National prosperity is created not inherited. It does not grow out of a countrys natural endowments, its labor pool, its inters rates or its currencys value. A nations competitiveness depends on the capacity of its industry to innovate and upgrade. They benefit from having strong domestic rivals, aggressive home based suppliers and demanding local customers. Innovation is what drives and sustains competitiveness. A firm must avail itself to all dimension of competition, which he categorized into four major components of the diamond of national advantage
1. Factor Conditions: The appropriateness of the nations factors of production to compete successfully in a specific industry. Porters notes that although these factor conditions are very important in the determination of trade, they are not the only source of competitiveness as suggested by the classical, or factor portions, theories trade. Most importantly for Porter, it is the ability of a nation to continually create, upgrade, and deploy its factors ( such as skilled labors) that is important, not the initial endowment. 2. Demand conditions: The degree of health and competition the firm must face in its original home market. Firms that can survive and flourish in highly competitive and demanding local markets are much more likely to gain the competitive edge. Porter notes that if the character of the market, not its size, that is paramount in promoting the continual competitiveness of the firm. And Porter translates Characters as demanding costumers.
3. Related and supporting industries: The competitiveness of all related industries and suppliers to the firm. A firm that is operating within a mass of related firms and industries gains and maintains advantages through close working relationship, proximity to suppliers, and timeliness of product and information flows. The constant and close interaction is successful if it occurs not only in terms of physical proximity but also through the willingness of firms to work at it. 4. Firms strategy, structure and rivalry: The conditions of the home- nation that either hinder or aid in the firms creation and sustaining of international strategy is universally appropriate. It depends on the fit and flexibility of what works for that country at that time.
These four points constiture what nations and firms must strive to create and sustain through a highly localized process to ensure their success.