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Porter’s diamond framework

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Published: Mon, 5 Dec 2016

Introduction

Michael porter’s model focuses on analysis of how organizations and/or firms functions in national markets. Additionally, the model, explores the capacity of national markets to compete with other national markets (i.e. international market).The model explains four pillars that lay emphasis on macroeconomic variables to determine demand along with other production factors. Macroeconomic variables address issues that relate to aggregate (national) economy as a whole. Michael’s pillars also focus on microeconomic factors which are explained by the firm’s structure, rivalry and strategy. Microeconomic variable address factors within an individual firm framework. Finally, the models also focus on supporting and related industries (Grimwade, 1999).

Firm’s strategy, structure and rivalry

Prevailing local conditions of a given country to a larger extent determine how firms are organized and managed. Therefore, local conditions have a major role in shaping the nature of domestic competition. For example, German firms are more hierarchical with good managers who usually have tough technical background hence domestic competition is higher as compared to Italy with family based firms. Also according to Porters (1998), management structures, interactions between firms and working morale are different in any given company. Therefore, different company cultures provide advantages or limitations for the given firm.

Additionally, corporate objectives and/or goals are subjective to frameworks of ownership and control. For instance, managers of public companies usually behave different from leaders of family based businesses and therefore the strategies employed differ. Competition is higher in public than family-run business as the managers in public firms are more aggressive and risk averse as compared to family-run company managers. Moreover, local or domestic rivalry and efforts by firms to remain on competitive edge locally can provide a nation firms with a better platform for achieving such advantage on global markets. This is because domestic rivalry forces compels organizations to move beyond fundamental advantages that the home country enjoys and works more to focus on increased innovation and productivity. Similarly, according to porter, a local rivalry that is very high is associated with low or less global rivalry. This is due to the fact that local competition triggers production of quality products giving a country competitive advantage globally.

Demand conditions

Domestic demand conditions contribute on a higher percentage in framing the direction and the rate of product development and innovation. This is because local firms have greater ability to understand and satisfy client’s needs than foreign market. Domestic demand is influenced by the needs as well as customers’ wants, degree of domestic preference as compared to foreign markets, and the rate and growth of local firms. When market and/or demand for a product are large in local than international markets, local companies devote their resources and time in production of that particular product. This results into production of products which are of high quality and thereby giving local firms a competitive advantage in case of export option for their products (Porter, 1998).

Additionally, a domestic market with a high demand results to national advantage in the sense that more aggressive or demanding customers in any economy forces firms to constantly employ strategies to retain market. For instance, companies will employ product differentiation and innovation to remain competitive. For example, customers of Cameras in Japan who were knowledgeable and demanding caused the firms in the camera industry to engage intensively in product differentiation and innovation resulting to quick growth of the industry. Innovation and differentiation strategies helps a firm not only remain competitive in local market but also in international markets. For instance, high domestic demand in Scandinavia for cellular phones triggered the two leading companies (Ericson and Nokia) to extend their investment to other nations. Therefore, the degree of local demand has appositive relationship with global success (Grimwade, 1999).

Factor conditions

Factors include, human resources, capital resources knowledge resources, material resources and infrastructure. Factors also include liquidity of the stock market of a nation, labor markets deregulation and research quality in universities. Factors can be divided into advanced and basic factors. Basic factors are natural such as natural resources and climate while advanced factors are man made such as advanced research, improved infrastructure among other factors. Each country has its own unique factor conditions and develops firms or industries where factor combination set is optimal. Factors keep on changing with time due to social-cultural changes, political initiatives; technological changes which in most instances influence a country’s factor conditions.

Additionally, Porter argues that a nation can create its own factor conditions such as improved technology and highly skilled resources to remain competitive. Also, to maintain success basic factors should be used together with the advanced factors. For example, Japan which has small amount of mineral deposits and arable land supplements the basic factors with advanced factor by having a pool of highly trained engineers thus helping the country to remain on competitive edge in the manufacturing industry. Similarly, Porters model emphasizes that the efficiency of upgrading and use of factor combination in a country is more important than the stock of factors. Also, the model presupposes that adverse conditions trigger innovations. For instance, as discussed earlier lack of mineral deposit and arable land inn Japan triggered the nation to engage in advancing human resource factor that have high skill to entrepreneur innovation in the manufacturing industry (Grimwade, 1999).

Supporting and Related industry

Performance of supporting and/or related industries in local and foreign market can affect the trend of a given industry in which they relate. A firm that is operating successfully in global market can cause successful influence of the other firms in the value chain. Supplying industries which are competitive usually triggers internationalization and innovation of other industries in value structure at later stages. Related industries can also be used to organize activities in the value structure or even produce compliment products that can be used together such as software along with hardware products in a computer system. For instance in Italy, success of leather and shoe industry has triggered the success of markets of other related products such as design and working machinery for leather among others. Similarly, close relationship among industries allows for information exchange and this encourages innovation as the companies constantly use the borrowed ideas from other related industries. Also supporting industries could provide inputs critical for internationalization and innovation. These firms and/or industries supply inputs which are cost effective, they could also involve themselves in the product improvement .These actions will trigger other firms operating in the same value chain to adopt innovation. Similarly, advantages of investment in advanced factors by related and/or supporting firms may spill over to other firms creating a very strong competitive position for the industry structure both internationally and locally. For instance, the noted successful trend in profitability and business in Switzerland pharmaceutical industry is linked to success in dye industry (Porter, 1998).

References

Grimwade, N. (1999) International Trade: new Patterns of Trade, Production and Investment. New York, US: Routledge publishers

Porter, M. (1998). On competition: Watertown, MA: Harvard Business Press Publishers


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