The Porter's Diamond Model is designed to help companies convert their advantages in the current market into new markets (e.g., new segments, new industries, new countries). This is so that businesses that have made their mark on the home front can leverage their competitive advantages to build a global presence. This article discusses the components that make this model useful for businesses keen on exploring expansion opportunities.
What is it?
The Porter's Diamond model asserts that a business succeeds in a particular region due to a combination of factors, which, when strategically integrated, will give the business a competitive advantage in that region.
This competitive advantage will make it enters the new market from a position of strength. The model is defined by four components, each representing the nodes of a diamond: 1) Factor Conditions; 2) Demand Conditions; 3) Related and Supporting Industries; and 4) Firm Strategy, Structure, and Rivalry.
1. Factor Conditions
Factor conditions refer to the resources (human, natural, and capital resources) available to a business by its geographic location. It also accounts for the knowledge and infrastructure concentrated in a region or country. These factors contribute to the sphere of influence around which several businesses in the market operate.
For example, Silicon Valley has become a Tech hub due to its proximity to several top universities (abundant human capital) and various tech companies (vast network and capital resources), as well as its temperate climate (a natural factor that makes top talent wants to come work there). Similarly, Nutella – the world's most successful hazelnut spread – contains a lot of hazelnuts because Alba, where it originates, has a lot of hazelnuts (a natural factor), pastry artisans (human capital factors), and local traffic (demand conditions).
2. Demand Conditions
The prevailing demand for certain products in any place largely influences the type of businesses sited there. This creates a significant market for the particular product and increases competition for the biggest share of local patronage. The ripple effect of this scenario is that it fosters innovation among competing businesses.
For example, Indian restaurants are flourishing in Birmingham (England) because the area has a sizeable population of South Asian descent. The market is so dynamic that many innovative Indian cuisines, e.g., the famous Balti dishes, are invented here. At the same time, sushi restaurants are dying in the area – due to limited demand for sushi there.
3. Related and Supporting Industries
The growth of any business or industry is often backed by the presence of others providing relevant support services. This support often presents as material support from suppliers, technical know-how, and other advantages. These partnerships provide the platform for businesses to build increased value and meet their goals.
For example, building a garment factory in Shen Zhen, China, is advantageous because all the major button suppliers, fabric suppliers, zipper suppliers, thread suppliers, sewist training centers, logistic companies, and shipping companies are all located in Shen Zhen. There is no need to pay expensive transportation, custom, or import fees.
4. Strategy, Structure, and Rivalry
This component refers to a combination of internal elements that influence how businesses are run and the competition that drives them in their environment. The internal factors include specific organizational structures, policies, and management styles that shape the business's operation.
For example, in the highly competitive consulting market, McKinsey & Company can distinguish itself and becomes a leading player because it has a dynamic business model and a unique internal way of operating.
When do we use it?
The Porter's Diamond model proves useful for businesses because:
It provides the premise for companies looking to expand and explore opportunities in a thriving foreign market.
The model can provide an ideal framework whenever you seek to understand the peculiarity of an operating environment. It will help you identify all the important internal components that influence the flow of business there.
It'll help you build on the success of your competition by understanding the strategy and structure that makes them tick. This way, you can measure up to or even gain an edge on them.
What business questions is it helping us to answer?
The Porter's Diamond model was developed to help businesses remain competitive in the new market by exploiting their advantages in the current market. This means that it helps to answer questions such as:
What do I do to remain competitive? How can I consistently innovate and explore new frontiers beyond my sphere of influence?
What is my best foot forward? What do I put out for my customers to positively associate me with?
How can my business expand and thrive in foreign markets? What do I do to gain an edge in international business environments?
What conditions must be provided for my business to flourish in my location? What are the internal and external factors that influence the business environment?
What technologies, processes, or strategies can my business employ to give it a controlling share of its host economy? What regional advantage is peculiar in my operational base?
How do we use it?
To use Porter's Diamond model, consider the four components when developing your business strategy.
First, introduce favorable internal policies and develop an efficient organizational structure.
Then, leverage opportunities in your environment and make the most of your available resources.
Next, ensure that the demand conditions of your business are fully satisfied for you to exert control on the market.
In addition, strong ties should be built with partnering companies to provide technical support and other auxiliary services.
Doing all this will give your business a competitive advantage on the home front and improve your prospects for global competition.
Practical Example
A car manufacturer in Germany's competitive automobile industry uses Porter's Diamond model to improve its advantages.
Demand conditions:
The car manufacturer identifies an opportunity in eco-cars due to untapped, strong consumer demand. To capture the opportunity, the company decided to produce eco-cars to meet the strong demand.
Factor Conditions:
The company also hires top engineers from German universities and sources raw materials from the surrounding states of Germany.
Firm's Strategy, Structure, and Rivalry:
The company opts to focus on growing its eco-car business. Therefore, it restructured itself into two separate divisions, i.e., the eco-car division and the traditional car division, in a bid to ensure faster innovation, more focused sales, more effective branding/marketing, and a sharper edge against competitors.
Related And Supporting Industries:
The company gets its steel supplies from nearby mills. It also receives further IT support from a communications firm. In addition, it partners with marketing and interior design firms to develop and deliver customized seats and car accessories offerings. These supporting industries allow the car manufacturer to deliver eco-cars more cost-effectively.
Advantages
The Porter's Diamond Model helps businesses gain a competitive advantage in their environments.
It provides immense value to businesses exploring expansion opportunities in global markets.
It is easy to understand and apply. It doesn't require expert input or any exceptional technical support to be implemented.
It can be applied both at the individual company level and the overall industry level. This makes it valuable to businesses looking to evolve and explore new markets or new sectors.
It accounts for factors within and outside businesses' control, thus providing a holistic approach.
Disadvantages
Porter's Diamond model is a high-level tool. It doesn't exactly tell you how to win. Originally, it was developed to explain the competitiveness of a country – before people realized the tool could be applied at the individual company level too.
To use the tool effectively, you need to have a deep understanding of the new market or new sector you are trying to penetrate. If you don't know anything about the new market/sector, the tool is pretty much useless for you.
The Porter's Diamond model is often considered too academic and not practical for the real world's business decisions.
The competitiveness of a business is influenced by other factors that Porter's Diamond model doesn’t explicitly describe.
It'd be more suited to product manufacturers than to service providers.
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