What is Porter's Diamond Theory? (Simple explanation with examples)

Michael E. Porter has developed many theories in his lifetime and Diamond Theory or National Diamond is amongst the best of those theories. 

What is Diamond Theory?

In a nutshell The Diamond Theory determines what factors gives a firm a comparative advantage over the other firms. On a national scale it determines what factors give a country a comparative advantage on an international market. So Diamond Theory can be applied on a both micro and a macro level.

Diamond Theory diagram

As the above diagram depicts, there are four main factors influencing a firm to gain a competitive edge over the other firms. You may also notice that all the arrows connect all the four factors - meaning that all four factors affect and support each other and the firm to create comparative advantages. If not for even one factor, the model fails.

(01) Factor Conditions

One of the most crucial aspects for a country or a firm to gain a comparative advantage is the 'factor conditions'. This means that a firm or a nation should possess some unique or rare factor (or a resource) that other firms or nations do not have (or have limited) access to. Or even easier access to a resource than another firm or country could give a firm a significant advantage too. These 'factors' could mean a raw material, machinery and tools, technology, unique labor and such.

Eg: Middle East has a natural endowment of oil deposits, hence Middle East (and it's firms) possess a significant competitive advantage over the other oil producing firms and countries.

(02) Demand Conditions

This means that there should be 'sufficient' demand for a product of the firm locally. Locally means the country the firm originated in. A sufficient demand for the product locally is necessary for a firm to grow beyond the geographical boundaries of the country and gain a comparative advantage. 

Eg: Sri Lanka is world famous for Tea production. Originally this specialization began as a result of heavy local demand for tea.

(03) Related and Supporting Industries

No firm or nation is able to survive on it's won in this globalized world. And what supportive industries a firms possesses affects the development of that firm to a great extent. Supporting industries are which provides additional services to a firm. For an example transportation for a manufacturing firm is a supporting industry. Communication in general is a supportive industry for all the firms. These supporting and related industries help a firm minimize it's costs and allows a firm to focus on it's core business activities - thus giving them a competitive advantage over their core business activities.

Eg:  Amazon.com uses DHL courier services to deliver high value products across the world. DHL is a supporting service.

(04) Strategy, Structure and Rivalry

Strategy means the strategy of the firm it uses to deal with the operations of the business. A sound strategy (incorporating flexibility) is vital for an organization to deliver a world class product and gain a competitive advantage. Structure is the setting within the firm - where organizational goals, culture, strategy and line of authority is enforced. Rivalry is also a crucial factor, because it gives incentives for a competing organization to be competitive and better than its competitor, by means of product, service and productivity. All these factors affect towards the competitive edge of a country or a firm.

However, as mentioned earlier, one or two of these factors will not be sufficient for a firm or a country to gain a significant comparative advantage over another firm or a country. 

Why Does Marginal Revenue (MR) Equals Marginal Cost (MC) Equals Price (P) in a Perfectly Competitive Market?

You may have heard, seen and written the formula MR = MC = P countless occasions. But have you even wondered what's the logic behind this? Well, let me explain...

First of all we will glance through what MR, MC and P means. 

• MR - Marginal Revenue - additional revenue generated by selling one additional unit of a product
• MC - Marginal Cost - additional cost to produce one additional unit of product
• P - Price - price of the product, selling price

So how does the price of a product (P) equals marginal revenue(MR) of that product? Well, it's pretty simple...

MR = MC = P condition only occurs in a perfectly competitive market, meaning there are a large number of suppliers in the market and none of them are large enough to influence the market price. All they can do is sell their product at the prevailing market price.

So in a perfectly competitive market, the firms engage in high competition and ultimately drive the price to a very low level. This is so low that practically there is no profits in the sales price (P). Hence the product will be sold at the same price as the cost of producing the product (MC). Since the price is market given, the firms are unable to sell at a higher price either. So P = MC...

When the firm is producing the product at a specific cost, in a perfectly competitive market, they can only sell the product covering the cost of production. Since they cannot force a profit on the selling price, they will be forced to sell the product merely covering their production cost so that they can survive in the market. So any revenue generated by selling one unit of product (MR) will be more or less equal to the cost of producing the same unit (MC). Hence we can deduct that MR = MC.

Since P = MC and MR = MC, we can derive that P = MR = MC formula...

However this situation is unique to a perfect competition, which, in a real world is difficult to find. But the logic holds true.

Know Your Stakeholders - Mendelow's Matrix

Mendelow's Matrix is one of the most frequently used matrices in the business world. The only purpose of using Mendelow's Matrix is to evaluate the stakeholders of a business. More specifically, what stakeholders have more or less power to influence the business and what stakeholders have more or less interest in the business and any combinations of the two. 

Following is the Mendelow's Matrix.

As the diagram above displays, there are basically four types of stakeholders that a business has to be aware of. 

01) High Power & High Interest stakeholders

This is shown at the top, right hand corner square of the matrix. These stakeholders have a high influence over the business and also they are very much concerned about the business and it's activities. 

The business should pay a very close attention to the needs of these stakeholders because their withdrawal from the business could mean trouble. 

High Power & High Interest stakeholders are usually main shareholders of the company, main investors of the company, government environmental authorities etc. 

NOTE:

The examples for stakeholders for each category will vary vastly depending on the type of business you are in. For a business that deals with chemicals, environmental authorities will be a high power-high interest stakeholder. For a company dealing with medicine, health authorities will be a high power-high interest stakeholder. 

02) High Power & Low Interest stakeholders

These stakeholders possess a high power to influence the business but are not much interested to do so. They will involve only when they need to. They are not much worried about the sustenance of the business. The Government towards a normal business organization may have this kind of relationship. A government will only meddle with the business activities only when necessary. 

03) Low Power & High Interest stakeholders

Employees of an organization can be fit into this description. Employees will be constantly worried about their job security, their pay, promotions etc. So that means they have a high interest towards the business. But being employees, they possess low power to influence any business activity of the organization. 

04) Low Power & Low Interest stakeholders

For most general organizations, customers can be identified as low power, low interest stakeholders. Customers anyway have a low power against a company, unless and otherwise they are organized against the company. Also customers will be rather less interested in the activities of the company as long as they receive their good or service from the company. 

As I have mentioned above the role each stakeholder performs will vastly depend on the type of the organization. So there are no standards set in stone that this stakeholder should possess this much power and interest. It will vary from one business to another, even in the same industry. So you will have to identify the type of business the organization does and think on that who and who will be more or less interested in the activities of the business and who and who will or will not possess a high or a low influence on the activities of the business. 

What is TOPCIMA?

TOPCIMA (code name T4) stands for 'Test Of Professional Competence In Management Accounting'. This is the fifth and the final stage of the CIMA professional qualification offered by CIMA UK. 

To reach the TOPCIMA stage one had to come through four other stages, namely, Foundation Level, Operational Level, Managerial Level and Strategic Level. 

The Pre-seen 

TOPCIMA consists of one paper based on a pre-seen and an unseen case scenario. The pre-seen will be issued a few months before the standard exam dates (May and November). The pre-seen will consist of a fabricated business scenario, developed through real world and real business implications and situations. Usually the pre-seen will cover a wide array of the business and the industry in which the business operates. 

The pre-seen will start from usually the incorporation of the business or at least will give a few details about the incorporation, if the focus is on other aspects. Then the pre-seen will provide the background to some specific areas of the business, of which the unseen issues can be developed later. Such areas are, 

1. Issues with the incorporation
2. Issues with the management/BOD
3. Issues with the business performance
4. Issues with the business financials
5. Issues in relation to HR of the business
6. Issues in relation to technology of the business
7. Issues in relation to competition of the business
8. Issues in relation to new investments/divestment
9. Issues in relation to undertaking new projects
10. Issues in relation to expansion of the business
11. Issues in relation to business takeovers, partnerships, mergers and acquisitions
12. Issues in relation to opportunities and threats of the external environment
13. Issues in relation to business closure/liquidation.

Only a basic background story for such issues will be given in the pre-seen. Mostly they do provide some financial information relating to the current/past/future years in preparation to the unseen issues they will raise.

So it is highly advised that a student facing for the TOPCIMA exam has a thorough understanding of the operational, strategic and financial situation of the specific business and the industry given in the unseen. It will help to remember some critical information out of the pre-seen so that the student does not have to refer to the pre-seen again and again and waste time at the exam. 

The Unseen 

The unseen will be given at the exam and will have specific issues that have developed within the time. Usually 5 issues under five different topics/segments will be given in the unseen and they will not necessarily appear in any order of significance. 

The student is expected to prioritize (order the issues in a logical basis) the issues when they are presented in the report. Unlike Strategic level case study, TOPCIMA case study will require a great degree of integration between the pre-seen and the unseen. The student should be able to draw out information form the pre-seen to support the issues/recommendations for issues given in the unseen.

A 20 minute time slot will be allocated for reading the unseen and another 3 hours to write the full report. 

The unseen will usually focus on a maximum of three calculation based issues and an ethical issue. The financial analysis based issues should be supported by proper calculations shown in the separate booklet give, named 'Supplementary Booklet'. 

Balanced Scorecard: A Balanced Approach to Business Analysis

Balanced Scorecard is a modern business analysis model that provides a quite balanced or 'holistic' analysis of the business. This means that Balanced Scorecard does not mrerly focus on one aspect of business such as financial preformance, but rather focuses on the improvement of the business aspects all around.

Balanced Scorecard focuses on four main aspects as depicted by the diagram below.

Dimensions of Balanced Scorecard

01) Financial Perspective

Financial perspective focuses on the achievement of the financial objectives of the organization. Pretty much most of the objectives of a general business organization tend to financial in nature, such as, achieving a certain level of profits, reaching a specific revenue target, reducing costs etc. These are all important and relevant objectives for a business, but the Balance Scorecard shows that merely financial objectives are not enough for a successful enterprise.

02) Customer Perspective

This is where a business has to be concerned, in almost all the ways, about the customer. 'Customer is the King , so needs to be treated as such. Customer feedback on satisfaction level, required additional products or services, customers' expectations etc are variables of this dimension. Always the focus will be on providing a 'better' service to the customer so that the customer will retain and hopefully bring in more customers in the long term.

03) Internal Business Process Perspective

This aspect mainly focuses on the improvement of the process of the business. Aspects such as improving the efficiency, productivity, success of the internal controls, systems and processes etc are the variables of thsi dimension.

04) Learning and Growth Perspective

This says that an organization always has to be positive about 'learning and growing'. Or simply put, the organization has to continuously be improving and keeping up with the changing environment. Employee and management training and development, improving technologies used in organization, focus on expansions and growth are a few variables of this dimension.

Balances Scorecard is a relatively modern business analysis tool and is being recognized as a valuable tool for measuring business performance. An overall idea of the concept is critical for the successful management of the modern business organizations. 

Rational Planning Model – Part III – Strategic Option Generation (Part 05)

So far four other strategies for businesses have been discussed in the previous articles. This will be the fifth and the last of the third area of the Rational Planning Model. Another matrix will be discussed under this final part.

Need-Provision Matrix

This matrix is specifically designed for the public sector organizations, which are rather into social welfare than profit maximization. However in the allocation of resources towards the best interests of the society, public sector organizations too do have to develop strategies, to ensure the effectiveness and the efficiency of the process.

The matrix consists of the need for a product (high and low) and provision of resources by the private sector (high and low).

                                     Need

               Low                             High

No Provision	Selected Provision
Encourage Others	Extensive Provision

High

                Provision By Others

Low

No Provision

This is where the need for the product is low yet the private sector is providing for the product highly. Entertainment industry can be taken as a close example. The ‘need’ for entertainment is low (the ‘want’ for entertainment is high), but the private sector is generating wants out of entertainment industry.

Selected Provision

This is where the need for the product is high and the private sector provision is high too. In such cases the public sector will only intervene if necessary. Health industry shows these characteristics. Public sector will only intervene when there is some massive capital expenditure.

Encourage Others

This is a situation where the need for the product and the provision by the private sector are both low. Public Sector will motivate the private sector to provide for any low demand for the product.

Extensive Provision

This is where the need for the product is high and for some reason the private sector provision is low. Mostly very expensive provisions fall into this category or completely social welfare motive businesses are found in this category. Examples include maintaining law and order, national security and infrastructure facilities. 

Rational Planning Model – Part III: Strategic Option Generation (Part 04)

After a series of Michael Porter’s theories on strategy generations, this article focuses on Igor Ansoff’s ‘Ansoff Matrix’.

Ansoff Matrix – Igor Ansoff

This is also known as ‘Product-Market Matrix’ due to the fact that this theory focuses on the development of strategies based on products and the markets. The matrix focuses on existing products and markets and new products and markets and how strategies should be developed to face each situation appropriately.

Market Penetration

This is the strategy that should be adopted by a business when an existing product is introduced to an existing market. The market is already occupied with the same product and hence the business will have to adopt some pricing strategy to penetrate the market, preferably a cost leader approach.

Diversification

This strategy should be adopted when a business enters into a new market with a new product. A new product naturally signifies ‘differentiation’ from the existing products. However diversification is a broader concept. 

Two major aspects of diversification are horizontal diversification and vertical diversification. Horizontal Diversification signifies entering into different businesses that are related or close to the products of the current business (Eg: A soap company entering into shampoo industry). Vertical Diversification signifies a business entering into the different levels of the supply chain of the same business. (Eg: A cereal producing company purchasing a corn field – Upward Integration or the same cereal company purchasing a cereal distribution company – Downward Integration).

Product Development

This strategy deals with a business introducing a new product to the existing market. Hence strategies to develop the ‘product’ have to be initiated. Marketing, advertising, product promotions, discounts are a few strategies to be adopted.

Market Development

This is where a business introduces an existing product to a new market. So strategies to develop the market have to be adopted. Having a proper distribution channel, having convenient outlets to facilitate easy access for customers are some strategies that could be adopted.