Microeconomic Foundations of Competitiveness … Foundations of Competitiveness and International...

Microeconomic Foundations of Competitivenessand International Business

Christian H. M. Ketels, PhDInstitute for Strategy and Competitiveness

Harvard Business School

Fribourg, Switzerland8 December 2006

This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report 2005, (World Economic Forum, 2005), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998), and the “Cluster Initiative Greenbook” by C Ketels, O Solvell, and G Lindqvist. 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 the author.Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu

2 Copyright 2006 © Professor Michael E. Porter, Christian H. M. KetelsEIBA 12-08-06 CK

Related Concepts

Achieving prosperity in competition

with other locations

Achieving profitability in competition

with other companies

Competitiveness International Business

• Locations compete based on business environment conditions to support high levels of company productivity

• Companies compete based on internal capabilities and access to specific locational environments


Themes

• International businesses in the concept of competitiveness

• Strategy for locations and companies’ locational choices

• Investing in the competitiveness of locations


Microeconomic CapacityMicroeconomic Capacity

Quality of the Microeconomic

BusinessEnvironment

Quality of the Quality of the MicroeconomicMicroeconomic

BusinessBusinessEnvironmentEnvironment

Sophisticationof Company

Operations andStrategy

SophisticationSophisticationof Companyof Company

Operations andOperations andStrategyStrategy

Microeconomics of Competitiveness: The Core Concept

Macroeconomic, Political, Legal, and Social ContextMacroeconomic, Political, Legal, and Social ContextMacroeconomic, Political, Legal, and Social Context

• Competitiveness is given by the level of prosperity a location can sustain based on the productivity of companies based there

• Company productivity is driven by internal and external factors• A sound macroeconomic, political, legal, and social context creates the

potential for competitiveness, but is not sufficient


Trends in the Global Economy

• Globalization of markets

• Globalization of value chains

• Globalization of knowledge

• Innovation and skill an increasing share of value added

• Services an increasing share of value added


Competition between locations can be positive-sum

Globalization and the Competition between RegionsImpact on Clusters

The Context for competition between locations is changing• More locations reach a high level of growth, making them attractive

markets to serve • More locations meet the minimum conditions to become potential

production sites• The environment locations provide become more important for

company success as the their value creation logic is changing

And thus the relationship between locations• More competiton• More specialization and regional concentration • More linkages


Positioning of Life Science ClustersUnited States

NY

PA

NC

VA

WV

FL

GA

SC

AL

TN

OHIL

IA

IN

AR

LA

MS

TX

ND

OK

CA

AZ

NV

WY

MT

ID

NM

CO

OR

UT

KS

SD

NE

MN

WI

MO

WA

MI

KY

ME

MI VT NH

MA

CTRI

Note: All 318 Metropolitan Areas are shown as shaded; includes subclusters in which the MA has employment rank 1 or 2 nationally, 1999 data Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School

Boston, MAResearch Organizations 7%Medical Equipment 12%

Boston, MAResearch Organizations 7%Medical Equipment 12%

Chicago, ILDiagnostic Substances 42%Chicago, ILDiagnostic Substances 42%

Washington, D.C.Research Organizations 10%Washington, D.C.Research Organizations 10%

Los Angeles, CAHealth/Beauty Products 11%Los Angeles, CAHealth/Beauty Products 11%

Middlesex – Somerset, NJHealth/Beauty Products 9% Middlesex – Somerset, NJHealth/Beauty Products 9%

Minneapolis, St. Paul, MNSurgical Instruments 6%Medical Equipment 8%

Minneapolis, St. Paul, MNSurgical Instruments 6%Medical Equipment 8%

Newark, NJPharmaceutical Products 12%Newark, NJPharmaceutical Products 12%

Oakland, CABiological Products 14%Oakland, CABiological Products 14%

Philadelphia, PAPharmaceutical Products 6%Philadelphia, PAPharmaceutical Products 6%

ResearchProductionDevices and Substances


$15,000

$25,000

$35,000

$45,000

$55,000

50 100 150 200 250 300

Average Regional Wage, 2001

Share of Traded Employment in Strong Clusters (LQ > .8), Broad Cluster, 2001

y = 96.736x + 16218R2 = 0.377

New York, NYBay Area, CA

Boston, MA

Regional Specialization and Prosperity

Source: County Business Patterns; Michael E. Porter, The Economic Performance of Regions”, Regional Studies, Vol. 37, 2003


Positioning of Footwear ClustersSelected Countries

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


The Role of International Firms

• Driver of specialization

• Linkage between regional clusters

• Locations have to understand the motivations of international firmsto attract their investment

• The successful internationalization of domestic firms becomes and increasingly important driver of locations’ economic success

• International firms increasingly become the managers of linkages between clusters, not just of their own operations in different locations

• Cluster organizations increasingly aim to also provide services in the development and management of linkages between clusters


Locations and Companies’ Locational ChoicesThe Role of Strategy

• Copy business environment conditions of prosperous locations

• Focus on established or high-wage clusters

• Identify most attractive locations for specific activities in a given industry

• Develop specific business environment strengths to support a unique economic role

• Focus on a distinct and reinforcing set of clusters

• Identify most attractive locations for specific activities that match the market position of a given company

Location Locational Choices

Operational Efficiency

StrategicPositioning


National Strategic Positioning: The Case of Ireland

• Ireland has been one of the most impressive economic growthstories of the last decades

• Ireland has been successful by positioning itself as a very efficient location for multinational companies to serve the European market

• Ireland has supported this positioning through strengthening therelevant dimensions of the business environment

– Focus on education to provide a well-educated workforce at competitive wage levels

– Focus on communication and transportation infrastructure to provide an efficient platform to reach other European markets

– Focus on a highly professional investment attraction agency to smoothly manage all contacts with potential and established investors

– Focus on activities and investors for which the selected positioning has the strongest appeal


Location and Strategic Positioning of CompaniesExample of Interactions

FAST Search & Transfer• Norwegian software company

producing internet search technology

• Location has strong skill base but small demand and limited marketing capability

• Company has decided to position itself as a supplier to customer-facing internet companies, not as a second Google

BMW• German premium car producer that

was looking for a new production site in Europe

• Strategic position based on German technology and up-to-date product portfolio

• Company has decided to place the plant in Leipzig (Germany), not in nearby Central European locations as many competitors

Location driving strategy Strategy driving location


Related But Different Concepts

• Aims to improve the quality of locations

• Takes the quality of locations as given

• Aims to improve companies’ ability to leverage barriers between differences across locations

Competitiveness International Business


Company-Driven Competitiveness and Cluster Efforts

Danfoss,Southern Jutland (Denmark)Ensure availability of skills as

company reduces manufacturing operations

Dow Chemical/BMW/…,Mitteldeutschland (Germany)Ensure attractiveness for further

investments by headquarters

Magna Steyr,Styria (Austria)

Ensure capabilities atregional supplier network

Philips,Eindhoven (Netherlands)

Increase innovative capacity in an open innovation-model


• Social and economic goals can be addressed simultaneously by improving a company’s competitive context

• Social and economic goals can be addressed simultaneously by improving a company’s competitive context

Strategic Corporate Philanthropy

• Companies should give not just money but leverage the company’s unique capabilities in support of social causes, far exceeding the impact possible by individuals

• Companies should give not just money but leverage the company’s unique capabilities in support of social causes, far exceeding the impact possible by individuals

Where to Focus Where to Focus Corporate PhilanthropyCorporate Philanthropy

How Companies Should Invest in Philanthropy

Source: Porter/Kramer (2006)


Picking a location:Where do we locate which activity in sync

with our strategic position?

Picking a location:Where do we locate which activity in sync

with our strategic position?

Improving a location:How can improve the value of our location

in supporting our strategic position?

Improving a location:How can improve the value of our location

in supporting our strategic position?

Leveraging a location:How do we derive strategic benefits from

the characteristics of our location?

Leveraging a location:How do we derive strategic benefits from

the characteristics of our location?

LocationLocation StrategyStrategy

Location and Strategic ManagementTraditional roles of locational analysis

New roles of locational analysis

Microeconomic Foundations of Competitiveness … Foundations of Competitiveness and International...

Documents

Transcript of Microeconomic Foundations of Competitiveness … Foundations of Competitiveness and International...