Diamond Model and Clusters
(Michael Porter)

Understand the competitive position of a nation in global competition. Explanation of Diamond Model of Michael Porter. Clusters. ('98)

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What is the Diamond Model? Description

The Diamond Model of Michael Porter for the competitive advantage of Nations offers a model that can help understand the comparative position of a nation in global competition. The model can also be used for major geographic regions.

Traditional country advantages

Traditionally, economic theory mentions the following factors for comparative advantage for regions or countries:

Land
Location
Natural resources (minerals, energy)
Labor, and
Local population size.

Because these 5 factors can hardly be influenced, this fits in a rather passive (inherited) view regarding national economic opportunity.

Clusters

Porter says that sustained industrial growth has hardly ever been built on above mentioned basic inherited factors. Abundance of such factors may actually undermine competitive advantage! He introduces a concept called "clusters" or groups of interconnected firms, suppliers, related industries, and institutions, that arise in certain locations.

These clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field. They grow on locations where enough resources and competences amass and reach a critical threshold, giving it a key position in a given economic branch of activity, with a decisive sustainable competitive advantage over others places, or even a world supremacy in that field. Porter says clusters can influence competition in three ways:

They can increase the productivity of the companies in the cluster.
They can drive innovation in the field.
They can stimulate new businesses in the field.

Some well-known examples of Clusters are USA/Silicon Valley (computers), Netherlands/Rotterdam (logistics), India/Bangalore (software outsourcing), USA/Hollywood (movies), France/Paris (fashion).

According to Porter, as a rule competitive advantage of nations is the outcome of 4 interlinked advanced factors and activities in and between companies in these clusters. These can be influenced in a pro-active way by government.

Interlinked advanced factors for Competitive Advantage

The Strategy, Structure and Rivalry of Firms. The world is dominated by dynamic conditions. Direct competition impels firms to work for increases in productivity and innovation.
Demand Conditions. If the customers in an economy are very demanding, the pressure facing firms to constantly improve their competitiveness via innovative products, through high quality, etc, will be greater.
Related Supporting Industries. Spatial proximity of upstream or downstream industries facilitates the exchange of information and promotes a continuous exchange of ideas and innovations.
Factor Conditions. Contrary to conventional wisdom, Porter argues that the "key" factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labor, capital and infrastructure. "Non-key" factors or general use factors, such as unskilled labor and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors involve heavy, sustained investment. They are more difficult to duplicate. This creates a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable.

The role of government in the Diamond Model of Porter

The role of government in the Diamond Model of Porter is to act 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, to stimulate early demand for advanced products, to focus on specialized factor creation and to stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations.

The competitive advantage of nations

Porter introduced this model in his book: "The Competitive Advantage of Nations", after having done research in ten leading trading nations. The book was the first theory of competitiveness based on the causes of the productivity with which companies compete. Instead of traditional comparative advantages such as natural resources and pools of labor. This book should be considered obligatory reading for government economic strategists. It is also highly recommended for corporate strategists that are interested in the macro-economic environment of corporations.

Book: Michael Porter - The Competitive Advantage of Nations -

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Recent User Comments

    			 
  			   Odogwu - Nigeria
  	       
  		     Ugly Side of Nigerian Business
  	  		 "Organisations are more concerned with being seen as productive and how large the profits are than ensuring overall national productive efficiency. Clusters are not existent and cut throat competition is the name of the game. Basically when a nation lacks the basic infrastructure of energy and an enabling environment for efficiency then it can never be business as usual."
  			   
    	  		 1

    			 
  			   Izabela Waglay - Canada
  	       
  		     Governments' Role in Comparative Advantage
  	  		 "I believe that governments have a very significant role in shaping the competitiveness of the nation through setting up key policies,  promoting the right set of values, and providing the appropriate level of capital.  For example, the country where diversity and a peaceful coexistance of different cultures is fostered creates a climate for creativity, innovation, collaboration, all leading to the regional competitiveness; setting strong policies and allocating funds for equal access to education increases the national knowledge capital thus leading to the more competitive workforce."
  			   
    	  		 0

    			 
  			   Carole - Msia
  	       
  		     Nation Advantages and Firm's Advantages
  	  		 "I'm confused what does firm strategy and structure help to promote the nation advantage against other nations?
I'm being told that when a foreign firm wants to enter a particular country, it has to look if it can take advantage of any of the clusters mentioned in the diamond. But, even if the foreign firm enters the nation due to a cluster made up by other firms, it's still up to the foreign firm's own strategy and structure (it's own competitive advantage) to succeed in that nation isn't it?"
  			   
    	  		 0

    			 
  			   Peter v G. - Netherlands
  	       
  		     China's Labor Cost Advantage
  	  		 "Many people believe (as I did) that China has a clear cost advantage in manufacturing from cheap labor. Not so according to Research conducted with funding from the Alliance for American Manufacturing...

In China's steel industry, large government energy subsidies are actually responsible for keeping steel prices down. In 2007, energy subsidies to Chinese steel reached $27 billion. Labor costs account for less than 10% of the total costs to manufacture Chinese steel."
  			   
    	  		 5

    			 
  			   Stephen - UK
  	       
  		     Membership Organisations
  	  		 "Can a membership organisation be a cluster?
There is a taste in the UK for governmental sponsored clusters to evolve into membership organisations.  I would proposes that they  cease to  be clusters once they formalise this link.  Thoughts????"
  			   
    	  		 3

Best User Comments

    			   
    			     Raymond Pe - Canada
  	         
  				   Chance in Diamond Model
  				   "Porter defines Chance events as the ones that have little to do with circumstances in a nation and are largely outside of the control of firms. Chance events could be significant shifts in exchange rates, wars or decisions taken by foreign governments. Chance plays its role by altering the four main conditions in the diamond model."
    			   
        	  		 18

    			   
    			     Bertrand - Belgium
  	         
  				   Clusters and Knowledge Economy
  				   "Put simply, clusters are geographically close groups of interrelated specialized organizations. Two  main historic reasons for industrial clusters were: easy knowledge exchange and the availability of skilled labor. I believe the arrival of the knowledge economy including all its communication technologies decreases the need for traditional regional clusters."
    			   
        	  		 9

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More Management Methods, Models and Theory

12manage for:

                     
                      ●  (india)
                      
                    governments' role in comparative advantage
                    "I fully agree with Izabela Waglays' views. This is more true in case of India where diverse culture exists."

● Enzo (Argentine)	Clusterization	"The first thing to achieve as a high tech firm to export sophisticated products to foreign markets, is to create a "Clusterization" in the field of this special technology. Perhaps this concept in general to create competitive advantage is more dependent on two factors: demand and factor conditions."
● Owen (Switzerland)	Coopetition	"Firms have to co-operate and compete at the same time. For this it requires the entering firm to have a clear business plan on how they intend to compete, but at the same time they will have to build alliances and relationships with cluster members. There are numerous examples where 'coopetition' exists, particularly in India. Technology transfer and market know-how can provide a basis for this approach."
● Carole (Msia)	Thanks for the info	"To Enzo & Owen, thanks for the information. I have a more clearer pic on my query."
● (Colombia)	Clusterization	"I´m confused, could you please explain what clusterization means? I also believe that to create a competitive advantage, innovation is required at all levels, because the creation of new products or services with aggregated value is very important if the company would like to increase the market and also with a clear strategy."

                     
                      ● Neeton (China)
                      
                    Industrial Chain
                    "But the steel industry in China are almost at the low level of the industrial chain, which can only produce less value in the chain, and that value can only make these workers not to starve to death.  Average $3000 per year is their income. So is that "advantage". It's just advantage in that less value part of the chain."

                     
                      ● Lakna Paranawithana (Sri Lanka)
                      
                    Membership Organizations and clusters
                    "Functional Clusters effectively combine value chain action and supply chain dynamics. Membership organizations should not be called clusters as MO represent only a part of the social value chain of the respective cluster. MO, to a certain degree, could take action to improve the efficiency of cluster functioning by taking deliberate action to improve performance of cluster entities. Sustainability of MO is the question as most often MO s have been initiated by intervening (donors) agents with limited timelines. In short, clusters are natural developments in comparison to MOs that are synthetic entities."

                       
                        ● Mike G (USA)
                        
                      Porter Diamond and 5 forces
                      "Chance is not the only thing, change in technology also changes power situations and positions of all."

● Stan (UK)	Regional proximity	"Decrease the need: yes. But not end it: there are still valid reasons for regional clusters remaining."
● Editor (NL)	Special Interest Group on Clusters	"Specialized business communities such as those on 12manage could be seen as a new type of clusters, without the need for geographical proximity. Make sure you are part of the SIG on Clusters at 12manage and Register ;-)"
● Juan (Spain)	Cooperation and Competition	"I agree with Bertrand. We are seeing new types of clusters arriving without national or regional borders. Note that firms within clusters may be cooperative or competitive or even independent. This aspect remains unchanged in internet / knowledge economy."
● Edmund L. (US)	Three types of clusters	"We can distinguish at least three industrial cluster types: 1. SKILL CLUSTERS: With similar skill requirements 2. VALUE CHAIN CLUSTERS: Part of same value (supply) chain 3. INNOVATION CLUSTERS: firms that exchange key information leading to technological advances and competitive improvements. In the knowledge era the category 1 and 3 seem most important."
● Robert (UK)	Definition	"Normally, "Clusters" of organizations are per definition geographically close. For the virtual variants without this aspect I recommend the term "Hubs" or "Nodes" or "Networks" or "Business Webs" or indeed "Communities" as on 12manage."
● Theo (NL)	Still need for local action	"Sharing knowledge and information today is global. Yet, understanding it, and turning it into actions, still needs regional knowledge and skills."
● Stephen (UK)	4 Cluster Drivers	"1 Geography - Location 2 Horizontal - other inter firm networks 3 Vertical - Supply chain 4 Sector For a cluster to exist I would argue that there needs to be interorganisational networking on at least two of these. Perhaps we need to rethink the entire proposition outside of the "industrial" perameter."

Diamond Model and Clusters (Michael Porter)