Diamond model

Factor conditions include the nation's production resources, including infrastructure, labor force, land, and natural resources.

According to Porter, "a nation does not inherit but instead creates the most important factors of production—such as skilled human resources or a scientific base."[1] A lack of less important factors, such as an unskilled labor force or access to raw materials, can be mediated through technology or by implementing what Porter calls "a global strategy."

Factor endowment can be categorized into two forms:

• "Home-grown" resources/highly specialized resources
• Natural endowments

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.

This component refers to industries that supply, distribute, or are otherwise related to the industry being examined.[1] 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 US and Silicon Glen in the UK are techno clusters of high-technology industries which includes individual computer software and semi-conductor firms. In Germany, a similar cluster exists around chemicals, synthetic dyes, textiles and textile machinery.

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, 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.

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 upgradation 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 8 major competitors (Honda, Toyota, Suzuki, Isuzu, Nissan, Mazda, Mitsubishi, and Subaru) provide intense competition in the domestic market, as well as the foreign markets in which they compete.

Porter identifies two other variables that affect competitiveness. These factors "support and complement the system of national competitiveness but do not create lasting competitive advantages."[2]

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.

The role of chance basically denotes the idea that it may occur that many times a product or an enterprise may get an opportunity to maximize its benefits out of sheer luck. Thus chance plays a key role in determining the fate of the product as well.