Porters National

Diamond
Competitive
Advantage Of
Nations
Lecture 5 & 6
Background
Disillusioned by the economic theories of trade, Michael
Porter (1990 from Harvard Business School) advanced a
new theory to explain national competitive advantage.
The main question he attempts to answer was:
Why a nation achieve international success in a particular
industry?
Example:
Why does Japan do so sell in the automobile industry
Why does Switzerland excel in the production and export of
precision instruments and pharmaceuticals?
Why do Germany and the United States do so well in the
chemical industry?
Porter and his team conducted a comprehensive study on
100 industries in10 leading nations to learn what leads to
competitive advantage to nations.
United States
Germany
Italy
Sweden
United Kingdom
Japan
Korea
Denmark
Singapore
Switzerland
Background (Cont.)
Porters Diamond Model
Michael Porter postulated that determinants of
competitive advantage of a nation were based on four
major attributes.
1) Factor Endowments:- A nations position in factors
of production (Labor, Land, and Capital).
2) Demand Conditions:- The nature of home demand
for the industrys product or services.
3) Related And Supporting Industries:- The presence
of absence of supplier industries and related
industries that are internationally competitive.
4) Firm Strategy, Structure and Rivalry:- The
conditions governing how companies are created,
organized, and managed the nature of domestic
rivalry.
And two additional variables that can influence the national
diamond in important ways.
1) Chance:- An event, such as major innovations, which
can reshape industry structure and provide the
opportunity for one nations firms to replace anothers.
2) Government:- By its choice of policies, can detract from
or improve national advantage.
Porter argues that success occurs where these attributes
exist.
Greater the attribute, the higher chance of success.
According to him diamond is a mutually reinforcing system,
the effect of one attribute is contingent on the state of others.
Example, favorable demand conditions will not result in
competitive advantage unless the state of rivalry is sufficient
to cause firms to respond to them.
Porters Diamond Model (Cont.)
Porters Diamond Model (Cont.)
Determinants of National Competitive Advantage
Factor
Endowments
Firm Strategy,
Structure, And
Rivalry
Demand
Conditions
Related And
Supporting
Industries
Factor Endowments
Traditions trade theories define factor conditions as land,
labor, and capital.
Where as porter divided factors in to two categories:
Basic factors (unskilled labor, natural resources, climate,
location, and demographics) are inherited and require little
or no investment to be utilized in the production process.
Advanced factors (communication infrastructure,
sophisticated and skilled labor, research facilities, and
technological know-how) are created and upgraded
through reinvestment and innovation to specialized
factors.
Basic factors can provide only an initial advantage. They
must be supported by advanced factors to maintain success.
Porters Diamond Model (Cont.)
Factor Endowments (Cont.)
For Example:-
1) Switzerland was the First country to experience
labor shortages. They abandoned labor-intensive
watches and concentrated on innovative/high-end
watches.
2) Japan, a country that lacks arable land and mineral
deposits and yet through investment has build a
substantial endowment of advanced factors.
3) Sweden has a short building season and high
construction costs. These two things combined
created a need for pre-fabricated houses.
Porters Diamond Model (Cont.)
Demand Conditions
Home country Demand plays an important role in
producing competitiveness.
According to him, it is not only the size of the home
demand that matters, but also the sophistication of
home country buyers.
It is the composition of home demand that shapes how
firms perceive, interpret and respond to buyers
needs.
This forces home country firms to continually innovate
and upgrade their competitive positions to meet the
high standards in terms of product quality, features
and service demands.
More specifically, Porter regards the essential
conditions of demand as: a home demand that
anticipates and leads international demand, industry
segments with a significant share of home demand,
and sophisticated and demanding buyers.
Porters Diamond Model (Cont.)
Demand Conditions (Cont.)
For Example:-
1) Italian ceramic Industry after the world war II. There
was a postwar housing BOOM. Consumers wanted
cool floors because of Hot climatic conditions.
2) Japans knowledgeable buyers of cameras made
that industry to innovate and grow tremendously.
3) The French wine industry. The French are
sophisticated wine consumers. These consumers
force and help French wineries to produce high
quality wines.
4) Local demand for cellular phones in Scandinavia
made Nokia and Ericson in invest in other
developing nations.
Porters Diamond Model (Cont.)
Related And Supporting Industries
The third broad attribute of national advantage in an industry
is the presence of suppliers or related industries that are
internationally competitive.
Benefits of investment in advanced factors by suppliers and
related industries can spill over.
For Example:-
1) Technological leadership in the U.S. semiconductor
industry provided the basis for U.S. success in personal
computers and several other technically advanced
electronic products.
2) Switzerland success in pharmaceutical industry is
closely related to its international success in
technological dye industry.
3) Swedish strength in fabricated steel industry is the
reason for development in the Swedens specialty steel
industry.
Porters Diamond Model (Cont.)
Related And Supporting Industries (Cont.)
Successful industries tend to be grouped in clusters in
countries which then prompts knowledge flows between
firms through employees.
One such cluster that porter identified was in the
German textile and apparel sector, which included high
quality cotton, wool, synthetic fibers, sewing machine
needles, and a wide range of textile machinery.
Porters Diamond Model (Cont.)
Firm Strategy, Structure, And Rivalry
The conditions in the nation governing how companies are
created, organized, and managed, and the nature of
domestic rivalry.
Nations are characterized by different management
ideologies which influence the ability of firms to build national
competitive advantage.
There is a strong association between vigorous domestic
rivalry and the creation and persistence of competitive
advantage in an industry.
For Example:-
Japan has high priced land and so its factory space is at a
premium. This lead to just-in-time inventory techniques
(Japanese firms cant have a lot of stock taking up space, so
to cope with the potential of not have goods around when
they need it). They innovated traditional inventory
techniques.
Porters Diamond Model (Cont.)
Government & Chance
Regulation can alter home demand conditions
Government investment in education can change
factor endowment.
For Example:-
1991 US Govt Tariff on Japanese imports of
LCD screens
APPLE and IBM Protested strongly
Japan The low cost LCD manufacturer
Increase the LCD screens as well as Laptops
in the global market Reduce the Market
Share.
Porters Diamond Model (Cont.)
Evaluating Porters Theory

Question: Is Porter right?

Answer

If Porter is correct, his model should predict the pattern
of international trade in the real world.
Countries should export products from industries
where the diamond is favorable.
Countries should import products from areas where
the diamond is not favorable.
So, far there has been little empirical testing of the
theory.
Porters Diamond Model (Cont.)
Criticism
Government can influence on any four components
of the diamond.

Porter developed this paper based on case studies
and these tend to only apply to developed
economies.
Porters Diamond Model (Cont.)
Case Study
Information And Telecommunication
Koreas Competitive Advantages
Analysis of Koreas Competitive Advantage
with Michael E. Porter's Diamond
Framework.

Korea - New developed countries -
Information and Telecommunication.
Case Study (Cont.)
Factors Condition
Korean Government continuous effort
Improvement in IT infrastructure.
Facilitating the usage of information technology.
Favorable environment for development of IT
industry.
Over 90% of nation area is wired with broadband
internet network.
IT workforce in Korea accounted for 447,000 (2.1% of
total workforce).
Overall level of education in Korea is relatively high.
Korean government support educational institutions
related to IT skills.
Supply of quality of IT workforce is expected to
increased.
Factors Condition (Cont.)
Dae Deok Valley - an important IT cluster - Attracts
foreign investment.

Several joint research and development projects with
well-known foreign companies and universities.

Through export of CDMA technology - solid network
among the south Asian nations is established.
Case Study (Cont.)
Demand Conditions
High computing and Internet penetration rate since 1998.
Large user base of Internet - sophisticated internet usage.
IT effectively used - individual level, Business & government
sectors.
The competitive market situation - Forcing market players -
higher quality service at cheaper rate to users.
Korean governments effort to develop IT industry -
Privatization and Market Deregulation in Telecommunication
market.
Encouraged fair market competition in Telecommunication
market.
Resulting in lower price, better quality, better service and
created favorable business environments for business.
E-commerce exceeded 45 billion USD and projected a
growth rate of 9% per year.
Case Study (Cont.)
Related And Supporting Industry
Korea has secured leading position in semiconductor market
especially for DRAM (Dynamic Random Access Memory) -
DDR RAM and SD RAM.
Cheap and Quality Hardware production units available.
IT Enabled Services like BPOs and KPOs Yantram
Solutions.
Korea ranks itself in top manufacture in LCD and Mobile
phone, example LG group, Samsung group, Doosan
Group, DiaBell.
Korea - the leading position in IT related production.
The proactive effort - R&D and market expansion, as well as
government support are expected.
Korean government plans to extend its financial support for
R&D especially in 10 core technologies.
Initiated several huge project with private sectors

Case Study (Cont.)
Firm Strategy, Structure, And Rivalry
Korea - favorable business environments
Quick registration process,
Lower entry barriers in IT industry,
Lower cost using telecommunication infrastructure,
Diverse capital resources
Government supports
These activities result in huge number of small,
medium-sized venture company in IT industry.
And Hence it leads to severe domestic rivalry because
of market competition.
Encourages the continuous development of Innovative
technology and improvement of business models in
business sectors.

Case Study (Cont.)
Recap
Case Study 2
Competitive Advantage Of Telecommunication
Sector Of India
Government
Factor condition
Firm structure ,strategy and rivalry
Related and supported industry
Demand condition
Government
Government full support through reform process.
Policies are in place to safeguard the interest of service
provider as well those of consumer.
Example:-
1) Government is promoting telecom manufacturing by
providing Tax sop and establishing telecom SEZ.
2) Liberal Foreign Investment Regime: FDI limit increased from
49% to 74% ,rural telecom equipment also open to large
investments.
3) Auction of 3G Spectrum by inviting bids.
4) To safeguard consumer DOT established TRAI,TDSAT.
5) Unified access licensing regime was established.
Case Study 2 (Cont.)
Government (Cont.)
6)Number portability was proposed and still pending.
7)Unified access licensing regime was established.
8)Number portability was proposed and still pending.
9)Universal service obligation (USO).
10)Total FDI US$3892.19 mn(1991-2007), 3
rd
largest
sector to attract FDI.
11)100% FDI is permitted through automatic route in
telecom equipment manufacturing.
12)Foreign telecom companies can bid for 3G without
partnering local service provider.
Case Study 2 (Cont.)
Factor Condition
Presence of skilled and talented labor pool.
Rapidly developing robust telecom infrastructure.
Increasing disposable income of consumer.
Increasing demand due to changing lifestyle and growing
attraction for mobile with new features.
Low labor cost .
Country emerged as major R&D hub.
Example:-
1) It is estimated working age population is expected to
rise by 83% by 2026.
2) Nokia which has set up its manufacturing operation in
India considering long term sustainable demand for
mobile telephony.
Case Study 2 (Cont.)
Demand Condition
India has a large middle class of 300 mn.
Growing affordability and life free schemes have created the
market at the bottom of the pyramid.
Country increasing population and Low teledensity of 19%.
Export opportunities and ensure India as a manufacturing
hub for Asia Pacific.
Huge rural population yet to be tapped (close to 100 mn
come from rural area).
Example:-
1) India's upper middle class spends 6% of their earning
on telecom services.
2) ARPU for GSM user is 6.6$ per month.
Case Study 2 (Cont.)
Firm structure, Strategy And Rivalry
Series of reform opened up the economy as a result of
intensive competition in the country pop up which has
made it possible for service providers to offer service at
low fare [number of operator in circle have increased to 5-
6].
Saturation in urban market so capitalizing on value added
service will enable service provider to increase ARPU.
Many new handset have been launched.
Merger & acquisition strategy is being followed by the
service provider in expanding their reach.
Business alliance to improve cost and quality company
outsource non core activities. Ex-Airtel alliance with
Ericson.

Case Study 2 (Cont.)
Rural Penetration:- BSNL is developing infrastructure
in rural area to increase its customer base.
Low Cost Strategy:- To increase customer base and
retain them many service provider adhere to this
service.
Rapid Innovation:- Company launches new handset
in the market by developing set with new features.
Attractive Designing:- This strategy is used by
Motorola and established a distinct identity in the
market.
Case Study 2 (Cont.)
Competitive Pricing Strategy:- Motorola come up
with this strategy and aims at connecting the
unconnected to penetrate the market with competitive
pricing.
Example:-
1) Providing services at low fair have been possible
due to infrastructure sharing.
2) Currently private participation is permitted in all
segment of the telecom industry including
international long distance, domestic long
distance, internet etc.
3) Vodafone - Hutchison telecom international.
Case Study 2 (Cont.)
Related And Supported Industry
Competent handset manufactures have produced the
low price handset for the Indian market and India has
low manufacturing cost.
Handset manufactures are setting up manufacturing
bases in India for better operation management.
Many telecom and equipment and software
companies are based in India like nokia ,Samsung
and telecom equipment market stood at us $17100
million.
Network infrastructure companies like Alcatel -
Lucent, Cisco, Eriksson.
Telecom solution provider, tech Mahindra, IBM etc.
Case Study 2 (Cont.)
Conclusions
The diamond of national advantage makes sense as
a means of understanding global economic success.
Domestic success does prepare companies to
compete globally.
Major European and an increasing number of Asian
countries are capable of competing on a global basis.
The global marketplace is only going to get tougher
based on more, tougher competitors.
The diamond can help to anticipate and understand
new competitors.