Competitive Advantage Nations States Regions Porter

The Competitive Advantage
of Nations, States and Regions

Professor Michael E. Porter
Harvard Business School
Advanced Management Program
April 15, 2009
This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990),
“Building the Microeconomic Foundations of Competitiveness,” in The Global Competitiveness Report (World Economic Forum), “Clusters and the New
Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008), 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 Version: April 15, 12pm
20090515 – AMP – final.ppt

1

Copyright © 2009 Professor Michael E. Porter

Competitive Advantage and Competitiveness

Internal

External

• Competitive advantage
resides inside the company

• Competitive advantage resides
in the locations in which the
company is based

• Competitive success
depends on company
choices

• Cluster participation is an
important contributor to
competitiveness


2


The Changing Nature of Domestic
and International Competition
•
•
•
•
•
•
•
•
•
•
•

Falling barriers to trade and investment
Globalization of markets
Globalization of capital investment
Globalization of company value chains
Rapidly increasing stock and diffusion of knowledge
Increasing knowledge and skill intensity of competition
Value is increasingly concentrated in service functions, not manufacturing
activities themselves
Shift from vertical integration to relying on outside suppliers, partners, and
institutions
Rising logistical costs due to costs of energy and emissions
Costs in China and India are rising rapidly
Competitive upgrading is occurring in many countries

• Improving competitiveness is increasingly essential to a country’s prosperity

3


Prosperity Performance
Selected Countries
PPP-adjusted GDP per
Capita, 2007 ($USD)

$50,000

Norway ($56,650)

Qatar ($58,000, 0.92%)
United States

$45,000

Ireland
Kuwait

$40,000
$35,000
Italy

$30,000

Canada

Hong Kong
Singapore

Australia

Sweden
UK
Finland
Japan
Germany
France
Spain

Taiwan

Greece

Slovenia

UAE

Israel
New Zealand

$25,000

Bahrain

South Korea

Saudi Arabia

Czech Republic

Oman
Slovakia

$20,000

Estonia
Lithuania

Hungary
Poland

Libya

$15,000

Argentina

Mexico
Lebanon

$10,000

Brazil

Chile

Yemen

Russia

Latvia (12.6%)

Malaysia
Turkey

Iran
South Africa
Thailand
Egypt
Syria Jordan
Pakistan Philippines

$5,000

Croatia

China (13.0%)
Laos

India

Vietnam

Cambodia

$0
2%

4%

6%

8%

10%

12%

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000 to 2007
Note: highlighted countries are part of the East African Community (EAC). Source: EIU (2009), authors calculations

4


What is Competitiveness?
• Competitiveness depends on the productivity with which a nation uses
its human, capital, and natural resources.
– Productivity sets the sustainable standard of living (wages, returns on
capital, returns on natural resources) that a country can sustain
– It is not what industries a nation competes in that matters for prosperity, but
how productively it competes in those industries
– Productivity in a national economy arises from a combination of domestic
and foreign firms
– The productivity of “local” or domestic industries is fundamental to
competitiveness, not just that of export industries

• Nations compete to offer the most productive environment for business
• The public and private sectors play different but interrelated roles in
creating a productive economy

5


Innovative Capacity
Innovation Output of Top 25 Patent Producing Countries
Average U.S. patents per 1
million population, 2003-2007

350

United States

300

Japan
Taiwan

250

200
Switzerland
Swede
n
Germany

150

Canada

100

50

Finland

Israel

Korea

Singapore
Denmark
Austria
France
Italy

0
-10%

Brazil

UK
Belgium
Spain

-5%

Netherlands
Norway
Ireland

Hong Kong

India

Russia

0%

5%

CAGR of US-registered patents, 2003 – 2007
Source: USPTO (2008), EIU (2008)

Australi
a

6

10%

China
(26.97%)

15%
10,000 patents =

Determinants of Competitiveness
Microeconomic Competitiveness
Quality of the
National
Business
Environment

State of Cluster
Development

Sophistication
of Company
Operations and
Strategy

Macroeconomic Competitiveness
Social
Infrastructure
and Political
Institutions

Macroeconomic
Policies

Natural Endowments

• Macroeconomic competitiveness creates the potential for high productivity, but is
not sufficient
• Productivity ultimately depends on improving the microeconomic capability of
the economy and the sophistication of local competition

7


Microeconomic Competitiveness: Quality of the
Business Environment
Context for
Firm
Strategy
and Rivalry


– e.g. salaries, incentives for
capital investments, intellectual
property protection, corporate
governance standards

Factor
(Input)
Conditions



–
–
–
–
–

Demand
Conditions

Vigorous local competition
– Openness to foreign competition
– Competition laws

Access to high quality business
inputs
Natural endowments
Human resources
Capital availability
Physical infrastructure
Administrative and information
infrastructure (e.g. registration,
permitting, transparency)
– Scientific and technological
infrastructure

Local rules and incentives that
encourage investment and
productivity



Sophistication of local customers
and needs

Related and
Supporting
Industries


– e.g., Strict quality, safety, and
environmental standards
– Consumer protection laws

Availability of suppliers and supporting
industries

• Many things matter for competitiveness
• Successful economic development is a process of successive upgrading, in which the
business environment improves to enable increasingly sophisticated ways of competing

8


Microeconomic Competitiveness: State of Cluster Development
Tourism Cluster in Cairns, Australia
Public Relations &
Market Research
Services

Travel agents

Tour operators

Restaurants

Attractions and
Activities

Food
Suppliers

Local
Transportation

e.g., theme parks,
casinos, sports

Property
Services

Maintenance
Services

Local retail,
health care, and
other services

Souvenirs,
Duty Free
Airlines,
Cruise Ships

Hotels

Banks,
Foreign
Exchange

Government agencies

Educational Institutions

Industry Groups

e.g. Australian Tourism Commission,
Great Barrier Reef Authority

e.g. James Cook University,
Cairns College of TAFE

e.g. Queensland Tourism
Industry Council

Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden

9


State of Cluster Development
Massachusetts, Life Sciences
Health and Beauty
Products

Cluster Organizations
MassMedic, MassBio, others

Teaching and Specialized Hospitals

Surgical Instruments
and Suppliers

Specialized Business
Services

Medical Equipment

Dental Instruments
and Suppliers

Biopharmaceutical
Products

Biological
Products

Banking, Accounting, Legal

Specialized Risk Capital
Ophthalmic Goods

VC Firms, Angel Networks

Diagnostic Substances

Specialized Research
Service Providers

Research Organizations
Containers

Analytical Instruments


Laboratory, Clinical Testing

Educational Institutions
Harvard University, MIT, Tufts University,
Boston University, UMass
10


Globalization and Cluster Specialization
Footwear
Romania
• Production subsidiaries
of Italian companies
• Focus on lower to
medium price range

Portugal
• Production
• Focus on shortproduction runs in the
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

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

China
• OEM Production
• Focus on low cost
segment mainly for the
US market

Vietnam/Indonesia
• OEM Production
• Focus on the low cost
segment mainly for the
European market

Source: Research by HBS student teams in 2002 – Van Thi Huynh, Evan Lee, Kevin Newman, Nils Ole Oermann

11


National Cluster Export Portfolio
Germany, 1997 to 2007
20%
Change In Germany’s Overall World
Export Share: +0.43%

Automotive

Production Technology

Construction Services
Prefabricated Enclosures and Structures

Germany’s world export market share, 2007

Lighting and Electrical Equipment

15%

Publishing and Printing

Heavy Machinery

Plastics
Chemical
Products

Aerospace Vehicles
and Defense


Processed Foods

Forest Products
Power and Power
Generation Equipment

Building Fixtures
and Equipment

Motor Driven Products

Construction Materials

10%

Business Services

Metal Mining and
Manufacturing

Commercial Services

Textiles

5%

Furniture
Transportation and Logistics

Aerospace Engines

Communications
Equipment

Tobacco (8.55%)

Biopharmaceuticals

Medical Devices

Germany’s Average World
Sporting, Recreational and
Children's Goods

Marine Equipment

Apparel
Entertainment
Financial Services
Leather and Related Products
Hospitality and Tourism
Agricultural Products

Information Technology
Footwear
Jewelry, Precious Metals and Collectibles

Fishing and Fishing Related Products
Oil and Gas
Coal

0%
-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Change in Germany’s world export market share, 1997 to 2007
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.
12

Exports of US$44 Billion =

National Cluster Export Portfolio
Indonesia, 1997 to 2007
2.5%

Fishing and Fishing Related Products

Change In Indonesia’s Overall
World Export Share: -0.03%

Agricultural Products

Footwear

2.0%

Indonesia’s world export market share, 2007

Coal
(5.3%, 12.3%)

Forest Products

Furniture
Textiles

Building Fixtures and Equipment (-3.75%)

1.5%

Apparel

Tobacco
Plastics
Oil and Gas
Metal Mining and Manufacturing

1.0%

Entertainment

Indonesia’s Average World

Motor Driven Products
Chemical Products
Publishing and Printing
Sporting Goods
Leather and Related Products


0.5%

Prefabricated Enclosures and Structures
Jewelry, Precious Metals and Collectibles
Business Services
Medical Devices
Biopharmaceuticals

0.0%
-2.0%

-1.5%

-1.0%

-0.5%

0.0%

Communication Services
Lighting and Electrical Equipment
Marine
Processed Food
Equipment
Power and Power Generation Equipment
Heavy Machinery
Production Technology
Automotive
Aerospace Engines

0.5%

1.0%

1.5%

2.0%

Change in Indonesia’s world export market share, 1997 to 2007
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.
13

Exports of US$4.2 Billion =

Institutions for Collaboration
Selected Massachusetts Organizations, Life Sciences
Life Sciences Industry Associations





University Initiatives

Massachusetts Biotechnology Council
Massachusetts Medical Device Industry
Council
Massachusetts Hospital Association






General Industry Associations




Informal networks

Associated Industries of Massachusetts
Greater Boston Chamber of Commerce
High Tech Council of Massachusetts





Economic Development Initiatives





Company alumni groups
Venture capital community
University alumni groups

Joint Research Initiatives

Massachusetts Technology Collaborative
Mass Biomedical Initiatives
Mass Development
Massachusetts Alliance for Economic
Development


Harvard Biomedical Community
MIT Enterprise Forum
Biotech Club at Harvard Medical School
Technology Transfer offices






14

New England Healthcare Institute
Whitehead Institute For Biomedical
Research
Center for Integration of Medicine and
Innovative Technology (CIMIT)

Regional Economic Performance
U.S. States

$60,000

Highly productive and
productivity rising versus U.S.

Delaware

$55,000

Gross State Product per Capita, 2007

Connecticut

$50,000

New York

Massachusetts
$45,000

$40,000

$35,000

$30,000

New Jersey

Alaska

California
Virginia
Colorado
Minnesota
Wyoming
Washington
Maryland
Hawaii
U.S. GDP per Capita: $38,020
Texas
Oregon
New Hampshire
Nebraska
Rhode Island South Dakota
North Carolina
Kansas
Iowa
Georgia
Pennsylvania
Wisconsin
Louisiana
North Dakota
Ohio
Tennessee
Vermont
Arizona
Florida
Michigan
Utah
Indiana
Missouri
New Mexico
Kentucky
Maine
Idaho
Alabama
Oklahoma
South Carolina
Montana
Arkansas
Nevada
Illinois

$25,000

West Virginia

Mississippi

U.S. GDP per Capita
Growth: 1.71%

$20,000
0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Gross State Product per Capita Growth Rate, 1998-2007
Source: Bureau of Economic Analysis. Growth calculated using compound annual growth rates. Gross state product figures in 2000 chained US dollars.
Notes: District of Columbia: $124,363, %3.09. Growth rate calculated as compound annual growth rate (CAGR).
15

Specialization of Regional Economies
Selected U.S. Geographic Areas

Seattle-BellevueEverett, WA
Aerospace Vehicles and
Defense
Fishing and Fishing
Products

Denver, CO
Leather and Sporting Goods
Oil and Gas
Aerospace Vehicles and Defense

Chicago
Communications Equipment
Processed Food
Heavy Machinery
Pittsburgh, PA
Metal Manufacturing
Education and Knowledge
Creation

Wichita, KS
Aerospace Vehicles and
Defense
Heavy Machinery
Oil and Gas

San FranciscoOakland-San Jose
Bay Area
Communications
Equipment
Agricultural
Products
Information
Technology

Los Angeles Area
Apparel
Building Fixtures,
Equipment and
Services
Entertainment

Boston
Education and Knowledge Creation

Raleigh-Durham, NC
Education and
Knowledge Creation

San Diego
Leather and Sporting Goods
Power Generation
Education and Knowledge
Creation

Houston
Oil and Gas Products and Services
Chemical Products
Heavy Construction Services

Atlanta, GA
Business Services

Note: Clusters listed are the three highest ranking clusters in terms of share of national employment.
Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School, 11/2006.

16


Cluster Strength in Europe versus the United States
Share of Employment in
Strong Clusters

30%

25%

20%
Europe
United States

15%

10%

5%

0%
Median Region
Source: European Cluster Observatory

17


The Australian Wine Cluster
Trade Performance
Australian Wine
Exports in thousand US $

Australian Wine
World Export Market
Share

$2,700,000
$2,400,000

10.0%

Value
Market Share

$2,100,000
8.0%
$1,800,000
$1,500,000

6.0%

$1,200,000
4.0%

$900,000
$600,000

2.0%
$300,000
$0

0.0%
1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

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.

18


The Australian Wine Cluster
History
1991 to 1998

1930

1965

1980

First oenology
course at
Roseworthy
Agricultural
College 1955

Australian Wine
Bureau
established

Australian Wine
and Brandy
Corporation
established 1990

1970

New organizations
created for education,
research, market
information, and
export promotions
Winemaker’s
Federation of
Australia
established

Winemaking
school at Charles
Sturt University
founded

Australian Wine
Research
Institute founded

1950s

1960s

1970s

1980s

1990s

Import of
European winery
technology

Recruiting of
experienced
foreign investors,
e.g. Wolf Bass

Continued inflow
of foreign capital
and
management

Creation of
large number of
new wineries

Surge in exports
and international
acquisitions

Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002

19


The Evolution of Regional Economies
San Diego

Climate
and
Geography

Sporting and
Leather Goods

Transportation
and Logistics
Power Generation

Communications
Equipment

Aerospace Vehicles
and Defense

U.S.
Military

Education and
Knowledge Creation
Medical Devices

Bioscience
Research
Centers

1910

1930

1950

Biotech / Pharmaceuticals

1970
20

1990

Competitiveness and the Composition of the Economy
Linkages Across Clusters
Fishing &
Fishing
Products

Entertainment
Hospitality
& Tourism

Textiles
Prefabricated
Enclosures

Agricultural
Products

Jewelry &
Precious
Metals

Furniture

Transportation
& Logistics

Distribution
Services

Aerospace
Vehicles &
Information
Defense
Tech.

Business
Services
Education &
Knowledge
Creation

Financial
Services
Publishing
& Printing

Analytical
Instruments
Medical
Devices

Biopharmaceuticals
Chemical
Products

Apparel
Leather &
Related
Products

Construction
Materials
Processed
Food

Heavy
Construction
Services

Lightning &
Electrical
Equipment

Communications
Equipment

Forest
Products

Power
Generation

Heavy
Machinery
Motor Driven
Products

Production
Technology

Tobacco

Oil &
Gas
Plastics

Aerospace
Engines

Footwear

Note: Clusters with overlapping borders or identical shading have at least 20% overlap
(by number of industries) in both directions.

Building
Fixtures,
Equipment &
Services

21

Metal
Automotive
Manufacturing

Sporting
& Recreation
Goods

Geographic Influences on Competitiveness
World Economy

Broad Economic Areas

Groups of Neighboring
Nations

The Neighborhood

Nation

States, Provinces

Metropolitan Areas

Urban and Rural Areas

22


The Neighborhood
Southeast Asia

• Economic coordination among neighboring countries can significantly enhance competitiveness
• Integration offers greater opportunities than participation in broader economic forums (e.g., APEC)

23


The Process of Economic Development
Shifting Roles and Responsibilities

Old Model

New Model

• Government drives economic
development through policy
decisions and incentives

• Economic development is a
collaborative process involving
government at multiple levels,
companies, teaching and
research institutions, and private
sector organizations

• Competitiveness must become a bottoms-up process in which many
individuals, companies, and institutions take responsibilities
• Every community and cluster can take steps to enhance competitiveness
• The rapid sector must become more engaged in competitiveness to improve
rapidly

24


Role of the Private Sector in Economic Development
•
•

•
•
•

•
•
•

A company’s competitive advantage depends partly on the quality of the
business environment
A company gains advantages from being part of a cluster

Take an active role in upgrading local infrastructure
Nurture local suppliers and attract foreign suppliers
Work closely with local educational and research institutions, to upgrade
their quality and create specialized programs addressing the cluster’s
needs
Inform government on regulatory issues and constraints bearing on cluster
development
Focus corporate philanthropy on enhancing the local business environment
Leverage trade associations for competitiveness
– Greater influence if many companies are united
– Cost sharing between members

•

Businesses must drive the process of competitiveness improvement at the
national and regional level


25


Defining an Economic Strategy
National Value Proposition
•

What is the unique competitive position of the nation or region
given its location, legacy, and existing and potential strengths?
– What role can it play with neighbors, the region, and the world
economy?
– What unique value as a business location?
– For what types of activities and clusters?

Achieving and Maintaining Parity
with Peers

Developing Unique Strengths

• Priorities and sequencing are necessity in economic development


26


Strategic Issues For the United States
Core Strengths

•

Weaknesses
•

Innovation

–
–
–

– Science, technology, R&D

•

Entrepreneurship

•

Human resources challenges

Free and open competition

•

Distortions in the international trading
system
–
–
–

•

•

Capital markets (current
uncertainty)

•

Economic decentralization

•


27

Retraining system
Pension security
Health insurance access and mobility

Unnecessary cost of doing business
–
–
–
–
–

Dynamism and flexibility

U.S. influence, authority, and focus has
diminished

Weak transitional “Security Blanket”
–
–
–

•

Intellectual Property protection
Foreign market access for advanced
services
Distortions/currency/subsidies

Falling U.S. leadership in international
economic development
–

•

Need to restructure public education
Access to higher education
Training Americans vs. low skilled
immigration

Burdensome regulations
Litigation costs
High-cost / high complexity tax system
Energy inefficiency
High healthcare costs

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