G.N. KHALSA COLLEGE

2011

STRATEGIC MANAGEMENT

MICHAEL PORTER’S DIAMOND MODEL

TYBBI {SEM-6}

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Michael Porter

Michael Porter

BornMay 23, 1947 (age 63)

Ann Arbor, Michigan

Occupation Author, Management Consultant

Michael Eugene Porter (born May 23, 1947 is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porter’s work is recognized in many governments, corporations and academic circles globally. He chairs Harvard Business School's program dedicated for newly appointed CEOs of very large corporations.

Early life

Michael Eugene Porter received a B.S.E. with high honors in aerospace and mechanical engineering from Princeton University in 1969, where he was elected to Phi Beta Kappa and Tau Beta Pi.

He received an M.B.A. with high distinction in 1971 from the Harvard Business School, where he was a George F. Baker Scholar, and a Ph.D. in Business Economics from Harvard University in 1973. Porter was an outstanding intercollegiate golfer while at Princeton.

Career

Michael Porter is the author of 18 books and numerous articles including Competitive Strategy, Competitive Advantage, Competitive Advantage of Nations, and On Competition. A six-time winner of the McKinsey Award for the best Harvard Business Review article of the year, Professor Porter is the most cited author in business and economics.

Michael Porter’s core field is competition and company strategy. He is generally recognized as the father of the modern strategy field, and his ideas are taught in virtually every business school in the world. His work has also re-defined thinking about competitiveness, economic development, economically distressed urban communities, environmental policy, and the role of corporations in society.

Recently, Porter has devoted considerable attention to understanding and addressing the pressing problems in health care delivery in the United States and other countries. His book, Redefining Health Care (written with Elizabeth Teisberg), develops a new strategic framework for transforming the value delivered by the health care system, with implications for providers, health plans, employers, and government, among other actors. The book received the James A. Hamilton award of the American College of Healthcare Executives in 2007 for book of the year. His New England Journal of Medicine research article, “A Strategy for Health Care Reform—Toward a Value-Based System” (June 2009), lays out a health reform strategy for the U.S. His work on health care is being extended to address the problems of health care delivery in developing countries, in collaboration with Dr. Jim Yong Kim and the Harvard Medical School and Harvard School of Public Health.

In addition to his research, writing, and teaching, Porter serves as an advisor to business, government, and the social sector. He has served as strategy advisor to numerous leading U.S. and international companies, including Caterpillar, Procter & Gamble, Scotts Miracle-Gro, Royal Dutch Shell, and Taiwan Semiconductor. Professor Porter serves on two public boards of directors, Thermo Fisher Scientific and Parametric Technology Corporation. Professor Porter also plays an active role in U.S. economic policy with the Executive Branch and Congress, and has led national economic strategy programs in numerous countries. He is currently working with the Presidents of Rwanda and South Korea.

Michael Porter has founded three major non-profit organizations: Initiative for a Competitive Inner City - ICIC in 1994, which addresses economic development in distressed urban communities; the Center for Effective Philanthropy, which creates rigorous tools for measuring foundation effectiveness; and FSG-Social Impact Advisors, a leading non-profit strategy firm serving NGOs, corporations, and foundations in the area of creating social value. He also currently serves on the Board of Trustees of Princeton University.

In 2000, Michael Porter was appointed a Harvard University Professor, the highest professional recognition that can be awarded to a Harvard faculty member.

Michael Porter is one of the founders of The Monitor Group, a premier strategy consulting firm. He is a Senior Partner and Academic Director.

His main academic objectives focus on how a firm or a region can build a competitive advantage and develop competitive strategy. He is also a Fellow Member of the Strategic Management Society. One of his most significant contributions is the five forces. Porter's strategic system consists primarily of:

Competitive advantage Porter's Five Forces Analysis

strategic groups (also called strategic sets)

the value chain

the generic strategies of cost leadership, product differentiation, and focus

the market positioning strategies of variety based, needs based, and access based market positions

global strategy

Porter's clusters of competence for regional economic development

Diamond model

Works

Competitive Strategy

Porter, M.E. (1979) "How Competitive Forces Shape Strategy", Harvard Business Review, March/April 1979.

Porter, M.E. (1980) Competitive Strategy, Free Press, New York, 1980.

Porter, M.E. (1985) Competitive Advantage, Free Press, New York, 1985.

Porter, M.E. (ed.) (1986) Competition in Global Industries, Harvard Business School Press, Boston, 1986.

Porter, M.E. (1987) "From Competitive Advantage to Corporate Strategy", Harvard Business Review, May/June 1987, pp 43-59.

Porter, M.E. (1996) "What is Strategy", Harvard Business Review, Nov/Dec 1996.

Porter, M.E. (1998) On Competition, Boston: Harvard Business School, 1998.

Porter, M.E. (1990, 1998) "The Competitive Advantage of Nations", Free Press, New York, 1990.

Porter, M.E. (1991) "Towards a Dynamic Theory of Strategy", Strategic Management Journal, 12 (Winter Special Issue), pp. 95-117.

McGahan, A.M. & Porter, M.E. Porter. (1997) "How Much Does Industry Matter, Really?" Strategic Management Journal, 18 (Summer Special Issue), pp. 15-30.

Porter, M.E. (2001) "Strategy and the Internet", Harvard Business Review, March 2001, pp. 62-78.

Porter, M.E. & Kramer, M.R. (2006) "Strategy and Society: The Link between Competitive Advantage and Corporate Social Responsibility", Harvard Business Review, December 2006, pp. 78-92.

Domestic Health Care

Porter, M.E. & Teisberg, E.O. (2006) "Redefining Health Care: Creating Value-Based Competition On Results", Harvard Business School Press, 2006.

Global Health Care

Jain SH, Weintraub R, Rhatigan J, Porter ME, Kim JY. Delivering Global Health. Student British Medical Journal 2008; 16:27.

Kim JY, Rhatigan J, Jain SH, Weintraub R, Porter ME. From a declaration of values to the creation of value in global health: a report from Harvard University's Global Health Delivery Project. Glob Public Health. 2010 Mar; 5(2):181-8.

Rhatigan, Joseph, Sachin H Jain, Joia S. Mukherjee, and Michael E. Porter. "Applying the Care Delivery Value Chain: HIV/AIDS Care in Resource Poor Settings." Harvard Business School Working Paper, No. 09-093, February 2009.

Criticisms

Porter has been criticized by some academics for inconsistent logical argument in his assertions.[2] Critics have also labeled

Porter's conclusions as lacking in empirical support and as justified with selective case studies.

National Diamond

Strategic analysis typically focuses on two views of organization. The industry-view and The Resource-Based View (RBV). These views analyze the organization without taking into consideration relationship between the organizations strategic choice (i.e. Porter generic strategies) and institutional frameworks. The National Diamond' is a tool for analyzing the organizations task environment. The National Diamond highlights that strategic choices should not only be a function of industry structure and a firms resources, it should also be a function of the constraints of the institutional framework. Institutional analysis (such as the National Diamond) becomes increasingly important as firms enter

new operating environments and operate within new institutional frameworks.

Michael Porter's National Diamond framework resulted from a study of patterns of comparative advantage among industrialized nations. It works to integrate much of Porter's previous work in his competitive five forces theory, his value chain framework as well as his theory of competitive advantage into a consolidated framework that looks at the sources of competitive advantage sourcable from the national context. It can be used both to analyze a firm's ability to function in a national market, as well as analyze a national markets ability to compete in an international market.

It recognizes four pillars of research (factor conditions, demand conditions, related and supporting industries, firm structure, strategy and rivalry) that one must undertake in analyzing the viability of a nation competing in a particular international market, but it also can be used as a comparative analysis tool in recognizing which country a particular firm is suited to expanding into.

Two of the aforementioned pillars focus on the (national) macroeconomics environment to determine if the demand is present along with the factors needed for production (i.e. both extreme ends of the value chain). Another pillar focuses on the specific relationships supporting industries have with the particular firm/nation/industry being studied. The last pillar it looks at the firm's strategic response (microeconomics) i.e. its strategy, taking into account the industry structure and rivalry (see five forces). In this way it tries to highlight areas of competitive advantage as well as competitive weakness, by looking at a company’s/nations suitability to the particular conditions of a particular market.

Principles

For analyzing national competitiveness, we need to focus upon firm performance. The role of the national environment

is providing a context within which firms develop their identity, resources, capabilities, and managerial styles.

For a country to sustain a competitive advantage in a particular industry sector requires dynamic advantage: firms must broaden and extend the basis of their competitive advantage by innovation and upgrading. The dynamic conditions that influence innovation and the upgrading are far more important than initial resource endowments in determining national patterns of competitiveness.

Components

The four different components of the framework are:

Factor Conditions Related And Supporting Industries

Demand Conditions

Strategy, Structure, And Rivalry

Factor Conditions

Factor conditions can be categorized into two forms:

"Home-Grown" resources Highly specialized resources

For example, in analyzing Hollywood's preeminence in film production, Porter has pointed out the local concentration of skilled labor, including the different schools of film (UCLA & USC) in the area. Also, resource constraints may encourage development of substitute capabilities; Japan's relative lack of raw materials has spurred miniaturization and zero-defect manufacturing.

Related and Supporting Industries

For many firms, the presence of related and supporting industries is of critical importance to the growth of that particular industry. A critical concept here is that national competitive strengths tend to be associated with "clusters" of industries. For example, Silicon Valley in the USA and Silicon Glen in the UK are techno clusters of high-technology industries which includes individual computer software & semi-conductor firms. In Germany, a similar cluster exists around chemicals, synthetic dyes, textiles and textile machinery.

Demand Conditions

Demand conditions in the domestic market provide the primary driver of growth, innovation and quality improvement. The premise is that a strong domestic market stimulates the firm from being a startup to a slightly expanded and bigger organization. As an illustration, we can take the case of Germany which has some of the world's premier automobile companies like Mercedes, BMW and Porsche. German auto companies have dominated the world when it comes to the high-performance segment of the world automobile industry. However, their position in the market of cheaper, mass-produced autos is much weaker. This can be linked to a domestic market which has traditionally demanded a high level of engineering performance. Also, the transport infrastructure of Germany, with its Autobahns does tend to favor high-performance automobiles.

Strategy, Structure and Rivalry

National performance in particular sectors is inevitably related to the strategies and the structure of the firms in that sector. Competition plays a big role in driving innovation and the subsequent up gradation of competitive advantage. Since domestic competition is more direct and impacts earlier than steps taken by foreign competitors, the stimulus provided by them is higher in terms of innovation and efficiency. As an example, the Japanese automobile industry with 9 major competitors (Honda, Toyota, Suzuki, Isuzu, Nissan, Mazda, Mitsubishi, Subaru & Datsun) provide intense competition in the domestic market, as well as the foreign markets in which they compete.

The Diamond as a System

The effect of one point depends on the others. For example, factor disadvantages will not lead firms to innovate unless there is sufficient rivalry. The diamond also is a self-reinforcing system. For example, a high level of rivalry often leads to the formation of unique specialized factors.

The role of government

The role of government in Porter's Diamond Model is "acting as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance ….” They must encourage companies to raise their performance, stimulate early demand for advanced products, focus on specialized factor creation and to stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations.

Criticism

Criticism on Porter's national diamond model resolves around a number of assumptions that underlie it. As described by Davies and Ellis:"Sustained prosperity may be achieved without a nation becoming 'innovation-driven', strong 'diamonds' are not in place

in the home bases of many internationally successful industries and inward foreign direct investment does not indicate a lack of 'competitiveness' or low national productivity". Porter generalized from the American case; for developing countries the model may be wrong.

CASE STUDIES

Application to the Japanese Fax Machine Industry

The Japanese facsimile industry illustrates the diamond of national advantage. Japanese firms achieved dominance in this industry for the following reasons:

Japanese factor conditions: Japan has a relatively high number of electrical engineers per capita.

Japanese demand conditions: The Japanese market was very demanding because of the written language.

Large number of related and supporting industries with good technology, for example, good miniaturized components since there is less space in Japan.

Domestic rivalry in the Japanese fax machine industry pushed innovation and resulted in rapid cost reductions.

Government support - NTT (the state-owned telecom company) changed its cumbersome approval requirements for each installation to a more general type approval.

Greek’s Olive Oil Sector Using Porter’s Diamond Model

Agricultural products of Greek are olive oil and table olives.

In Greece a large number of small family businesses olive oil sector enterprises are operating.

Greece has the third largest production capacity of olive oil, a production that for certain areas of the country are the major sources of income.

The aim of this work is to study the comparative and competitive advantages of the olive oil production in Greece and international markets.

It is also used to study the economic structure and profile of Greek rural areas.

Factor conditions area) analysis of cultivation procedures and demandsb) production and processing infrastructuresc) human capital and labour costd) technological innovation ande) capital.

Demand conditions of national market refer toa) structure and characteristics of domestic demandb) size and trends of domestic demand andc) international demand for Greek olive oil and its characteristics.

According to Porter, domestic demand can alone lead in economies of scale and actively support international competitiveness of local companies. An example indicating this process is the adoption of innovations in domestic companies originating from strong demand and needs in local markets for higher quality products.

Relating or supporting sectors develop a piece of the value system of the product and actively support and affect the proper operation and growth of olive oil sector. In our case such factors are thea) suppliers of growersb) transportation enterprises andc) distribution channels.Aims, culture and overall structure determine largely Corporate Strategy, a crucial factor for the final success of the whole attempt which also affects severely the operation of any other subsidiary or affiliate company. Also domestic competition can lead both parent and subsidiary company’s strategic choices and contribute to the final form of its competitive advantage.

For Greek olive oil production sector the domestic competition liesa) between same activity companiesb) their marketing strategiesc) market trends and focus.Finally government as an external factor affects each of the previous mentioned parameters, thus enterprise’s competitiveness. Governmental policy is applied in regional, national and international level and obviously can directly affect and influence business operations.

ACKNOWLEDGEMENTACKNOWLEDGEMENT

We express our sincere thanks toWe express our sincere thanks to our esteemed institution “Guruour esteemed institution “Guru Nanak Khalsa College” for thisNanak Khalsa College” for this opportunity given to us.opportunity given to us.

We wish to express our deepWe wish to express our deep sense of gratitude to Professorsense of gratitude to Professor Allan D’souza and Professor KapilAllan D’souza and Professor Kapil Bhopatkar. We also sincerelyBhopatkar. We also sincerely thanks to all our professors andthanks to all our professors and non – teaching staff. They havenon – teaching staff. They have been constant source ofbeen constant source of inspiration in completing theinspiration in completing the

project. It is our foremost duty toproject. It is our foremost duty to thanks all our respondents andthanks all our respondents and group members who helped us ingroup members who helped us in completingcompleting our project.our project.

WebsitesWebsites http://www.12manage.com/http://www.12manage.com/

methods_porter_diamond_model.htmlmethods_porter_diamond_model.html

http://http://www.valuebasedmanagement.net/www.valuebasedmanagement.net/methods_porter_diamond_model.htmlmethods_porter_diamond_model.html

http://en.wikipedia.org/wiki/http://en.wikipedia.org/wiki/Michael_PorterMichael_Porter

http://www.12manage.com/http://www.12manage.com/methods_porter_diamond_model.htmlmethods_porter_diamond_model.html

http://en.wikipedia.org/wiki/http://en.wikipedia.org/wiki/National_DiamondNational_Diamond

http://www.quickmba.com/strategy/http://www.quickmba.com/strategy/global/diamond/global/diamond/

http://www.themanager.org/models/http://www.themanager.org/models/diamond.htmdiamond.htm

http://www.themanager.org/models/http://www.themanager.org/models/diamond.htmdiamond.htm

INDEXINDEX

Michael Eugene PorterMichael Eugene Porter

National DiamondNational Diamond

IntroductionIntroduction

PrinciplesPrinciples

ComponentsComponents

Factor ConditionsFactor Conditions

Demand ConditionsDemand Conditions

Related and Supporting IndustriesRelated and Supporting Industries

Strategy, Structure and RivalryStrategy, Structure and Rivalry

The Diamond as a SystemThe Diamond as a System

The Role of GovernmentThe Role of Government

CriticismCriticism

Case StudiesCase Studies

Japenese Fax Machine IndustryJapenese Fax Machine Industry

Greek’s Olive Oil SectorGreek’s Olive Oil Sector