The competitive advantage of nations

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

http://www.isc.hbs.edu/�








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


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


$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


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


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


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


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


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


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


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


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%)


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%


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


Prefabricated Enclosures and Structures

Leather and Related Products


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


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)


$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


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.


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


$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.


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


The Evolution of Regional EconomiesSan Diego

U.S. Military

CommunicationsEquipment

Sporting andLeather Goods

Analytical Instruments

Power GenerationAerospace Vehicles

and Defense

Transportationand Logistics


1910 1930 1950 19901970

Bioscience Research Centers

Climate and

Geography


Medical Devices

Biotech / Pharmaceuticals

Education andKnowledge Creation


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


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.


Geographic Influences on Competitiveness

Broad Economic Areas

Groups of Neighboring Nations

States, Provinces

Metropolitan Areas

Nation

World Economy

Urban and Rural Areas

The Neighborhood


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)


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


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


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


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

The competitive advantage of nations

Business

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