What are the four 4 determinants of Porters theory of national competitive advantage?

What is a Porter Diamond?

The Porter Diamond refers to an economic model that aids the understanding of factors that give a group, organization or country a competitive advantage over others. The theory is otherwise called the Porter Diamond Theory of National Advantage, it was developed by Michael Porter in 1990. The Proter Diamond is a model or framework that explains the competitive advantage that a nation possesses and resources or factors available to them that put them in that position. It also explains ways through which governments than improve the competitive advantage of countries in international environments. Other names for this model are "Porter's Diamond" and the "Diamond Model." Here are some vital points to note about Porter Diamond:

• The Porter Diamond model is a framework that explains the competitive position of a country and factors at the disposal of such a country that gives it such an advantage.
• The Diamond model is also applicable to industries, it explains why certain industries within an economy are globally competitive when compared to others.
• In business, the diamond model explains factors that make a business more competitive than other businesses in the international space.
• The model also highlights how the government can improve the global competitive positions of their countries.

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How is the Porter Diamond Used?

Before the introduction of the Michael Porter diamonds model, several theories on global economics posit that the inherent attributes of a country will give it a competitive advantage in the global economic environment. These inherent attributes include natural resources, population size, land, and other primary resources. In 1990, Michael Porter explained in his book; The competitive Advantage of Nations how governments can act as stimulants for the competitive positioning of a country in the global space. The Porter Diamond model suggests ways to improve the competitive advantage of a country, these include skilled labor, a developed technology sector, fiscal policy, and government support, among others.

The Importance of Factor Conditions

The Porter Diamond is also a framework that analyzes the certain factors available to a corporate organization or business that gives it a competitive advantage over other businesses. This framework considers industry-based factors and resource-based factors that the business leverage on. These factors include organizational strategy, structure, and competition. When used to explain the competitiveness and economic advantage of a country, there are four points theorized in the Porter Diamond Model. These are:

• Firm strategy, structure, and rivalry;
• Related supporting industries;
• Demand conditions; and
• Factor conditions.

According to Michael Porter, these four points or elements determine the competitive advantage of a country or corporation, rather than intrinsic factors such as land, natural resources, skilled Labour and Population.

Related Topics

• Porter's Diamond
• Physical Capital
• Human Capital
• Capital Deepening
• Infrastructure
• Staple Thesis
• Resource Curse

 QuickMBA / Strategy / Porter's Diamond of National Advantage

Porter's Diamond of National Advantage

Classical theories of international trade propose that comparative advantage resides in the factor endowments that a country may be fortunate enough to inherit. Factor endowments include land, natural resources, labor, and the size of the local population.

Michael E. Porter argued that a nation can create new advanced factor endowments such as skilled labor, a strong technology and knowledge base, government support, and culture. Porter used a diamond shaped diagram as the basis of a framework to illustrate the determinants of national advantage. This diamond represents the national playing field that countries establish for their industries.

The individual points on the diamond and the diamond as a whole affect four ingredients that lead to a national comparative advantage. These ingredients are:

1. the availability of resources and skills,

2. information that firms use to decide which opportunities to pursue with those resources and skills,

3. the goals of individuals in companies,

4. the pressure on companies to innovate and invest.

I.  Factor Conditions

• A country creates its own important factors such as skilled resources and technological base.

• The stock of factors at a given time is less important than the extent that they are upgraded and deployed.

• Local disadvantages in factors of production force innovation. Adverse conditions such as labor shortages or scarce raw materials force firms to develop new methods, and this innovation often leads to a national comparative advantage.

• When the market for a particular product is larger locally than in foreign markets, the local firms devote more attention to that product than do foreign firms, leading to a competitive advantage when the local firms begin exporting the product.
• A more demanding local market leads to national advantage.
• A strong, trend-setting local market helps local firms anticipate global trends.
  

• When local supporting industries are competitive, firms enjoy more cost effective and innovative inputs.
• This effect is strengthened when the suppliers themselves are strong global competitors.
  

• Local conditions affect firm strategy. For example, German companies tend to be hierarchical. Italian companies tend to be smaller and are run more like extended families. Such strategy and structure helps to determine in which types of industries a nation's firms will excel.
• In Porter's Five Forces model, low rivalry made an industry attractive. While at a single point in time a firm prefers less rivalry, over the long run more local rivalry is better since it puts pressure on firms to innovate and improve. In fact, high local rivalry results in less global rivalry.
• Local rivalry forces firms to move beyond basic advantages that the home country may enjoy, such as low factor costs.
  

• The effect of one point depends on the others. For example, factor disadvantages will not lead firms to innovate unless there is sufficient rivalry.

• The diamond also is a self-reinforcing system. For example, a high level of rivalry often leads to the formation of unique specialized factors.

The role of government in the model is to:

• Encourage companies to raise their performance, for example by enforcing strict product standards.
• Stimulate early demand for advanced products.
• Focus on specialized factor creation.
• Stimulate local rivalry by limiting direct cooperation and enforcing antitrust regulations.
  

The Japanese facsimile industry illustrates the diamond of national advantage. Japanese firms achieved dominance is this industry for the following reasons:

• Japanese factor conditions: Japan has a relatively high number of electrical engineers per capita.

• Japanese demand conditions: The Japanese market was very demanding because of the written language.

• Large number of related and supporting industries with good technology, for example, good miniaturized components since there is less space in Japan.

• Domestic rivalry in the Japanese fax machine industry pushed innovation and resulted in rapid cost reductions.

• Government support - NTT [the state-owned telecom company] changed its cumbersome approval requirements for each installation to a more general type approval.

Recommended Reading

  QuickMBA / Strategy / Porters Diamond of National Advantage

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