Porters diamond model

Porter's diamond is a model used as part fo the strategic analysis stage of the strategic planning process.

Porter tried to answer the following questions:

• Why does a nation become the home base for successful international competitors in an industry? Germany is renowned for car manufacture; Japan is prominent in consumer electronics.
• Why are firms based in a particular nation able to create and sustain competitive advantage against the world's best competitors in a particular field?
• Why is one country often the home of so many of an industry's world leaders?

Porter called the answers to these questions the determinants of national competitive advantage. He suggested that there are four main factors which determine national competitive advantage and expressed them in the form of a diamond.

Porter's Diamond

Factor conditions

Favourable factor conditions include the following:

Porter also found that countries with factor disadvantages were forced to innovate to overcome these problems, e.g.Japanese firms experienced high energy costs and were forced to develop energy efficient products and processes that were subsequently demanded worldwide.

Demand Conditions

There must be a strong home market demand for the product or service.

This determines how industries perceive and respond to buyer needs and creates the pressure to innovate. A compliant domestic market is a disadvantage because it does not force the industry to become innovative and excellent.

Related and supporting industries

The success of an industry can be due to its suppliers and related industries.

Sweden's global superiority in its pulp and paper industries is supported by a network of related industries including packaging, chemicals, wood-processing, conveyor systems and truck manufacture. Many of these supporting industries have also achieved leading global positions.

Firm strategy, structure and rivalry

Organisational goals can be determined by ownership structure. Unquoted companies may have slightly longer time horizons to operate in because their financial performance is subject to much less scrutiny than quoted companies. They may also have different 'return on capital' requirements.

Porter found that domestic competition was vital as a spur to innovation and also enhanced global competitive advantage. Conversely, where governments have encouraged mergers to get the critical mass required to be a global player, these national monopolies have not, on the whole, been successful in establishing a global position.

Criticisms

The following criticisms are made of Porter’s Diamond model:

• Porter developed the model by looking at ten developed countries. The model thus only really applies to developed economies.
• Porter argues that inbound FDI does not increase domestic competition significantly because domestic firms lack the capability
  to defend their own markets and face a process of market share erosion and decline. However, there seems to be little empirical
  evidence to support that claim.
• The Porter model does not adequately address the role of MNCs.
• There seems to be ample evidence that the diamond is influenced by factors outside the home country.
• Porter’s analysis focused on manufacturers, banks and management consultancy firms. Some have questioned its
  relevance to service based companies such as McDonalds.
• Porter’s focus is on the domestic country rather than which foreign markets have been targeted. A careful choice of target is essential to ensure that the firm has the competences required for success.
• Not all firms from a given country are successful, suggesting that corporate management is more important than geographical
  location.

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Tags:	Porter;diamond;Factor conditions;Demand Conditions;Related and supporting industries;Firm strategy;structure and rivalry