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Porter Diamond
Porter Diamond
1. Factor Conditions
1
Porter, M, The Competitive Advantage of Nations, THE FREE PRESS, A Division of McMillan, Inc.,
New York, 1990, p. xii
2
Ibid., p. 34
Factor conditions being the inputs which affect competition in any industry
comprise a number of broad categories:
Human resources: the quantity, skills, and cost of personnel (including
management);
Physical resources: the abundance, quality, accessibility, and cost of the
nation’s land, water, mineral, or timber deposits, hydroelectric power
sources, fishing grounds, and other physical traits.
Knowledge resources: the accumulated scientific, technical, and market
knowledge in a nation in the sphere of goods and services
Capital resources: the stock of capital available in a country and the cost
of its deployment;
Infrastructure resources: the characteristics (including type, quality) and
the cost of using the infrastructure available.3
While analyzing these factors as a prerequisite for building competitive
advantage, it is relatively unimportant to emphasize just their quantity or involvement
in a particular industry. What determines their influence on competitiveness is the
degree of efficiency and effectiveness of the way they are deployed within an industry.
This in turn affects directly their potential for influencing the establishment
of competitive advantage. Nevertheless, productivity in deployment does not
automatically translate into international success. This is achieved only under the
condition that the other determinants in the “diamond” are in a position to influence
favorably the utilization of production factors. With a view of isolating the factors
which are most significant for the creation of competitive advantage in the context of
the whole “diamond”, a hierarchy among factors has been established.
Depending on the degree of investment required for the possession of a particular
factor, factors of production are divided into two groups: basic and advanced. Basic
factors are passively inherited, that is, their creation requires relatively modest or
unsophisticated private and social investment. 4 They can include natural resources,
climate, location, unskilled or semi-skilled labor, and debt capital. Unlike them,
advanced factors which can comprise highly educated personnel, modern digital data
communications infrastructure, etc. require large and often sustained investments for
their development. Factor development which has been achieved through substantial
3
Ibid., p. 74 - 75
4
Ibid., p. 77
investment, in turn, provides for the creation of a higher-order competitive advantage
and, therefore, assumes greater significance for competitiveness.
Distinguishing among factors for he purpose of isolating those which account
for the establishment of competitive advantage most, yields another division:
generalized and specialized factors. Generalized factors derive their name from the
feature that they could be deployed in a wide range of industries. Specialized factors,
on the other hand, are characterized by a narrow field of application due to a high
degree of customization to the needs of a particular industry. Compared to the
generalized factors, specialized factors require more focused, and often riskier, private
and social investment. This, together with their specifically tailored characteristics to
the nature of the particular industry, determines their superiority over generalized
factors in terms of influencing the creation of competitive advantage. With respect to
the relation between advanced and specialized factors, the latter do not necessarily
comprise the former, but at any rate the more constantly upgrading and developing
advanced and specialized factors of production exist in an industry, the better is the
basis for a significant and sustainable advantage in a given field.
2. Demand Conditions
The importance of demand conditions as a factor influencing competitive
advantage stems from the fact that in a market economy the direction of production,
that is, the kinds of goods which are produced, is determined by the needs of buyers.
What this means is that, regardless of the state of the other determinants in the
“diamond”, competitiveness in an industry is impossible to be achieved unless
demand conditions allow for the successful realization of firms’ products. Underlying
this dependence is the dynamic influence of home demand which shapes the rate and
character of improvement and innovation by a nation’s firms. The sources of this
influence within the context of home demand are divided into three broad attributes:
the composition of home demand, the size and pattern of growth of home demand, and
the mechanisms by which a nation’s domestic preferences are transmitted to foreign
markets.
Home Demand Composition: The composition of home demand
determines the way firms perceive, interpret, and respond to buyer needs.5
5
Ibid., p. 86
Three characteristics of the composition of home demand play a
particularly significant role for the achievement of competitive advantage.
One of them refers to the segment structure of demand. It is quite favorable
for enhancing competitiveness provided that the relevant segment of the
market represents a highly visible share of home demand but accounts for a
less significant share in other nations. An even more important feature of
home demand composition is the level of buyers’ sophistication. Its
significance stems from the fact that sophisticated and demanding buyers
exert pressure on firms to excel in quality of the product, features, and
service and thus help for sustaining the acquired advantage. A final attribute
of home demand composition which could spur the establishment of
competitive advantage relates to anticipatory buyer needs. They give
priority of firms over their international competitors by indicating early
what will become widespread later.
Demand Size and Pattern of Growth: In order for a clear relationship
between this attribute of home demand and competitive advantage to be
established, a number of its characteristics should be considered. One of
them is the size of home demand. Its importance is expressed in the fact that
depending on the magnitude of the home market a nation's firms could be
encouraged, with a view of reaping economies of scale and learning, to
invest aggressively in large-scale facilities, technology development, and
productivity improvement.6. Another important factor which could spur
activities intended to create or upgrade competitive advantage is the rate
growth of home demand. The latter could lead firms to adopt new
technologies faster and to make changes for increased efficiency without
fearing that there would be no response on the part of consumers. The effect
of these two factors is further enhanced provided that home demand is
characterized by early saturation as well. The underlying logic is that early
saturation, like early penetration, directs a nation’s firms to products and
product features that are desired abroad.
Internalization of Domestic Demand: While the source for creating
national advantage is rooted in the composition of home demand, its
sustainability is accounted for by the size and pattern of growth of home
6
Ibid., p. 92
demand, the transfer of a nation’s products and services abroad relates to a
third attribute of home demand – its capacity of becoming internalized.
This attribute refers to the existence of mobile or multinational local buyers
which could create an advantage for a nation’s firms since domestic buyers
are also foreign buyers. It hints on the other aspect of this attribute: the
influence exerted on foreign needs. The latter presents another way through
which domestic demand conditions can pull through foreign sales and
relates to the cases when domestic needs and desires get transmitted to or
inculcated in foreign buyers.
10
Ibid., p. 72