Porter’s Diamond Model

Porter’s Diamond Model is a Tool that analyzes Countries or Regions to describe what characterizes their Competitiveness.

• As its name indicates, it was created by Michael Porter.

Its main objective is to explain why companies or sectors in certain countries are more competitive in the global market than those in other countries.

To do this, the Porter Diamond Model focuses on 4 Attributes:

Porter’s Diamond Model.

The 4 Attributes studied by the Porter Diamond Model are:

• Firm Strategy, Structure and Rivalry.
• Demand Conditions.
• Related and Supporting Industries.
• Factor Conditions.

Although these 4 Attributes can be studied globally (within a certain Country) we recommend focusing on the particular Market that you are interested in analyzing.

• It is not the same to analyze a fishing company than a technology company.

Let’s see them in more detail so that you understand it better:

The Firm Strategy, Structure and Rivalry attribute studies:

• The average Corporate Philosophy in a certain country.
  • How companies Innovate, What Strategies do they follow, their Vision etc.
• How Companies Compete each other.
  • Do they Merge frequently? Do they collaborate? Do they compete “aggressively”?

Example of Firm Strategy – Structure and Rivalry

Look at the Financial Sector in the US.

• Why are the most competitive Investment Banks based in New York?

Because, the Competition on Wall Street has worked like the process of “Natural Selection”.

• Only the best have survived.

Those with better Vision, Investment Philosophy and Strategy have conquered the rest of the World.

The Demand Conditions attribute studies:

• The Internal Market of a Country.
  • How Strong is the internal Demand, How seasonal it is, etc.
• Customer Behavior within a Country.
  • What Clients Value most, Their Preferences, How much they Spend, etc.

Example of Demand Conditions

Let’s look at the Demand Conditions in Iceland.

Do you think Icelanders behave exactly the same as American citizens?

• No, of course not.

They don’t spend as much as people from the US.

Furthermore, domestic demand is surely very seasonal.

• Iceland is 6 months at night and 6 months with sunlight.

These factors affect all Companies established in Iceland.

The Related and Supporting Industries attribute studies:

• How many Companies are there in a Country.
  • And in which Sector are they Specialized.
• How Strong the different Economic Sectors are.
  • If there are lots of Suppliers, related Businesses, etc.

Example of Related and Supporting Industries

Let’s take a look at Germany.

Germany has, by far, the strongest Automotive Sector in the World.

• How is that possible?

There are many factors involved, of course, but the huge presence of Automotive Companies creates many Synergies that allow Automotive-related Businesses to be successful.

There are all kinds of Suppliers, Clients, Transport companies, etc.

• Lots of Competition? Yes, but also, lots of Opportunities.

The Factor Conditions attribute studies:

• The Natural Resources that a Country has.
  • If there is oil, gas, a fertile land, the climate, the geographical location, etc.
• The Human Resources of a Country.
  • The Mentality of its population, the Education of its citizens, Corruptions, etc.

Example of Factor Conditions

The Oil Sector is a good example of Factor Conditions.

Only countries with good Oil Reserves can have successful Oil extraction Businesses.

• Although they tend to partner with companies from other countries that provide the necessary Technology.

These Factors are not difficult to understand.

However, now you may be wondering:

• “Ok I understand but… How can I use this tool?“.

Let’s see How Porter’s Diamond Model works:

1. Analyze the Value Chain of your Company.

• The Processes and Activities create its Added Value.

2. For each Activity in the Value Chain, analyze the Country where your Company is located.

• Using the Porter’s Diamond Model.

3. Look for existing Synergies in the Domestic Market of your Country.

• Analyze the Strengths of your Country, and use them (Cheap labor, Raw materials, Education, etc).

4. Lean on other Regions to overcome the Weaknesses of your Country.

• Buying cheaper Raw materials, hiring more trained professionals, etc.

We know that all this sounds very complex.

• Yet we all do it unconsciously, every day.

• When we choose a French wine, we do it because they are good at making wine.
  • There are also good wines in Italy, Spain, Australia, etc, of course.
• When we watch a Hollywood movie it’s because they are the best at making movies.
  • On average, of course.
• When you buy a German car, you do it because they develop high-quality automobiles.
  • As we explained before.

Different countries excel at different things.

Porter’s Diamond Model highlights the need to consider the Domestic market of a Country as an important Strategic factor.

Now, let’s look at some practical examples:

We have chosen 5 real examples of companies whose success can be easily understood using Porter’s Diamond Model.

Let’s begin:

McDonald’s is a large company that employs hundreds of thousands of people around the world.

As you surely know, it is an American company specialized in Fast Food.

How did it get so successful?

Let’s use the Porter Diamond Model to analyze the American Fast Food Market:

• Firm Strategy, Structure and Rivalry:
  • Fast food consumption is widespread in the United States.
    • Only Companies with an aggressive Strategy and a versatile Structure survive.

• Demand Conditions:
  • The internal Demand is Large and Competitive.
    • It is much higher than that of other nations.

• Related and Supporting Industries:
  • There is a huge primary sector in the US.
    • Wheat, Corn, Cattle, etc., are extremely competitive in the US.

• Factor Conditions:
  • The internal Market of the US is enormous.
    • In addition, the huge Natural resources (arable land) allow cheap Raw Materials.

All of these factors have contributed to McDonald’s success around the world.

• And many other American Fast Food companies.

Another successful American Company: Apple.

• At the time we write these lines, it is the largest company in the world.

How did a company that was on the verge of bankruptcy become the largest company in the world?

Let’s analyze the American Tech industry with the Porter Diamond Model:

• Firm Strategy, Structure and Rivalry:
  • Apple was born in the most entrepreneurial country in the World.
    • A country where companies are familiar with Strategy and Think Big.

• Demand Conditions:
  • The American tech Market is very Consumerist.
    • People want the “last new thing” and are willing to spend their money on it.

• Related and Supporting Industries:
  • In Silicon Valley, there are hundreds of innovative Tech Companies.
    • Companies of all kinds that can provide solutions to each other.

• Factor Conditions:
  • Apple designs its products in California, where there are thousands of Engineers.
    • However, they assemble their products in China, where labor is cheap.

Apple has used the Strengths of the US and China to produce High quality products at “affordable” prices.

• Expensive but achievable (if you save enough).

Amazon: The last American Company we’ll analyze.

• The US has lots of very good examples.
  • We could analyze hundreds of examples.

How is possible that a company that started selling books online has become so large and Successful?

Again, the Porter Diamond Model can help us understand it:

• Firm Strategy, Structure and Rivalry:
  • Again, the US Tech Market is very Competitive.
    • Those with the best Strategy and optimal Structure have survived.

• Demand Conditions:
  • It is the most Consumerist Country in the World.
    • And, in the United States, people are hungry for new Products.

• Related and Supporting Industries:
  • In the US, there is a large Technology and Logistics sector.
    • The size of the country has “forced” it to have a highly developed Logistics Sector.

• Factor Conditions:
  • The United States has the best Universities in the World.
    • Amazon has benefited from having access to the best Engineers and Professionals.

Amazon did what Apple did but in the Logistics Industry.

They saw the Synergies they could benefit from, and created the most Competitive Logistic Company in the World.

In case you don’t know, Nestlé is a Swiss Company.

• It is one of the most important food companies in the world.

But what made Switzerland the best place for the success of this company?

Let’s analyze the Swiss Food Sector with the Porter Diamond Model:

• Firm Strategy, Structure and Rivalry:
  • Switzerland is a Country that is famous for its precision.
    • As with their watches, Companies want things to be done perfectly.

• Demand Conditions:
  • Switzerland is a Country with a Strong Demand for Dairy products.
    • Nestlé started as a Company specialized in Milk-based products.

• Related and Supporting Industries:
  • There is a Strong and varied Dairy Industry in Switzerland.
    • Lindt, Milka, Toblerone … And many more, they are Swiss companies.

• Factor Conditions:
  • Switzerland is in the Heart of Europe.
    • It has access to a Huge Market, with reduced Logistics Costs.

All of these factors contributed to Nestlé becoming the Large and successful food Company it is today.

• After being successful with dairy products, they diversified their products.

Samsung is one of the largest technology companies in the World.

• And, it is a Korean Company.

Although it started as a small fish trading company, we will analyze its success in Technology.

To do so, let’s analyze the Tech Market in South Korea:

• Firm Strategy, Structure and Rivalry:
  • South Korea (like Japan) is a Country with a tradition of Large Corporations.
    • There are large conglomerates that work in very different Markets.

• Demand Conditions:
  • The Korean domestic market has a Strong demand for Technology products.
    • In addition, younger generations spend much more than their parents did.

• Related and Supporting Industries:
  • There are lots of companies specialized in Technological components.
    • It has been very influenced by Japan.

• Factor Conditions:
  • The quality of its Educational System is unquestionable.
    • Also, its proximity to China and its cheap labor also helps Korean Conglomerates.

All of these factors helped build the giant and successful company that Samsung is today.

• Not only in the Technology Sector.

Porter’s Diamond Model is a Tool that analyzes Countries or Regions to describe what characterizes their Competitiveness.

It highlights the need to consider the Domestic market of a Country as an important Strategic factor.

To do this, the Porter Diamond Model focuses on 4 Attributes:

• Firm Strategy, Structure and Rivalry:
  • The average Corporate Philosophy in a certain country.
  • How Companies Compete each other.
• Demand Conditions:
  • The Internal Market of a Country.
  • Customer Behavior within a Country.
• Related and Supporting Industries:
  • How many Companies are there in a Country.
  • How Strong the different Economic Sectors are.
• Factor Conditions:
  • The Natural Resources that a Country has.
  • The Human Resources of a Country.

How to use Porter’s Diamond Model:

1. Analyze the Value Chain of your Company.
2. For each Activity in the Value Chain, analyze the Country where your Company is located.
3. Look for existing Synergies in the Domestic Market of your Country.
4. Lean on other Regions to overcome the Weaknesses of your Country.