What Is the Porter Diamond Model?
The Porter Diamond Theory of National Advantage, or the Porter Diamond Model, is a model that describes the competitive advantage that nations or groups possess based on factors available to them. The theory explains how governments can act to improve a country’s position in a globally competitive economic environment.
Created by Michael Porter, founder of the Institute for Strategy and Competitiveness at the Harvard Business School, the Porter Diamond Model is considered a proactive economic theory.
- The Porter Diamond Model explains the factors that can provide a competitive advantage for one national market or economy over another.
- The Porter Diamond Model visually resembles the points of a diamond and includes the factors of strategy, structure and rivalry, related industries, demand conditions, and factor conditions.
- The model is used by businesses to guide and shape strategy regarding investing and operating in national markets.
Understanding the Porter Diamond Model
The Porter Diamond Model suggests that countries can create advantages for themselves, such as a strong technology industry or a skilled labor force. Another application of the Porter Diamond Model is used in corporate strategy as a framework to analyze the relative merits of investing and operating in national markets.
The Porter Diamond Model is visually represented by a diagram that resembles the points of a diamond and includes the interrelated determinants that Porter theorizes as the deciding factors of national comparative economic advantage:
- Firm strategy, structure, and rivalry
- Related supporting industries
- Demand conditions
- Factor conditions.
Harvard Business School professor Michael E. Porter created the Porter Diamond Model and Porter’s Five Forces.
Points on the Porter Diamond Model
Firm Strategy, Structure, and Rivalry
Firm strategy, structure, and rivalry define that competition leads to increased production and the development of technological innovations. The concentration of market power, degree of competition, and ability of rival firms to enter a nation’s market are influential.
Related Supporting Industries
Related supporting industries consider the upstream and downstream industries that facilitate innovation through exchanging ideas. These can spur innovation depending on the degree of transparency and knowledge transfer.
Demand conditions refer to the size and nature of the customer base for products, which also drives innovation and product improvement. Larger consumer markets will demand and stimulate a need to differentiate and innovate and increase market scale for businesses.
According to Porter, the most important of the five points is factor conditions. Factor conditions are those elements that Porter believes a country’s economy can create for itself, such as a large pool of skilled labor, technological innovation, infrastructure, and capital. One way for the government to accomplish that goal is to stimulate competition between domestic companies by establishing and enforcing anti-trust laws.
Why Does the Porter Diamond Model Consider Factor Conditions as Most Important?
The Porter Diamond Model purports that a country’s economy can create skilled labor, technological innovation, infrastructure, and capital, and these factors outweigh naturally inherited factors such as land and natural resources.
How Have Countries Developed Factor Conditions to Create a Better Economy?
Japan has developed a competitive global economic presence beyond the country’s inherent resources by producing a large number of engineers that have helped drive technological innovation in Japanese industries.
How Can the Porter Diamond Model Help Businesses Improve?
The theory helps businesses understand why certain industries are widespread in some nations. Companies can then analyze and compare their position in the market and implement strategies to compete.
What Is Porter’s Five Forces Model?
Similar to the Porter Diamond Model, Porter’s Five Forces model of business strategy identifies and analyzes five competitive forces that shape every industry and help determine an industry’s weaknesses and strengths.
The Bottom Line
The Porter Diamond Model explains the factors that provide a competitive advantage for one national economy or business over another. The points of the theory resembling a diamond include the firm strategy, structure and rivalry, related industries, demand conditions, and factor conditions. The model can be used by businesses to guide and shape strategies regarding investing and operating in national markets.