Use this framework to determine a competitive advantage
Michael Porter, the architect of a number of our favourite frameworks, wrote a book in 1990 called The Competitive Advantage Of Nations. In the book Porter suggests a diamond shaped framework that is also known as the Theory of National Competitive Advantage of Industries. We can use the model to assess the strength of a company within its national market.
Strategy, structure and rivalry sit at the top of the diamond and describe the performance of companies in their national market. By way of example, the competition among Japanese car companies such as Honda, Toyota, Nissan, Mazda and the like has resulted in very efficient automotive companies that perform well on the world stage. When applying the framework, evaluate the strategies employed by firms in the industry, their organisational structures, and the intensity of competition. Consider how these factors contribute to or hinder the competitiveness of your company within the region where you operate.
Demand conditions in the national market create fertile ground for a company to grow. Again sticking with the automotive industry, the demand for high level engineering within German car buyers has helped Mercedes, BMW and Porsche grow locally and become international players. When applying the framework, examine the characteristics and dynamics of the local market, including consumer preferences, purchasing power, and demand sophistication. Understand how local demand influences the competitiveness of your company.
Factor conditions are those resources that exist locally that benefit a company. These can be natural resources such as oil, hydro electric power or minerals or they could be home-grown resources such as a skilled and educated labour force. When applying the framework, identify and analyse the factors of production within a specific location. This includes considering factors such as skilled labor, infrastructure, capital availability, and technology. Evaluate how these factors contribute to or hinder your competitiveness.
Related and supporting industries make up the fourth part of the diamond. These are resources that we have seen in the Value Net model. Most companies need skilled subcontractors and specialists who can help them. For example, these could be the tech companies in Silicon Valley which are helped by the cluster of local freelance software engineers. When applying the framework analyse the presence and strength of related and supporting industries in the region. Assess the availability of suppliers, service providers, and complementary industries. Evaluate how the ecosystem affects the competitiveness of your firm.
Porter reminds us that two other factors can act as lubricants to growth. A government that encourages businesses can be a great help. And we shouldn't forget that sheer luck (chance) can sometimes play an important part in a company's success.
The model can be used to assess the strength of a company and its future strategy. For example, it has applications in businesses for the following:
International Expansion: When a company is considering international expansion, the Diamond Framework can help assess the competitive advantages of potential target countries. It provides insights into the factors that may influence success in specific markets.
Industry Analysis: For industries with significant global competition, understanding the factors that contribute to a nation's competitive advantage can guide strategic decisions. This is particularly relevant in industries where location-specific factors play a crucial role.
Strategic Planning: When developing or reviewing a business strategy, the Diamond Framework can provide a systematic approach to understanding the various factors influencing the competitive environment. This understanding can inform decisions about resource allocation and market focus.
Supply Chain Management: Companies can use the framework to analyse and optimize their supply chain by considering the advantages offered by specific locations in terms of factor conditions, related industries, and demand conditions.
Some things to think about:
How would you rate your understanding of your competitiveness? Specifically, what is your understanding of factors that influence your competitiveness, such as skilled labour, and technology within your region? What is your understanding of customers and their preferences within your region? What do you know about suppliers and supporting industries in your region? And what do you know about your competitors in your region?
Which of these forces have the greatest impact on your company?