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Contents of Today’s Session (15/11/2021)

Porter’s Diamond Model

How the Diamond Works: The Italian Ceramic Tile Industry?

• Why certain industries within a particular nation are competitive internationally?

• Why certain companies based in certain nations are capable of consistent innovation?

• Why do they ruthlessly pursue improvements, seeking an ever more sophisticated source
of competitive advantage?

• Why are they able to overcome the substantial barriers to change and innovation that so
often accompany success?
 Japanese Automakers
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Japanese automakers also illustrates two additional prerequisites for sustaining competitive
advantage. First, a company must adopt a global approach to strategy. It must sell its
product worldwide, under its own brand name, through international marketing channels
that it controls. A truly global approach may even require the company to locate production
or R&D facilities in other nations to take advantage of lower wage rates, to gain or improve
market access, or to take advantage of foreign technology. Second, creating more
sustainable advantages often means that a company must make its existing advantage
obsolete—even while it is still an advantage. Japanese auto companies recognized this; either
they would make their advantage obsolete, or a competitor would do it for them.
 The Porter Diamond Model
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1. Factor Conditions: The nation’s position in factors
of production, such as skilled labor or infrastructure,
necessary to compete in a given industry.
2. Demand Conditions:  The nature of home-market
demand for the industry’s product or service.
3. Related and Supporting Industries:  The presence or
absence in the nation of supplier industries and other
related industries that are internationally competitive.
4. Firm Strategy, Structure, and Rivalry:  The
conditions in the nation governing how companies are
created, organized, and managed, as well as the nature
of domestic rivalry.
 Factor Conditions
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• According to standard economic theory, factors of production—labor, land, natural
resources, capital, infrastructure—will determine the flow of trade.

• In the sophisticated industries that form the backbone of any advanced economy, a nation
does not inherit but instead creates the most important factors of production—such as
skilled human resources or a scientific base.

• The stock of factors that a nation enjoys at a particular time is less important than the rate
and efficiency with which it creates, upgrades, and deploys them in particular industries.
 Factor Conditions
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• To support competitive advantage, a factor must be highly specialized / advanced to an
industry’s particular needs—a scientific institute specialized in optics, a pool of venture
capital to fund software companies.
• Factors are -
• more scarce,
• more difficult for foreign competitors to imitate
• Require sustained investment to create.
 Nations succeed in industries where they are particularly good at factor creation.
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• Competitive advantage results from the presence of world-class institutions that first create
specialized factors and then continually work to upgrade them.
• For Example –
• Denmark has two hospitals that concentrate in studying and treating diabetes—and a
world-leading export position in insulin.
• Holland has premier research institutes in the cultivation, packaging, and shipping of
flowers, where it is the world’s export leader.
• Implicit in the oft-repeated Japanese statement, “We are an island nation with no
natural resources,” is the understanding that these deficiencies have only served to
spur Japan’s competitive innovation.
 Converted factor disadvantages into competitive advantage
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• Italian steel producers in the Brescia area faced a similar set of disadvantages: high capital
costs, high energy costs, and no local raw materials. Located in Northern Lombardy, these
privately owned companies faced staggering logistics costs due to their distance from
southern ports and the inefficiencies of the state-owned Italian transportation system.

• They pioneered technologically advanced minimills that require only modest capital
investment, use less energy, employ scrap metal as the feedstock, are efficient at small scale,
and permit producers to locate close to sources of scrap and end-use customers. In other
words, they converted factor disadvantages into competitive advantage.
 Demand Conditions
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• It might seem that the globalization of competition would diminish the importance of
home demand.
• composition and character of the home market usually has a disproportionate effect on
how companies perceive, interpret, and respond to buyer needs. 
• Sophisticated, demanding buyers provide a window into advanced customer needs; they
pressure companies to meet high standards; they prod them to improve, to innovate, and to
upgrade into more advanced segments. 
 Demand Conditions - Example
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• Japanese consumers, who live in small, tightly packed homes, must contend with hot,
humid summers and high-cost electrical energy—a daunting combination of circumstances.
In response, Japanese companies have pioneered compact, quiet air-conditioning units
powered by energy-saving rotary compressors. In industry after industry, the tightly
constrained requirements of the Japanese market have forced companies to innovate,
yielding products that are kei-haku-tan-sho—light, thin, short, small—and that are
internationally accepted.
 Demand Conditions
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• Local buyers can help a nation’s companies gain advantage if their needs anticipate or even
shape those of other nations—if their needs provide ongoing “early-warning indicators” of
global market trends.
• For Example –
• The international success of U.S. companies in fast food and credit cards, for example, reflects
not only the American desire for convenience but also the spread of these tastes to the rest of the world. 
• Nations export their values and tastes through media, through training foreigners, through
political influence, and through the foreign activities of their citizens and companies.
 Demand Conditions
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• Sometimes anticipatory needs emerge because a nation’s political values foreshadow needs
that will grow elsewhere.
• For Example –
• Sweden’s long-standing concern for handicapped people has spawned an increasingly competitive
industry focused on special needs. 
• Denmark’s environmentalism has led to success for companies in water-pollution control equipment
and windmills.
 Related and Supporting Industries
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• Internationally competitive home-based suppliers create advantages in downstream
industries in several ways.
• Deliver the most cost-effective inputs in an efficient, early, rapid, and sometimes
preferential way. 
• For Example -
• Italian gold and silver jewelry companies lead the world in that industry in part because other Italian
companies supply two-thirds of the world’s jewelry-making and precious-metal recycling machinery.
 The Italian Footwear Cluster
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The illustration of “The Italian Footwear Cluster”
offers a graphic example of how a group of
close-by, supporting industries creates competitive
advantage in a range of interconnected industries
that are all internationally competitive. Shoe
producers, for instance, interact regularly with
leather manufacturers on new styles and
manufacturing techniques and learn about new
textures and colors of leather when they are still
on the drawing boards. Leather manufacturers
gain early insights into fashion trends, helping
them to plan new products. The interaction is
mutually advantageous and self-reinforcing, but it
does not happen automatically: it is helped by
proximity, but occurs only because companies and
suppliers work at it.
 Firm Strategy, Structure, and Rivalry
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• National circumstances and context create strong tendencies in how companies are
created, organized, and managed, as well as what the nature of domestic rivalry will be. 
• For Example -
• In Italy, for example, successful international competitors are often small or medium-sized companies
that are privately owned and operated like extended families
• in Germany, in contrast, companies tend to be strictly hierarchical in organization and management
practices, and top managers usually have technical backgrounds.
 Firm Strategy, Structure, and Rivalry
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• The presence of strong local rivals is a final, and powerful, stimulus to the creation and
persistence of competitive advantage.
• For Example –
• In Switzerland, where the rivalry among its pharmaceutical companies, Hoffmann-La Roche,
Ciba-Geigy, and Sandoz, contributes to a leading worldwide position.
• In the United States in the computer and software industries.
• In Japan, where there are 112 companies competing in machine tools, 34 in semiconductors, 25 in
audio equipment, 15 in cameras—in fact, there are usually double figures in the industries in which
Japan boasts global dominance.
 Gratitude
Managemen Students
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Wisdom
Knowledge
Staff

Technology