The Porter Diamond model is one of the most popular models used for evaluating competitive advantage. First introduced around 30 years ago, it has become a foundation for further research, a source for reinterpretations, and a starting point for transformations and improvements for economic competition scholarship and practice. The present paper aims at discussing the Porter Diamond model and its application in the contemporary context.
Michael Porter’s Theory of the National Competitive Advantage of Industries
In 1990, Michael E. Porter, a leading authority on strategy and economic competition, first introduced a theoretical model called the Theory of National Competitive Advantage of Industries. It was designed to explain some nations’ competitive advantage and demonstrate how governments can improve a country’s economic potential. According to Porter (1990), national prosperity “does not grow out of a country’s natural endowments, its labor pool, its interest rates, or its currency’s value,” but the ability of the nation’s industry to innovate and upgrade (para. 1).
Another name for this model is the Porter Diamond model, as it was based on four main components that could be positioned in the form of a diamond. The elements that form the Porter diamond model are factor conditions, related and supporting industries, demand conditions, strategy, structure, and rivalry factors (Porter, 1990). Moreover, the diamond model also acknowledges two additional variables that affect competitiveness. They are the role of government and the role of chance.
The factor conditions include the existing infrastructure, land, labor, and natural resources that are directly linked to the examined industry. Suppliers, distributors, and other sectors of the economy crucial for the industry are analyzed as a second component. The demand conditions are the ones created by the domestic market and determine the level of quality and performance. Finally, such factors as strategy, structure, and rivalry are analyzed, as they directly influence the performance.
The Impact of Michael Porter’s Work
Michael Porter’s work has become one of the most influential theories. Since its publication, the diamond model theory has been a subject of debate over its workability and application in the real world. Among the advantages of this model, specialists single out that it can be applied not only to the national level of the economy but also to help companies develop their investment and operational strategy.
The original Porter’s work, The Competitive Advantage of Nations, studied eight developed countries and emerging newly industrialized South Korea and Singapore. Over the years, the model has been expanded and adapted to other nations and levels. By doing this, researchers have come up with double-diamond and nine-factor models and other theories analyzing national competitiveness (Cho & Moon, 2013). This extensive use of the model manifests its significance and applicability even in the contemporary context.
However, the model is not only celebrated but also criticized. The most contested points are Porter’s failure to acknowledge globalization’s impact, assess countries’ ability to create cross-border synergies, and predict competitive advantage (Tsiligiris, 2017). Moreover, according to critics, the model ignores multinational organizations, does not dwell in detail on the government’s role, and does not apply to smaller nations. Finally, it did not consider some other intangible factors, such as culture, a step that was implemented later after a new paradigm was introduced.
The Paradigm Shift to Competitive Productivity
In business, productivity determines the connection between organizational goals and external environment factors, production and resources, efforts, and output. This factor is deemed one of the most critical sources of competitive advantage. However, over the years, it has become evident that increasing the number of resources, efforts, and time does not necessarily lead to increased productivity. Conversely, these actions can even result in some negative consequences.
Over recent years, a paradigm shift resulted in establishing the concept of competitive productivity (CP). As a term closely connected to competitive advantage, CP “benchmarks performance against industry leaders to aspire to the same, if not higher, market position” (Baumann & Pintado, 2013, p. 10). It means that competitive productivity deals with infrastructure, production, trade, and other economic factors. Moreover, competitive productivity takes into account the nation’s culture, education, and attitudes.
What is more, competitive productivity theory presupposes its application by various agents. Thus, Baumann, Cherry, and Chu (2019) propose three models to capture components at the macro, meso, and micro levels. They are a National Competitive Productivity model to capture the national competitive productivity, a Firm Competitive Productivity model to be used in the industry context, and an Individual Competitive Productivity for the individual level.
Comparison and Evaluation of Porter’s Model and Competitive Productivity Approach
Both theories – Michael Porter’s Diamond Model and Competitive Productivity theory– are focused on analyzing and evaluating competitive advantage. These approaches consider fundamental variables that determine economic competitiveness at different levels: infrastructure, resources, labor. However, certain factors are various and demonstrate the advantage of a competitive productivity perspective.
First, it is the applicability scope that presupposes the use of these models by different agents. According to researchers, CP models can be used by the government and policymakers (NCP model), managers and organizations (FCP model), and individuals, such as workers and students (ICP model) to evaluate and enhance their performance (Baumann & Pintado, 2013). Although Porter’s model has the capability of being used for businesses, it requires additional modifications.
Second, the competitive productivity approach defines the concept of benchmarking. While Michael Porter’s view on competition is quite vague as it considers the status quo of international relations as competitive without providing details, the competitive productivity perspective sets objective goals. The benchmarking is supposed to be carried out against industry leaders.
Finally, the main difference between the two approaches is the inclusion of intangible factors in the competitive productivity paradigm. This theory presupposes careful consideration of the culture, education, and attitudes that a country or business represents. Competitive advantage can be nurtured through developing a performance-oriented culture, encouraging progress, and hard work. These factors were left out in Michael Porter’s model and were not considered as noteworthy. However, it might be productive to take them into account, and, in combination with other observations, they could be used for further development of the established Diamond model.
Michael Porter’s Diamond model continues to be a highly relevant and applicable theory used for evaluating the competitive advantage of countries, industries, and businesses. However, for a more productive and sufficient competitiveness assessment, it can be enriched by adopting a competitive productivity approach. It will allow taking into account initially overlooked factors, ensure a universal overview, and improve evaluation precision.
Baumann, C., Cherry, M., & Chu, W. (2019). Competitive productivity (CP) at macro-meso-micro levels. Cross Cultural & Strategic Management, 26(2), 118-144. Web.
Baumann, C., & Pintado, I. (2013). Competitive productivity – a new perspective on effective output. Journal of the Institute of Management Services, 57(1), 9-11.
Cho, D.S, & Moon, H.C. (2013). From Adam Smith to Michael Porter: Evolution of competitiveness theory. World Scientific Publishing.
Porter, M. (1990). The competitive advantage of nations. Harvard Business Review. Web.
Tsiligiris, V. (2017). An adapted Porter Diamond Model for the evaluation of transnational education host countries. International Journal of Educational Management, 32(2), 210-226. Web.