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By

Saumyadeep Mazoomdar

INTRODUCTION

PORTERS
DIAMOND
MODEL

PORTERS
DIAMOND
EXPLANATION

Introduc)on
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 and rivalry

the eect of one point depends on

the others.

PROs Of the
MODEL

PORTERs
CRITICISM

CASE Example

Traditional economic theories cite land,

location, natural resources, labor and


population as determinants in
competitive advantage.
The Diamond Model uses a more
proactive approach in considering
factors such as:
The rm strategy, structure and rivalry
Demand conditions for products
Related supporting industries
Factor conditions

Porter says that sustained industrial

growth has hardly ever been built on


above mentioned basic inherited factors.
He introduces a concept called "clusters"
Additional Variables that inuence
or groups of interconnected rms,
are Government and Chance
suppliers, related industries, and
institutions, that arise in certain locations.

attribution http://www.citehr.com/6865-michael-porters-diamond-theory-its-application.html
It is a self-reinforcing system.

INTRODUCTION

PORTERS
DIAMOND
MODEL

PORTERS
DIAMOND
EXPLANATION

PROs Of the
MODEL

PORTERs
CRITICISM

CASE Example

Porters Analysis

The approach looks at clusters, a number of small industries, where the competitiveness of one company is related to the
performance of other companies and other factors tied together in the value-added chain, in customer-client relation, or in a local
or regional contexts.

Porter's analysis deals with the dynamic process by which competitive advantage is created.. The basic method in these studies is
historical analysis. The phenomena that are analyzed are classied into six broad factors incorporated into the Porter diamond,
which has become a key tool for the analysis of competitiveness:
Demand conditions in the home market can help companies create a competitive advantage, when sophisticated home
market buyers pressure rms to innovate faster and to create more advanced products than those of competitors.
Factor conditions are human resources, physical resources, knowledge resources, capital resources and infrastructure.
Specialized resources are often specic for an industry and important for its competitiveness. Specic resources can be
created to compensate for factor disadvantages.
Related and supporting industries can produce inputs that are important for innovation and internationalization. These
industries provide cost-eective inputs, but they also participate in the upgrading process, thus stimulating other
companies in the chain to innovate.
Firm strategy, structure and rivalry constitute the fourth determinant of competitiveness. The way in which companies
are created, set goals and are managed is important for success. But the presence of intense rivalry in the home base is also
important; it creates pressure to innovate in order to upgrade competitiveness.
Government can inuence each of the above four determinants of competitiveness. Clearly government can inuence the
supply conditions of key production factors, demand conditions in the home market, and competition between rms.
Government interventions can occur at local, regional, national or supranational level.
Chance events are occurrences that are outside of control of a rm. They are important because they create discontinuities
in which some gain competitive positions and some lose

The Porter thesis is that these factors interact with each other to create conditions where innovation and improved
competitiveness occurs.

INTRODUCTION

PORTERS
DIAMOND
MODEL

PORTERS
DIAMOND
EXPLANATION

PROs Of the
MODEL

Porters Diamond Model

PORTERs
CRITICISM

CASE Example

INTRODUCTION

PORTERS
DIAMOND
MODEL

PORTERS
DIAMOND
EXPLANATION

PROs Of the
MODEL

PORTERs
CRITICISM

CASE Example

Demand Condi)ons
A more demanding local market

leads to national advantage

A strong trend setting local market

helps local rms anticipate global


trends

Home country Demand plays an

important role

Enables better understand the

needs and desires of the customers

It shapes the attributes of

domestic ally made products and


creates pressure for innovation
and quality

E.g. 1
Japans knowledgeable buyers of
cameras made that industry to
innovate and grow
tremendously
E.g. 2
Local demand for cellular
phones in scandinavia made
nokia and ericson to invest in
that in other developing
nations.
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.

attribution http://www.citehr.com/6865-michael-porters-diamond-theory-its-application.html#ixzz2sZVQxsQ9

INTRODUCTION

PORTERS
DIAMOND
MODEL

PORTERS
DIAMOND
EXPLANATION

PROs Of the
MODEL

PORTERs
CRITICISM

CASE Example

Factor Condi)ons
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. They must be supported by


advanced factors to maintain success

Eg: Indian BPO/KPO industry


INDIA has created its own

important factors such as skilled


resources and technological
base for expanding BPOs /
KPOs

A country creates its own important

factors such as skilled resources and


technological base

INDIA is upgrading / deploying

resources over time to meet


the demand

These factors are upgraded / deployed

over time to meet


the demand

local disadvantges force innovations. new

methods and hence comparative


advantage.

New innovations. new methods

has given the


local industry the comparative
advantage.

attribution http://www.citehr.com/6865-michael-porters-diamond-theory-its-application.html#ixzz2sZWFtAnX

INTRODUCTION

PORTERS
DIAMOND
MODEL

PORTERS
DIAMOND
EXPLANATION

PROs Of the
MODEL

PORTERs
CRITICISM

CASE Example

Related/Suppor)ng Industries
Benets 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.

local competition creates

innovations and cost


eectiveness

This also puts pressure on local

suppliers to lift their game

Eg: Indian BPO/KPO industry


local competition has created

innovations and cost


eectiveness.
for the INDIAN BPOs AND
KPOs.

This has also put the pressure

on local suppliers to lift their


game.

attribution http://www.citehr.com/6865-michael-porters-diamond-theory-its-application.html#ixzz2sZWFtAnX

INTRODUCTION

PORTERS
DIAMOND
MODEL

PORTERS
DIAMOND
EXPLANATION

PROs Of the
MODEL

PORTERs
CRITICISM

CASE Example

Strategy ,Structure & Rivalry


Long term corporate vision

(Strategy) is a determinant of
success

Eg: Indian BPO/KPO industry


Local conditions have

Ability of the companies to

develop and sustain a competitive


advantage requires the 4th
attribute.
Presence of domestic rivalry

improves a companys
competitiveness
local conditions aect rm

strategy.

aected various rms


strategy.

local rivalry have forced rms

to move beyond basic


advantages.
examples INFOSYS , WIPRO
AND TCS [ TATAS]


local rivalry forces rm to move

beyond basic advantages.





attribution http://www.citehr.com/6865-michael-porters-diamond-theory-its-application.html#ixzz2sZWFtAnX

INTRODUCTION

PORTERS
DIAMOND
MODEL

PORTERS
DIAMOND
EXPLANATION

PROs Of the
MODEL

PORTERs
CRITICISM

CASE Example

Government
The role of Government in this

model is to
Encourage
stimulate
help to create
growth in industries.

Government Policies Can detract
from or improve national advantage
Regulation can alter home demand

conditions

Government investment in

education can change factor


endowment

Eg: Indian BPO/KPO industry



GOVERNMENT is encouraging
more BPOs / KPOs
GOVERNMENT is stimulating

with paperwork reforms

GOVERNMENT is helping to

create more skilled labors

GOVERNMENT is providing

infrastructures to attract
more industries

INTRODUCTION

PORTERS
DIAMOND
MODEL

PORTERS
DIAMOND
EXPLANATION

PROs Of the
MODEL

PORTERs
CRITICISM

CASE Example

Chance
Disruptive developments outside

the control of rms and


governments that allow in new
players who exploit opportunities
arising from a reshaped industry
structure.

Chance Events such as major

innovations, can reshape industry


structure

hey are important because they

create discontinuities in which


some gain competitive positions
and some lose

For example, radical

innovations,
unexpected oil price
rises, revolutions,
wars, etc.

INTRODUCTION

PORTERS
DIAMOND
MODEL

PORTERS
DIAMOND
EXPLANATION

PROs Of the
MODEL

PORTERs
CRITICISM

CASE Example

Pros of the Model

Porters Diamond model explains why corporations domiciled in certain countries are successful

in penetrating foreign markets. This model can be used to assess competitive advantage of the
national environment in which individual business units, organizations, or industries operate.

The model helps to understand the dynamic interplay between a rms corporate strategy and

the competitive advantages of a country the habitat in which organizations operate. This
model is an addition to Porters ve forces model dealing with industry structure. The diamond
model emphasizes that a rm should only internationalize when it has a strong position in its
home market.

The model provides an explanation of why industry clusters are relevant


Governments can play an active role in supporting the development of clusters countering the

notion of public laissez-fair


The model shows that apart from inter-rm rivalry, cooperation is a vital component of

corporate strategy. Companies should form strategic alliances, especially with organisations in
related and supporting industries.
The model explains in part the resource curse -- why a large natural resources base is not

sucient to develop industrial might

INTRODUCTION

PORTERS
DIAMOND
MODEL

PORTERS
DIAMOND
EXPLANATION

PROs Of the
MODEL

PORTERs
CRITICISM

CASE Example

Cri)cism

optimistic about the future of the Korean economy. He argues that Korea may well reach true

advanced status in the next decade (p. 383). In contrast, Porter is less optimistic about
Singapore. In his view, Singapore will remain a factor-driven economy (p. 566) which reects
an early stage of economic development. Since the publication of Porter's work, however,
Singapore has been more successful than Korea. This dierence in performance raises
important questions regarding the validity of Porter's diamond model of a nation's
competitiveness.

While the variables of Porter's diamond model are useful terms of reference when analysing a

nation's competitiveness, a weakness of Porter's work is his exclusive focus on the 'home base'
concept. In the case of Canada, Porter did not adequately consider the nature of multinational
activities.In the case of New Zealand, the Porter model could not explain the success of
export-dependent and resource-based industries.Therefore, applications of Porter's home-
based diamond require careful consideration and appropriate modication.
The double diamond model, developed by Rugman and D'Cruz,suggests that managers build

upon both domestic and foreign diamonds to become globally competitive in terms of
survival, protability, and growth. While the Rugman and D'Cruz North American diamond
framework ts well for Canada and New Zealand, it does not carry over to all other small
nations, including Korea and Singapore.

INTRODUCTION

PORTERS
DIAMOND
MODEL

PORTERS
DIAMOND
EXPLANATION

PROs Of the
MODEL

PORTERs
CRITICISM

CASE Example

Korea-Informa)on & Telecommunica)on

References
(1)"Competitive Advantage of Nations" Michael E. Porter, March~April, 1990 HBR Download available at
http://online.sfsu.edu/~yywong/Porter1990HBR.pdf

(2) "Global Information Technology Report 2001~2002" from World Economic Forum at www.weforum.org/
site/homepublic.nsf/Content/Global+Informat
ion+Technology+Report+2001-2002

(3) "Asia's New Tech Competitors" at www.nsf.gov/sbe/srs/s4495/conten3d.htm

(4) "National Competitiveness Analysis " from the Institute of
Industrial Policy Studies - http://www.ips.or.kr/ncr/index.asp

(5) www.outsourcing-service-india.com

(6) http://www.bsau.org/

(7) http://corsairmemory.com/products/twinx10255.htm

(8) www.technology.gov/reports/korea/korea.pdf

(9) http://www.quickmba.com/strategy/global/diamond/

(10) Charles W. L. Hill & Arun K. Jain, International Business,
Fifth Edition, 2006, TATA McGraw-Hill

(11) John D. Daniels & LeeH. Radebaugh, International Business,
Ninth Edition, 2003, Pearson Education