In a global business environment, no two organizations are the same. While some manage to consistently expand their business footprint, others struggle to up their profits and stay in the game. But why does a particular organization enjoy a better market position than its rivals? How does it sustain a competitive edge in the long run? Porter’s Diamond Model has the answers.
What Is Porter’s Diamond Model?
Porter’s Diamond Model, also known as Porter’s National Competitive Advantage Theory or Porter’s Diamond Theory, is an economic model that aims to understand the factors that give certain nations or groups a competitive advantage over others. It also highlights how governments can significantly catalyze a country’s competitive position in a global environment and suggests ways to improve the same.
Developed by Michael Porter in 1990, the Diamond Model is extensively used by organizations around the world today. It helps them understand why specific businesses enjoy industrial advantages in a particular region and plan a strategy on how to operate in diverse market segments.
The Determinants Of Porter’s Diamond Model
A visual representation of Porter’s Diamond Model takes the form of a diamond. The four points of the diamond represent the four major determinants of Porter’s Diamond Theory. These four determinants are the deciding factors that result in a competitive advantage. Let’s look at each determinant in detail:
1. Firm Strategy, Structure And Rivalry
The first determinant in Porter’s National Competitive Advantage Theory is based on how organizations strategize and structure themselves. Strategy and structure often depend on a combination of economic, social and political factors. These, along with rivalry, decide the competitive position of an organization in the market. Rivalry pushes an organization to better itself in terms of productivity, product quality and efficiency. The more the rivalry, the more is an organization’s urge to differentiate themselves.
2. Demand Conditions
Demand conditions in Porter’s Diamond Model refer to home market demand for a particular product or service. These depend on customer demographics, size of customer segments and their distribution. High demand conditions prompt an organization to constantly improve its product lineup and innovate to be able to gain a competitive edge.
3. Factor Conditions
Factor conditions in the Diamond Model include the various resources that are available to a nation or organization. These can be of two types—basic and advanced. Basic resources include land, natural resources and unskilled labor, while advanced resources involve capital, infrastructure and cutting-edge technology—resources that a nation or organization can develop for themselves. According to Porter, advanced resources play a greater role in establishing competitive advantage compared to basic resources.
4. Related Supporting Industries
Porter’s Diamond Theory says the success of a particular industry depends upon other related industries. Supporting industries can boost an organization’s market position and create competitive advantage through supply chains, exchange of ideas and resources.
Apart from these four primary determinants, the Diamond Framework also includes two additional determinants—government and chance. Governments can influence a country’s international competitiveness through aids, exports/imports and investments. Chance refers to random occurrences that might affect established positions in the market. These are often beyond the control of a nation or organization, and include natural disasters, groundbreaking inventions or sudden shifts in international markets.
Porter’s Diamond Model Example
An international smartphone manufacturer consistently remains a step ahead of the competition with attractive smartphone releases at regular intervals. Let’s analyze its success using the Diamond Model to understand why it enjoys a leading market position:
- Rivalry: The organization faces tremendous competition from the other smartphone giants, which forces it to innovate and improve its product lineup
- Demand conditions: The home demand for smartphones is on the rise, especially with the advent of the pandemic
- Factor conditions: The organization has an excellent pool of skilled employees, state-of-the-art infrastructure and equipment at its disposal
- Related industries: Supporting industries such as component suppliers help the organization expand its product range to gain an edge
This is a Porter’s Diamond Model example. Because the smartphone manufacturer satisfies all the parameters of the Diamond Model, it manages to retain and improve its market position.
Bring Out The Best
Remaining relevant in a rapidly evolving business landscape is crucial to maintaining and enhancing market position. The Michael Porter Diamond Model is essential for any organization looking to expand its business footprint, assess its standing or break into a new territory. Professionals need to know how to use the Diamond Model to their organization’s advantage to scale up business.
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