Diamond Model

It is important to recognize when the Diamond Model was proposed by Porter (1990), it represented a substantially different paradigm to assess the competitiveness of a country. The previous theories, Absolute Advantage Theory (Smith, 1776) and the Comparative Advantage Theory (Ricardo, 1817) focused on each country's factors of production: land, labor cost, capital, and natural resources. According to Adam Smith, the wealth of nations was determined by the total output of production, given specific resources. As modified by Ricardo, the opportunity cost of resource deployment, not simple productivity, would determine the advantage for one country



in comparison with another. In either case, however, a country was seen to be more competitive than another based fundamentally on the factors of production or endowments it enjoyed.

The problem is that when this theory found support in the eighteenth and nineteenth century, only lower skills were necessary for competition. In those days, natural resources and factors of production was the main source of competitive advantages. However, as increased technological innovation and globalization of the markets have taken place, theories based primarily on factor endowments can not explain either the success of some countries that lack natural resources, or the poor performance of countries that have enormous natural endowments.

Porter (1990) argues that productivity is the main factor for international competitiveness and that the standard of living of a country's population can be improved as a direct result of increases in that factor. Productivity relies on increasing workers' skills, developing technologies, producing quality products, and reducing costs.

At the national level, productivity can be increased when the industries in a particular country "upgrade" themselves to improve efficiencies. For instance, an increase in technology can boost productivity and at the same time, can facilitate the production of differentiated products with much added value for customers. By doing so, industries can compete in more sophisticated and international markets. But in order to maintain or improve this position, an industry requires a continual upgrading process.

Porter explains that a country should focus on some industries that can be highly successful, because it is not possible to be highly competitive in every industry. To lay the theoretical underpinnings of this interplay of country and industry competitiveness issues, Porter developed The Diamond Model which consists of four national determinants of competitive advantage in a particular industry: 1) factor conditions, 2) demand conditions, 3) related and supporting industries, and 4) firm's strategy, structure and rivalry. These four sources of competitive advantage can produce a fertile soil to build an internationally competitive industry in a country. In other words, some industries, in a particular country, have strong diamonds, while others have weak ones. In addition to these four determinants of competitiveness, there are two indirect variables in the model: 5) chance and 6) government. The "Diamond Model" is shown in Figure3 as following:

Figure3: The diamond model

The six variables of the Diamond are explained here:

Factor conditions are the factors of production and infrastructure necessary to compete in

a particular industry. They include the labor skills and natural resources that in early stages of development can provide an advantage. Porter distinguishes between basic and advanced factors. The first factors are related to natural resources and endowments, abundant cheap labor, and geographic location, among others. The second ones are created by the nation such as a base of skilled workers, high tech infrastructure, research and development in institutions and universities, among others. In general, it is expected that the second ones will provide a more sustainable source of competitive advantage than the first.



Demand conditions are the pressures based on buyers' requirements about quality, price, and services in a particular industry. This will prepare the industry to compete internationally in future stages. For instance, Japanese car buyers exert pressure on Japanese carmakers with regard to high quality standards forcing them to improve the quality of their products, processes, and practices, which in turn prepares the entire industry to compete internationally.

Related and supporting industries are the networks of suppliers and distributors