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1 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Creating A Competitive South Africa
Professor Michael E. PorterInstitute for Strategy and Competitiveness
Harvard Business School
Johannesburg, South Africa3 July 2007
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 2006 (World Economic Forum, 2006), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998), and ongoing research on clusters and competitiveness. 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 the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu
2 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
The Changing Nature of International Competition
• Fewer barriers to trade and investment• Rapidly increasing stock and diffusion of knowledge• Competitiveness upgrading in many countries
• Globalization of markets• Globalization of capital investment• Globalization of value chains• Increasing knowledge and skill intensity of competition• Value migrating to the service component of the value chain
Drivers
Market reaction
• Improving competitiveness is increasingly essential to South Africa’s prosperity
3 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
$0
$2,000
$4,000
$6,000
$8,000
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$12,000
$14,000
$16,000
-4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6%
Prosperity Performance Selected Countries
Real PPP-adjusted GDP per Capita, 2006
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1998-2006Source: EIU (2007)
Botswana
South Africa
Gabon Namibia
Cape VerdeSwaziland
Mauritius
Chad Angola (6.2%)
TanzaniaNigeria
Zimbabwe (-6.3%) Cote D’Ivoire
Eritrea TogoMalawi
LesothoGuinea
BurundiMadagascarKenya
Rwanda
Cameroon
GhanaUganda
Zambia EthiopiaMozambique
India
Russia (7.2%)
Brazil
China (8.6%)
4 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Comparative Economic Performance Real GDP Growth Rates
-15%
-10%
-5%
0%
5%
10%
15%
20%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
ANGOLAMOZAMBIQUETANZANIANIGERIAETHIOPIAUGANDABURKINA FASOGHANACAPE VERDEMALAWIBOTSWANANAMIBIARWANDACONGO (BRAZZAVILLE)ZAMBIASOUTH AFRICASENEGALSAO TOME AND PRINCIPEKENYABENINTHE GAMBIACAMEROONMAURITIUSGUINEABURUNDILESOTHOTOGOSWAZILANDMADAGASCARERITREAGABONCOTE D'IVOIREZIMBABWE
Source: EIU (2007)
Countries sorted by 2001- 2006 annual real GDP growth rate (CAGR)Annual growth rate
of real GDP
5 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Income Inequality Selected Countries
Gini Index
0
10
20
30
40
50
60
70
Haiti
Brazil
South
Africa
Chile
Argenti
naMex
icoMad
agas
car
China
Cote d'
Ivoire
Camero
onNige
riaUga
nda
Zambia
Burkina
Faso
Ghana
Maurita
niaBen
inTan
zania
Indon
esia
Ethiop
iaRwan
da
Note: Most recent Gini index data available for each country (1999 – 2003). South Africa’s data is from 2000. Source: World Bank, World Development Indicators, 2007.
6 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
South African Economy 2007
• Economic growth rates are solid and have reached a higher path since 2003, driven increasingly by domestic demand
• A combination of domestic policies and supportive conditions in the global economy have driven growth
However
• Growth rates have not been exceptional compared to other middle income and natural resource-rich countries
• Domestic demand growth is threatening to create unsustainable external balances; export capacity needs to broaden and grow
• Unemployment, inequality, and the social tensions they create recede only slowly
• Is South Africa improving competitiveness fast enough to avoid the risk of macroeconomic and political instability?
720070511 AMP – Final 20070508 Copyright © 2007 Professor Michael E. Porter
• Competitiveness is determined by the productivity (value per unit of input) with which a nation uses its human, capital, and natural resources.
What is Competitiveness?
– Productivity depends on the prices that a nation’s products and services command (e.g. uniqueness, quality), not just on efficiency
– It is not what industries a nation competes in that matters for prosperity, but how it competes in those industries
– Productivity requires a combination of domestic and foreign firms operating in the nation
– The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of traded industries
– Devaluation does not make a country more competitive
• Only business can create wealth
• Nations compete in offering the most productive environment for business
• The public and private sectors play different but interrelated roles in creating a productive economy
– Productivity sets a the standard of living (wages, returns on capital, returns on natural resources) that a nation can sustain
8 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Decomposing Prosperity
Per Capita IncomePer Capita IncomePer Capita Income
Labor Productivity
Labor Productivity
Labor Utilization
Labor Utilization
Domestic Purchasing
Power
Domestic Purchasing
Power• Consumption taxes• Local prices
– Efficiency of local industries
– Level of local market competition
ProsperityProsperityProsperity
• Skills• Capital stock• Total factor productivity
• Working hours• Unemployment• Workforce participation rate
– Population age profile
• Standard of living• Inequality
9 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
0
10,000
20,000
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50,000
60,000
70,000
-2% 0% 2% 4% 6% 8% 10%
Comparative Labor Productivity Performance Selected Developing Countries
Compound annual growth rate (CAGR) of real GDP per employee (PPP- adjusted), 2001-2006
GDP per employee
(PPP adjusted) in US-$,
2006
Source: EIU (2007)
South Africa
MauritiusChina
IndiaIndonesia
Malaysia
Thailand
TurkeyChile
Brazil
Croatia
Hungary
Latvia
Estonia
Mexico
Portugal
SloveniaJapan
Singapore
Spain
Taiwan
10 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
0%
5%
10%
15%
20%
25%
30%
35%
-5% -3% -1% 1% 3% 5% 7% 9%
Unemployment Performance Selected Countries
Unemployment Rate, 2006
Change of Unemployment Rate in Percentage Points, 1998 - 2006
Source: EIU (2007)
Improving Worsening
South Africa
Mauritius China
India
Indonesia
Malaysia
Russia
Thailand
TurkeyChile
Brazil
Macedonia
Honduras (14%)
Estonia Latvia
Tunisia
Colombia
Croatia Paraguay Poland
11 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Labor Force Mobilization Selected Countries
Employees as % of Population, 2006
Source: EIU, 2007
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
CHINA
BRAZILESTONIA
LATV
IATANZANIA
GHANAMOZAMBIQ
UEIN
DIAUGANDA
MAURITIUS
GABONZAMBIA
SENEGALANGOLA
CAMEROON
COTE D'IV
OIRE
SOUTH AFRIC
ANIG
ERIANAMIBIA
ZIMBABWE
12 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Domestic Purchasing Power Normalized Purchasing Power Across Countries
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
India
China
Niger
MaliNam
ibia
Mauriti
usSud
anSen
egal
Chad
Tanz
ania
South
Africa
Algeria
Camero
onKen
yaBraz
ilLib
yaAng
olaZa
mbia
Source: IMF (2007), authors’ calculations
Purchasing Power Factor, 2006, (USD = 1)
Lower Cost of Living
Higher Cost of Living
13 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Enablers and Indicators of Competitiveness
Productivity
Competitiveness Environment
ExportsInbound
Foreign Direct Investment
Outbound Foreign Direct
Investment
Domestic Innovation
Domestic Investment
14 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
South African Export Performance 1994 - 2005
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
GoodsServicesTOTAL
Source: WTO (2007)
World Export Market Share
15 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Inbound Foreign Investment Performance Stocks and Flows, Selected Countries
Source: UNCTAD (2007)
0%
10%
20%
30%
40%
50%
60%
70%
0% 5% 10% 15% 20% 25% 30% 35% 40%
FDI Stocks as % of GDP, Average 2002 - 2005
FDI Inflows as % of Gross Fixed Capital Formation, Average 2002 - 2005
Rwanda
Cameroon
Zimbabwe
Kenya
Madagascar
Ethiopia
Ghana
Zambia
Eritrea
Lesotho
SwazilandMozambique
Namibia
Uganda
South Africa
Tanzania
Botswana
Malawi
Mauritius
Nigeria
Angola (94%, 80%)
LibyaNiger
IndiaAlgeria
Congo
Sudan
Mali
Gambia
Morocco
Uganda
EgyptBrazil
Russia
Tunisia
Australia
Canada
ChinaSenegal
16 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Fixed Investment Rates Selected Countries
0
5
10
15
20
25
30
35
40
45
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
China
SenegalGhana
IndiaZambia
NamibiaNigeria
The GambiaUganda
Mozambique
EthiopiaKenya
TanzaniaBotswana
South AfricaRussia
BrazilZimbabwe
Gross Fixed Investment as % of GDP Sorted by 2006 Share
Source: EIU, 2007.
17 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
International Patenting Output Selected Countries
Source: USPTO, 2006
Annual U.S. patents per 1 million population, 2005
Compound annual growth rate of US-registered patents, 1998 – 2005
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
-10% 0% 10% 20% 30%
South Africa
ChinaIndia
Indonesia
Malaysia
ThailandTurkey
ChileBrazil
Croatia
LatviaMexico
Russia
18 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
South Africa’s Economic Performance
Core components of prosperity• Productivity is comparable versus peers but growing less dynamically • The mobilization of the working age population remains dramatically lower • Labor mobilization is becoming more crucial for future prosperity growth, but
job creation still lags the growth of the available labor force
Indicators and enablers of competitiveness• South Africa’s export share has been flat, despite the country’s focus on
growing natural resource-driven clusters• Inward foreign direct investment has increased in recent years, but South
Africa still remains well below its potential• Domestic investment is increasing, but continues to fall short of peer countries
and the benchmark set by the government• Innovation output is falling behind peer countries
• South Africa continues to suffer from a ‘two-economy phenomena’– A formal economy with relatively solid productivity close to global standards– An informal economy with low productivity that provides jobs for a large
share of the population, especially the poor
19 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Determinants of Competitiveness
Microeconomic CompetitivenessMicroeconomic Competitiveness
Quality of the Quality of the BusinessBusiness
EnvironmentEnvironment
SophisticationSophisticationof Companyof Company
Operations andOperations andStrategyStrategy
Macroeconomic, Political, Legal, and Social ContextMacroeconomic, Political, Legal, and Social ContextMacroeconomic, Political, Legal, and Social Context
• A sound 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 competition
State of Cluster State of Cluster DevelopmentDevelopment
20 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Governance Indicators Selected Countries
BOTSWANAMAURITI
US
SOUTH AFRIC
ANAMIBIA
GHANA
MADAGASCARLE
SOTHO
SENEGALMALI
BURKINA FA
SOBENIN
MOZAMBIQUE
GABON
MAURITANIA
GAMBIATANZANIA
MALAWI
ZAMBIANIG
ER
SWAZILAND
UGANDAKENYA
CAMEROONRWANDAETH
IOPIA
TOGOANGOLANIG
ERIABURUNDI
ZIMBABWE
CONGO, DEM. R
EP.
Voice and AccountabilityPolitical Stability/No ViolenceGovernment EffectivenessRegulatory QualityRule of LawControl of Corruption
Note: Sorted left to right by decreasing average value across all indicators. The ‘zero’ horizontal line corresponds to the median country’s average value across all indicators. Source: World Bank (2007)
Better
Worse
Index of Governance
Quality, 2006
21 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Prosperity and Human Development Selected Countries
Note: Percentages are relative to best country in the world Source: UNDP (2006)
22 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.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
Conditions Demand
Conditions
Improving the Business Environment: The Diamond
• Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing
Local demand with improving sophisticationLocal 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 resource availability
Access to capable, locally based suppliersand firms in related fields
A local context and rules that encourage investment and productivity
–e.g., Intellectual property protection
Meritocratic incentive systems in businesses and other institutionsOpen and vigorous local competition
–e.g., Anti-monopoly laws, openness to imports
23 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Local equity market access 12
Efficiency of legal framework 16
Financial market sophistication 18
University/industry research collaboration 22
Quality of management schools 22
Judicial independence 22
Air transport infrastructure quality 24
Quality of scientific research institutions 25
Competitive Disadvantages Relative to GDP per Capita
Competitive Advantages Relative to GDP per Capita
Quality of math and science education 119
Availability of scientists and engineers 96
Quality of public schools 89
Reliability of police services 86
Telephone/fax infrastructure quality 83
Quality of electricity supply 68
Port infrastructure quality 43
Overall infrastructure quality 41
Railroad infrastructure development 40
Ease of access to loans 37
Venture capital availability 35
Country Ranking, Arrows indicate a change of 5 or more
ranks since 2001
Country Ranking, Arrows indicate a change of 5 or more
ranks since 2001
Factor (Input) Conditions South Africa’s Relative Position 2006
Factor(Input)
Conditions
Factor(Input)
Conditions
Note: Rank versus 121 countries; overall, South Africa ranks 33rd in 2005 PPP adjusted GDP per capita and 46th in Business Competitiveness. Source: Global Competitiveness Report 2006-2007.
24 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Weaknesses in South Africa’s Labor Market
• South Africa continues to struggle with high unemployment and a significant informal economy
• Skill shortages are a clear reason for the persistent unemployment; a large share of the unemployed are low-skilled long-term unemployed
• Labor market rules and regulations are major causes of low job creation in the economy– Hiring and firing rules and work procedures are comparable to peer
countries; especially after the 2002 modifications to the legislation of the initial post-apartheid period
– Wage policies, which set unrealistically high minimum wages and uneconomic wage structures within industries, are a serious barrier
• Rising unit labor costs, despite persistently high unemployment, is a sign of clear structural problems in South Africa’s labor market
25 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Context for Strategy and Rivalry South Africa’s Relative Position 2006
Efficacy of corporate boards 8
Effectiveness of antitrust policy 19
Intellectual property protection 23
Business costs of corruption 33
Decentralization of corporate activity 34
Intensity of local competition 35
Competitive Disadvantages Relative to GDP per Capita
Competitive Advantages Relative to GDP per Capita
Cooperation in labor-employer relations 107
Centralization of economic policymaking 79
Favoritism in decisions of government 48 officials
Prevalence of trade barriers 38
Country Ranking, Arrows indicate a change of 5 or more
ranks since 2001
Country Ranking, Arrows indicate a change of 5 or more
ranks since 2001
Context for Firm Strategy and Rivalry
Context for Firm Strategy and Rivalry
Note: Rank versus 121 countries; overall, South Africa ranks 33rd in 2005 PPP adjusted GDP per capita and 46th in Business Competitiveness. Source: Global Competitiveness Report 2006-2007.
26 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
0
20
40
60
80
100
120
140
DoingBusiness
ProtectingInvestors
ObtainingCredit
EnforcingContracts
Dealingwith
Licenses
Starting aBusiness
Closing aBusiness
TradingAcrossBorders
RegisteringProperty
PayingTaxes
EmployingWorkers
Ease of Doing Business South Africa
Ranking, 2006 (of 175 countries)
Source: World Bank Doing Business (2007)
Favorable Unfavorable
Median Ranking, Sub-Saharan Africa
South Africa’s GNI per capita rank: 54
27 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Demand Conditions South Africa’s Relative Position 2006
Competitive Disadvantages Relative to GDP per Capita
Competitive Advantages Relative to GDP per Capita
Country Ranking, Arrows indicate a change of 5 or more
ranks since 2001
Laws relating to ICT 26
Stringency of environmental regulations 32
Government procurement advanced 32 technology products
Presence of demanding regulatory 34 standards
Buyer sophistication 34
Demand Conditions Demand
Conditions
Note: Rank versus 121 countries; overall, South Africa ranks 33rd in 2005 PPP adjusted GDP per capita and 46th in Business Competitiveness. Source: Global Competitiveness Report 2006-2007.
28 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Related and Supporting Industries South Africa’s Relative Position 2006
Competitive Disadvantages Relative to GDP per Capita
Competitive Advantages Relative to GDP per Capita
Local availability of process machinery 40
Country Ranking, Arrows indicate a change of 5 or more
ranks since 2001
Related and Supporting Industries
Related and Supporting Industries
Local supplier quantity 23
Local supplier quality 28
Local availability of specialized research 31 and training services
Country Ranking, Arrows indicate a change of 5 or more
ranks since 2001
Note: Rank versus 121 countries; overall, South Africa ranks 33rd in 2005 PPP adjusted GDP per capita and 46th in Business Competitiveness. Source: Global Competitiveness Report 2006-2007.
29 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Company Operations and Strategy South Africa’s Relative Position 2006
Presence across the value chain 83
Nature of competitive advantage 73
Degree of customer orientation 52
Production process sophistication 46
Control of international distribution 37
Capacity for innovation 35
Competitive Disadvantages Relative to GDP per Capita
Competitive Advantages Relative to GDP per Capita
Country Ranking, Arrows indicate a change of 5 or more
ranks since 2001
Note: Rank versus 121 countries; overall, South Africa ranks 33rd in 2005 PPP adjusted GDP per capita and 46th in Business Competitiveness. Source: Global Competitiveness Report 2006-2007.
Extent of incentive compensation 4
Prevalence of foreign technology 11 licensing
Reliance on professional management 13
Extent of regional sales 15
Extent of marketing 20
Company spending on research and 22 development
Extent of staff training 24
Willingness to delegate authority 27
Breadth of international markets 29
Country Ranking, Arrows indicate a change of 5 or more
ranks since 2001
30 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Determinants of Competitiveness
Microeconomic CompetitivenessMicroeconomic Competitiveness
Quality of the Business
Environment
Sophisticationof Company
Operations andStrategy
Macroeconomic, Political, Legal, and Social ContextMacroeconomic, Political, Legal, and Social Context
State of Cluster State of Cluster DevelopmentDevelopment
31 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
HotelsHotels
Attractions andActivities
e.g., theme parks, casinos, sports
Attractions andActivities
e.g., theme parks, casinos, sports
Airlines, Cruise Ships
Airlines, Cruise Ships
Travel agentsTravel agents Tour operatorsTour operators
RestaurantsRestaurants
Property Services Property Services
Maintenance Services
Maintenance Services
Government agenciese.g. Australian Tourism Commission,
Great Barrier Reef Authority
Government agenciese.g. Australian Tourism Commission,
Great Barrier Reef Authority
Educational Institutionse.g. James Cook University,
Cairns College of TAFE
Educational Institutionse.g. James Cook University,
Cairns College of TAFE
Industry Groupse.g. Queensland Tourism
Industry Council
Industry Groupse.g. Queensland Tourism
Industry Council
Food Suppliers
Food Suppliers
Public Relations & Market Research
Services
Public Relations & Market Research
Services
Enhancing Cluster Development Tourism Cluster in Cairns, Australia
Local retail, health care, and other services
Local retail, health care, and other services
Souvenirs, Duty Free
Souvenirs, Duty Free
Banks,Foreign
Exchange
Banks,Foreign
Exchange
Local Transportation
Local Transportation
32 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Enhancing Cluster Development 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)
33 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
$0
$50,000
$100,000
$150,000
$200,000
$250,00019
90
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
ValueMarket Share
The Kenyan Cut Flower Cluster Trade Performance
Kenyan Cut Flower Exports in thousand US $
Kenyan Cut Flower 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.
34 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Kenya’s Cut Flower Cluster
Sources: HBS student team research (2007) - Kusi Hornberger, Nick Ndiritu, Lalo Ponce-Brito, Melesse Tashu, Tijan Watt
35 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Institutions for Collaboration Selected Massachusetts Organizations, Life Sciences
Economic Development InitiativesEconomic Development Initiatives
Massachusetts Technology CollaborativeMass Biomedical InitiativesMass DevelopmentMassachusetts Alliance for Economic Development
Massachusetts Technology CollaborativeMass Biomedical InitiativesMass DevelopmentMassachusetts Alliance for Economic Development
Life Sciences Industry AssociationsLife Sciences Industry Associations
Massachusetts Biotechnology CouncilMassachusetts Medical Device Industry CouncilMassachusetts Hospital Association
Massachusetts Biotechnology CouncilMassachusetts Medical Device Industry CouncilMassachusetts Hospital Association
General Industry AssociationsGeneral Industry Associations
Associated Industries of MassachusettsGreater Boston Chamber of CommerceHigh Tech Council of Massachusetts
Associated Industries of MassachusettsGreater Boston Chamber of CommerceHigh Tech Council of Massachusetts
University InitiativesUniversity Initiatives
Harvard Biomedical CommunityMIT Enterprise ForumBiotech Club at Harvard Medical SchoolTechnology Transfer offices
Harvard Biomedical CommunityMIT Enterprise ForumBiotech Club at Harvard Medical SchoolTechnology Transfer offices
Informal networksInformal networks
Company alumni groupsVenture capital communityUniversity alumni groups
Company alumni groupsVenture capital communityUniversity alumni groups
Joint Research InitiativesJoint Research Initiatives
New England Healthcare InstituteWhitehead Institute For Biomedical ResearchCenter for Integration of Medicine and Innovative Technology (CIMIT)
New England Healthcare InstituteWhitehead Institute For Biomedical ResearchCenter for Integration of Medicine and Innovative Technology (CIMIT)
36 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
South Africa Cluster Portfolio Measured by Exports Goods and Services Exports, 2000-2005
Change in South Africa’s world export market share, 2000 – 2005Source: 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. Note: Services data 1997-2005.
Sout
h A
fric
a’s
wor
ld e
xpor
t mar
ket s
hare
, 200
5
0.00%
0.50%
1.00%
1.50%
2.00%
-0.40% -0.20% 0.00% 0.20% 0.40% 0.60%
Change In South Africa’s Overall World Export Share: +0.058%
South Africa’s Average World Export Share: 0.512%
Exports of $2Billion =
Coal and Briquettes
(7.13%, +0.79%)
Jewelry, Precious Metals and Collectibles (4.74%, +2.67%)
Metal Mining and Manufacturing
Hospitality and Tourism
Chemical Products
Financial Services
Agricultural Products
Forest Products
Production Technology
Automotive
Aerospace EnginesOil and Gas Products
Transportation and Logistics
Prefabricated Enclosures and Structures
Building Fixtures and Equipment
Aerospace Vehicles and Defense
Leather and Related Products
Tobacco
Publishing and PrintingConstruction Materials
Fishing and Fishing Products
37 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
South Africa Cluster Portfolio Measured by Exports Goods and Services Exports, 2000-2005 (continued)
Change in South Africa’s world export market share, 2000 – 2005
Sout
h A
fric
a’s
wor
ld e
xpor
t mar
ket s
hare
, 200
5
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
-0.10% -0.08% -0.06% -0.04% -0.02% 0.00% 0.02% 0.04% 0.06%
Change In South Africa’s Overall World Export
Share: +0.058%
Exports of $2Billion =
Transportation and Logistics
Building Fixtures and Equipment
Aerospace Engines
Footwear
Sporting, Recreational and Children's Goods
Marine Equipment
Communications Services
Power and Power Generation Equipment
Entertainment and Reproduction Equipment
Lighting and Electrical Equipment
Medical Devices
Apparel
Furniture
Information Technology
Analytical Instruments
Communications Equipment
Motor Driven Products
Biopharmaceuticals
Textiles
Processed Food
Heavy Machinery
Business Services
Plastics
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 and the IMF BOP statistics. Note: Services data 1997-2005.
38 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20050.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
ValueMarket Share
The South African Wine Cluster Trade Performance
South African Wine Exports in thousand US $
South African 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.
39 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
The South African Wine ClusterChanging Government Roles
• Until 1997, the South African wine industry was highly regulated through KWV (wine grower’s cooperative):
• Regulated prices• Quotas• Regulated planting
Surpluses and inefficient production
• After 1997, full deregulation occurred. In 2003, the Ministry of Agriculture announced the Wine Industry Strategic Plan (WIP), a new wine policy around:
• Competitiveness• Black Economic Empowerment (BEE)• Resource management• Enhanced responsibility devolved to institutions for collaboration, especially
South African Wine and Brandy Company (SAWB)
Source: Harvard students Mutsa Chironga, Maria Demeke, Christopher Maloney, Leigh C. Miselis, and Markus Scheuermaier
40 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
United States
Switzerland
Italy
DenmarkIceland
Ireland
India
Business Competitiveness Index
2005 GDP per Capita (Purchasing Power Adjusted)
Malaysia
Source: Global Competitiveness Report 2006
Sweden
CanadaFinland
GermanyQatar
Norway
HighLow
UAESpain
Israel
Brazil
Estonia
Chile
Indonesia
Greece
Bahrain
Argentina
Slovenia
SingaporeTaiwan
New Zealand
S. Korea
South Africa
Thailand
JordanChina
Trinidad & Tobago
Turkey
Jamaica
Australia
Cyprus
Ranking Microeconomic Competitiveness Business Competitiveness Index, 2006
Japan
Variation in BCI score explains more than 80% of variation in GDP per capita
41 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
BCI Value, 2006
Dynamism Score, 2002 - 2006
India
China Pakistan
Italy
Finland
Australia
SwedenNorway
Hong KongJapan
Portugal
Malaysia
Turkey
El SalvadorPeru
United States Germany
Chad
MaliVietnam
MalawiZimbabwe
High-incomeMiddle-incomeLow-income
EstoniaChile
Switzerland
Iceland
Ireland
Paraguay
Dominican Rep.
EthiopiaBolivia
Mozambique NicaraguaHonduras
Bangladesh
Nigeria
BrazilTrinidad
Slovenia
Russia
SpainNew Zealand
ColombiaJordan
GreeceSouth Africa
Ukraine
Thailand
Uruguay
Argentina
Mauritius
Slovak RepublicLithuania
High Level of
Compet- itiveness
Below average Above averageAverage
Competitive Dynamism Rate of Competitiveness Improvement
Source: Global Competitiveness Report (2006)
Low Level of
Compet- itiveness
42 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
South African Competitiveness in 2007
Overall competitiveness• South Africa is ranked 33rd in the Business Competitiveness Index,
down three ranks since 2001
• Competitiveness improvement has been moderate, only slightly above the global average
• South Africa’s current prosperity is below the level expected given its competitiveness, pointing towards unexploited potential
Competitiveness profile• Strengths are present in company sophistication, financial markets, and
some aspects of context for rivalry
• Weaknesses are most visible in infrastructure and skills, especially basic skills
• South Africa is facing critical bottlenecks that limit its ability to exploit its strengths
43 Copyright 2007 © Professor Michael E. Porter20070618 South Africa - DRAFT.ppt
• Creating a unique and sustainable competitive position
• Assimilating, attaining, and extending best practices
OperationalOperationalEffectivenessEffectiveness
StrategicStrategicPositioningPositioning
Run the same race faster Choose to run a different race
Operational Effectiveness is Not Strategy
44 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Geographic Influences on Competitiveness Levels of Influence
Broad Economic AreasBroad Economic Areas
Groups of Neighboring Nations
Groups of Neighboring Nations
States, ProvincesStates, Provinces
Metropolitan AreasMetropolitan Areas
NationsNations
World EconomyWorld Economy
Distressed Urban and Rural Communities
Distressed Urban and Rural Communities
“The Neighborhood”
(Regional Economies)
45 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Specialization of Regional Economies Select U.S. Geographic Areas
BostonAnalytical InstrumentsEducation and Knowledge CreationCommunications Equipment
BostonAnalytical InstrumentsEducation and Knowledge CreationCommunications Equipment
Los Angeles AreaApparelBuilding Fixtures,
Equipment and Services
Entertainment
Los Angeles AreaApparelBuilding Fixtures,
Equipment and Services
Entertainment
ChicagoCommunications EquipmentProcessed FoodHeavy Machinery
ChicagoCommunications EquipmentProcessed FoodHeavy Machinery
Denver, COLeather and Sporting GoodsOil and GasAerospace Vehicles and Defense
Denver, COLeather and Sporting GoodsOil and GasAerospace Vehicles and Defense
San DiegoLeather and Sporting GoodsPower GenerationEducation and Knowledge Creation
San DiegoLeather and Sporting GoodsPower GenerationEducation and Knowledge Creation
San Francisco-Oakland-San Jose Bay AreaCommunications Equipment Agricultural Products Information Technology
San Francisco-Oakland-San Jose Bay AreaCommunications EquipmentAgricultural ProductsInformation Technology
Seattle-Bellevue- Everett, WA Aerospace Vehicles and Defense Fishing and Fishing Products Analytical Instruments
Seattle-Bellevue- Everett, WAAerospace Vehicles and DefenseFishing and Fishing ProductsAnalytical Instruments
HoustonHeavy Construction ServicesOil and GasAerospace Vehicles and Defense
HoustonHeavy Construction ServicesOil and GasAerospace Vehicles and Defense
Pittsburgh, PAConstruction MaterialsMetal ManufacturingEducation and Knowledge
Creation
Pittsburgh, PAConstruction MaterialsMetal ManufacturingEducation and Knowledge
Creation
Atlanta, GAConstruction MaterialsTransportation and LogisticsBusiness Services
Atlanta, GAConstruction MaterialsTransportation and LogisticsBusiness Services
Raleigh-Durham, NCCommunications EquipmentInformation TechnologyEducation and Knowledge Creation
Raleigh-Durham, NCCommunications EquipmentInformation TechnologyEducation and Knowledge Creation
Wichita, KSAerospace Vehicles and
Defense Heavy MachineryOil and Gas
Wichita, KSAerospace Vehicles and
DefenseHeavy MachineryOil and Gas
Note: Clusters listed are the three highest ranking clusters in terms of share of national employmentSource: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School
46 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Comparative Regional Economic Performance South African Provinces
0%
50%
100%
150%
200%
1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%
Gauteng
KwaZulu-Natal
Western Cape
Eastern Cape
Northern Cape
Free State
Limpopo
Mpumalanga
North West
GDP per Capita, South Africa = 100, 2003
Growth of Real GDP, 2003Note: Size of bubble is proportional to population Source: Statistics South Africa, GDP Annual Estimates, 2004.
Average Growth of Real GDP: 2.6%
47 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
South Africa’s Role in the Neighborhood
48 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
• Coordinate macroecono- mic policies
• Eliminate trade and investment barriers within the region
• Simplify and harmonize cross-border regulations and paperwork
• Harmonize environmental standards
• Harmonize product safety standards
• Establish reciprocal consumer protection laws
• Coordinate antimonopoly and fair competition policies
• Improve regional transportation infrastructure
• Create an efficient energy network
• Interconnect regional communications
• Link financial markets
• Facilitate the movement of students to enhance higher education
• Harmonize regulatory requirements for business
• Coordinate programs to improve public safety
• Coordinate development of cross-border clusters, e.g.
– Tourism
– Agribusiness
– Transport & Logistics
– Business services
• Share best practices in government operations
• Create regional institutions
– Dispute resolution mechanisms
– Regional development bank
• Develop a regional marketing strategy
Factor (Input)
Conditions
Factor Factor (Input)(Input)
ConditionsConditionsRegional
GovernanceRegional
GovernanceContext for
Strategy and Rivalry
Context for Context for Strategy Strategy
and Rivalryand Rivalry
Related and Supporting Industries
Related and Supporting Industries
Demand ConditionsDemand Demand
ConditionsConditions
Regional Economic Coordination Illustrative Policy Areas
49 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
The Process of Economic Development Shifting Roles and Responsibilities
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, the private sector, universities, research institutions, and business associations
• Economic development is a collaborative process involving government at multiple levels, the private sector, universities, research institutions, and business associations
• Competitiveness must become a bottom-up process in which many individuals, companies, clusters, and institutions take responsibility
50 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Clusters and Economic Policy
ClustersClusters
Specialized Physical Infrastructure
Natural Resource Protection
Environmental Stewardship
Science and Technology Investments (e.g., centers, university departments, technology transfer)
Education and Workforce TrainingBusiness Attraction
Export Promotion
• Clusters provide a framework for organizing the implementation of public policy and public investments towards economic development
Standard settingMarket Information and Disclosure
51 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Role of the Private Sector in Economic Development
• A company’s competitive advantage depends partly on the quality of the business environment
• A company gains advantages from being part of a cluster• Companies have a strong role to play in upgrading their business
environment
• Take an active role in upgrading the local infrastructure• Nurture local suppliers and attract foreign suppliers• Work closely with local educational and research institutions, to
upgrade their quality and address the cluster’s needs• Inform government on regulatory issues and constraints bearing on
cluster development• Focus corporate philanthropy on enhancing the local business
environment
• An important role for trade associations– Collaboration, cost sharing, and increasing influence
52 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
The Australian Wine Cluster Time Line
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
53 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
The Australian Wine Cluster Recently founded Institutions for Collaboration
Wine Industry National Education and Training Council
Wine Industry National Wine Industry National Education and Training CouncilEducation and Training Council
Established in 1995
Focus: Coordination, integration, and standard maintenance for vocational training and education
Funding: Government; other cluster organizations
Established in 1995
Focus: Coordination, integration, and standard maintenance for vocational training and education
Funding: Government; other cluster organizations
Cooperative Centre for ViticultureCooperative Centre for ViticultureCooperative Centre for Viticulture
Established in 1991
Focus: Coordination of research and education policy in viticulture
Funding: other cluster organizations
Established in 1991
Focus: Coordination of research and education policy in viticulture
Funding: other cluster organizations
Australian Wine Export CouncilAustralian Wine Export CouncilAustralian Wine Export Council
Established in 1992
Focus: Wine export promotion through international offices in London and San Francisco
Funding: Government; cluster organizations
Established in 1992
Focus: Wine export promotion through international offices in London and San Francisco
Funding: Government; cluster organizations
Winemakers’ Federation of AustraliaWinemakersWinemakers’’ Federation of AustraliaFederation of Australia
Established in 1990
Focus: Public policy representation of companies in the wine cluster
Funding: Member companies
Established in 1990
Focus: Public policy representation of companies in the wine cluster
Funding: Member companies
Grape and Wine R&D CorporationGrape and Wine R&D CorporationGrape and Wine R&D Corporation
Established in 1991 as statutory body
Focus: Funding of research and development activities
Funding: Government; statutory levy
Established in 1991 as statutory body
Focus: Funding of research and development activities
Funding: Government; statutory levy
Wine Industry Information ServiceWine Industry Information ServiceWine Industry Information Service
Established in 1998
Focus: Information collection, organization, and dissemination
Funding: Cluster organizations
Established in 1998
Focus: Information collection, organization, and dissemination
Funding: Cluster organizations
Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002
54 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
The Evolution of Economies San Diego
U.S. Military
U.S. Military
CommunicationsEquipment
Sporting andLeather Goods
Analytical Instruments
Power GenerationAerospace Vehicles
and Defense
Transportationand Logistics
Information Technology
1910 1930 1950 19901970
Bioscience Research Centers
Bioscience Bioscience Research Research CentersCenters
Climate and
Geography
Climate and
Geography
Hospitality and Tourism
Medical Devices
Biotech / Pharmaceuticals
Education andKnowledge Creation
55 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Value PropositionValue Proposition
Defining an Economic Strategy
Developing Unique StrengthsDeveloping Unique Strengths Achieving and Maintaining Parity with Peers
Achieving and Maintaining Parity with Peers
•ASGISA needs to become a true national economic strategy, defining the value proposition of the country in the global economy
• What elements of context and the business environment become crucial priorities?
• What existing and emerging clusters should be developed first?
• What weaknesses must be addressed to achieve parity with peer countries?
• What is the unique competitive position of the nation given its location, legacy, and existing and potential strengths?
– What roles with neighbors, the region, and the broader world?
– What unique value as a business location?– For what types of activities and clusters?
56 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
National Value Proposition
Creating Unique Strengths
Mitigating Weaknesses
Macro/political/legal/social e.g., Absence of corruption
National Diamonde.g., Singapore’s physical infrastructure
Cluster Developmente.g., Singapore’s logistical services, financial services, petrochemical processing, tourism
Company Capabilitiese.g., large number of world-class multinationals with regional headquarters and significant operations in Singapore
Geographic Levelse.g., Growth Triangle, ASEAN
Macro/political/legal/sociale.g., Expand cultural attractions
National Diamonde.g., Upgrade Singapore’s research institutions; improve the efficiency of Singaporean domestic economy
Cluster Developmente.g., Develop more Singaporean SMEs to deepen clusters; improve the number and quality of IFCs
Company Capabilitiese.g., build the capability of Singaporean companies and encourage regional strategies
Geographic Levels e.g., Create friendly relationships with ASEAN neighbors
National Economic Strategy Singapore
• What roles in regional and world economy? e.g., Business, financial, and knowledge hub of Southeast Asia
• What unique value as a business location? e.g., Highly efficient place to do business; access to skilled and hardworking staff
• For what range of clusters, activities within clusters? e.g., clusters benefiting from a business hub but not dependent on a large home market or physical proximity to markets
57 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Government Economic Policy in South Africa The Accelerated and Shared Growth Initiative (ASGISA)
• In 2004, the South African government set ambitious goals in terms of economic growth and social improvements
• In dialogue with the private sector, civil society, and experts, binding constraints to growth were identified
CONSTRAINTS
• Volatile currency
• Inefficient and costly transport infrastructure
• Skill shortages
• Barriers to entry and competition
• Burdensome regulations for small companies
• Weaknesses in administrative capacity
RESPONSES
• Macroeconomic management
• Infrastructure investments
• Skills and education initiatives
• Sector strategies
• ‘Second economy’ programs
• Public administration reform
58 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Sectoral Priorities within ASGISA
• Business Process Outsourcing• Tourism• Biofuels (under planning)
• Chemicals• Metal beneficiation• Creative industries• Clothing and textiles• Durable consumer goods• Wood, pulp and paper
TOP PRIORITY SECTORS
NEXT RANK OF PRIORITIES
59 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
The Role of Government in Cluster Initiatives
May...
• Convene• Provide matching
funds
Should...
• Actively participate• Be ready to
implement recommendations
Should not
• Select priority clusters• Define cluster action
priorities
• Debates about the role of government in cluster development are too often focused on which clusters should be supported and how much financing they should get
• Cluster selection is an important but ultimately operative question; focus is necessary to achieve impact and not all clusters have equal potential
• Financing is important but cluster policy needs to be more; policy needs to improve the potential for companies to increase productivity
60 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Backup
61 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Vietnam/Indonesia• OEM Production • Focus on the low cost
segment mainly for the European market
China• OEM Production• Focus on low cost
segment mainly for the US market
Portugal• Production • Focus on short-
production runs in the medium price range
Romania• Production subsidiaries
of Italian companies• Focus on lower to
medium price range
United States• Design and marketing • Focus on specific market
segments like sport and recreational shoes and boots
• Manufacturing only in selected lines such as hand-sewn casual shoes and boots
Source: Research by HBS student teams in 2002 – Van Thi Huynh, Evan Lee, Kevin Newman, Nils Ole Oermann
Italy• Design, marketing,
and production of premium shoes
• Export widely to the world market
Brazil• Low to medium quality finished
shoes, inputs, leather tanning• Shift toward higher quality
products in response to Chinese price competition
Cluster Specialization Leading Footwear Clusters
62 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Plastics
Oil and Gas
Chemical Products
Pharma- ceutical
Power Generation
Aerospace Vehicles &
Defense
Lightning & Electrical Equipment
Financial Services
Publishing and Printing
Entertainment
Hospitality and Tourism
Trans- portation
and Logistics
Information Tech.
Communi- cations
Equipment
Medical Devices
Analytical Instruments
Education and
Knowledge Creation
ApparelLeather
and Related Products
Processed Food
Agricultural Products
FurnitureBuilding Fixtures,
Equipment and
Services
Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions.
Sporting and Recreation
Goods
Business Services
Distribution Services
Fishing & Fishing
Products
Footwear
Forest Products
Heavy Construction
Services
Jewelry & Precious Metals Construction
Materials
Prefabricated Enclosures
Textiles
Tobacco
Heavy Machinery
Aerospace Engines
Automotive
Production Technology
Motor Driven Products
Metal Manufacturing
Related Clusters and Competitiveness Cluster Overlap in the U.S. Economy
63 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
TradedTraded LocalLocalLocal Natural Resource-Driven
NaturalNatural ResourceResource--DrivenDriven
29.3%0.7%
$49,367137.2%
4.2%
144.1
23.0
590
29.3%0.7%
$49,367137.2%
4.2%
144.1
23.0
590
70.0%2.4%
$30,41684.53.4%
79.3
0.4
241
70.0%70.0%2.4%2.4%
$30,416$30,41684.584.53.4%3.4%
79.379.3
0.40.4
241241
0.7%-1.2%
$35,81599.52.1%
140.1
3.3
48
0.7%0.7%--1.2%1.2%
$35,815$35,81599.599.52.1%2.1%
140.1140.1
3.33.3
4848
Share of EmploymentEmployment Growth Rate,
1990 to 2004
Average WageRelative WageWage Growth
Relative Productivity
Patents per 10,000 Employees
Number of SIC Industries
Note: 2004 data, except relative productivity which uses 1997 data.Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School
The Composition of Regional Economies United States, 2004
64 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Stages Of Competitive Development Shifting Policy Imperatives
Factor-Driven Economy
FactorFactor--Driven Driven EconomyEconomy
Investment- Driven Economy
InvestmentInvestment-- Driven EconomyDriven Economy
Innovation- Driven Economy
InnovationInnovation-- Driven EconomyDriven Economy
Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990
Cost of Inputs Efficiency Unique Value
• Macro, political, and legal stability
• Efficient basic infrastructure
• Lowering the regulatory costs of doing business
• Local competition• Market openness• Incentives and rules
encouraging productivity• Cluster formation and
activation
• Advanced skills• Advanced infrastructure• Incentives and rules
encouraging innovation• Cluster upgrading
65 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
• Improve the macroeconomic, political, legal, and social context– Establish a stable, predictable, and effective macroeconomic, legal, and political context– Improve the social conditions of citizens
• Upgrade the general business environment– Improve the availability, quality, and efficiency of cross-cutting or general purpose inputs,
infrastructure, and institutions– Set overall rules and incentives governing competition that encourage productivity growth
• Facilitate cluster formation and enhancement– Identify existing and emerging clusters– Encourage and support cluster upgrading
• Lead a collaborative process of economic change– Develop and overall economic strategy together with key constituencies– Organize the parts of government in a coordinated development agenda– Engage multiple levels of government in economic development– Create institutions and processes for upgrading competitiveness that inform citizens and
mobilize the private sector to take action
Government and Economic Development Roles
66 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
• The competitiveness of companies depends heavily on– Rising skill levels – Safe working conditions – A sense of equal opportunity– Low levels of pollution (pollution is a sign of unproductive use of physical
resources) • However, efforts to meet “social” objectives must be aligned with
productivity and prepare and motivate individuals to succeed in the market system
• Efforts to meet “economic” objectives must include explicit programs to raise human capability, improve the lives and sense of opportunity for individuals, and enhance the broader business environment
• The competitiveness of companies depends heavily on– Rising skill levels – Safe working conditions – A sense of equal opportunity– Low levels of pollution (pollution is a sign of unproductive use of physical
resources)• However, efforts to meet “social” objectives must be aligned with
productivity and prepare and motivate individuals to succeed in the market system
• Efforts to meet “economic” objectives must include explicit programs to raise human capability, improve the lives and sense of opportunity for individuals, and enhance the broader business environment
• In the new thinking on competition, there is not an inherent conflict between economic and social objectives, but a long term synergy
EconomicObjectives
SocialObjectives
Integrating Economic and Social Policy
67 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Integrating Economic and Social Policy Examples
Training• Organize training investments around clusters
Housing• Create mechanisms to encourage home ownership; provide incentives for new company
formation in the construction cluster; reduce unnecessary costs of housing construction due to regulatory and approval requirement; secure property rights to residents
Health Care• Create incentives for private health insurance; open health care delivery to competition
Social Security• Create incentives for saving; encourage a private pension system that agglomerates
investment capital
Environmental Quality• Institute a regulatory regime that encourages movement to more environmental friendly
methods; invest in technical assistance in eco-efficient processes and practices
68 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
ASGISA and Beyond: An Early Assessment
• The Accelerated and Shared Growth Initiative (ASGISA) is an important step forward for South African competitiveness policy– Fact-driven analysis of specific challenges– Identification of key priorities– Medium-term perspective with regular assessment of progress
• The ASGISA needs to be ‘the’ economic action plan for the country, internally consistent and widely accepted as a national objective
• Execution is crucial; even when the policy right area is identified, success depends on specific steps taken and the government’s capacity to deliver
• The action plan needs to add a clear geographic dimension, mobilizing South African regions and leveraging integration with neighboring countries
69 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
What are Cluster Initiatives?
• Upgrading of company operations and strategies across a group of companies
• Strengthening of networks to enhance spill-overs and other economic benefits of clusters
• Upgrading of cluster- specific business environment conditions
Cluster initiatives are collaborative activities by a group of companies, public sector entities, and other related institutions with the objective to improve the competitiveness of a
group of interlinked economic activities in a specific geographic region
70 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Towards Sustainable Black Economic Empowerment Selected Policies
• Improve social conditions• Improve and extend public education• Invest aggressively in managerial training for black citizens• Create incentives and support the hiring and promotion of black
employees into low- and middle-management positions in white- owned local companies as well as multinationals
• Focus on upgrading indigenous local businesses, including in agriculture, local services, and manufacturing businesses serving local needs
• Place early attention to clusters involving small- and medium size enterprises
• Create incentives for risk capital investments in business with significant (>10%) black ownership. Avoid programs that apply only to majority black-owned businesses, especially when other owners are passive investors or private equity firms
• There a no short cuts for addressing this long-term challenge
71 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Decomposing South Africa’s GDP per Capita Growth
-$600
-$400
-$200
$0
$200
$400
$600
$800
2001 2002 2003 2004 2005 2006
Contribution to change in real GDP per Capita (PPP adjusted)
Labor Force Participation
Labor Productivity
Note: Data before 2001 not available. Source: EIU (2007)
72 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Organization Patents Issued from 2000 to 2004
1 SASOL TECHNOLOGY (PROPRIETARY) LIMITED 29 2 WINDSOR TECHNOLOGIES LIMITED 11 3 CSIR 8 4 WATER RESEARCH COMMISSION 6 4 DENEL (PROPRIETARY) LIMITED 6 4 IPCOR NV 6 4 SUPERSENSOR (PROPRIETARY) LIMITED 6 8 TECHNOLOGY FINANCE CORPORATION (PROPRIETARY) LIMITED 5 8 IMPLICO B.V. 5 8 CLAAS SELBSTFAHRENDE ERNTEMASCHINEN GMBH 5
11 SLIC TRADING COMPANY LIMITED 4 11 ESKOM 4 11 ADCOCK INGRAM LIMITED 4 14 MEDTRONIC INC. 3 14 MINTEK 3 14 SANDVIK AKTIEBOLAG 3 14 BILLITON INTELLECTUAL PROPERTY B.V. 3 14 CATALYTIC DISTILLATION TECHNOLOGIES 3 14 UNIVERSITY OF PRETORIA 3 14 SALBU RESEARCH AND DEVELOPMENT (PROPRIETARY LIMITED) 3 14 GARFIELD INTERNATIONAL INVESTMENTS LIMITED 3 14 SOUTH AFRICA NUCLEAR ENERGY CORPORATION LTD. 3 14 AZOTEQ (PTY) LIMITED 3
U.S. Patenting by South African Institutions
Note: Shading indicates universities, research institutions or government agencies. Nine more institutions with three patents are not listed. Source: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.
73 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
Decomposing South African Real GDP Growth
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1980-94 1995-2003
TFPCapitalLabor Overall GDP
Source: IMF (2006)
Growth rate, CAGR
74 Copyright 2007 © Professor Michael E. PorterSouth Africa CAON 2007 07-02-07.ppt
• Sound fiscal and monetary policies create stability and encourage business investment and upgrading
• Sound and stable macroeconomic conditions hold down interest rates and provide accurate price signals for market transactions
Macroeconomic policies
• An independent, timely, effective and trusted legal system solidifies the rule of law and provides a fair environment for business, encouraging investment
• Strict monitoring and prosecution of corruption rewards productivity instead of favoritism
Legal system
Macroeconomic, Political, Legal, and Social Context
• Improving social conditions in basic education, housing, health, and absence of discrimination enhances productivity
• A functioning social safety net gives citizens the confidence to accept and deal with change in the economy
• Improvements of social conditions signal the benefits of reforms and increase the political support for policies to enhance competitiveness
Social conditions
• Due process in political decisions and orderly transfers of power create a stable planning horizon for business
• Checks and balances in the political system mitigate instability and the abuse of power
Political governance