Porters Diamond of competitive advantage

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National Competitiveness

Competitive Advantage of Nations

Porter's Diamond of National Advantage

Porter argued that as a rule Competitive Advantage of nations has been the outcome of 4 interlinked advanced factors and activities in and between companies in these clusters.

These can be influenced in a pro-active way by government.

Porter's Diamond of National Advantage

He used a diamond shaped diagram as the basis of a framework to illustrate the determinants of national advantage. This diamond represents the national playing field that countries establish for their industries.

Nations are most likely to succeed in industries or industry segments where the national ‘diamond’ is most favorable.

The Porter Diamond

Factor Conditions

A country creates its own important factors such as skilled resources and technological base.

The stock of factors at a given time is less important than the extent that they are upgraded and deployed.

Local disadvantages in factors of production force innovation. Adverse conditions such as labor shortages or scarce raw materials force firms to develop new methods. Such innovation often leads to a national comparative advantage.

The Resource CurseJoseph E Stiglitz

• For some nations, natural resources are a curse - but it needn't be so. There is a curious phenomenon that economists call the resource curse - so named because, on average, countries with large endowments of natural resources perform worse than countries less well endowed.

The Resource CurseJoseph E Stiglitz

• Yet some countries with abundant natural resources do perform better than others, and some have done well. Why is the spell of the resource curse cast so unequally?

Demand Conditions

A more demanding local market leads to national advantage.

A strong, trend-setting local market helps local firms anticipate global trends.

Related and Supporting Industries

When local supporting industries are competitive, firms enjoy more cost effective and innovative inputs.

This effect is strengthened when the suppliers themselves are strong global competitors.

Firm Strategy, Structure, and Rivalry

Local conditions affect firm strategy. For example, German companies tend to be hierarchical. Italian companies tend to be smaller and are run more like extended families.

In the long run more local rivalry is better since it puts pressure on firms to innovate and improve. High local rivalry results in less global rivalry..

The Diamond As a System

The effect of one point depends on the others. For example, factor disadvantages will not lead firms to innovate unless there is sufficient rivalry.

The diamond also is a self-reinforcing system. For example, a high level of rivalry often leads to the formation of unique specialized factors.

Government's Role

Encourage companies to raise their performance, for example by enforcing strict product standards.

Focus on specialized factor creation. Stimulate local rivalry by limiting direct

cooperation and enforcing antitrust regulations.

Japanese Fax Machine Industry

The Japanese facsimile industry illustrates the diamond of national advantage. Japanese firms achieved dominance in this industry for the following reasons:

Japanese Factor Conditions

Japan has a relatively high number of electrical engineers per capita.

Japanese Demand Conditions:

The Japanese market was very demanding.

Related Industries

Large number of related and supporting industries with good technology, for example, good miniaturized components since there is less space in Japan.

Domestic Rivalry

Domestic rivalry in the Japanese fax machine industry pushed innovation and resulted in rapid cost reductions.

Government Support

NTT (the state-owned telecom company) changed its cumbersome approval requirements for each installation to a more general type approval.