graduates.
Related and supporting industries – like all vehicle manufacturers, BMW relies on an extensive network of over 100 components suppliers. Over 43% of these are located in Germany or are subsidiaries of companies based in the country.
Louis Vuitton
LVMH is a global luxury empire with over €46 billion in revenues for 2018 spanning several industries: wines and spirits, fashion and leather goods, perfumes and cosmetics, watched and jewelry, and selective retailing. It comprises brands like Louis Vuitton, Christian Dior Couture, Fendi, Loro Piana, and many others.
Firm Strategy, Structure, and Rivalry – in France where the company was founded, the luxury goods market is extremely competitive and in recent years has been disrupted by new technology. In response, Louis Vuitton has embarked on a well-documented acquisition strategy, combining with champagne producer Moët Hennessy to form luxury brand conglomerate LVMH.
Factor conditions – French culture is synonymous with fashion and luxury, characteristics that were instilled by King Louis XIV who established a powerful textile industry to support the economic wealth of the nation. This culture continues today with a workforce of craftspeople that are sometimes required to train for up to two years before becoming certified.
Demand conditions – the culture of luxury has also meant that discerning French consumers continue to demand opulent products. Demand has also soared in new markets such as China which has enabled Louis Vuitton and its subsidiaries to expand and maintain competitive advantage.
Related and supporting industries – as noted, the luxury goods industry has close ties with the French textile industry. It is also linked to apparel, garments, embellishments, and sewing machinery. These elements comprise an ecosystem where every constituent part is motivated to innovate and succeed for the collective good.
IKEA is a brand comprising two separate owners. INGKA Holding B.V. owns the IKEA Group, the holding of the group. At the same time, that is held by the Stichting INGKA Foundation, which is the owner of the whole Group. Thus, IKEA Group is a franchisee that pays 3% royalties to Inter IKEA Systems.
Firm strategy, structure, and rivalry – IKEA has a focus on three core components: sustainability, climate change, and diversity across its entire value chain. Business strategy is based on the IKEA Concept which promotes the idea that furniture should combine function, value, quality, and design. IKEA has few notable rivals in its home market of Sweden, but Walmart, Amazon, Sears, and Wayfair are its main competitors in the American market and elsewhere.
Factor conditions – in Sweden, IKEA has access to a diverse, skilled, and educated workforce who understands the Scandinavian culture on which the company is based. While most of the sales and design work is done in Sweden, manufacturing is outsourced to China and other Asian countries. Access to natural resources has also been problematic for IKEA, with the company frequently associated with timber sourcing in countries such as Russia, Ukraine, and Romania.
Demand conditions – demand for affordable flat-pack furniture enabled the company to expand around the world, but a new trend is emerging in 2022 around environmentally-conscious, second-hand purchases. In the wake of the COVID-19 pandemic, consumers are also looking for more outdoor furniture and products that can satisfy hybrid living spaces for work, play, and entertaining.
Related and supporting industries – IKEA manages a vast supply chain with over 1,600 suppliers across the home furniture, components, food, and transport industries. To ensure its core sustainability values are upheld by suppliers, the company developed the IWAY code of conduct system which stipulates various requirements and standards.
Starbucks is a retail company that sells beverages (primarily consisting of coffee-related drinks) and food. In 2018, Starbucks had 52% of company-operated stores vs. 48% of licensed stores. The revenues for company-operated stores accounted for 80% of total revenues, thus making Starbucks a chain business model.
Firm strategy, structure, and rivalry – Starbucks’s strategy is based on continued investment in customer service to increase brand equity and quality-based differentiation. The company also has a focus on making a positive impact on the planet and its employees. Primary competitors include McDonald’s, Tim Horton’s, and Dunkin’ Donuts, with the company also competing with Nestle and Lavazza for coffee and related product sales. Intense competition has led to innovative products such as a bean-to-cup traceability tool, enhanced customer rewards programs, and a recently released line of RTD cold coffee drinks.
Factor conditions – Starbucks has access to a young, savvy, social, and relatively skilled workforce in the United States and other Western markets. The company offers barista and management training to its employees so that they embody the company’s customer-centric values and deliver the Starbucks Experience. The vertically integrated coffee bean supply chain is also an important factor condition for Starbucks.
Demand conditions – demand for coffee and coffee-related products is not likely to decrease any time soon. In the United States alone, over 400 million cups of coffee are consumed daily by around 150 million consumers. In 2022, coffee consumption soared to a two-decade high with over 66% of Americans drinking it each day. Demand has increased because consumers – many of whom were stuck at home during COVID-19 lockdowns – developed an interest in making their own coffee or a taste for specialty coffee products.
Related and supporting industries – as hinted at above, Starbucks owns or at least enjoys positive working relationships with its coffee bean suppliers. The company has also recently moved into the coffee machine industry, selling a range of branded, self-serve machines to other businesses. Starbucks also sells coffee-pod machines to consumers for use in the home. Without the development of coffee machines and coffee pod technology from other manufacturers, it is unlikely Starbucks would have achieved the same level of penetration in the at-home consumer market.
Key takeaways:
Porter’s Diamond Model is an economic model which argues that the global competitiveness of a particular organization is dependent on the country it operates.
Porter’s Diamond Model is based on four key characteristics which explain the requirements for a competitively strong nation.
Porter’s Diamond Model has attracted criticism for its lack of scope and a focus on select, non-service-related industries.
Porter’s Diamond Model is a diamond-shaped framework that explains why specific industries in a nation become internationally competitive while those in other nations do not. The model was first published in Michael Porter’s 1990 book The Competitive Advantage of Nations. This framework looks at the firm strategy, structure/rivalry, factor conditions, demand conditions, and related and supporting industries.
The ADKAR model is a management tool designed to assist employees and businesses in transitioning through organizational change. To maximize the chances of employees embracing change, the ADKAR model was developed by author and engineer Jeff Hiatt in 2003. The model seeks to guide people through the change process and importantly, ensure that people do not revert to habitual ways of operating after some time has passed.
You can use the Ansoff Matrix as a strategic framework to understand what growthstrategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growthstrategy can be derived from whether the market is new or existing, and whether the product is new or existing.
The business model canvas is a framework proposed by Alexander Osterwalder and Yves Pigneur in Busines Model Generation enabling the design of business models through nine building blocks comprising: key partners, key activities, value propositions, customer relationships, customer segments, critical resources, channels, cost structure, and revenue streams.
The lean startup canvas is an adaptation by Ash Maurya of the business model canvas by Alexander Osterwalder, which adds a layer that focuses on problems, solutions, key metrics, unfair advantage based, and a unique value proposition. Thus, starting from mastering the problem rather than the solution.
The Blitzscaling business model canvas is a model based on the concept of Blitzscaling, which is a particular process of massive growth under uncertainty, and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is valueinnovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.
Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.
In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.
First proposed by accounting academic Robert Kaplan, the balanced scorecard is a management system that allows an organization to focus on big-picture strategic goals. The four perspectives of the balanced scorecard include financial, customer, business process, and organizational capacity. From there, according to the balanced scorecard, it’s possible to have a holistic view of the business.
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is valueinnovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.
A gap analysis helps an organization assess its alignment with strategic objectives to determine whether the current execution is in line with the company’s mission and long-term vision. Gap analyses then help reach a target performance by assisting organizations to use their resources better. A good gap analysis is a powerful tool to improve execution.
The GE McKinsey Matrix was developed in the 1970s after General Electric asked its consultant McKinsey to develop a portfolio management model. This matrix is a strategy tool that provides guidance on how a corporation should prioritize its investments among its business units, leading to three possible scenarios: invest, protect, harvest, and divest.
The McKinsey 7-S Model was developed in the late 1970s by Robert Waterman and Thomas Peters, who were consultants at McKinsey & Company. Waterman and Peters created seven key internal elements that inform a business of how well positioned it is to achieve its goals, based on three hard elements and four soft elements.
McKinsey’s Seven Degrees of Freedom for Growth is a strategy tool. Developed by partners at McKinsey and Company, the tool helps businesses understand which opportunities will contribute to expansion, and therefore it helps to prioritize those initiatives.
The McKinsey Horizon Model helps a business focus on innovation and growth. The model is a strategy framework divided into three broad categories, otherwise known as horizons. Thus, the framework is sometimes referred to as McKinsey’s Three Horizons of Growth.
Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces.
According to Michael Porter, a competitive advantage, in a given industry could be pursued in two key ways: low cost (cost leadership), or differentiation. A third generic strategy is focus. According to Porter a failure to do so would end up stuck in the middle scenario, where the company will not retain a long-term competitive advantage.
In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage. Porter’s Value Chain Model is a strategic management tool developed by Harvard Business School professor Michael Porter. The tool analyses a company’s value chain – defined as the combination of processes that the company uses to make money.
Porter’s Diamond Model is a diamond-shaped framework that explains why specific industries in a nation become internationally competitive while those in other nations do not. The model was first published in Michael Porter’s 1990 book The Competitive Advantage of Nations. This framework looks at the firm strategy, structure/rivalry, factor conditions, demand conditions, related and supporting industries.
A SWOT Analysis is a framework used for evaluating the business‘s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.
Businesses use scenario planning to make assumptions on future events and how their respective business environments may change in response to those future events. Therefore, scenario planning identifies specific uncertainties – or different realities and how they might affect future business operations. Scenario planning attempts at better strategic decision making by avoiding two pitfalls: underprediction, and overprediction.
The STEEPLE analysis is a variation of the STEEP analysis. Where the step analysis comprises socio-cultural, technological, economic, environmental/ecological, and political factors as the base of the analysis. The STEEPLE analysis adds other two factors such as Legal and Ethical.
A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
