Understanding Porter's Diamond Model for Competitive Advantage

This article discusses Porter's Diamond Model for Competitive Advantage and how it can be used to gain a competitive edge in global and international trade. It explains the four key ingredients that lead to a country's comparative advantage and how to create fresh factor endowments. The article also explores the role of industrial policies in enhancing and encouraging the growth and development of the manufacturing industry or other sectors of the economy.

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Question 1
Introduction
Classical theories used in global and international trade depicts comparative
advantage to factors endowed in a country that it is fortunate to inherit. (Adams, 2012) Such
endowment includes the size of population, land, vast natural resources and labor. (Porter,
2008) argued that a country can create fresh factor endowments such as government support,
modern technology, skilled labor, and a robust knowledge base. Therefore, Porter used a
diagram, which is diamond shaped, as the basis of support to his arguments. The framework
has been used to explain the various national playing field that different countries have
established for their industry’s success. The points used in the diamond solely affect four key
ingredients that normally lead to a country’s comparative advantage. These include the
available skills, information, and intensive resources that are used by organizations to decide
which opportunities to follow, the goals of various entities in companies and the pressure on
those businesses to invest and innovate. (Porter, 2008)
As a policy and strategy expert, one would reiterate and affirm the diamond’s
framework in that firms gain competitive advantage under certain conditions. Three
conditions have been set up in the theory. These include if a home base out rightly allow
accumulation of skills and assets if goals of managers, owners, and employees owners
possess the intense commitment and sustained investment and in companies where the home
base can afford better information and insight into various products and process needs.
Therefore, this would create a fundamental shift in the creation and assimilation of useful
knowledge by nations to gain more advantage in foreign direct investments. (Boyes and
Melvin, 2014)

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Standard economic theories attribute production factors such as labor, land, skilled or
unskilled resources, income capital, and infrastructure in determining the course of trade.
(Hatti, Singer and Tandon, 2013) Factor conditions, as explained in the diamond of national
advantage, relates a countries position in these factors which are essential to compete in any
industry. These production factors can be arranged in a hierarchy where on the lowest level
we have basic and generalized factors such as unskilled labor and raw materials, while
specialized and advanced factors such as educated and motivated labor, are on the higher
level. (Van Den Bulcke, Verbeke and Yuan, 2010) Therefore, one can argue that advanced and
specialized factors are vital for sustained and heavy investment in a given industry. Porter
argues that having a general high school or college education does not entirely represent a
competitive advantage in the modern global competition but what is important are factors
which are highly focused to an industry’s specific wants and needs. These factors are
uncommon and difficult to imitate and also require continuous investment to be initiated.
(Hatti, Singer and Tandon, 2013)
Competitive advantage results after the creation of specialized factors by leading
institutions and then continue working in their upgrade. (Boyes and Melvin, 2014) As a strategy
and policy expert, one would argue that the stock of factors by themselves are not what is
important in the sophisticated and advanced economies but how efficiently they can be
created, deployed and upgraded in the specific industries. A nation can, therefore, attract and
retain foreign direct investments by encouraging its companies to position themselves in the
market in innovation and upgrade before its foreign rivals. This active rivalry creates pressure
and company goals hence initiating a driving force in the innovative process leading to
constant commitment in the industry. (Huang et al., 2015) In order to do this, however,
favourable conditions should be present elsewhere in the diamond’s framework.

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A well versed domestic and international market is a significant component in
producing competition. Corporations that encounter sophisticated domestic markets tend to
trade superior produce because of the high demand for quality and the close proximity to
customers tend to enable the firms to recognize the desires and wants of the customers.
(Huang et al., 2015) A nation can attract extensive foreign direct investments by gaining a
competitive gain in industries where the home-based demand in a nation presents their
companies with a clearer and vibrant picture of developing and trending buyer needs. A
demanding pressure from the buyers can also create pressure for companies to transform
faster and achieve a better competitive advantage than the competing external rivals. (Jaffe
and Nebenzahl, 2011) Therefore, demand conditions relate to the demand of the home market
for the industry’s services and products.
Demand conditions in the local market are of less value if domestic preferences
cannot be transferred to other nations. A country can only anticipate international trends if the
state’s values are vastly spreading. A nation would indeed attract foreign investments by
exporting their values and preferences through the media, by training non-nationals, by
positive political influence and through overseas activities of their citizens and domestic
companies. (Lloyd and Vautier, 2014)Therefore, as a strategy expert, one would advise a nation
that by transferring domestic partialities to foreign markets will not only benefit the general
market growth but will also be key for small and vulnerable economies that are too small to
secure a high growth rate in the home market.
Related and auxiliary industries denote the presence or absences of a supplier industry
and other significant related businesses that are globally competitive. (Jaffe and Nebenzahl,
2011)The presence of a global competitive home-based supplier creates an advantage in
downstream companies in numerous ways such as offering the most economical method of
input delivery and close relationships in the working environment. The countries’ companies

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tend to benefit more if the suppliers themselves are mostly global competitors. Therefore,
home-based competitiveness in other industries that are related tends to provide the same
benefits as with suppliers where there is a smooth flow of information and increased speed on
the rate of innovation and upgrading. (Rezaee, 2016)
The nature of national rivalry and the context in which firms are created and
organized is constituted by a firm’s strategies, structure, and rivalry. (Lloyd and Vautier, 2014)
The goal of the industry’s owners, their management and employees also play a vital role.
One would, therefore, encourage a nation’s increase in competitiveness and effectiveness in a
specific industry through its convergence in organization practices, favoured organization
styles, and the institution of government policies that influence firm’s operation through its
favourable taxation policies hence encouraging long-term investments. Porter argues that
different management styles are incorporated in various industries. The best style of
management and individual motivation in working and expanding skills also plays an
important role in competitive advantage. Therefore, the context in business varies among
countries and domestic advantage rises from a respectable match amongst choices in the
context and the sources in an industry regarding competitive advantage. (Porter, 2008)
Question 2
Industrial policies of a country are strategic efforts to enhance and encourage the
development or growth of the manufacturing industry or other sectors of the economy. One
method the government would enhance the capability of its industries to upgrade and
innovate is by proving an enabling environment. The cornerstones of ensuring this would be
to provide investment incentives which include, provision of allowances in investment,
general liberalization of the economy and provision of target infrastructure. (Aronson and
Schwartz, 2014) The government should also help in the technological acquisition, an

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improved market for local products, institute public procurement policies that increase public
sector purchase of domestic products and provide a wide dissemination of information of
local and export, markets using its agencies. The government should also undertake a
comprehensive review of all regulatory acts that restrict and impede the operations of these
industries. Such acts include the employment act, building code act, and licensing
requirement acts. (Peñalver, 2011)
Lack of credit has been acknowledged as one of the major restraints facing the growth
and upgrading of industries. The government should propose policies such as the credit
policy to alleviate this problem. This policy stipulates that the flow of funds to the local
companies could be increased by, deregulating and liberalizing the financial sector, assisting
with obtaining of foreign loans for local industries and shouldering the related risks in foreign
exchange, and by exploring the possibilities of establishing export insurance schemes which
will increase local exports. The government can also increase the training of local
entrepreneurs which will be facilitated through changes in legislation such as amendment in
the act of industrial training which will allow banks to commence training of domestic clients
using the levy. Finally, the government can review some restrictive requirements, procedures
and regulations that reduce the flow of funds to these sectors hence making it more flexible to
accommodate the needs of domestic industries. (Peñalver, 2011)
Non-financial promotional policies play a significant role in the growth, innovation,
and upgrade of local industries. These policies constitute programmes such as guidance,
marketing, and training in technical issues, marketing, and product design. These services are
required by local enterprises for their entry, productivity, upgrade, and survival. The
government should promote technical and managerial enhancing policies and market
improving policies that increase the supply of entrepreneurs, colleges and other teaching
institutions in introducing entrepreneurship learning in their programmes. It can also

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undertake market surveys to identify openings for products development, growth, and
variation in the local sector. (Warnecke, 2014)
The society’s attitudes toward business play a role in the willingness of competent
entrepreneurs in responding to profitable opportunities. The government should institute
favourable gender-related policies that encourage the effectiveness of women in business. In
some societies, female entrepreneurs or other women face cultural barriers in undertaking
business activities outside their home. (Aronson and Schwartz, 2014) A nation should propose
policies to rectify such situations. This includes the public education and recognizing women
as role models, review of laws on ownership and inheritance of land and rights of women,
and the compilation of a database ascertaining the level of women involved in local
businesses, including their successes and difficulties. This will help in the development of an
appropriate support structure for them hence encouraging growth, innovation, and upgrade of
industries in the country.

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References
Adams, F. (2012). Industrial policies for growth and competitiveness. Lexington, MA [etc.]:
Heath, pp.4-14.
Aronson, J. and Schwartz, E. (2014). Management policies in local government finance.
Washington, D.C.: Published for the ICMA University by the International
City/County Management Association, pp.65-87.
Boyes, W. and Melvin, M. (2014). Fundamentals of economics. Mason, Ohio: South-Western
Cengage Learning, pp.10-14.
Hatti, N., Singer, H. and Tandon, R. (2013). Foreign direct investments. New Delhi: Indus,
pp.23-49.
Huang, K., Dyerson, R., Wu, L. and Harindranath, G. (2015). From Temporary Competitive
Advantage to Sustainable Competitive Advantage. British Journal of Management,
26(4), pp.617-636.
Jaffe, E. and Nebenzahl, I. (2011). National image & competitive advantage. [Frederiksberg]:
Copenhagen Business School Press, pp.23-45.
Lloyd, P. and Vautier, K. (2014). Promoting competition in global markets. Cheltenham, UK:
E. Elgar, pp.21-65.
Peñalver, M. (2011). Brazil, industrial policies and manufactured exports. 1st ed.
Washington, D.C.: World Bank, pp.34-54.
Porter, M. (2008). Competitive advantage. New York: Free Press, pp.26-45.

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Rezaee, F. (2016). Key Determinants of Success to Achieve Sustainable Competitive
Advantage (SCA). Archives of Business Research, 4(6), pp.10-16.
Van Den Bulcke, D., Verbeke, A. and Yuan, W. (2010). Handbook on Small Nations in the
Global Economy. Cheltenham: Edward Elgar Pub., pp.13-30.
Warnecke, S. (2014). International trade and industrial policies. [Place of publication not
identified]: Palgrave Macmillan, pp.27-34.