Porter’s Diamond

Shaping Your Strategy to Reflect National Strengths and Weaknesses

Porter's Diamond - Shaping Your Strategy to Reflect National Strengths and Weaknesses

© iStockphoto
TommL

How do business conditions differ from one country to the next?

Business is more global than it's ever been.

And with every passing year, competition between different organizations in different countries is likely to become ever more intense.

For us as consumers, this is great! It creates a downward pressure on prices that benefits everyone. However for us as businesspeople and employees, it creates a strong need for ever-increasing efficiency, innovation, and intelligent deployment of limited resources, if we're to be competitive in this global market.

For organizations to deploy their resources effectively, they need to understand how global competition is likely to play out. An important part of this is understanding how the business conditions in one country differ from those in another country. This is the subject of "Porter's Diamond."

On one level, this seems a topic suited only to the boardrooms of large multi-national conglomerates. However, on another level, this is an issue that all organizations, and all individuals, have to consider as they think about how they'll succeed in this fast-changing world.

Understanding the Theory

In his book, "The Competitive Advantage of Nations," Michael Porter introduced his model for analyzing the areas of strength and weakness that can give a country, or industry within a country, a competitive advantage or disadvantage. 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.
  • Related and Supporting Industries.

In addition, Porter proposed that the four key elements all influence each other, and that they are all also affected by Chance and by Government Policies. This is shown in Figure 1 below.

 

Porter's Diamond Diagram

From "The Competitive Advantage of Nations," by Michael E. Porter. Copyright © 1990 by Michael E. Porter. Reprinted by permission of Free Press, a Division of Simon & Schuster.

Explaining These Elements

Let's look at each element separately:

"Factor Conditions"

"Factor" is an economist's word for the things that contribute to the production of goods and services: Traditionally these were people, raw materials, "land" and capital (although this idea has shifted to include a measure for knowledge and technology.)

Factor Conditions relate to the availability or non-availability of these things in a particular country, and this allows nations to:

  • Differentiate

    This involves making best use of widely-available production factors to differentiate one country from competing countries. This might involve developing university research programs to build skill levels in micro-electronics, for example. India as a country has a large graduate workforce whose pay expectations are lower than those of graduates in Western countries. This has allowed India to become a leader in offshore call center and business process supply.

  • Use disadvantage to force innovation

    When factor conditions are in short supply, countries need to innovate to overcome this, and this innovation can build competitive advantage. Sweden is plagued with a short building season, so it became proficient in building prefabricated homes. Now Swedish industry has a distinct competitive advantage in the global marketplace for prefabricated buildings.

Demand Conditions

This term refers to the level of demand for a product or service from the organization's home country. If people in your own country are demanding a lot of a product or service, that can give you a strong advantage over global competitors. This can be exploited in three main ways:

  • Exporting

    When your own country creates a large demand for a particular type of product or service, domestic companies get good at producing them. That country is then well placed to respond to developing demands abroad.

  • National advantage

    When demand is high at home, there are likely to be more competitors in your local industry. Competition forces innovation, making the country as a whole more effective in that industry.

  • Anticipating trends

    When consumers at home are discerning and keyed into trends in a particular product- or service-type, this forces domestic companies to stay current and change quickly and flexibly as demand changes. This helps these companies succeed in international competition.

How to Coach Toolkit Offer

FREE when you join the Mind Tools Club before midnight, PST June 21.

Find Out More

Firm Strategy, Structure, and Rivalry

These are the characteristics that shape domestic competition. The typical size of companies, the way they are managed, and the way they compete are factors that can help companies succeed or fail globally. Things affecting this include:

  • Matching industries to conditions

    Different industries suit different types of organization. For example, there is an unusually high proportion of small, family-run firms in Italy. This helps keep Italy at the forefront of the fashion industry (where the ability to react quickly to trends is critical to success.) It is much harder to have the same level of flexibility in larger organizations.

  • Matching investment to firms

    Industries will thrive best in a country if that country's investors find that the industry's ways of operating meet their needs. This will encourage them to invest. Those looking for long-term, stable returns, may be nervous of industries based on clusters of highly innovative start-up organizations. Equally, investors wanting high returns will not find them easily in well-established industries.

Related and Supporting Industries

This element relates to the competitiveness of other industries in the country. The presence of high-quality suppliers and other related industries leads to two main types of advantage:

  • Cost

    Highly competitive companies typically offer a cost advantage. When these companies operate in the same country, this translates to a cost advantage for all other related industries. A prime example, again, are the shoe and leather industries in Italy. Their success has translated into other successes related to leather manufacturing and processing.

  • Innovation

    Highly competitive companies tend to be innovative. Related industries benefit from this innovation.

Using the Model

Most people have little opportunity to influence government's policy and the national economy at the level of the elements of Porter's Diamond.

In this case, the model starts to be useful when you want to understand how these factors affect your organization, or yourself. By thinking about questions like this, you can understand whether an industry you're in (or thinking of moving into) has a long term future. After all, working in an expanding, successful industry is an exciting, energizing experience. Working in a declining industry can be miserable, and can have a profoundly negative effect on your life outcomes.

Follow these steps to analyze an industry you're interested in:

  1. Start by downloading our free template.
  2. Identify the factor conditions that apply to the industry and country you work in. If your industry is successful internationally, what factors give your country an advantage over other countries? If it is struggling, why? Think about people, raw materials, capital, land, educational levels and technological expertise. And how do these compare with those of countries that compete with you?
  3. Write down the characteristics of the demand conditions in your country. Are domestic buyers discerning and demanding in your market or industry? Are there aspects of demand that are specific to your country that wouldn't apply anywhere else? How sophisticated are distribution methods? And how do these compare with the situation in the countries that most successfully compete with you?
  4. Analyze the national approach to organization structure and the levels of competitive rivalry in your country. Is this what your industry needs?
  5. What are the related and supporting industries in your country like? Does your industry rely on imports, or benefit from high quality or low cost (or both) suppliers? And how much knowledge and expertise is there in local related industries that could benefit your own?

Tip:

It is often said that people overestimate the short term impact of trends like these, but underestimate the long term impact. It's also easy to become overwhelmed with the potential for change, but to miss the factors that will block it, slow it, or reduce its impact. Remember the lessons of the dotcom boom and bust!

Key Points

Porter's Diamond is a framework for analyzing competitive advantage at the national level. It looks at four areas that affect the opportunities available to national industries for success:

  • Factor Conditions.
  • Demand Conditions.
  • Firm Strategy, Structure and Rivalry.
  • Related and Supporting Industries.

By thinking about how these factors can affect your own industry or personal situation, you can shape the way you or your organization develop, in such a way that you thrive in a highly competitive global market.

Download Worksheet

Rate this resource

Comments (2)
  • Over a month ago Dianna wrote
    Hi Andras - you are not reading wrong... we made a mistake. The text is incorrect and the changes have been made.

    Chance and government can both affect any and all of the Factor Conditions. Many of the diagrams you'll find from other sources omit the influence of chance, however, MindTools chose to stay true to the original model and included it.

    Thanks for pointing out the inconsistency - we really appreciate it.

    Dianna
  • Over a month ago gosh72 wrote
    Hello,

    I have just one observation: is Figure 1 correct? The text above it states the following:

    In addition to the four key elements that all influence each other, Porter proposed that Factor Conditions and Firm Strategy, Structure and Rivalry were also affected by Chance, while Demand Conditions and Related and Supporting Industries were affected by Government Policies. This is shown in Figure 1 below.

    In this case there should be no arrows from CHANCE to "Related and Supporting Industries" and "Demand conditions" and there should be no arrows from GOVERNMENT to "Firm Strategy, Structure and Rivalry" and "Factor Conditions".

    Is it a mistake or haven't I caught the idea?

    Andras