National Diamond
Encyclopedia
Strategic analysis typically focuses on two views of organization. The industry-view and The Resource-Based View
(RBV). These views analyse the organisation without taking into consideration relationship between the organizations strategic choice (i.e. Porter generic strategies
) and institutional frameworks. The National Diamond is a tool for analyzing the organizations task environment. The National Diamond highlights that strategic choices should not only be a function of industry structure and a firms resources, it should also be a function of the constraints of the institutional framework. Institutional analysis (such as the National Diamond) becomes increasingly important as firms enter new operating environments and operate within new institutional frameworks.
Michael Porter
's National Diamond framework resulted from a study of patterns of comparative advantage
among industrialized nations. It works to integrate much of Porter's previous work in his competitive five forces theory, his value chain
framework as well as his theory of competitive advantage into a consolidated framework that looks at the sources of competitive advantage sourcable from the national context. It can be used both to analyze a firm's ability to function in a national market, as well as analyse a national markets ability to compete in an international market.
It recognizes four pillars of research (factor conditions, demand conditions, related and supporting industries, firm structure, strategy and rivalry) that one must undertake in analysing the viability of a nation competing in a particular international market, but it also can be used as a comparative analysis tool in recognising which country a particular firm is suited to expanding into.
Two of the aforementioned pillars focus on the (national) macroeconomics
environment to determine if the demand is present along with the factors needed for production (i.e. both extreme ends of the value chain
). Another pillar focuses on the specific relationships supporting industries have with the particular firm/nation/industry being studied. The last pillar it looks at the firm's strategic response (microeconomics
) i.e. its strategy, taking into account the industry structure and rivalry (see five forces). In this way it tries to highlight areas of competitive advantage as well as competitive weakness, by looking at a companies/nations suitability to the particular conditions of a particular market.
For example, in analyzing Hollywood's preeminence in film production, Porter has pointed out the local concentration of skilled labor, including the different schools of film (UCLA & USC
) in the area. Also, resource constraints may encourage development of substitute capabilities; Japan's relative lack of raw materials has spurred miniaturization and zero-defect manufacturing.
in the USA and Silicon Glen
in the UK are techno clusters of high-technology industries which includes individual computer software & semi-conductor firms. In Germany, a similar cluster exists around chemicals, synthetic dyes, textiles and textile machinery.
, BMW
, Porsche
. German auto companies have dominated the world when it comes to the high-performance segment of the world automobile industry. However, their position in the market of cheaper, mass-produced autos is much weaker. This can be linked to a domestic market which has traditionally demanded a high level of engineering performance. Also, the transport infrastructure of Germany, with its Autobahns does tend to favor high-performance automobiles.
, Toyota, Suzuki
, Isuzu
, Nissan, Mazda
, Mitsubishi
, and Subaru
) provide intense competition in the domestic market, as well as the foreign markets in which they compete.
Porter generalised from the American case; for developing countries the model may be wrong.
Resource-Based View
The resource-based view is a business management tool used to determine the strategic resources available to a company. The fundamental principle of the RBV is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm's...
(RBV). These views analyse the organisation without taking into consideration relationship between the organizations strategic choice (i.e. Porter generic strategies
Porter generic strategies
Michael Porter has described a category scheme consisting of three general types of strategies that are commonly used by businesses to achieve and maintain competitive advantage. These three generic strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope...
) and institutional frameworks. The National Diamond is a tool for analyzing the organizations task environment. The National Diamond highlights that strategic choices should not only be a function of industry structure and a firms resources, it should also be a function of the constraints of the institutional framework. Institutional analysis (such as the National Diamond) becomes increasingly important as firms enter new operating environments and operate within new institutional frameworks.
Michael Porter
Michael Porter
Michael Eugene Porter is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porter’s work is recognized in many governments, corporations and academic circles globally...
's National Diamond framework resulted from a study of patterns of comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
among industrialized nations. It works to integrate much of Porter's previous work in his competitive five forces theory, his value chain
Value chain
The value chain, is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.-Firm Level:...
framework as well as his theory of competitive advantage into a consolidated framework that looks at the sources of competitive advantage sourcable from the national context. It can be used both to analyze a firm's ability to function in a national market, as well as analyse a national markets ability to compete in an international market.
It recognizes four pillars of research (factor conditions, demand conditions, related and supporting industries, firm structure, strategy and rivalry) that one must undertake in analysing the viability of a nation competing in a particular international market, but it also can be used as a comparative analysis tool in recognising which country a particular firm is suited to expanding into.
Two of the aforementioned pillars focus on the (national) macroeconomics
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
environment to determine if the demand is present along with the factors needed for production (i.e. both extreme ends of the value chain
Value chain
The value chain, is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.-Firm Level:...
). Another pillar focuses on the specific relationships supporting industries have with the particular firm/nation/industry being studied. The last pillar it looks at the firm's strategic response (microeconomics
Microeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
) i.e. its strategy, taking into account the industry structure and rivalry (see five forces). In this way it tries to highlight areas of competitive advantage as well as competitive weakness, by looking at a companies/nations suitability to the particular conditions of a particular market.
Principles
- For analyzing national competitiveness, we need to focus upon firm performance. The role of the national environment is providing a context within which firms develop their identity, resources, capabilities, and managerial styles.
- For a country to sustain a competitive advantage in a particular industry sector requires dynamic advantage: firms must broaden and extend the basis of their competitive advantage by innovation and upgrading. The dynamic conditions that influence innovation and the upgrading are far more important than initial resource endowments in determining national patterns of competitiveness.
Components
The four different components of the framework are:- Factor Endowment
- Related And Supporting Industries
- Demand Conditions
- Strategy, Structure, And Rivalry
Factor Endowment
Factor Endowment can be categorized into two forms:- "Home-Grown" resources
- Highly specialized resources
For example, in analyzing Hollywood's preeminence in film production, Porter has pointed out the local concentration of skilled labor, including the different schools of film (UCLA & USC
University of Southern California
The University of Southern California is a private, not-for-profit, nonsectarian, research university located in Los Angeles, California, United States. USC was founded in 1880, making it California's oldest private research university...
) in the area. Also, resource constraints may encourage development of substitute capabilities; Japan's relative lack of raw materials has spurred miniaturization and zero-defect manufacturing.
Related and Supporting Industries
For many firms, the presence of related and supporting industries is of critical importance to the growth of that particular industry. A critical concept here is that national competitive strengths tend to be associated with "clusters" of industries. For example, Silicon ValleySilicon Valley
Silicon Valley is a term which refers to the southern part of the San Francisco Bay Area in Northern California in the United States. The region is home to many of the world's largest technology corporations...
in the USA and Silicon Glen
Silicon Glen
Silicon Glen is a nickname for the high tech sector of Scotland. It is applied to the Central Belt triangle between Dundee, Inverclyde and Edinburgh, which includes Fife, Glasgow and Stirling; although electronics facilities outside this area may also be included in the term. The term has been in...
in the UK are techno clusters of high-technology industries which includes individual computer software & semi-conductor firms. In Germany, a similar cluster exists around chemicals, synthetic dyes, textiles and textile machinery.
Demand Conditions
Demand conditions in the domestic market provide the primary driver of growth, innovation and quality improvement. The premise is that a strong domestic market stimulates the firm from being a startup to a slightly expanded and bigger organization. As an illustration, we can take the case of Germany which has some of the world's premier automobile companies like MercedesMercedes-Benz
Mercedes-Benz is a German manufacturer of automobiles, buses, coaches, and trucks. Mercedes-Benz is a division of its parent company, Daimler AG...
, BMW
BMW
Bayerische Motoren Werke AG is a German automobile, motorcycle and engine manufacturing company founded in 1916. It also owns and produces the Mini marque, and is the parent company of Rolls-Royce Motor Cars. BMW produces motorcycles under BMW Motorrad and Husqvarna brands...
, Porsche
Porsche
Porsche Automobil Holding SE, usually shortened to Porsche SE a Societas Europaea or European Public Company, is a German based holding company with investments in the automotive industry....
. German auto companies have dominated the world when it comes to the high-performance segment of the world automobile industry. However, their position in the market of cheaper, mass-produced autos is much weaker. This can be linked to a domestic market which has traditionally demanded a high level of engineering performance. Also, the transport infrastructure of Germany, with its Autobahns does tend to favor high-performance automobiles.
Strategy, Structure and Rivalry
National performance in particular sectors is inevitably related to the strategies and the structure of the firms in that sector. Competition plays a big role in driving innovation and the subsequent upgradation of competitive advantage. Since domestic competition is more direct and impacts earlier than steps taken by foreign competitors, the stimulus provided by them is higher in terms of innovation and efficiency. As an example, the Japanese automobile industry with 8 major competitors (HondaHonda
is a Japanese public multinational corporation primarily known as a manufacturer of automobiles and motorcycles.Honda has been the world's largest motorcycle manufacturer since 1959, as well as the world's largest manufacturer of internal combustion engines measured by volume, producing more than...
, Toyota, Suzuki
Suzuki
is a Japanese multinational corporation headquartered in Hamamatsu, Japan that specializes in manufacturing compact automobiles and 4x4 vehicles, a full range of motorcycles, all-terrain vehicles , outboard marine engines, wheelchairs and a variety of other small internal combustion engines...
, Isuzu
Isuzu
, is a Japanese car, commercial vehicle and heavy truck manufacturing company, headquartered in Tokyo. In 2005, Isuzu became the world's largest manufacturer of medium to heavy duty trucks. It has assembly and manufacturing plants in the Japanese city of Fujisawa, as well as in the prefectures...
, Nissan, Mazda
Mazda
is a Japanese automotive manufacturer based in Fuchū, Aki District, Hiroshima Prefecture, Japan.In 2007, Mazda produced almost 1.3 million vehicles for global sales...
, Mitsubishi
Mitsubishi
The Mitsubishi Group , Mitsubishi Group of Companies, or Mitsubishi Companies is a Japanese multinational conglomerate company that consists of a range of autonomous businesses which share the Mitsubishi brand, trademark and legacy...
, and Subaru
Subaru
; is the automobile manufacturing division of Japanese transportation conglomerate Fuji Heavy Industries .Subaru is internationally known for their use of the boxer engine layout popularized in cars by the Volkswagen Beetle and Porsche 911, in most of their vehicles above 1500 cc as well as...
) provide intense competition in the domestic market, as well as the foreign markets in which they compete.
The role of government
The role of government in Porter's Diamond Model is "acting as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance …" . They must encourage companies to raise their performance, stimulate early demand for advanced products, focus on specialized factor creation and to stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations.Criticism
Criticism on Porter's national diamond model resolves around a number of assumptions that underlie it. As described by Davies and Ellis:"sustained prosperity may be achieved without a nation becoming 'innovation-driven', strong 'diamonds' are not in place in the home bases of many internationally successful industries and inward foreign direct investment does not indicate a lack of 'competitiveness' or low national productivity".
Porter generalised from the American case; for developing countries the model may be wrong.
See also
- Techno cluster
- Strategic planningStrategic planningStrategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy. In order to determine the direction of the organization, it is necessary to understand its current position and the possible avenues...
- Strategic managementStrategic managementStrategic management is a field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of firms in their external environments...
- Porter 5 forces analysisPorter 5 forces analysisPorter's five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws upon industrial organization economics to derive five forces that determine the competitive intensity and therefore...
- Porter's Four Corners ModelPorter's Four Corners ModelPorter’s four corners model is a predictive tool designed by Michael Porter that helps in determining a competitor’s course of action. Unlike other predictive models which predominantly rely on a firm’s current strategy and capabilities to determine future strategy, Porter’s model additionally...
- Cluster developmentCluster developmentCluster development is the economic development of business clusters. The cluster concept has rapidly attracted attention from governments, consultants, and academics since it was first proposed in 1990 by Michael Porter...