National Diamond

Michael Porter's National Diamond framework resulted from a study of patterns of comparative advantage among industrialized nations. It offers insights into the role of dynamic & endogenous national conditions on firms' international competitive advantage.



Principles

 * For analyzing national competitiveness, we need to focus upon firm performance. The role of the national environment is providing a context within which firms develop their identity, resources, capabilities, and managerial styles.
 * For a country to sustain a competitive advantage in a particular industry sector requires dynamic advantage: firms must broaden and extend the basis of their competitive advantage by innovation and upgrading. The dynamic conditions that influence innovation and the upgrading are far more important than initial resource endowments in determining national patterns of competitiveness.

Components
The four different components of the framework are:


 * Factor Conditions
 * Related And Supporting Industries
 * Demand Conditions
 * Strategy, Structure, And Rivalry

Factor Conditions
Factor conditions can be categorized into two forms:


 * "Home-Grown" resources
 * Highly specialized resources

For example, in analyzing Hollywood's preeminence in film production, Porter has pointed out the local concentration of skilled labor, including the different schools of film (UCLA & USC) in the area. Also, resource constraints may encourage development of substitute capabilities; Japan's relative lack of raw materials has spurred miniaturization and zero-defect manufacturing.

Related and Supporting Industries
For many firms, the presence of related and supporting industries is of critical importance to the growth of that particular industry. A critical concept here is that national competitive strengths tend to be associated with "clusters" of industries. For example, Silicon Valley in the USA and Silicon Glen in the UK are techno clusters of high-technology industries which includes individual computer software & semi-conductor firms. In Germany, a similar cluster exists around chemicals, synthetic dyes, textiles and textile machinery.

Demand Conditions
Demand conditions in the domestic market provide the primary driver of growth, innovation and quality improvement. The premise is that a strong domestic market stimulates the firm from being a startup to a slightly expanded and bigger organization. As an illustration, we can take the case of Germany which has some of the world's premier automobile companies like Mercedes, BMW, Porsche. German auto companies have dominated the world when it comes to the high-performance segment of the world automobile industry. However, their position in the market of cheaper, mass-produced autos is much weaker. This can be linked to a domestic market which has traditionally demanded a high level of engineering performance. Also, the transport infrastructure of Germany, with its Autobahns does tend to favor high-performance automobiles.

Strategy, Structure and Rivalry
National performance in particular sectors is inevitably related to the strategies and the structure of the firms in that sector. Competition plays a big role in driving innovation and the subsequent upgradation of competitive advantage. Since domestic competition is more direct and impacts earlier than steps taken by foreign competitors, the stimulus provided by them is higher in terms of innovation and efficiency. As an example, the Japanese automobile industry with 9 major competitors (Honda, Toyota, Suzuki, Isuzu, Nissan, Mazda, Mitsubishi, Subaru & Datsun) provide intense competition in the domestic market, as well as the foreign markets in which they compete. Analysis with 5 Forces of Porter.