A Competitive Advantage of Nations

Diamond Model

Summary/Abstract

Michael Porter

The Diamond model of Michael Porter for the Competitive Advantage of Nations offers a model that can help understand the competitive position of a nation in global competition. This model can also be used for other major geographic regions.

Traditionally, economic theory mentions the following factors for comparative advantage for regions or countries:

A. Land

B. Location

C. Natural resources (minerals, energy)

D. Labor, and

E. Local population size.

Because these factor endowments can hardly be influenced, this fits in a rather passive (inherited) view towards national economic opportunity.

Porter says sustained industrial growth has hardly ever been built on above mentioned basic inherited factors. Abundance of such factors may actually undermine competitive advantage! He introduced a concept of "clusters," or groups of interconnected firms, suppliers, related industries, and institutions that arise in particular locations.

As a rule Competitive Advantage of nations has been the outcome of 4 interlinked advanced factors and activities in and between companies in these clusters. These can be influenced in a pro-active way by government.

These interlinked advanced factors for Competitive Advantage for countries or regions in Porters Diamond framework are:

1. Firm Strategy, Structure and Rivalry (The world is dominated by dynamic conditions, and it is direct competition that impels firms to work for increases in productivity and innovation)

2. Demand Conditions (The more demanding the customers in an economy, the greater the pressure facing firms to constantly improve their competitiveness via innovative products, through high quality, etc)

3. Related Supporting Industries (Spatial proximity of upstream or downstream industries facilitates the exchange of information and promotes a continuous exchange of ideas and innovations)

4. Factor Conditions (Contrary to conventional wisdom, Porter argues that the "key" factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labor, capital and infrastructure. "Non-key" factors or general use factors, such as unskilled labor and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors involve heavy, sustained investment. They are more difficult to duplicate. This leads to a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable).

The role of government in Porter's Diamond Model is "acting as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance …" . They must encourage companies to raise their performance, stimulate early demand for advanced products, focus on specialized factor creation and to stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations.

Porter introduced this model in his book: The Competitive Advantage of Nations, after having done research in ten leading trading nations. The book was the first theory of competitiveness based on the causes of the productivity with which companies compete instead of traditional comparative advantages such as natural resources and pools of labor. This book is considered required reading for government economic strategists and is also highly recommended for corporate strategist taking an interest in the macro-economic environment of corporations.

👀	TIP: On this website you can find much more about industry clusters and the Diamond Model!

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