What Is Porter’s Diamond Model And Why It Matters In Business

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.

Contents

Understanding Porter’s Diamond Model
The four characteristics of Porter’s Diamond Model
Criticisms of Porter’s Diamond Model
Key takeaways:
Other frameworks by Michael Porter
Other strategy frameworks
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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 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.

For example, German carmakers 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 in nature 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 an 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 who 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. Thus, it does not yet apply 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.

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 in.
Porter’s Diamond Model is based on four key characteristics that explain the requirements for a competitively strong nation.
Porter’s Diamond Model has attracted criticism for its lack of scope and focuses on select, non-service related industries.