ANSWER: In 1990, Michael Porter thesis outlined four broad attributes that shape the environment in which local
firms compete and these attributes promote the creation of competitive
advantage. They are explained as follows:
Factor endowments - Characteristics of production were analysed in
detail. Heirarchies are recognised, as is distinguishing between basic factors
like natural resources, climate, location and so on and advanced factors
like
communications infrastructure, research facilities.
Demand conditions - The role of home demand in improving competitive
advantage is emphasised since firms are most sensitive about the needs of their
closest customers. Example, the Japanese camera industry which caters to a
sophisticated and knowledgeable local market.
Relating and supporting industries - The presence of suppliers or related industries is
advantageous since the benefits of investment in advanced factors of production spill over to
these supporting industries. Successful industries within a country tend to be
grouped into clusters of related industries.Example, Silicon Valley.
Firm strategy, structure and rivalry:Domestic rivalry creates pressure to
innovate, improve quality, reduce costs which in turn helps create world-class
competitors.
He said that these four attributes
constituted the diamond and he argued that firms are most likely to succeed in
industries where the diamond is most favourable. He also stated that the
diamond is a mutually reinforcing system and the effect of one attribute
depends on the state of others.
For example, favourable demand conditions will not result in a competitive
advantage unless the state of rivalry is enough to elicit a response from the
firms.
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