Plowing the sea

PLOWING THE SEA: Summary

Chapter One: Avoid Overreliance on Basic Factors
Summary from book p. 37

The belief we examined first in the story of the Colombian flowers and have explored in
greater detail here -- that countries and companies can compete globally based on factor
advantages such as natural resources, cheap wages, or geographic location--dominates
economic activity throughout the developing world. The challenge that business and
political leaders of those countries face is two-fold: (1) to develop more sophisticated
sources of advantage that are not so easily imitated, and (2) to realize that depleting
natural resources and suppressing wages will not lead to sustainable, long-term wealth
creation. It is critical for leaders to develop the capacity to think about the future and to
move out of such unattractive "factor-based" industries. That will require a fundamental
reassessment of how competitiveness is understood. The sources of growth for
developing nations are hidden behind the abundance of natural resources that so many of
them possess.

Chapter Two: Improve Understanding of Customers
Summary from book page 46-47

There are three fundamental reasons the Colombian leather industry leaders had worked
themselves into such a difficult position:

1. They had not taken an explicit position about choosing customer segments.

2. They did not try to understand customers' different needs.

3. They did not seek the most attractive customers that they could serve.

In the days when the local markets were protected and export markets were easier to
penetrate because of favorable exchange rates and government incentives, the issues
listed above were not so critical. They are now.

Firms that fail to choose specific segments are essentially enabling the competition to
choose for them. Whether we are discussing state-owned tourism in the Colca Valley of
Peru, or the leather sector in Colombia, very predictable and consistent patterns will
result. In failing to choose the most attractive segments that they can serve, those firms
will be forced into segments where average margins are lower, where competition on cost
will be fierce, and where dependence on exogenous variables such as exchange rates will

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be high. These are the patterns associated with competing in basic-factor-dependent
industries, and they are inconsistent with creating a high and rising standard of living for
the average citizen.

Moreover, there will continue to be little incentive for innovation or cooperation among
industry participants because they will perceive that the number of customers is limited
and that one firm can succeed only if another is not. The ability to create wealth, in other
words, tends to be viewed as finite. Furthermore, firms will redouble their efforts to
ensure that the government is providing them every source of advantage to continue
competing in these unattractive segments. The eyes of the productive sector will be on
the government--not on the market--and that will further reinforce the pattern of not
proactively choosing the best segments in which to compete.

Chapter Three: Know Your Relative Competitive Position

It is important for firms to analyze their position relative to
competitors for three main reasons: (1) it can facilitate productive
dialogue between the public sector and the private sector; (2) it can
help firm managers make more informed choices; and 3) it can help
firms anticipate areas where they may be vulnerable to the
competition.

There are two components to relative position analysis that we should
make explicit. First, it is important to understand a given firm's basis
of competition--meaning, is it competing on costs, or competing as a
differentiated player who can charge more for the product by adding
unique value for the consumer? If the basis of the competition is cost,
then relative cost position analysis is most critical. If the basis of the
competition is differentiation, then analysis of customer satisfaction
relative to the competition is most critical. Either way, the challenge is
to know and understand one's own position in order to develop a clear
view of how likely success is in the competitive battlefield.

The second critical point regards competitors. "Competition never
occurs in a vacuum." And a lack of knowledge about the goals and
capabilities of the competition to serve the customers may leave a firm
very vulnerable.

A theme that we repeat often in our discussions and seminars is that,
when it comes to market demand, developing nations have to upgrade
themselves from being responders to seekers, and ultimately, to
creators. Instead of extracting and exporting the basic wealth of their
countries--again, a strategy that other countries can usually imitate
and therefore vulnerable to price fluctuations and exchange-rate



management--firms need to learn how to understand demand and the
dynamics of competition better so that they might find more attractive
customer segments. That is what we mean by seeking.

Furthermore, if firms in developing countries understood customer
preferences so intimately that they could anticipate them, and perhaps
even help shape them, that would mean they were becoming creators.
The high-end fashion producers in Italy are creators in the sense that
what they make tends to shape the tastes and preferences of
consumers, and influence competitors, in a portion of their market.
Very often, they make excellent profit margins doing just that.

The essence of this upgrading process is in becoming competent at
ascertaining relative position. As we have said, the lack of this
knowledge is one of the reasons firms in developing countries find
themselves competing in unattractive industry segments. It is also
preventing the type of high-quality discussion that needs to take place
between senior public and private sector decision makers as they
make increasingly complex decisions about opportunities that will
come and go with increasing rapidity. With a clear understanding of
relative position, however, those decision makers will be able to begin
creating their own opportunities that provide even greater reward.

Chapter Four: Know When and When Not to Integrate

Exporters from the developing world face a wide variety of challenges
regarding not only the production of their goods, but also those goods'
distribution and sales. Wide variations in the macroeconomic
environment, political and social instability, inconsistent government
policies, and poor infrastructure are the problems most often
associated with poor export performance. Correcting those problems is
a prerequisite to creating sustainable and profitable growth in many
exporting industries, but it is not enough. The many strategic
challenges that firms face cannot be postponed any longer; as
companies wait to make decisions about critical strategic issues, they
actually cede control of their future to more nimble competitors, and
to buyers.

If exporting firms in the developing world are to have any hope of
capturing more of the economic rewards they now create for others,
they must address the three problems we have just discussed: poor
knowledge of channel needs, a failure to leverage channels, and a
failure to capture market feedback.



Because exporters rely on brokers and distributors who typically do
not pass along valuable information about market trends and
dynamics, they are inherently less able to understand customers'
needs than either the brokers or the competition can. That reduces
their ability to differentiate themselves in the marketplace through
service, better understanding and fulfillment of customers' needs, or
an ability to anticipate market trends. In light of the changing market
dynamics, that also poses a problem because exporting firms tend to
be relatively unaware of the relative performance of their competition
in key market areas, which could mean they will face some
unexpected and painful realizations about their industry's development
down the road.

Lack of forward positioning contributes to yet another problem we
have observed: groups of companies in the same industry are unable
to cooperate with each other to improve the consistency of supply, the
quality of products, and the scale needed to export efficiently. That
fact has hampered the growth of dynamic groups of industries that
could help upgrade the broader competitive environment. We call
those kinds of dynamic industry groups clusters, and we will examine
their value in more detail in the next chapter when we discuss the
specific problem of interfirm cooperation.

Poor thinking about forward integration is part of a system engendered
by other patterns we discuss in this book. For example, a tradition of
depending on natural resource based products -- what we have called
factor or comparative advantages-- forces competition to be based
simply on price and scale. That, combined with a historic dependency
on government policies to facilitate exports, has inhibited firms' ability
to think "outside of the box" about how to distribute their products.
Forward integration would go a long way to mitigate some of the
challenges facing firms and industries in developing nations, and for
this reason we consider it an underutilized strategy; another hidden
source of growth.

Chapter Five: Improve Interfirm Cooperation

The three stories recounted in this chapter -- soy, fruit juice, and alpaca -- are actually the
same story in one sense: they demonstrate that a company's competitiveness often
depends heavily on the competitiveness of other firms and institutions in the same
industry. That interdependence can be a source of weakness or strength, depending on the
collective competitiveness of an industry cluster. When thinking about implementing a
sound strategy, companies must explicitly understand where their strategies are



vulnerable to the actions of suppliers and buyers, and ensure that the chains of companies
behind a product are all working together. Without strong related and supporting
industries, achieving sustainable competitive advantage in the developing world will be
much more difficult than it should be. In the past, it may have made sense not to
cooperate, but in the increasingly competitive global economy, firms must seize the
opportunity to create the conditions where buyers and suppliers no longer insist "Es la
culpa de la vaca."

Chapter Six: Overcome Defensiveness
Summary from book page 102

Overcoming defensive behavior is critical to the success of all
enterprises, not just those in the developing world. To seize the
opportunities identified in previous chapters, business and government
leaders will need to develop more sophisticated sources of advantage.
Gone are the days when cheap labor and access to raw materials -
very visible and accessible advantages - will allow sustained success.
Gone are the days when it is worthwhile to argue publicly about how to
allocate finite resources. The challenge in the 21st century will be to
work together to create sustainable sources of growth in a way that
neither degregates the environment nor exploits human beings. This
cannot be done in highly defensive environments. Today's sources of
competitive advantage are more subtle than yesterday's. They are
based on human relations, on productive reasoning, on trust, on
cooperation. They are hidden sources of advantage that we must learn
to develop.

Chapter Seven: Avoid Paternalism
Summary from the book page 117-118

Two choices: Breakfast with the Minister or Reshaping the Industry

In Bolivia, we once gave a presentation to several hundred business
and government leaders in a grand hall, darkened except for the
raised stage on which we were speaking. After relating some
preliminary analysis about the country's export performance, some
survey results about patterns of decision making, and some
hypotheses concerning the future of the country, we stated that the
business people in the audience had two choices going forward. The
first choice was that they could simply wake up tomorrow and take to
breakfast whichever Minister had an interest in their particular
industry.



"You know the Minister," we said, "your wife knows the Minister's wife,
your children baby-sit for the children of the Minister, and on
weekends you give a friendly nod to the Minister from across the
tennis court at the club or on the golf course. You can take the
Minister to breakfast and ask him for a favor. That's one choice."

"But there's another choice," we continued. And we asked that
someone in the audience articulate what was that choice. From the
back of the room, a man raised his hand timidly and addressed us
from deep within the anonymity of the darkened hall.

"We can take the Minister to lunch." And the audience laughed in a
sublime moment of self-recognition.

Choice number two is not that business people can have one meal or
another with a Minister, but that they can try to reframe their
perspective so they do not interpret events from a paternalistic frame.
Specifically, they can learn how to judge the attractiveness of industry
structures, they can work on developing their competitive environment
to improve their relative position inside those industry structures, they
can focus on learning about competitor behavior and customer
preferences. In a phrase, they can learn how to reshape the industry
structure around themselves. And once they have accomplished that,
maybe they will represent a new model of a relationship between the
government and the private sector.

Chapter Eight: Strategic Actions
Summary from the book page 133

Strategy is deciding to decide. It is making discrete choices along clear
dimensions and is a critical first step to nurturing the hidden sources of
growth about which we are writing. Not making choices is, indeed,
allowing others to make choices for you. More than once we have
shown a client his relative competitive position on a map with all of
their competitors only to hear, "We didn't decide to be there." Our
response is always the same: "No you didn't, but your competitor
decided for you."

Competing by making better choices about where to compete, how to
compete, what products to produce - this is the way to build
sustainable sources of advantage. The next chapter looks more deeply
into the type of learning required so that firms can begin to make
informed choices and take timely action.



Chapter Nine: Firm-Level Learning

As the Cervantes quote at the beginning of the chapter suggests,
learning is not without "inconveniences". He mentions "dizziness in the
head" and "weakness in the stomach" among others. Our view is that
it is more costly not to do the learning.

The "three C's" in this chapter are the types of learning that inform the
strategy choices that firms get to make. That type of learning can be
one of the great points of leverage in mitigating the problems inherent
in the seven patterns and turning them into opportunities for growth.

Customer learning, for example, will help firms rely less on factor
conditions as they learn that they are often competing from within a
poor "five forces," with high rivalry and little ability to influence
customer behavior. Understanding costs and competitors has the
effect of improving relative position, by understanding the sources of
sustainable competitive advantages, and fundamental weaknesses that
need to be worked on. The combination of all three C's allow firms to
make a decision about their capacity and the desirability to forward
integrate, and provide the basis for interfirm cooperation.

Perhaps the most innovative use of this type of firm-level learning is
the capacity to inform the government-private sector dialogue about
the realities of the international competitive context, which provides an
opportunity to overcome paternalistic behavior. That does not mean
that government should use that information to take an overtly
interventionist role; however, at present so much of the dialogue
between the government and the private sector is colored by poor
information that the results is often negative attributions and
defensiveness.

Improved, strategic-type learning could focus a country's leaders on
creating sustainable, non-imitatable advantages that can position local
firms closer to end-users. The benefits will include the formation of
international alliances and the creation of high and rising value for
increasingly sophisticated customers who are willing to pay more
money for the unique value they perceive. Learning like this creates
informed choice, which improves competitive positioning, and turns
the seven patterns into sources of advantage.

Chapter Ten: Steering Mechanisms



In the Andean region, constantly changing development strategies and
inconsistent public policies over time have created organizational and
administrative steering mechanisms that tend to reinforce -- in fact to
help create--the seven patterns that we have observed. Competition
based on basic factors is reinforced when there is neither confidence in
how the government will behave in the future nor a qualified human
resource pool from which to draw. When faced with that dual problem,
firms tend to mitigate their risk by choosing industry segments that
have low barriers to entry and exit. They tend to maximize short-term
gains because they have no confidence that any investment in the
long-term will be fruitful. That creates a reinforcing pattern: firms
actively encourage the government to ensure they are at least able to
achieve short-term gains, which translates into strong lobbying efforts
and often antagonism toward the government when it is not
responsive to their needs. That breeds paternalism and defensiveness.
Import substitution policies which limit competition make it
unnecessary for firms to understand their customers and their
competitors. This in turn makes it difficult to choose good segments in
which to compete and limits the need for knowledge about relative
competitive advantage. Finally, import-substitution-oriented steering
mechanisms have inhibited the development of strong clusters
because firms do not need to cooperate in order to succeed in those
highly regulated environments.

As we suggested earlier, there have been several contributing factors
to the inability thus far of firms in the Andean region, and in
developing countries in general, to change the seven patterns into
opportunities for economic growth and social equity. We have
attempted to make a case that a major reason has been the rapidly
changing national development strategies and unpredictable steering
mechanisms that limit long-term strategic thinking and investment in
innovation.

If leaders of developing countries can begin to develop informed and
explicit national development strategies and make steering
mechanisms consistent and predictable, they will help create
environments more conducive to long-term thinking and investment.
This, in turn, will encourage better choices and a higher level of
learning at the firm level that will ultimately lead to the development
of more productive firms and industries competing in better ways.

Chapter Eleven: Mental Models



We have attempted to do some complex things in this chapter to begin
to understand some of the prevailing beliefs about wealth creation and
distribution in an uncertain country. First, we have used the example
of Venezuela because, at the moment, it is a country with a great
amount of uncertainty, and, as such, is a rich environment for
learning. Second, we have introduced a methodology for determining
how to know a little better "who is out there" through our discussion of
the five very different segment groups that we identified in Venezuela
and believe exist in many countries. We described these groups and
the views and "mental models" they embody, with a view toward
learning what it is that may unify them behind a shared vision. Finally,
we reintroduced the "Seven Patterns" described in the first part of this
book and examined the perspectives which may be driving these
patterns, and inhibiting wealth creation.

We have seen that creating wealth is no longer about macroeconomics
and the advantages with which countries are born. It is more complex,
involving a wide array of steps, such as building integrated
frameworks based on cutting-edge concepts of measuring results,
categorizing the scope of strategy choices, understanding institutional
dynamics, making paradigms explicit, and understanding how and
when paradigms become obsolete. Most importantly, creating wealth
in the future will involve pulling the integrated frameworks referred to
above together, and incorporating a fundamental understanding of
"who is out there," what they believe, and how one structures a
process to move them to shared understanding. As the quote with
which we began this chapter suggests, everything now (including
wealth creation) really is human relations.

Chapter Twelve: The Hidden Sources of Growth

How do we understand the invisible effects of the seven patterns on
productivity? -- The answer is through use of mental models, many of
which we examined in the chapter on divisiveness; institutional
efficiency which we studied in the chapter on steering mechanisms;
knowledge-capture along the dimensions of the scope and positions of
strategy; and the three C's.

These components of change, informed by the paradigm of high-
productivity, create the conditions for exponential, and even explosive
growth in wealth generation and distribution.



But there is yet another challenge: How can these components of
exponential productivity growth fit together into an overarching
framework for positive change? And we leave that for the final
chapter.

Chapter Thirteen: A Framework for Action

The moral authority in an innovation-based environment will come
from the wisdom of the leader to manage the other preconditions for
change: electrifying and then clarifying for the electorate the new
moral purpose of an innovation-based, upgrading economy girded by
the high and rising standard of value created by the average citizen.
This leader will facilitate the development and use of hard and soft
technologies for change and learning. He or she will create a broad
degree of real and sustained ownership of change among the political
base, the opposition, and the increasingly complex populace.

It is ironic for us to think that all of the preconditions for change to a
new framework for wealth creation and distribution now exist, except
perhaps that our present leadership may still not recognize the
possibilities inherent: the hidden sources of growth.


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