Michaels Porter’s Diamond Model

Clusters versus traditional sources of competitive advantage Model that helps understand the competitive position of nation or region Traditionally following factors mentioned for competitive advantage of region: land, location, natural resources, labor, local population size All of them can hardly be influenced Porter introduces a concept of clusters: groups of interconnected firms and institutions that arise in particular location

4 interlinked factors for competitive advantage 1. Firm strategy, structure and rivalry (conditions for organization of companies 2. Demand conditions (sophisticated customers in home market - pressure to improve competitiveness via innovation) 3. Related supporting industries (facilitate the exchange of information and ideas) 4. Factor conditions (key factors and non-key factors)

Firm strategy, structure and rivalry Strategy: - long-run or short-run capital markets in individual countries and regions. Countries with short-run outlook more competitive in industries with short-term investment (computer industry in US). Switzerland with long-run outlook more competitive in long-term investment (pharmaceuticals) Structure: best managements styles vary among industries: Germany has hierarchical management structure consisted of managers with strong technical background, Italy has smaller family-run firms Rivalry: intense competition stimulates innovation

Related and supporting industries A set of strong related industries important to the competitiveness of firms: Silicon Valley, leather shoes and other leather goods industry Advantages to locating close to your rivals: -potential knowledge spillovers - some market power Disadvantages: potential poaching of employees by rival companies and decrease of profits because of more intense competition

Demand conditions Firms facing a sophisticated market will sell more superior products A good example: the French wine industry. French sophisticated consumers force French wineries to produce high quality wines Other examples? Other counter-examples?

Factor conditions Refers to inputs such as labor, land natural resources, capital and infrastructure Key factors (specialized factors): skilled labor, capital and infrastructure are created not inherited factors, there are more difficult to duplicate Non-key factors: unskilled labor and raw materials do not generate sustained competitive advantage Lack of resources helps countries to become competitive (selected factor disadvantage)

Abundance generates waste, scarcity generates an innovative mindset 3 examples: Switzerland moved from labor intensive watches to innovative/high-end watches because of labor shortage Japan: land is scarce and expensive. This lead to just-in time inventory techniques to save space Sweden created a need for pre-fabricated houses because of a short building season Other examples?

The role of government in Diamonds Model Acts as catalyst, pushes companies to raise their aspiration and performance, Stimulates early demand for advanced products, Stimulates local rivalry by enforcing anti-trust regulation Tools used by the government: subsidies to firms, tax exempts to business or property ownership, educational policies, specialized factors creation, enforcing tough technical and product standards

Points on the Diamond constitute a self- reinforcing system Rivalry for final goods stimulates the emergence of an industry providing specialized intermediate goods Domestic competition leads to more sophisticated consumers who expect better quality and more innovative product The diamond promotes clustering

The „diamond” as an analytical tool, case of the paperboard micro-cluster in Barcelona 1)Strategy, structure, rivalry:2 dominant producers with the necessary scale, belonging to large European groups 2) factor conditions: high energy costs, abundant water supply, high-tech machinery producers, potentially abundant supply of recycled paper 3) related industries: strong printing, advertising and design industry 4) demand conditions: sophisticated multinationals as end users, (prices, delivery terms, quality