Micheal porter, a recognized authority on corporate strategy and economic competition, developed an economic model for businesses to help them understand their competitive position in global markets. This model is also known as Porter’s diamond theory of national advantage. the model helps to understand the competitive advantage nations or groups possess due to certain factors available to them and also explains how governments can act as catalysts to improve a country’s position in a globally competitive economic environment.
the factors which lead to the comparative national advantage of a nation or a particular industry are –
- FACTOR CONDITION – A country in order to gain a competitive advantage should not rely on inherited factors only. Factor conditions in a country will not gain a competitive advantage until and unless they are upgraded and deployed in an effective way. By upgrading its technological base, labour skills etc. a country develops new efficient ways of managing operations.
- DEMAND CONDITIONS – A strong demand for a particular product in the home market, forces a firm to produce goods efficiently at low cost with a huge output which a foreign firm may not do instantly. Proactive response to demand conditions in home market enables a firm to easily understand the trends of demand in a foreign market also. Because of efficiency in production and knowledge of trends in market companies in a country may not find it difficult when they enter the foreign market. this provides a competitive advantage to industries in a particular country.
- RELATED AND SUPPORTIVE INDUSTRIES- If a company has various options available for its inputs, it means that related and supportive industry is competitive and efficient. companies enjoy getting cost effective, high-quality innovative inputs which ultimately makes local companies far more better than companies in other countries.
- FIRM STRATEGY, STRUCTURE AND RIVALRY- this is related to the way in which a firm is organised and managed. The kind of hierarchy a company follows affects operations of a company like German companies tend to be hierarchical while Italian companies tend to be taller and extend like families. the kind of interdepartmental competition when one department tries to excel from other department helps a company to be competitively more efficient. This helps a country get a comparative advantage.
Apart from these four variables, Micheal Porter also includes Government and chance variable which also affect firms in a country to advance (positively and negatively).
5. GOVERNMENT- Governments can play a powerful role in developing the industries in the nation.Governments finance and construct infrastructure (roads, railways, airports,) and invest in education and healthcare. Strict regulations for industries, easier norms for clearing applications, better facilities for exporting product, check on unethical practices etc.
6.CHANCE- Micheal Porter provides that new companies with innovative products must be given proper guidance and facilities to establish and grow. Given the chance, a startup can prove to be a boon to the industries and may revolutionise technological developments.
For MCQs on Porter’s Diamond Model