Porter’s diamond model explains the reasons why industries within the country or in a different country are more competitive than the other worldwide. The discussion is about the specific factors that an organization, within a nation, provides to other organizations.
The model says that the industry is dependent on four primary factors as discussed below:
1. Factor Conditions
Factor conditions can be seen as opportunities within a country. As every country will significantly have different factor conditions. So, operating in a place that is suitable for your business needs is a huge advantage. The factors are important; it may be the human resource that is most important of all. Without the availability of manpower, it becomes impossible to complete the work required. Also, it will become difficult to compete in the chosen market. This includes the availability of factors of production such as labour, capital, raw material, knowledge, etc. They may or may not be available in a home country. For example, rubber and labour should be available for a Tyre manufacturing company.
2. Demand Conditions
If there is a high demand for your product in your home market than in a foreign market, it will increase the global competitiveness of local exporting companies. This will be an advantage; as a rapid increase in demand for a product can help you in growing a business.
3. Related and Supporting Industries
The success of a market depends on the presence of suppliers, competitors, and complementary firms. Further, competitive suppliers reinforce innovation and internationalization. A success of an organization will always be an advantage to related or supporting organizations. Ultimately, they encourage each other by producing complementary products.
4. Strategy Structure And Rivalry In The Industry
This factor is related to the way in which an organization is organized and managed, its corporate objectives and the measure of rivalry within its own organizational culture. The role of a strategy is to help in setting new goals, the role of a structure is to help in managing operations, and rivalry helps in generating new innovative ideas in organizations.
According to Porter’s diamond model, these dimensions interact with each other and help in increasing the competitiveness of the organizations.
Importance of Porter’s Diamond Model
- Government policies can influence the components of the diamond model.
- The presence of supporting industries in close proximity to manufacturing companies can reduce input costs and increase profits.
- A competitive industry structure is essential; as those companies who successfully survive tough competition at home are usually capable enough to withstand even tougher competition in a global business environment.
Let’s take an example of Germany’s Automobile Industry
In parts of Germany, there are no speed limits, so the sophisticated homebuyers look for more powerful cars. Therefore, Germany’s luxury car manufacturing industries try to develop more powerful engines for their consumers.
Professional engineers pass out from well-known German universities, and the government’s policies, which helps in the growth of the car manufacturing industry.
Related And Supporting Industry
Iron and steel industry is an example of supporting the industry which provides materials to car manufacturers.
Banks and financial institution are other examples of supporting the industry that provides capital to car manufacturers as a source of finance.
Firm Strategy, Structure, and Rivalry
Due to the huge demand for cars, there is a strong rivalry in the automobile industry amongst lots of car manufacturers. Therefore, they compete with each other potentially and keep developing more innovative and quality products.