Porters Diamond Analysis

Chapter II: Literature Review

Summary

Competitiveness depends on the productivity with which a nation uses its human, capital, and natural resources. A nation's competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world's best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers.

In a world of increasingly global competition, nations have become more, not less, important. As the basis of competition has shifted more and more to the creation and assimilation of knowledge, the role of the nation has grown. Competitive advantage is created and sustained through a highly localized process. Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success. There are striking differences in the patterns of competitiveness in every country; no nation can or will be competitive in every, or even most industries. Ultimately, nations succeed in particular industries because their home environment is the most forward-looking, dynamic, and challenging.

The idea of the Diamond Model for the competitive advantage of nations was developed by the American scientist Michael Porter. According to him, most important for competitive advantage is the ability of companies to constant innovation. The so called "Porters Diamond Model" are five interlined factors: Factor Conditions, Home Demand Conditions, Related and Supporting Industries, Firm Strategy, Structure, and Rivalry, Government and Chance. Government and Chance are also important factors in his model (figure 1)

[Figure 1: Porters Diamond Model]

Introduction

Porter's Diamond Model

Porter's (1990a) model of a national “diamond” that determines industrial competitiveness - first comprehensively elaborated in his book The Competitive Advantage of Nations (CAN) - attempts a wide ranging exploration of the reasons why some nations gain competitive advantage in international markets. He argues that the shape of the “diamond” depends on four influences - factor conditions; demand conditions; firm strategy; structure and rivalry; and, finally, related and supporting industries.

Porter also suggests that there are four stages of competitive development which characterise a nation's sources of advantage in international competition; the factor-driven, investment-driven, innovation-driven and wealth-driven stages. These stages schematically describe the economic development process, as well as define certain problems and obstacles which firms and industries face in achieving competitive advantage. Countries normally pass through these stages by increasing national competitive advantage and ultimately raising economic prosperity, and Porter recommends the appropriate role that governments should play in each of them. In particular, Porter prescribes a more active role to the government in improving industrial competitive advantage in the factor-driven and investment-driven stages of development, and a rather indirect role in the innovation-driven stage. According to Porter (1990a and b) government's major role is a “catalyst and challenger” encouraging or even pushing companies to raise their aspirations and move to higher levels of competitive performance. Though the government's role is inherently partial, it is powerful in transmitting and amplifying the forces of the “diamond” (Porter, 1990b). While not ignoring the role of macroeconomic policy in promoting competitiveness, ...