Diamond model by Porter

Diamond model

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The Porter diamond^[1]

The diamond model is an economic model developed by Michael Porter in his book The Competitive Advantage of Nations,^[2] where he published his theory of why particular industries become competitive in particular locations.^[3] Afterwards, this model has been expanded by other scholars.

Contents

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• 1 Porter's analysis
• 2 Criticism
• 3 Double diamond model
• 4 See also
• 5 References

Porter's analysis[edit]

The approach looks at clusters, a number of small industries, where the competitiveness of one company is related to the performance of other companies and other factors tied together in the value-added chain, in customer-client relation, or in a local or regional contexts.^[2] The Porter analysis was made in two steps.^[2] First, clusters of successful industries have been mapped in 10 important trading nations.^[2] In the second, the history of competition in particular industries is examined to clarify the dynamic process by which competitive advantage was created.^[2] The second step in Porter's analysis deals with the dynamic process by which competitive advantage is created.^[2] The basic method in these studies is historical analysis.^[2] The phenomena that are analysed are classified into six broad factors incorporated into the Porter diamond, which has become a key tool for the analysis of competitiveness:

• Factor conditions are human resources, physical resources, knowledge resources, capital resources and infrastructure.^[2] Specialized resources are often specific for an industry and important for its competitiveness.^[2] Specific resources can be created to compensate for factor disadvantages.
• Demand conditions in the home market can help companies create a competitive advantage, when sophisticated home market buyers pressure firms to innovate faster and to create more advanced products than those of competitors.^[2]
• Related and supporting industries can produce inputs that are important for innovation and internationalization.^[2] These industries provide cost-effective inputs, but they also participate in the upgrading process, thus stimulating other companies in the chain to innovate.^[2]
• Firm strategy, structure and rivalry constitute the fourth determinant of competitiveness.^[2] The way in which companies are created, set goals and are managed is important for success.^[2] But the presence of intense rivalry in the home base is also important; it creates pressure to innovate in order to upgrade competitiveness.^[2]
• Government can influence each of the above four determinants of competitiveness.^[2] Clearly government can influence the supply conditions of key production factors, demand conditions in the home market, and competition between firms.^[2] Government interventions can occur at local, regional, national or supranational level.^[2]
• Chance events are occurrences that are outside of control of a firm.^[2] They are important because they create discontinuities in which some gain competitive positions and some lose.^[2]

The Porter thesis is that these factors interact with each other to create conditions where innovation and improved competitiveness occurs.^[3]

Criticism[edit]

At his famous book, The Competitive Advantage of Nations, Porter studied eight developed countries and two newly industrialized countries (NICs). The latter two are Korea and Singapore. Porter is quite optimistic about the future of the Korean economy. He argues that Korea may well reach true advanced status in the next decade (p. 383). In contrast, Porter is less optimistic about Singapore. In his view, Singapore will remain a factor-driven economy (p. 566) which reflects an early stage of economic development. Since the publication of Porter's work, however, Singapore has been more successful than Korea. This difference in performance raises important questions regarding the validity of Porter's diamond model of a nation's competitiveness.

Porter has used the diamond model when consulting with the governments of Canada^[4] and New Zealand.^[5] While the variables of Porter's diamond model are useful terms of reference when analysing a nation's competitiveness, a weakness of Porter's work is his exclusive focus on the 'home base' concept. In the case of Canada, Porter did not adequately consider the nature of multinational activities.^[6] In the case of New Zealand, the Porter model could not explain the success of export-dependent and resource-based industries.^[7] Therefore, applications of Porter's home-based diamond require careful consideration and appropriate modification.

In Porter's single home-based diamond approach, a firm's capabilities to tap into the location advantages of other nations are viewed as very limited. Rugman^[8] has demonstrated that a much more relevant concept prevails in small, open economies, namely the 'double diamond' model. For example, in the case of Canada, an integrated North American diamond (including both Canada and the United States), not just a Canadian one, is more relevant. The double diamond model, developed by Rugman and D'Cruz,^[9] suggests that managers build upon both domestic and foreign diamonds to become globally competitive in terms of survival, profitability, and growth. While the Rugman and D'Cruz North American diamond framework fits well for Canada and New Zealand, it does not carry over to all other small nations, including Korea andSingapore.

Double diamond model[edit]

Porter (p. 1)^[2] raises the basic question of international competitiveness: "Why do some nations succeed and others fail in international competition?" As its title suggests, the book is meant to be a contemporary equivalent of the wealth of nations, a new-forged version of Adam Smith's opus.^[10] Porter argues that nations are most likely to succeed in industries or industry segments where the national 'diamond' is the most favorable. The diamond has four interrelated components: (1) factor conditions, (2) demand conditions, (3) related and supporting industries, and (4) firm strategy, structure, and rivalry, and two exogenous parameters (1) government and (2) chance, as shown above.

This model cleverly integrates the important variables determining a nation's competitiveness into one model. Most other models designed for this purpose represent subsets of Porter's comprehensive model. However, substantial ambiguity remains regarding the signs of relationships and the predictive power of the 'model'.^[11] This is mainly because Porter fails to incorporate the effects of multinational activities in his model. To solve this problem, Dunning,^[12] for example, treats multinational activities as a third exogenous variable which should be added to Porter's model. In today's global business, however, multinational activities represent much more than just an exogenous variable. Therefore, Porter's original diamond model has been extended to the generalized double diamond model^[13] whereby multinational activity is formally incorporated into the model.

Firms from small countries such as Korea and Singapore target resources and markets not just in a domestic context, but also in a global context (Global targeting also becomes very important to firms from large economic systems such as the United States). Therefore, a nation's competitiveness depends partly upon the domestic diamond and partly upon the 'international' diamond relevant to its firms. The figure on the left side shows the generalized double diamond where the outside one represents a global diamond and the inside one a domestic diamond. The size of the global diamond is fixed within a foreseeable period, but the size of the domestic diamond varies according to the country size and its competitiveness. The diamond of dotted lines, between these two diamonds, is an international diamond which represents the nation's competitiveness as determined by both domestic and international parameters. The difference between the international diamond and the domestic diamond thus represents international or multinational activities. The multinational activities include both outbound and inboundforeign direct investment (FDI).

In the generalized double diamond model, national competitiveness is defined as the capability of firms engaged in value added activities in a specific industry in a particular country to sustain this value added over long periods of time in spite of international competition. Theoretically, two methodological differences between Porter and this new model are important. First, sustainable value added in a specific country may result from both domestically owned and foreign owned firms. Porter, however, does not incorporate foreign activities into his model as he makes a distinction between geographic scope of competition and the geographic locus of competitive advantage.^[14] Second, sustainability may require a geographic configuration spanning many countries, whereby firm specific and location advantages present in several nations may complement each other. In contrast, Porter ^[2][15] argues that the most effective global strategy is to concentrate as many activities as possible in one country and to serve the world from this home base. Porter's global firm is just an exporter and his methodology does not take into account the organizational complexities of true global operations by multinational firms.^[16]

Porter's narrow view on multinational activities has led him to underestimate the potential of Singapore's economy. Porter (p. 566)^[2] argues that Singapore is largely a production base for foreign multinationals, attracted by Singapore's relatively low-cost, well-educated workforce and efficient infrastructure including roads, ports, airports, and telecommunications. According to Porter, the primary sources of competitive advantage of Singapore are basic factors such as location and unskilled/semi-skilled labor which are not very important to national competitive advantage. In fact, Singapore has been the most successful economy among the NICs. Singapore's success is mainly due to inbound FDI by foreign multinational enterprises in Singapore, as well as outbound FDI by Singapore firms in foreign countries. The inbound FDI brings foreign capital and technology; whereas outbound FDI allows Singapore to gain access to cheap labor and natural resources. It is the combination of domestic and international diamond determinants that leads to a sustainable competitive advantage in many Singaporean industries.

Multinational activities are also important in explaining Korea's competitiveness. The most important comparative advantage of Korea is its human resources which have been inexpensive and well-disciplined. However, Korea has recently experienced severe labor problems. Its labor is no longer cheap and controllable. Major increases in the wages in Korea were awarded to a newly militant labor force in 1987–90, which lifted average earnings in manufacturing by 11.6 per cent in 1987, 19.6 per cent in 1988, 25 per cent in 1989 and 20.2 per cent in 1990.^[17] Korea's wage level is now comparable to that of the United Kingdom, but the quality of its products has not kept pace. For the last several years, Korea's wage increases have been significantly higher than those in other NICs and three or four times as high as those in other developed countries.^[18] Faced with a deteriorating labor advantage, Korean firms have two choices: (1) go abroad to find cheap labor; (2) enhance their production capabilities by introducing advanced technology from developed countries. In both cases, the implementation of these choices requires the development of multinational activities.

To sum up, multinational activities are very important when analyzing the global competitiveness of Korea and Singapore. In fact the most important difference between the single diamond model^[2] and the generalized double diamond model^[13] is the successful incorporation of multinational activities in the latter.

See also[edit]

• Internationalization

References[edit]

1. Jump up^ Traill, Bruce; Eamonn Pitts (1998). Competitiveness in the Food Industry. Porter (1990, p. 127). Springer. p. 19. ISBN 0-7514-0431-4.
2. ^ Jump up to:^{a b c d e f g h i j k l m n o p q r s t u v w x} Porter, M.E. The competitive advantage of nations. New York: Free Press. (1990)
3. ^ Jump up to:^a b Traill, Bruce; Eamonn Pitts (1998). Competitiveness in the Food Industry. Springer. pp. 17–19. ISBN 0-7514-0431-4.
4. Jump up^ Porter, M.E., & the Monitor Company, Canada at the crossroads: The reality of a new competitive environment, Business Council on National Issues and Minister of Supply and Services of the Government of Canada, Ottawa. (1991)
5. Jump up^ Crocombe, F.T., Enright, M.J., & Porter, M.E., Upgrading New Zealand's competitive advantage. Auckland: Oxford University Press. (1991)
6. Jump up^ Rugman, A.M., Diamond in the rough. Business Quarterly, 55(3), 61–64. (1991)
7. Jump up^ Cartwright, W.R., Multiple linked diamonds: New Zealand’s experience. Management International Review, 33(2), 55–70. (1993)
8. Jump up^ Rugman, A.M., Porter takes the wrong turn. Business Quarterly, 56(3), 59–64. (1992)
9. Jump up^ Rugman, A.M., & D'Cruz, J.R., The double diamond model of international competitiveness: Canada's experience. Management International Review, 33(2), 17–39. (1993)
10. Jump up^ Ryan, R. A grand disunity. National Review, 42(13), 46–47. pp.46. (1990)
11. Jump up^ Grant, R.M. Porter's competitive advantage of nations: An assessment. Strategic Management Journal, 12(7), 535–548. (1991)
12. Jump up^ Dunning, J.H. The competitive advantage of countries and the activities of transnational corporations. Transnational Corporations, 1 February, No. 1, 135–168. (1992)
13. ^ Jump up to:^a b Moon, H.C., Rugman, A.M., & Verbeke, A. (1995). The generalized double diamond approach to international competitiveness. In A. Rugman, J. Van Den Broeck & A. Verbeke (Eds.), Research in global strategic management: Volume 5: Beyond the diamond (pp. 97–114). Greenwich, CT: JAI Press. (1995)
14. Jump up^ Porter, M.E., & Armstrong, J. Canada at the crossroads: Dialogue. Business Quarterly, Spring, 6–10. (1992)
15. Jump up^ Porter, M.E. (1986). Competition in global industries: A conceptual framework. In M.E. Porter (Ed.), Competition in global industries. Boston, MA: Harvard Business School Press. (1986)
16. Jump up^ Moon, H.C. A revised framework of global strategy: Extending the coordination–configuration framework. The International Executive, 36(5), 557–574. (1994)
17. Jump up^ The Economist Intelligence Unit. South Korea 1992–93: Annual survey of political and economic background. EIU Country Profile. (1992)
18. Jump up^ Chungang Daily Newspaper. Wages of Korea and other major countries, 25 February. (1995)