Framework Author: Michael E.
Porter
Year of origin: 1990
Originating Organization: The Competitive Advantage of Nations Book
Objective (Edit by Souvik)
The Porter’s diamond model is used to understand the competitive advantages and disadvantages a
country or organization has in any field. It can be used to understand the suitable measures that can
be taken by the country or organization to improve its performance.
Executive summary (Edit by Kapil)
The Porter Diamond model is a strategic economic model that tries to explain why one nation-state
is more successful in a given industry than another. Four determinant elements must be present,
according to the model, for an industry to have a national competitive advantage.
The following are the four elements:
• Factor conditions • Demand conditions • Related and supporting industries • Firm strategy,
structure, and rivalry
Furthermore, government policies, as well as chance, can influence whether or not an industry
develops a competitive edge.
Description (Edit by Kapil)
Introduction
Michael Porter's Diamond Model, often known as the Porter Diamond Theory of National
Advantage, was first published in his book, The Competitive Advantage of Nations, released in 1990.
It's a model for determining a country's or group's competitive edge in a specific industry.
Businesses frequently employ the model to assess the external competitive environment. This data
can then be used to demonstrate how one firm compares to another. It also explains why some
industries in each region are more favourable than others and how governments can act as catalysts
to help a country enhance its position in a globally competitive economic climate.
Porter uses the model to try to address the following questions:
1) What causes one country to become the most competitive in a certain industry? Porter refers to
this as "becoming the home base" in his model. Consider the following scenario:
2) China is a major producer of electric vehicles.
3) Consumer gadgets are made in South Korea.
4) What allows enterprises from a single country or region to maintain a competitive advantage in a
certain industry?
The answers to these questions are the determinants of competitive advantage in the Diamond
Model.
The model
Porter claims that a company's ability to compete on a global scale is largely determined by an
interconnected set of location advantages that certain industries in different countries have, namely:
Firm Strategy, Structure, and Rivalry; Factor Conditions; Demand Conditions; and Related and
Supporting Industries. When these conditions are favourable, domestic enterprises are compelled to
innovate and update on a regular basis. When going international and competing against the world's
largest competitors, the competitiveness that results from this is beneficial and even vital.
The model also reveals that two additional factors, chance and government, can influence any or all
of the four basic factors. They work together to create a national ecosystem in which businesses can
grow and learn how to compete.
Understanding the Diamond Model
It is a model of economic theory that quantifies a country's or region's beneficial advantages over
other nations and offers it a competitive advantage over others in terms of growth.
According to the Porter Diamond, countries can develop new factor advantages for themselves, such
as superior manufacturing technologies, skilled labour, and efficient human resources,
technologically advanced industries, and favourable government policies that support and elevate
the country's economy several notches higher.
Natural resources, population, land, and location are among the primary factor on which the country
can rely for economic growth.
The 4 factors of PDM Strategy
1. Factors
The various types of resources that may or may not be present inside a country are referred to as
factor conditions. Human resources, capital resources, natural resources, infrastructure, and
knowledge resources are all examples of resources.
We must distinguish between basic and advanced factor conditions in order to comprehend the role
of factor conditions. Natural resources and unskilled labour are two important variables. Some
countries, for example, have abundant natural resources such as oil (Saudi Arabia). This helps to
explain why Saudi Arabia is one of the world's greatest oil exporters. Advanced variables include,
among others, trained personnel, expert knowledge, and capital.
Basic factors, according to Porter, do not provide competitive advantage because they can be
acquired by any organisation. Advanced factor conditions are the only way to gain a competitive
advantage.
It's critical that the advanced factor conditions that have been produced are constantly upgraded
through the development of new abilities and the creation of new information. The presence of
world-class institutions that first build specialised factors and then endeavour to upgrade them
results in a competitive advantage. As a result, nations succeed in industries where they excel at
factor generation.
As an example of an advanced factor, IITs & NITs in India produces graduates with very good IT skills.
This, in turn, feeds an IT competitive advantage for India which can be seen by the dominance of
Indian IT industries
2. Demand Conditions
The level of beneficial industries inside a country is mostly determined by domestic demand. A wider
market means more obstacles, but it also offers more chances for the organisation to develop and
improve. In fact, the more demanding home market customers are, the greater the pressure on
corporations to innovate and improve. Companies that strive to serve a demanding domestic market
are propelled to new heights and may acquire early insights into future client wants across borders.
Nations have a competitive advantage in businesses where local customers provide a clearer or
earlier image of future buyer demands, and where demanding customers force enterprises to
innovate faster and attain longer-term competitive advantages than their international competitors.
3. Related & Supporting Industries
One industry's success may be influenced by the success of linked industries or suppliers.
The presence of internationally competitive suppliers within a country can be beneficial to the
businesses that use them. This is due to the fact that it allows for the most cost-effective access to
inputs. In addition, it provides early access to new items and stimulates information exchange.
When a country's suppliers are also global rivals, the country's companies profit the most. Creating
strong related and supporting sectors that help domestic companies become globally competitive
can require years (or even decades) of hard effort and investment. However, once these variables
are in place, their existence can often benefit the entire region or nation. This can be seen in India's
Silicon Valley, Bangalore, where a variety of IT giants and start-ups have gathered to share ideas and
promote innovation.
Having a large number of connected industries in a country typically leads to the creation of new
industries. This occurs when allied industries can pool their resources. Automobile manufacturers in
Germany, for example, may share access to a wind tunnel. Because it raises the barrier to entrance,
the usage of shared resources inside a country can provide a competitive advantage.
4. Firm Strategy, Structure & Rivalry
The competitiveness of a country's businesses is determined by how such businesses formulate their
strategy and organise themselves. The amount of competition between enterprises in an industry
also influences competitiveness.
Firms are structured differently in different countries, as are their purposes. A variety of social,
political, and legal variables will influence it.
Domestic competition is also important for international competitiveness because it drives
organisations to create distinctive and long-term strengths and capabilities. Companies are
compelled to innovate and improve to keep their competitive advantage as domestic competition
becomes more intense. In the end, this will only benefit businesses when they reach the global
market. The Japanese automobile industry is a notable illustration of this, with fierce competition
between Nissan, Honda, Toyota, Suzuki, Mitsubishi, and Subaru. They have been better able to
compete in global markets as a result of their own tough home competition.
5. Government
In Porter's Diamond Model, the government serves as a "catalyst" as well as a "challenger." Porter
opposes a free market in which the government leaves everything to the invisible hand in the
economy. Porter, on the other hand, does not consider the government to be a crucial industry
backer also. Companies, not governments, can build competitive industries. Governments, on the
other hand, should promote and push businesses to elevate their goals and achieve even greater
levels of competitiveness. This can be accomplished by increasing early demand for sophisticated
items (demand factors), focusing on specialised factor developments such as infrastructure,
education, and health care (factor conditions), boosting domestic competition by enforcing antitrust
laws, and fostering change.
Thus, the government can aid in the growth of the four aforementioned variables in a way that
benefits a country's industry.
6. Chance
Despite the fact that Porter did not mention anything about chance or luck in his writings, the
Diamond Model frequently includes the role of chance as the potential that external events such as
war and natural catastrophes might negatively or positively affect a country or business. Random
events, such as where and when key scientific breakthroughs occur, are also included. These
incidents are beyond the government's or private firms' control.
An example of this can be the effect of COVID-19 lockdowns & restrictions on tourism & hospitality
sectors in India
Image: Porter’s Diamond Model
Diagram: Porter’s Diamond Model Relations (Created via doc.io software)
What is the significance of Porter's Diamond?
a) Recognizing the market's competitive rivalry
The Diamond Model aids businesses in analysing direct and indirect market rivalry in a very effective
and efficient manner. From who they are, how many of them there are, the quality of their products
and services offered, their level of customer service and overall experience, their pricing strategy,
sales strategy, and market strategy, as well as their future plans in the pipeline, and the nature and
features of their products offered.
If the competition is fierce, the company must be aggressive in its approach by developing products
that are novel in concept and innovative in nature, lowering prices by offering discounts to
customers, planning, designing, and implementing ground-breaking marketing and promotional
strategies, and providing the best level of customer service. All of this contributes to the company's
overall growth and development by retaining existing clients and transforming them into loyal ones,
as well as attracting new customers.
b) Suppliers’ Power: What You Should Know
Suppliers who provide the essential raw materials for industrial purposes play a significant role in the
company's growth and development ecosystem. The Porter's Diamond model can help you figure
out how many suppliers you have, how many of them are potential suppliers, how unique is their
product, how good is their customer service to your company, do they cater to your competitors as
well, what their prices are, and how effective switching from one supplier to another will be.
If you have the choice to choose from a large number of suppliers in the market, you will be able to
purchase a cheaper raw material; but, if there are fewer suppliers in the market, their position is
strong, and they have the power and capacity to charge you more. All of this has an impact on your
profit margins and pricing plans.
c) Buyers' Power: What You Should Know
The Porter's Diamond model can help you figure out how many buyers you have, how big their
orders are, whether they are loyal to your brand, whether they are powerful enough to dictate their
terms to you, and what influence switching from you to a competitor brand will have on them.
When there are few buyers for your product options, they have more power. And as the number of
buyers on your list grows, so does your ability to command a higher price.
d) Recognizing the threat of replacement
Substitution is always a threat to your organisation, and it can have a negative impact on your
earnings and revenue growth. For example, if you've been selling home appliances at your physical
store for a long time and now, thanks to the internet and social media, your consumers are ordering
the appliances through online portals that guarantee doorstep delivery at lower prices while saving
them time and money. Understanding this, you must rethink your complete business strategy to
remain relevant in the market as market dynamics change.
e) Recognizing the threat of new entrants in the market
Existing players as well as new entrants to the market pose a constant danger of competition. This
Diamond Model focuses on the threat of new market entrants, including their industry presence,
types of products offered, price strategies, the factor of innovation, and other important details.
Case Study (Edited by Souvik)
Introduction
The origins of sports equipment India's industry may be traced back to Pakistan's Sialkot. Following
partition in 1947, an entrepreneur from one group wanted to relocate from Sialkot. Along with the
businesses, the labourers from that community also relocated. According to the Indian government's
resettlement plan, these migrants first settled in Batala, but eventually relocated to Jalandhar.
(United Nations Industrial Development Organization, 2001, p.3). The essential raw material was
readily accessible in Jalandhar. Some of the refugees relocated to Meerut, where the essential raw
materials were also accessible.
Punjab and Meerut have emerged as the key hubs for sports goods manufacturing, and the sports
goods sector in Punjab looks to be the sole industry with any potential. Meerut is yet to rise to
prominence.
Jalandhar has developed into a key centre for the Indian sporting goods sector. The second biggest
cluster of sports goods production is in Meerut, Uttar Pradesh, while the third largest cluster is in
Gurgaon, Haryana.
Observations:
The purpose of this study is to utilise the Diamond model to examine the position of the sports
goods cluster in Jalandhar in terms of the availability of competitive advantage drivers.
Let us look at the factor conditions one by one:
1. Human Resources: Jalandhar's sports goods cluster employs labour-intensive processes. It
employs 5000 highly skilled and competent individuals for manufacturing and allied activities. This
figure represents the number of permanent employees employed by the registered businesses.
Aside from that, numerous unskilled and semi-skilled employees are employed in unregistered units,
as well as domestic workers who work at home. According to SGS data, the cluster has a total of
10000 employees.
After deeper investigations it is discovered that the cluster's businesses employ fewer than ten
people. The major motivation is to circumvent the requirements of the Factories Act of 1947.
Furthermore, because of the seasonal need for sports items, the companies do not hire permanent
employees, instead appointing staff as needed. When demand grows, job workers are assigned to
meet the need. Furthermore, the cluster's presence of subcontractors ensures that items are
available as soon as need arises.
2. Physical Resources: Jalandhar was determined to be an ideal site for producing sports products
due to its proximity to the Himalayan foothills, which ensured a steady supply of wood, and the
presence of a leather cluster, which ensured a steady supply of leather. Both of the needed raw
materials are readily available in Jalandhar.
3. Knowledge Resources: Within the cluster, there is a scarcity of knowledge resources. Human
resource development activities are observed to be absent from the cluster. Most businesses do not
provide training to their employees because they believe that the workers have inherited abilities
from their forebears and that training is unnecessary. In the cluster, there isn't a single training
institute. It was discovered that a few industrial groups in the cluster have arranged occasional
training programmes in which only active members of the cluster participate, but non-members do
not wish to send their staff for training.
4. Capital Resources: It was discovered that the cluster operates entirely on its own financial
resources (Cash Reserves), and those enterprises have no financial difficulties. It might be because of
the high rate of interest on loans, but the primary element contributing to the smaller difficulty of
finance is the majority of enterprises' low fixed capital base. Because most of a firm's activities are
skill-based, the need for fixed capital is limited, and most enterprises rely on their own resources.
5. Infrastructure: In terms of infrastructure, all states and the country have adequate road and rail
connectivity with Jalandhar, allowing for simple movement of raw materials and completed goods.
Furthermore, the vicinity of the Amritsar airport (60 km) ensures import and export from other
countries.
Demand Conditions: a Porter's categorization of demand circumstances will be utilised to assess the
sports goods cluster in Jalandhar in terms of determining competitive advantage. The local and
foreign markets for sporting products may be classified into two categories. Government
departments, local clients, and educational institutions are the primary buyers in the domestic
market. Foreign clients, government departments, corporations and organisations from various
nations such as the United Kingdom, Australia, the United States, South Africa, France, and Germany
are the key customers for the international market.
Related Supporting Industries: Within the cluster, raw material and machinery providers are
accessible. The cluster's raw material sources supply both natural and man-made materials. There
are a number of facilities in the cluster that supply raw materials to the producers. These raw
material providers are located in the Basti Nau and Basti Sheikh core cluster locations. It has been
discovered that raw material suppliers do not give any technical assistance to enterprises in the area
of innovation, and are just concerned in the sale of their product.
Firm Strategy, Structure and Rivalry: Jalandhar's sports goods cluster is made up of micro and small
businesses. There are no medium or large-scale businesses in the cluster. The cluster's businesses
have all existed since India's independence. The firm is run by the founder's descendants for the next
two or three generations. Apart from migrants' units, numerous new enterprises are identified to be
members of the cluster in this analysis. New entrepreneurs generate new ideas, and their vision,
style, and operation differ from those of older businesses. The majority of the businesses in the
cluster are family-owned and operated as sole proprietorships or partnerships. Family members or
friends make up the partnership companies' partners. It allows businesses to make more
autonomous decisions and take greater risks.
Rivalry is reported to be quite high in the Jalandhar cluster due to the presence of a large number of
enterprises in one location. The existence of a high number of rivals in the cluster encourages all
enterprises to pay attention to what each other is doing and to strive to adopt the best approach for
dealing with the competition.
Government: Various policies for the sports goods business have been developed by the federal
government and the Punjab government. The majority of policies are geared on promoting product
exports, while there is none geared toward promoting the sports goods cluster. In terms of the local
market, it has been discovered that the Government of Punjab has just one policy in place to provide
incentives to domestic businesses. It has been noticed that although exporters are pleased with the
government's incentives, local players are unsatisfied with the government's participation. The
United Nations Industrial Development Organization (UNIDO) did research on the sports goods
cluster in Jalandhar in 2001 and discovered that the government had offered help to exporters for
the development of exports, but no support was provided to the domestic market. It demonstrates
that, despite the passage of ten years, the government has made no steps to assist domestic
businesses.
Several businesses have stated that the government announces policies but never implements them.
For example, the Punjab government proclaimed a 1% freight subsidy, but it has never been
distributed to businesses. Some businesses appear to be completely oblivious of the government's
initiatives. To foster the cluster's growth and development, the government will need to take a
number of steps.
Chance: It has been discovered that Jalandhar's sports goods cluster has benefited from random
incidents. The cluster's position in the Himalayan foothills assures a steady supply of wood, which is
an important raw resource for the cluster. Furthermore, efficient rail and road connections ensures
that raw materials are readily available and completed items are delivered to the target market.
The application of the Diamond model to the Jalandhar sports goods cluster may be seen as follows:
Based on above analysis, the present study suggests various strategies to upgrade the competitive
advantage of sports goods cluster of Jalandhar:
Human Resource Development: A It has been discovered that the cluster is experiencing a skilled
labour shortage. Furthermore, the majority of businesses do not provide training to their employees.
Workers must be trained to operate machines since the industry requires them to adapt to new
technologies. Because of their averseness to face the cost of training, the majority of the enterprises
in the cluster refuse to provide training to their employees. To meet the demands of the cluster, the
public and private sectors should collaborate to build specialised training institutes.
Promotion of domestic products: It has been revealed that there is a skilled labour shortage in the
cluster. Furthermore, the majority of firms do not give staff training. Because the sector expects
workers to adapt to changing technology, they must be taught to operate equipment. The bulk of
the businesses in the cluster refuse to give training to their staff because they are afraid of the costs.
The public and commercial sectors should combine to develop specialised training institutes to
satisfy the cluster's needs.
Initiatives by the Government: Many of the companies in the cluster appear to be unaware of the
different rules governing the sports business. Interactions with industry groups and Business
Development Service providers can assist the government in disseminating information to all of the
cluster's enterprises. The government should host a series of seminars and workshops to offer
information about the policies and their advantages so that as many businesses as possible may
profit from them. Government's task does not end with the formulation of a policy; it must also
guarantee that it is implemented. The duty of ensuring timely policy execution should be delegated
to a distinct government department. This agency should also solicit input on the policy from
businesses to ensure that it achieves the goal for which it was created. Furthermore, this input
should be utilised as a guideline for developing new regulations or updating current ones. The
government should also guarantee that all departments engaged in policy implementation are kept
up to date in order to ensure that policies are properly implemented.
The government should build an information centre as part of the Cluster Development Program,
where all the newest information on technology, innovation, and raw materials may be found. Each
business in the cluster should be given this information so that they are informed of the most recent
advancements.
A variety of trade shows and exhibits are held in various locations across the world. Various
exporters are receiving assistance from the Sports Goods Export Promotion Council in order to
participate in sports fairs. However, this assistance is only available to its registered members. But a
number of microbusinesses do not engage in such events, hence the government should offer
financial assistance to these small businesses so that they may attend trade fairs.
It has been observed that all sporting equipment certified by international federations is used in
international events. However, the cost of such accreditation is prohibitively expensive for most
businesses. The government should subsidise the expense of obtaining certifications for the
company.
Setting up Special Economic Zones: The cluster of Jalandhar should be designated as a Special
Economic Zone. The designation of the cluster as a Special Economic Zone will aid in export
promotion. A considerable amount of investment from both the local and international markets will
be attracted. Infrastructure facilities may be quickly constructed, allowing for the advancement of
existing technologies as well as the rapid acceptance of new ideas. Better infrastructure will attract
new businesses, resulting in the development of new jobs.
Establishment of Business Development Cell and Research Institutes: In the cluster, a Business
Development Cell should be developed, with at least some full-time specialists recruited. These
specialists should focus on gathering the most up-to-date knowledge about the global market. The
government of India may support the cell through the Sports Goods Export Promotion Council or the
Cluster Development Scheme.
Several research institutes or universities should be formed to assist the cluster in improving its
research operations. Apart from that, the Punjab Government's Department of Industries should aid
the cluster in obtaining assistance on inventions from other research institutes outside the cluster.
Conclusion: After evaluating the many factors of competitive advantage using Porter's model, we
can infer that the Jalandhar sports goods cluster is mostly dependent on factor circumstances, such
as raw material availability and skilled labour. Aside from that, the cluster's expansion is aided by the
presence of sophisticated customers, machinery suppliers, and rivals. In order to upgrade
competitive advantage from fundamental factors of production, the cluster must focus on
generating specialised and advanced factors. Furthermore, the cluster can benefit from the timely
and successful execution of government policies and objectives.
Summary (edit by Souvik)
According to the Porter Diamond model, nations may develop new factor advantages for
themselves, such as a strong technological industry, trained workforce, and government economic
backing. Most conventional theories of global economics vary in that they highlight aspects, or
attributes, that a nation or area has intrinsically, such as land, location, natural resources, labour,
and population size, as the key drivers of a country's competitive economic advantage. Another
usage of the Porter Diamond is in business strategy, where it is used as a framework to assess the
relative benefits of investing and operating in different national markets.
In Porter's Diamond framework, these interconnected advanced criteria for Competitive Advantage
for nations or regions are:
Strategy, Structure, and Rivalry in the Firm (The world is dominated by dynamic conditions, and it is
direct competition that impels firms to work for increases in productivity and innovation)
Supply and Demand (The more demanding the customers in an economy, the greater the pressure
facing firms to constantly improve their competitiveness via innovative products, through high
quality, etc)
Associated Supporting Businesses (Spatial proximity of upstream or downstream industries
facilitates the exchange of information and promotes a continuous exchange of ideas and
innovations)
Factors Conditions (Contrary to popular belief, Porter contends that "key" production factors (or
specialised factors) are generated rather than inherited.) Skilled labour, money, and infrastructure
are all specialised production inputs. Unskilled labour and raw materials, for example, are "non-key"
or "general use" variables that may be purchased by any firm and hence do not provide a sustainable
competitive edge. Specified elements, on the other hand, necessitate a significant and long-term
commitment. Duplicating them is more complicated. This provides a competitive edge since these
qualities are useful if they are difficult to copy by other organisations.
In Porter's Diamond Model, the government's job is to "serve as a catalyst and challenger,
encouraging- or perhaps forcing- enterprises to elevate their goals and advance to greater levels of
competitive performance." They must encourage businesses to improve their performance,
generate early demand for innovative products, focus on specialised factor development, and drive
local competition by restricting direct collaboration and implementing anti-trust laws. After doing
research on 10 prominent trade nations, Porter proposed this approach in his book, The Competitive
Advantage of Nations. The model was the first theory of competitiveness to focus on the reasons of
company productivity rather than traditional comparative advantages like natural resources and
labour pools.
Here we have also shown the study of the sports equipment manufacturing industry in Jalandhar.
We have critically analysed the current state of the industry in light of the Porter’s Diamond model.
We have identified the issues and suggested solutions for the same in our case study.
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