Ben Mayson (BCG) on Cluster Competitiveness
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Clusters and Competitiveness. Theory & Application: New Zealand, Marine industry.
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Ben Mayson (BCG) on Cluster Competitiveness
- 4. Q. Why a cluster theory? A. Traditional economics not enough... Advanced Economies Source: Michael Porter Endowments Developing Nations Microeconomic Competitiveness Quality of the Business Environment State of Cluster Development Sophistication of Company Ops and Strategy Macroeconomic Competitiveness Social Infrastructure and Political Institutions (SIPI) Macroeconomic Policies (MP) Determinants of Competitiveness
- 9. Q. Why does cluster theory matter? A. NZ… not a rich nation GDP Per Capita (US$, 2008 PPP), Selected Countries ~30% < Australia
- 11. Poor productivity… slow progress Source: OECD … No Sign We Are Closing The Gap Change in labour productivity (% p.a.) Average (83-07) NZ G7 Australia GDP per hour worked (US$/hour) GDP p/c (US$k PPP) OECD average ($32,664) Low Labour Productivity… Labour Productivity vs. GDP per capita (PPP): 2007 Labour Productivity Growth: 1983-2007 Backup Period 83-87 88-92 93-97 98-02 03-07 Average 1.2% 1.8% 1.1% 1.8% 1.0%
- 12. The puzzle… competitiveness not translating into prosperity ‘ Prosperity’: GDP p/c, log scale High GCI ‘ Competitiveness’: GCI Ranking Low GCI NZ Note: GCI = (Overall) Global Competitiveness Index; Source: Institute for Strategy and Competitiveness Ireland Slovenia Where we ‘should’ be? Singapore Australia ‘ Competitiveness’ vs Prosperity
- 15. What do we mean by SIPI and MP? Backup Social Infrastructure / Political Institutions (SIPI) Secondary enrollment Judicial independence (Low occurrence of) Diversion of public funds (Low occurrence of) Irregular payments by firms Ethical behavior of firms (Low impact of) Organized crime (Low) Business costs of corruption Control of Corruption (WB) Rule of Law (WB) Voice and Accountability (WB) Primary enrollment Freedom of the press (Low) Favoritism in decisions of government officials Public trust of politicians Life expectancy Transparency of government policymaking Efficiency of legal framework Property rights Effectiveness of law-making bodies Quality of primary education Health expenditure (Low) Tuberculosis incidence Government effectiveness in reducing poverty and inequality Reliability of police services Accessibility of healthcare services (Low) Business costs of crime and violence Quality of healthcare services (Low) Infant mortality 1 2 2 2 2 4 4 5 5 6 8 9 10 11 12 12 13 13 14 15 16 17 18 20 21 21 22 22 Macroeconomic Policy (MP) Government surplus/deficit Inflation Government debt 1 1 9 Overall Ranking = 8 Overall Ranking = 11 New Zealand’s Strengths – SIPI and MP, Selected examples
- 24. Generates NZ$1.9B in sales annually… and continues to grow Equipment Superyachts Launches Inflatables Other Trailer Boats Racing Refit CAGR (03-08) 6 4 17 2 15 (3) 5 10 1,366 1,548 1,641 1,905 7 Total Cluster Performance, Total Sales (NZ$m)
- 25. Two groups within the cluster... made for export, made for local Superyachts Imports (%) Exports (%) Size: total sales (NZ$m) Racing Yachts Launches Refit Inflatables Trailer Boats Other 50% 50% Equipment Most internationally competitive segments 100% Value : weight ratio key determinant of import / export competitiveness Cluster Performance, Imp/Exp (% of Sales)
- 28. All parts of the diamond contributing to success… however, key fragilities also evident Firm Strategy and Rivalry Factor (Input) Conditions Demand Conditions Related and Supporting Industries The New Zealand Marine Cluster Endowments + High quality harbors + Friendly climate for boating + S. Hemisphere (counter cyclical for refit) + Skilled sailors + Competitive sailing success + Highest boat ownership in world + Safety / quality standards + Skilled workforce + Commercial boats/fishing + Tourism + Many firms (>1,000) + Significant differentiation + IFCs present + Govt support for cluster - Distance from major markets x - Weak capital markets - Cluster gaps (e.g. engines, advanced raw materials) x - Small # of well-known firms - Highly fragmented, sub-scale - Lack of ambition/risk-taking - Reluctance to invest - Lack of business acumen x - Brain drain - Skills shortages - Infrastructure/zoning issues x x - Tiny local market overall - Negligible local mkt at high end - Loss of global marine events
- 39. Cluster contains a number of world-class firms… with a long-tail Alloy High Modulus Southern Spars Leading Firms In The Marine Cluster – Selected Examples North Sails Robinsons Marine Interiors Cookson Superyachts Masts Sails Composites Interiors Racing Yachts Trailer Boats Ray Glass Refit Orams ?? ?? Extreme fragmentation outside of leading firms… ~80% of firms within the cluster have 4 employees or fewer Logos…
Editor's Notes
- Thank-you... great to be here. Context on how I came to be here. In brief: recent graduate, took this course, really enjoyed it... got me thinking. Broader context of 'business school'... getting out there and doing stuff. Contacted several of NZ's top business schools... affiliate program. Ian Lafferty. As part of process, shared some of the work we had been doing. He said... why not come to IBW. Michael Porter – Porters's 5 forces. The focus of the last decade or so – countries. His approach: worldwide survey of top-performing economies and clusters within those countries. A study of what made them successful... put it into a theory. MOC – takes these studies... case by case walk through of all these different scenarios: e.g. Wine industry (California, Australia), Swiss watches, Japanese fax machines, Brazlian plastics... Then student projects... pick a country... pick a cluster. Apply the frameworks. Go away and figure out what those clusters need to do... present back. Write a paper. Adds to the body of knowledge – as part of this... New Zealand... well what are we going to do? Dairy? Marine... assumed it was dead. Team-mates: Australian, German, Brit. Relevance to IBW. What is this week about for you guys? I guess it about how to think about doing business internationally? Look at your speakers/ topics. You've got some NZ's key clusters on show... Tourism , wine , fishing, dairy. Then you've also got some sessions covering some of the key enablers for competitive clusters... foreign investment, capital markets stuff. I'd like to think that some of the stuff I'm going to cover today should help you link some of the various topics your going to hear about under a broader framework of competitiveness... at a level that sits above the individual company... but with practical implications for company strategy and your own career strategy... anyway thats what I feel this material has provided me.
- Three sections today. 1. I'm going to outline very briefly what we essentially covered in about 15 sessions earlier this year... obviously won't be able to cover everything in as much detail but my hope is that it might peak your interest to go and read more. And more practically give you a framework to help you think about one of your assignments this week, which as I understand it is to loook at an NZ cluster/company... and recomend what they might do. 2. In the 2nd part I'm going to cover briefly my take on New Zealand... within the context of Porter's framework... and hope to show why cluster theory is of particular relevance to New Zealand 3. In the final session, I'm going to go through an analysis of the NZ Marine sector in particular... to show you how we approached analysing the issues of the sector... and outline some of the recommendations that we put together. QUESTIONS . THROUGHOUT I HOPE YOU WILL INTERRUPT ME WITH QUESTIONS OR COMMENTS... and they need not be directed at me... they could be questions for the group. I've just come from an environment in which 80% of the class was discussion and debate between the students... so I am more than comfortable with that. We have an hour and a half I believe... which if you all sit silently throughout we will whip through much quicker than that.
- Ok, so lets get specific. Here is how Porter sees the competitiveness of countries. SOURCES of COMPETITIVENESS (remember productivity). 1. At the bottom, in developing countries... the 1st stage of competitiveness is whether or not a country has endowments (oil, minerals, climate, location)... and how well they use them. But developed countries clearly move well-beyond this... and some of the more successful countries (Singapore, Japan), notably have terrible sets of endowments... 2. Then you go... ok, well you might have good endowments... but you can surely screw these up with bad macro policy and ineffective institutions. Macro policy – trade, inflation, govt's fiscal situation etc... the kinds of things you typically see as prescribed by the IMF when they come in to clean up a country... the Washington Consensus. Institutions – Govt, legal, education, health-care... etc. How well do these function... dictates whether a country can move beyond natural endowments and start to do more productive activities. 3. Then at the top you have what he terms MICROECONOMIC competitiveness... and this is where you see the really advanced economies playing... here is what determines whether you can play in industries that are completely divorced from any natural set of endowments... high tech, advanced services etc. You've got the quality of the business environment [which we'll discuss more in a bit]... you've got the state of clusters [which is basically, how many different competitive industries do you have... and how healthy are they... and then you've got the sophistication of company org and strategy... which is basically how clever are these companies being... [ALL kind of linked... clusters fall out of the business environment... sophistication comes out of the health of the clusters]
- Ok, so the theory. Here is my take. Michael Porter would probably not approve entirely. But this is how I compartmentalised his theory... and what made the most sense to me in terms of relevance. TWO POINTS. Why is there a cluster theory? 1. SKEPTICAL ABOUT BASIS OF COMPETITIVENESS. Comp adv. Macro policy. 2. THE TWO EXTREMES DON'T WORK. Govt. Free-market. 1. Role of Govt One of my frustrations with discussions about POLITICS and ECONOMICS... in New Zealand in particular... is the ideological baggage that we all seem to carry around. On one extreme... there are the free-marketeers... who see no/little role for govt... you see this in the US in particular with REPUBLICANs... but our own reform movement of the 80's and early 90's produced similar kinds of people... CONFESS of which I was probably one... or close to. On the other extreme... are those who think govt can solve lots of things... that private enterprise is evil. These people tend to underestimate the virtue of efficient capital allocation... And you get no middle ground... just becomes a tug of war In NZ's context this is particularly frustrating... because we have kind of tried both extremes and clearly neither have worked for us. Porter's theory as a middle ground. Recognition that govt has a role... but that what it can do is clearly limited. ROLE OF GOVT according ot Porter's theory. Not as a helper... but as a catalyst and challenger... encourage and push companies to raise expectations... and upgrade competitiveness. Transmitting and amplifying effects. Specifically. 1. Specialised Factor Production; 2. Non-intervention in factor and currency markets; 3. High product and environmental standards; 4. Strong anti-trust policy... limit natural monopolies, collusion, cooperative R&D; 5. Promote sustained investment; 6. Don't manage trade. 2. Basis of Competitiveness. BEYOND COMPARATIVE ADVANTAGE – its about productivity... BELOW THE MACRO... above the COMPANY.
- Recap. So we are saying there is kind of the hierarchy of factors that determines competitiveness... and we are saying MICROECONOMIC competitiveness is at the top of the theory... Well digging more into MICROECONOMIC competitiveness... we have Porter's diamond framework... where he is basically saying that the competitiveness of a country is determined by the combination of 4 factors... the stronger these factors... the more competitive a countries BUSINESS ENVIRONMENT will be... the more likely that CLUSTERS will FORM AND UPGRADE... which will in turn lead to the success of more advanced industries... with greater productivity... allowing greater standards of living. COMPETITIVENESS – relating to EXPORTS. Framework applies to countries as well as clusters. 1. Factor conditions – the inputs . Quantity/cost, quality, specialisation. E.g. Californian wine... UC Davis , or NZ Dairy... something like Massey university in Palmerston Nth... specialised horticultural science. Or your broadband infra. 2. Demand conditions – how sophisticated is this? Are buyers ahead of world demand... does demand position country to be an exporter. Is it predictive or just peculiar? E.g. Japanese fax machine... or the fact that NZers like good coffee... or enjoy their rugby. 3. Context for strategy and rivalry – 1. What is the environment for investment? Capital structure of firms...? Availability of capital? 2. Degree of competition... strong local rivals... toughening them up for o/seas...? E.g. American Dream... appetite for risk. E.g. Availability of venture capital. E.g. # of owner motivation... Kiwi lifestyle? 4. Related and supporting industries (clusters) – basically what is the health of the interconnections in the economy? You might be good in 1 industry... but how healthy are the clusters up and downstream? Or do you have to source your inputs from o/seas. Spillover benefits. Key thing also is that this Diamond acts in a reinforcing way (positive or negative)... Good factor conditions + good demand... then fuel companies to form... which then compete... which then leads them to invest in new factors... or allows related clusters to form... and they reinforce. Or... a bottleneck in 1 area... might lead a strength in another to erode.
- SOURCEs of COMPETITIVENESS. ROLE of GOVT. IMPLICATIONs.
- This section is designed to show you why this is is so important... why this course spoke to me. About setting the baseline.. There are many good things about NZ... we have a great lifestyle... its beautiful... BUT... in conventional economic terms we are not rich. We used to be... in the days of our ties with UK etc... but we are not anymore. Basically at the bottom of the OECD... Rapidly being overtaken by countries that have had a pretty torrid history of political upheaval and economic poverty... Spain – only emerged from dictatorship. Franco died in 75... early 80s still an unstable democracy. Asian Tiger economies – like S. Korea. Transition economies – like Slovenia. Israel – living in a war zone. THIS IS WORTH THINKING ABOUT... A bit of poke in the backside for us... A wake-up call for foreigners... Oh, NZ... its so beautiful... must be like here... would love to go there. NO, LISTEN... we are in trouble... we are an opportunity... think of us as you do Slovenia.
- Our progress. 1. We have made little progress... Since the reform programs of the 80s... when we were heralded as the bastion of free-market ideology... Very modest growth. More recently... as some of the more tougher reform ideology has been rejected... again little progress. 2. What progress we have made... Driven by LABOUR FORCE PARTICIPATION... And employment growth... These things are great... But there are limits... can only pile so many people into the economy Ultimately, making progress is about doing more per hour of work. Something that we have not been making progress on.
- More on productivity... Graph on the left... shows rather obviously the link between productivity and prosperity... The more productive you are... the more wealthy you are. Variation explained by how many hours you actually work. If we had more room to grow in terms of hours we would be low on the trendline ... but we are not. Graph on the right, shows how little progress we are making. Behind the G7 countries and well behind Australia. We are poor and getting poorer (in a relative sense).
- The puzzle. 1. Explain what we are looking at. Graph shows prosperity vs competitiveness. Competitiveness measured as GCI what is GCI? Porter's Institute for Strategy and Competitiveness Collection of 100's of metrics... categorised into some buckets, aggregated to a single number... highly subjective, but quite useful What we are saying... NZ is competitive... but not prosperous... quite an outlier. Reference... As competitive as Ireland... and nearly Australia But as prosperous as Slovenia.
- Obvious point... Further away you are the harder it is to compete. The less attractive for FDI... tech transfer. Less attractive for capital in general... less capital intensity Less obvious point The further away you are the harder it is for foreigners to compete in NZ... competition not as intense... Local players a little sloppy And/or consumers and downstream players pay a premium... Fletchers 'Australasian premium' On the size of the market... Impacts on ability to achieve scale... Impacts the type of solutions that win... straddle strategies... lack of specialisation. Upshot... Less foreign influence... means less competition... less FDI... less tech tfr Winners in NZ are not well-prepared to win elsewhere... solutions not right... sub-scale. Evidence failure of NZ companies to successfully expand... Warehouse, Fletcher Challenge, Fonterra? Capital Intensity FDI as above.. but also low savings... shallow capital markets... investment skewed towards non-productive housing... capital is not cheap or widely available.... low investment.
- Recall determinants of competitiveness... Early stage of devpt... endowments Middle income countries... fixing Macro and Institutions Advanced economies... micro factors. On the middle portion... we do quite well. SIPI... what is it. [see next slide] Macro... what is it [see next slide] Both constituents of Competitiveness... GCI.
- Pull out some of the highlights.. 11th in the world on SIPI Basic education stuff: Primary, secondary enrollment Administrative infra: Judicial independence... corruption. Rule of law type stuff... law and order. Health indicators.. 8th in the world on MACRO. Record of managing inflation... Reserve Bank. Fiscal responsibilty. Public debt levels.
- Third, and most critical component of Competitiveness... we do not do well... Recall MICROECONOMIC competitiveness the top part of Porter's determinants... key to becoming an advanced economy. Recall also, the diamond... the 4 bits. Factors, Demand conditions, Strategy and Rivalry, Related industries. Well behind Ireland, Australia... about the same as S. Korea Where are the real weakspots... go through them. Factors – Brain Drain, Scientists, electricity/infra, transport Related Industries – Supplier Quality, Cluster policy, Value Chain Breadth, Collaboration Rivalry – Competitive intensity, FDI/tech tfr, RECAP THE STORY SO FAR... Not a rich country... Not getting any richer (or at least not quickly)... Gains we have made have been in easy areas... like employment Productivity is poor... and growing slowly. MICROECONOMIC factors are the bottleneck.
- How does all this manifest? As a not very diversified economy... Reading the Graph. Y-axis – share of world exports 'competitiveness' X-axis – progress. Are we winning or losing. Three big blobs... Sheep, cheese and bungy jumping.. not much else... nothing really emerging. You can see Dairy industry and Tourism doing really well... Meat... kind of struggling Same with fishing, forestry.... All pretty low-tech kind of stuff. Some bright spots... Marine, Wine.
- Comparison with some other countries to give you an idea of the problem. Picked 3 small countries with similar populations... varying levels of prosperity Singapore, 5m people. We know they are a winner. 4th in the world. Ireland, 4.5m people. We know they have been doing well. 7th in the world. Slovenia, 2m people. Probably not on your radar screen. 30th in the world... two places ahead of NZ... Graphs are kind of similar to the slide before.... y-axis adjusted for population. The red-lines mark the equivalent of some of NZ's industries. Dairy #1. Forestry #6. Two takeaways. 1. Look at the # of clusters these countries have. Singapore alone, as 11 sectors better than NZ dairy. Even Slovenia... 10 sectors better than NZ Forestry (which is our #6). 2. The other dimension is the type of industries... much more high-tech... NZ is just basic industry really... highly correlated with our endowments.
- 1. There are 8 segments... and the overall cluster is growing. 2. There are 2 key groups within the cluster Made for export segments [i.e. the red box] Made for local segments, which sustaining varying levels of import competition. 3. Import competition is largely of function of value:weight ratio. E.g. Launches maybe heavy but are high value... so the cost of importing is dwarfed by value of product... which means IMPORTS are a threat. E.g. Trailer boats are low value and heavy... which means too expensive to IMPORT... or EXPORT.
- 1. There are 8 segments... and the overall cluster is growing. 2. There are 2 key groups within the cluster Made for export segments [i.e. the red box] Made for local segments, which sustaining varying levels of import competition. 3. Import competition is largely of function of value:weight ratio. E.g. Launches maybe heavy but are high value... so the cost of importing is dwarfed by value of product... which means IMPORTS are a threat. E.g. Trailer boats are low value and heavy... which means too expensive to IMPORT... or EXPORT.
- 1. There are 8 segments... and the overall cluster is growing. 2. There are 2 key groups within the cluster Made for export segments [i.e. the red box] Made for local segments, which sustaining varying levels of import competition. 3. Import competition is largely of function of value:weight ratio. E.g. Launches maybe heavy but are high value... so the cost of importing is dwarfed by value of product... which means IMPORTS are a threat. E.g. Trailer boats are low value and heavy... which means too expensive to IMPORT... or EXPORT.