The factors in the ‘Diamond’ are interrelated. Competitive advantage in an industry rarely rests on a single determinant.
Related industries affect demand conditions for an industry. For example ‘piggy-back’ exporting is when an exporting company also exports some of the products of related industries.
Domestic rivalry can encourage the creation of more specialized supplier industries.
Using Porter’s Diamond to develop business strategies
Porter claims that firms gain competitive advantage from either of two sources.
Lower costs of supply to customers which result in higher profitability (cost leadership).
Differentiated service or reputation resulting in higher prices and sales revenues (differentiation).
Porter advises management to consider the diamond factors in their home country and to compare them with the diamond factors available to rivals from other countries. He offers the following prescription.
If the home diamond factors give a comparative cost advantage over those of foreign rivals then management should adopt strategies based on overall cost leadership. This may explain the strategies of South Korean car manufacturers like Hyundai/Kia, Daewoo and SsangYong (the latter two being respectively offshoots of General Motors and Daimler Chrysler).
If the home diamond factors give a differentiation advantage over foreign rivals management should adopt strategies based on differentiation. This may explain why car manufacturers Mercedes, BMW and Audi tend to develop and initially produce their limousines in Germany but build vans and utility cars in Spain, South Africa and Brazil.
If the diamond does not confer advantage over rivals then management must focus on sub-sections of the industry which large players may have overlooked or not be able to exploit commercially. This may explain the large number of private banks in Switzerland or the boutique sports car makers in Italy (Ferrari, Lamborghini, Maserati etc).
