the competitive advantage of nations
TRANSCRIPT
1 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
The Competitive Advantage of Nations, States and Regions
Professor Michael E. PorterHarvard Business School
Advanced Management ProgramApril 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 NewCompetitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008), and ongoing research on clusters andcompetitiveness. 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 theInstitute for Strategy and Competitiveness is available at www.isc.hbs.edu Version: April 15, 12pm
2 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
Competitive Advantage and Competitiveness
Internal External
• Competitive advantage resides inside the company
• Competitive success depends on company choices
• Competitive advantage resides in the locations in which the company is based
• Cluster participation is an important contributor to competitiveness
3 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
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
4 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
2% 4% 6% 8% 10% 12%
PPP-adjusted GDP per Capita, 2007 ($USD)
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000 to 2007Note: highlighted countries are part of the East African Community (EAC). Source: EIU (2009), authors calculations
Bahrain
China (13.0%)
Vietnam
South Africa
Latvia (12.6%)
TaiwanGermany
Oman
Croatia
Czech Republic
Libya
Saudi Arabia
Thailand
Estonia
Russia
Lebanon
Yemen
Qatar ($58,000, 0.92%)
UAE
France
Brazil
SyriaIndia
Turkey
Egypt
Lithuania
United States
SlovakiaHungary
IranMexico
Slovenia
Jordan
Singapore
Norway ($56,650)
Chile
Prosperity PerformanceSelected Countries
Argentina
Greece
South Korea
Italy
Australia
UKSweden
Kuwait
Japan
Spain
Hong Kong
Poland
Malaysia
CambodiaLaosPakistan Philippines
Canada
Ireland
IsraelNew Zealand
Finland
5 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
What is Competitiveness?
• 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
• 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
6 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
0
50
100
150
200
250
300
350
-10% -5% 0% 5% 10% 15%
Source: USPTO (2008), EIU (2008)
Average U.S. patents per 1 million population, 2003-2007
CAGR of US-registered patents, 2003 – 2007
Innovative CapacityInnovation Output of Top 25 Patent Producing Countries
Hong Kong
GermanyCanada
Russia
Belgium
Netherlands
Taiwan
India
France
Israel
Spain
Sweden
Ireland
Finland
China (26.97%)
United States
Singapore
Norway
Denmark
Italy
Australia
Switzerland
UK
Korea
10,000 patents =
Austria
Japan
Brazil
7 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
Macroeconomic Competitiveness
Microeconomic Competitiveness
Sophisticationof Company
Operations andStrategy
Quality of the NationalBusiness
Environment
MacroeconomicPolicies
SocialInfrastructure and PoliticalInstitutions
State of Cluster Development
• 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
Determinants of Competitiveness
Natural Endowments
8 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
Microeconomic Competitiveness: Quality of the Business Environment
Context for Firm
Strategy and Rivalry
Related and Supporting Industries
Factor(Input)
ConditionsDemand
Conditions
Sophistication of local customers and needs
– e.g., Strict quality, safety, and environmental standards
– Consumer protection laws
• 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
Local rules and incentives that encourage investment and productivity
– e.g. salaries, incentives for capital investments, intellectual property protection, corporate governance standards
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
Availability of suppliers and supporting industries
9 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
Hotels
Attractions andActivities
e.g., theme parks, casinos, sports
Airlines, Cruise Ships
Travel agents Tour operators
Restaurants
PropertyServices
MaintenanceServices
Government agenciese.g. Australian Tourism Commission,
Great Barrier Reef Authority
Educational Institutionse.g. James Cook University,
Cairns College of TAFE
Industry Groupse.g. Queensland Tourism
Industry Council
FoodSuppliers
Public Relations & Market Research
Services
Local retail, health care, andother services
Souvenirs, Duty Free
Banks,Foreign
Exchange
Local Transportation
Microeconomic Competitiveness: State of Cluster DevelopmentTourism Cluster in Cairns, Australia
10 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
Research Organizations
Biological Products
Specialized Risk CapitalVC Firms, Angel Networks
Biopharma-ceutical
Products
Specialized BusinessServices
Banking, Accounting, Legal
Specialized ResearchService Providers
Laboratory, Clinical Testing
Dental Instrumentsand Suppliers
Surgical Instruments and Suppliers
Diagnostic Substances
Containers
Medical Equipment
Ophthalmic Goods
Health and Beauty Products Teaching and Specialized Hospitals
Educational InstitutionsHarvard University, MIT, Tufts University,
Boston University, UMass
Cluster OrganizationsMassMedic, MassBio, others
Analytical Instruments
State of Cluster DevelopmentMassachusetts, Life Sciences
11 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
Vietnam/Indonesia• OEM Production • Focus on the low cost
segment mainly for the European market
China• OEM Production• Focus on low cost
segment mainly for the US market
Portugal• Production • Focus on short-
production runs in the medium price range
Romania• Production subsidiaries
of Italian companies• Focus on lower to
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
Source: Research by HBS student teams in 2002 – Van Thi Huynh, Evan Lee, Kevin Newman, Nils Ole Oermann
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
Globalization and Cluster SpecializationFootwear
12 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
0%
5%
10%
15%
20%
-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0%
National Cluster Export PortfolioGermany, 1997 to 2007
Change in Germany’s world export market share, 1997 to 2007Source: 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.
Ger
man
y’s
wor
ld e
xpor
t mar
ket s
hare
, 200
7
Change In Germany’s Overall World Export Share: +0.43%
Germany’s Average World Export Share: +9.22%
Exports of US$44 Billion =
Hospitality and Tourism
Automotive
Agricultural Products
Business Services
Sporting, Recreational and Children's Goods
Biopharmaceuticals
Production Technology
Motor Driven ProductsChemical Products
Oil and Gas
Marine Equipment
Fishing and Fishing Related Products
Information Technology
Aerospace Vehicles and DefensePlastics
Textiles
Forest Products
Construction Services
Power and Power Generation Equipment
Prefabricated Enclosures and Structures
Leather and Related Products
Aerospace Engines
Construction Materials
Financial Services
Lighting and Electrical Equipment
Heavy Machinery
Analytical InstrumentsProcessed Foods
Publishing and Printing
Metal Mining and Manufacturing
Entertainment Apparel
Jewelry, Precious Metals and Collectibles
Coal
Commercial Services
Communications Equipment
Footwear
Building Fixtures and Equipment
Transportation and Logistics
Furniture
Medical DevicesTobacco (8.55%)
13 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
-2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%
National Cluster Export PortfolioIndonesia, 1997 to 2007
Change in Indonesia’s world export market share, 1997 to 2007Source: 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.
Indo
nesi
a’s
wor
ld e
xpor
t mar
ket s
hare
, 200
7
Exports of US$4.2 Billion =
Change In Indonesia’s Overall World Export Share: -0.03%
Indonesia’s Average World Export Share: +0.82%
Hospitality and Tourism
Automotive
Agricultural Products
Transportation and Logistics
Biopharmaceuticals
Tobacco
Motor Driven Products
Chemical Products
Oil and Gas
Marine Equipment
Fishing and Fishing Related Products
Building Fixtures and Equipment (-3.75%)
Plastics
Textiles
Forest Products
Production Technology
Prefabricated Enclosures and Structures
Leather and Related Products
Information Technology
Construction Materials
Aerospace Engines
Lighting and Electrical Equipment
Furniture
Medical Devices
Publishing and Printing
Metal Mining and Manufacturing
Entertainment
Apparel
Jewelry, Precious Metals and Collectibles
Communication Services
Heavy Machinery
Coal(5.3%, 12.3%)
Footwear
Processed Food
Business Services
Power and Power Generation Equipment
Sporting Goods
14 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
Institutions for CollaborationSelected Massachusetts Organizations, Life Sciences
Economic Development Initiatives
Massachusetts Technology Collaborative Mass Biomedical Initiatives Mass Development Massachusetts Alliance for Economic
Development
Life Sciences Industry Associations
Massachusetts Biotechnology Council Massachusetts Medical Device Industry
Council Massachusetts Hospital Association
General Industry Associations
Associated Industries of Massachusetts Greater Boston Chamber of Commerce High Tech Council of Massachusetts
University Initiatives
Harvard Biomedical Community MIT Enterprise Forum Biotech Club at Harvard Medical School Technology Transfer offices
Informal networks
Company alumni groups Venture capital community University alumni groups
Joint Research Initiatives
New England Healthcare Institute Whitehead Institute For Biomedical
Research Center for Integration of Medicine and
Innovative Technology (CIMIT)
15 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
$55,000
$60,000
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%
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).
U.S. GDP per Capita Growth: 1.71%
U.S. GDP per Capita: $38,020
Gross State Product per Capita Growth Rate, 1998-2007
Gro
ss S
tate
Pro
duct
per
Cap
ita, 2
007
Highly productive and productivity rising versus U.S.Delaware
Connecticut
MassachusettsNew York
California
Oregon
South DakotaNorth Dakota
Vermont
Rhode IslandIowa
Idaho
Montana
New MexicoAlabama Oklahoma
Maine
Arkansas
West VirginiaMississippi
South Carolina
MichiganMissouri
Kentucky
IndianaOhio
Georgia
Alaska New Jersey
Nevada MinnesotaIllinois
ColoradoWashington
Hawaii MarylandWyoming
Virginia
Nebraska
FloridaArizona
TexasNew Hampshire
North CarolinaWisconsin
TennesseeUtah
Pennsylvania KansasLouisiana
Regional Economic PerformanceU.S. States
16 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
Specialization of Regional EconomiesSelected U.S. Geographic Areas
BostonAnalytical InstrumentsEducation and Knowledge CreationCommunications Equipment
Los Angeles AreaApparelBuilding Fixtures,
Equipment and Services
Entertainment
ChicagoCommunications EquipmentProcessed FoodHeavy Machinery
Denver, COLeather and Sporting GoodsOil and GasAerospace Vehicles and Defense
San DiegoLeather and Sporting GoodsPower GenerationEducation and Knowledge Creation
San Francisco-Oakland-San Jose Bay AreaCommunications EquipmentAgricultural ProductsInformation Technology
Seattle-Bellevue-Everett, WAAerospace Vehicles and DefenseFishing and Fishing ProductsAnalytical Instruments
HoustonOil and Gas Products and ServicesChemical ProductsHeavy Construction Services
Pittsburgh, PAConstruction MaterialsMetal ManufacturingEducation and Knowledge
Creation
Atlanta, GAConstruction MaterialsTransportation and LogisticsBusiness Services
Raleigh-Durham, NCCommunications EquipmentInformation TechnologyEducation andKnowledge Creation
Wichita, KSAerospace Vehicles and
DefenseHeavy MachineryOil and Gas
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.
17 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
Cluster Strength in Europe versus the United States
0%
5%
10%
15%
20%
25%
30%
Median Region
EuropeUnited States
Share of Employment in Strong Clusters
Source: European Cluster Observatory
18 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
$0
$300,000
$600,000
$900,000
$1,200,000
$1,500,000
$1,800,000
$2,100,000
$2,400,000
$2,700,000
1988 1990 1992 1994 1996 1998 2000 2002 2004 20060.0%
2.0%
4.0%
6.0%
8.0%
10.0%ValueMarket Share
The Australian Wine ClusterTrade Performance
Australian Wine Exports in thousand US $
Australian Wine World Export Market
Share
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.
19 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
The Australian Wine ClusterHistory
1955
Australian Wine Research Institute founded
1970
Winemaking school at Charles Sturt University founded
1980
Australian Wine and Brandy Corporation established
1965
Australian Wine Bureau established
1930
First oenology course at Roseworthy Agricultural College
1950s
Import of European winery technology
1960s
Recruiting of experienced foreign investors, e.g. Wolf Bass
1990s
Surge in exports and international acquisitions
1980s
Creation of large number of new wineries
1970s
Continued inflow of foreign capital and management
1990
Winemaker’s Federation of Australia established
1991 to 1998
New organizations created for education, research, market information, and export promotions
Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002
20 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
The Evolution of Regional EconomiesSan Diego
U.S. Military
CommunicationsEquipment
Sporting andLeather Goods
Analytical Instruments
Power GenerationAerospace Vehicles
and Defense
Transportationand Logistics
Information Technology
1910 1930 1950 19901970
Bioscience Research Centers
Climate and
Geography
Hospitality and Tourism
Medical Devices
Biotech / Pharmaceuticals
Education andKnowledge Creation
21 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
FurnitureBuilding Fixtures,
Equipment & Services
Fishing & Fishing Products Hospitality
& TourismAgricultural
ProductsTransportation
& Logistics
Competitiveness and the Composition of the EconomyLinkages Across Clusters
Plastics
Oil & Gas
Chemical Products
Biopharma-ceuticals
Power Generation
Aerospace Vehicles &
Defense
Lightning & ElectricalEquipment
Financial Services
Publishing & Printing
Entertainment
Information Tech.
Communi-cations
Equipment
Aerospace Engines
Business Services
DistributionServices
Forest Products
Heavy Construction
Services
ConstructionMaterials
Prefabricated Enclosures
Heavy Machinery
Sporting & Recreation
Goods
Automotive
Production Technology
Motor Driven Products
Metal Manufacturing
Apparel
Leather & Related Products
Jewelry & Precious Metals
Textiles
Footwear
Processed Food
Tobacco
Medical Devices
Analytical InstrumentsEducation &
Knowledge Creation
Note: Clusters with overlapping borders or identical shading have at least 20% overlap(by number of industries) in both directions.
22 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
Geographic Influences on Competitiveness
Broad Economic Areas
Groups of Neighboring Nations
States, Provinces
Metropolitan Areas
Nation
World Economy
Urban and Rural Areas
The Neighborhood
23 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
The NeighborhoodSoutheast Asia
• Economic coordination among neighboring countries can significantly enhance competitiveness• Integration offers greater opportunities than participation in broader economic forums (e.g., APEC)
24 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
The Process of Economic DevelopmentShifting Roles and Responsibilities
Old Model
• Government drives economic development through policy decisions and incentives
New Model
• 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
25 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
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
26 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
National Value Proposition
Defining an Economic Strategy
Developing Unique Strengths Achieving and Maintaining Parity with Peers
• 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?
• Priorities and sequencing are necessity in economic development
27 Copyright © 2009 Professor Michael E. Porter20090515 – AMP – final.ppt
Strategic Issues For the United States
• Innovation– Science, technology, R&D
• Entrepreneurship
• Free and open competition
• Capital markets (current uncertainty)
• Economic decentralization
• Dynamism and flexibility
• Human resources challenges– Need to restructure public education– Access to higher education– Training Americans vs. low skilled
immigration
• Distortions in the international trading system
– Intellectual Property protection– Foreign market access for advanced
services– Distortions/currency/subsidies
• Falling U.S. leadership in international economic development
– U.S. influence, authority, and focus has diminished
• Weak transitional “Security Blanket”– Retraining system– Pension security– Health insurance access and mobility
• Unnecessary cost of doing business– Burdensome regulations– Litigation costs– High-cost / high complexity tax system– Energy inefficiency– High healthcare costs
WeaknessesCore Strengths