Porter’s National Diamond suggests that there are reasons why some nations’ industries are inherently more competitive than others. Conditions found within particular countries can help firms to be more competitive than foreign competitors. This can help explain why Scotland is good at producing whiskey whereas Jamaica produces rum; or why Japanese electronics manufacturers or Italian fashion houses dominate their respective markets.
Porter identified four principle factors (the ‘diamond’) that determine national competitive advantage (or disadvantage):
- Factor conditions
- Demand conditions
- Firm strategy, structure, rivalry
- Related and supporting industries
Factor conditions are an abundance of cheap, or good quality, inputs to production. These could include:
- physical resources such as land, minerals and weather
- human resources such as skills, motivation, price and industrial relations
- knowledge that can be used effectively
Demand conditions (in the home, or domestic marketplace) refers to how firms perceive, and respond to, their home customer needs. German people are particularly demanding of car manufacturers; this has helped make German car manufacturers particularly competitive versus their foreign rivals.
Firm strategy, structure, rivalry refers to how organisational goals can be determined by ownership structure. Smaller companies may have slightly longer time horizons to operate in because their shares are not traded as much as larger organisations. They might also have different return on capital requirements.
Related and supporting industries refers to how firms can achieve synergy by working with domestic supply chain partners, giving them competitive advantages over foreign firms that cannot replicate such synergies. A good example of this could be biotech businesses clustered around the UK city of Cambridge (attracted by the world class university there).