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The competitive advantage of nations


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The competitive advantage of nations

  1. 1. The Competitive Advantage of Nations, States and Regions Professor Michael E. Porter Harvard Business School Advanced Management Program April 15, 2009 This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “Building the Microeconomic Foundations of Competitiveness,” in The Global Competitiveness Report (World Economic Forum), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008), and ongoing research on clusters and competitiveness. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter. Further information on Professor Porter’s work and the Institute for Strategy and Competitiveness is available at Version: April 15, 12pm 20090515 – AMP – final.ppt 1 Copyright © 2009 Professor Michael E. Porter
  2. 2. Competitive Advantage and Competitiveness Internal External • Competitive advantage resides inside the company • Competitive advantage resides in the locations in which the company is based • Competitive success depends on company choices • Cluster participation is an important contributor to competitiveness 20090515 – AMP – final.ppt 2 Copyright © 2009 Professor Michael E. Porter
  3. 3. The Changing Nature of Domestic and International Competition • • • • • • • • • • • Falling barriers to trade and investment Globalization of markets Globalization of capital investment Globalization of company value chains Rapidly increasing stock and diffusion of knowledge Increasing knowledge and skill intensity of competition Value is increasingly concentrated in service functions, not manufacturing activities themselves Shift from vertical integration to relying on outside suppliers, partners, and institutions Rising logistical costs due to costs of energy and emissions Costs in China and India are rising rapidly Competitive upgrading is occurring in many countries • Improving competitiveness is increasingly essential to a country’s prosperity 20090515 – AMP – final.ppt 3 Copyright © 2009 Professor Michael E. Porter
  4. 4. Prosperity Performance Selected Countries PPP-adjusted GDP per Capita, 2007 ($USD) $50,000 Norway ($56,650) Qatar ($58,000, 0.92%) United States $45,000 Ireland Kuwait $40,000 $35,000 Italy $30,000 Canada Hong Kong Singapore Australia Sweden UK Finland Japan Germany France Spain Taiwan Greece Slovenia UAE Israel New Zealand $25,000 Bahrain South Korea Saudi Arabia Czech Republic Oman Slovakia $20,000 Estonia Lithuania Hungary Poland Libya $15,000 Argentina Mexico Lebanon $10,000 Brazil Chile Yemen Russia Latvia (12.6%) Malaysia Turkey Iran South Africa Thailand Egypt Syria Jordan Pakistan Philippines $5,000 Croatia China (13.0%) Laos India Vietnam Cambodia $0 2% 4% 6% 8% 10% 12% Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000 to 2007 Note: highlighted countries are part of the East African Community (EAC). Source: EIU (2009), authors calculations 20090515 – AMP – final.ppt 4 Copyright © 2009 Professor Michael E. Porter
  5. 5. What is Competitiveness? • Competitiveness depends on the productivity with which a nation uses its human, capital, and natural resources. – Productivity sets the sustainable standard of living (wages, returns on capital, returns on natural resources) that a country can sustain – It is not what industries a nation competes in that matters for prosperity, but how productively it competes in those industries – Productivity in a national economy arises from a combination of domestic and foreign firms – The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of export industries • Nations compete to offer the most productive environment for business • The public and private sectors play different but interrelated roles in creating a productive economy 20090515 – AMP – final.ppt 5 Copyright © 2009 Professor Michael E. Porter
  6. 6. Innovative Capacity Innovation Output of Top 25 Patent Producing Countries Average U.S. patents per 1 million population, 2003-2007 350 United States 300 Japan Taiwan 250 200 Switzerland Swede n Germany 150 Canada 100 50 Finland Israel Korea Singapore Denmark Austria France Italy 0 -10% Brazil UK Belgium Spain -5% Netherlands Norway Ireland Hong Kong India Russia 0% 5% CAGR of US-registered patents, 2003 – 2007 Source: USPTO (2008), EIU (2008) 20090515 – AMP – final.ppt Australi a 6 10% China (26.97%) 15% 10,000 patents = Copyright © 2009 Professor Michael E. Porter
  7. 7. Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies Natural Endowments • Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient • Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition 20090515 – AMP – final.ppt 7 Copyright © 2009 Professor Michael E. Porter
  8. 8. Microeconomic Competitiveness: Quality of the Business Environment Context for Firm Strategy and Rivalry  – e.g. salaries, incentives for capital investments, intellectual property protection, corporate governance standards Factor (Input) Conditions   – – – – – Demand Conditions Vigorous local competition – Openness to foreign competition – Competition laws Access to high quality business inputs Natural endowments Human resources Capital availability Physical infrastructure Administrative and information infrastructure (e.g. registration, permitting, transparency) – Scientific and technological infrastructure Local rules and incentives that encourage investment and productivity  Sophistication of local customers and needs Related and Supporting Industries  – e.g., Strict quality, safety, and environmental standards – Consumer protection laws Availability of suppliers and supporting industries • Many things matter for competitiveness • Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing 20090515 – AMP – final.ppt 8 Copyright © 2009 Professor Michael E. Porter
  9. 9. Microeconomic Competitiveness: State of Cluster Development Tourism Cluster in Cairns, Australia Public Relations & Market Research Services Travel agents Tour operators Restaurants Attractions and Activities Food Suppliers Local Transportation e.g., theme parks, casinos, sports Property Services Maintenance Services Local retail, health care, and other services Souvenirs, Duty Free Airlines, Cruise Ships Hotels Banks, Foreign Exchange Government agencies Educational Institutions Industry Groups e.g. Australian Tourism Commission, Great Barrier Reef Authority e.g. James Cook University, Cairns College of TAFE e.g. Queensland Tourism Industry Council Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden 20090515 – AMP – final.ppt 9 Copyright © 2009 Professor Michael E. Porter
  10. 10. State of Cluster Development Massachusetts, Life Sciences Health and Beauty Products Cluster Organizations MassMedic, MassBio, others Teaching and Specialized Hospitals Surgical Instruments and Suppliers Specialized Business Services Medical Equipment Dental Instruments and Suppliers Biopharmaceutical Products Biological Products Banking, Accounting, Legal Specialized Risk Capital Ophthalmic Goods VC Firms, Angel Networks Diagnostic Substances Specialized Research Service Providers Research Organizations Containers Analytical Instruments 20090515 – AMP – final.ppt Laboratory, Clinical Testing Educational Institutions Harvard University, MIT, Tufts University, Boston University, UMass 10 Copyright © 2009 Professor Michael E. Porter
  11. 11. Globalization and Cluster Specialization Footwear Romania • Production subsidiaries of Italian companies • Focus on lower to medium price range Portugal • Production • Focus on shortproduction runs in the medium price range United States • Design and marketing • Focus on specific market segments like sport and recreational shoes and boots • Manufacturing only in selected lines such as hand-sewn casual shoes and boots Italy • Design, marketing, and production of premium shoes • Export widely to the world market Brazil • Low to medium quality finished shoes, inputs, leather tanning • Shift toward higher quality products in response to Chinese price competition China • OEM Production • Focus on low cost segment mainly for the US market Vietnam/Indonesia • OEM Production • Focus on the low cost segment mainly for the European market Source: Research by HBS student teams in 2002 – Van Thi Huynh, Evan Lee, Kevin Newman, Nils Ole Oermann 20090515 – AMP – final.ppt 11 Copyright © 2009 Professor Michael E. Porter
  12. 12. National Cluster Export Portfolio Germany, 1997 to 2007 20% Change In Germany’s Overall World Export Share: +0.43% Automotive Production Technology Construction Services Prefabricated Enclosures and Structures Germany’s world export market share, 2007 Lighting and Electrical Equipment 15% Publishing and Printing Heavy Machinery Plastics Chemical Products Aerospace Vehicles and Defense Analytical Instruments Processed Foods Forest Products Power and Power Generation Equipment Building Fixtures and Equipment Motor Driven Products Construction Materials 10% Business Services Metal Mining and Manufacturing Commercial Services Textiles 5% Furniture Transportation and Logistics Aerospace Engines Communications Equipment Tobacco (8.55%) Biopharmaceuticals Medical Devices Germany’s Average World Export Share: +9.22% Sporting, Recreational and Children's Goods Marine Equipment Apparel Entertainment Financial Services Leather and Related Products Hospitality and Tourism Agricultural Products Information Technology Footwear Jewelry, Precious Metals and Collectibles Fishing and Fishing Related Products Oil and Gas Coal 0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% Change in Germany’s world export market share, 1997 to 2007 Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 12 20090515 – AMP – final.ppt Exports of US$44 Billion = Copyright © 2009 Professor Michael E. Porter
  13. 13. National Cluster Export Portfolio Indonesia, 1997 to 2007 2.5% Fishing and Fishing Related Products Change In Indonesia’s Overall World Export Share: -0.03% Agricultural Products Footwear 2.0% Indonesia’s world export market share, 2007 Coal (5.3%, 12.3%) Forest Products Furniture Textiles Building Fixtures and Equipment (-3.75%) 1.5% Apparel Tobacco Plastics Oil and Gas Metal Mining and Manufacturing 1.0% Entertainment Indonesia’s Average World Export Share: +0.82% Motor Driven Products Construction Materials Chemical Products Publishing and Printing Sporting Goods Leather and Related Products Transportation and Logistics Hospitality and Tourism 0.5% Prefabricated Enclosures and Structures Jewelry, Precious Metals and Collectibles Business Services Information Technology Medical Devices Biopharmaceuticals 0.0% -2.0% -1.5% -1.0% -0.5% 0.0% Communication Services Lighting and Electrical Equipment Marine Processed Food Equipment Power and Power Generation Equipment Heavy Machinery Production Technology Automotive Aerospace Engines 0.5% 1.0% 1.5% 2.0% Change in Indonesia’s world export market share, 1997 to 2007 Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 13 20090515 – AMP – final.ppt Exports of US$4.2 Billion = Copyright © 2009 Professor Michael E. Porter
  14. 14. Institutions for Collaboration Selected Massachusetts Organizations, Life Sciences Life Sciences Industry Associations    University Initiatives Massachusetts Biotechnology Council Massachusetts Medical Device Industry Council Massachusetts Hospital Association     General Industry Associations    Informal networks Associated Industries of Massachusetts Greater Boston Chamber of Commerce High Tech Council of Massachusetts    Economic Development Initiatives     Company alumni groups Venture capital community University alumni groups Joint Research Initiatives Massachusetts Technology Collaborative Mass Biomedical Initiatives Mass Development Massachusetts Alliance for Economic Development 20090515 – AMP – final.ppt Harvard Biomedical Community MIT Enterprise Forum Biotech Club at Harvard Medical School Technology Transfer offices    14 New England Healthcare Institute Whitehead Institute For Biomedical Research Center for Integration of Medicine and Innovative Technology (CIMIT) Copyright © 2009 Professor Michael E. Porter
  15. 15. Regional Economic Performance U.S. States $60,000 Highly productive and productivity rising versus U.S. Delaware $55,000 Gross State Product per Capita, 2007 Connecticut $50,000 New York Massachusetts $45,000 $40,000 $35,000 $30,000 New Jersey Alaska California Virginia Colorado Minnesota Wyoming Washington Maryland Hawaii U.S. GDP per Capita: $38,020 Texas Oregon New Hampshire Nebraska Rhode Island South Dakota North Carolina Kansas Iowa Georgia Pennsylvania Wisconsin Louisiana North Dakota Ohio Tennessee Vermont Arizona Florida Michigan Utah Indiana Missouri New Mexico Kentucky Maine Idaho Alabama Oklahoma South Carolina Montana Arkansas Nevada Illinois $25,000 West Virginia Mississippi U.S. GDP per Capita Growth: 1.71% $20,000 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% Gross State Product per Capita Growth Rate, 1998-2007 Source: Bureau of Economic Analysis. Growth calculated using compound annual growth rates. Gross state product figures in 2000 chained US dollars. Notes: District of Columbia: $124,363, %3.09. Growth rate calculated as compound annual growth rate (CAGR). 15 20090515 – AMP – final.ppt Copyright © 2009 Professor Michael E. Porter
  16. 16. Specialization of Regional Economies Selected U.S. Geographic Areas Seattle-BellevueEverett, WA Aerospace Vehicles and Defense Fishing and Fishing Products Analytical Instruments Denver, CO Leather and Sporting Goods Oil and Gas Aerospace Vehicles and Defense Chicago Communications Equipment Processed Food Heavy Machinery Pittsburgh, PA Construction Materials Metal Manufacturing Education and Knowledge Creation Wichita, KS Aerospace Vehicles and Defense Heavy Machinery Oil and Gas San FranciscoOakland-San Jose Bay Area Communications Equipment Agricultural Products Information Technology Los Angeles Area Apparel Building Fixtures, Equipment and Services Entertainment Boston Analytical Instruments Education and Knowledge Creation Communications Equipment Raleigh-Durham, NC Communications Equipment Information Technology Education and Knowledge Creation San Diego Leather and Sporting Goods Power Generation Education and Knowledge Creation Houston Oil and Gas Products and Services Chemical Products Heavy Construction Services Atlanta, GA Construction Materials Transportation and Logistics Business Services Note: Clusters listed are the three highest ranking clusters in terms of share of national employment. Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School, 11/2006. 20090515 – AMP – final.ppt 16 Copyright © 2009 Professor Michael E. Porter
  17. 17. Cluster Strength in Europe versus the United States Share of Employment in Strong Clusters 30% 25% 20% Europe United States 15% 10% 5% 0% Median Region Source: European Cluster Observatory 20090515 – AMP – final.ppt 17 Copyright © 2009 Professor Michael E. Porter
  18. 18. The Australian Wine Cluster Trade Performance Australian Wine Exports in thousand US $ Australian Wine World Export Market Share $2,700,000 $2,400,000 10.0% Value Market Share $2,100,000 8.0% $1,800,000 $1,500,000 6.0% $1,200,000 4.0% $900,000 $600,000 2.0% $300,000 $0 0.0% 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database. 20090515 – AMP – final.ppt 18 Copyright © 2009 Professor Michael E. Porter
  19. 19. The Australian Wine Cluster History 1991 to 1998 1930 1965 1980 First oenology course at Roseworthy Agricultural College 1955 Australian Wine Bureau established Australian Wine and Brandy Corporation established 1990 1970 New organizations created for education, research, market information, and export promotions Winemaker’s Federation of Australia established Winemaking school at Charles Sturt University founded Australian Wine Research Institute founded 1950s 1960s 1970s 1980s 1990s Import of European winery technology Recruiting of experienced foreign investors, e.g. Wolf Bass Continued inflow of foreign capital and management Creation of large number of new wineries Surge in exports and international acquisitions Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002 20090515 – AMP – final.ppt 19 Copyright © 2009 Professor Michael E. Porter
  20. 20. The Evolution of Regional Economies San Diego Hospitality and Tourism Climate and Geography Sporting and Leather Goods Transportation and Logistics Power Generation Communications Equipment Aerospace Vehicles and Defense U.S. Military Information Technology Analytical Instruments Education and Knowledge Creation Medical Devices Bioscience Research Centers 1910 20090515 – AMP – final.ppt 1930 1950 Biotech / Pharmaceuticals 1970 20 1990 Copyright © 2009 Professor Michael E. Porter
  21. 21. Competitiveness and the Composition of the Economy Linkages Across Clusters Fishing & Fishing Products Entertainment Hospitality & Tourism Textiles Prefabricated Enclosures Agricultural Products Jewelry & Precious Metals Furniture Transportation & Logistics Distribution Services Aerospace Vehicles & Information Defense Tech. Business Services Education & Knowledge Creation Financial Services Publishing & Printing Analytical Instruments Medical Devices Biopharmaceuticals Chemical Products Apparel Leather & Related Products Construction Materials Processed Food Heavy Construction Services Lightning & Electrical Equipment Communications Equipment Forest Products Power Generation Heavy Machinery Motor Driven Products Production Technology Tobacco Oil & Gas Plastics Aerospace Engines Footwear Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions. 20090515 – AMP – final.ppt Building Fixtures, Equipment & Services 21 Metal Automotive Manufacturing Sporting & Recreation Goods Copyright © 2009 Professor Michael E. Porter
  22. 22. Geographic Influences on Competitiveness World Economy Broad Economic Areas Groups of Neighboring Nations The Neighborhood Nation States, Provinces Metropolitan Areas Urban and Rural Areas 20090515 – AMP – final.ppt 22 Copyright © 2009 Professor Michael E. Porter
  23. 23. The Neighborhood Southeast Asia • Economic coordination among neighboring countries can significantly enhance competitiveness • Integration offers greater opportunities than participation in broader economic forums (e.g., APEC) 20090515 – AMP – final.ppt 23 Copyright © 2009 Professor Michael E. Porter
  24. 24. The Process of Economic Development Shifting Roles and Responsibilities Old Model New Model • Government drives economic development through policy decisions and incentives • Economic development is a collaborative process involving government at multiple levels, companies, teaching and research institutions, and private sector organizations • Competitiveness must become a bottoms-up process in which many individuals, companies, and institutions take responsibilities • Every community and cluster can take steps to enhance competitiveness • The rapid sector must become more engaged in competitiveness to improve rapidly 20090515 – AMP – final.ppt 24 Copyright © 2009 Professor Michael E. Porter
  25. 25. Role of the Private Sector in Economic Development • • • • • • • • A company’s competitive advantage depends partly on the quality of the business environment A company gains advantages from being part of a cluster Take an active role in upgrading local infrastructure Nurture local suppliers and attract foreign suppliers Work closely with local educational and research institutions, to upgrade their quality and create specialized programs addressing the cluster’s needs Inform government on regulatory issues and constraints bearing on cluster development Focus corporate philanthropy on enhancing the local business environment Leverage trade associations for competitiveness – Greater influence if many companies are united – Cost sharing between members • Businesses must drive the process of competitiveness improvement at the national and regional level 20090515 – AMP – final.ppt 25 Copyright © 2009 Professor Michael E. Porter
  26. 26. Defining an Economic Strategy National Value Proposition • What is the unique competitive position of the nation or region given its location, legacy, and existing and potential strengths? – What role can it play with neighbors, the region, and the world economy? – What unique value as a business location? – For what types of activities and clusters? Achieving and Maintaining Parity with Peers Developing Unique Strengths • Priorities and sequencing are necessity in economic development 20090515 – AMP – final.ppt 26 Copyright © 2009 Professor Michael E. Porter
  27. 27. Strategic Issues For the United States Core Strengths • Weaknesses • Innovation – – – – Science, technology, R&D • Entrepreneurship • Human resources challenges Free and open competition • Distortions in the international trading system – – – • • Capital markets (current uncertainty) • Economic decentralization • 20090515 – AMP – final.ppt 27 Retraining system Pension security Health insurance access and mobility Unnecessary cost of doing business – – – – – Dynamism and flexibility U.S. influence, authority, and focus has diminished Weak transitional “Security Blanket” – – – • Intellectual Property protection Foreign market access for advanced services Distortions/currency/subsidies Falling U.S. leadership in international economic development – • Need to restructure public education Access to higher education Training Americans vs. low skilled immigration Burdensome regulations Litigation costs High-cost / high complexity tax system Energy inefficiency High healthcare costs Copyright © 2009 Professor Michael E. Porter