Chapter 9
“The Competitive Advantage of Nations”
by Michael E. Porter
Explain Porter’s “Diamonds of national advantage”. Discuss the relevance of this
analytical tool for policy making by national governments in both developed and
developing countries. Final Sep 2007
Or What is Porter’s “Diamond of national advantage”? Discuss how Governments
can utilize this tool in policy making. Final March 2008
Or Explain how Porter’s “Diamonds of national advantage” influence innovation
by firms in a nation, and discuss the implications of this analysis for policy
making by national governments. Support your answer by relevant B300 course
concepts & models.
Final March, 2009
Or Discuss the determinants of national competitive advantage and explain the
basic principles that governments should embrace to support national
competitiveness. Final 2011
Porter argued that a nation’s competitiveness depends on the capacity of its industry to
innovate and upgrade. Companies gain advantage against the world’s best competitors
because of pressure and challenge. They benefit from having strong domestic rivals,
aggressive home-base suppliers, and demanding local customers.
According to Porter, a nation achieves a competitive advantage if its firms are competitive.
Firms become competitive through innovation. Innovation can include technical
improvements to the product or to the production process.
Porter used a diamond shaped diagram as the basis of a framework to illustrate the
determinants of national advantage. This diamond represents the national plying field that
countries establish for their industries:
Porter’s Diamond Model for the Competitive Advantage of Nations
Four attributes of a nation comprise Porter's "Diamond" of national advantage. They are:
A. Factor conditions (i.e. the nation's position in factors of production, such as skilled
labor and infrastructure),
B. Demand conditions (i.e. the nature of home-market demand for the industry`s product
or service, sophisticated customers in home market),
C. Related and supporting industries, the presence or absence in the nation of supplier
industries and other related industries that are internationally competitive.
D. Firm strategy, structure and rivalry (i.e. conditions in the nation governing how
companies are created, organize, and managed, as well as the nature of domestic
rivalry).
1. Factors conditions:
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According to standard economic theory factors of production (land, labor, capital,
natural resources & infrastructure) will determine the flow of trade. According to Porter
this theory is at best incomplete and at worst incorrect. Porter argues that the "key"
factors of production (or specialized factors) are created, not inherited.
"Non-key" factors or general use factors, such as unskilled labor and raw materials, can
be obtained by any company and, hence, do not generate sustained competitive
advantage. However, specialized factors involve heavy, sustained investment. They are
more difficult to duplicate. This leads to a competitive advantage, because of other firms
cannot easily duplicate these factors, they are valuable.
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Nations succeed in industries where they are particularly good at factor creation.
Competitive advantage results from the presence of world-class institution that first
create specialized factors and then continually work to upgrade them. For example:
 Denmark: world leading exports position in insulin.
 Holland: cultivation, packaging and shipping of flowers.
The disadvantage in a static model of competition can become an advantage in a
dynamic one. For example; Companies should innovate and upgrade when they face a
disadvantage like high factor costs.
Companies or nations can convert factor disadvantages into competitive advantage:
Japan: an island with no natural resources created Just-in-time method because of
expensive space. Deficiencies did serve to spur Japan's competitive innovation.
Disadvantages can become advantages only under certain conditions:
 When they send companies proper signals equipping them to innovate in advance
before foreign rivals arrive. For example: Swiss companies: upgrading labor
productivity, seeking higher value.
 When there are favorable conditions elsewhere in the diamond for example:
 Access to people with appropriate skills.
 Home-demand conditions that send the right signals. US consumer electronics
moved to Taiwan and other nations.
 Active domestic rivals who create pressure to innovate. Japanese rivals chose to
eliminate labor through automation.
 Company goals that lead to sustained commitment to the industry.
2. Demand conditions:
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Porter argues that a sophisticated domestic market is an important element to
producing competitiveness. Firms that face a sophisticated domestic market are likely to
sell superior products because the market demands high quality and a close proximity to
such consumers enables the firm to better understand the needs and desires of the
customers.
Nations gain competitive advantage in industries where the home demand gives their
companies a cleared or earlier picture of emerging buyer needs, and where demanding
buyers pressure companies to innovate faster and achieve more sophisticated
competitive advantages than their foreign rivals.
If the nation’s values spread to other countries, then the local firms will be competitive in
the global market, that if the country is exporting its values and tastes as well as its
products, through media, training foreigners, political influences and through the foreign
activities of their citizens and companies. (i.e. US fast food and credit cards companies).
Example:
The Egyptian cotton industry. The Egyptian is sophisticated cotton consumers. These
consumers force and help Egyptian producer to produce high quality cotton.
3. Related and supporting industries:
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Internationally competitive home-based suppliers create advantages in downstream
industries by delivering the most cost effective inputs in an efficient, early, rapid and
preferential way and where close working relationships is in place where suppliers and
end-users located near each others:
 First, they deliver the most cost-effective inputs in an efficient, early rapid and
sometimes preferential way.
 Short lines of communications
 Quick and constant flow of information
 Ongoing exchange of ideas and innovations
 Access to components & machinery contribute to accelerating the pace of innovation
in a nation’s leading industry
Home-based suppliers and related industries that are internationally competitive can be
very efficient and fast. Example, the ‘Italian Footwear Cluster’ include co-operation and
interactions between shoe producers, leather manufacturers and fashion designers. The
nation’s companies benefit most when the suppliers and related industries are global
competitors. Japanese dominance in acoustic instruments and consumer electronics
resulted in Japan’s leadership in electronic musical keyboards.
4. Firm strategy, goals, structure and rivalry:
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National circumstances and context create strong tendencies in how companies are
created, organized, and managed, as well as what the nature of domestic rivalry will be.
Government policy can influence a firm’s behavior through its taxation policies towards
long-term investment and through the nature of its competition policies. Competitiveness
in a specific industry results from convergence of the management practices and
organizational modes favored in the country and the sources of competitive advantage
in the industry.
 Strategy (such as Capital Markets):
 Domestic capital markets affect the strategy of firms. Some countries’ capital markets
have a long-run outlook, while others have a short-run outlook. Industries vary in
how long the long-run is.
 Countries with a short-run outlook (like the U.S.) will tend to be more competitive in
industries where investment is short-term (like the computer industry).
 Countries with a long run outlook (like Kuwait) will tend to be more competitive in
industries where investment is long-term (like the Oil industry).
 Countries also differ in the goals that companies and individuals seek to achieve.
Company goals reflect the characteristics of national capital markets and
compensation practices for managers.
 Example:
Italians are leaders in lighting, furniture, footwear, woolen fabrics. Accordingly, their
strategy focus on:
- Customized products
-
Niche marketing
Rapid change
 Structure:
Porter argues that the best management styles vary among industries. Some countries
may be oriented toward a particular style of management. Those countries will tend to be
more competitive in industries for which that style of management is suited. Individual
motivation to work and expand skills is also important to competitive advantage.
Example:
Germany tends to have hierarchical management structures composed of managers with
strong technical backgrounds and Italy has smaller, family-run firms.
 Rivalry:
Porter argues the presence of strong local rivals is a final, and powerful, stimulus to the
creation and persistence of competitive advantage. Competition is particularly strong in
Japan, where many companies compete strongly in most industries. Domestic rivalry,
like any rivalry, creates pressure on companies to innovate and improve. Local rivals
push each other to lower costs, improve quality and service, and create new products
and processes, also will keep each other honest in obtaining government support.
The Role of Government:
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Many see government as essential helper or supporter of industry. Others accept the
free market concept. Porter believes both views are incorrect.
Government role is as catalyst and challenger:
- To encourage companies to raise their aspirations and objectives and move to higher
levels of competitive performance.
- Government cannot create competitive industries only companies can do that.
- Government should create an environment that stimulates companies to gain
competitive advantage.
The role of government to support the diamonds: ‫مهم جدا‬
1) Focus on specialized factor creation:
Government should provide national infrastructure like education or research institutions
connected with industry and encourage private investment to create factors.
2) Avoid intervening in factor and currency markets:
Interventions are often counterproductive. They work against upgrading of industry and
the search for more suitable competitive advantage. Devaluation shocks can be harmful.
When market forces create rising factor costs or higher exchange rate, government
should not push them back down.
3) Enforce strict product, safety and environmental standards:
Strict standards for product, safety and environmental which pressure companies to:
- Improve quality
- Upgrade technology
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Provide features that respond to consumer and social demands
4) Sharply limit direct cooperation among industry rivals:
Companies rarely contribute their best scientists and engineers to cooperative projects
and usually spend more on their own private research in the same field. Typically,
government should allow more cooperative R&D to achieve economy of scale to reduce
duplication of resources and cost.
5) Promote goals that lead to sustained investment:
Government should encourage sustained investment in human skills, innovation, physical
assets thru tax incentives.
6) Deregulate competition:
Regulation of competition thru such policies as maintaining a state monopoly,
controlling entry to market or fixing prices has negative consequences. However
deregulation will not succeed without strong domestic rivalry that requires a strong and
consistent antitrust policy.
7) Enforce strong domestic antitrust policies:
Disallow mergers, acquisition and alliances that involve industry leaders because they
reduce the incentive to innovate. Also, same standards should be applied to both domestic
and foreign competitors. Allow it for small companies in related industries to promote the
transfer of skills
8) Reject managed trade:
Managed trade guaranteed markets for inefficient companies, so trade agreement would
reduce motivation to innovate. Therefore, Policies should follow open market access to
every foreign nation and remove its barriers.
The role of company policies to support the diamonds:
1- Create pressure for innovation:
A company should expose themselves to challenges to have incentive to innovate and
sell to customer with difficult needs or provide material from advanced suppliers.
2- Seek out the most capable competitors as motivators:
Company should be dynamic and meet new challenges by studying and respecting
competitors and compete with them
3- Establish early-warning systems:
Company had to investigate new buyers, competitors and maintain relation with
research centers
4- Improve the national diamond:
For international success firm had to improve their national position through forming
clusters and deal with local buyers, suppliers to help them upgrade.
5- Welcome domestic rivalry:
To compete globally companies had to have domestic rivals to create incentive to
innovation.
6- Globalize a tap selective advantage in other nations:
Innovation to support local diamond is better than outsourcing, that is developing local
suppliers is better than depending on one foreign supplier. While foreign activities are
selective and only used to support the competitive advantage, e.g. establish R&D
overseas.
7- Use alliance only selectively:
Most alliance with foreign companies is short term, to benefit from foreign capabilities.
It requires cooperation between two operations and reconciling goals
8- Locate the home base to support competitive advantage:
If the national state not supporting companies then they had to move elsewhere to
achieve economy of scale.