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1 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Competitiveness and Company Strategy:Issues for Brazil
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 2002, (World Economic Forum, 2003), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998), and the Clusters of Innovation Initiative (www.compete.org), a joint effort of the Council on Competitiveness, Monitor Group, and Professor Porter. 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.Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu
Professor Michael E. PorterInstitute for Strategy and Competitiveness
Harvard Business School
ExpoManagementSao Paulo, Brazil
November 4, 2003
2 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Perspectives on Firm Success
InternalInternalInternal ExternalExternalExternal
• Competitive advantage resides inside a company
• Competitive success depends primarily on company choices
• Competitive advantage (or disadvantage) resides partly in the proximate environment in which a company’s business units operate
– Cluster participation
• Company choices are strongly influenced by location
3 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Competitiveness and Productivity
ProductivityProductivity
Innovative CapacityInnovative CapacityInnovative Capacity
Competitiveness
• Competitiveness is determined by the productivity with which a nation, region, or cluster uses its human, capital, and natural resources. Productivity sets a nation’s or region’s standard of living (wages, returns on capital, returns on natural resources)
• The most important sources of prosperity are created not inherited• Productivity does not depend on what industries a region competes in,
but on how it competes• The prosperity of a region depends on the productivity of all its industries• There are no low-tech industries, only low-tech firms
4 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Comparative Economic Performance
0
2,000
4,000
6,000
8,000
10,000
12,000
-2% -1% 0% 1% 2% 3% 4% 5%
Nicaragua
Brazil
ArgentinaChile
El SalvadorJamaica
Colombia
Panama
Guatemala
Honduras
Costa Rica
Compound annual growth rate of real GDP per capita, 1990-2002
GDP per capita (PPP
adjusted) in US-$,
2002
BoliviaEcuador
Mexico
Dominican Republic
Source: EIU (2003)
Trinidad & Tobago
Venezuela
Paraguay
Peru
Uruguay
5 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.pptSource: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.
Annual U.S. patents per 1 million
population, 2001
Compound annual growth rate of US-registered patents, 1990 - 2001
International Patenting Output
0
50
100
150
200
250
300
350
400
0% 10% 20% 30% 40%
Australia
Canada
Germany
Japan
South Korea
New Zealand
Singapore
Sweden
Taiwan
UK
Israel
= 10,000 patents granted in 2001
USA
Finland
Ireland
Brazil
6 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Note: Other Latin American countries have negligible rates of US patenting Source: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.
Annual U.S. patents per 1 million population, 2001
Compound annual growth rate of US-registered patents, 1990 - 2001
International Patenting OutputSelected Latin American Countries
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
-5% 0% 5% 10% 15% 20%= 15 patents granted in 2001
Colombia
Argentina
Brazil
ChileCosta Rica
EcuadorJamaica
Mexico
Peru
Venezuela
Average Growth Rate of Countries shown: 7.9%
Patents per Capita for total of Countries shown: 0.71
7 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Comparison of U.S. Patenting1997 - 2001
123456789
1011121314151617181920
RankRank Brazilian Institution Massachusetts Institution
PETROLEO BRASILEIROCARRIER CORPORATION EMP. BR. DE COMPR. METAGAL INDUSTRIACO. VALE DO RIO DOCE PRAXAIR TECHNOLOGYSMAR RESEARCH CORP. TELECOM. BRASILEIRASELC PRODUTOS DE SEG. FORJAS TAURUS S/A SABO INDUSTRIA E COM. TECUMSEH PRODUCTS EXOGEN, INC. HENKEL CORPORATIONAEROMOVEL INDUSTRIAS ROMI S.A. MAQUINAS AGRICOLASMETAL LEVE S.A. METALGRAFICA ROJEK WHITAKER CORP.
MITMASS GENERAL HOSPITAL EMC CORPORATIONDECPOLAROID CORPORATIONANALOG DEVICES, INC.MILLENNIUM PHARMAC.HARVARD UNIVERSITYCOMPAQ COMPUTERSUN MICROSYSTEMS, INC.BOSTON SCIENTIFIC CORP.ACUSHNET COMPANYGENETICS INSTITUTE, INC.GILLETTE COMPANYBRIGHAM & WOMEN'S HOSP.RAYTHEON COMPANYGENERAL ELECTRIC COMPANYHEWLETT-PACKARD COMPANYCHILDREN'S MEDICAL CENTERQUANTUM CORP. (CA)
51829626926121316716515014714313513012711210710199969393
Patents
Source:Global Competitiveness Report 2003
5829171010865443333333222
Patents
8 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Microeconomic Foundations of DevelopmentMicroeconomic Foundations of Development
Quality of the Microeconomic
BusinessEnvironment
Quality of the Quality of the MicroeconomicMicroeconomic
BusinessBusinessEnvironmentEnvironment
Sophisticationof Company
Operations andStrategy
SophisticationSophisticationof Companyof Company
Operations andOperations andStrategyStrategy
What Causes Competitiveness?
Macroeconomic, Political, Legal, and Social Context for Development
Macroeconomic, Political, Legal, and Social Macroeconomic, Political, Legal, and Social Context for DevelopmentContext for Development
• A sound macroeconomic, political, legal, and social context creates the potential for competitiveness, but is not sufficient
• Competitiveness ultimately depends on improving the microeconomic capability of the economy and the sophistication of local companies and local competition
9 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Context for Firm
Strategy and Rivalry
Context for Firm
Strategy and Rivalry
Related and Supporting Industries
Related and Supporting Industries
Factor(Input)
Conditions
Factor(Input)
ConditionsDemand
ConditionsDemand
Conditions
Productivity and the Business Environment
• Successful economic development is a process of successive economic upgrading, in which the business environment in a nation evolves to support and encourage increasingly sophisticated ways of competing
Sophisticated and demandinglocal customer(s)Local customer needs that anticipate those elsewhereUnusual local demand in specialized segments that can be served nationally and globally
Presence of high quality, specialized inputs available to firms
–Human resources–Capital resources–Physical infrastructure–Administrative infrastructure–Information infrastructure–Scientific and technological
infrastructure–Natural resources
Access to capable, locally based suppliersand firms in related fieldsPresence of clusters instead of isolated industries
A local context and rules that encourage investment and sustained upgrading
–e.g., Intellectual property protection
Meritocratic incentive system across institutionsOpen and vigorous competition among locally based rivals
10 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
The California Wine Cluster
Educational, Research, & Trade Organizations (e.g. Wine Institute,
UC Davis, Culinary Institutes)
Educational, Research, & Trade Organizations (e.g. Wine Institute,
UC Davis, Culinary Institutes)
Growers/VineyardsGrowers/Vineyards
Sources: California Wine Institute, Internet search, California State Legislature. Based on research by MBA 1997 students R. Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda.
Wineries/ProcessingFacilities
Wineries/ProcessingFacilities
GrapestockGrapestock
Fertilizer, Pesticides, Herbicides
Fertilizer, Pesticides, Herbicides
Grape Harvesting Equipment
Grape Harvesting Equipment
Irrigation TechnologyIrrigation Technology
Winemaking Equipment
Winemaking Equipment
BarrelsBarrels
LabelsLabels
BottlesBottles
Caps and CorksCaps and Corks
Public Relations and Advertising
Public Relations and Advertising
Specialized Publications (e.g., Wine Spectator,
Trade Journal)
Specialized Publications (e.g., Wine Spectator,
Trade Journal)
Food ClusterFood Cluster
Tourism ClusterTourism ClusterCalifornia Agricultural Cluster
California Agricultural Cluster
State Government Agencies(e.g., Select Committee on Wine
Production and Economy)
11 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Leading Footwear Clusters
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
Italy• Design, marketing,
and production of premium shoes
• Export widely to the world market
12 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
The Costa Rica Information Technology Cluster
Source: Niels Ketelhohn research for Professor Michael E. Porter
Electronic Assembly
Semiconductor Production
PassiveElectronic Components (e.g., inductors, transistors)
Other Electronic Components
(e.g., circuitboards)
Venture Capital FirmsVenture Capital Firms
Computer Software (e.g., ArtinSoft)
Computer Software (e.g., ArtinSoft)
Specialized Academic and Training Institutions
(e.g., Instituto Tecnológico de Costa Rica, Instituto Nacional de Aprendizaje)
Specialized Academic and Training Institutions
(e.g., Instituto Tecnológico de Costa Rica, Instituto Nacional de Aprendizaje)
State Government Agencies (e.g., export and investments promotion
agencies: Cinde and Procomer)
State Government Agencies (e.g., export and investments promotion
agencies: Cinde and Procomer)
Specialized ChemicalsSpecialized Chemicals
Specialized Packaging (e.g., plastics, corrugated
materials)
Specialized Packaging (e.g., plastics, corrugated
materials)
13 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Influences on CompetitivenessMultiple Geographic Levels
Broad Economic AreasBroad Economic Areas
Groups of Neighboring Groups of Neighboring NationsNations
States, ProvincesStates, Provinces
Cities, Metropolitan Cities, Metropolitan AreasAreas
NationsNations
World EconomyWorld Economy
14 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Shifting Responsibilities for Economic Development
Old ModelOld Model
• Government drives economic development through policy decisions and incentives
• Government drives economic development through policy decisions and incentives
New ModelNew Model
• Economic development is a collaborative process involving government at multiple levels, companies, teaching and research institutions, and institutions for collaboration
• Economic development is a collaborative process involving government at multiple levels, companies, teaching and research institutions, and institutions for collaboration
15 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
• Ranks 30 overall in the Business Competitiveness Index– Second highest Latin American country after Chile, but on a
negative trend since 2001– Company operations and strategy (currently ranked 26) is
consistently ranked higher than business environment (ranked 35)
• Key competitive advantages– Cluster presence; but largely a legacy of a closed economy– Local competition– Strong regional governments
• Key competitive disadvantages– Trade barriers – Human resource weaknesses– Cumbersome and inefficient administrative infrastructure– Weaknesses in the physical infrastructure– Inequality
• Ranks 30 overall in the Business Competitiveness Index– Second highest Latin American country after Chile, but on a
negative trend since 2001– Company operations and strategy (currently ranked 26) is
consistently ranked higher than business environment (ranked 35)
• Key competitive advantages– Cluster presence; but largely a legacy of a closed economy– Local competition– Strong regional governments
• Key competitive disadvantages– Trade barriers – Human resource weaknesses– Cumbersome and inefficient administrative infrastructure– Weaknesses in the physical infrastructure– Inequality
Brazil’s Competitive Position
16 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
• Create a regional company strategy
• Build the cluster
• Take a leadership role in economic development
• Link corporate philanthropy to the competitive context
Implications for Brazilian Companies
17 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
0%
20%
40%
60%
80%
100%
1997 1998 1999 2000 2001
Brazil’s Exports By Destination1997-2001
-1.0%
+6.8%
-4.5%
-2.0%
Europe
North America
Latin America
Asia
Change in Share, 1997-2001:
Source: UNCTAD Trade Data. Author’s analysis.
18 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
• High quality, fashionable printed towels designed for global markets
• High quality, fashionable printed towels designed for global markets
• Highly customized products with rapid delivery• R&D located at production sites to enable rapid
implementation of technology improvements• Design groups organized to provide fast response
to custom orders• Bilingual sales office based in Miami • Manufacturing located in El Salvador and Mexico
to minimize costs while maintaining close access to the U.S. market
• State-of-the-art computer systems to track customer orders from design to shipping
• Highest quality machinery, equipment, cotton, and dyes sourced from Europe and the U.S.
• Highly customized products with rapid delivery• R&D located at production sites to enable rapid
implementation of technology improvements• Design groups organized to provide fast response
to custom orders• Bilingual sales office based in Miami • Manufacturing located in El Salvador and Mexico
to minimize costs while maintaining close access to the U.S. market
• State-of-the-art computer systems to track customer orders from design to shipping
• Highest quality machinery, equipment, cotton, and dyes sourced from Europe and the U.S.
Internationalization StrategyHilasal
Value PropositionValue PropositionValue Proposition Set of Activities
Set of Set of ActivitiesActivities
• Firm-based competitive advantage in a particular segment• Hilasal developed a successful differentiation-based positioning•• FirmFirm--based competitive advantage in a particular segmentbased competitive advantage in a particular segment•• HilasalHilasal developed a successful differentiationdeveloped a successful differentiation--based positioningbased positioning
Source: Condo, A. “Internationalization of Firms Based in Developing Countries.” Ph.D. dissertation, Harvard Business School, Boston, 2000.
19 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Public / Private Cooperation in Cluster UpgradingMinnesota’s Medical Device Cluster
Context for Firm
Strategy and Rivalry
Context for Firm
Strategy and Rivalry
Related and Supporting Industries
Related and Supporting Industries
Factor(Input)
Conditions
Factor(Input)
ConditionsDemand
ConditionsDemand
Conditions
• Joint development of vocational-technical college curricula with the medical device industry
• Minnesota Project Outreach exposes businesses to resources available at university and state government agencies
• Active medical technology licensing through University of Minnesota
• State-formed Greater Minnesota Corp. to finance applied research, invest in new products, and assist in technology transfer
• State sanctioned reimbursement policiesto enable easier adoption and reimbursement for innovative products
• Aggressive trade associations(Medical Alley Association, High Tech Council)
• Effective global marketing of the cluster and of Minnesota as the “The Great State of Health”
• Full-time “Health Care Industry Specialist” in the department of Trade and Economic Development
20 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
1995 1996 1997 1998 1999 20000%
1%
2%
3%
4%
5%
6%
7%
8%
ValueMarket Share
The Australian Wine ClusterTrade Performance
Source: UN Trade Statistics
Australian Wine Exports in million US
Dollars
Australian Wine World Export Market
Share
21 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.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
22 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Role of the Private Sector in Economic Development
• A company’s competitive advantage is partly the result of the local environment
• Company membership in a cluster offers collective benefits• Private investment in “public goods” is justified
• Take an active role in upgrading the local infrastructure• Nurture local suppliers and attract new supplier investments • Work closely with local educational and research institutions to
upgrade quality and create specialized programs addressing cluster needs
• Provide government with information and substantive input on regulatory issues and constraints bearing on cluster development
• Focus corporate philanthropy on enhancing the local business environment
• An important role for trade associations– Greater influence – Cost sharing
23 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
• 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
The New Role of 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
Philanthropy's Impact on the Competitive ContextAdvanced Micro Devices
Demand ConditionsDemand
ConditionsFactor(Input)
Conditions
FactorFactor(Input) (Input)
ConditionsConditions
Context for Firm Strategy and Rivalry
Context for Firm Strategy and Rivalry
Related and Supporting Industries
Related and Supporting Industries
Advanced Micro Devices (AMD) is a leading semiconductor manufacturerDue to labor constraints, AMD has difficulty finding skilled workers for its semiconductor fabrication facility in Austin, TX. The cost of recruiting and filling these positions was up to $12,000 per personAMD invested in the development of a regional training and apprenticeship program for minority students from low-income areas called Accelerated Careers in Education
Social Benefits: Nearly all of the program’s graduates received jobs or continued on to higher educationEconomic Benefits: 55% of the graduates came to work for AMD, saving recruitment and training costs that more than paid for the program. The program has also expanded the pool of qualified job candidates for the future.
Social Benefits: Nearly all of the program’s graduates received jobs or continued on to higher educationEconomic Benefits: 55% of the graduates came to work for AMD, saving recruitment and training costs that more than paid for the program. The program has also expanded the pool of qualified job candidates for the future.
Source: “Business Development: Aligning Corporate Performance with Community Economic Development to Achieve Win-Win Impacts”, The Center for Corporate Citizenship at Boston College
25 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Selected References
• The Competitive Advantage of Nations, New York: The Free Press, 1990
• “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition, Boston: Harvard Business School Press, 1998
• “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report 1998-99, (World Economic Forum, 1998)
• “The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity” in The Global Competitiveness Report 2000-01, New York: Oxford University Press, 2000
• “Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index” in The Global Competitiveness Report 2001-02, New York: Oxford University Press, 2001
• “Building the Microeconomic Foundations of Prosperity: Findings from the Microeconomic Competitiveness Index” in The Global Competitiveness Report 2002-03, New York: Oxford University Press, New York: Oxford University Press, 2002
• “The Economic Performance of Regions”, Regional Studies, 37(6&7), 2003: 549–678.
• “Location, Competition, and Economic Development: Local Clusters in a Global Economy,” Economic Development Quarterly, February 2000, 15-34.
• “Locations, Clusters, and Company Strategy” in The Oxford Handbook of Economic Geography, (G. L. Clark, M.P. Feldman, and M.S. Gertler, eds.), New York: Oxford University Press, 2000
26 Copyright 2003 © Professor Michael E. PorterGCR Brazil 2003 10-09-03 CK.ppt
Selected References (continued)• “Attitudes, Values, Beliefs and the Microeconomics of Prosperity,” in Culture Matters: How Values Shape
Human Progress, (Harrison, Huntington, eds.), New York: Basic Books, 2000
• “U.S. Competitiveness 2001,” (with Debra van Opstal), Washington, DC: Council on Competitiveness, 2001
• “Innovation Lecture,” published by the Dutch Ministry of Economics, 2001
• “National Report: Clusters of Innovation Initiative,” (with the Council on Competitiveness, Monitor Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2001
• “Clusters of Innovation Initiative: San Diego Report,” (with the Council on Competitiveness, Monitor Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2001
• “Clusters of Innovation Initiative: Wichita Report,” (with the Council on Competitiveness, Monitor Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002
• “Clusters of Innovation Initiative: Research Triangle Report,” (with the Council on Competitiveness, Monitor Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002
• “Clusters of Innovation Initiative: Pittsburgh Report,” (with the Council on Competitiveness, Monitor Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002
• “Clusters of Innovation Initiative: Atlanta Report,” (with the Council on Competitiveness, Monitor Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002
• “The Competitive Advantage of Corporate Philanthropy,” (with Mark Kramer), Harvard Business Review, December 2002