MICHAEL PORTER

DIAMOND THEORY &

ITS APPLICATION
P R E S E N T E D BY : ABHIJIT KHANDAGALE
A B H I S H E K PA N D E Y
A D I T YAVA R D H A N S I N G H
ANKIT VERMA
B A S U B H AT TA R

TRADITIONAL THEORY
Definition:
The benefit oradvantageof an economy to be able to produce a commodity at a lesser opportunity
cost than other entities is referred to ascomparative advantagein international tradetheory.
Traditionally, economic theory mentions the following factors for comparative advantage for regions or
countries:
1. Land
2. Location
3. Natural resources
4. Labour, and
5. Local population size.
Because these 5 factors can hardly be influenced, this fits in a rather passive (inherited) view regarding
national economic opportunity.

Important Criticism of Comparative

Advantage Theory In Relation To
International Trade
Unrealistic assumption of labour cost:
In calculating production costs, it takes only labour costs and neglects nonlabour costs involved in the production commodities which is highly unrealistic.
Neglects the role of technology:
The theory neglects the role of technological innovations in international trade.
Unrealistic assumptions of full employment:
Existence of underemployed economies makes this theory static.
Ignores transport costs:
Transport costs play an important role in determining the pattern of world trade.
Incomplete theory:.
It simply explains how two countries gain from international trade. But it fails to
show how the gains from trade are distributed between the two countries.

PORTERS CONCEPT
Porter says that sustained industrial growth has hardly ever
been built on the basic inherited factors. Abundance of such
factors may actually undermine COMPETATIVE ADVANTAGE!
Increased specialisation may lead to diseconomies of
scale.He introduces a concept called "clusters" or groups of
interconnected firms, suppliers, related industries, and
institutions, that arise in certain locations.

WHAT IS THE DIAMOND

MODEL
The Diamond Model of Michael Porter for the competitive advantage
of Nations offers a model that can help understand the comparative
position of a nation in global competition. The model can also be used
for major geographic regions.
According to Porter, as a rule competitive advantage of nations is the
outcome of 4 interlinked advanced factors and activities in and
between companies in these clusters. These can be influenced in a
pro-active way by government.

PORTERS DIAMOND MODEL

APPLICATION
In terms of application, we can take theexample of
IT/ITES Business in India
(ITES) is established and is on the development
stage.
(IT) is on the threshold of the growth .

THE PASSIVE ANALYSIS OF

1. Land
Available in plenty.
2. Location
Strategic locations are available.
3. Natural resources (minerals, energy)
Apart from energy, all other resources are available
4. Labor, and
Skilled and unskilled labors are available in plenty.
5. Local population size.
Local market size has the potential to absorb any excess production.

FACTOR CONDITIONS
Cost Arbitrage.
Favorable endowments Resources.
Lower infrastructural costs boosting entrepreneurship.
MNCs imparting positive externalities.
The Presence Of Indian Diaspora.
Eg:India has created its own important factors such as skilled
resources and technological base for expanding IT / ITES
India is upgrading / deploying resources over time to meet
the demand.
New innovations. new methods has given the
local industry the comparative advantage.

DEMAND CONDITIONS
Industry Structure.
Size and Pattern Of Growth.
The Composition.
Eg:A more demanding local/ global market has given INDIA
the international / national advantage.
A strong trend setting local market has helped local firms anticipate
global trends.

DOMESTIC IT/ITES SCENARIOS

14,000
12,000
10,000
8,000
6,000
4,000
2,000
0

Domestic IT-ITeS scenario. FY2009

Domestic IT-ITeS scenario. FY2011
Domestic IT-ITeS scenario. FY2013

Domestic IT-ITeS scenario. FY2010

Domestic IT-ITeS scenario. FY2012
Domestic IT-ITeS scenario. FY2014E

RELATING SUPPORTING
INDUSTRIES
Educational Institutions.
Hardware Sector.
Eg:Local competition has created innovations and cost effectiveness.
for the Indian IT AND ITES.
This has also put the pressure on local suppliers to lift their game.

FIRM STRATEGY, STRUCTURE &

RIVALRY
Industry Structure.
Competitive Strategies:
1.Focus On Innovations.
2.Focus On tier 2 tier 3 Cities.
3.Mergers and acquisitions.
4.Adoption Of Quality certifications.
5.Reliance On the Domestic market.
Eg:- Local conditions have affected various firms strategy.
Local rivalry have forced firms to move beyond basic advantages.
examples INFOSYS , WIPRO AND TCS

Emerging IT hubs in India

GOVERNMENT POLICIES
The reforms have reduced licensing requirements and made foreign technology
accessible, removed restrictions, process of investment easier.
The Indian government is actively promoting FDI and investments from NRIs.
In pursuance of liberalization and globalization, the Indian government has been
formulating and implementing more transparent and investment friendly policies.
Another significant example of the liberal policy of the Indian government is the IT
Act.

GOVERNMENT POLICIES
The Indian government has been continuously proposing amendments in
the Indian Evidence Act, Indian Penal Code and the RBI Act to address the
issues of jurisdiction, authentication and origination.
Recognizing the importance of Venture Capital Funding, the Ministry of
Information Technology has set up a National Venture Fund for the Software
and IT Industry with a corpus of Rs. 100 crore.
Nasscom (most important promoter of the IT/BPO industry) has been
playing a crucial role in advertising and helping the IT industry.

References
http://www.ibef.org/industry/information-technology-india.aspx
http://
dipp.nic.in/English/Publications/Annual_Reports/AnnualReport_Eng_2013-14.pd
f
Investigating India's competitive edge in the IT-ITeS sector, Sankalpa
Bhattacharjee, Debkumar Chakrabarti, March 2015.

Thank You!