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This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990),

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Presentation on theme: "This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990),"— Presentation transcript:

1 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 Achieving Economic and Social Progress in Latin America: The New Learning Professor Michael E. Porter Harvard Business School VI Ministerial Forum for Development United Nations - New York July 11, 2013

2 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 2 The Dual Challenges of Development Social Development There is a powerful connection between economic and social development Improving competitiveness requires improving the economic and social context simultaneously Economic Development

3 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 3 Competitiveness depends on the long-run productivity of a location as a place to do business -Productivity of existing firms and workers -Ability to achieve high participation of working age citizens in the workforce Competitiveness is not: -Low wages -A weak currency -Jobs per se A country or state is competitive to the extent that firms operating there are able to compete successfully in the regional and global economy while supporting high and rising wages and living standards for the average citizen Economic Development depends on Competitiveness What is Competitiveness?

4 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 4 Endowments, including natural resources, geographical location, population, and country size, create a foundation for prosperity, but true prosperity arises from productivity in the use of endowments Endowments What Determines Competitiveness?

5 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 5 Endowments Macroeconomic Competitiveness Human Development and Effective Political Institutions Sound Monetary and Fiscal Policies What Determines Competitiveness? Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not sufficient to ensure productivity Endowments, including natural resources, geographical location, population, and country size, create a foundation for prosperity, but true prosperity arises from productivity in the use of endowments

6 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 6 Human Development: Basic education, health care, equal opportunity Rule of Law: Property rights, personal security, and due process Political Institutions: Stable and effective political and governmental organizations and processes Human Development and Effective Political Institutions Macroeconomic Competitiveness Endowments What Determines Competitiveness? Sound Monetary and Fiscal Policies Human Development and Effective Political Institutions

7 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 7 Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition revealed at the level of firms, clusters, and regions Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not sufficient to ensure productivity Endowments, including natural resources, geographical location, population, and country size, create a foundation for prosperity, but true prosperity arises from productivity in the use of endowments Macroeconomic Competitiveness Microeconomic Competitiveness Sophistication of Company Operations and Strategy Quality of the Business Environment State of Cluster Development Endowments Human Development and Effective Political Institutions Sound Monetary and Fiscal Policies What Determines Competitiveness?

8 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 8 + Abundant resources: mineral, agricultural, fishing, and cultural + Advantageous location + Improving administrative infrastructure + Simplified customs procedures ± Sound banking system, but high interest spreads ± Improving financial markets, but limited venture capital availability –Poor physical infrastructure –Low skill levels in the labor force, mismatch with demand –Weak university-industry research collaboration –Few high-quality research and scientific institutions Peru’s National Business Environment, 2012 Context for Firm Strategy and Rivalry Related and Supporting Industries Factor (Input) Conditions Demand Conditions + Openness to foreign investment, trade, capital flows + Improvements in investor protections ± Efforts to strengthen competition policy – Rigidity of employment – Difficulty in business formation – Low intensity of local competition – High Informality of the economy +Improving consumer protection regulation ± Improving sophistication of local buyers – Weak environmental standards enforcement – Limited local suppliers and supporting industries – Shallow clusters

9 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 9 Geographic Influences on Competitiveness Regions and Cities Nation Regions are the most important economic unit for competitiveness in larger countries, especially countries beyond subsistence development

10 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 10 Prosperity of Mexican States Real Growth Rate of GDP per capita, Gross Domestic Product per Capita, 2010 (in constant 2003 Mexican Pesos) Source: INEGI. Sistema de Cuentas Nacionales de México. Mexico Real Growth Rate of GDP per Capita: 1.36% Mexico GDP per Capita: $77,212 Campeche (-4.9%, $333,700) Baja California Sur Distrito Federal Tabasco Baja California Querétaro Aguascalientes Sonora Zacatecas Nayarit Veracruz Puebla Coahuila Chiapas Tlaxcala Quintana Roo Tamaulipas Chihuahua Durango Morelos Colima Jalisco Sinaloa San Luis Potosí Yucatán Guanajuato México Hidalgo Michoacán Oaxaca Guerrero Nuevo Leon

11 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 11 Many essential levers of competitiveness reside at the regional level Regions specialize in different sets of clusters The Role of Regions in Economic Development

12 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 12 Change in Puebla’s share of National Employment, 2003 to 2008 Puebla’s national employment share, 2008 Employees 5,000 = Traded Cluster Composition of the Puebla Economy Overall change in the Puebla Share of Mexican Traded Employment: +0.09% Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Contributions by Prof. Niels Ketelhohn. Puebla Overall Share of Mexican Traded Employment: 4.20% Added Jobs Lost Jobs Employment Education and Knowledge Creation Textiles Apparel Information Technology Construction Materials Automotive Processed Food Building Fixtures, Equipment and Services Distribution Services Heavy Machinery Furniture Leather and Related Products Forest Products Chemical Products

13 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 13 Many essential levers of competitiveness reside at the regional level Regions specialize in different sets of clusters Regions are a critical unit in competitiveness Each region needs its own distinctive strategy and action agenda –Business environment improvement –Cluster upgrading –Improving government effectiveness The Role of Regions in Economic Development

14 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 14 Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden Restaurants Attractions and Activities e.g., theme parks, casinos, sports Airlines, Cruise Ships Travel AgentsTour Operators Hotels Property Services Maintenance Services Government Agencies e.g., Australian Tourism Commission, Great Barrier Reef Authority Educational Institutions e.g., James Cook University, Cairns College of TAFE Industry Groups e.g., Queensland Tourism Industry Council Food Suppliers Public Relations & Market Research Services Local Retail, Health Care, and Other Services Souvenirs, Duty Free Banks, Foreign Exchange Local Transportation Developing Clusters Tourism in Cairns, Australia

15 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 15 Institutions for collaboration Processed/Frozen Asparagus White Asparagus Fresh Asparagus Green Asparagus Airports Ports (Salaverry) Cold Chain Transportation (Frío Aéreo) Railways Asparagus Growers Transportation/Logistics Inputs Domestic Production/StrengthsImports/Weaknesses Related Clusters Financial Services Gastronomy Government Institutions Export Promotion (PROMPERU) Agriculture Sanitation (SENASA) Universities (Trujillo, UNAM, UPN) Technical Standards (ANTCS) Asparagus Industry Group (IPEH) Peru Export Association (ADEX) Agroexporters Guild (AGAP) SME Promotion (PROMPEX) Customs Agencies Other Equipment Machinery Processing Equipment Packing Material Fertilizer Irrigation Systems Seed/Seedlings Pesticides Source: Interviews with industry representatives, team analysis Developing Clusters Peruvian Asparagus

16 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 16 Clusters Specialized Physical Infrastructure Natural Resource Protection Science and Technology Infrastructure (e.g., centers, university departments, technology transfer) Education and Workforce Training Business Attraction Export Promotion Clusters provide a framework for organizing the implementation of many public policies and public investments directed at economic development Quality and environmental standards Market Information and Disclosure Organize Public Policy around Clusters

17 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 17 Economic progress has a positive impact on social progress, but rising GDP per Capita does not guarantee social progress We must measure social progress directly in order to understand performance and inform improvement The Social Progress Index is a new tool to do so −Holistic framework −Outcomes (not inputs) −Separate from economic By separating social and economic progress, we can better understand performance and how social and economic performance are linked Economic Development and Social Progress

18 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 18 What is Social Progress? Social progress is the capacity of a society to meet the basic human needs of its citizens, establish the building blocks that allow citizens and communities to enhance and sustain the quality of their lives, and create the conditions for all individuals to reach their full potential.

19 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 19 The Social Progress Index Framework

20 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 Costa Rica

21 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 21 Comparing country Performance: Costa Rica vs. South Africa 21

22 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 22 Philanthropy Donations to worthy social causes Volunteering The Role of Business in Social and Economic Development Evolving Approaches

23 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 23 Corporate Social Responsibility (CSR) Philanthropy Donations to worthy social causes Volunteering Compliance with community standards Good corporate citizenship “Sustainability” Mitigate risk and harm The Role of Business in Social and Economic Development Evolving Approaches

24 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 24 Corporate Social Responsibility (CSR) Creating Shared Value (CSV) Philanthropy Donations to worthy social causes Volunteering Compliance with community standards Good corporate citizenship “Sustainability” Mitigate risk and harm Integrating social needs and challenges into economic value creation itself The Role of Business in Social and Economic Development Evolving Approaches

25 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 25 What is Shared Value? Creating Shared Value: Addressing a social issue with a business model

26 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 26 Social Needs and Economic Value Creation Social deficits create economic costs “Externalities” affect internal company productivity Social needs represent the largest market opportunities Company Productivity Supplier Access and Viability Worker Safety Environmental Improvement Community Economic Development Water Use Energy Use Worker Skills Health Affordable Housing

27 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 27 Levels of Shared Value I.Meeting social needs through products and underserved customers II.Redefining productivity in the value chain III.Improving the local and regional business environment

28 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 28 Creating Shared Value in Products and Markets Jain Irrigation Systems Drip irrigation equipment for small farmers in Africa and India Serves 4 million farmers worldwide as of 2012 Reduces water use by over 40% Enables higher crop yields that improve food security while raising farmers’ income Jain is now a $820 million business that is rapidly growing

29 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 29 Shared Value in the Value Chain Fibria, Brazil Fibria, a large manufacturer of pulp for paper, utilizes planted eucalyptus trees rather than native and old growth forests The company also encourages small-scale producers near its mills to plant eucalyptus in conjunction with other crops, assisting them with technical training and inputs Fibria achieves far greater resource efficiency versus old growth forest production, with eucalyptus yielding 30 times higher yield per acre of wood pulp Small scale producers contribute 27% of the raw material volume utilized in Fibria mills, improving efficiency 4000 households have significantly increased their income

30 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 30 Improving the Business Environment: Upgrading Channels Arca Continental Arca Continental is the second largest bottling company in Latin America, and one of the largest Coca-Cola bottlers in the world Arca Continental established a program to train and invest in the micro-entrepreneur retailers who sell more than 60% of the Company’s products, including management, sales and marketing and merchandising Invests in low energy use coolers and fixture improvements Participating retailers register sales increases of 25% or more, with improved customer satisfaction, leading to similar increases in the sales of Arca’s products Arca Continental recovers its investment in 6 months or less Beginning in Mexico, the program is being extended to Argentina and Ecuador

31 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 31 Skill and Supplier Development Rio Tinto, Canada Rio Tinto’s Diavik Diamond mine has helped create a variety of community based training partnerships with communities, contractors, governments and educational institutions in remote Northern Canada Education: Promotes careers in diamond mining. Offers apprenticeships that employ and train students Worker training: Partners with communities, colleges and government to train workers in mining related activities Supplier development: Sources local inputs and capacity building for local providers of goods and services Rio Tinto hires 62% of its employees locally The company sources 71% of goods and services locally

32 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 32 Novartis Arogya Parivar Initiative Rural India Enabling Regional Development Reconceiving Products and Markets Redefining Productivity in Value Chain Community health education program to address lack of health- seeking behavior Frequent health camps with physicians brought into rural areas Microfinance partners to improve healthcare infrastructure and access to working capital Local sales teams that know the culture and speak the dialect, which provided access to crucial market intelligence and reduced mistrust Dense network of local distributors to reduce stock-outs Portfolio of the appropriate and affordable medicines from its originals, generics, and over-the- counter (OTC) businesses Adapted packs of some OTC medicines (appeal and size) to address limited consumers’ ability to spend out-of- pocket on healthcare

33 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 33 New Stakeholder Roles and Relationships Shared value thinking is driving new relationships between companies, philanthropists, NGOs, and government in addressing social issues Traditional RolesNew Roles Donate to charitable causesInitiate and scale shared value strategiesCompanies Donate to charitable causesPartner with companies and NGOs to catalyze shared value initiatives Philanthropists Receive grants to provide social services Enable implementation of new shared value business models NGOs Tax business and regulate business practices; operate social programs Governments Partner with companies and NGOs to make platform investments and support shared value strategies

34 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 34 Redefining the Role of Business Businesses acting as businesses, not as charitable givers, are arguably the most powerful force for addressing many of the pressing issues facing our society Shared value gives rise to far broader opportunities for economic success than conventional management thinking Shared value thinking will drive the next wave of innovation, productivity, and economic growth A transformation of business practice around shared value gives purpose to the corporation

35 —UNDP Competitiveness SV Presentation — FINAL Copyright 2013 © Professor Michael E. Porter 35 The Dual Challenges of Development Social Development There is a powerful connection between economic and social development Improving competitiveness requires improving the economic and social context simultaneously Economic Development


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