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 -
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