Porter’s Diamond

There are very few businesses in the modern world that remain ‘local’ in nature. Sure, there are some businesses that are truly local – such as a restaurant, for example – but most businesses have at least some part of their operation that is affected by global markets.

Porter's Diamond

Most likely, your business is impacted by global forces, so you need to understand exactly what those forces are and how they impact what you are going to be able to do going forward.

When looking at ‘Porter’s Diamond’, you will be thinking about how your own nation impacts what you are able to do from a business perspective. Does your location give you any specific advantages over competition from other countries? Do you face any specific disadvantages as a result of your location? If these are questions that have never before ran through your mind, now is a great time to weigh the ways that Porter’s Diamond can influence your business decisions.

The Four Elements

There are four elements highlighted in the diamond that are going to be taken into consideration. Those four points are listed below –

  • Factor Conditions
  • Demand Conditions
  • Firm Strategy, Structure, and Rivalry
  • Related and Supporting Industries

While these are the four main factors that are going to be weighed within the diamond, there are two other elements that should not be ignored according to the diamond’s creator, Michael Porter.

The four Factors in Porter's Diamond Model

Those points are Chance, and Government Policy. These two don’t fit within the diamond, per se, but rather they sit on the outside holding influence over all of the four points listed above.

Factor Conditions

This first point within the diamond relates to all of the resources that are available to you as a function of your location. There are a great number of factors that fall under this umbrella such as the human resources available, the physical resources, capital, infrastructure, and more.

Factor Conditions

Naturally, different countries will have significantly different factor conditions in all of these categories and more, so operating in a place that is suitable for your business needs is a huge advantage. While all of the factors are important, it may be the human resource that is most important of all. Without the availability of people who can successfully complete the work required, you will have difficulty competing in your chosen market.

Demand Conditions

Is there a high demand for your products and services in your home market? If so, you may be able to use that demand to quickly grow your business and develop new and innovative products. By having to rise above competition at home, you will have an advantage when you then set out to compete overseas as well. The battle for market share in a high-demand arena within your own country is going to force your company to be its best, and that pressure is exactly what you need in order to prepare the company for great performance in other nations.

Firm Strategy, Structure, and Rivalry

In some ways, this point relates to the previous point on demand. When demand is present, there is usually rivalry with other firms – and that rivalry often brings out the best in everyone.

Firm Strategy, Structure and Rivalry

Also, the strategy and structure of your business, meaning the way the business has been set up and the goals of the organization, will impact success as well. Are you set up to expand quickly and compete in other countries? Is that something that is even on your radar at this time?

Related and Supporting Industries

This is one of the biggest keys when you are thinking about being able to compete on a global stage. Within your own country, are there the supporting industries in place to help you rise to the top of the market? You will almost certainly need to purchase inputs from another business in order to create your product – can you get those quality inputs for a fair price and on a reliable basis? The infrastructure within your company as far as supporting industries are concerned will have a lot to say about your potential success.

Organizational Infrastructure and Porter's Diamond

Companies who are operating in an area with a lacking assortment of supporting industries will find it difficult to compete with firms in other countries that are working with a better set of supporting firms. This is often why specific markets tend to have all of their major players clustered in one specific area. Once the related and supporting industries are in place, those companies hold a high degree of influence over the market as a whole.

Government and Chance

As you would assume, the influence of government can play a huge role in how you are able to success within your market. The conditions of your home market, the influence of taxes (both domestic taxes and taxes on trade), and much more can be influenced by decisions that are made within the government. It isn’t just the federal government that you need to worry about, either – decisions made at all levels of government have the potential to greatly impact your bottom line both this year and for years to come.

External Elements

On the point of chance, it should be understood and recognized that there is an element of luck involved with succeeding in business. Many factors that impact your prosperity are outside of your control, and while these issues cannot be changed, they should at least be monitored so you can make decisions as necessary to adapt to changing market conditions.

The business world becomes more and more global with each passing day. As technology makes it easier to communicate with those on the other side of the world, and improved travel makes it easier to physically reach a market thousands of miles away, the barriers that once stopped companies from competing overseas are quickly being torn down. Even if you operate a relatively small business, there is a good chance that you are influenced in some way by the forces of the global market. Using Porter’s Diamond, you should be able to gain a better understanding of exactly how your home nation impacts what you can do as a company both today and for years to come.

Key Points

  • Porter’s diamond is an economic model developed by Michael Porter that aims to explain why particular industries become competitive in particular locations.
  • There are four elements highlighted in the diamond: factor conditions, demand conditions, firm strategy, structure, and rivalry, and related and supporting industries.
  • There are two other elements that sit outside of the diamond and influence the four factors. These are are Chance, and Government Policy.
  • Factor conditions are human resources, physical resources, knowledge resources, capital resources and infrastructure.
  • Demand conditions can help companies to innovate faster and to create more advanced products than those of competitors.
  • Related and supporting industries can produce inputs that are important for innovation and provide cost-effective inputs.
  • Firm strategy, structure and rivalry creates pressure to innovate in order to upgrade competitiveness.
  • Government interventions the supply conditions of key production factors, demand conditions in the home market, and competition between firms.
  • Chance events are important because they create discontinuities in which some gain competitive positions and some lose.
  • Using Porter’s Diamond, you should be able to gain a better understanding of exactly how your home nation impacts what you can do as a company both today and in the future.

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