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The Porter diamond is a diagram created by Michael E. Porter to illustrate the primary factors that affect a country's national advantage. This diamond illustration was originally expounded upon and published in his book The Competitive Advantage of Nations. This non-fiction book provides both the details of the diamond and multiple examples of its use in corporate strategy, in both manufacturing and service industries.
National advantage is the term used to refer to the factors that set each country apart, and determine the success and dominance of their businesses in a global market. The elements that determine this advantage can be both inherited and created. Companies that choose to employ the Porter Diamond in crafting corporate strategy may experience increased innovation and revenue.
The four points of the diamond are: factor conditions, related and supporting industries, demand conditions, and firm strategy. Each of these relates to another, causing the entire structure to reinforce itself. As each aspect is improved upon, the other three quadrants are each positively affected respectively.
Factor conditions are the geographical advantages and disadvantages with which a company must contend. These may include natural resources, skilled labor, and government oversight, among others. Companies that wish to create and sell a product that requires a resource that is scarce in their country may be forced to overcome that limitation through innovation. This creativity can include material goods and employees.
One example of this is a company that refines and sells oil, and operates in the Middle East, which would have a tremendous advantage in the gasoline market over a company attempting the same work in a country with limited access to petroleum. That second company could then choose to innovate and create an alternative fuel source to gasoline, drawing upon resources to which that company already has access.
All companies that interact in some way with the primary business, whether through hiring staff or selling component materials, fall under the Porter diamond category of related and supporting industries. They can either improve or damage the primary corporation through their own competitive advantage and global strategies. In the example of the company that begins to manufacture alternative fuel sources for cars, the related industries could include the factory that mines the components of that source, and the auto-maker that chooses to base its next car around that alternative source. Strong supporting industries increase a country's national advantage.
The final two components of the Porter diamond are demand conditions and firm strategy, both of which are influenced by local business circumstances. Demand conditions is used to refer to the quality of the local market in which a business operates. Companies that offer products in high demand locally tend to manufacture and market them more expertly than companies attempting to import them. The company manufacturing an alternative auto fuel source will typically work harder on perfecting that technology when the cars that use that new source are created and sold in that company's home country. That company will often experience global advantage over other makers of similar fuel sources, due to the attention devoted to the product in its initial phases.
Firm strategy includes all aspects of the company's internal structure and its external rivals. The structure of a business is often determined by the social conventions of the country in which it is created. Japanese companies, for instance, may value honor and a collective, or team, mentality. Local rivalry can also serve to improve the quality of the product being manufactured and sold.