Exam question :
“Globalisation
Your consultancy is considering the use of Porter’s Diamond model in its analyses of national competitive advantage.
Write a briefing note, giving examples, detailing
a) how and why you would use the diamond model
b) what limitations if any there are in doing so. ”

Classical economics insists that a national competitive advantage grows out of a country’s natural endowments, its labor pools, its interest rates, and its currency’s value.
However, according to Michael Porter theory, national prosperity is created, not inherited.
A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade through new technologies or new ways of doing things, as a result of technology push or market pull. It is important to upgrade your competitive advantage.

What is considered as a competitive advantage at the national level = productivity of the nation, which leads to high and rising standard of living for its citizens.
Classic theory: success of nations depends from factors of production (labor, lands, etc) but it has been overshadowed in advanced industries and economics by globalization of competition and power of technology.
Porter’s theory brings a comparative advantage to the competitive advantage of a nation.
Porter says that a new theory must explain why a national provides a favorable home base for companies that compete internationally. It succeeds in reflecting conception of competition that includes:
- segmented markets
- differentiated products
- technology differences
- economies of scale
The new theory must go beyond costs, and must explain why companies from some nations are better than others at creating advantages based on quality, features and new product innovation.

The Porter’s Diamond is a model developed by Michael Porter - who is considered as an authority on company strategy and competition – that attempts to explain the competitive advantage some nations have due to certain factors available to them.
The answer is in four attributes of a nation, each of the four defines a point on the diamond of natural advantage. Porter created a model linking these four sources in a diamond and argued that firms are most likely to succeed in industries or industry segments in which the four sources are favorable. He also argues that the sources in the diamond form a mutually reinforcing system in which the effect of one determinant or source is dependent on the state of the others.
Four attributes:
1. Factor conditions: human resources, physical resources, knowledge resources, capital and infrastructure.
Competitive advantage from presence of world-class institutions that create specialized factors and then continually works to upgrade them. Eg. Holland has premier research institutes in cultivation, packaging, and shipping flowers, and they’re the world’s export leader.
Although a nations may have many resources, they might not exploit them well. On the contrary, sometimes natural disadvantages can be turned into advantages. Eg. Japan is a nation which lacks of land and natural resources exploited its wealth of human resources =leader in technology with variety of world’s most successful industries in Japan=automobiles, electronics, computers, etc. Also, factory space at premium, with world's highest levels of crop yields per unit area

2. Demand condition: in home market, can help companies get a competitive advantage, when sophisticated and demanding home market buyers pressure companies to innovate faster and create advanced products. It helps also understand better the needs of customers.
Eg. Japanese consumers who live in small, tightly packed homes+hot and humid summers. creation compact, quiet air-conditions units powered by energy-saving rotary compressors.
Eg2: Denmark’s environmentalism has led to success for companies in water-pollution control equipment and windmills.

3. Related and supporting industries: can produce inputs that are important for innovation and internalization
National competitive advantage: when internationally compettive supplying industries are prosperous and lead to the prosperity of its related and supporting industries.
Eg. Success of automobile industry benefits suppliers, but also industries linked to automobiles like car insurance.
Italian Footwear (interconnected industries all internationally competitive create a NCA)

4. Firm strategy, structure and rivalry: 4th determinant of competitiveness. The way companies are created, set foals and are managed is important for success. Presence of rivalry is important, creates pressure to innovate, generates a NCA.
Eg. Competition between iPhone and Androids
Eg. In Italy successful companies are often small or medium sized companies, family businesses, who focus in meeting needs of small market niches. In Germany, on the contrary, successful companies tend to be strictly hierarchical, emphasise technical/engineering content; involve precision manufacturing and a highly disciplined management structure.

Government can influence the four determinants. Chance also influence, as there are occurences outside of control of a firm.
The diamond creates an environment that promotes cluster of competitive industries.

b) Limitations
*Has been criticized as it has been formulated 30 years ago, and the conditions of international business were different. Internet didn’t exist as we know it today
*Porter developed his paper based on cased studies on ten important trading nations: Denmark, Germany, Italy, Japan, Korea, Singapore, Sweden, Switzerland, the United Kingdom, and the United States. However this tends to apply to only developed countries.
*Role of government is underplayed in the Diamond, as the government can highly influence all four points.
*Inability of model to explain the growth and development of some very successful industries such as Indian software (no local endowments, local demand for software was initially non existent, the demand for customized software did not come from India itself. It was the existence of cheap programmers that gave the Indian software industry its initial competitive advantage. Local influence was littke, other than the presence of a large number of people speaking English and a readiness to travel abroad
*Porter’s Diamond is based on many assumptions that might be wrong:
- sustained prosperity may be achieved without a nation becoming “innovation-driven”
- inward foreign direct investment does not indicate a lack of ‘competitiveness’ or low national productivity