Porter's Diamond - Nation Competitive Advantage of an Industry

Certain nation or country has a competitive advantage for certain industry. Michael E. Porter argued that a nation can create new advanced factor endowments such as skilled labor, a strong technology and knowledge base, government support, and culture. 

The role of government in Porter's Diamond Model is "acting as a catalyst and challenger, it is to encourage or even push companies to raise their aspirations and move to higher levels of competitive performance". They must encourage companies to raise their performance, stimulate early demand for advanced products, focus on specialized factor creation and to stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations.

Porter suggested that there are four interlinked main factors which determine national competitive advantage and expressed them in the form of a diamond. These can be influenced in a pro-active way by government.

The 4 factors are :-

a) Factor conditions - physical resources such as land, minerals and water, capital, human resources, knowledge that can be used effectively and infrastructure. The basic factors are essential for an industry to exist, which advance factors can give competitive advantage to the industry to grow. Each country has its own particular set of factor conditions, such as low-cost labor or fertile soil (for agriculture industry).

b) Demand - there must be a strong home market demand for the product or services in order for the industry to be sustainable. This determines how industries perceive and respond to buyer needs and creates the pressure to innovate. According to Porter, home demand is determined by three major characteristics: their mixture (the mix of customers needs and wants), their scope and growth rate, and the mechanisms that transmit domestic preferences to foreign markets. Government can encouraging local demand by restricting import such as impose of tariff and non-tariff barriers.

c) Related and Supporting Industries - The success of an industry can be due to its suppliers and related industries. For example, a success of an industry in a certain nation is supported by the network of its related industries such as packaging and distribution. One internationally successful industry may lead to advantages in other related or supporting industries. 

d) Strategy, Structure and Rivalry - The conditions in a country that determine how companies are established, are organized and are managed, and that determine the characteristics of domestic competition. Here, cultural aspects play an important role. In different nations, factors like management structures, working morale, or interactions between companies are shaped differently. This will provide advantages and disadvantages for particular industries. Typical corporate objectives in relation to patterns of commitment among workforce are of special importance. They are heavily influenced by structures of ownership and control. Family-business based industries that are dominated by owner-managers will behave differently than publicly quoted companies. This will be also be determined by number and size of competitor. No. of competitor can be reduced by government by introducing government grant.