The Diamond Model: Understanding Competitive Advantage in Business

Posted on Feb 09, 2024 at 10:02 PM

Is one of the best economic models for analysing and understanding the competitive advantages of different things, such as those between small groups, companies, or countries.

The diamond model is also called "Porter's Diamond" model, after its creator - the American entrepreneur - Michael Porter.

Today, the diamond model (or Michael Porter's) is used to define competitive advantage and is a comprehensive and influential theory in economics. 

The diamond model helps prepare investment and business strategies and achieves excellent results. However, it requires many factors to be adopted, which will be explained below.

What are the uses of the diamond model?

There are a large number of uses for the diamond model. But the 5 uses below are the most important:

• The Diamond model demonstrates how governments can play a positive role while companies operate in their territory.

• Porter's diamond model can find effective economic sources to create a competitive advantage in a single country or market.

• The diamond model emphasises the necessity of having the ability to develop the infrastructures of nations.

• The diamond model thoroughly explains why one company is distinguished from another.

• Using the Porter Diamond model, robust competitive investment strategies can be developed.

What are the factors of the diamond model?

The diamond model proposes a unique framework of forces or factors necessary to succeed and stand out from competitors. This is regardless of the business models followed. This framework includes:

• Firm Strategy, Structure, and Rivalry,

• The government,

• Demand Conditions,

• Related Supporting Industries,

• Chance,

• Factor Conditions.

1- Firm Strategy, Structure, and Rivalry

It's The first factor in the pattern of the diamond model. It is a way to manage and organise firms from the inside to succeed and compete strongly. There are various models and ways to organise firms, which significantly affect productivity and financial efficiency. 

Also, internal local competition (within a specific market or a specific country) helps firms significantly develop and modernise their services and products. The reason is that the product, whether “normal” or “popular”, will eventually lose out to the competition.

The stronger the national or local competition between firms, the greater the capacity for innovation and productivity. Thus, it becomes easy for these companies to enter the international market.

An example of this is the fierce competition in the automobile industry in Japan. Where several companies, such as (Mitsubishi, Toyota, etc.) compete for the Japanese market, It allowed her to enter the world arena more easily.

2- The Government 

In the diamond model, the implemented government policies play a significant role in developing, motivating, and supporting companies. As well as create a cohesive and typical work environment for operation. For example, governments ensure good infrastructure (buildings, roads, etc.), fair practices within markets, pass laws that help companies financially, and other things governments can implement.

According to Porter, the government can help businesses but not build competitive industries. In other words, businesses alone can build competition and raise it to the highest levels.

3- Demand Conditions 

One of the most vital factors in the diamond model is the demand for the product or service the firms provide. If there is no demand for the product, then to whom will the firm offer its services?!

Firms are keen to provide the customer with a product or service. And this is in an appropriate way that meets his/her aspirations. In turn, it helps trademarks grow and thrive. Therefore, before investing in a specific market, ensure a significant and sustainable demand for the service provided within this market.

The vast market demand drives and motivates companies to improve and develop their production methods. This is to increase productivity and meet market requirements.

4- Related Supporting Industries

It includes the complementary industries and services supported by the country's infrastructure, which can support companies. For example, high-quality raw materials at reasonable prices attract investors from all over the world in the construction field.

Strong supply chains are crucial for providing higher quality and lower priced raw materials. Supply chains also help keep companies' inventory and savings within acceptable limits.

Building related industries is undoubtedly tricky because it takes a long time; it is worth it! For example, Silicon Valley in California is where tech giants gather to exchange knowledge, ideas, and creative products.

5- Chance 

Although Porter did not mention anything about chance or luck in his writings, he alluded to it with a few words simply because the role of chance in success or failure cannot be denied. For example, natural catastrophes or wars between countries will affect industries and sometimes destroy them. This was evident on September 11, when the international trade in towers was disrupted for a certain period.

In addition, unpredictable random events may sometimes occur (such as an invention or a scientific discovery that develops the industry). An example is the development of artificial intelligence tools such as "ChatGbt or Bard", which has revolutionised the content industry.

However, leadership and management training helps to know which chances work and which do not.

6- Factor Conditions 

It is the last and most important factor in the diamond model. The factor conditions represent the human resources available to companies within the country, as they help increase productivity and raise work efficiency. The factor conditions include (the quality of the workforce, the level of experience and skill available, the level of education, the cost, and knowledge of the average rate of labour turnover).

For example, the frequent earthquakes in Japan have generated world-class building engineers with expertise that no one else has.

In Conclusion,

Paying attention to the diamond model (Michael Porter's diamond model) 's importance in understanding and analysing competitive advantages between industries and countries is essential. It also significantly explains any economic system's chances, threats, strengths, and weaknesses!

With this model, you can easily follow the best strategies and make the best decisions.