Diamond Model and Clusters
(Michael Porter)

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Understand the competitive position of a nation in global competition. Explanation of Diamond Model of Michael Porter. Clusters. ('98)

What is the Diamond Model? Description

The Diamond Model of Michael Porter for the competitive advantage of Nations offers a model that can help understand the comparative position of a nation in global competition. The model can also be used for major geographic regions.

Traditional country advantages

Traditionally, economic theory mentions the following factors for comparative advantage for regions or countries:

Land
Location
Natural resources (minerals, energy)
Labor, and
Local population size.

Because these 5 factors can hardly be influenced, this fits in a rather passive (inherited) view regarding national economic opportunity.

Clusters

Porter says that sustained industrial growth has hardly ever been built on above mentioned basic inherited factors. Abundance of such factors may actually undermine competitive advantage! He introduces a concept called "clusters" or groups of interconnected firms, suppliers, related industries, and institutions, that arise in certain locations.

These clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field. They grow on locations where enough resources and competences amass and reach a critical threshold, giving it a key position in a given economic branch of activity, with a decisive sustainable competitive advantage over others places, or even a world supremacy in that field. Porter says clusters can influence competition in three ways:

They can increase the productivity of the companies in the cluster.
They can drive innovation in the field.
They can stimulate new businesses in the field.

Some well-known examples of Clusters are USA/Silicon Valley (computers), Netherlands/Rotterdam (logistics), India/Bangalore (software outsourcing), USA/Hollywood (movies), France/Paris (fashion).

According to Porter, as a rule competitive advantage of nations is the outcome of 4 interlinked advanced factors and activities in and between companies in these clusters. These can be influenced in a pro-active way by government.

Interlinked advanced factors for Competitive Advantage

The Strategy, Structure and Rivalry of Firms. The world is dominated by dynamic conditions. Direct competition impels firms to work for increases in productivity and innovation.
Demand Conditions. If the customers in an economy are very demanding, the pressure facing firms to constantly improve their competitiveness via innovative products, through high quality, etc, will be greater.
Related Supporting Industries. Spatial proximity of upstream or downstream industries facilitates the exchange of information and promotes a continuous exchange of ideas and innovations.
Factor Conditions. Contrary to conventional wisdom, Porter argues that the "key" factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labor, capital and infrastructure. "Non-key" factors or general use factors, such as unskilled labor and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors involve heavy, sustained investment. They are more difficult to duplicate. This creates a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable.

The role of government in the Diamond Model of Porter

The role of government in the Diamond Model of Porter is to act as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance. They must encourage companies to raise their performance, to stimulate early demand for advanced products, to focus on specialized factor creation and to stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations.

The competitive advantage of nations

Porter introduced this model in his book: "The Competitive Advantage of Nations", after having done research in ten leading trading nations. The book was the first theory of competitiveness based on the causes of the productivity with which companies compete. Instead of traditional comparative advantages such as natural resources and pools of labor. This book should be considered obligatory reading for government economic strategists. It is also highly recommended for corporate strategists that are interested in the macro-economic environment of corporations.

Book: Michael Porter - The Competitive Advantage of Nations -

Diamond Model and Clusters Forum

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What makes Clusters Start at some Place? How are Clusters Initiated?
"In another discussion we have found the main success factors of clusters. But what actually makes them start? How are clusters initiated?
1. I..."

Success Factors of Economic Clusters
"Economic clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field that are present in a nation or..."

Contribution of Diamond Model to International Research
"How did the Diamond Model contribute to international research? Porter is usually talking about nations...!? Thanks for your help..."

Diamond Model versus WTO (World Trade Organisation)
"Liberalization of barriers to trade impacts the viability of the Diamond Model especially for emerging market countries or weak countries in terms of bargaining power in trade negotiations.
..."

Flower Industry in Kenya
"Can someone help me with more information in regards to the Kenyan flower industry and how it is interlinked with the diamond model."

What Country has Optimal Clusters in Tourism?
"In what country do you think the tourism and hospitality industry is using Porter's diamond of national competitiveness in an optimal way? Why?"

The Contribution of Government
"I think that the contribution of government depends on the nature of economy. In a liberal economy like the USA the contribution of government is eliminated. In Tunisia the Diamond model was used to a..."

Ugly Side of Nigerian Business
"Organisations are more concerned with being seen as productive and how large the profits are than ensuring overall national productive efficiency. Clusters are not existent and cut throat competition ..."

Governments' Role in Comparative Advantage
"I believe that governments have a very significant role in shaping the competitiveness of the nation through setting up key policies, promoting the right set of values, and providing the appropriate ..."

Nation Advantages and Firm's Advantages
"I'm confused what does firm strategy and structure help to promote the nation advantage against other nations? I'm being told that when a foreign firm wants to enter a particular country, it has to l..."

	China's Labor Cost Advantage "Many people believe (as I did) that China has a clear cost advantage in manufacturing from cheap labor. Not so according to
	Membership Organisations "Can a membership organisation be a cluster? There is a taste in the UK for governmental sponsored clusters to evolve into membership organisations. I would proposes that they cease to be clusters ..."

Clusters and Knowledge Economy
"Put simply, clusters are geographically close groups of interrelated specialized organizations. Two main historic reasons for industrial clusters were: easy knowledge exchange and the availabi..."

Chance in Diamond Model
"Porter defines Chance events as the ones that have little to do with circumstances in a nation and are largely outside of the control of firms. Chance events could be significant shifts in exchange ra..."