hello everyone welcome to business school 101 porter's diamond model also known as the theory of national competitive advantage of industries is a diamond-shaped framework that focuses on explaining why certain industries within a particular nation are competitive internationally and why certain companies based in certain nations are capable of consistent innovation the model was created by michael porter a recognized authority on corporate strategy and economic competition and founder of the institute for strategy and competitiveness at the harvard business school according to his model porter argues that any company's ability to compete in the international arena is based mainly on an interrelated set of location advantages that certain industries and different nations possess those location advantages include firm strategy structure and rivalry factor conditions demand conditions and related and supporting industries if these conditions are favorable it forces domestic companies to continuously innovate and upgrade beside the four main components sometimes the role of the government and chance are also included in the model so let's discuss these factors separately number one factor conditions factor conditions refer to different types of resources that may or may not be present in the home country they include basic factors and advanced factors basic factors include natural resources like climate minerals and oil where the mobility of the factors is low for example with the second largest proven oil reserves in the world saudi arabia is one of the largest exporters of oil worldwide however porter indicates that although basic factors may create the ground for international competitiveness they can never turn into real value creation without the advance factors advanced factors are more sophisticated such as human resources and research capabilities they are normally specific to the industry contrary to conventional wisdom simply having a general workforce that is high school or even college educated represents no competitive advantage in modern international competition to support competitive advantage a factor must be highly specialized to an industry's particular needs like a scientific institute specialized in optics or a pool of venture capital to fund software companies these factors are scarcer more difficult for foreign competitors to imitate and they require sustained investment to create number two demand conditions it might seem that the globalization of competition would diminish the importance of home demand in practice however this is simply not the case in fact the composition and character of the home market usually has a disproportionate effect on how companies perceive interpret and respond to buyer needs nations gain competitive advantages in industries where the home demand gives their companies a clearer or earlier picture of emerging buyer needs 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 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 more generally a nation's companies can anticipate global trends if the nation's values are spreading for example the international success of u.s companies in the fast food industry reflects not only the american desire for convenience but also the spread of those tastes to the rest of the world nations export their values and taste through media training foreigners political influence and through the foreign activity of their citizens and companies number three related and supporting industries as we know industrial production does not take place in isolation but rather relies on networks of suppliers component manufacturers and distributors therefore the presence of related and supporting industries provides the foundation on which the focal industry can excel in addition companies are often dependent on alliances and partnerships with other companies in order to create additional value for customers and become more competitive for instance suppliers are crucial to enhancing innovation through more efficient and higher quality inputs timely feedback and short lines of communication a nation's companies benefit most when their suppliers themselves are global leaders it can often take years or even decades of hard work and investments to create strong related and supporting industries that assist domestic companies to become globally competitive however once those factors are in place the entire region or nation can often benefit from its presence for example after three decades of continuous development shenzhen a city bordering hong kong and southeast china has evolved into an innovation and manufacturing hub for the electronics industry it has cultivated an ecosystem to support the manufacturing supply chain including thousands of component manufacturers assembly suppliers distributors and a strong technical workforce that is why shinzen is the birthplace of many famous tech companies which include the internet and gaming giant tencent the global information and communication technology provider huawei and the world's largest drone maker dji and robot kit maker make block number four firm strategy structure and rivalry national circumstances and contexts create strong tendencies in how companies are created organized and managed for example in italy successful international competitors are often small or mid-sized companies that are privately owned and operated like extended families in contrast in germany companies tend to be strictly hierarchical in organization and management practices and top managers usually have technical backgrounds no one managerial system is universally appropriate competitiveness in a specific industry results from convergence of the management practices and organizational modes favored in the country and the sources of competitive advantage in the industry in industries where italian companies are world leaders such as lighting furniture footwear woolen fabrics and packaging machines a company strategy that emphasizes focus customized products niche marketing rapid change and breathtaking flexibility fits both the dynamics of the industry and the character of the italian management system in contrast the german management system works well in technical or engineering oriented industries such as optics chemicals and complicated machinery where complex products demand precision manufacturing a careful development process after cell service and thus a highly disciplined management structure moreover domestic rivalry is instrumental to international competitiveness since it forces companies to develop unique and sustainable strengths and capabilities the more intense domestic rivalry is the more companies are being pushed to innovate and improve in order to maintain their competitive advantage in the end this will only help companies when entering the international arena a good example of this is the japanese automobile industry with intense rivalry between players such as nissan honda toyota suzuki mitsubishi and subaru because of their own fierce domestic competition they have become able to more easily compete in foreign markets as well beside these four factors the role of the government and chance are often included in porter's diamond model governments can encourage and push companies to raise their aspirations and move to even higher levels of competitiveness this can be done by stimulating early demand for advanced products focusing on specialized factor creation such as infrastructure education system and the health sector promoting domestic rivalry by enforcing antitrust laws and encouraging change the government can thus assist the development of the four aforementioned factors in a way that should benefit the industries in a certain country lastly although porter hasn't officially mentioned chance or luck it is often associated with the diamond model there are external events such as natural disasters or war that can make a positive or negative impact on the industry or country while such factors are beyond the control of companies they should at least monitor them so they can make well-informed decisions moving forward now let's do a quick review of today's topic porter's diamond model is a strategic economic model that attempts to explain why one country is more successful than another for a particular industry according to the model for an industry to have a national competitive advantage four determinate factors must be present those four factors are factor conditions demand conditions related and supporting industries and firm strategy structure and rivalry additionally the actions of the government and chance can play a role in determining if an industry achieves a competitive advantage so what do you think about porter's diamond model which of those factors is the most interesting to you please leave your thoughts in a comment below as always this channel aims to educate college students on matters related to the business world in hopes that you can apply this information to your own lives i hope that you guys have enjoyed this video and if you did make sure to give it a thumbs up also don't forget to subscribe to the channel and click the notification bell so you can be the first to know when i upload new content thanks for watching and i'll see you next time