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.
Component
Description
Origin
Developed by Harvard Business School professor Michael E. Porter in 1990.
Overview
Porter’s Diamond Model, also known as the Diamond Theory of National Advantage, provides a framework for understanding why some countries or regions have a competitive advantage in certain industries. It identifies factors that contribute to a nation’s or region’s competitiveness on a global scale.
Key Elements
– Factor Conditions: Refers to a nation’s or region’s endowments in terms of labor, natural resources, capital, infrastructure, and technological capabilities.
– Demand Conditions: Describes the nature and size of the domestic or local market, including customer preferences, needs, and the level of sophistication.
– Related and Supporting Industries: Focuses on the presence and strength of supporting industries, suppliers, and a competitive supply chain.
– Firm Strategy, Structure, and Rivalry: Addresses the competitive dynamics within the nation or region, including the level of competition, management practices, and the overall business environment.
How It Works
The Diamond Model emphasizes that these four interconnected elements influence one another and collectively impact a nation’s or region’s competitiveness in specific industries. Changes or improvements in one element can lead to ripple effects throughout the model, ultimately enhancing or diminishing competitiveness.
Applications
– Economic Policy: Used by governments to formulate policies that promote industry competitiveness.
– Investment Decisions: Helps businesses make informed decisions about where to invest and expand.
Benefits
– Strategic Insight: Offers insights into factors affecting competitiveness in specific industries.
– Policy Guidance: Assists policymakers in shaping strategies to support national or regional industries.
Drawbacks
– Complexity: Analyzing and managing all four factors can be intricate and may require extensive data and resources.
– External Factors: The model doesn’t account for external factors like global economic shifts or political changes.
Key Takeaway
Porter’s Diamond Model emphasizes that competitiveness isn’t solely determined by one factor but results from the interplay of multiple elements. Nations or regions can enhance their competitive advantage by improving factor conditions, nurturing domestic demand, strengthening supporting industries, and fostering a competitive business environment. The model helps governments and businesses make informed decisions to enhance competitiveness.
Table of Contents
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.
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.
Additional case studies
1. Amazon
Firm Strategy, Structure, and Rivalry: Originating in the USA, Amazon started as an online bookstore but quickly expanded its product range. It faces competition from both online retailers like eBay and traditional retail giants like Walmart. Its strategy hinges on customer-centricity, fast delivery, and technological innovation.
Factor Conditions: The USA’s strong technological infrastructure and access to vast capital allowed Amazon to invest heavily in its operations and scale rapidly.
Demand Conditions: The shift towards online shopping, especially in the USA, created a massive demand for Amazon’s services. Their continual introduction of new product categories meets varied consumer demands.
Related and Supporting Industries: Amazon’s vast ecosystem includes collaborations with thousands of sellers, publishers, and tech firms. Its acquisition of companies like Whole Foods also indicates its strategic moves into different sectors.
2. Tata Motors
Firm Strategy, Structure, and Rivalry: Originating from India, Tata Motors is a dominant player in the Indian automobile market, competing with domestic companies like Mahindra and international ones like Hyundai. Their strategy combines affordability with innovation, as seen with vehicles like the Tata Nano.
Factor Conditions: India’s vast pool of skilled labor, engineers, and a growing manufacturing sector provided Tata Motors with the necessary resources to grow.
Demand Conditions: The growing middle class in India and the need for affordable transportation options have fueled demand for Tata Motors’ range of vehicles.
Related and Supporting Industries: Tata Motors benefits from India’s extensive auto components industry and has forged collaborations with numerous suppliers. Their acquisition of Jaguar Land Rover also integrates them with global supply chains.
3. Huawei
Firm Strategy, Structure, and Rivalry: Based in China, Huawei is a leading global telecom solutions provider. It faces intense competition from companies like Apple, Samsung, and Ericsson. Its strategy focuses on R&D, affordability, and expanding to emerging markets.
Factor Conditions: China’s emphasis on technological advancement, vast manufacturing capabilities, and access to a skilled workforce has supported Huawei’s rise.
Demand Conditions: The global need for advanced telecom solutions, especially in emerging markets, has driven demand for Huawei’s products.
Related and Supporting Industries: Huawei collaborates closely with tech developers, chip manufacturers, and has built strong relationships with telecom operators worldwide.
4. Adidas
Firm Strategy, Structure, and Rivalry: Originating from Germany, Adidas is a global sportswear giant, competing with brands like Nike and Puma. Its strategy revolves around brand strength, innovation in sportswear technology, and celebrity endorsements.
Factor Conditions: Germany’s emphasis on quality manufacturing and design, combined with a strong tradition in sports, played a role in Adidas’s success.
Demand Conditions: The global passion for sports and fitness trends has led to high demand for Adidas’s products.
Related and Supporting Industries: Adidas benefits from a robust European textile industry and collaborates with various tech companies for product innovations, like incorporating recycled materials in sportswear.
5. Sony
Firm Strategy, Structure, and Rivalry: Based in Japan, Sony is a diversified electronics and entertainment company. Competing against giants like Samsung, LG, and Microsoft, Sony’s strategy is based on innovation, brand value, and diversification into various entertainment sectors like gaming and movies.
Factor Conditions: Japan’s leadership in technology, strong R&D culture, and emphasis on precision engineering facilitated Sony’s rise in the electronics world.
Demand Conditions: The global appetite for advanced electronics, entertainment products, and services ensures a persistent demand for Sony’s offerings.
Related and Supporting Industries: Sony’s vast ecosystem ranges from collaborations with tech developers, film studios, and music producers to its own gaming studios for its PlayStation platform.
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.
Key Highlights
Porter’s Diamond Model: Developed by Michael Porter in his 1990 book “The Competitive Advantage of Nations,” the model is a diamond-shaped framework that explains why certain industries in a nation become internationally competitive while others do not.
Four Characteristics: Porter’s Diamond Model identifies four key factors that influence a nation’s competitive advantage:
Firm Strategy, Structure, and Rivalry: This characteristic refers to how companies are managed and structured. Competitive rivalries within the domestic market encourage innovation and better prepare companies for the global stage. For instance, the intense competition among German auto manufacturers like BMW, Mercedes-Benz, and Audi has contributed to their global success.
Factor Conditions: These are the basic factors of production, such as unskilled labor, natural resources, and infrastructure. Porter argued that advanced factor conditions like skilled labor and access to capital are more critical for achieving a competitive advantage.
Demand Conditions: The level of demand in the domestic market plays a vital role in fostering competition and innovation. High demand encourages companies to develop new products and services to meet consumers’ needs. Specific demand conditions, such as market size and sophistication, also influence competitiveness.
Related and Supporting Industries: The success of large companies often depends on the efficiency of their supply chains and relationships with suppliers. Nations with concentrations of innovative companies in related industries foster innovation and competitiveness. For example, the cluster of tech companies in Silicon Valley facilitates innovation through collaboration and proximity.
Criticism: Despite its significance, Porter’s Diamond Model has faced criticism:
Limited Scope: When originally developed, the model focused on just 10 developed countries, which raises questions about its relevance to second or third-world nations.
External Influences: Some critics argue that a nation’s competitiveness is influenced by various external factors that Porter’s model does not account for.
Industry Selective: The model’s original analysis emphasized manufacturing and banking sectors, leading to doubts about its applicability to global service companies like McDonald’s.
Examples: Applying Porter’s Diamond Model to well-known companies provides insights into their competitive advantage:
Apple: Apple’s success can be attributed to factors like innovative firm strategy, rivalry within Silicon Valley, access to a skilled workforce, and strong demand for its technology products worldwide.
BMW: BMW’s competitiveness is driven by a strategy combining market relevance, R&D, and competitive services, along with access to a skilled German automotive workforce and strong demand in the German market.
Louis Vuitton: The luxury brand’s success is influenced by its acquisition strategy, French cultural emphasis on fashion and luxury, demand for opulent products, and close ties with the French textile and apparel industries.
IKEA: IKEA’s competitiveness is linked to its focus on sustainability, skilled Swedish workforce, demand for affordable furniture, and a vast supply chain that upholds sustainability values.
Starbucks: Starbucks’ strategy of customer service investment, environmental impact focus, and strong demand for coffee-related products in the US and globally contribute to its competitive advantage.
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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.
