Why are some nations competitive, while others are not? The answer lies in Single Diamond Model
Michael Porter's single diamond model is a strategic tool that has been used by economists, academics, and managers for decades. It can be applied to various environments including the business environment. This blog post will discuss how businesses can use the Single Diamond Model to help improve their performance in the marketplace.
What is the Single Diamond Model?
The theory of national competitive advantage, also known as the diamond model and coined by Michael Porter is a framework that focuses on explaining why particular industries within countries tend to be more globally competitive than others. And what makes some companies capable or innovative while others might not?
Porter believes that any firm's capacity to compete globally is based on a complex network of location advantages possessed by specific industries in various countries, including Firm Strategy, Structure, and Rivalry; Factor Conditions; Demand Conditions; and Related and Supporting Industries.
The purpose of the single diamond model is to attempt to address two issues:
What determines whether a country is the most competitive in an industry (home base)?
What is the reason for one industry's firms to be able to maintain competitiveness in that industry?
When these conditions are right, it compels domestic firms to keep developing and improving. The competitive advantages that will result from this are beneficial and even required when competing against the world's largest rivals across borders.
Analyzing a country's competitive advantage. Diamond is often referred to as the "national advantage."
For example, Italy -> Fashion, Germany -> Engineering, and Sweden -> Furniture are just a few examples.
This article will discuss the four basic components in detail, as well as two components that are frequently included in this model: the Government's role and Chance. They shape the country's overall environment in which businesses are formed and learn how to compete.
There are 4 elements (determinants) in the analysis of national advantages (competitiveness).
The nation is fortunate by chance (luck) or knowledge. Although Greece is well-known for tourism, Germany is known for its engineering. It was due to luck that Greece became a tourist destination.
1) Factor conditions
Two types of factor conditions:
a) Basic: e.g. basic resources and natural resources.
b) Advanced: e.g., professional labor, specialized capital.
Factors that are basic do not give a competitive advantage. Only complex factors can provide a competitive edge.
Basic factors include natural resources (climate, minerals) where the mobility of these assets is low. These basic elements can also lay a foundation for international competitiveness but they will never become real value-creation unless there are more advanced components such as sophisticated human resources and research capabilities which tend to be industry-specific in nature.
2) Demand conditions
Is there a market for what the country has to offer? Do people desire to purchase vehicles made in Germany? Is Greece travel on people's radar?
Increased pressure on businesses to develop and enhance as a result of increased demand for their goods or services in their home market. The more demanding the domestic (home) market, the greater the incentive for businesses to innovate and improve.
Porter's diamond shows that a company with early home demand, a large market size, and a rate of growth in this industry will have more success.
The fundamental or core design of a product is typically representative of consumer demands in the home market. Sweden, for example, reigns supreme in the high-voltage distribution sector worldwide. In this instance, the demands of the home market influenced the industry that was subsequently able to respond to global markets (ABB is one of the world's major producers).
3) Firm Strategy, Structure & Rivalry
The national context in which companies operate largely determines how they are created, organized, and managed. As a result of this, domestic rivalry is instrumental to international competitiveness since it forces these businesses to develop unique strengths that make them sustainable over time while also being able to withstand economic changes within their borders or abroad.
The more intense domestic rivalry is, the faster companies are being pushed to innovate and improve in order to maintain their competitive advantage. In this way, it will help them when entering international markets later on down the road. The Japanese automobile industry is a great illustration of this, with fierce rivalry among players such as Nissan, Honda, Toyota, Suzuki, Mitsubishi, and Subaru. They have been able to compete more effectively in foreign markets due to their own intense domestic competition.
4) Related and Supporting Industries
A strong industry is only possible when it has a foundation of supporting industries. The more related and complementary the products or services in an area, the easier it becomes for one company to excel over others because its success will be dependent on having access to all these other businesses rather than just focusing solely on its own product line alone. Businesses rely on collaborations and partnerships with other organizations to generate added value for consumers and improve their competitiveness. Suppliers are especially crucial in improving innovation by providing more efficient and higher-quality inputs, quick feedback, and short lines of communication.
Companies in a nation generally profit the most when their suppliers are, in fact, global competitors. It may take years (or even decades) of hard effort and investment to build strong linked and supporting industries that assist domestic firms to become globally competitive. Once these factors are in place, however, the presence of an entire region or country can frequently benefit all residents. This is evident, for example, in Silicon Valley, where a variety of information technology companies and start-ups are congregated to share ideas and promote innovation.
The government's role in Porter's Diamond Model is characterized as both "a catalyst and challenger." Porter does not believe in a free market in which the government has no role. However, Porter isn't of the opinion that the government is required to be assistance and supporter to businesses. Only businesses can create competitive industries. Instead of attempting to build new industries, governments should simply encourage and urge corporations to raise their goals and strive for even higher levels of competitiveness. This may be accomplished by promoting early demand for innovative goods (demand drivers), concentrating on specialized factor developments such as infrastructure, education, and health care (factor conditions), enforcing anti-monopoly legislation, and practicing fiscal policy.
While these factors are no guarantee for international competitiveness, they can definitely help companies along the way. In this manner, the government may help the growth of the four aforementioned variables in a way that is favorable to a certain country's industries.
The role of chance is frequently incorporated into the Diamond Model as the probability that external events such as war and natural disasters may harm or help a nation or region. For example, the occurrence of the First World War led to an acute scarcity of raw materials and labor forces throughout Europe, giving an advantage to the United States and Japan. This, in turn, led to an opportunity for these countries to increase their exports by replacing European imports with cheaper substitutes sourced.
It's impossible for the government or businesses to influence these events. For example, the increased border security produced as a result of the September 11 terrorist attacks on the United States has had a detrimental influence on Mexican export activity. The circumstances that result from chance may benefit certain organizations and harm others. Some companies may improve their competitive positions, while others may suffer losses. While these events are beyond an organization's control, it is important to consider how they may impact one business over another.
Benefits of the Single Diamond Model
Porter's Diamond Model can be applied to any industry, but it is especially helpful in countries where the environment of business is rapidly changing. By identifying how a firm should compete and structure itself within an ever-changing landscape through Porter’s single diamond model, a company will have clear direction on what their future strategy should look like as the business environment changes. Some benefits are:
Helps to predict the future competitive environment
Creates a clear strategy for the country
Creates a more optimal business structure
Increases the quality of firm rivalry
Summary of Porter's Single Diamond Model
Porter’s Diamond Model of National Advantage explains why some industries in some countries are so much more developed and competitive compared to other, less fortunate regions. It basically sums up the location advantages that Dunning refers to when he mentions the OLI framework (also known as the Eclectic paradigm). The Diamond Model might be employed when looking at potential entry points or making Foreign Direct Investment decisions in other countries. It is also necessary to conduct a macro-environment study and a business analysis using PESTEL and Porter's Five Forces, respectively.
The single diamond model is a strategic tool that has been used by economists, academics, and managers for decades. It can be applied to various environments including the business environment. This blog post discussed how countries can use this powerful model to help improve their performance in the global marketplace.
Have you ever used a strategic tool like this to help improve an organization's performance in the marketplace? Let me know which model/framework worked best for you in the comments below.