Porter describes how companies succeed in international markets. His theory is based on a four-year study of patterns of competitive succes in ten nations. Porter argues that companies achieve competitive advantage through acts of innovation. He explains why certain companies in certain nations are capable of consistent innovation with his diamond of national advantage model. This model describes for different attributes of a nation that determine their competitive advantage. Factor conditions – In contrast to standard economic theory, Porter argues that a nation does not inherit but creates the most important factors of production.
He makes a distinction between basic factors and advanced factors. Basic factors, such as natural resouces and pool of labor, do not lead to a competitive advantage because they can easily be accessed by companies. Factors which are specialized to an industry’s particular needs create competitive advantage. Demand conditions – A second determinant is a nations home demand conditions. Nations gain competitive advantage in industries when the home demanding buyers pressure companies to innovate faster by drawing a clearer or earlier picture of emrging buyer needs.
Related and Supporting Industries – The presence of related and supporting industries that are internationally competitive is the third determinant of national advantages. Not only leads this to more efficiency, it also results in the advantage that home-based related and supporting industries provide in innovation and upgrading. Companies accelerate innovation by influencing their supplier’s technical efforts and can serving as test sites for R&D work. Firm strategy, Structure, and Rivalry – Differnt nations are characterized by different management structures. There is no one managerial system that is universally appropriate.
The competitive advantage in a specific industry results when there is a fit between the dynamics of the industry and the characer of the management system. Strong local rivalry creates pressure on companies to innovate and improve their efficiency. Porter argues that the degree of a nation to achieve international success depends on the combined impact of these four determinants. Goverments can influence the four determinants. In the end only companies themselves can achieve and sustain competitive advantage. By recognizing the central role of innovation and acting on the four they can achieve their competitive advantage.