Porter's Diamond of National Advantage is a model developed by Michael Porter and this model helps in understanding the comparative position of a nation in global competition. This model can also be used for major geographic regions of a single country.
Traditionally, economic and international trade theories indicates below factors for comparative advantage for regions or countries:
- Natural resources (minerals, energy)
- And Local population size
Michael E Porter says that nations or sustained industrial growth can create new advanced factor endowments like skilled management and labor, advance technology, government support and culture. He used a diamond shaped diagram to illustrate the determinants of national advantage.
According to Porter competitive advantage of different nations is dependent on or the outcome of 4 interlinked activities and advanced factors.
The points of the diamond are discussed as below:
1. Factors Conditions
Factors conditions refer to different important factors in a country with respect of trade and business. Every country creates its own factors such as skilled and well trained staff/ labor, well organized resources and up to date technologies. The important consideration is that these factors should be upgraded / deployed over time to meet the dynamic demands of international trades and customers. Force innovation is local disadvantage of factor of production. Labor shortage, scarce raw materials and other adverse conditions force a nation or company to develop new methods, and this innovation often results in competitive advantage.
2. Demanding Conditions
When the local market of a particular product is larger than foreign market, the local companies devote more resources and attention to that product. This finally may lead to a competitive advantage when companies start exporting the product. Simply a more demanding local market leads to national advantage. If local market of a company is strong trend setting it helps the companies to anticipate
3. Relating & supporting instructions
When local supportive industries are competitive this local competition creates innovations and cost effectiveness for the firm. And this become more strengthen when the supplier of a company facing global competition.
4. Firm Strategy, Structure & Rivalry
Local conditions of a country always affect firm strategy, for example Italian companies tend to be smaller and run just like the extended families. So all local as well as international companies makes their strategies keeping in view there targeted customers, government policies and laws, and international operating companies also need to know about tariffs and custom duties. Local rivalry forces also gives competitive advantages like low factors cost to different firm.
The diamond as a system
The diamond national advantage system works like a common system. And a system achieves its goal by means of interrelated components. Same like that diamond system have four interrelated components to gain national and competitive advantage. Every single factor of diamond system has its impacts on all other three components.
Government rules and regulations also play a vital role in Porter's Diamond of National Advantage. For example government encourages a firm to raise its product standard by imposing strict product standards. Government of a country can also stimulate early demand for technological advanced products.