Michaels Porter’s Diamond

Model
Clusters versus traditional sources of competitive
advantage

 Model that helps understand the competitive

position of nation or region
 Traditionally following factors mentioned for
competitive advantage of region: land, location,
natural resources, labor, local population size
 All of them can hardly be influenced
 Porter introduces a concept of clusters: groups of
interconnected firms and institutions that arise in
particular location
 4 interlinked factors for competitive advantage

 1. Firm strategy, structure and rivalry (conditions for

organization of companies
 2. Demand conditions (sophisticated customers in
home market - pressure to improve competitiveness
via innovation)
 3. Related supporting industries (facilitate the
exchange of information and ideas)
 4. Factor conditions (key factors and non-key
factors)
 Firm strategy, structure and rivalry

 Strategy:
 - long-run or short-run capital markets in individual
countries and regions. Countries with short-run outlook
more competitive in industries with short-term
investment (computer industry in US). Switzerland with
long-run outlook more competitive in long-term
investment (pharmaceuticals)
 Structure: best managements styles vary among
industries: Germany has hierarchical management
structure consisted of managers with strong technical
background, Italy has smaller family-run firms
 Rivalry: intense competition stimulates innovation
 Related and supporting industries

 A set of strong related industries important to the

competitiveness of firms: Silicon Valley, leather
shoes and other leather goods industry
 Advantages to locating close to your rivals:
 -potential knowledge spillovers
 - some market power
 Disadvantages: potential poaching of employees by
rival companies and decrease of profits because of
more intense competition
 Demand conditions

 Firms facing a sophisticated market will sell more

superior products
 A good example: the French wine industry. French
sophisticated consumers force French wineries to
produce high quality wines
 Other examples?
 Other counter-examples?
 Factor conditions

 Refers to inputs such as labor, land natural

resources, capital and infrastructure
 Key factors (specialized factors): skilled labor,
capital and infrastructure are created not inherited
factors, there are more difficult to duplicate
 Non-key factors: unskilled labor and raw materials
do not generate sustained competitive advantage
 Lack of resources helps countries to become
competitive (selected factor disadvantage)
 Abundance generates waste, scarcity generates
an innovative mindset

 3 examples:
 Switzerland moved from labor intensive watches to
innovative/high-end watches because of labor
shortage
 Japan: land is scarce and expensive. This lead to
just-in time inventory techniques to save space
 Sweden created a need for pre-fabricated houses
because of a short building season
 Other examples?
The role of government in Diamonds Model

 Acts as catalyst,
 pushes companies to raise their aspiration and
performance,
 Stimulates early demand for advanced products,
 Stimulates local rivalry by enforcing anti-trust
regulation
 Tools used by the government: subsidies to firms, tax
exempts to business or property ownership,
educational policies, specialized factors creation,
enforcing tough technical and product standards
 Points on the Diamond constitute a self-
reinforcing system

 Rivalry for final goods stimulates the emergence of

an industry providing specialized intermediate goods
 Domestic competition leads to more sophisticated
consumers who expect better quality and more
innovative product
 The diamond promotes clustering
 The „diamond” as an analytical tool, case of the
paperboard micro-cluster in Barcelona

 1)Strategy, structure, rivalry:2 dominant producers

with the necessary scale, belonging to large
European groups
 2) factor conditions: high energy costs, abundant
water supply, high-tech machinery producers,
potentially abundant supply of recycled paper
 3) related industries: strong printing, advertising
and design industry
 4) demand conditions: sophisticated multinationals
as end users, (prices, delivery terms, quality