Porter’s Diamond Theory of National Competitiveness

Introduction

Competition has always been one of the strongest driving forces for development in various areas, regardless of the nature of enterprises’ work and the goals that organizations set in the short or long term. An opportunity to occupy a leading market niche opens up significant growth possibilities, and as drivers of success, different methods and approaches to achieve competitive advantage are used. On a global scale, rivalry may take distinct forms from those local businesses and industrial firms adhere to while developing and gaining recognition from the target market. At the same time, the differences are connected, first of all, with the volume of resources involved, and from the common perspective, similar principles of the market struggle for leadership can be utilized. This work is aimed at identifying the role of such a concept as Porter’s diamond theory in the context of national competition, as well as determining the value of this methodological framework. Porter’s theory is an approach combining the key factors that define the success of competitive activities and reflect development potential, which indicates the importance of this framework in relation to the topic of international competitiveness.

Theory Analysis

Porter’s diamond model is an application tool to identify typical competitive drivers and criteria to consider. In its classical view, the model consists of four components, and due to the interweaving of connections between the elements of the concept, it has the name of a diamond¹. However, as the topic has evolved and competitive incentives have been analyzed, additional components have been added to the traditional theory to address the missing stimuli to consider. The updated frame includes six components linked to each other. As the variables involved, such components are estimated as factor conditions, demand conditions, related and supporting industries, firm strategy, structure, and rivalry, chance, and government.² In the context of the existing requirements for the activities of enterprises at different levels, including legislative, environmental, social, and other determinants, the presented components cannot be ignored. The more criteria are taken into account, the higher the likelihood of sustainable operations. Therefore, all elements of the framework are essential in assessing national competitiveness, and the ability to withstand competition is largely determined by the ability to meet the stated conditions.

Usefulness of the Theory

Porter’s diamond theory is a convenient concept for analyzing national competitiveness for a number of reasons. For example, from an economic perspective, a comprehensive assessment of the factors affecting financial activities can be performed by utilizing adequate statistical estimates and calculations.³ Such a perspective is of particular importance for identifying the capabilities of countries operating in the international market and striving to gain superiority. The ability to determine how sustainable the fiscal environment is helps one highlight the trade and economic potential of the state and, therefore, its possible role in strengthening on the global stage. The absence of these data, conversely, does not allow for obtaining an objective picture. For instance, when comparing countries in terms of their economic stability, the GDP parameter is often regarded as one of the most important.⁴ The diamond theory, among other things, implies evaluating this criterion, which enhances the effectiveness of the analysis and contributes to calculating exact data.

While analyzing Porter’s theory, some researchers criticize the convenience of this framework in the context of assessing real competitive performance among different national economies. For instance, in one of the articles, the authors argue that in their efforts to develop local economies, some states rely heavily on work both in the domestic market and outside it.⁵ In other words, export characteristics, business globalization, and other aspects of activity outside the country do not allow for identifying relevant competitive features, which, in turn, narrows the application of the model under consideration. However, given the different variables that shape Porter’s concept, related activities may be included in the analysis. The related and supported industries parameter helps assess how competitive the activities of businesses are on an international scale, and there are no barriers to an adequate assessment.⁶ Moreover, a different range of industries can be analyzed, which does not narrow the range of evaluation but, conversely, increases the opportunities for comparative analysis. As a result, the diamond theory is a universal concept that is not limited to the assessment of local markets and can be applied to global businesses.

Another indisputable factor proving the usefulness of Porter’s concept is the ability to identify characteristic local resources that distinguish national economies from each other and shape a unique trading potential. Countries have different reserves of minerals, forest plantations, water reservoirs, and other natural resources.⁷ By identifying the demand indicators of local and foreign buyers, including private and public partners, a competitiveness assessment can be performed. This activity is realized by comparing relevant stocks and analyzing the potential for further trade while taking into account the data obtained. Having different purchasing interests, the engaged participants are ready to offer those terms of trade relations that allow for avoiding excessive costs. If the national environment is favorable for the sale of relevant goods that other states need, this allows for a clear competitive advantage, which is explained by the traditional idea of supply and demand distinctions.⁸ Porter’s model is a framework that helps identify trading capabilities and compare indicators across different market participants. Thus, by applying this concept, interested parties can effectively highlight specific buying and selling trends in terms of national capabilities, which is a valuable perspective for identifying competitive parameters.

Potential Disadvantages of the Model

Although the presented model is useful as a framework for building a sustainable system of competitive advantage at the international level, its application may be accompanied by some ambiguous aspects. Individual conventions are important to consider to ensure real success. For instance, in the absence of regular investments, the use of Porter’s concept is irrational and can rather harm because the costs will exceed the profit.⁹ Manufacturing-focused companies must continually optimize their facilities; otherwise, the model under consideration cannot be useful due to limited development opportunities. Moreover, if a company does not have appropriate government support, this may mean a lack of competitive opportunities. Firms that compete globally tend to do business that their national governments approve of and encourage. Using Porter’s model by a young and small company can do it more harm than good because there is no reason to rely on government support. Thus, the restraints presented are counter-arguments that testify to the imperfection of the considered concept.

Value of the Model for Managers of International Firms

In the context of the value of Porter’s theory to managers of international firms, several factors should be considered to support the validity of the model. One of the features of the application of this concept is the ability to identify and, if necessary, implement innovative solutions designed to increase competitiveness.¹⁰ Regardless of the scale of firms involved in domestic economies, their managers must control the dynamics of market relations and adapt the activities of their firms to specific trends. Porter’s model helps identify parameters that affect the sustainability of businesses and contributes to finding solutions that assist managers in increasing competitiveness. Innovation, in this case, correlates with productivity, thereby reinforcing existing competitive advantages. In addition, with today’s capabilities, numerous optimization solutions can be applied, including advanced digital programs with artificial intelligence and other popular options. Therefore, managers of international firms can benefit from the application of Porter’s theory.

Since innovative solutions are a factor that logically follows from the application of Porter’s concept, along with them, identifying performance gaps is a prospect for managers of international firms to apply this framework. Regardless of the type of gaps, for instance, financial, resource, operational, or others, the theory under consideration makes it possible to form an adequate evaluation algorithm aimed at identifying omissions.¹¹ This option, supplemented by benchmarking, is one of the advantages of Porter’s model in relation to the activities of international firms. While imagining that managers can identify problematic aspects of the workflow timely and eliminate them as they arise, one can argue that such a framework is indispensable. Although the factors of competition are the main ones to identify with the help of the diamond concept, the deterrent criteria that prevent the realization of competitive advantages are equally essential to highlight. Thus, the analysis of performance gaps is directly related to the application of Porter’s concept in international firms.

The nature of leadership in international firms varies, and relevant approaches and practices have a direct impact on performance indicators and the ability to compete. Porter’s model can be considered a tool that allows managers to seek flexible control mechanisms and promote sustainable leadership by leveraging operational capabilities and resource bases.¹² Competitive advantage may be considered one of the ultimate goals to achieve, but the accompanying internal changes are a must. Otherwise, there is no guarantee that success is long-term because, due to planning omissions and other barriers, unsustainable management can be the result of incompetent interventions. International firms employ distinctive development strategies, and some approaches differ dramatically.¹³ In this regard, Porter’s concept allows for finding the best ways to promote businesses rather than applying universal practices, which enhances its value for managers and speaks in favor of local rather than global changes.

The possibilities of the framework under consideration in the context of optimizing work for managers of international firms are complemented by the prospects for successful interaction with local policymakers. According to relevant findings, the effective application of Porter’s theory makes it possible to coordinate trade policies, including export conditions, rationally in view of a comprehensive assessment of legislative regulations.¹⁴ In building competitive businesses, managers need to take into account specific limits and constraints that largely determine the nature of work both in the domestic and global markets. The factor of government, which is included in this model, allows for assessing the role of the authorities as the stakeholders and those who can contribute to mitigating difficulties. Moreover, the range of potential public partners is not limited to government officials. Fiscal authorities, antitrust funds, and other bodies can be partners in achieving competitiveness.¹⁵ By following Porter’s model of analysis, international managers can successfully implement various strategies for interacting with such officials to optimize work in the right directions. Therefore, the concept in question is significant as a theoretical background for improvement changes.

Conclusion

Porter’s diamond model is one of the most convenient tools used to assess international competitiveness and identify development strategies and optimization solutions within the current trend of globalization. The components this concept consists of make it possible to analyze different incentives for promotion in the market, which minimizes risks and increases competitive potential. While introducing the model to their analytical processes, international managers can greatly benefit from this model for a number of reasons. Identifying innovative solutions, highlighting performance gaps, achieving flexibility in maintaining sustainable leadership, and promoting successful collaboration with policymakers are obvious strengths of the theory.

References

Afzal, M., Lawrey, R., & Gope, J. (2019). Understanding national innovation system (NIS) using Porter’s diamond model (PDM) of competitiveness in ASEAN-05. Competitiveness Review: An International Business Journal, 29(4), 336-355. Web.

Choiriah, S., & Sudibyo, Y. A. (2020). Competitive advantage, organizational culture and sustainable leadership on the success of management accounting information system implementation. Saudi Journal of Economics and Finance, 4(9), 481-486. Web.

Estevão, C., Nunes, S., Ferreira, J., & Fernandes, C. (2018). Tourism sector competitiveness in Portugal: Applying Porter’s diamond. Tourism & Management Studies, 14(1), 30-44. Web.

Fang, K., Zhou, Y., Wang, S., Ye, R., & Guo, S. (2018). Assessing national renewable energy competitiveness of the G20: A revised Porter’s diamond model. Renewable and Sustainable Energy Reviews, 93, 719-731. Web.

Kharub, M., & Sharma, R. (2017). Comparative analyses of competitive advantage using Porter diamond model (the case of MSMEs in Himachal Pradesh). Competitiveness Review: An International Business Journal, 27(2), 132-160. Web.

Porter, M. E. (1990). The competitive advantage of nations. Harvard Business Review. Web.

Tsai, P. H., Chen, C. J., & Yang, H. C. (2021). Using Porter’s diamond model to assess the competitiveness of Taiwan’s solar photovoltaic industry. Sage Open, 11(1), 1-16. Web.

Tsiligiris, V. (2018). An adapted Porter diamond model for the evaluation of transnational education host countries. International Journal of Educational Management, 32(2), 210-226. Web.

Vlados, C. (2019). Porter’s diamond approaches and the competitiveness web. International Journal of Business Administration, 10(5), 33-52. Web.

Vlados, C., & Chatzinikolaou, D. (2019). Methodological redirections for an evolutionary approach of the external business environment. Journal of Management and Sustainability, 9(2), 25-46. Web.

Footnotes

1. Porter, M. E. (1990). The competitive advantage of nations. Harvard Business Review. Web.
2. Tsiligiris, V. (2018). An adapted Porter diamond model for the evaluation of transnational education host countries. International Journal of Educational Management, 32(2), 210-226. Web.
3. Vlados, C. (2019). Porter’s diamond approaches and the competitiveness web. International Journal of Business Administration, 10(5), 33-52. Web.
4. Afzal, M., Lawrey, R., & Gope, J. (2019). Understanding national innovation system (NIS) using Porter’s diamond model (PDM) of competitiveness in ASEAN-05. Competitiveness Review: An International Business Journal, 29(4), 336-355. Web.
5. Fang, K., Zhou, Y., Wang, S., Ye, R., & Guo, S. (2018). Assessing national renewable energy competitiveness of the G20: A revised Porter’s diamond model. Renewable and Sustainable Energy Reviews, 93, 719-731. Web.
6. Porter, M. E. (1990). The competitive advantage of nations. Harvard Business Review. Web.
7. Kharub, M., & Sharma, R. (2017). Comparative analyses of competitive advantage using Porter diamond model (the case of MSMEs in Himachal Pradesh). Competitiveness Review: An International Business Journal, 27(2), 132-160. Web.
8. Porter, M. E. (1990). The competitive advantage of nations. Harvard Business Review. Web.
9. Porter, M. E. (1990). The competitive advantage of nations. Harvard Business Review. Web.
10. Estevão, C., Nunes, S., Ferreira, J., & Fernandes, C. (2018). Tourism sector competitiveness in Portugal: Applying Porter’s diamond. Tourism & Management Studies, 14(1), 30-44. Web.
11. Tsai, P. H., Chen, C. J., & Yang, H. C. (2021). Using Porter’s diamond model to assess the competitiveness of Taiwan’s solar photovoltaic industry. Sage Open, 11(1), 1-16. Web.
12. Choiriah, S., & Sudibyo, Y. A. (2020). Competitive advantage, organizational culture and sustainable leadership on the success of management accounting information system implementation. Saudi Journal of Economics and Finance, 4(9), 481-486. Web.
13. Porter, M. E. (1990). The competitive advantage of nations. Harvard Business Review. Web.
14. Vlados, C., & Chatzinikolaou, D. (2019). Methodological redirections for an evolutionary approach of the external business environment. Journal of Management and Sustainability, 9(2), 25-46. Web.
15. Porter, M. E. (1990). The competitive advantage of nations. Harvard Business Review. Web.