- Porter
For the section(s) taught by Prof. Tim Richardson
This page last updated 2012 Nov 30th
INTRODUCTION This unit will cover
  • Porter: International competitiveness determined by several conditions
  • Porter's "Diamond Theory" - "countries do not trade - companies do"
  • Nepal / Japan, countries being competitive 
Why We have competition Competition is the essence of capitalism. Companies make a product, and people buy it based upon their opinion that it is the best price for the best quality they can get. If a company makes a product at a price which is too high, other companies will seek a way to undercut them and steal their customers away - it sounds like it is not very nice, but, that is the real world. With a world growing smaller due to the pressures of globalization, which is greatly facilitated by 
  • developments in transportation technology in the 1980's and 
  • communications technology in the 1990's
it is more and more likely that some company making some product in one part of the world, for their customers, will have to deal with competition from some other company that has a way of making the same thing more cheaply, and offering it to the same customers. 

The original company has the choice of cutting production costs to meet this competition, or using marketing promotion techniques to try to convince their customers to stick to buying the original product at the higher price because of quality reasons or cultural reasons. 

This is the "arena" of international competitiveness in the early years of the new millenium and there are a number of things we need to learn about in order to understand how Canada and Canadian companies are challenged by the global competitive environment.

Prof. Michael Porter
Porter at the World Economic Forum in Switzerland
Prof. Porter of Harvard University is known internationally as a leading expert on corporate strategy. He has written a number of famous books and articles on strategy which have been widely quoted and used in many university courses on management strategy at the graduate and undergraduate level.

Wikipedia says Porter is a "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" (Canada's Mintzberg won this award twice)

Porter is most well known for his Five Forces analysis which originally developed in 1979.


Dr. Porter has also developed many links with the University of Toronto and collaborated with a number of UofT professors on various "competitiveness" projects and research.

One of the recent collaborations Porter had with UofT was research conducted with Prof. Roger Martin. Martin [2012] serves as Dean of UofT's Joseph L. Rotman School of Management. 

In 1991 Prof. Martin, along with Prof. Porter (and John Armstrong), published Canada at the Crossroads. This report looked at the Canadian economy. In 2001, Porter and Martin released Canadian Competitiveness: A Decade after the Crossroads. In the 2002 report they found that Canada is lagging in the global competitiveness race. "In 1991," says Martin, "Canada was the third-richest country in the world in GDP per capita, and had a dollar valued at 87 cents U.S. By the time we released our follow-up study, Canada was in fifth place and had a dollar valued at 65 cents U.S., representing a 23 per cent pay cut."
for further details see



U.S.  competitiveness
Nov 2012
Writing after the election of Pres. Obama to a 2nd term, Prof. Porter and Prof. Rivkin of Harvard Business School authored and article in the Nov 2012 issue of The Economist in which they discussed what Washington must do now.

Porter and Rivkin explain
"American competitiveness? American firms and workers thrived historically because the United States was the most productive place to do business. It retains core strengths, but unneeded costs have crept in, skills have eroded and critical assets have deteriorated."

Their "recipe" includes
1. Ease the immigration of highly skilled individuals.
2. Simplify the corporate-tax code.
3. Tax overseas profits only where they are earned.
4. Address trade distortions.
5. Simplify regulation.
6. Enact a multi-year programme to improve infrastructure. 
7. Agree on a framework for developing shale gas and oil. 
8. Create a sustainable federal budget. 


"Porter's 'Diamond' proposes several basic elements which govern a country's trading competitiveness. The theory propounds demand, factor and inter-firm conditions as the rudiments of a healthy open economy."
Barbara J. O'Toole

"He [Porter] argues that the factor endowment theories of Heckscher and Ohlin are too simplistic to determine a nation-state's competitive advantage. Comparative advantage can no longer be seen as 'divine inheritance'. Porter states that international success in a particular industry is determined by four broad mutually reinforcing factors which create an environment which enables these firms to compete. The four include factor conditions, demand conditions, related and supporting industries and firm structure, strategy and rivalry. These determinants also being influenced by the nation's government and by chance events."

International competitiveness determined by
  • factor conditions
    • skilled labour and capital
  • demand conditions
    • if the customers in an economy are very demanding, companies will face constant competitive pressure to improve their products to meet these demands through innovation
  • related and supporting industries and firm structure
    • proximity - whichis a consequence of the "geographic environment" heps companies do business with each other
    • at the time Porter developed his Diamond Model the Web and online business did not exist, which has effected the requirement for some types of companies to be physically in the same location
  • the company's strategy, organizational structure and rivalry
Porter divides factors into
    • basic 
      • natural resources, 
      • climate
      • un/semi-skilled labour
    • advanced
      • those whose development demands large and substantial investment in human and physical capital
    • generalised 
    • specialised
In a number of textbooks dealing with international business, the author sometimes includes a diagram representing Porter's "diamond", which is similar to the diagram above.

The important point is that all 4 of these conditions need to be favourable in order for an industry, within a particular country, to achieve worldwide success.

  • factor conditions
  • demand conditions
  • related and supporting industries and firm structure
  • the company's strategy, organizational structure and rivalry
The reason for the "diamond" diagram is that it allows for the 4 parts to show links to each neighbour, and also across the diagram to other components - in effect each part (condition) is linked, and cross-linked to each other part.

The diagram above comes from the site of Prof. Keith Head, Associate Professor , Strategy and Business Economics Division, at UBC and is reproduced here with his permission given in a Jan 18th 2001 email. Copies of emails are kept in the permissions binder
The point of discussing Prof. Porter's "diamond", is that once you understand some theories of why countries trade - it is reasonable to discuss the point that  - "countries do not trade - companies do"; therefore Porter's theory is useful in order to look at why companies trade and what are the conditions that allow for a company to have competitive superiority.


Porter's theory has been widely adopted and there are many examples of where people use it to speculate how an entire country should be planned.   Example - Nepal
In this article from Nepal News, Navin Dahal explains how Nepal could benefit from adopting some of the principles that Porter theorizes.

"Asking "How can Nepal be competitive?" will lead us nowhere as countries do not compete, companies do. The very notion of a country being competitive is misleading. No country in the world, even Japan and the USA, is competitive in all industries. A country can be globally competitive only in a few industries. Thus the right question to ask would be "In which industry or industries can Nepal be competitive?" Answering this will require an understanding of what makes a country competitive in a particular industry.

  • Why are the Japanese doing so well in the electronics industry and the Americans in the IT industry? 
  • What is it that a particular country has, but others do not, making its industry globally competitive? 
"Are sound macroeconomic policies and political stability enough? The answer, according to Prof. Michael E. Porter of Harvard Business School, is a big no. Political stability and sound macroeconomic policies are necessary but not sufficient. ... The central issue in becoming globally competitive is how to create the conditions for rapid and sustained productivity growth in a particular industry. The microeconomic foundations of productivity rest on two interrelated areas: First the sophistication with which companies compete, and second, the quality of the microeconomic business environment. Companies, not governments, ultimately set the level of national productivity, and their ability to upgrade depends on the national business environment. Once companies move to more sophisticated ways of competing at the national level, their chance of becoming globally competitive increases. "

Go here  to read the entire article


Porter and the role of government A key part of Porter's theory is his description of what government should and should not do to help business, or stay out of the way off innovation.

Porter is saying great government policy can't help companies of the country be competitive. Companies have to be competitive by striving for things beyond that which their host government can effect.

This does not "release" governments from responsibility to help companies - it simply recognizes that government is not the total answer.

Understanding this point is critical for students of international business in Canada since it should be recognized that Canadian companies (in the opinion of many observers) are much more coddled than U.S. companies.