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.
- Understanding Porter’s Diamond Model
- The four characteristics of Porter’s Diamond Model
- Criticisms of Porter’s Diamond Model
- Porter’s Diamond model examples
- Key takeaways:
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Understanding Porter’s Diamond Model
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.
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.
- 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.
- 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.
- 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.
- Demand conditions – in FY2021, 2.622 million vehicles were sold in Germany alone, with BMW the third-best seller with 222,481 vehicles. The German market is considered to be the largest and most stable in Europe and is predicted to have a market volume of $90.65 billion by 2026.
- 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.
- 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.
- 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 in.
- 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.
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