B300 / part 2: TMA02 Michael Porter’s ‘diamond’ of National Competitive Advantage/ Policy Module

Name: Khitam B. Yamani ID: 051284

FACULTY OF BUSINESS STUDIES

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 B300 / part 2: TMA02 Michael Porter’s ‘diamond’ of National Competitive Advantage/ Policy Module
Name: Khitam B. Yamani ID: 051284

TMA FORM (PT 3)

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1. Student name: Khitam Bashir Yamani 2. Registration #:
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B300 / part 2: TMA02 Michael Porter’s ‘diamond’ of National Competitive Advantage/ Policy Module
Name: Khitam B. Yamani ID: 051284

Table of Contents:
Introduction

Description of Factors of Michael Porter’s ‘diamond’ of

National Competitive Advantage.

Explanation about role/ impact of Government for each type

of Diamond factors.

Conclusion:

Diagram of the determinants of national competitive

advantage
Michael Porter Diamond Model

Diagram (of Porter Diamond Model) shows the determinants

of national competitive advantage and the interaction
between them with the external forces influence

Spray diagram showing how nations can gain competitive

advantage
(according to Porter Diamond Model)

References:

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B300 / part 2: TMA02 Michael Porter’s ‘diamond’ of National Competitive Advantage/ Policy Module
Name: Khitam B. Yamani ID: 051284

Introduction
A nation’s competitiveness depends on the capacity of its industries to
continually innovate and upgrade. Companies achieve competitive
advantage though acts of innovation, as it’s a way to succeed in the
international markets, and it can sustain it only through relentless
improvement. He presented more on how a firm can position itself in the
market and how it can be different from market competitors. Porter
presented his Diamond model which focuses on the determinants of
national advantage and it is based on four country-specific “determinants”
and variables; like the role of government. Porter’s four determinants and
external forces interact in the “diamond” of competitive advantage, with
the nature of a country’s international competitiveness depending upon
the type and quality of these interactions. The four determinants for a
nation shape the environment in which local firm compete and promote or
impede the creation of competitive conditions,” The four determinants of
Porter’s Diamond model are:
(Vivek Suneja, 2002 p. 113/ by M. Porter 1990) Policy module.

Factor Conditions: The nation’s factors of production, including natural

resource and created factors, such as the quantity, skills and cost of
personnel; the abundance, quality, accessibility, and cost of the nation’s
physical resource; the nation’s stock of knowledge resources; the amount
and cost of capital resources that are available in the banking and finance
sector; and the type, quality, and user cost of the nation’s infrastructure,
etc,. Here we should recall the argument of J.Barney about developing a
sustainable competitive advantage, firms must more importantly search
and develop their internal resources and capabilities which can add value
to the firm, being rare and hard to imitate. (Mariana, Mazzucato, 2002 –
P.147).

Demand Conditions: The nature of demand for products or service at

home and the degree of sophistication of buyers, such as the compositions
of demand in the home market; the size and growth rate of demand at
home; and the mechanisms through which domestic demand is
internationalized and a nation’s products and services sells abroad, etc,..
(Vivek Suneja, 2002 p. 147/ by M. Porter 1990) Policy module.

Related and Supporting Industries: The presence or absence of supplier

and related industries that basically is international competitive, such as
the presence of internationally competitive supplier industries that create
advantages in downstream industries through efficient, early, or rapid
access to cost-effective inputs; and internationally competitive related
industries which can coordinate and share activities in the value chain
when competing or those which involve products that are complementary.
(Vivek Suneja, 2002 p. 147/ by M. Porter 1990) Policy Module.

Firm Strategy, Structure and Rivalry: The domestic rivalry of firms and the
conditions governing how companies are created, organized and
managed, such as the ways in which firms are managed and choose to
compete; the goals that companies seek to attain as well as the
motivations of their employees and managers; and the amount of

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B300 / part 2: TMA02 Michael Porter’s ‘diamond’ of National Competitive Advantage/ Policy Module
Name: Khitam B. Yamani ID: 051284

domestic rivalry and the creation and persistence of competitive

advantage in the respective industry.
(Vivek Suneja, 2002 p. 147/ by M. Porter 1990) Policy module.

Porter stresses that the “diamond” factors form a system, that is, a set of
interdependent parts that together form a unitary whole so that
weaknesses in one part of the system can undermine the whole. There are
even synergies from the clustering of suppliers, buyers and rivals in the
home country, mainly in promoting efficiencies, specialization and
innovation. That there are inter-dependencies cannot be denied but the
importance for any particular industry would have to be established
empirically; In addition to the other influencing factors mentioned by
Porter. “Much government policy aimed at ‘revitalizing’ industry has failed.
It is doomed because it does not address the determinants of competitive
advantage and is therefore not directed at the true cause of decline”.
Porter, M. E., 1990, Competitive Advantage of Nations, New York: Free
Press.

Porter argued that productivity is the main factor for international

competitiveness and that the standard of living of a country’s population
can be improved as a direct result of increases in that factor. Clusters may
take different forms between firms producing different products across
value-added chains or between firms producing similar products at
different stages of the same chain. Porter, M. E., 1990, Competitive
Advantage of Nations, New York: Free Press.

The forces that affect the competitiveness of a nation, but are not direct
determinants; are the firm chance; as caused by developments such as
new inventions; political decisions by foreign government; wars; significant
shift in world financial markets or exchange rates; discontinuities in input
costs such as oil shocks; surges in world or region demand; and major
technological breakthroughs, in addition to the various roles of
government including subsidies; education policies; actions toward capital
markets; the establishment of local product standards and regulations; the
purchase of goods and service; tax laws; and antitrust regulation. Internet
search, Michael porter's competitive advantage revisited(
http://www.busmgt.ulster.ac.uk/modules/bmg900m1/OShaughnessy.pdf)
date of access 23.12.2009.
+ (Vivek Suneja, 2002 p. 139/ by M. Porter 1990) Policy module.

Porter says that “most theories of trade look solely at cost, treating quality
and differentiated products in a footnote. A new theory must reflect a rich
conception of competition that includes segmented markets, differentiated
products, technology differences and economies of scale”. He argues that
“a new theory must explain why firms from particular nations choose
better strategies than those from others competing in particular
industries”. He believes that “much traditional thinking has embodied an
essentially static view focusing on cash efficiency due to factor scale
advantages”. His sharpest area of stress is the importance of
competitiveness, a theme he repeatedly returns to, and he thinks that “a
new theory must make improvement and innovation in methods and

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B300 / part 2: TMA02 Michael Porter’s ‘diamond’ of National Competitive Advantage/ Policy Module
Name: Khitam B. Yamani ID: 051284

technology a central element”. Porter, M. E., 1980, Competitive Strategy:

Techniques for Analyzing Industries and Competitors, New York: Free Press.

Government choice of policies can influence each of the four

determinants. Successful government policies work in those industries
where underlying determinants of national advantage are present and
reinforced by government actions. Government can raise the odds of
gaining competitive advantage but lacks the power to create advantages
on its own. As Porter sees Government to play a role of catalyst and
challenger; to encourage companies to raise aspirations and move to
higher levels of competitive performance so this stimulates firms to create
the competitive industries. These determinants can promote or impede
the creation of competitive advantages of firms, clusters, and nations. All
conditions need to be present and favorable for an industry/company
within a country to attain global supremacy. (Tsurumi, Y., Multinational
Management, Ballinger, Cambridge, MA, 1984, p. 85)

So government has an important role to play in relation to the national

diamond of Porter; its policies can support factors related to specific
industry such as specialized apprenticeship programs, research efforts in
universities that are connected to the industry, trade association activities,
and boost the private investments of companies that all will yield to
competitive advantage. Example from course material is; Holland’s
premier research institutes in the cultivation, packaging, and shipping of
flowers being the world’s export leader.

On the other hand in other certain conditions where lack of natural

resources, government still can support by transforming the disadvantage
to competitive advantages depending on productivity as a major and
principal goal of a nation since productivity is the value of the output
produced by a unit of labor or capital. Example on this certain conditions
is; the Swiss companies responded to disadvantages by upgrading labor
productivity and seek higher value and more sustainable market
segments.

As countries, companies and individuals have different goals to achieve,

these firms’ goals reflect the characteristics of national capital markets,
individual motivation to expand skills, outstanding talent in a nation
committing themselves to the values set and achieving targets and
associated prestige that will all affect their performance in certain industry
resulting from a well-built and managed strategy. Sometimes local rivals
such as exist in Japan – around 112 companies competing in machine
tools- powerfully stimulate creating and persistence of competitive
advantage leading to lower costs, improve quality and service, attracting
technical excellence and bargaining rights.
Vivek Suneja, 2002 p. 131/ by M. Porter 1990) Policy module.

An upgrading of sources of competitive advantage enforced by looking

outward to foreign markets to capture greater efficiency and higher
profitability, thus an area for government for more constructive forms of
support in assisting of opening foreign markets and investing in focused
educational institutions, so government can shape those goals, incentives
of investors; encourage sustained investment.

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B300 / part 2: TMA02 Michael Porter’s ‘diamond’ of National Competitive Advantage/ Policy Module
Name: Khitam B. Yamani ID: 051284

Also government can strict the regulations to promote competitive

advantage by upgrading and stimulating domestic demand and stringent
standards for product performance, product safety and environmental
impact pressure companies to improve quality, upgrade technology and
respond to consumer and social demands. It will enable nation’s firms to
start in developing products and services that will be valuable elsewhere,
however those standards combined with a rapid regulatory process should
not absorb resources and cause delays. A good example on this is the
Sweden’s strict standards for environmental protection have promoted
competitive advantage in many industries.

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B300 / part 2: TMA02 Michael Porter’s ‘diamond’ of National Competitive Advantage/ Policy Module
Name: Khitam B. Yamani ID: 051284

Government can embrace the idea of more direct cooperation as

happened in the US; the antitrust laws were modified to allow more
cooperative research and development processes, and more projects of
information-technology bringing the companies together from several
countries for exploring new fields and boost internal R&D to know more.
Also a form of deregulating competition and privatization can be
approached as well to have more dynamic industry and more desirable
buyer or supplier together with the domestic rivalry through consistent
antitrust policy. Vivek Suneja, 2002 p. 131/ by M. Porter 1990) Policy
module.

It’s worthy to mention that we mention the government policy approaches

to guide nations seeking to gain competitive advantage; focus on
specialized factor creation, Enforce strict product, safety and
environmental standards, Avoid intervening in factor and currency
markets, Sharply limit direct cooperation among industry rivals, Promote
goals that lead to sustained investment, Deregulate competition, Enforce
strong domestic antitrust policies, Reject managed trade; I have include
them in the attached spray diagram.
Vivek Suneja, 2002 p. 127-132/ by M. Porter 1990) Policy module.

A firm can achieve and sustain competitive advantage by following some

kinds of policies like; create pressures for innovation, seek out the most
capable competitors as motivators, establish early-warning systems,
improve the national diamond, welcome domestic rivalry, Globalize to tap
selective advantage in other nations, use alliance only selectively and
locate the home base to support competitive advantage.
Vivek Suneja, 2002 p. 132-135/ by M. Porter 1990) Policy module.

Conclusion:
After reviewing the above report we can conclude that for a country to
sustain a competitive advantage in a particular industry sector it needs
dynamic advantage: firms must extend the basis of their competitive
advantage by innovation and upgrading. Government and firms change to
innovate and upgrade policies and strategies have embedded into the four
key diamonds in a complete diamond model. Overall, these four diamonds
make a complete picture on the national competitiveness measurements
and hence using them as strengthening factors, like taking production
factors, demand conditions, related and supporting industries, and
business strategy, structure and rivalry four diamond altogether to do an
analysis for firm performance.
The dynamic conditions that influence innovation and the upgrading are
far more important than initial resource endowments in determining
national patterns of competitiveness. And national competitiveness, we
need to focus upon firm performance. The national environment role is to
provide a context within which firms develop their identity, resources,
capabilities, and managerial styles.
Vivek Suneja, 2002 p. 139/ by M. Porter 1990) Policy module.
Overall, the global diamonds from both domestic and international
variables, including factor conditions, demand conditions, related and
supporting industries conditions, and firm strategy, structure and rivalry
conditions, all demonstrate a superior performance of national

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B300 / part 2: TMA02 Michael Porter’s ‘diamond’ of National Competitive Advantage/ Policy Module
Name: Khitam B. Yamani ID: 051284

competitiveness.

The above diagram shows the determinants of national competitive advantage

Michael Porter Diamond Model

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B300 / part 2: TMA02 Michael Porter’s ‘diamond’ of National Competitive Advantage/ Policy Module
Name: Khitam B. Yamani ID: 051284

The above diagram (of Porter Diamond Model) shows the determinants of
national competitive advantage and the interaction between them
with the external forces influence

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B300 / part 2: TMA02 Michael Porter’s ‘diamond’ of National Competitive Advantage/ Policy Module
Name: Khitam B. Yamani ID: 051284

C r e a t e p r e s s u r e s f o r in n o v a t io n s

E n f o r c e s tr ic t p r o d u c t , s a fe t y a n d
S e e k o u t t h e m o s t c a p a b le e n v ir o n m e n t a l s t a n d a r d s
c o m p e t ito r s a s m o t iv a to r s

E s t a b l i s h e a r l y - w a r n in g s y s t e m s F o c u s o n s p e c i a l i z e d f a c t o r c r e a t io n
The com pany agenda
Im p r o v e t h e n a t io n a l d i a m o n d

W e lc o m e d o m e s t ic r i v a l r y

G l o b a li z e t o t a p s e le c t i v e a d v a t a g e s
in o th e r n a t io n s
U s e a l li a n c e o n ly s e le c t iv e l y
L o c a te th e h o m e b a s e to s u p p o rt
c o m p e t i t iv e a d v a n t a g e
T h e r o le o f g o v e r n m e n t
N a tio n s G a in
c o m p e titiv e
a d v a n ta g e b y :
A v o i d i n t e r v e n i n g in f a c t o r a n d
c u rre n c y m a rk e ts
T h e r o le o f le a d e r s h ip S h a r p l y l im it d i r e c t c o o p e r a t i o n
a m o n g i n d u s t r y r iv a l s
B e l i e v e in c h a n g e , e n e r g iz e
o r g a n i z a t i o n t o i n n o v a t e c o n t in u o u s ly P r o m o t e g o a l s t h a t l e a d t o s u s t a in e d
in v e s t m e n t

R e c o g n iz e im p o r t a n c e o f h o m e
c o u n t r y a s i n t e g r a l t o t h e i r c o m p e t it i v e D e r e g u la t e c o m p e t itio n
s u c c e s s a n d w o r k t o u p g r a d e it
E n f o r c e s t r o n g d o m e s tic a n t itr u s t
R e c o g n iz e t h e n e e d f o r p r e s s u r e a n d p o li c i e s
c h a ll e n g e .
R e je c t m a n a g e d t r a d e

A S p r a y d ia g r a m s h o w in g h o w n a t io n s c a n g a in c o m p e t it iv e a d v a n t a g e
( a c c o r d in g t o P o r t e r D ia m o n d M o d e l)

References:-
− Mazzucato, Mariana, (2002), Business Behavior in a Changing World,
Strategy for Business, London, The Open University, SAGE
− Vivek, Suneja, (2002), Business Behavior in a changing World, Policy Issues
for Business. London The Open University, SAGE
− B300 CD Audio
− Porter, M. E., 1990, Competitive Advantage of Nations, New York: Free
Press.
− Internet search, Michael porter's competitive advantage revisited(
http://www.busmgt.ulster.ac.uk/modules/bmg900m1/OShaughnessy.pdf)
date of access 23.12.2009.+/ (Vivek Suneja, 2002 p. 139/ by M. Porter
1990) Policy module.
− Porter, M. E., 1980, Competitive Strategy: Techniques for Analyzing
Industries and Competitors, New York: Free Press.
− (Tsurumi, Y., Multinational Management, Ballinger, Cambridge, MA, 1984,
p. 85)

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