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• Acc to Heckscher-Ohlin theory and Comparative Advantage
theory

• E.g. A nation uses its resources very productively… BUT HOW?

• Above theories give only Partial Explanation to the Question.

• Porter’s Diamond Model is used to solve this puzzle

• Developed in 1990, by Michael Porter of the Harvard Business

School.

• Porter theorizes 4 Broad attributes – Factor Endowment, Demand

conditions, Related/Support industry, Firm Strategy and rivalry.

• Additional Variables that influence are Government and Chance

PORTER’S TWO MONOGRAPHS
Porter conducted a comprehensive study on
10 leading nations to learn what leads to
competitive advantage to nation’s.

• United States • Japan

• Germany • Korea
• Italy • Denmark
• Sweden • Singapore
• United Kingdom • Switzerland
Competitive Advantage of Nation’s
• Michael Porter* describes four keys to a nation’s
competitive advantage in relation to other countries

• Factor Endowments
• Demand conditions
• Related and supporting industries
• Firm Strategy, Structure and Rivalry.

* Popularly referred to as “Porter’s Diamond”

 Porter’s Diamond
Determinants of National Competitive Advantage
Co
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Go Structure and ac
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Factor Endowments Demand Conditions

Co Related and
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FACTOR CONDITIONS:
• BASIC FACTORS – Natural resources, climate, location and demographics

• ADVANCE FACTORS – Communication Infrastructure, skilled labour, Research facilities and so

on.

• Basic factors can provide only an initial advantage

• They must be supported by advanced factors to maintain success.

E.g.
• Switzerland was the First country to experience labour shortages. They abandoned labour-
intensive watches and concentrated on innovative/high-end watches.

• Japan has high priced land and so its factory space is at a premium. This lead to just-in-time
inventory techniques.

• Sweden has a short building season and high construction costs. These two things combined
created a need for pre-fabricated houses.
 DEMAND CONDITIONS:
• Home country Demand plays an important role in producing
competitiveness.

• Enables better understand the needs and desires of the customers

• It shapes the attributes of domestically made products and creates

pressure for innovation and quality.

E.g. 1
• Italian ceramic Industry after the world war II
• There was a postwar housing BOOM !!
• Consumers wanted cool floors because of Hot climatic conditions
E.g. 2
• Japan’s knowledgeable buyers of cameras made that industry to
innovate and grow tremendously
E.g. 3
• The French wine industry. The French are sophisticated wine
consumers. These consumers force and help French wineries to
produce high quality wines.
RELATED AND SUPPORTING INDUSTRIES:
• Benefits of investment in advanced factors by Suppliers and
related industries can spill over

• Creates clusters of supporting industries, thereby achieving a

strong competitive position internationally.

E.g.1
• The enamel production unit was available.
• The glazes production was also favorable.
• These two were the main composition of producing tiles.
• This reduces the Transportation cost.

E.g. 2
• Switzerland success in pharmaceutical industry is closely
related to its international success in technical dye industry.
FIRM STRATEGY, STRUCTURE & RIVALRY:

• Long term corporate vision (Strategy) is a determinant of success

• Ability of the companies to develop and sustain a competitive advantage

requires the 4th attribute.

• Presence of domestic rivalry improves a company’s competitiveness

E.g. 1
• Low entry barriers to market in the tile industry
• Rivalry became very intense
• Breakthroughs in both product and process technologies

E.g. 2
• Japan has high priced land and so its factory space is at a premium

• This lead to just-in-time inventory techniques

• (Japanese firms can’t have a lot of stock taking up space, so to cope with the
potential of not have goods around when they need it)

• They innovated traditional inventory techniques.

• Chance Events such as major innovations, can reshape
industry structure
• Government – Policies – Can detract from or improve national
advantage
• Regulation can alter home demand conditions
• Government investment in education can change factor
endowment.
E.g.
• 1991 – US Govt – Tariff on Japanese imports of LCD screens
• APPLE and IBM – Protested strongly
• Japan – The low cost LCD manufacturer
• Increase the LCD screens as well as Laptops in the global market – Reduce
the Market Share.
• Countries should be exporting products from those
industries where all four components of the
diamond are favorable.

• while importing in those areas where the

components are not favorable.
PORTER DIAMOND - CRITISICM

• Government can influence on any four components

of the diamond.

• Porter developed this paper based on case studies

and these tend to only apply to developed
economies.
• Analysis of Korea’s Competitive Advantage with
Michael E. Porter's Diamond Framework

• Korea - New developed countries - Information and

Telecommunication.
 FACTORS CONDITION
• Korean Government- continuous effort
- Improvement in IT infrastructure,
- Facilitating the usage of information technology,
- Favorable environment for development of IT industry

• Over 90% of nation area is wired with broadband internet network

• IT workforce in Korea accounted for 447,000 (2.1% of total workforce).

• Overall level of education in Korea is relatively high

• Korean government support educational institutions related to IT skills

• Supply of quality of IT workforce is expected to increased.

• DaeDeok Valley- an important IT cluster -Attracts foreign
investment

• Several joint research and development projects with well-known

foreign companies and universities.

• Through export of CDMA technology- solid network among the

south Asian nations is established.
• High computing and Internet penetration rate since 1998.

• Large user base of Internet - sophisticated internet usage

• IT effectively used - individual level, Business & government sectors

• The competitive market situation - Forcing market players - higher

quality service at cheaper rate to users.

• Korean government’s effort to develop IT industry - Privatization and

Market Deregulation in Telecommunication market.

• Encouraged fair market competition in Telecommunication market

 Resulting in lower price ,better quality, better service and
created favorable business environments for business.

• E-commerce exceeded 45 billion USD and Projected a growth rate of

9% per year
 RELATED/SUPPORTING INDUSTRY

• Korea has secured leading position in semiconductor market

especially for DRAM (Dynamic Random Access Memory) - DDR
RAM and SD RAM

• Cheap and Quality Hardware production units available.

• IT Enabled Services like BPOs and KPOs – Yantram Solutions

• Korea ranks itself in top manufacture in LCD and Mobile phone,

example – LG group, Samsung group, Doosan Group, DiaBell.

• Korea - the leading position in IT related production

 RELATED/SUPPORTING INDUSTRY
(cont.)

• The proactive effort - R&D and market expansion, as well as

government support are expected.

• Korean government plans to extend its financial support for R&D

especially in 10 core technologies

• Initiated several huge project with private sectors

 FIRM STRATEGY AND STRUCTURE

• Korea - favorable business environments

- Quick registration process,
- Lower entry barriers in IT industry,
- Lower cost using telecommunication infrastructure,
- Diverse capital resources
- Government supports

• These activities result in huge number of small, medium-sized venture

company in IT industry

• And Hence it leads to severe domestic rivalry because of market

competition.

• Encourages the continuous development of Innovative technology and

improvement of business models in business sectors.
RECAP
GLOBAL COMPETITIVENESS INDEX(GCI)

• Tool for benchmarking country strengths &

Weaknesses.
• Professor Jeffery Sachs introduced it in 2000.
• Country rank depends on 12 parameters.
PARAMETERS

• Institutions : Provide the framework within which individuals, firms &

Government interact to generate wealth in the economy.

• Infrastructure: Transportation, Communication network.

• Macroeconomic stability: Inflation, Interest rate, Fiscal deficit.

• Health and Primary Education

• Higher education and training

• Good market efficiency: Healthy market competition

• Labor Market Efficiency: Labors are allocated to most efficient use
in the economy.

• Financial Market sophistication: To allocate resources to most

productive uses.

• Technological readiness: Ability to which an economy adopts

existing technologies to enhance the productivity.

• Market size: Demand of the country’s goods and services.

• Business sophistication: means quality of country’s overall

business networks as well as the quality of a individuals firms’
operations & strategies.

• Technological Innovation: sufficient investment ion R&D.

Country Rank(2008) GCI Score (2008) GCI rank (2007)

US 1 5.74 1

Switzerland 2 5.61 2

Denmark 3 5.58 3

Singapore 5 5.53 7

Japan 9 5.38 8

France 16 5.22 18

China 30 4.7 34

India 50 4.33 48

Brazil 64 4.13 72
SUB INDEXES OF GCI

• Basic requirements Sub Index : Institutions,

Infrastructure, Macroeconomic stability, Health and
primary education
• Efficiency enhancers sub index: Higher education
and training, Good market efficiency, Labor market
efficiency, Financial market sophistication,
Technological readiness, Market size.
• Innovation sub index : Business sophistication,
Technological Innovation
 COUNTRY’S STAGE

Factor driven Efficiency driven Innovation

Stage(%) stage(%) driven stage (%)
Pillar group
Basic 60 40 20
requirements
Efficiency 35 50 50
Enhancers
Innovation factors 5 10 30
FACTORS AFFECTING STAGE

GDP Per Capita

Share of primary Export to Total Export(%)

Stage of development GDP per capita (USD)

Stage 1: Factor driven <2000

Transition stage 2000-3000

Stage 2: Efficiency driven 3000-9000

Transition stage 9000-17000

Stage 3: Innovation driven >17000

STAGE OF COUNTRY
SUBINDEXES
 WEIGHTS ASSIGNED

Basic requirements sub index

Institution-25%
Public institution-75%
Private institution -25%
Infrastructure-25%
Macroeconomic stability-25%
Health and Primary education-25%
 EFFICIENCY ENHANCER SUB INDEX

• Higher education, training-17%

• Goods and market efficient- 17%
Competition-67%
Quality of demand condition-33%
• Labor market efficiency-17%
• Financial market Sophistication-17%
• Technological readiness-17%
• Market size-17%
Domestic-75%
Foreign-25%
Innovation Subindex
Business Sophistication-50%
Innovation-50%

• Rate each country on each factor on the

scale of 1-7. 1 indicates worst, 7 indicates
best
• For instance, Inflation rate between 0.5%
to 2.9% get 7 points.
Standard formula

• Sample minimum is lowest country score in the

Sample of countries under study
• Sample maximum is highest country score.
Competitive advantage of
telecommunication sector of India

• Government
• Factor condition
• Firm structure ,strategy and rivalry
• Related and supported industry
• Demand condition
 Government
• Government full support through reform process
• Policies are in place to safeguard the interest of service
provider as well those of consumer
Example:-
1) Government id promoting telecom manufacturing by
providing Tax sop and establishing telecom SEZ
2) Liberal foreign investment Regime: FDI limit increased
from 49% to 74% ,rural telecom equipment also open to
large investments
3) Auction of 3G Spectrum by inviting bids
4) To safeguard consumer DOT established TRAI,TDSAT
5) Unified access licensing regime was established
6) Number portability was proposed and still pending
7) Unified access licensing regime was established
6) Number portability was proposed and still
pending
7) Universal service obligation(USO)
8) Total FDI US$3892.19mn(1991-2007) ,3rd largest
sector to attract FDI
9) 100% FDI is permitted through automatic route in
telecom equipment manufacturing.
10) Foreign telecom companies can bid for 3G
without partnering local service provider.
 Factor condition
• Presence of skilled and talented labor pool
• Rapidly developing robust telecom infrastructure
• Increasing disposable income of consumer
• Increasing demand due to changing lifestyle and
growing attraction for mobile with new features
• Low labor cost
• Country emerged as major R&D hub
Example:-
(1) it is estimated working age population is expected to
rise by 83% by 2026.
(2) Nokia which has set up its manufacturing operation
in India considering long term sustainable demand for
mobile telephony
Demand condition
• India has a large middle class of 300 mn
• Growing affordability and life free schemes have
created the market at the bottom of the pyramid
• Country increasing population and Low
teledensity of 19%
• Export opportunities and ensure India as a
manufacturing hub for Asia Pacific
• Huge rural population yet to be tapped(close to
100 mn come from rural area)
Example:
(1) India's upper middle class spends 6% of their
earning on telecom services
(2) ARPU for GSM user is 6.6$ per month
 Firm structure, strategy and rivalry
• Series of reform opened up the economy as a result
Intensive competition in the country pop up which has
made it possible for service providers to offer service
at low fare[number of operator in circle have
increased to 5-6 ]
• Saturation in urban market so capitalizing on value
added service will enable service provider to increase
ARPU
• Many new handset have been launched.
• Merger & acquisition strategy is being followed by the
service provider in expanding their reach.
• Business alliance:-to improve cost and quality
company outsource non core activities. ex-airtel
alliance with Eriksson
• Rural penetration:- BSNL is developing
infrastructure in rural area to increase its customer
base.

Low cost strategy:-to increase customer base and

retain them many service provider adhere to this
service

Rapid innovation:-company launches new handset in

the market by developing set with new features.
Attractive designing:-this strategy is used by motorola
and established a distinct identity in the market
Competitive pricing strategy:-Motorola come up
with this strategy and aims at connecting the
unconnected to penetrate the market with
competitive pricing
Example:-(1)providing services at low fair have
been possible due to infrastructure sharing
(significant reduction in set up cost , low operating
cost , faster roll out of service)
(2) Currently private participation is permitted in all
segment of the telecom industry including
international long distance, domestic long
distance, internet etc.
(3) vodafone-hutchison telecom international
Related and supported industry

• Competent handset manufactures have produced

the low price handset for the Indian market and
India has low manufacturing cost
• Handset manufactures are setting up
manufacturing bases in India for better operation
management .[handset manufacturing market is
likely to touch US $ 7 bn by 2010]
• Many telecom and equipment and software
companies are based in India like nokia
,Samsung and telecom equipment market stood
at us $17100 million.
• Network infrastructure companies like alcatel-
lucent, cisco, Eriksson.
• Telecom solution provider :tech mahindra,IBM etc
 Network infrastructure companies like alcatel-
lucent, Cisco, Eriksson.

Telecom solution provider :tech Mahindra, IBM etc

 Conclusions
• The diamond of national advantage makes sense
as a means of understanding global economic
success.
• Domestic success does prepare companies to
compete globally.
• Major European and an increasing number of
Asian countries are capable of competing on a
global basis.
• The global marketplace is only going to get
tougher based on more, tougher competitors.
• The diamond can help to anticipate and
understand new competitors.