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.
Key Takeaways
- 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.
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
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.
Factor Conditions
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.
FAQs
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.
What is Porter's Five Forces diamond model? ›
Porter's Five Forces model is a framework for industry analysis and business strategy development. It draws attention to five competitive forces that shape every industry: the threat of new entrants, the power of suppliers, the power of buyers, the threat of substitutes, and rivalry among existing competitors.
What is diamond model strategy? ›
Every business operates within a playing field—the environment where it is born and where it learns to compete. The diamond is a model for identifying multiple dimensions of microeconomic competitiveness in nations, states, or other locations, and understanding how they interact.
What is Porter's theory? ›
Porter's theory stated that a nation's competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in certain industries.
What elements are in the Porter's diamond model? ›
He created a diamond-shaped framework to explain the international competitiveness of different industries. Porter's Diamond framework consists of a system of four mutually reinforcing factors: factor conditions, demand conditions, related/supporting industries, and firm strategy, structure and rivalry 6.
How does Porter's Diamond model work? ›
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.
What is the purpose of Porter's five forces analysis? ›
Porter's five forces are used to identify and analyze an industry's competitive forces. The five forces are competition, the threat of new entrants to the industry, supplier bargaining power, customer bargaining power, and the ability of customers to find substitutes for the sector's products.
What does Porter's model do? ›
Porter's Five Forces Model is an important tool for understanding the main competitive forces at work in an industry. This can help you to assess the attractiveness of an industry, and pinpoint areas where you can adjust your strategy to improve profitability.
What is the Porter's principle? ›
Porter's Five Forces are Threat of new entrants, Bargaining power of buyers, Bargaining power of suppliers, Threat of new substitutes, and Competitive rivalry. This framework helps strategists understand what makes an industry profitable and provides insights needed to make strategic choices.
What are the factor conditions of Porter's diamond? ›
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.
The model is known as "Porter's Diamond" and includes four key elements (we'll explain these in detail below): "Factor Conditions." Demand Conditions. Firm (or organization) Strategy, Structure, and Rivalry.
What is the Porter's diamond model template? ›
Porter's Diamond Template is an analytical tool used by management to assess and identify the strategies that lead to a company's competitive advantage. It takes into account factors in the company's internal and external environment including the firm's strategy, structure and rivalry.
What is Michael Porter's five forces model? ›
Since then, the model has become one of the most popular business strategy tools that organizations use to understand more about the main competitive forces at work in their industry. Porter's Five Forces include: Competitive Rivalry, Supplier Power, Buyer Power, Threat of Substitution, and Threat of New Entry.
What is the Porter's Diamond model template? ›
Porter's Diamond Template is an analytical tool used by management to assess and identify the strategies that lead to a company's competitive advantage. It takes into account factors in the company's internal and external environment including the firm's strategy, structure and rivalry.
What terms were used in Porter's diamond theory to describe the differences in the factor endowments of a nation? ›
Porter, an expert on economic competitiveness, divides the factors of competitive advantage into four categories, placing one at each point of the diamond. The four categories are firm strategy, structure, and rivalry; related and supporting industries; demand conditions; and factor conditions.
