Running head: MICHAEL PORTERS DIAMOND MODEL

MICHAEL PORTERS DIAMOND MODEL REGARDING COMPETITIVE ADVANTAGE:

IS IT STILL APPLICABLE?

Faliboga Tiberiu
Academia de Studii Economice din Bucuresti
REI GROUP 939

Running head: MICHAEL PORTERS DIAMOND MODEL

Abstract
The theory of comparative advantage was first exposed to the public by David Ricardo, a British
political economist. In the 16th century Mercantilism was the main economic theory and practice
which promoted state power. Inspired by the work of Adam Smith, Ricardo was in favor of free
trade, justifying that international trade is always a positive aspect of economics. Given the
evolution of modern economics and the appearance of globalization along with large companies
a new model had to be thought of taking into account the competitive aspect of business
activities. The business concept of competitive advantage matches core opportunities with
elements which can be improved in a company in order to generate greater value for a firm,
including comparative advantage. This theory surfaced in Michael Porters book The
Competitive Advantage of Nations. The diamond model offers a closer look at why do certain
industries become more competitive in certain locations using clusters in value-added chains.
Keywords: comparative advantage, competitive advantage, diamond model, clusters

Running head: MICHAEL PORTERS DIAMOND MODEL

Introduction
The diamond model suggests that there are certain reasons why industries within nations
are more competitive than others based on 4 determinants of national advantage: factor
conditions (workforce, raw materials); demand conditions (based on historic behavior); related
and supporting industries (local competition); firm strategy, structure and rivalry. For this study, I
will be using Michael Porters book to define and explain the model along with other academic
papers which try to apply the concept: Anne-Wil Harzing, Axle Giroud (2013) - The
competitive advantage of nations: An application to academia, Donald J. Daily (1993) Porters
Diamond and Exchange Rates, Davies, H., P.D. Ellis (2000), - Porters Competitive Advantage
of Nations: Time for a final judgment? Journal of Management Studies
Diamond model theory
Porter claims that most economic theories overlook product differentiation and quality
and focus too much on cost. In his analysis of the diamond model he mapped 10 important
clusters of successful industries in different trading nations and analyzed the history of
competition in those particular industries to observe the process by which the competitive
advantage was crated. In his analysis, he came across the 4 factors mentioned in the introduction
which are incorporated in the Porter diamond, now being used to analyze competitiveness.
Applications.
The Diamond model can, basically, be applied in any competitive industry. This paper
will only go through some examples.
With regards to academia, the field of bibliometrics, nations are in constant competition
in terms of academic disciplines, owning different advantages over another. Based on the factors

Running head: MICHAEL PORTERS DIAMOND MODEL

presented in the diamond higher education is considered as an advanced factor, being a source of
competitive advantage. Country competition is based on the affiliation of the authors of the
published papers, although multiple authors from different countries will add up the number of
publications for each of those countries.
The exchange rate is another element which can be analyzed using the diamond model.
Porter missed out the correlation between the exchange rate and his model stating that they not
matter. The limitation of his study was the lack of exceptional cases, as the last year of his study
was 1985, since then there were cases of significant exchange rate changes. For example,
between 1985 and 1990 the Japanese yen appreciated more than 60 percent (in relation to the
U.S dollar), Japan also being a key country in his study. Due to extreme cases of exchange rate
fluctuations the volume of export in certain industries are affected. This type of events lead to a
chain-reaction which can, in turn, damage market shares of the certain industry.
Limitations.
The final academic paper to be analyzed emphasizes the limitations of the diamond
model. To begin with, 2 important elements: change and government which include
unpredictable discontinuities are not actually part of the diamond but are capable of altering the
conditions within it.
Porter, within his book Competitive Advantage of Nations uses his diamond model as a
standard for achieving prosperity. This statement is easily refuted as there is no basis for defining
prosperity. A strong diamond is not capable of offering a country a certain level of prosperity.
Market shares within a company based in a highly competitive sector can be linked to local
prosperity which is not to be confused with the general idea. Even more, there have been
numerous cases of industries with weak diamonds which are more than capable to compete in the

Running head: MICHAEL PORTERS DIAMOND MODEL

international market. This idea has to do with the limitation of the diamond model regarding the
micro and macro environment. Globalization is the most discussed topic of the 21st century, small
companies now can secure their place in the international markets and benefit from free trade
without matching the factors described by Porter in his study
Research methods and results
All the academic papers, focus on empirical data subtracted from the real world. The
truth is that, as any other theory, there exist data which contradicts itself. Porters diamond can
still be used as an interpretation for achieving competitive industries, but it cannot be applied to
any cluster regarding its size and history. The main difference between the upholders and critics
of the theory are the business ethics each choose to follow. Whether we talk about competitive
advantage or comparative advantage, free trade is that which unites all in hope of a better future.
REFERENCES

1. Nicholas O'Shaughnessy (1997) The idea of competitive advantage and the ideas
of Michael Porter, Strategic Change, Vol. 6, 73-83;
2. Porter M.E. (1990) The competitive advantage of the nations;
3. Anne-Wil Harzing, Axle Giroud (2013) The competitive advantage of nations: An
application to academia, Journal of Informetrics 8 (2014) 2942;
4. Donald J. Daily (1993) Porters Diamond and Exchange Rates, MIR:
Management International Review, Vol. 33, Extensions of the Porter Diamond
Framework, pp. 119-134;
5. , Davies, H., P.D. Ellis (2000) - Porters Competitive Advantage of Nations: Time for
a final judgment?, Journal of Management Studies 37:8.