Michael Porter’s Diamond Model

Ms Ravneet Sandhu
Asst Prof., VSLLS-VIPS
 Porter’s Diamond Model
• Porter’s Diamond Model has been the exemplary work of 
Michael Porter, who first published about this economic
model in his book, “The Competitive Advantage of Nations”
 (1990).
• This simple but effective model aims at explaining the
cause behind the reason as to why one nation tends to be
more competitive than other nations in relation to a
particular industry.
• This book also tries to look into the matter of innovations
in businesses that may be more conducive to one nation
and might not be possible in others.
• Porter’s Diamond Model, also known as the Theory of
National Advantage, is used by different economic
institutions to calculate the external competitive
environment.
• This analysis helps in giving us an understanding of the
relative strength of one business than the other. On
analyzing the external environment, the causes for
industrial advantages for some businesses in a particular
place or region can also be deciphered. In simpler terms,
the Porter’s Diamond Model attempts to answer the
following basic questions:
• Why are corporations domiciled in certain
countries more successful than others?
• What are industry clusters and why are they
relevant?
• When is the right time for a firm to go
international?
• Do governments have a role in the development
of industrial clusters and successful
corporations?
• It counters the notion of public laissez-faire, or the
principle of no regulation.
• Helps to understand the dynamic interplay between
 firm’s corporate strategy and competitive advantages
of a country
• It helps to assess environmental competitive
advantage where individual business units,
organizations, or industries operate
The habitat in which organizations work
• The answers to the above – mentioned
questions lie in the determinants identified by
Porter that generates a competitive advantage
as mentioned above. The four determinants
enumerated in Porter’s Diamond Model are as
follows:
• The theory and model of Porter’s Diamond were
incepted and designed in order to understand the
competitive edge and advantage that certain nations
and groups possess owing to the certain favorable
factors available to them.
• Diamond also highlights the fact that how the
government authorities can act as a catalyst in
improvising the position of the country on the global
level with the highly competitive economic 
environment.
• It is the proactive model of economic theory
that quantifies those favorable advantages
that a country or region may possess as
compared to the other nations and gives it a
competitive edge over others in terms of
growth.
• The Porter’s Diamond also suggests that
countries can also formulate new factor
advantages for themselves such as superior
manufacturing technologies, skilled labor, and
efficient human resources, technologically
advanced industries, and the favorable
government policies that support and elevate
the country’s economy quite a few notches
higher.
• The primary determinants on which the
country can harp for its economic growth
include natural resources, population, land,
and location amongst others.
• Porter’s Diamond is a diagram that represents
the 4 points of a diamond and highlights the 4
interrelated determinants that work as
deciding factors of the national comparative
economic advantage.
 The 4 factors of PDM Strategy

Factor Conditions:
• Factor conditions relate to the different types of resources that
are present or absent within a nation. Resources can be typed
into basic and advanced ones. The basic ones include useful
natural resources and the availability of unskilled labor.
Advanced or ‘created’ resources include specialization and
skilled knowledge and expertise, availability of capital,
infrastructure, etc.
• For Porter, natural resources are of less importance as compared
to the created resources. Competitive advantage develops in
nations and in particular industries that are able to create these
advanced and specialized factors.
Demand Conditions:
• Demand conditions invariably talk about the ‘home
demand’ which affects how successful a particular industry
within a certain nation is. A strong home demand of
industries in their own nations creates a large market for
them and therefore, creates opportunities for them to
grow.
• More demands inevitably mean more challenges, but these
challenges turn the companies toward innovation and
improvement. The size of the market, the growth rate of
the market, etc. are some indicators of the home demand.
 Related and Supporting Industries:
• According to Porter, the level of success of one industry
can be related to the success of related and supporting
industries. In the present economies, the role of ‘suppliers’
is a crucial one. These suppliers help in advancing
innovation processes through shared resources- technical
and other types of aids.
• In recent times, the booming of startups has stimulated
the renovation. These startups have entered into
innumerable mergers with various industrial giants leading
to the creation of competitive advantage.
Firm Strategy, Structure, and Rivalry:
• The internal environment in which a firm is established determines
how firms are created and structured. This structuring of the firm
can be influenced by a number of factors- political, economic, and
social. This structuring will form the basis of creating a strategy
towards the establishment of the firm.
• The level of competitiveness between firms of a particular industry
in one nation is marked by domestic rivalry. The more intense the
domestic rivalry, the more it will push firms toward innovations,
improvement and global competitiveness. Domestic rivalry in the
automobile industry between various Japanese firms such as
Toyota, Nissan, Honda, etc. can be cited as a perfect example.
 Additional Conditions
Government:
• The government plays a vital role in the success of a firm or
company. It is the government that provides for technical and
financial aid to companies for its growth. The government has
been referred to as ‘a catalyst and challenger’.
• Porter believes that the market is not meant to be in the
‘invisible hands’ but the government should regulate it in order
to stimulate the creation of advanced factors and therefore,
leading to the development of competitive advantage.
Government policies, investment in infrastructure, funding, etc.
are some ways in which governments help in intensifying home
demands.
Chance:
• The role of chance has not been originally
discussed by Porter but it has been included in
the Diamond Model as there may emerge
random events like some scientific
breakthrough, natural disasters or wars that
might affect the established competitive
positions in the society.