3/3/24, 7:11 PM Porter Diamond Model: What It Is and How It Works

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BUSINESS BUSINESS ESSENTIALS

Investopedia / Laura Porter

Porter Diamond Model: What It Is and

How It Works
By THE INVESTOPEDIA TEAM Updated January 24, 2024

Reviewed by KHADIJA KHARTIT

Fact checked by SUZANNE KVILHAUG

What Is the Porter Diamond Model?

The Porter Diamond Theory of National Advantage, or the Porter Diamond
Model, is a model that describes the competitive advantage that nations or
groups possess based on factors available to them. The theory explains how
governments can act to improve a country's position in a globally competitive
economic environment.

Created by Michael Porter, founder of the Institute for Strategy and

Competitiveness at the Harvard Business School, the Porter Diamond Model is

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considered a proactive economic theory. [ 1 ]

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KEY TAKEAWAYS
The Porter Diamond Model explains the factors that can provide a
competitive advantage for one national market or economy over
another.
The Porter Diamond Model visually resembles the points of a diamond
and includes the factors of strategy, structure and rivalry, related
industries, demand conditions, and factor conditions.
The model is used by businesses to guide and shape strategy regarding
investing and operating in national markets.

Understanding the Porter Diamond Model

The Porter Diamond Model suggests that countries can create advantages for
themselves, such as a strong technology industry or a skilled labor
force. Another application of the Porter Diamond Model is used in corporate
strategy as a framework to analyze the relative merits of investing and
operating in national markets. [ 2 ]

The Porter Diamond Model is visually represented by a diagram that resembles

the points of a diamond and includes the interrelated determinants that Porter
theorizes as the deciding factors of national comparative economic advantage:

Firm strategy, structure, and rivalry

Related supporting industries
Demand conditions
Factor conditions. [ 2 ]

FAST FACT
Harvard Business School professor Michael E. Porter created the
Porter Diamond Model and Porter's Five Forces.

Points on the Porter Diamond Model

Firm Strategy, Structure, and Rivalry
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Firm strategy, structure, and rivalry define that competition leads to increased
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production and the development of technological innovations. The
TABLEconcentration
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to enter a nation's market are influential. [ 2 ]

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Related Supporting Industries

Related supporting industries consider the upstream and downstream
industries that facilitate innovation through exchanging ideas. These can spur
innovation depending on the degree of transparency and knowledge transfer.

Demand Conditions
Demand conditions refer to the size and nature of the customer base for
products, which also drives innovation and product improvement. Larger
consumer markets will demand and stimulate a need to differentiate and
innovate and increase market scale for businesses. [ 2 ]

Factor Conditions
According to Porter, the most important of the five points is factor conditions.
Factor conditions are those elements that Porter believes a country's economy
can create for itself, such as a large pool of skilled labor, technological
innovation, infrastructure, and capital. One way for the government to
accomplish that goal is to stimulate competition between domestic companies
by establishing and enforcing anti-trust laws. [ 2 ]

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Why Does the Porter Diamond Model Consider FactorTRADE

Conditions as Most Important?
TABLEThe Porter Diamond Model purports that a country's economy can create
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skilled labor, technological innovation, infrastructure, and capital, and these

factors outweigh naturally inherited factors such as land and natural resources.
How Have Countries Developed Factor Conditions to Create a
Better Economy?
Japan has developed a competitive global economic presence beyond the
country's inherent resources by producing a large number of engineers that
have helped drive technological innovation in Japanese industries. [ 2 ]

How Can the Porter Diamond Model Help Businesses Improve?

The theory helps businesses understand why certain industries are widespread
in some nations. Companies can then analyze and compare their position in the
market and implement strategies to compete.

What Is Porter's Five Forces Model?

Similar to the Porter Diamond Model, Porter's Five Forces model of business
strategy identifies and analyzes five competitive forces that shape every
industry and help determine an industry's weaknesses and strengths.

The Bottom Line

The Porter Diamond Model explains the factors that provide a competitive
advantage for one national economy or business over another. The points of
the theory resembling a diamond include the firm strategy, structure and
rivalry, related industries, demand conditions, and factor conditions. The model
can be used by businesses to guide and shape strategies regarding investing
and operating in national markets.
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