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QuickMBA / Strategy / Porter's Diamond of National Advantage

Porter's Diamond of National Advantage

Classical theories of international trade propose that comparative advantage resides
in the factor endowments that a country may be fortunate enough to inherit. Factor
endowments include land, natural resources, labor, and the size of the local
population.
Michael E. Porter argued that a nation can create new advanced factor endowments
such as skilled labor, a strong technology and knowledge base, government
support, and culture. Porter used a diamond shaped diagram as the basis of a
framework to illustrate the determinants of national advantage. This diamond
represents the national playing field that countries establish for their industries.
Porter's Diamond of National Advantage

Firm Strategy,
Structure,
and Rivalry

Factor
Conditions

Demand
Conditions

Related and
Supporting
Industries

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The individual points on the diamond and the diamond as a whole affect four
ingredients that lead to a national comparative advantage. These ingredients are:
1. the availability of resources and skills,
2. information that firms use to decide which opportunities to pursue with those
resources and skills,
3. the goals of individuals in companies,
4. the pressure on companies to innovate and invest.
The points of the diamond are described as follows.
I. Factor Conditions
A country creates its own important factors such as skilled resources and
technological base.
The stock of factors at a given time is less important than the extent that they
are upgraded and deployed.
Local disadvantages in factors of production force innovation. Adverse
conditions such as labor shortages or scarce raw materials force firms to
develop new methods, and this innovation often leads to a national
comparative advantage.
II. Demand Conditions
When the market for a particular product is larger locally than in foreign
markets, the local firms devote more attention to that product than do foreign
firms, leading to a competitive advantage when the local firms begin exporting
the product.
A more demanding local market leads to national advantage.
A strong, trend-setting local market helps local firms anticipate global trends.
III. Related and Supporting Industries
When local supporting industries are competitive, firms enjoy more cost
effective and innovative inputs.
This effect is strengthened when the suppliers themselves are strong global
competitors.

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IV. Firm Strategy, Structure, and Rivalry

Local conditions affect firm strategy. For example, German companies tend to
be hierarchical. Italian companies tend to be smaller and are run more like
extended families. Such strategy and structure helps to determine in which
types of industries a nation's firms will excel.
In Porter's Five Forces model, low rivalry made an industry attractive. While at
a single point in time a firm prefers less rivalry, over the long run more local
rivalry is better since it puts pressure on firms to innovate and improve. In fact,
high local rivalry results in less global rivalry.
Local rivalry forces firms to move beyond basic advantages that the home
country may enjoy, such as low factor costs.
The Diamond as a System
The effect of one point depends on the others. For example, factor
disadvantages will not lead firms to innovate unless there is sufficient rivalry.
The diamond also is a self-reinforcing system. For example, a high level of
rivalry often leads to the formation of unique specialized factors.
Government's Role
The role of government in the model is to:
Encourage companies to raise their performance, for example by enforcing
strict product standards.
Stimulate early demand for advanced products.
Focus on specialized factor creation.
Stimulate local rivalry by limiting direct cooperation and enforcing antitrust
regulations.
Application to the Japanese Fax Machine Industry
The Japanese facsimile industry illustrates the diamond of national advantage.
Japanese firms achieved dominance is this industry for the following reasons:
Japanese factor conditions: Japan has a relatively high number of electrical
engineers per capita.
Japanese demand conditions: The Japanese market was very demanding
because of the written language.

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Large number of related and supporting industries with good technology, for
example, good miniaturized components since there is less space in Japan.
Domestic rivalry in the Japanese fax machine industry pushed innovation and
resulted in rapid cost reductions.
Government support - NTT (the state-owned telecom company) changed its
cumbersome approval requirements for each installation to a more general
type approval.

Recommended Reading
Porter, Michael E., The Competitive Advantage of Nations
In this 800+ page work, Michael Porter introduces his diamond of national advantage and its selfreinforcing nature. He then applies the diamond to examples in both manufacturing and service
industries, and uses the value chain to explain the growing role of services. The book concludes with
implications on company strategy and national agendas.
QuickMBA / Strategy / Porters Diamond of National Advantage
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