Question

What are the four factors described in Porter’s diamond of national advantage? How do the four factors explain why some industries in a given country are more successful than others?

Answer 1

Porters Diamond: Four factors

Porters Diamond – Factors that determine national advantage

Firm Strategy, Structure, and Rivalry

The conditions in a country that determine how companies are established, are organized and are managed, and that determine the characteristics of domestic competition

Here, cultural aspects play an important role. In different nations, factors like management structures, working morale, or interactions between companies are shaped differently. This will provide advantages and disadvantages for particular industries.

Typical corporate objectives in relation to patterns of commitment among workforce are of special importance. They are heavily influenced by structures of ownership and control. Family-business based industries that are dominated by owner-managers will behave differently than publicly quoted companies.

Porter argues that domestic rivalry and the search for competitive advantage within a nation can help provide organizations with bases for achieving such advantage on a more global scale.

Factor Conditions

Factor conditions in a certain country refer to the natural, capital and human resources available. Some countries are for example very rich in natural resources such as oil for example (Saudi Arabia). This explains why Saudi Arabia is one of the largest exporters of oil worldwide. With human resources, we mean created factor conditions such as a skilled labor force, good infrastructure and a scientific knowlegde base. Porter argues that especially these ‘created’ factor conditions are important opposed to ‘natural’ factor conditions that are already present. It is important that these created factor conditions are continiously upgraded through the development of skills and the creation of new knowledge. Competitive advantage results from the presence of world-class institutions that first create specialized factors and then continually work to upgrade them. Nations thus succeed in industries where they are particularly good at factor creation.

Demand Conditions

The home demand largely affects how favorable industries within a certain nation are. A larger market means more challenges, but also creates opportunities to grow and become better as a company. The presence of sophisticated demand conditions from local customers also pushes companies to grow, innovate and improve quality. Striving to satisfy a demanding domestic market propels companies to scale new heights and possibly gain early insights into the future needs of customers across borders. Nations thus gain competitive advantage in industries where the local customers give companies a clearer or earlier picture of emerging buyer needs, and where demanding customers pressure companies to innovate faster and achieve more sustainable competitive advantages than their foreign rivals.

Related and Supporting Industries

The presence of related and supporting industries provides the foundation on which the focal industry can excel. As we have seen with the Value Net, companies are often dependent on alliances and partnerships with other companies in order to create additional value for customers and become more competitive. Especially suppliers are crucial to enhancing innovation through more efficient and higher-quality inputs, timely feedback and short lines of communication. A nation’s companies benefit most when these suppliers themselves are, in fact, global competitors. It can often take years (or even decades) of hard work and investments to create strong related and supporting industries that assist domestic companies to become globally competitive. However, once these factors are in place, the entire region or nation can often benefit from its presence. We can for example see this in Silicon Valley, where all kinds of tech-giants and tech-start-ups are clustered in order to share ideas and stimulate innovation.

Porter’s Diamond Model of National Advantage explains why some industries in some countries are so much more developed and competitive compared to industries elsewhere on the planet. It basically sums up the location advantages that Dunning is referring to in his Eclectic paradigm(also known as OLI framework). The Diamond Model could therefore be used when analyzing foreign markets for potential entry or when making Foreign Direct Investment decisions. It is adviced to also conduct a macro-environment analysis and an industry analysis by using PESTEL Analysis and Porter’s Five Forces respectively.

Note: I tried my best in answering the question. It'd be appreciated if you leave an upvote. Thanks in advance.