What it means
Porter set out the idea in his 1990 book on the competitive advantage of nations. His question was why Swiss, German or Japanese firms lead certain industries, when traditional trade theory pointed only to cheap labour or natural resources.
The diamond is his answer, and it is shaped like a diamond because the four corners reinforce one another. The first corner is factor conditions: the quality of the workforce, infrastructure, capital and knowledge available.
Advanced factors such as specialised skills and research institutes matter more than basic ones like land. The second is demand conditions: demanding home customers push firms to improve and innovate faster than easy customers do.
The third corner is related and supporting industries, meaning suppliers and neighbouring businesses that are themselves strong. Clusters of such firms share knowledge and speed up innovation.
The fourth is firm strategy, structure and rivalry, which captures how companies are managed and how intensely they compete at home. Porter added two outside influences: government and chance.
Government can help or harm through regulation, education policy, subsidies and standards, while chance covers events such as new inventions, wars and sudden shifts in demand. Neither is a corner of the diamond, but both can change its shape.
For a business reader, the model is a checklist when choosing where to locate a factory or research centre, or when judging why a foreign competitor is so strong. It is a framework for discussion, not a formula, and critics note that it was built mainly on the experience of large, developed economies.
It also works at the level of a single city or region. Many technology hubs and manufacturing districts show the diamond in miniature, with skilled workers, specialist suppliers, demanding customers and local rivals pushing each other forward.
Companies deciding where to place a new plant can score each location on the four corners and compare the results.
In practice
Real-world examples.
Example
A drone manufacturer weighs two countries for its main research centre. One has strong engineering universities, a cluster of battery and sensor suppliers and demanding military and agricultural customers, so it scores well on all four corners of the diamond. The company also notes that skilled engineers can be hired locally without paying relocation costs.
Example
A furniture maker asks why a small foreign region dominates the market for flat-pack designs. The answer is a combination of skilled designers, local timber suppliers, picky home buyers and fierce rivalry among a dozen local firms. None of the four elements alone would have been enough.
Example
A government adviser reviewing an industrial policy for textiles notices that subsidies alone are not working. She recommends investing in design schools and supplier networks to strengthen the other corners of the diamond. She also suggests ending subsidies that protect weak firms from home competition.
Case study
Seen in the real world.
Valdor is an illustrative, fictional country that wanted to build a world-class wine technology industry. It offered tax breaks to new firms, but after five years only two small companies had formed.
A consultant used the national diamond to diagnose the gap. The country had good vineyards, but few specialised engineers, weak links between growers and equipment makers, and a home market that bought mostly cheap bulk wine.
In this illustrative story the government changed course, funding a university research centre, a growers' cooperative that demanded better equipment and a supplier park near the main vineyards. Within eight years a cluster of 30 firms had formed, showing that all four corners had to move together. The government later copied the same approach for its food processing sector.
Watch out
Common mistakes.
- Treating the diamond as a score to be added up, when it is a qualitative tool for thinking about advantage.
- Assuming a country with cheap labour will win, when Porter argued that advanced skills, demanding customers and strong local rivals matter more.
- Applying it to a single company, when it is mainly a way of analysing a nation or region within an industry.
Questions
People also ask.
Who created the national diamond?
Michael Porter, a Harvard professor, introduced it in his 1990 work on the competitive advantage of nations. It sits alongside his other well-known frameworks for business strategy.
What are the four corners?
Factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry. Together they decide how fast firms in a nation can learn and improve.
Where do government and chance fit?
They are outside influences that can strengthen or weaken the four corners, but they are not corners themselves. Policy choices, in particular, can be changed within a few years.
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