Porter’s Diamond is an economic model that is developed by Michael Porter that aims to highlight and explain on why particular industries or nations become quite competitive in a particular location and on the national and international levels.
Michael Porter is one of the highly renowned and famous authorities on the corporate strategy and economic competition. He is the founder of The Institute for Strategy and Competitiveness at the Harvard Business School.
Understanding the Concept
The theory and model of Porter’s Diamond were incepted and designed in order to understand the competitive edge and advantage that certain nations and groups possess owing to the certain favorable factors available to them. It also highlights the fact that how the government authorities can act as a catalyst in improvising the position of the country on the global level with the highly competitive economic environment.
It is the proactive model of economic theory that quantifies those favorable advantages that a country or region may possess as compared to the other nations and gives it a competitive edge over others in terms of growth.
The Porter’s Diamond also suggests that countries can also formulate new factor advantages for themselves such as superior manufacturing technologies, skilled labor, and efficient human resources, technologically advanced industries, and the favorable government policies that support and elevate the country’s economy quite a few notches higher.
The primary determinants on which the country can harp for its economic growth include natural resources, population, land, and location amongst others.
Porter’s Diamond is a diagram that represents the 4 points of a diamond and highlights the 4 interrelated determinants that work as deciding factors of the national comparative economic advantage.
The 4 factors of Porter’s Diamond Model :
1) Firm Strategy and Rivalry
The first factor of Porter’s Diamond focuses on the competition within the home market from the contemporary industries that challenges the companies to come up with the novel and innovative products, efficient customer service levels, and manufacturing techniques that helps the companies to grow resulting in the overall development of the nation. It keeps the companies on their toes on the continuous and consistent basis to compete with one another.
2) Factor Condition
This factor focuses on the domestic homebuyers of the country or the local target audience that are sophisticated in nature and are quite well aware having a flair for products that are high on quality, class, and innovation. They prefer the home ground products rather than going for the international labels resulting in the growth and development of domestic and national industries.
3) Related and Supporting Industries
For the overall growth and success of the companies and the country, it is very important for all the industry domains being interconnected with one another helping each other to grow and flourish having a holistic approach in mind and the third factor of Diamond model harps on the same.
For example, a Real Estate company requires good quality raw material such as cement and steel for construction purposes and it will procure the same from the related companies within the country rather than going for the international markets that work as a profitable deal for both the parties resulting in overall growth and development of the nation.
4) Demand Conditions
The last factor comprises of the input factors that are required for the production that includes raw material, skilled labour, expert and talented human resources, well-placed infrastructure, education, capital, and favourable weather conditions amongst other such vital factors.
Why is Porter’s Diamond Important?
1) Understanding the competitive rivalry in the market
The Diamond Model helps the companies in the highly effective and efficient manner to study the direct and indirect competition in the market. Right from who are they, how many of them are there, what is the quality of their products and services offered, what is their level of customer service and the overall experience, what is their pricing strategy, what is their sales strategy, and what is their marketing strategy along with their future plans in pipeline plus the nature and features of their products offered.
If the level of competition is very high and intense, then the company needs to be quite aggressive in its approach by coming up with the products that are novel in the ideation and innovative in nature, come up with price cuts by giving discounts to the customers, plan, design, and execute path-breaking marketing and promotional strategies, and offer the best level of customer service experience. All this helps in retaining the existing customers converting them into the loyal ones and attract the new set of customers as well resulting in the overall growth and development of the company.
2) Understanding the power of suppliers
Suppliers that provide the basic raw material for the manufacturing purposes hold quite an important place in the ecosystem of the company for its growth and development. The Porter’s Diamond helps in determining how many suppliers do you have, how many of them are the potential ones, how unique is their product offered, what is their customer service levels towards your company, are they catering to your competitors as well, what are their prices, and how effective will it be for you to switch from one supplier to the other.
You will be able to get the cheaper raw material if you have an option to pick and choose from many suppliers in the market but if there are fewer suppliers in the market than their position is strong and they have the power and ability to charge you more. All this impacts your profit margins and pricing strategies.
3) Understanding the power of buyers
Here you analyze that who is driving your pricing strategy, is it you or your buyers. The Porter’s Diamond model helps you determine how many buyers you have, how big are their orders, are they loyal to your brand, are they powerful enough to dictate their terms to you, and what will an impact on them if they switch from you to the other competitive brand in the market.
When you have few buyers for your product offerings, they have more power. And once the list of your buyer’s increases, your power increases to command the premium.
4) Understanding the threat of substitution
There is always a threat of substitution to your business that can affect your business profits and revenue generation. For example, if you are selling the women fashion apparels at your physical store for many years and with the power of the internet and social media, your customers are ordering the apparels through online portals that ensure doorstep delivery cheaper prices and saving their time and resources. Understanding the same, you have to re-plan your overall business strategy to stay relevant in the market as per the changing market dynamics.
5) Understanding the threat of new entrants in the market
There is always a threat of competition in the market from the existing players and the new entrants as well. This Model focuses on the threat of new entrants in the market understanding their foothold in the industry, types of products offered, pricing strategies, the factor of innovation, and other such vital details.
Example of Porter’s Diamond
Luxury car manufacturing industry in the country of Germany
The Luxury car manufacturing industry in the country of Germany is one of the best and finest example to explain Porter’s Diamond Model in detail as it complies will all the 4 determinant factors.
Starting with the strategy and rivalry, there are many automobile giants such as Audi and more than compete amongst them within the market and come up with the innovative and outlandish car models that high on the realms of quality and class catering to the need of the car lovers in the country and all across the globe.
The factor and demand conditions of the Porter’s Diamond model also gets fulfilled as there is no speed limit in the country of Germany and the homebuyers are the lovers of quality and innovative car models that are powerful and sophisticated. The car manufacturers cater to the needs and demands of the local target market in the highly efficient and effective way.
There are variously related and supporting industries that provide the impetus for growth and development to the car manufacturers in the country. There are iron and steel industries that provide the basic raw material, competent suppliers for other requirements, well placed IT infrastructure, expert and talented workforce, and huge capital investments from the banks and financial institutions.
There are also skilled engineers from the renowned German universities plus there is a huge focus of the government on scientific research and technological advancements. Also, there are various favourable compliances and policies by the German government that pushes the car manufacturers to scale up the bar of excellence and innovation and all this has resulted in the car manufacturing industry of the country ruling the roost all across the world.