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Clusters And Shared Value: Drivers Of Competitiveness
Transcript of Clusters And Shared Value: Drivers Of Competitiveness
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), ―Creating Shared Value‖ (Harvard Business Review, Jan 2011), the Social Progress Index Report (Social Progress Imperative)
and ongoing related research. 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. For further materials, see the website of the Institute for Strategy and Competitiveness
(www.isc.hbs.edu), FSG (www.fsg.org) and the Social Progress Imperative (www.socialprogressimperative.org).
Clusters and Shared Value: Drivers of
Competitiveness
Professor Michael E. Porter Harvard Business School
Bogotá Chamber of Commerce
Bogotá, Colombia May 6th, 2014
Copyright 2014 © Professor Michael E. Porter 2 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
1. Company Strategy
2. Clusters and Competitiveness
3. Creating Shared Value
Agenda
Copyright 2014 © Professor Michael E. Porter 3 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Thinking Strategically
COMPETING
TO BE THE BEST
COMPETING
TO BE UNIQUE
The worst error in strategy is to compete
with rivals on the same dimensions
Copyright 2014 © Professor Michael E. Porter 4 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
• Company economic performance results from two distinct causes
• Companies need to also focus on the health of the industry, which
can be as important as a company‘s own position
Industry
Structure
Strategic Positioning
Within the Industry
- Industry Attractiveness - Sustainable Competitive Advantage
Business Strategy Drivers of Company Performance
Copyright 2014 © Professor Michael E. Porter 5 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
• Part of strategy is to drive a positive transformation in industry structure
Threat of Substitute
Products or Services
Threat of New
Entrants
Rivalry Among
Existing
Competitors
Bargaining Power
of Suppliers Bargaining Power
of Buyers
Understanding Industry Structure
Copyright 2014 © Professor Michael E. Porter 6 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Positioning Types of Competitive Advantage
Differentiation
(Premium Price)
Lower Cost
Competitive
Advantage
• Operating Cost
• Utilization of Capital
Copyright 2014 © Professor Michael E. Porter 7 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
• The value chain is the activities involved in delivering value to customers
• Strategy is reflected in the set of choices about how activities are configured and linked together
Sources of Competitive Advantage The Value Chain
Support
Activities
Marketing
& Sales
(e.g., Sales
Force,
Promotion,
Advertising,
Proposal
Writing,
Website)
Inbound
Logistics
(e.g., Customer
Access, Data
Collection,
Incoming
Material
Storage,
Service)
Operations
(e.g., Branch
Operations,
Assembly,
Component
Fabrication)
Outbound
Logistics
(e.g., Order
Processing,
Warehousing,
Report
Preparation)
After-Sales
Service
(e.g., Installation,
Customer
Support,
Complaint
Resolution,
Repair)
M
a
r
g
i
n
Primary Activities
Firm Infrastructure (e.g., Financing, Planning, Investor Relations)
Procurement (e.g., Services, Machines, Advertising, Data)
Technology Development (e.g., Product Design, Process Design, Market Research)
Human Resource Management (e.g., Recruiting, Training, Compensation System)
Value
What
buyers are
willing to
pay
Copyright 2014 © Professor Michael E. Porter 8 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
• Creating a unique value
proposition
• Assimilating, attaining, and
extending best practices
Operational
Effectiveness
Operational Effectiveness Versus Strategy
Doing the same things better
and better
Doing things differently to
deliver distinctive value
Validating and Executing Making Choices
Strategic
Positioning
Copyright 2014 © Professor Michael E. Porter 9 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
• A unique value proposition compared to competitors
Tests of a Successful Strategy
Copyright 2014 © Professor Michael E. Porter 10 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Defining the Value Proposition
What Relative
Price?
What
Customers? Which Needs?
• What end users?
• What channels?
• Which products?
• Which features?
• Which services?
• A novel value proposition can expand the market
• Finding a unique value proposition often involves a new
way of segmenting the market
• Premium? Parity?
Discount?
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• A unique value proposition compared to competitors
• A distinctive value chain involving clear choices about how
the company will operate differently to deliver its value
proposition
Tests of a Successful Strategy
Copyright 2014 © Professor Michael E. Porter 12 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
• A unique value proposition compared to competitors
• A distinctive value chain involving clear choices about how
the company will operate differently to deliver its value
proposition
• Making clear tradeoffs, and choosing what not to do
Tests of a Successful Strategy
Copyright 2014 © Professor Michael E. Porter 13 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
• A unique value proposition compared to competitors
• A distinctive value chain involving clear choices about how
the company will operate differently to deliver its value
proposition
• Making clear tradeoffs, and choosing what not to do
• Integrating activity choices across the value chain to fit
together and reinforce each other
Tests of a Successful Strategy
Copyright 2014 © Professor Michael E. Porter 14 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
• A unique value proposition compared to competitors
• A distinctive value chain involving clear choices about how
the company will operate differently to deliver its value
proposition
• Making clear tradeoffs, and choosing what not to do
• Integrating activity choices across the value chain to fit
together and reinforce each other
• Continuity of strategic direction with continuous
improvement in realizing the unique value proposition
Tests of a Successful Strategy
Copyright 2014 © Professor Michael E. Porter 15 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
• Understanding industry structure
• Finding a novel value proposition
– Creative segmentation
• Reinventing the value chain
• Capitalizing on changes in technology, customers, needs,
regulation, and other areas
• Successful strategies involve a core strategic insight that is
improved and expanded over time
Finding a Unique Strategic Position
Copyright 2014 © Professor Michael E. Porter 16 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Shifting the Nature of Industry Competition
Zero Sum
Competition
Positive Sum
Competition
• Compete head to head on
price
• One company‘s gain requires
another company‘s loss
• Competition dissipates
industry structure and
profitability
• Compete on distinctive
strategic positioning
• More than one company
can be successful
• Competition expands the
customers served, the
needs that are met, and the
overall value pool
Copyright 2014 © Professor Michael E. Porter 17 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
1. Company Strategy
2. Clusters and Competitiveness
3. Creating Shared Value
Agenda
Copyright 2014 © Professor Michael E. Porter 18 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
Restaurants
Attractions and Activities
e.g., theme parks, casinos, sports
Airlines, Cruise Ships
Travel Agents Tour Operators
Hotels
Property Services
Maintenance Services
Government Agencies e.g., Australian Tourism
Commission, Great Barrier Reef Authority
Educational Institutions e.g., James Cook University,
Cairns College of TAFE
Industry Groups e.g., Queensland Tourism
Industry Council
Food Suppliers
Public Relations & Market Research
Services
Local Retail, Health Care, and Other Services
Souvenirs, Duty Free
Banks, Foreign
Exchange
Local Transportation
What is a Cluster? Tourism in Cairns, Australia
Copyright 2014 © Professor Michael E. Porter 19 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Providers IFCs Clients Government Products
What is a Cluster? Bogota’s Software Cluster
Private Investors and Venture Capital Funds
Hardware Solutions
Insurers
Infrastructure (Communications, Servers, Data
Storage, Management of networks and
systems)
Human Resources & Investigation
(Universities, Job training centers, Cintel, Uniempresarial)
Support Services (Personnel recruitment and specialized training, marketing and sales, process
mngmt, legal and financial counseling)
Bancoldex
Innpulsa Colciencias SENA
MinTIC –
ViveDigital
MinCIT –
Program
Transform
Productivity
DIAN
(Internal
Revenue
Service)
Bogotá’s
Secretary of
Economic
Dev.
Main Domestic Clients: Financial
Government Telecommunications
Industry
Applications Tailor-Made Software
IT and Ancillary Services
Associative
Groups (SinerTic,
Alliance,
Karion)
Tech Centers (ESI Center,
SinerTic,
Andino,
ParqueSoft)
Trade
Organizations (Fedesoft,
ACIS)
Proexport Invest in
Bogotá
Bogotá
Chamber of
Commerce
Source: Cluster Bogota and authors.
Copyright 2014 © Professor Michael E. Porter 20 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Institutions of Collaboration (IFCs) The Australian Wine Cluster
Wine Industry National Education and Training Council
Established 1995
Focus: Coordination, integration, and standard
maintenance for vocational training and education
Funding: Government; cluster organizations
Cooperative Centre for Viticulture
Established 1991
Focus: Coordination of research and education
policy in viticulture
Funding: Cluster organizations
Australian Wine Export Council
Established 1992
Focus: Wine export promotion through international
offices in London and San Francisco
Funding: Government; cluster organizations
Winemakers’ Federation of Australia
Established 1990
Focus: Public policy representation of companies
in the wine cluster
Funding: Member companies
Grape and Wine R&D Corporation
Established 1991 as statutory body
Focus: Funding of research and development
activities
Funding: Government; statutory levy
Wine Industry Information Service
Established 1998
Focus: Information collection, organization, and
dissemination
Funding: Cluster organizations
Source: Porter/Solvell, The Australian Wine Cluster – Supplement, HBS 2002
Copyright 2014 © Professor Michael E. Porter 21 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Why Clusters Matter?
• Clusters increase productivity and operational efficiency
• Clusters stimulate and enable innovations
• Clusters facilitate commercialization and new business formation
• Clusters reflect the fundamental importance to productivity and innovation of
linkages and spill-overs across firms and associated institutions
Copyright 2014 © Professor Michael E. Porter 22 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Evidence on the Impact of Clusters
Source: ―Cluster and Entrepreneurship‖ by Mercedes Delgado, Michael E. Porter, and Scott Stern (2010); ―The Economic Performance of Regions‖ by Michael E. Porter (2003)
• Specialization in strong
clusters
• Breadth of industries within the
cluster
• Strength in related clusters
• Presence of a region‗s clusters
in neighboring regions
• Job growth
• Higher wages
• Higher patenting rates
• Greater new business
formation, growth and survival
Copyright 2014 © Professor Michael E. Porter 23 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Colombia National Cluster Export Portfolio, 2011
Colombia Overall
World Export Share: 0.17%
= $750 million
World Export Market
Share, 2011
Change in World Export Market Share, 2001-2011
Change in Colombia Overall World Export Share: +.053%
Communications
Services
(-.14%, .08%)
Publishing
and Printing
-.10%, .13%)
Oil and Gas Products
Coal and Briquettes (+.19%, 2.7%)
Agricultural Products
Jewelry, Precious Metals and Collectibles (+.23%, .28%) Hospitality and Tourism
Metal Mining & Manufacturing
Plastics
Transportation and Logistics
Chemical Products
Biopharmaceuticals
Processed Food
Apparel
Forest Products Textiles
Business Services
Automotive
Motor Driven Products Building Fixtures and Equipment
Construction Materials
Furniture
Leather and Related Products
Power and Power Generation Equipment Fishing &
Fishing Products
Lighting and Electrical Equipment
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
-0.10% -0.05% 0.00% 0.05% 0.10% 0.15% 0.20%
Copyright 2014 © Professor Michael E. Porter 24 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Marine
Equipment
Related Clusters and Economic Diversification
Furniture Building
Fixtures,
Equipment &
Services
Fishing &
Fishing
Products
Hospitality
& Tourism Agricultural
Products
Transportation
& Logistics
Plastics
Oil & Gas
Products
Chemical
Products
Biopharma-
ceuticals
Power
Generation &
Transmission
Aerospace
Vehicles &
Defense
Lighting &
Electrical
Equipment
Financial
Services
Publishing
& Printing
Entertainment
Information
Technology
Aerospace
Engines
Business
Services
Distribution
Services
Forest
Products
Heavy
Construction
Services
Construction
Materials
Prefabricated
Enclosures
Heavy
Machinery
Automotive
Sporting,
Recreational &
Children‘s
Goods
Production
Technology Motor Driven
Products
Metal
Manufacturing
Jewelry &
Precious
Metals
Textiles
Footwear
Processed
Food
Tobacco
Medical
Devices
Analytical
Instruments Education &
Knowledge
Creation
Apparel
Leather &
Related
Products
Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions.
Communications
Services Coal &
Briquettes
Copyright 2014 © Professor Michael E. Porter 25 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Furniture Building
Fixtures,
Equipment &
Services
Fishing &
Fishing
Products Hospitality
& Tourism Agricultural
Products Transportation
& Logistics
Colombia’s Share of World Exports by Cluster, 2011
Plastics
Oil &
Gas
Chemical
Products
Biopharma-
ceuticals
Power
Generation
Aerospace
Vehicles &
Defense
Lightning &
Electrical
Equipment
Financial
Services
Publishing
& Printing
Information
Tech.
Communi-
cations
Services
Business
Services
Distribution
Services
Forest
Products
Heavy
Construction
Services
Construction
Materials
Prefabricated
Enclosures
Apparel
Leather &
Related
Products
Jewelry &
Precious
Metals
Textiles
Footwear
Processed
Food
Tobacco
Medical
Devices
Analytical
Instruments Education &
Knowledge
Creation
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.
Marine
Equipment
Aerospace
Engines
Heavy
Machinery
Sporting
& Recreation
Goods
Automotive
Production
Technology
Motor Driven
Products
Mining & Metal
Manufacturing
Enter-
tainment
> 0.10%
> 0.25%
> 0.50%
World Market Share
Coal &
Briquettes
Copyright 2014 © Professor Michael E. Porter 26 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Clusters as a Tool for Economic Policy
• A forum for collaboration between the private sector, trade associations,
government, educational, and research institutions
• Brings together firms of all sizes, including SME‘s
• Creates a mechanism for constructive business-government dialog
• A tool to identify problems and action recommendations
• A vehicle for investments that strengthen multiple firms/institutions
simultaneously
• Fosters greater competition rather than distorting the market
• Enhances the efficiency and effectiveness of traditional economic policy
areas, such as training, R&D, export promotion, FDI attraction, etc.
• Sound cluster policy addresses all clusters, and does not pick winners
Copyright 2014 © Professor Michael E. Porter 27 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
• Improving the general business environment is essential, but cluster development is
necessary to attain middle-income levels
• Developing economies should upgrade traditional clusters (including agriculture), never
abandon them
• Existing MNCs in the country should be treated as nodes for cluster development
– The best way to retain companies is for them to be part of a cluster
• Attracting foreign direct investment should focus on existing and emerging clusters, not
generalized appeals to locate in the country
• Free Trade or Export Processing Zones should be organized around clusters, with
governing regulations designed to encourage linkages with the local economy
• A formal process for cluster development is an important component of economic
development
– Private sector led
– Government roles in convening, supporting, and participating
– Seed funding for cluster assessment and the formation of cluster-based IFCs
Clusters in Developing Economies Principles
Copyright 2014 © Professor Michael E. Porter 28 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Cluster Initiatives The Role of Government
• Initiate/ Convene
• Co-Finance
• Support all existing and
emerging clusters
• Participate
• Enable data collection and
dissemination at the cluster
level
• Be ready to implement
recommendations
• Pick favored clusters
• Pick favored companies
• Subsidize or distort
competition
• Define cluster action
priorities
Government
should
Government
may
Government
should not
Copyright 2014 © Professor Michael E. Porter 29 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Clusters
Specialized Physical
Infrastructure
Natural Resource Protection
Science and Technology
Infrastructure
(e.g., centers, university
departments, technology
transfer)
Education and
Workforce Training
Business Attraction
Export Promotion
• Clusters provide a framework for organizing the implementation of many
public policies and public investments directed at economic development
Quality and Environmental
standards
Market Information
and Disclosure
Organize Public Policy around Clusters
Copyright 2014 © Professor Michael E. Porter 30 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Chamber of Commerce of Bogotá Cluster Growth Strategy 2.11
• Created a private sector-led cluster upgrading program with matching
support from all actors (government, institutions of collaboration, academia)
• Built on existing and emerging regional cluster strengths rather than
chasing hot fields
• Focused on clusters where the Bogota region has potential competitive
advantages
• Created institutional capacity to coordinate activities
• Aligned other economic development policies with clusters, including
targeted workforce development, export promotion and specialized
infrastructure and research initiatives
• Linked cluster programs with shared value promotion
Copyright 2014 © Professor Michael E. Porter 31 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Coordinating
development of a
common agenda
Defining
standards
Creating
networks
of firms
Facilitating
exchange of
information
Creating
institutional
capacity
Building
relationships and
cultivating trust
Co-financing
activities
Cluster
Development
Program
The Role of an Institution for Collaboration Bogotá Chamber of Commerce (CCB)
Initial Clusters:
• Tourism
• Creative
Industries
• Software and IT
• Apparel
• Leather and
Footwear
• Cosmetics
• Graphic design
• Jewelry
Copyright 2014 © Professor Michael E. Porter 32 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
1. Company Strategy
2. Clusters and Competitiveness
3. Creating Shared Value
Agenda
Copyright 2014 © Professor Michael E. Porter 33 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
• Only business can create economic prosperity, through meeting
needs at a profit
• Societies everywhere are facing significant social, environmental
and economic development challenges
• Government and NGO‘s lack sufficient resources and
capabilities to fully meet these challenges alone
• Corporate social responsibility efforts are greater than ever, but the
legitimacy of business has fallen
We need a new approach
The Role of Business in Society
Copyright 2014 © Professor Michael E. Porter 34 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
The Role of Business in Society Evolving Approaches
Philanthropy
• Donations to worthy
social causes
• Volunteering
Copyright 2014 © Professor Michael E. Porter 35 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
The Role of Business in Society Evolving Approaches
Corporate Social
Responsibility
(CSR)
Philanthropy
• Donations to worthy
social causes
• Volunteering
• Compliance with
community standards
• Good corporate
citizenship
• ―Sustainability‖
• Mitigating risk and
harm
• Improving trust and
reputation
Copyright 2014 © Professor Michael E. Porter 36 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
The Role of Business in Society Evolving Approaches
Corporate Social
Responsibility
(CSR)
Creating Shared
Value
(CSV)
Philanthropy
• Donations to worthy
social causes
• Volunteering
• Compliance with
community standards
• Good corporate
citizenship
• ―Sustainability‖
• Mitigating risk and
harm
• Improving trust and
reputation
• Addressing societal
needs and challenges
with a business model
Copyright 2014 © Professor Michael E. Porter 37 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
CSR CSV
Fair Trade
• Paying a higher price to farmers
for the same products
• Certification as a fair trade
company
Transforming Procurement
• Collaborate with farmers to
improve quality and yield
• Supporting investments in
technology and inputs
• Higher prices for better quality
• Higher yield increases
quantity produced
• Environmental impact also
improved
CSR versus Shared Value Fair Trade
Copyright 2014 © Professor Michael E. Porter 38 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
• Social deficits and environmental impact create economic costs for companies
• Community weaknesses affect company productivity
• Social needs represent the largest unserved market opportunities
Company
Productivity
Workforce
Skills
Worker Safety
Environmental
Improvement
Education
Water Use
Energy
Efficiency
Health
Affordable
Housing
Community
Economic
Development
The Opportunity for Shared Value
Copyright 2014 © Professor Michael E. Porter 39 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Levels of Shared Value
I. Reconceiving needs, products, and customers
– Meeting societal needs through products and services
– Serving unserved or underserved customers
Copyright 2014 © Professor Michael E. Porter 40 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Shared Value in Products Dow Chemical
• Dow recognized that global social issues represent its largest market
opportunities
• Created the “Breakthroughs to World Challenges” Program
– Each business unit was challenged to apply Dow‘s tradition of ―solutionism‖
through innovation to a range of global problems inspired by the Millennium
Development Goals
• One of Dow‘s business units developed Omega-9 canola and sunflower seeds
that produce cooking oil with no trans fats and low saturated fats
• The technology yields twice the oil per hectare for farmers than soybeans,
raising farmer and farmland productivity
• The oils have longer shelf life and usage life for food processors
• Has become one of Dow‘s largest selling product lines, with 2012 total revenues
of approximately $700 million
Copyright 2014 © Professor Michael E. Porter 41 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Shared Value in Products and Markets Banco de Crédito e Inversiones (BCI), Chile
• BCI launched in 2007 the ―Nace” fund to provide credit to scale entrepreneurs who
did not qualify for conventional financing
• Unique lending criteria targeted entrepreneurs with a high level of commitment
and perseverance, as well as high quality business plans
• In addition to capital, Nace provides tools and advice to clients for business
planning and networking
• Since its inception, the program has extended $160 million in credit to 7,500
entrepreneurs with a comparable default rate to BCI‘s conventional SME clients
• An estimated 15,000 new jobs have been created
• Nace profits have grown by a factor of 25 and the program is considered to be an
important opportunity for continued growth at the bank
Copyright 2014 © Professor Michael E. Porter 42 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Levels of Shared Value
I. Reconceiving needs, products, and customers
– Meeting societal needs through products and services
– Serving unserved or underserved customers
II. Redefining productivity in the value chain
– Utilizing resources, energy, suppliers, logistics, and employees differently
and better
Copyright 2014 © Professor Michael E. Porter 43 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Shared Value in the Value Chain
Marketing
& Sales
(e.g., Sales
Force,
Promotion,
Advertising,
Proposal
Writing,
Website)
Inbound
Logistics
(e.g., Incoming
Material
Storage, Data
Collection,
Service,
Customer
Access)
Operations
(e.g., Assembly,
Component
Fabrication,
Branch
Operations)
Outbound
Logistics
(e.g., Order
Processing,
Warehousing,
Report
Preparation)
After-Sales
Service
(e.g., Installation,
Customer
Support,
Complaint
Resolution,
Repair)
M
a
r
g
i
n
Firm Infrastructure (e.g., Financing, Planning, Investor Relations)
Procurement (e.g., Components, Machinery, Advertising, Services)
Technology Development (e.g., Product Design, Testing, Process Design, Material Research, Market Research)
Human Resource Management (e.g., Recruiting, Training, Compensation System)
• Procurement that enhances supplier
capabilities and efficiency
• Improving energy, water and resource
efficiency across the value chain
• Minimizing logistical intensity
• Improving employee health and safety
• Enhancing the productivity (and through this
wages) of lower income employees
• Recruiting to reflect the diversity of
customers and the communities where a
company operates
• Others…
Copyright 2014 © Professor Michael E. Porter 44 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Shared Value in the Value Chain Fibria, Brazil
• Fibria, the world‘s leading manufacturer of chemical pulp, utilizes planted
eucalyptus trees and integration of native habitat to dramatically reduce the
land required and sustainability in wood fiber cultivation
• The company also encourages small-scale producers near its mills to plant
eucalyptus in conjunction with other crops, assisting them with technical
training and inputs
• Fibria achieves far greater land and water efficiency than traditional
plantation methods
• Small scale producers currently contribute 27% of the raw material volume
utilized in Fibria mills, improving efficiency
• Over 4000 households have significantly increased employment and incomes
Copyright 2014 © Professor Michael E. Porter 45 20140507—Cali Regional Development Presentation—v5
Shared Value in the Value Chain Manuelita Palm Oil Company, Colombia
• Manuelita‘s palm oil extraction company in the Eastern Plains of Colombia
involved high energy cost, and methane emissions from the production
process were a major environmental problem
• The company began capturing the methane gas emitted during production
and invested $8.5 million in a bioreactor for gas processing
• Manuelita energy costs fell by 80%
• Methane gas emissions fell by 85%
Copyright 2014 © Professor Michael E. Porter 46 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Levels of Shared Value
I. Reconceiving needs, products, and customers
– Meeting societal needs through products and services
– Serving unserved or underserved customers
II. Redefining productivity in the value chain
– Utilizing resources, energy, suppliers, logistics, and employees differently
and better
III. Improving the local and regional business environment
– Improving skills, the supplier base, the regulatory environment, and the
supporting institutions that affect the business
– Strengthening the cluster on which the company depends
• Strengthens the link between company success and community
success
Copyright 2014 © Professor Michael E. Porter 47 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Shared Value in the Local Business Environment Arca Continental
• Arca Continental is the second largest bottling company in Latin America,
and one of the largest Coca-Cola bottlers in the world
• Arca Continental established a program to train and invest in the micro-
entrepreneur retailers who sell more than 60% of the Company‘s products,
including management, sales and marketing and merchandising
• Invests in low energy use coolers and fixture improvements
• Participating retailers register sales increases of 25% or more, with improved
customer satisfaction, leading to similar increases in the sales of Arca’s
products
• Arca Continental recovers its investment in 6 months or less
• Beginning in Mexico, the program is being extended to Argentina and
Ecuador
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Shared Value in the Local Business Environment BHP Billiton, Chile
• BHP Billiton invested USD $50 million over 4 years in a supplier development
program that engages local suppliers to develop innovative solutions to critical
aspects of mining
• Goal of creating 250 world-class mining suppliers with export potential by 2020
• Originated within the company‘s business and the social investment teams jointly,
and was launched in collaboration with Government of Chile, NGOs, and non-
mining companies
• Engaged 36 suppliers in the initiative, with over $400 million in combined sales
and 5,000 employees between them
• Operated 43 innovation projects so far, which have resulted in capacity
improvements and innovations
• Estimated savings of $121 million to BHP Billiton
Copyright 2014 © Professor Michael E. Porter 49 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Partnering for Shared Value
NGOs
• Hold business accountable
• Seek donations
• Partner with business to implement
and scale shared value solutions
• Invest with companies, NGOs and
government to enable shared value
solutions
Foundations
• Donate to charitable causes
Government
• Regulate how businesses
operate
• Tax businesses to pay for
social services
• Operate social programs
• Regulate to encourage market
solutions
• Jumpstart market solutions through
purchase commitments or incentives
• Partner on shared value solutions to
delivering social services
• Invest in infrastructure to enable
shared value approaches (e.g. roads,
skills)
• Partner on business environment
improvements
Competitors
• ―Brand‖ solo CSR initiatives
Copyright 2014 © Professor Michael E. Porter 50 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Creating Shared Value: Where is the Opportunity?
Nestlé
Water Rural
Development
Nutrition
• Opportunities to create shared value are inevitably
tied closely to a company‘s particular businesses
Copyright 2014 © Professor Michael E. Porter 51 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
• Natural, fresh, organic, and freshly prepared foods and
health items with excellent service at premium prices
• Cater to specialized nutritional requirements (gluten
allergies, vegan, etc.)
• Serve educated customers who are passionate about
food and a healthy lifestyle
• Well-lit, inviting supermarket store formats with
appealing displays and extensive prepared foods
sections
• Produce section as ―theater‖
• Café-style seating areas with wireless internet for
meals and meetings
• Each store carries local produce and has the authority
to contract with the local farmers. Company provides
low-interest loans if needed
• Nutrition information and education provided to
shoppers along with products
• High touch in-store customer service via
knowledgeable, flexible, and highly motivated
personnel
• Flat compensation structure
• Own seafood procurement and processing facilities to
control quality, sustainability and price from the boat to
the counter
• Heavy emphasis on environmental sustainability in all
activities
• Emphasis on supporting community development
Value Proposition Distinctive Activities
• Whole Foods is the most economically successful food retailer in North America
• Successful strategies in the future will embody a significant shared value dimension
Shared Value and Company Strategy Whole Foods Markets
Copyright 2014 © Professor Michael E. Porter 52 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Purpose Based Strategic Positioning
Traditional Positioning New Positioning
• Food and Beverage
Company
• Nutrition, Health and Wellness
Company
Nestlé
• Defining the clear social purpose underlying a company‘s products and activities opens
new opportunities for growth and profitability, while motivating and attracting
consumers, business partners, employees, shareholders, and the public
• Health Insurance • ―Making People Healthier and
Enhancing Their Lives‖
Discovery
Health
Insurance
• Book Publishing • Improving Educational
Outcomes Pearson
Copyright 2014 © Professor Michael E. Porter 53 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Redefining Corporate Purpose Danone
• In the late 1990‘s, Danone realized that it had drifted away from its origins as a
manufacturer of healthy foods
• Sold off its beer, meat and cheese units
• Refocused the company on dairy and water
• Acquired medical nutrition and baby foods businesses
• Created Innovation Committees in business units to provide ―healthy food for as many
people as possible‖
Bringing health through food to as many
people as possible by refocusing on four
complementary business lines and
expanding into fast-growing new regions
Vision Mission
The ‘dual economic and social’ project,
creating economic value by creating
social value
Copyright 2014 © Professor Michael E. Porter 54 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
Driving Shared Value Bogotá Chamber of Commerce (CCB)
• In 2012, CCB redefined its institutional value proposition to promote rising
prosperity of Bogota by increasing the value generated by companies in the region
• Focused on facilitating the creation of shared value by companies in Bogotá and
promoting a new business culture
• Realigned its corporate social responsibility program towards shared value
• Explained the shared value concept to the business community
• Promoted the shared value framework within local government
• Designed a training program for consultants on shared value creation methodologies
• Modified its innovation program to help companies in the process of identifying new
customer needs, products, and markets that create shared value
• Adopted a cluster development vision for economic development with companies at
the core
• Built a supplier development program with partner companies
• Promoted shared value events, a shared value prize, and marketing campaigns
Copyright 2014 © Professor Michael E. Porter 55 20140506—Bogota Chamber of Commerce CSV and Clusters Presentation—FINAL
The Purpose of Business
• The purpose in business is to create economic value while creating shared
value for society
• Businesses acting as businesses, not as charitable givers, are arguably the
most powerful force for addressing many of the pressing issues facing our
society
• Shared value will give rise to far broader opportunities for strategy and
economic value creation and will drive the next wave of innovation,
productivity, and economic growth
• A transformation of business practice around shared value will give purpose to
the corporation