Lecture Notes on Porter’s Diamond Model

The most important factors in marketing are “location, location, and location.” Finding the right country for selling products or services is critical to the success of a global entrepreneur. In the previous module, we examined how to find attractive industries. Now our attention is turned to finding attractive countries for our products and services. Before turning attention to the internal resources that can cause a country to be attractive for entrepreneurial activity, it is important to understand the external factors that affect a firm’s ability to successfully operate within a country’s borders. This is done by assessing the economic, cultural, political, legal, and technological environments. The CIA World Factbook provides a wealth of information of all these external factors. When examining the economic environment, attention must be paid to the country’s banking system. The cultural element of a country will have a definite impact on the products and services that are sold within the country.

It is critical to understand the demographics of the country and any restrictions that culture may impose on goods and services. Geert Hofstede created the Cultural Dimensions Index, which allows the entrepreneur to examine the differences and similarities in culture from one country to another. From a legal perspective, entrepreneurs need to know how to protect their products and services and how to operate effectively within the country’s legal system. The technological environment is also essential to examine. Entrepreneurs need to know how to use technology to their advantage in the country environment. The International Telecommunication Union (ITU) provides information on internet usage, broadband use, and other telecommunication statistics. Understanding if credit cards are frequently utilized or if online buying is a part of the culture can improve the entrepreneur’s strategy in the market.

Porter’s Diamond In addition to his work on developing a model to assess attractive industries, Michael Porter also developed a model to assess the features and benefits of doing business in foreign location, and this model is called “Porter’s diamond.” The name refers to the four components in the country environment that are important to examine: factor endowments (land, labor, and capital); demand conditions in the home market; firm strategy, structure, and rivalry; and supporting and related industries. Porter also notes two additional factors that lie outside of the diamond, chance and the government, that also influence how  attractive a country can be to future investors. As an example, the government has control over taxes within its domain, and lower taxes can stimulate consumer demand. For entrepreneurs and other businesses, this will hopefully translate into higher sales and higher profits. When this is related to the factor of endowments, if countries invest in a skilled workforce, then the attraction of higher-paying jobs is a possibility.

For firms in the country, a skilled workforce can make them more competitive, and competition benefits everyone. As core businesses become a stronger force in the market, related and supporting industries will want to locate in close proximity to take advantage of “spillover” effects—the benefit of economic activity or processes that affect those who are not directly involved. These activities can often create demand conditions in the home market. The PowerPoint presentation “Exploring Country Attractiveness” in this module’s Resources folder provides more information on understanding Porter’s diamond. Accurate country assessment requires finding valid information. Two global resources, the Legatum Prosperity Index and the Index of Economic Freedom, which is from the Heritage Foundation, provide tools to analyze factor endowments in over 183 countries around the world. A more comprehensive look at commercial activity within a country’s border can be found in the Country Commercial Guides, maintained by the U.S. Commercial Service. These guides provide a wealth of information on all facets of doing business in the country.