PORTER'S DIAMOND: DEFINITION AND ITS 4 PILLARS - CULTURE VOCABULARY - 2025

The Porter diamond is a method of structure of the companies that increases the profit of the same. It was developed by economist Michael Porter in 1990. It is not one of his first contributions to this field and he was already known for the value chain method, a theoretical model where the business organization is developed, generating value for the end customer.

Porter's diamond is a self-reinforcing system, the components can be analyzed separately, but they are interconnected, and the development of one will always directly affect another. It is a scheme in which the microeconomic indices that affect the development of an economic unit are related, so that it is more competitive.

The idea was initially conceived as a method of developing countries, however, Porter realized that it was applicable to companies and in small areas such as regions or communities.

The Porter diamond analyzes the competitive advantages or the reasons why they do not have them. This idea is not innovative in the field of economics, since all companies look for their strengths or weaknesses to improve their economic performance. What is innovative about this theory is the way in which they are interrelated.

The four components of the Porter diamond

It is called Porter's diamond because the structure in which it places its components has a rhomboid shape. It establishes four basic components for the analysis of competitive advantages.

Factor conditions

In this attribute of the Porter diamond, we consider scarcity as the main source of competitive advantage. Abundance generates a complacent attitude, while selective disadvantages enhance the success of an industry as more is invested in innovation.

In his study of the Competitive Advantage of Nations, he showed that the richest nations are the most innovative and creative.

The factors of production are common to all economic strategies, labor, resources, capital and infrastructure.

Porter breaks with the classical theory where trade is based on factors of production, for Porter this is much more complex. The factors of production that a company has are not given, but must be created through innovation, creating advanced and specialized production factors of the industry in which we are operating.

We group the factors of production into large generic categories such as:

• Human resources
• physical resources
• knowledge
• the capital
• the infrastructure.

The mixture of these factors is what generates the competitive advantage, depending on the efficiency and effectiveness.

We must distinguish between basic and advanced factors. The basic factors with those included in the environment, natural resources, climate, geography, etc. These are obtained passively, and the investment, private or social, is relatively small.

Those that matter for a company to succeed are advanced factors, qualified personnel, digital infrastructure, etc.

These factors are what allow us to build comparative advantage. They are rare and difficult to obtain, otherwise all companies would succeed and would not have a comparative advantage. However, they are created through basic factors.

Demand conditions

This other point of the Porter diamond is based on the composition of domestic demand. We are interested in analyzing the composition of domestic demand, its magnitude and growth patterns, and the mechanisms through which national demand preferences are transmitted to other countries.

The composition of demand allows companies to create their market, responding to the consumer. To achieve competitive advantage, we analyze the distribution of demand: whether it is formed in small nuclei or in large agglomerations.

We also have to take into account the level of the buyers or if we are manufacturing a product with more important characteristics where a level of knowledge and understanding is required.

Highlight the precursor needs of the purchase. If companies manufacture a product that is a basic need for consumers, this will be done with greater control of market demand.

We have to take into account the growth rate of demand, as it can lead to economies of scale. Economies of scale are those in which increased production increases cost at a smaller rate.

Finally, we must assess the buyers that our company has, if they are national, or on the contrary we can expand the business abroad.

Related and auxiliary sectors

We have to take into account for the benefit of the company, companies that generate direct competition for us or those that generate parts that we need in our production chain.

A company, if it wants to obtain a competitive advantage, will not try to establish itself in a market in which there are already many specialized companies in the sector. Market entry costs can be high, this being known as market entry barriers.

To be able to operate in a market in which there are already many competitors, a large investment is required to reach the level of infrastructure and development of these.

If a company does not have suppliers that supply what it needs, it will stop its production chain and it will not be competitive or profitable

Company strategy, structure and rivalry

This point deals with the intensity with which the market forces companies to compete in an aggressive, innovative and global way.

Increased rivalry between companies helps companies try to expand rapidly in markets where these patterns do not exist.

The organizational structures of companies vary from one country to another, however, the most successful companies will be those that the environment provides the sources of competitive advantage.

For example, the labor policy that a government follows will also determine the relationship of workers to the company and vice versa. In conclusion, the company is a living organism that depends on its environment to survive.

Within a company, but also within a nation, goals and objectives to be achieved are established. To achieve these goals, they have to be consistent with the comparative advantages available to them.

The goals that are set have to be realistic and achievable and the management has to take charge of motivating all parts of the company so that these goals are achieved. Which leads to the point of the strategy that has to be clear and communication has to flow, within the company itself

Added to Porter's Diamond

Despite the fact that Porter's original diamond theory centered on four pillars. Recent studies add two more characteristics that could be included in the study of competitive advantage.

government

Although one part is included in the strategy, the resource management model imposed by a government in a country can directly affect the business organization. It also influences through donations and investments in certain fields for innovation and development.

The government does not always favor companies by investing in R + D + i, although it is more than proven that it helps the development of the national economy.

This characteristic is not so frequent to value in developed countries, since most have democratic governments for the creation of laws. However, if our intention is to invest in a developing country, the political situation is a great factor to take into account.

Many governments that suffer coups, carry out privatization of companies located in their territory, or modify the law at will to become a protectionist market for local production, and do not help foreign companies.

Random

No matter how much planning is done, there are events that are not subject to any kind of rule or planning. We are not only referring to changes, for example environmental, that can lead to a catastrophe for the company.

We also talk about the chance to which we are subjected in terms of the actions of our rival.

The market has information problems, since the information of competing companies can be biased. Chance means that many rivals' innovations can undo years of development that we carry out in our own company.

References

1. DUNNING, John H. Internationalizing Porter's diamond MIR: Management International Review, 1993.
2. MARKUS, Gabor, et al. Measuring company level competitiveness in Porter's Diamond model framework. EnFIKUSZ 2008 Business Sciences-Symposium for Young Researchers: Proceedings. 2008.
3. BAKAN, Ismail; DOĞAN, İnci Fatma. Competitiveness of the industries based on the porter's diamond model: An empirical study, International Journal of Research and Reviews in Applied Sciences, 2012.
4. MURRAY, Alan I. A contingency view of Porter's “generic strategies.” Academy of management review, 1988.
5. PORTER, Michael. Porter's generic strategies.Retrieved June, 2007.
6. AKAN, Obasi, et al. Critical tactics for implementing Porter's generic strategies, Journal of Business Strategy, 2006.
7. KIM, Eonsoo; NAM, Dae-il; STIMPERT, JL The applicability of Porter's generic strategies in the digital age: Assumptions, conjectures, and suggestions.Journal of Management, 2004.