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analysis five forces of framework
as new needs are met and new
customers are drawn into the market. It is important to note that internationally
competitive, advanced nations have more innovation- and differentiation-based
competition, while less competitive nations tend to compete on imitation and price.19
This analysis leads to the controversial conclusion that holding down profitability is
the wrong issue for society. Profitability has a contingent relationship with productivity
growth. The American software industry is far more profitable than the software
industries in other countries, but it is also far more productive and internationally
competitive. High profits are fine, provided competition is healthy and there are strong
pressures for dynamic improvement. The productivity growth standard, then, casts new
light on how we assess competition. It reveals the importance of understanding the kind
of competition a nation should really be looking for.
III.2.2. Measuring the health of local competition: The Diamond framework
As has been argued, it is not sufficient to consider only industry competition
generally. We must also have a means of gauging the health of local competition. Here,
one such approach to assessing the potential productivity of a local business environment
is embodied in the so-called diamond framework.20
The productivity of a national business environment can be modeled using four
interacting components that can be depicted as a diamond (see figure 8). These are:
1. Context for firm strategy and rivalry
2. Factor (input) conditions
3. Demand conditions
19 For supporting statistical findings, see Porter, supra note 5. Results are similar in previous years
reports. See the full The Global Competitiveness Reports for 1998, 1999 & 2000; and Porter, Takeuchi
& Sakakibara, supra note 7.
20 M.E. Porter, The Competitive Advantage of Nations (1990). For the empirical application of Diamond
theory to 59 countries, see The Global Competitiveness Report 2000, at 40-58, 101-221, including data
definitions and sources at 223-333. For 1998 and 1999, see The Global Competitiveness Report for
those years. For an extensive empirical application of Diamond theory to Japan, see Porter, Takeuchi
& Sakakibara, supra note 7.
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4. Related and supporting industries
Like the five forces, this framework aims to capture the many influences on the
productivity of the local business environment in an industry or overall. Rivalry among
locally based competitors is not only important to productivity growth directly but also
creates positive externalities for the local business environment. A group of competing
local rivals helps customers become more knowledgeable and competitive, encourages
more specialized suppliers to develop, and enhances the local supply of high-quality,
specialized inputs. This gives rise to a series of new questions that must be addressed in
analyzing the impact on competition of a merger or other competitive practice, which will
be discussed below.
Figure 8 The Externalities of Rivalry: Locational Determinants of Productivity
and Productivity Growth
Related and
Supporting
Industries
Related and
Supporting
Industries
Open and vigorous competition
among locally based rivals
Rivalry among locally-based competitors is not only important directly but also creates positive
externalities for the local business environment
Context for
Firm
Strategy
and Rivalry
Context for
Firm
Strategy
and Rivalry
Factor
(Input)
Conditions
Factor
(Input)
Conditions
Sophisticated and demanding
local customer(s) whose needs
anticipate those elsewhere
Unusual local demand in
specialized segments that can be
served globally
Presence of capable, locally based
suppliers and firms in related fields
Demand
Conditions
Demand
Conditions
A local context that encourages
investment and sustained upgrading
Availability of highquality
and specialized
inputs
Source: M.E. Porter, The Competitive Advantage of Nations 133 [next page]