C

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om ort
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Na
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 Acc to Heckscher-Ohlin theory and Comparative

Advantage theory
E.g. A nation uses its resources very productively
BUT HOW?
Above theories give only Partial Explanation to the
Question.
Porters Diamond Model is used to solve this puzzle
Developed in 1990, by Michael Porter of the Harvard
Business School.
Porter theorizes 4 Broad attributes Factor
Endowment, Demand
conditions, Related/Support industry, Firm Strategy

PORTERS TWO MONOGRAPHS

Porter conducted a comprehensive study on

10 leading nations to learn what leads to
competitive advantage to nations.

United States
Germany
Italy
Sweden
United Kingdom

Japan
Korea
Denmark
Singapore
Switzerland

Competitive Advantage of Nations

Michael Porter* describes four keys to a nations
competitive advantage in relation to other countries

Factor Endowments
Demand conditions
Related and supporting industries
Firm Strategy, Structure and Rivalry.

* Popularly referred to as Porters Diamond

Porters Diamond
Determinants of National Competitive Advantage
Co
mb
t
n
e
ine
Firm
Strategy,
m
dI
rn
e
v
mp
Structure and
Go
ac
t
Rivalry

Factor Endowments

Co
mb

ine
dI

mp
ac

Demand Conditions

Related and
Supporting
Industries
t

ce
n
a
h
C

BASIC FACTORS Natural resources, climate, location and demographics

ADVANCE FACTORS Communication Infrastructure, skilled labour, Research facilities and so

on.

Basic factors can provide only an initial advantage

FACTOR CONDITIONS:

They must be supported by advanced factors to maintain success.

E.g.
Switzerland was the First country to experience labour shortages. They abandoned labourintensive watches and concentrated on innovative/high-end watches.

Japan has high priced land and so its factory space is at a premium. This lead to just-in-time
inventory techniques.

Sweden has a short building season and high construction costs. These two things combined
created a need for pre-fabricated houses.

DEMAND CONDITIONS:

Home country Demand plays an important role in producing

competitiveness.

Enables better understand the needs and desires of the customers

It shapes the attributes of domestically made products and creates

pressure for innovation and quality.

E.g. 1
Italian ceramic Industry after the world war II
There was a postwar housing BOOM !!
Consumers wanted cool floors because of Hot climatic conditions
E.g. 2
Japans knowledgeable buyers of cameras made that industry to
innovate and grow tremendously
E.g. 3
The French wine industry. The French are sophisticated wine
consumers. These consumers force and help French wineries to
produce high quality wines.

RELATED AND SUPPORTING INDUSTRIES:

Benefits of investment in advanced factors by Suppliers and

related industries can spill over

Creates clusters of supporting industries, thereby achieving a

strong competitive position internationally.

E.g.1
The enamel production unit was available.
The glazes production was also favorable.
These two were the main composition of producing tiles.
This reduces the Transportation cost.
E.g. 2
Switzerland success in pharmaceutical industry is closely
related to its international success in technical dye industry.

FIRM STRATEGY, STRUCTURE & RIVALRY:

Long term corporate vision (Strategy) is a determinant of success

Ability of the companies to develop and sustain a competitive advantage

requires the 4th attribute.

Presence of domestic rivalry improves a companys competitiveness

E.g. 1
Low entry barriers to market in the tile industry
Rivalry became very intense
Breakthroughs in both product and process technologies

E.g. 2
Japan has high priced land and so its factory space is at a premium

This lead to just-in-time inventory techniques

(Japanese firms cant have a lot of stock taking up space, so to cope with the
potential of not have goods around when they need it)

They innovated traditional inventory techniques.

Chance Events such as major innovations, can reshape industry

structure
Government Policies Can detract from or improve national
advantage
Regulation can alter home demand conditions
Government investment in education can change factor
endowment.
E.g.
1991 US Govt Tariff on Japanese imports of LCD screens
APPLE and IBM Protested strongly

Japan The low cost LCD manufacturer

Increase the LCD screens as well as Laptops in the global market Reduce
the Market Share.

 Countries should be exporting products from those

industries where all four components of the
diamond are favorable.
while importing in those areas where the
components are not favorable.

PORTER DIAMOND - CRITISICM

Government can influence on any four components

of the diamond.
Porter developed this paper based on case studies
and these tend to only apply to developed
economies.

Analysis of Koreas Competitive Advantage with

Michael E. Porter's Diamond Framework

Korea - New developed countries - Information and

Telecommunication.

FACTORS CONDITION

Korean Government- continuous effort

- Improvement in IT infrastructure,
- Facilitating the usage of information technology,
- Favorable environment for development of IT industry

Over 90% of nation area is wired with broadband internet network

IT workforce in Korea accounted for 447,000 (2.1% of total workforce).

Overall level of education in Korea is relatively high

Korean government support educational institutions related to IT skills

Supply of quality of IT workforce is expected to increased.

DaeDeok Valley- an important IT cluster -Attracts foreign

investment

Several joint research and development projects with well-known

foreign companies and universities.

Through export of CDMA technology- solid network among the

south Asian nations is established.

High computing and Internet penetration rate since 1998.

Large user base of Internet - sophisticated internet usage

IT effectively used - individual level, Business & government sectors

The competitive market situation - Forcing market players - higher

quality service at cheaper rate to users.

Korean governments effort to develop IT industry - Privatization and

Market Deregulation in Telecommunication market.

Encouraged fair market competition in Telecommunication market

Resulting in lower price ,better quality, better service and

created favorable business environments for business.

E-commerce exceeded 45 billion USD and Projected a growth rate

of 9% per year

RELATED/SUPPORTING INDUSTRY

Korea has secured leading position in semiconductor market

especially for DRAM (Dynamic Random Access Memory) - DDR
RAM and SD RAM

Cheap and Quality Hardware production units available.

IT Enabled Services like BPOs and KPOs Yantram Solutions

Korea ranks itself in top manufacture in LCD and Mobile phone,

example LG group, Samsung group, Doosan Group, DiaBell.

Korea - the leading position in IT related production

RELATED/SUPPORTING INDUSTRY
(cont.)

The proactive effort - R&D and market expansion, as well as

government support are expected.

Korean government plans to extend its financial support for R&D

especially in 10 core technologies

Initiated several huge project with private sectors

FIRM STRATEGY AND STRUCTURE

Korea - favorable business environments

- Quick registration process,
- Lower entry barriers in IT industry,
- Lower cost using telecommunication infrastructure,
- Diverse capital resources
- Government supports

These activities result in huge number of small, medium-sized venture

company in IT industry

And Hence it leads to severe domestic rivalry because of market

competition.

Encourages the continuous development of Innovative technology and

improvement of business models in business sectors.

RECAP

GLOBAL COMPETITIVENESS INDEX(GCI)

Tool for benchmarking country strengths &
Weaknesses.
Professor Jeffery Sachs introduced it in 2000.
Country rank depends on 12 parameters.

PARAMETERS
Institutions : Provide the framework within which individuals, firms &
Government interact to generate wealth in the economy.
Infrastructure: Transportation, Communication network.
Macroeconomic stability: Inflation, Interest rate, Fiscal deficit.
Health and Primary Education
Higher education and training
Good market efficiency: Healthy

market competition

 Labor Market Efficiency: Labors are allocated to most efficient use

in the economy.
Financial Market sophistication: To allocate resources to most
productive uses.
Technological readiness: Ability to which an economy adopts
existing technologies to enhance the productivity.
Market size: Demand of the countrys goods and services.
Business sophistication: means quality of countrys overall business
networks as well as the quality of a individuals firms operations &
strategies.

Technological Innovation: sufficient investment ion R&D.

Country

Rank(2008)

GCI Score (2008)

GCI rank (2007)

US

5.74

Switzerland

5.61

Denmark

5.58

Singapore

5.53

Japan

5.38

France

16

5.22

18

China

30

4.7

34

India

50

4.33

48

Brazil

64

4.13

72

SUB INDEXES OF GCI

Basic requirements Sub Index : Institutions,
Infrastructure, Macroeconomic stability, Health and
primary education
Efficiency enhancers sub index: Higher education
and training, Good market efficiency, Labor market
efficiency, Financial market sophistication,
Technological readiness, Market size.
Innovation sub index : Business sophistication,
Technological Innovation

COUNTRYS STAGE

Factor driven
Stage(%)

Efficiency driven
stage(%)

Innovation
driven stage (%)

Basic
requirements

60

40

20

Efficiency
Enhancers

35

50

50

Innovation factors

10

30

Pillar group

FACTORS AFFECTING STAGE

GDP Per Capita
Share of primary Export to Total Export(%)

Stage of development

GDP per capita (USD)

Stage 1: Factor driven

<2000

Transition stage

2000-3000

Stage 2: Efficiency driven

3000-9000

Transition stage

9000-17000

Stage 3: Innovation driven

>17000

STAGE OF COUNTRY

SUBINDEXES

WEIGHTS ASSIGNED
Basic requirements sub index
Institution-25%
Public institution-75%
Private institution -25%
Infrastructure-25%
Macroeconomic stability-25%
Health and Primary education-25%

EFFICIENCY ENHANCER SUB INDEX

Higher education, training-17%
Goods and market efficient- 17%
Competition-67%
Quality of demand condition-33%
Labor market efficiency-17%
Financial market Sophistication-17%
Technological readiness-17%
Market size-17%
Domestic-75%
Foreign-25%

Innovation Subindex
Business Sophistication-50%
Innovation-50%

Rate each country on each factor on the

scale of 1-7. 1 indicates worst, 7 indicates
best
For instance, Inflation rate between 0.5%
to 2.9% get 7 points.

Standard formula

Sample minimum is lowest country score in the

Sample of countries under study
Sample maximum is highest country score.

Competitive advantage of
telecommunication sector of India

Government
Factor condition
Firm structure ,strategy and rivalry
Related and supported industry
Demand condition

Government
Government full support through reform process
Policies are in place to safeguard the interest of service
provider as well those of consumer
Example:1) Government id promoting telecom manufacturing by
providing Tax sop and establishing telecom SEZ
2) Liberal foreign investment Regime: FDI limit increased
from 49% to 74% ,rural telecom equipment also open to
large investments
3) Auction of 3G Spectrum by inviting bids
4) To safeguard consumer DOT established TRAI,TDSAT
5) Unified access licensing regime was established
6) Number portability was proposed and still pending

7) Unified access licensing regime was established

6) Number portability was proposed and still
pending
7) Universal service obligation(USO)
8) Total FDI US$3892.19mn(1991-2007) ,3rd largest
sector to attract FDI
9) 100% FDI is permitted through automatic route in
telecom equipment manufacturing.
10) Foreign telecom companies can bid for 3G
without partnering local service provider.

Factor condition
Presence of skilled and talented labor pool
Rapidly developing robust telecom infrastructure
Increasing disposable income of consumer
Increasing demand due to changing lifestyle and
growing attraction for mobile with new features
Low labor cost
Country emerged as major R&D hub
Example:(1) it is estimated working age population is expected to
rise by 83% by 2026.
(2) Nokia which has set up its manufacturing operation
in India considering long term sustainable demand for
mobile telephony

Demand condition
India has a large middle class of 300 mn
Growing affordability and life free schemes have
created the market at the bottom of the pyramid
Country increasing population and Low
teledensity of 19%
Export opportunities and ensure India as a
manufacturing hub for Asia Pacific
Huge rural population yet to be tapped(close to
100 mn come from rural area)
Example:
(1) India's upper middle class spends 6% of their
earning on telecom services
(2) ARPU for GSM user is 6.6$ per month

Firm structure, strategy and rivalry

Series of reform opened up the economy as a result
Intensive competition in the country pop up which has
made it possible for service providers to offer service
at low fare[number of operator in circle have
increased to 5-6 ]
Saturation in urban market so capitalizing on value
added service will enable service provider to increase
ARPU
Many new handset have been launched.
Merger & acquisition strategy is being followed by the
service provider in expanding their reach.
Business alliance:-to improve cost and quality
company outsource non core activities. ex-airtel
alliance with Eriksson

 Rural penetration:- BSNL is developing

infrastructure in rural area to increase its customer
base.
Low cost strategy:-to increase customer base and
retain them many service provider adhere to this
service
Rapid innovation:-company launches new handset in
the market by developing set with new features.
Attractive designing:-this strategy is used by motorola
and established a distinct identity in the market

Competitive pricing strategy:-Motorola come up

with this strategy and aims at connecting the
unconnected to penetrate the market with
competitive pricing
Example:-(1)providing services at low fair have
been possible due to infrastructure sharing
(significant reduction in set up cost , low operating
cost , faster roll out of service)
(2) Currently private participation is permitted in all
segment of the telecom industry including
international long distance, domestic long
distance, internet etc.
(3) vodafone-hutchison telecom international

Related and supported industry

Competent handset manufactures have produced
the low price handset for the Indian market and
India has low manufacturing cost
Handset manufactures are setting up
manufacturing bases in India for better operation
management .[handset manufacturing market is
likely to touch US $ 7 bn by 2010]
Many telecom and equipment and software
companies are based in India like nokia
,Samsung and telecom equipment market stood
at us $17100 million.
Network infrastructure companies like alcatellucent, cisco, Eriksson.
Telecom solution provider :tech mahindra,IBM etc

Network infrastructure companies like alcatellucent, Cisco, Eriksson.

Telecom solution provider :tech Mahindra, IBM etc

Conclusions

The diamond of national advantage makes sense

as a means of understanding global economic
success.

Domestic success does prepare companies to

compete globally.

Major European and an increasing number of Asian

countries are capable of competing on a global
basis.

The global marketplace is only going to get tougher

based on more, tougher competitors.

The diamond can help to anticipate and understand

new competitors.