Harvard University Professor Michael Porter developed the diamond model for organizational effectiveness in 1980. Porter uses the diamond model to explain why some nations gain a competitive advantage over others. Porter argues that classical theories, which try to explain national development using variables like climate, natural resources and the demography of workers, provide only a partial explanation. Porter’s model is based on a four-year study of 10 major trading nations and 100 industries, according to Proven Models.
Porter suggests that nations with a competitive advantage possess four main attributes. They include availability of resources and skills, and the types of information that are available to firms for determining the best approach to pursue a business with the available resources and skills. Other essential characteristics are the goals of individual companies and their drive to continuously innovate and invest. Porter suggests that productivity is the main driving force for international competitiveness. He argues further that a nation’s standard of living can be improved as a direct result of increases in productivity.
Porter argues that nations have the ability to create their own skilled resources and technological base. Other important determinants of national competitiveness include the availability of skilled labor and supporting infrastructure. He suggests that these essential criteria must be upgraded on an ongoing basis. In areas where there are local disadvantages such as a lack of resources and skilled labor, Porter recommends that firms can still compete by developing new methods of innovation to maintain their competitive edge.
Cultivating a local market that has a high demand for goods and services promotes a firm's competitive national advantage. Setting the stage for a strong local market helps firms predict their performance in the global marketplace. Companies must take into consideration both the quantity and quality for local demands. Japan, for example, was able to have a strong competitive advantage in the global marketplace because of its national consumer base, which demanded sophisticated technologies, leading companies to launch new and innovative models.
Related and Supporting Industries
Porter argues that the presence or absence of related supporting industries at local levels determines the development of more cost-effective and innovative products. Local supporting industries that are competitive help to support the innovations of other industries. In the United States, national highway systems combined with the oil and gas industry contributed significantly to the rise of the automobile industry. This is further strengthened when industries have a stronghold in the global marketplace.
The organizational structure of local firms has an overall influence on their ability to compete in local and global markets. This includes factors such as a company’s hierarchy, size and administrative model. The role of governments in the organizational structure of firms also determines which types of industries have the potential of excelling in the marketplace. Porter suggests that domestic rivalry forces local industries to become innovative by launching new products and improving quality, reducing costs and developing new technologies.