Porter's diamond model suggests that there are inherent reasons why some nations, and industries within nations, are more competitive than others on a global scale. The argument is that the national home base of an organization provides organizations with specific factors, which will potentially create competitive advantages on a global scale.
Porter's model includes 4 determinants of national advantage, which are shortly described below:
Factor conditions include those factors that can be exploited by companies in a given nation. Factor conditions can be seen as advantageous factors found within a country that are subsequently build upon by companies to more advanced factors of competition. Factors not normally seen as advantageous, such as workforce shortage, can also be seen as a factor potentially strengthening competitiveness, because this factor may heighten companies' focus on automation and zero defects.
Some examples of factor conditions:
- Highly skilled workforce
- Linguistic abilities of workforce
- Rich amount of raw materials
- Workforce shortage
If the local market for a product is larger and more demanding at home than in foreign markets, local firms potentially put more emphasis on improvements than foreign companies. This will potentially increase the global competitiveness of local exporting companies. A more demanding home market can thus be seen as a driver of growth, innovation and quality improvements. For instance, Japanese consumers have historically been more demanding of electrical and electronic equipment than western consumers. This has partly founded the success of Japanese manufacturers within this sector.
Related and Supporting Industries
When local supporting industries and suppliers are competitive, home country companies will potentially get more cost efficient and receive more innovative parts and products. This will potentially lead to greater competitiveness for national firms. For instance, the Italian shoe industry benefits from a highly competent pool of related businesses and industries, which has strengthened the competitiveness of the Italian shoe industry world-wide.
Firm Strategy, Structure, and Rivalry
The structure and management systems of firms in different countries can potentially affect competitiveness. German firms are oftentimes very hierarchical, which has resulted in advantages within industries such as engineering. In comparison, Danish firms are oftentimes more flat and organic, which leads to advantages within industries such as biochemistry and design.
Likewise, if rivalry in the domestic market is very fierce, companies may build up capabilities that can act as competitive advantages on a global scale. Home markets with less rivalry may therefore be counterproductive, and act as a barrier in the generating of global competitive advantages such as innovation and development.
By using Porter's diamond, business leaders may analyze which competitive factors may reside in their company's home country, and which of these factors may be exploited to gain global competitive advantages. Business leaders can also use the Porter's diamond model during a phase of internationalization, in which leaders may use the model to analyze whether or not the home market factors support the process of internationalization, and whether or not the conditions found in the home country are able to create competitive advantages on a global scale.
Finally, business leaders may use this model to asses in which counties to invest, and to assess which countries are most likely to be able to sustain growth and development.