The Importance of Porter's Diamond & Porter's Five Forces in Business

Harvard Business School Professor Michael E. Porter has authored dozens of books and articles about the dynamics of competitiveness in business. "Porter's Diamond" and his "Five Forces in Business" are two well-known concepts from his work. Porter's Diamond analyzes competitive factors at work in the international business marketplace. Porter's Five Forces model is a framework that helps small business owners understand the elements that shape competition in a given industry.

Porter's Diamond analyzes business competitiveness on an international scale. According to Porter, a company's inherent culture and other factors unique to its nationality determine the advantages that particular company will have in the international marketplace. A small U.S. business can use Porter's Diamond to assess the competitive advantages offered by its own local conditions. For a small business about to enter the international market, Porter's Diamond is a resource for analyzing how competitors from certain countries might be hard to beat because of their built-in advantages.

Porter's Diamond consists of four interrelated factors that, when arranged in a graphic, form a four-sided diamond. General factor conditions discuss topics such as local availability of raw materials and labor. Demand conditions say that company whose products are in high demand at home must have an edge to remain competitive in its home market. The third factor involves the strength of local industries that support the company and whether they offer low-cost, inventive products and services. The final factor involves strategy, structure and rivalry: how a country's culture affects management style and organizational structure.

Michael Porter's Five Forces in Business model broadens the concept of competition. Managers often view competition too narrowly. For example, an automobile manufacturer might consider only its direct competitors -- other automobile manufacturers -- as competition and plan its competitive strategy based on what other automakers are doing. Under Porter's model, the competitive landscape includes other forces that shape the industry and compete for the automaker's profits. An automaker that follows Porter's model might also consider alternative transportation products, such as bicycles and mass transit, in its strategic plans.

According to Porter, the five forces that shape an industry are: rivalries among direct competitors, consumers' bargaining power, suppliers' bargaining power, the threat of industry newcomers and the threat of substitute products or services. The importance of each force is relative, depending on the industry. In the movie theater industry, for example, the threat of substitute products such as online, cable and on-demand movies might make getting consumers into the theater a top priority, rather than trying to prevent new theaters from entering the marketplace.