Rational Planning Model – Part III: Strategic Option Generation (Part 02)

The previous article discussed about the Porter’s Generic Strategy model and this article will discuss about another strategy that’s important for any business. This strategy too was implemented by Michael Porter and is named as ‘Diamond Theory’.

02) Diamond Theory – Michael Porter

This theory specifically discusses about the factors/conditions that affect a business to develop a competitive advantage over another business and come to be ‘global businesses’. Michael Porter put forward this theory in his publication ‘The Competitive Advantage of Nations’.

The theory focuses on four aspects that make the businesses globally competitive.

1.        Demand Conditions 
2.        Factor Conditions
3.        Firm Structure, Strategy and Rivalry
4.        Related and Supportive Industries

Demand Conditions

This represents the home demand for a company. In simple, the demand for the product by the country in which the business originated affects the development of the business largely. A good and strong demand from the home country will tempt and challenge the business to innovate and evolve.

Eg: The local demand for chocolates and wrist watches made Switzerland the global leader in chocolate products and wrist watch industry.

The demand for fashion within Italy made it to be the hub of world fashion.

Factor Conditions

This represents the availability and the usage of factors/resources by a business to develop a competitive advantage. According to Porter natural availability of factors is not good for the business, since then the businesses are not motivated to innovate and crate factors. These factors can include human resources, capital resources, natural resources and intellectual resources.

Eg: Availability of natural oil has given the countries in the Middle East a natural competitive advantage; however this has lead such countries to innovate less.

Firm Structure, Strategy and Rivalry

This represents how the structure (flow of decision making), strategy (the business’s course of action to achieve objectives) and rivalry (competition) help the business in gaining a competitive advantage.

Firm structure that aids fast and flexible decision making, strategy that allows achievement of objectives and rivalry which pushes the businesses beyond the limits are vital for the growth and development of a business.

Related and Supportive Industries

Diamond theory shows that a business cannot function on its own. It needs aid from a variety o other businesses, which are also known as auxiliary services. These supportive industries could be transportation, communication, warehousing, financial etc.

A strong integration between these industries will help a business to develop long term relationships, gain cost benefits and gain a competitive advantage in the long run.