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Copyright 2007 © Professor Michael E. Porter

Global Competitiveness and Competitive Advantage of Vietnam

Professor Michael E. Porter Harvard Business School Ho Chi Minh City, Vietnam December 1, 2008
This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard Business Review, March 2001); and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: November 18, 2008, 3pm
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Copyright 2007 © Professor Michael E. Porter

Company Strategy

This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard Business Review, March 2001); and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: November 18, 2008, 3pm
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Copyright 2007 © Professor Michael E. Porter

Agenda

• The Economic Foundations of Competition • Principles of Strategy

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Copyright 2007 © Professor Michael E. Porter

How Managers Think About Competition

COMPETING TO BE THE COMPETING TO BE THE BEST BEST

COMPETING TO BE COMPETING TO BE UNIQUE UNIQUE

• The worst error in strategy is to compete with rivals on the same dimensions

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Copyright 2007 © Professor Michael E. Porter

Flawed Concepts of Strategy
• Strategy as action
– – – – – “Our strategy is to merge…” “… internationalize…” “… consolidate the industry…” “… outsource…” “…double our R&D budget…”

• Strategy as aspiration
– – – – “Our strategy is to be #1 or #2…” “Our strategy is to grow…” “Our strategy is to be the world leader…” “Our strategy is to provide superior returns to our shareholders…”

• Strategy as vision
– “Our strategy is to best understand and satisfy our customers’ needs…” – “… provide superior products and services…” – “…to advance technology for mankind…”
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Copyright 2007 © Professor Michael E. Porter

Vision Statements
Autodesk Transforming business by design Avon To be the company that best understands and satisfies the product, service and self-fulfillment needs of women – globally. Goodyear Tire and Rubber Become a market-focused tire company providing superior products and services to end-users and to our channel partners, leading to superior returns for our shareholders. Lafarge To be the undisputed world leader in building materials Marriott International, Inc. To be the number one lodging company in the world.

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Copyright 2007 © Professor Michael E. Porter

Setting the Right Goals
• Good strategy starts with setting appropriate financial goals for the company

• The fundamental goal of a company is superior long-term return on investment • Growth is good only if superiority in ROIC is achieved and sustained
– ROIC threshold

• Profitability must be measured realistically, capturing the actual profits on the full investment • Profitability metrics besides ROIC (e.g., return on sales; ebitda margin; pro-forma earnings; and cash flow margin) are risky for strategy • Prevalent accounting adjustments to reported profitability (e.g., writeoffs, restructuring charges) can obscure true economic performance • Goodwill must be treated as part of investment • Setting unrealistic profitability or growth targets can undermine strategy
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Copyright 2007 © Professor Michael E. Porter

Economic Foundations of Competition
• The fundamental unit of strategic analysis is the business or industry
− Defining the relevant industry is important to strategy

• Company economic performance results from two distinct causes

Industry Industry Structure Structure

Relative Position Relative Position Within the Within the Industry Industry

- Overall Rules of Competition

- Sources of Competitive Advantage

• Strategic thinking must encompass both

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Copyright 2007 © Professor Michael E. Porter

Disaggregating Economic Performance: Industry vs. Position
35%
31.6%

30%
27.8%

Return on Invested Capital 1993-2007

25% 20% 15% 10% 5% 0% Revlon
Industry Average

13.6% 10.5%

‘Invested capital less excess cash’ is the average of the beginning period and the ending period values. Excess cash is calculated by subtracting cash in excess of 10% of annual revenue.

Paccar

Source: Compustat (2008), author’s analysis

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Copyright 2007 © Professor Michael E. Porter

Profitability of Selected U.S. Industries
1993–2007
Soft Drinks Prepackaged Software Pharmaceuticals Perfume,Cosmetic,Toilet Prep Advertising Agencies Distilled Spirits Semiconductors Surgical and Medical Instruments Mens and Boys Clothing Household Appliances Tires Malt Beverages Child Day Care Services Household Furniture Drug Stores Grocery Stores Cookies and Crackers Iron and Steel Foundries Mobile Homes Bakery Products Oil and Gas Machinery Book Publishing Wine and Brandy Laboratory Equipment Engines and Turbines Soft Drink Bottling Hotels Knitting Mills Airlines Catalog, Mail-Order Houses

ROIC = Earnings before interest and taxes divided by invested capital less excess cash

Average industry ROIC in the US:15.1%

0%

5%

10% 15% 20% 25% Return on invested capital, 1993–2007 average

30%

35%

40%

Note: ‘Invested capital less excess cash’ is the average of the beginning period and the ending period values. Excess cash is calculated by subtracting cash in excess of 10% of annual revenue. Source: Compustat (2008), author’s analysis
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Copyright 2007 © Professor Michael E. Porter

Determinants of Industry Profitability

Threat of Substitute Products or Services

Bargaining Power of Suppliers

Rivalry Among Existing Competitors

Bargaining Power of Buyers

Threat of New Entrants

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Copyright 2007 © Professor Michael E. Porter

Strategy and Industry Structure: Heavy Trucks

Threat of Substitute Threat of Substitute Products or Products or Services Services • Railroads • Water transportation Bargaining Power Bargaining Power of Suppliers of Suppliers • Large independent suppliers of engines and drive train components • Unionized labor Rivalry Among Rivalry Among Existing Existing Competitors Competitors • Heavy price competition on standardized models Bargaining Power Bargaining Power of Buyers of Buyers • Large fleets • Leasing companies • Small fleets and owner operators

Threat of New Threat of New Entrants Entrants • Many truck producers are assemblers

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Copyright 2007 © Professor Michael E. Porter

Paccar Competitive Positioning
• Focus on owner-operators • Design trucks with special features and amenities • Customization and build-to-order • Achieve low truck operating costs • Offer extensive roadside assistance to truckers

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Copyright 2007 © Professor Michael E. Porter

Strategy and Industry Structure: Foodservice Distribution

Threat of Substitute Threat of Substitute Products or Services Products or Services • Go direct • Use retail / warehouse channels Bargaining Power of Bargaining Power of Suppliers Suppliers • Food processors • Food cooperatives • Farmers Rivalry Among Rivalry Among Existing Existing Competitors Competitors • Distributors –Purchasing –Warehousing –Delivery Threat of New Threat of New Entrants Entrants • Low barriers to entry • • • • • Bargaining Power Bargaining Power of Buyers of Buyers Restaurants Schools Hospitals Cafeterias Other food service establishments

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Copyright 2007 © Professor Michael E. Porter

Reshaping Industry Structure
Foodservice Distribution • Offering value-added services • Offering private-label products • Moving to national procurement contracts • Increasing the use of sophisticated information technology

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Copyright 2007 © Professor Michael E. Porter

Determinants of Relative Performance

Differentiation (Higher Price)

Competitive Competitive Advantage Advantage

Lower Cost

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Copyright 2007 © Professor Michael E. Porter

Foundations of Competitive Advantage
The Value Chain
Firm Infrastructure
(e.g. Financing, Planning, Investor Relations)

Human Resource Management

Support Activities

(e.g. Recruiting, Training, Compensation System)

Technology Development
(e.g. Product Design, Testing, Process Design, Material Research, Market Research)

M a r g

Value What buyers are willing to pay

Procurement
(e.g. Components, Machinery, Advertising, Services)

Inbound Logistics
(e.g. Incoming Material Storage, Data Collection, Service, Customer Access)

Operations
(e.g. Assembly, Component Fabrication, Branch Operations)

Outbound Logistics
(e.g. Order Processing, Warehousing, Report Preparation)

Marketing & Sales
(e.g. Sales Force, Promotion, Advertising, Proposal Writing, Web site)

After-Sales Service
(e.g. Installation, Customer Support, Complaint Resolution, Repair)

i n

Primary Activities

• Competing in a business involves performing a set of discrete activities, in which competitive advantage resides
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Copyright 2007 © Professor Michael E. Porter

Defining the Value Chain
Homebuilding
Firm Infrastructure
(e.g. Financing, Planning, Investor Relations)

Human Resource Management

Support Activities

(e.g. Recruiting, Training, Compensation System)

Technology Development
(e.g. Product Design, Testing, Process Design, Materials Research, Market Research)

M a r g

Value What buyers are willing to pay

Procurement
(e.g. Materials, Subcontracted Labor, Advertising, Services)

Land Acquisition & Development (Identify attractive
markets, Secure land, Procure entitlements and permits, Prepare site)

Construction

Marketing & Sales

Closing

After-Sales Service
(e.g. Warranties, Customer Complaints)

i n

(Design, (Lead generation, Engineering, Model home Schedule and display, Sales manage force, Customer construction selection of process) personalized options)

(e.g. Customer Financing, Contract, Title, Closing)

Primary Activities

• There are different ways of configuring the value chain in the same industry
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Copyright 2007 © Professor Michael E. Porter

Strategy For Non-Profits
The Museum Value Chain
Firm Infrastructure
(e.g. governance, planning, budgeting, information tech., facilities)

Fundraising
(e.g. earned revenues, proposals, solicitations, events, donor relations)

Human Resource Management
(e.g. recruiting, training, compensation system)

Program and Content Development
(e.g. scholarship, exhibit design, market research)

S u r p Visitor / Constituency Services
(e.g., member outreach, special events)

Educational Programs
(e.g. local school outreach, adult classes, special tours)

Assembly and Preservation
(e.g., acquisition, authentication, cataloguing)

Exhibition

Hospitality Services
(e.g., shops, restaurants, maintenance)

Marketing & Sales
(e.g., promotion, advertising, catalogs)

l u s

Social Benefits

(e.g., curating, display, support materials)

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Copyright 2007 © Professor Michael E. Porter

Agenda
• The Economic Foundations of Competition • Principles of Strategy

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Copyright 2007 © Professor Michael E. Porter

Achieving Superior Performance
Operational Effectiveness is Not Strategy

Operational Effectiveness

Strategic Positioning

• Assimilating, attaining, and extending best practices

Creating a unique and sustainable competitive position

Do the same thing better

Do things differently to achieve a different purpose

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Copyright 2007 © Professor Michael E. Porter

Five Tests of a Good Strategy
• A unique value proposition • A unique value proposition compared to other organizations compared to other organizations • A different, tailored value chain • A different, tailored value chain • Clear tradeoffs, and choosing what • Clear tradeoffs, and choosing what not to do not to do • Activities in the value chain that fit • Activities in the value chain that fit together and reinforce each together and reinforce each other other • Strategic continuity with continual • Strategic continuity with continual improvement in realization improvement in realization

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Copyright 2007 © Professor Michael E. Porter

Strategic Positioning
IKEA, Sweden
Value Proposition Value Proposition
• Young, first time, or price-sensitive buyers who want stylish, space efficient and scalable furniture and accessories at very low price points.

Distinctive Distinctive Activities Activities • • • • • • • • • • •
Modular, ready-to-assemble, easy to package designs In-house design of all products Wide range of styles displayed in huge warehouse stores with large on-site inventories Self-selection Extensive customer information in the form of catalogs, explanatory ticketing, do-it-yourself videos, and assembly instructions Ikea designer names attached to related products to inform coordinated purchases Long hours of operation Suburban locations with large parking lots On-site, low-cost, restaurants Child care provided in the store Self-delivery by most customers

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Copyright 2007 © Professor Michael E. Porter

Defining the Value Proposition

What What Customers? Customers?
• •
What end users? What channels?

Which Which Needs? Needs?
• • •
What Relative What Relative Price? Price?
Which products? Which features? Which services?

Premium? Discount?

• A novel value proposition often expands the market

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Copyright 2007 © Professor Michael E. Porter

Strategic Positioning
Enterprise Rent-A-Car
Value Proposition Value Proposition
• Home-city replacement cars for drivers whose cars are being repaired or who need an extra vehicle, at low rates (30% below airport rates)

Distinctive Distinctive Activities Activities
• Numerous, small, inexpensive offices in each
metropolitan area, including on-premises offices at major accounts

• Open during daylight hours • Deliver cars to customers’ homes or rental sites,
or deliver customers to cars

• Acquire new and older cars, favoring soon-to-be
discontinued older models

• Keep cars six months longer than other major
rental companies

• In-house reservations • Grassroots marketing with limited television • Cultivate strong relationships with auto
dealerships, body shops, and insurance adjusters

• Hire extroverted college graduates to encourage
community interaction and customer service

• Employ a highly sophisticated computer network
to track the fleet
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Copyright 2007 © Professor Michael E. Porter

Strategic Positioning
GOL Airlines, Brazil
Value Proposition Value Proposition • •
Convenient, basic airline service between 41 Brazilian and nearby international cities at very low prices, competing with bus transportation Price sensitive business (60%) and leisure travelers

Distinctive Distinctive Activities Activities • • • • • • •
No-frills service Many flights during late night hours Good time performance Single aircraft type (Boeing 737s) 80% reservations made via the Internet Quick airport turn-around Utilize aircraft more hours per day

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Copyright 2007 © Professor Michael E. Porter

Making Strategic Tradeoffs
• Tradeoffs occur when strategic positions are incompatible
– The need for a choice

Sources of Tradeoffs
– Incompatible product or service features / attributes – Differences in the best configuration of activities in the value chain to deliver the chosen value proposition – Inconsistencies in image or reputation across positions – Limits on internal coordination, measurement, motivation, and control

• Tradeoffs make a strategy sustainable against imitation by established rivals • An essential part of strategy is choosing what not to do

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Copyright 2007 © Professor Michael E. Porter

Strategic Tradeoffs
Neutrogena Soap (1990)

• Forgo cleaning, skin softening, and deodorizing
features

• Choose higher costs through the configuration of:
– packaging – manufacturing – detailing – medical advertising – skin research

• Give up the ability to reach customers via:
– promotions – television – some distribution channels
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Copyright 2007 © Professor Michael E. Porter

Strategic Tradeoffs
IKEA, Sweden
IKEA IKEA
Product • Low-priced, modular, ready-to-assemble designs • No custom options • Furniture design driven by cost, manufacturing simplicity, and style Value Chain • Centralized, in-house design of all products • All styles on display in huge warehouse stores • Large on-site inventories
• Limited sales help, but extensive customer information

Typical Furniture Retailer Typical Furniture Retailer
Product • Higher priced, fully assembled products • Customization of fabrics, colors, finishes, and sizes • Design driven by image, materials, varieties

Value Chain • Source some or all lines from outside suppliers • Medium sized showrooms with limited portion of available models on display • Limited inventories / order with lead time • Extensive sales assistance • Traditional retail hours

• Long hours of operation

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Copyright 2007 © Professor Michael E. Porter

Typical Thinking on the Sources of Competitive Advantage

•• “Key” Success Factors “Key” Success Factors •• “Core” Competencies “Core” Competencies •• “Critical” Resources “Critical” Resources

• Competitive advantage is seen as concentrated in a few parts of the value chain
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Copyright 2007 © Professor Michael E. Porter

Mutually Reinforcing Activities
Zara Apparel
Word-ofWord- ofmouth marketing and repeat buying
Wide range of styles

Customers chic but costcostconscious

CuttingCuttingedge fashion at moderate price and quality

Global team of trendspotters

Little media advertising

Very frequent product changes

Majority of production in Europe

Advanced production machinery

Prime store locations in high traffic areas
JIT delivery

Extensive use of store sales data Tight coordination with 20 wholly-owned factories

Very flexible production system

• Fit is leveraging what is different to be more different
Source: Draws on research by Jorge Lopez Ramon (IESE) at the Institute for Strategy and Competitiveness, HBS 32
Copyright 2007 © Professor Michael E. Porter

Strategic Continuity
• Continuity of strategy is fundamental to sustainable competitive advantage
– – – – e.g., allowing the organization to understand the strategy building truly unique skills and assets related to the strategy establishing a clear identity with customers, channels, and other outside entities strengthening fit across the value chain

• Reinvention and frequent shifts in direction are costly and confuse the customer, the industry, and the organization

• Maintain continuity in the value proposition • Continuously improve ways to realize the value proposition
– Strategic continuity and continuous change should occur simultaneously. They are not inconsistent

• Continuity of strategy allows learning and change to be faster and more effective
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Copyright 2007 © Professor Michael E. Porter

Barriers to Strategy
Flawed Management Thinking
• Misunderstanding of strategy principles • Poor industry definition obscures the arena in which competition actually takes place

Industry Convergence Pressures
• Labor agreements or regulations constrain price, product, service or process alternatives • Industry conventional wisdom leads all companies to follow common practices • Customers ask for incompatible features or request new products or services that do not fit the strategy

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Copyright 2007 © Professor Michael E. Porter

Barriers to Strategy
Internal Practices
• Inappropriate goals and performance metrics bias strategy choices
– Size over profitability – Short time horizon

• Rapid turnover of leadership undermines strategy in favor of shortterm performance • A desire for consensus blurs strategic tradeoffs • Inappropriate cost allocation leads to too many products, services, or customers • Outsourcing makes activities homogenous and less distinctive

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Copyright 2007 © Professor Michael E. Porter

Internal Barriers to Strategy
Neutrogena Soap (2005)

• • •

Prior to the 1990’s Neutrogena was the number one brand recommended by dermatologists Neutrogena had a relatively narrow target market but deep penetration and high customer loyalty Beginning in the early- to mid-1990’s, new growth-oriented management shifted Neutrogena from a dermatologist-focused marketing concept to mass market television advertisements and celebrity endorsements Neutrogena lost market share while Gallderma’s Cetaphil captured the loyalty of dermatologists, and prospered

Source: Draws on research conducted at the Institute for Strategy and Competitiveness and interviews conducted with a former Neutrogena executive. 36
Copyright 2007 © Professor Michael E. Porter

Finding a Unique Strategic Position
Segmenting the Industry (not just the Market) • Creatively segmenting product varieties, customer groups, and purchase occasions Exploiting Tradeoffs • Identifying tradeoffs in the value proposition or in the value chain

Leveraging Unique Activities Capitalizing on Industry Dynamics • Building off activities with true • Identifying strategic positions opened uniqueness up by industry structural changes • Looking for new activity configurations and combinations

• Migrate toward the chosen strategic position • Focus incremental investments on reinforcing the chosen strategy

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Copyright 2007 © Professor Michael E. Porter

Segmentation and Strategic Positioning
Automobile Insurance
Progressive Progressive
Customer Group • High-risk drivers shunned by standard automobile insurers Set of Activities • Distribution primarily through independent agents • Sales force that educates independent agents in complex information gathering techniques • 30-year database on high-risk drivers • Complex rating scheme • 14,000 different prices • 50-300% premium pricing over standard segment • Adjusters work from offices on wheels to provide immediate response. Adjusters trained and empowered to write out check at scene of accident • Steep incentives to make a 4% underwriting profit • Conservative, liquid investment portfolio

Geico Geico
Customer Group • “Preferred”, lowest risk drivers Set of Activities • Direct customer interaction through direct mail, telephone, and the Internet • Sophisticated direct mail targeting low risk households • 35+ year database and modeling utilities on preferred drivers • Complex rating and pricing system • Heavy advertising to drive requests for rate quotes (“I’ve got good news.”) • Quote rates to only 50% of customers who inquire about coverage • 15-20% lower prices than competition • Network of insurance adjusters with cell phones working out of own vehicles for immediate response • 24-hour customer service to handle sales, policy inquires, and claims • Conservative, liquid investment portfolio
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Copyright 2007 © Professor Michael E. Porter

Strategic Positioning
Enterprise Rent-A-Car
Value Proposition Value Proposition
• Home-city replacement cars for drivers whose cars are being repaired or who need an extra vehicle, at low rates (30% below airport rates)

Distinctive Distinctive Activities Activities
• Numerous, small, inexpensive offices in
metropolitan areas, including on-premises offices at major accounts

• Open during daylight hours • Deliver cars to customers’ homes or rental sites,
or deliver customers to cars

• Acquire new and older cars, favoring soon-to-be
discontinued older models

• Keep cars six months longer than other major
rental companies

• In-house reservations • Grassroots marketing with limited television • Cultivate strong relationships with auto
dealerships, body shops, and insurance adjusters

• Hire extroverted college graduates to encourage
community interaction and customer service

• Employ a highly sophisticated computer network
to track its fleet

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Copyright 2007 © Professor Michael E. Porter

The Process of Developing Business Unit Strategy
• Strategy should be developed and periodically reviewed in a formal process rather than being left to occur spontaneously
– The process need not be highly structured

• Strategy development is best done in a multifunctional team including the general manager and heads of important functions • The role of the strategic planning executive or department is to serve as staff to the team, not be responsible for strategy development • The strategy team itself should be relatively small to ensure frank and productive discussion between the leader and senior peers
– Strategy development involves making tradeoffs and exploring options that can be unsettling and disruptive if lower level people are involved – Other managers can be invited for particular meetings/input

• The strategy team should conduct its work jointly rather than delegating components of the strategy to functional areas
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Copyright 2007 © Professor Michael E. Porter

Communicating a Strategy
• Strategy involves everyone in an organization, not just top management • The benefits of strategy are greatest when it is communicated widely in the organization • Communicating strategy requires a simple and vivid way of describing the essence of the company’s unique position
– Symbols of the strategy are invaluable tools – Repetition

• The basic strategy and value proposition must also be communicated to customers, channels, suppliers, and financial markets
– What about confidentiality?

• Leaders should not assume that subordinates understand the strategy, or that they agree with it
– Help each organizational unit translate the strategy into implications for its own mandate

• Individuals who do not ultimately accept the strategy cannot have an ongoing role in the company
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Copyright 2007 © Professor Michael E. Porter

The Role of Leaders in Strategy
• Drive operational improvement, but clearly distinguish it from strategy • Lead the process of choosing the company’s unique position
– The CEO is the chief strategist – The choice of strategy cannot be entirely democratic • Communicate the strategy relentlessly to all constituencies – Harness the moral purpose of strategy

• Maintain discipline around the strategy, in the face of many distractions. • Decide which industry changes, technologies, and customer needs to respond to, and how the response can be tailored to the company’s strategy • Measure progress against the strategy using metrics that capture the implications of the strategy for serving customers and performing particular activities • Sell the strategy and how to evaluate progress against the strategy to the financial markets

• Commitment to strategy is tested every day
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Copyright 2007 © Professor Michael E. Porter

Strategy in Economic Downturns
• Create a positive agenda • Refocus on strategy • Return to economic fundamentals • Downsize to a strategy, not across the board • Do not overreact to distressed industry conditions • Use the downturn to get things done that would be more difficult in normal times • Position for long term economic performance, not near term stock price • Seize opportunities for discontinuities which are more likely to emerge

• Strategy is more important in downturns, not less
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Copyright 2007 © Professor Michael E. Porter

Vietnam’s Competitiveness and the Role of the Private Sector

This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard Business Review, March 2001); and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: November 18, 2008, 3pm
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Copyright 2007 © Professor Michael E. Porter

The Need For An Economic Strategy
• Vietnam has experienced an impressive growth over the last two decades • However, reforms so far are insufficient to move Vietnam to a middle income economy • The next several years will determine whether Vietnam will follow the experience of Korea, or the Philippines • Vietnam’s reform have been piecemeal and reactive • Improving Vietnam’s standard of living will require a long term economic strategy
– A set of interrelated policy changes, institutional structures, and rigorous implementation mechanisms

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Copyright 2007 © Professor Michael E. Porter

Agenda
• Understanding Vietnam’s Economic Performance

• Assessing Vietnamese Competitiveness

• Identifying Action Priorities

• Organizing for Competitiveness

• Creating an Economic Strategy

• Integrating Corporate Social Responsibility

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Copyright 2007 © Professor Michael E. Porter

Prosperity Performance
PPP-adjusted GDP per Capita, 2007

Selected Countries
USA

$45.000 $40.000 $35.000 $30.000 $25.000 $20.000 $15.000
Mexico Malaysia Ireland Singapore Switzerland Iceland Netherlands Canada Australia Austria Sweden Finland UK Germany Taiwan Japan France Bahrain Italy Spain Greece New Zealand Portugal Israel Saudi Arabia Hungary Croatia Chile Costa Rica South Africa Turkey Poland Romania Slovenia Korea Czech Republic Slovakia Lithuania Russia Argentina Estonia Latvia Hong Kong

$10.000 $5.000 $0 0% 2%

Brazil

Thailand Colombia Egypt Indonesia Philippines Pakistan Nigeria Bangladesh

Vietnam
Sri Lanka India Cambodia

China

4%
47

6%

8%

10%

12%

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2003-2007
Source: EIU (2008), authors calculations
Copyright 2007 © Professor Michael E. Porter

Labor Force Utilization
Labor Force Participation Rate, 2007 65%

Participation Rates, Selected Countries

60%

China Iceland Norway

Singapore (6.16%)

55%

50%
Brazil

45%

Colombia

40%
Sri Lanka

Thailand Hong Kong Canada Australia Portugal Sweden Russia Japan Czech Rep. New Zealand Germany Latvia USA UK Finland South Korea Spain Slovakia Lithuania Taiwan Indonesia Slovenia India France Bangladesh Poland Romania Chile Austria Hungary Italy Mexico Argentina Malaysia

Vietnam
Ireland

Philippines Nicaragua Morocco Bulgaria

35%
Turkey

30% -3%

Pakistan

-2%

-1% 0% 1% 2% 3% Change in Labor Force Participation Rate, 2003-2007
Source: Economist Intelligence Unit (2008)
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4%

5%

6%

Copyright 2007 © Professor Michael E. Porter

GDP per employee (PPP adjusted US$), 2007

Comparative Labor Productivity
Selected Countries
USA Ireland Norway Australia Canada Italy Austria Hong Kong

France Finland UK Sweden Denmark Singapore Taiwan Japan Iceland Germany Israel Switzerland South Korea Spain Greece Slovenia New Zealand Portugal Argentina Poland Saudi Arabia Malaysia

Estonia

Lithuania Turkey Czech Republic Croatia Hungary Kazakhstan Mexico Colombia Costa Rica Russia Syria Bulgaria Tunisia Thailand Sri Lanka Iran Peru Egypt South Africa Ecuador Ukraine Brazil Indonesia Yemen Pakistan Philippines Dominican Republic India Nigeria Cambodia Cote d’Ivoire Senegal Bangladesh Kenya Ethiopia Ghana

Chile

Slovakia

Latvia Belarus

Venezuela

China

Vietnam

Compound annual growth rate (CAGR) of real GDP per employee (PPP-adjusted), 2003-2007
Source: authors calculation Groningen Growth and Development Centre (2008)
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Copyright 2007 © Professor Michael E. Porter

Contribution to Annual GDP growth (%)

Decomposition of Vietnamese Growth
Capital Labor TFP

10%

8%

6%

4%

2%

0%

-2%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Ohno (2008)
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Copyright 2007 © Professor Michael E. Porter

Domestic Fixed Investment Rates
Gross Fixed Investment as % of GDP (2007)
36% 34% 32% 30%
Korea Slovenia Australia Slovakia Thailand Sri Lanka Romania Lithuania Indonesia

Selected Countries
China (40.4%) Latvia India

Vietnam
Estonia Croatia Spain Kazakhstan

Iceland

28% 26% 24% 22% 20% 18% 16%
USA

Colombia Venezuela Argentina

Denmark Poland Malaysia Italy Mexico Portugal Cambodia Egypt Pakistan France Turkey Hungary Austria Russi Chile Finland a Hong Kong Kenya South Africa Netherlands Saudi Arabia Norway Sweden Germany UK Brazil Dominican Republic
Canada

Greece Singapore Ireland Czech Republic Tunisia Japan Ukraine New Zealand

14% -4%

Philippines

-2%

0%

2%

4%

6%

8%

10%

12%

Change in Gross Fixed Investment (as % of GDP), 2003 - 2007
Note: Includes inbound FDI Source: EIU, 2008
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Copyright 2007 © Professor Michael E. Porter

Inbound Foreign Investment Performance
Inward FDI Stocks as % of GDP, Average 2003 - 2007

Stocks and Flows, Selected Countries
Netherlands Estonia Singapore (160.1%, 64.7%)

80% 70%

Vietnam
60% 50% 40% 30% 20% 10% 0% -5%
Australi a South Africa Spain

Hungary

Chile

Switzerland New Zealand Sweden Slovakia Czech Republic Denmark Portugal Cambodia UK Iceland (46.7%)

Norway Slovenia Germany Greece USA South Korea Indonesia Japan Indi a

Thailan Philippines Canad d Latvia Poland a Finland Lithuania France Colombia Mexico Laos Austria Russia Brazil

Israel

Turkey Italy Malaysia China Pakista n

Saudi Arabia

0%

5%

10%

15%

20%

25%

30%

35%

40%

FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007
Source: UNCTAD, World Investment Report (2007)
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Copyright 2007 © Professor Michael E. Porter

Export Performance
Exports as Share of GDP (in %, 2007)
100% 90%
Belgium

Selected Countries
Malaysia (116.4%) Slovakia Czech Republic Hungary

80% 70% 60%

Ireland Thailand Estonia Netherlands Slovenia Bulgaria Lithuania Austria Switzerland

Vietnam

Slovenia Cambodia

Saudi Arabia

50%

Philippines Croatia South Korea Finland Germany Latvia Norway Chile Ukraine China Poland 40% South Africa Egypt Canada Indonesia Russia France Portugal Sri Lanka 30% Venezuela Mexico Italy New Zealand Dominican Republic UK Argentina Colombi Turkey India Bangladesh 20% Spain a Australia Japan Pakistan Brazil USA 10% Tunisia

Kazakhstan

0% -15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Change of Exports as Share of GDP, 2003 to 2007

• Imports as a share of GDP are equally high
Source: EIU (2008), authors’ analysis
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Copyright 2007 © Professor Michael E. Porter

Vietnam’s Exports By Type of Industry
World Export Market Share (current USD)

0,8% 0,7% 0,6% 0,5% 0,4% 0,3% 0,2% 0,1% 0,0%

Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL

1997

1998

1999

2000

2001
54

2002

2003

2004

2005

2006

Source: UNComTrade, WTO (2008)
Copyright 2007 © Professor Michael E. Porter

Vietnam’s Cluster Export Portfolio
2000-2006
5%
Change In Vietnam’s Overall Growth In World Export Share: 0.25% Footwear (5.68%, 1.91%) Fishing and Fishing Products

Vietnam’s world export market share, 2006

4%

3%

2%

Appare l Coal & Briquettes Furnitur e

1%

Textiles Plastics Tobacco

Vietnam’s Average World Export Share: 0.31%

0% -0,3%

-0,1%

0,3% 0,5% 0,7% 0,9% 1,1% 0% 0,1% Change in Vietnam’s world export market share, 2000 – 2006

1,3%

1,5%

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 55 IMF BOP statistics.

Exports of US$1.1 Billion =
Copyright 2007 © Professor Michael E. Porter

Agenda
• Understanding Vietnam’s Economic Performance

• Assessing Vietnamese Competitiveness

• Identifying Action Priorities

• Organizing for Competitiveness

• Creating an Economic Strategy

• Integrating Corporate Social Responsibility

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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) – 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
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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
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Wage Level Comparison
Monthly Minimum Wage USD, log scale, 2008 $3,000 Ireland United Kingdom Italy $1,000 Greece Germany

Selected Countries
Denmark Sweden

Japan / Belgium / France Spain New Zealand Slovenia Portugal Korea Czech Republic Taiwan Cyprus

Netherlands Austria Australia Singapore

$500

Hungary

Poland Slovakia Lithuania

Estonia Malaysia

Romania $100 Bulgaria Philippines Indonesia $50 Cambodia

Latvia Thailand

China

Vietnam

$0 Global Competitiveness Index Score, 2008
Source: Global Competitiveness Report, 2008; EuroStat, 2008; Philippines Department of Labor and Employment, 59 2008

Copyright 2007 © Professor Michael E. Porter

Rate of Competitiveness Improvement
Low Income Countries, 2002 - 2007
BCI Value, 2007 High

India

Indonesia Sri Lanka

El Salvador Tanzania Uganda Zambia Zimbabwe Nigeria

Vietnam
Pakistan Gambia Mali Honduras

Low Below average

Madagascar Nicaragua Ethiopia Mozambique Bangladesh Paraguay Bolivia Average

Chad Above average

Dynamism Score, 2002 - 2007
Source: Global Competitiveness Report 2007
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Macroeconomic Competitiveness
Social Infrastructure and Political Institutions
• Basic human capacity
– – Basic education Health system

Macroeconomic Policies
• Fiscal policy
– – – Government surplus/deficit Government debt Savings / Investment rates

Political institutions
– – – – – Political freedom Voice and accountability Political stability Centralization of economic policymaking Government effectiveness

Monetary policy
– – Inflation Interest rate spread

Rule of law
– – – – – – Judicial independence Efficiency of legal framework Civil rights Business costs of corruption Reliability of police Prevalence and costs of crime

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Copyright 2007 © Professor Michael E. Porter

Macroeconomic Competitiveness
Vietnam’s Position Social Infrastructure and Political Institutions
Basic health and education + Solid provision of basic services

Macroeconomic Policies
Fiscal policy + Government budget and debt at acceptable levels – Government budget still reliant on foreign aid

– Increasing concerns about the quality of
these public services

Political institutions + High levels of political stability

Monetary Policy – High levels of inflation

+ Increasing decentralization of economic
policy responsibilities – Little effective policy dialogue

– Corruption remains a significant challenge
Rule of law + Quality of laws tends to be good

– Effectiveness of implementation remains
weak

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Governance Indicators
Best country in the world

Selected Countries
Voice and Accountability Political Stability Government Effectiveness Regulatory Quality Rule of Law Control of Corruption

Index of Governance Quality, 2007

Worst country in the world

an

ia

nd

re a

es ia

a

us si a

sia

na m

ka

h

ne s

or e

Br az

In d

ai la

iw

an

hi n

pa

es

ay

bo

La

ap

Ko

Ja

on

Sr iL

Vi et

Ta

M al

ilip

R

am

Th

ad

C

Si ng

ut h

Ph

In d

C

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. 63 Copyright 2007 © Professor Michael E. Porter Source: World Bank (2008)

So

Ba

ng l

Pa

kis

pi

ta n

n

il

di a

os

Corruption Perception Index, 2007
1

Deteriorating
Low corruption

Israel

Rank in Global Corruption Index, 2007

Tunisia Peru Panama Egypt

Finland New Zealand Sweden Improving Iceland Switzerland Norway Canada UK Hong Kong Austria Germany Ireland Japan United States France Chile Spain Uruguay Portugal Estonia Slovenia Taiwan Czech Republic Hungary South Korea Malaysia Italy South Africa Lithuania Slovakia Latvia Jordan Greece Poland Turkey Croatia Brazil Argentina Mexico Colombia China Thailand Romania India Tanzania Uganda Ukraine Pakistan Indonesia Nigeria

Senegal

Philippines High corruption Zimbabwe Cote d’Ivoire

Vietnam
Russia

91 Venezuela

Bangladesh

-20

-15

-10

-5

0

5

10

15

20

Change in Rank, Global Corruption Report, 2007 versus 2001

Note:

Ranks only countries available in both years (91 countries total) Source: Global Corruption Report, 2007
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Copyright 2007 © Professor Michael E. Porter

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

Local rules and incentives that encourage investment and productivity
– e.g. incentives for capital investments, intellectual property protection

Factor Factor (Input) (Input) Conditions Conditions

Demand Demand Conditions Conditions

Vigorous local competition
– Openness to foreign and local competition

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

Related and Related and Supporting Supporting Industries Industries

Sophistication of local customers and needs – e.g., strict quality, safety, and environmental standards

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
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Copyright 2007 © Professor Michael E. Porter

Vietnamese Business Environment
Vietnam’s Relative Position 2008
Competitive Advantages
•• Communications infrastructure Communications infrastructure (rank 72) (rank 72) ––E.g., quality of the telephone E.g., quality of the telephone infrastructure infrastructure •• Local competition (rank 75) Local competition (rank 75) ––E.g., intensity of local E.g., intensity of local competition competition

Competitive Disadvantages
•• Government intervention (rank 119) Government intervention (rank 119) ––E.g., SOE market dominance E.g., SOE market dominance •• Trade barriers (rank 113) Trade barriers (rank 113) ––E.g., level of import tariffs E.g., level of import tariffs

Note: Rank versus 130 countries; overall, Vietnam ranks 102nd in 2008 PPP adjusted GDP per capita and 76th in New Global Competitiveness Source: Institute for Strategy and Competitiveness, Harvard University (2008)
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Copyright 2007 © Professor Michael E. Porter

Rank (157 countries) 160

Openness to Trade
Selected Countries, 2008

140

Vietnam
120

100

80

60

40

20

New Zealand

Germany

Indonesia

Sri Lanka

Hong Kong

Japan

United States

South Korea

Singapore

Vietnam

Brazil

China

Cambodia

Taiwan

India

Philippines

Malaysia

• Vietnam’s lack of openness will retard further competitiveness upgrading
Source: Index of Economic Freedom (2008), Heritage Foundation
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Copyright 2007 © Professor Michael E. Porter

Pakistan

Thailand

Russia

0

Laos

Vietnamese Business Environment
Vietnam’s Relative Position 2008
Competitive Advantages
•• Communications infrastructure Communications infrastructure (rank 72) (rank 72) ––E.g., quality of the telephone E.g., quality of the telephone infrastructure infrastructure •• Local competition (rank 75) Local competition (rank 75) ––E.g., intensity of local E.g., intensity of local competition competition

Competitive Disadvantages
•• Government intervention (rank 119) Government intervention (rank 119) ––E.g., SOE market dominance E.g., SOE market dominance •• Trade barriers (rank 113) Trade barriers (rank 113) ––E.g., level of import tariffs E.g., level of import tariffs •• Energy infrastructure (rank 109) Energy infrastructure (rank 109) ––E.g., quality of electricity supply E.g., quality of electricity supply •• Access to finance (rank 109) Access to finance (rank 109) ––E.g., financial market sophistication E.g., financial market sophistication •• Innovation infrastructure (rank 99) Innovation infrastructure (rank 99) ––E.g., patents per capita E.g., patents per capita •• Logistical infrastructure (rank 96) Logistical infrastructure (rank 96) ––E.g., quality of roads E.g., quality of roads

Note: Rank versus 130 countries; overall, Vietnam ranks 102nd in 2008 PPP adjusted GDP per capita and 76th in New Global Competitiveness Source: Institute for Strategy and Competitiveness, Harvard University (2008)
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Cost of Doing Business
Ranking, 2008 (of 181 countries)

Favorable

Vietnam, 2008

Unfavorable

Median Ranking, East Asia and Pacific

Vietnam’s per capita GDP rank: 70th

• Especially in land ownership in rural areas significant problems remain
Source: World Bank Report, Doing Business (2008)
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State-Owned Enterprises (SOEs) in Vietnam
• SOEs continue to play a dominant role in the Vietnamese economy, despite the commitment to privatization • Government oversight of these companies and their spending is limited and largely reactive • The costs of slow progress on privatization are high for Vietnam’s competitiveness
– Retards entry of new private companies – Creates risks of corruption – Can exacerbate economic volatility through excessive investment financed through soft credit

• An effective privatization program strategy for Vietnam must shift economic structure, not just change ownership
– Privatization must go hand-in-hand with market opening and policies to curtail anti-competitive practices – Owners are needed that contribute new capital and skills – Minority stakes can distribute ownership more widely
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State of Cluster Development
Tourism Cluster in Cairns, Australia
Public Relations & Public Relations & Market Research Market Research Services Services

Travel agents Travel agents

Tour operators Tour operators

Local retail, Local retail, health care, and health care, and other services other services Local Local Transportation Transportation Souvenirs, Souvenirs, Duty Free Duty Free Banks, Banks, Foreign Foreign Exchange Exchange

Food Food Suppliers Suppliers Restaurants Restaurants Property Property Services Services Hotels Hotels

Attractions and Attractions and Activities Activities
e.g., theme parks, e.g., theme parks, casinos, sports casinos, sports

Maintenance Maintenance Services Services

Airlines, Airlines, Cruise Ships Cruise Ships

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

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

Industry Groups Industry Groups
e.g. Queensland Tourism e.g. Queensland Tourism Industry Council Industry Council

Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
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Vietnam’s Cluster Export Portfolio
2000-2006
5%
Change In Vietnam’s Overall Growth In World Export Share: 0.25% Footwear (5.68%, 1.91%) Fishing and Fishing Products

Vietnam’s world export market share, 2006

4%

3%

2%

Appare l Coal & Briquettes Furnitur e

1%

Textiles Plastics Tobacco

Vietnam’s Average World Export Share: 0.31%

0% -0,3%

-0,1%

0,3% 0,5% 0,7% 0,9% 1,1% 0% 0,1% Change in Vietnam’s world export market share, 2000 – 2006

1,3%

1,5%

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 72 IMF BOP statistics.

Exports of US$1.1 Billion =
Copyright 2007 © Professor Michael E. Porter

Vietnam’s Cluster Export Portfolio cont’d
2000-2006
1,0%
Change In Vietnam’s Overall Growth in World Export Share: 0.25%

Vietnam’s world export market share, 2006

0,8%

Agricultural Products Leather and Related Products

Oil & Gas

0,6%
Building Fixtures and Equipment Textiles

0,4%

Sporting, Recreational and Children's Goods Total Services

Construction Materials Communications Equipment

Vietnam’s Average World Export Share: 0.31%

Processed Foods

0,2%

Chemical Products Medical Devices

Information Technology Jewelry, Precious Metals and Collectibles Analytical Instruments Biopharmaceuticals

0,0% -0,10%

Lighting and Electrical Equipment Publishing and Printing Motor Driven Forest Products Products Power and Power Generation Equipment Entertainment Prefabricated Enclosures and Structures Metal Mining and Manufacturing Production Technology Automotive

-0,05%

0,00%

0,05%

0,10%

0,15%

0,20%

0,25%

0,30%

Change in Vietnam’s world export market share, 2000 – 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 and the 73 IMF BOP statistics.

Exports of US$1.1 Billion =
Copyright 2007 © Professor Michael E. Porter

Not reported < 0.07% 0.07 – 0.15% 0.16 – 0.31% 0.31 – 0.62%

Share of World Exports by Cluster
Vietnam, 2000
Fishing & Fishing Products Hospitality Entertainment Prefabricated Enclosures Textiles

& Tourism Agricultural 0.62- 1.24% Products Transportation Building Furniture > 1.24% & Logistics Distribution Fixtures, Aerospace Construction Services Materials Information Vehicles & Equipment & Defense Processed Tech. Services Lightning & Heavy Jewelry & Business Food Construction Electrical Services Analytical Precious Services Education & Instruments Equipment Forest Knowledge Medical Metals Power Products Generation CommuniCreation Financial Devices Services cations Publishing & Printing Biopharmaceuticals Chemical Products Leather & Related Products Footwear Oil & Gas Plastics Tobacco Automotive Aerospace Metal Engines Manufacturing Equipment Motor Driven Products Heavy Machinery

Apparel

Production Technology

Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.
74

Sporting & Recreation Goods

Marine Equipment

Copyright 2007 © Professor Michael E. Porter

Not reported < 0.07% 0.07 – 0.15% 0.16 – 0.31% 0.31 – 0.62%

Share of World Exports by Cluster
Vietnam, 2006
Fishing & Fishing Products Hospitality Entertainment Prefabricated Enclosures Textiles

& Tourism Agricultural 0.62- 1.24% Products Transportation Building Furniture > 1.24% & Logistics Distribution Fixtures, Aerospace Construction Services Materials Information Vehicles & Equipment & Defense Processed Tech. Services Lightning & Heavy Jewelry & Business Food Construction Electrical Services Analytical Precious Services Education & Instruments Equipment Forest Knowledge Medical Metals Power Products Generation CommuniCreation Financial Devices Services cations Publishing & Printing Biopharmaceuticals Chemical Products Leather & Related Products Footwear Oil & Gas Plastics Tobacco Automotive Aerospace Metal Engines Manufacturing Equipment Motor Driven Products Heavy Machinery

Apparel

Production Technology

Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.
75

Sporting & Recreation Goods

Marine Equipment

Copyright 2007 © Professor Michael E. Porter

Geographic Levels and Competitiveness
World Economy WTO

Broad Economic Areas

Asia

Groups of Neighboring Nations

Southeast Asia

• The business environment at a given location is the cumulative outcome of policy at all geographic levels • Many competitiveness drivers occur at the regional and local level

Nations

Vietnam

• The allocation of competitiveness responsibilities across geographic levels is a crucial policy challenge

States, Provinces

Vietnamese provinces

Metropolitan and Rural Areas

Ho Chi Minh City

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Copyright 2007 © Professor Michael E. Porter

Specialization of Regional Economies
Selected U.S. Geographic Areas
Denver, CO Denver, CO Leather and Sporting Goods Leather and Sporting Goods Oil and Gas Oil and Gas Aerospace Vehicles and Defense Aerospace Vehicles and Defense Wichita, KS Wichita, KS Aerospace Vehicles and Aerospace Vehicles and Defense Defense Heavy Machinery Heavy Machinery Oil and Gas Oil and Gas Chicago Chicago Communications Equipment Communications Equipment Processed Food Processed Food Heavy Machinery Heavy Machinery Pittsburgh, PA Pittsburgh, PA Construction Materials Construction Materials Metal Manufacturing Metal Manufacturing Education and Knowledge Education and Knowledge Creation Creation Boston Boston Analytical Instruments Analytical Instruments Education and Knowledge Creation Education and Knowledge Creation Communications Equipment Communications Equipment

Seattle-BellevueSeattle-BellevueEverett, WA Everett, WA Aerospace Vehicles and Aerospace Vehicles and Defense Defense Fishing and Fishing Fishing and Fishing Products Products Analytical Instruments Analytical Instruments

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

Raleigh-Durham, NC Raleigh-Durham, NC Communications Equipment Communications Equipment Information Technology Information Technology Education and Education and Knowledge Creation Knowledge Creation

Los Angeles Area Los Angeles Area Apparel Apparel Building Fixtures, Building Fixtures, Equipment and Equipment and Services Services Entertainment Entertainment

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

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

Atlanta, GA Atlanta, GA Construction Materials Construction Materials Transportation and Logistics Transportation and Logistics Business Services 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.
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Vietnam Provincial Competitiveness Index, 2006

Excellent High Performing Mid-high Average Mid-low Low Performing

Source: Vietnam Provincial Competitiveness Index 2006 (USAID)

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The Neighborhood
Southeast Asia

• Vietnam has a central position between ASEAN and China
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Economic Coordination Among Neighbors
Enhancing Productivity
Factor Factor (Input) (Input) Conditions Conditions
• Improving regional transportation infrastructure • Creating an efficient energy network • Enhancing regional communications and connectivity • Linking financial markets • Opening the movement of students for higher education • Harmonizing administrative requirements for businesses

Context for Context for Strategy Strategy and Rivalry and Rivalry
• Eliminating trade and investment barriers within the region • Simplifying and harmonizing cross-border regulations and paperwork • Coordinating antimonopoly and fair competition policies

Demand Demand Conditions Conditions

Related and Related and Supporting Supporting Industries Industries
• Facilitating crossborder cluster upgrading, e.g. – Tourism – Agribusiness – Transport & Logistics – Business services

Macroeconomic Macroeconomic Competitiveness Competitiveness

Regional Regional Strategy & Strategy & Governance Governance
• Creating a regional marketing program • Sharing best practices in government operations • Creating regional institutions – Dispute resolution mechanisms – Regional development bank • Developing a regional negotiating position with international organizations

• Harmonizing environmental standards • Harmonizing product safety standards • Establishing reciprocal consumer protection laws • Opening government procurement within the region

• Coordinating programs to improve public safety • Coordinating macro-economic policies

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Agenda
• Understanding Vietnam’s Economic Performance

• Assessing Vietnamese Competitiveness

• Identifying Action Priorities

• Organizing for Competitiveness

• Creating an Economic Strategy

• Integrating Corporate Social Responsibility

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Stages of National Competitive Development
Shifting Policy Imperatives

Factor-Driven Factor-Driven Economy Economy

InvestmentInvestmentDriven Economy Driven Economy

InnovationInnovationDriven Economy Driven Economy

Low Cost Inputs
• Macro, political, and legal stability • Efficient basic infrastructure • Lowering regulatory costs of doing business • • • •

Productivity
Increasing local competition Market openness Advanced infrastructure Incentives and rules encouraging productivity • Cluster formation and activation

Unique Value
• Advanced skills • Scientific and technological institutions • Incentives and rules encouraging innovation • Cluster upgrading

Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990
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Competitiveness Action Agenda: Key Priorities

Continue Existing Efforts • Reduce corruption

Fundamental Reform • Human resource development at all levels • Reform of SOEs • Cluster development

• Improve infrastructure • Deepen financial market reforms • Impose regulatory attractiveness

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Reducing Corruption
• The government has repeatedly committed itself towards reducing corruption; and some action has been taken • Evidence reveals little progress

• Vietnam needs to target corruption as a crucial barrier for growth and design an integrated strategy to tackle its occurrence Action priorities • Reduce the potential for corruption through simplified regulations, use of modern information technology, and improved SOE governance/ privatization • Set clear guidelines and reporting requirements for management of SOEs • Demonstrate a commitment for transparency, including support for a strong press
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Improving Infrastructure
• Significant infrastructure investments have been made in recent years • Evidence on their impact is mixed as best. There is significant duplication of efforts and companies complain about serious bottlenecks • Vietnam needs to better target infrastructure investments to meet the needs of its growing economy Action priorities • Establish a national fund for key infrastructure projects to be implemented under the supervision of the Prime Minister’s office • Utilize matching funds incentives to improve effectiveness if investments by provincial governments • Create a public-private council to advise on spending priorities

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Deepening Financial Markets
• Vietnam has made clear progress on opening up financial markets, more recently also to foreign companies as part of the WTO agreement • But the weakness of Vietnam’s financial markets even before the global crisis, and the financing constraints faced by private companies, indicate that serious challenges remain

• Vietnam needs to develop a modern regulatory and institutional structure to enable an effective financial system Action priorities • Continue opening financial markets in line with WTO commitments • Create an effective, independent financial regulator, using outside help as needed • Establish a development bank to develop financing tools for private SMEs
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Regulatory Reform
• Regulatory reform has been on the Vietnamese policy agenda for some time, especially over the last five years • Despite some progress, the overall regulatory burden on businesses and citizens remains high with no clear societal benefits

• Vietnam needs a fundamentally new approach to regulatory reform and assessment of new regulations Action priorities • Aggressively pursue the work on regulatory reform initiated with foreign donors • Improve institutional capacity to evaluate and administer regulations, not just the rules themselves • Include an obligatory assessment of the administrative burden on business in the process of introducing new laws and regulations
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Human Resource Development
• Enrolment rates have increased significantly but quality is low and skills fail to meet company needs • Vietnam needs to dramatically improve educational quality, through setting standards, improving curricula, and involving the private sector in governance

Basic education

Vocational training

• Vietnam lacks a skills training system • Companies have launched own training efforts to address skill bottlenecks • Vietnam needs a clear program for cluster-based workforce development

Higher education

• The number of universities has increased but quality is low and skills do not match company needs • Higher university education standards must be set and enforced, drawing on international experts • Vietnam needs to develop a plan and enabling institutions for assimilation of global technology

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Restructuring of State Owned Enterprises
• The government has an explicit policy to promote private enterprise but there is deep-seated ambivalence towards privatization • Without a thorough reform of the SOE sector, there is little hope for Vietnam to reach the next level of economic development SOE governance
• Create independent boards of directors • Implement transparent financial reporting • Define clear financial objectives – Set corporate charters

Competition in markets with SOEs

• Remove existing trade, investment, and artificial entry barriers protecting SOEs • Establish strong, independent regulatory bodies • Support start-ups and spin-offs from SOEs

Privatization

• Create clear legal conditions for privatization • Define explicit objectives for privatization process • Create a dedicated structure for implementing privatization

• The creation of SOE groups is not a solution and can exacerbate problems if no other reforms are being implemented
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Cluster Development in Vietnam
• Vietnam’s clusters currently tend to be narrowly focused on individual products • There is limited collaboration among companies, suppliers and other institutions
– Some clusters, like coffee, have the potential to significantly increase their performance if they adopt a collaboration approach

• Cluster-based development thinking is crucial in improving the delivery of other economic policies
– – – – Workforce skill development around clusters FDI attraction/industrial zones around clusters Cluster-based regional development initiatives Quality and technology transfer organization for each cluster

• Policy should upgrade all existing and emerging clusters, not choose among them
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Clusters and Economic Policy
Education and Workforce Training Management Training Science and Technology Investments (e.g., centers, university departments, technology transfer) Standard setting and quality initiatives

FDI/Business Attraction

Clusters
Export Promotion Market Information and Disclosure Environmental Stewardship Natural Resource Protection

Industrial parks and free trade zones Physical Infrastructure

• Clusters provide a framework for implementing public policy and organizing public-private collaboration to enhance competitiveness
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Clusters and Economic Diversification

Develop Related Clusters Develop Related Clusters

Deepen Existing Clusters Deepen Existing Clusters

Turn Niche Products Into Turn Niche Products Into Clusters Clusters

Build Clusters Around Build Clusters Around MNCs MNCs

Upgrade Existing Export Upgrade Existing Export Products and Services Products and Services

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Upgrading Vietnamese Niche Positions, 2006
Cluster Cluster World Export Share Subcluster Industry

Plastics

0.490%

Rubber Plastic Waste Plastic Products Rubber Motorcycles and Bicycles

Natural rubber, balata and similar natural gums Reclaimed unhardened rubber; waste Plastic sacks, bags Synthetic rubber Parts of other motorcycles Bicycles and other cycles, non-motorized Parts for calculating, accounting machines Insulted wire, cable and conductors Starches, inulin and gluten Distilling, rectifying plant Vegetable saps, extracts Milk, concentrated or sweetened Yeasts Homogenized food preparations Drawn, float, cast glass, worked Other inductors Other electric transformers Electric motors<=37.5w Sewing machines and parts Loudspeakers, unmounted Electric sound amplifiers

Industry Share of World Exports 7.82% 1.88% 1.55% 1.13% 1.42% 1.27% 23.04% 1.07% 7.93% 2.64% 0.90% 0.84% 0.81% 0.76% 6.39% 3.20% 1.17% 1.88% 1.21% 1.41% 1.07%

Change in Export Value (in Share (1997$thousands) 2006) 3.40% 1.87% 0.65% 1.13% 1.22% -1.56% 23.04% 0.72% 6.23% 2.64% 0.50% -0.22% 0.27% 0.59% 6.37% 2.86% 0.68% 1.15% 0.26% 1.40% 1.07% 1.01% -0.43% 1.23% -0.50% 0.34% 1.35% 0.31% 0.38% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1,137,205 6,084 150,234 143,316 60,962 49,628 444,384 705,725 148,445 19,449 9,193 89,315 7,962 4,888 78,185 137,477 63,386 150,425 45,749 39,964 8,745 653,740 85,738 53,690 12,186 1,415 53,010 7,292 7,501

Sporting, Recreational and Children's Goods Communications Equipment

0.361% Motorcycles and Bicycles 0.284% Specialty Office Machines Electrical and Electronic Components Specialty Foods and Ingredients Food Products Machinery Specialty Foods and Ingredients Dairy and Related Products Specialty Foods and Ingredients Specialty Foods and Ingredients Glass Electrical Parts Electrical Parts Motors and Generators Appliances Audio Equipment 0.125% Audio Equipment 0.121% 0.047% Peripherals Electronic Components and Assemblies Electronic Components Electronic Components Process Instruments Fabricated Plate Work Process Equipment Components Machine Tools and Accessories Input or output units 1.01% Printed circuits 0.36% TV picture tubes, CRTs 1.26% Other electronic valves, tubes 0.35% Gas meters 0.34% Steam generating boilers, super-heated water boilers; and parts 1.35% Articulated link chain and parts 0.45% Cutting blades for machines 0.42%

Processed Food

0.260%

Lighting and Electrical Equipment Motor Driven Products Entertainment and Reproduction Equipment Information Technology Analytical Instruments Production Technology

0.256% 0.156%

0.046%

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. 93

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Agenda
• Understanding Vietnam’s Economic Performance

• Assessing Vietnamese Competitiveness

• Identifying Action Priorities

• Organizing for Competitiveness

• Creating an Economic Strategy

• Integrating Corporate Social Responsibility

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The Process of Economic Development
Shifting Roles and Responsibilities

Old Model Old Model

New Model New Model

•• Government drives economic Government drives economic development through policy development through policy decisions and incentives decisions and incentives

•• Economic development is a Economic development is a collaborative process involving collaborative process involving government at multiple levels, government at multiple levels, companies, teaching and companies, teaching and research institutions, and research institutions, and institutions for collaboration institutions for collaboration

• Competitiveness must become a bottoms-up process in which many individuals, companies, and institutions take responsibility • Every community and cluster can take steps to enhance competitiveness
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Government and the Process of Economic Development
• Competitiveness is affected by a myriad of government entities
– Multiple agencies and departments (e.g. finance, trade, education, science and technology, commerce, regional policy, energy, agriculture) – Multiple levels of government (nations, states, cities, etc.) – Intergovernmental relations with neighboring countries affect competitiveness

Competitiveness is rarely the sole agenda of any government agency

Coordinating structures are needed that brings together the ministries and departments necessary to formulate and implement an economic strategy Explicit mechanisms are needed to engage the private sector in dialog about policy priorities and implementation progress
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Organizing for Competitiveness in Vietnam
Recommendations • Create effective, independent regulatory organizations • Improve economic policy at the provincial level • Improve mechanisms for public-private discussion and collaboration • Enhance strategic planning and program management capacity in the central and provincial governments • Develop a national economic strategy process to guide priorities in improving the business environment

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Regional Development in Vietnam
• Vietnam’s provinces are developing at different rates; prosperity levels between the richest and poorest regions differs greatly • Political power and responsibility for economic development has been decentralized to the provinces, who apply to the national government for funds • Provinces have adopted unfocused growth strategies with much duplication and little specialization across provinces • Provinces have insufficient technical capacity for policy design and implementation

• Each province should be charged with developing an economic plan based on its unique strengths and potential • Each province should be expected to publicly report on implementation

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Competitiveness Institutions
• Economic strategy unit in the Prime Minister’s office
– Regularly updating on progress – Lead a formal planning and program management process involving all agencies

• Public-private competitiveness council • Vietnam Competitiveness Institute
– To conduct analyses, benchmark vs. other countries, and train government leaders – Joint national and provincial

• Enhanced role of business associations

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Agenda
• Understanding Vietnam’s Economic Performance

• Assessing Vietnamese Competitiveness

• Identifying Action Priorities

• Organizing for Competitiveness

• Creating an Economic Strategy

• Integrating Corporate Social Responsibility

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Defining an Economic Strategy
National Value Proposition National Value Proposition
• What is the unique competitive position of the nation or region 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?

Developing Unique Strengths Developing Unique Strengths
• What elements of context and the business environment are crucial priorities? • What existing and emerging clusters should be developed first?

Achieving and Maintaining Parity Achieving and Maintaining Parity with Peers with Peers
• What weaknesses must be addressed to achieve parity with peer countries?

• Priorities and sequencing are a necessity in economic development
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The Need for an Economic Strategy
• The Vietnamese government follows largely an evolutionary and reactive approach in response to crises and specific problems • Foreign aid inflows are fragmented and driven by donor-priorities • This approach has been successful in achieving success in factorbased economic development, but will be insufficient to move to a new stage

• Government needs leads in a broad-based discussion on a new economic strategy that sets priorities for improvements in the business environment and institutions
– Internally, the government needs to increase its technical capacity to support such a strategic dialogue, for example through a strategy unit in the Prime Minister’s office

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Agenda
• Understanding Vietnam’s Economic Performance

• Assessing Vietnamese Competitiveness

• Identifying Action Priorities

• Organizing for Competitiveness

• Creating an Economic Strategy

• Integrating Corporate Social Responsibility

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Implications for Companies
• • • 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 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

An important role for trade associations – Greater influence if many companies are united – Cost sharing between members

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Corporate Social Responsibility
A Growing Agenda • External pressures for CSR continue to grow • Numerous organizations monitor, rank, and report social performance • The legal and business risks are great for companies engaging in practices deemed unacceptable

• CSR is increasingly important to business leaders, yet the concept and its justifications remain unclear • Few companies have integrated society into strategy in a way that reinforces competitive advantage for the business

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Integrating Strategy and Society
Economic Objectives Social Objectives

• There is an inevitable link between a business and society • The health of a society depends on having competitive companies that can create wealth and support high wages • The competitiveness of companies depends on the surrounding community
− − − − − E.g., educated and skilled employees Safe working conditions A transparent, corruption-free business environment A sense of equal opportunity Low levels of environmental degradation (productive use of physical resources)

• Companies can positively affect many social issues

• There is a long-term synergy between economic and social objectives • To maximize this synergy, business decisions and social policies must follow the principle of shared value
– Company competitiveness and social conditions must benefit simultaneously
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The Role of Business in Social Issues
• Business cannot solve all of society’s problems, nor bear the cost of doing so
– There are many worthy causes

• Business must approach its social agenda proactively and strategically • Business must address society and social issues where it can add the most value

• Where is a company able to have the greatest impact on social issues versus other institutions?
Social Benefits Resources Expended

Social Value =

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Inside-Out Links with Society
Value Chain Social Impacts
• Relationships with universities • Ethical research practices (e.g. animal testing, GMOs) • Product safety • • • • Financial reporting practices Governance practices Transparency Use of lobbying
Firm Infrastructure
(e.g. Financing, Planning, Investor Relations)

• Employee education and job training • Safe working conditions • Diversity and discrimination • Health care and other benefits • Compensation policies • Layoff policies

Human Resource Management Support Activities
(e.g. Recruiting, Training, Compensation System)

Technology Development
(e.g. Product Design, Testing, Process Design, Material Research, Market Research)

• Procurement practices (e.g. bribery, child labor, conflict diamonds, pricing to farmers) • Use of particular inputs (e.g. animal fur) • Conservation of raw materials • Recycling

M a r g

Value What buyers are willing to pay

Procurement
(e.g. Components, Machinery, Advertising, Services)

Inbound Logistics
(e.g. Incoming Material Storage, Data Collection, Service, Customer Access)

Operations
(e.g. Assembly, Component Fabrication, Branch Operations)

Outbound Logistics

Marketing & Sales

After-Sales Service
(e.g. Installation, Customer Support, Complaint Resolution, Repair)

i n

(e.g. Order (e.g. Sales Force, Processing, Promotion, Warehousing, Advertising, Report Proposal Preparation) Writing, Web site)

• Disposal of obsolete products • Handling of consumables (e.g. motor oil, printing ink • Customer privacy

Primary Activities

• Transportation impacts (e.g. emissions, congestion, logging roads)

• Emissions and waste • Biodiversity and ecological impacts • Energy and water use • Worker safety and labor relations • Hazardous materials

• Packaging use and disposal (e.g. McDonald’s clamshell) • Transportation impacts

• Marketing and advertising (e.g. truthful advertising, advertising to children) • Pricing practices (e.g. price discrimination among customers, anticompetitive pricing practices, pricing policy to the poor) • Consumer information

• Every activity in the value chain touches on communities in the locations where a company operates. These impacts can be positive or negative. 108

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Identifying Shared Value
Outside-In Social Impact on the Company
• Availability of qualified human resources (Marriott’s job training) • Access to specialized training programs • Efficient physical infrastructure • Efficient permitting and regulatory practices • Availability of scientific and technological institutions (Microsoft’s Working Connections; Nestlé’s knowledge transfer to farmers) • Sustainable access to natural resources (GrupoNueva’s water conservation) • Efficient access to capital • Fair and open local competition (e.g., the absence of trade barriers, fair regulations) • Intellectual property protection • Transparency (e.g., financial reporting, corruption: Extractive Industries Transparency Initiative) • Rule of law (e.g., security, protection of property, legal system) • Meritocratic incentive systems (e.g., antidiscrimination)

Context for Context for Firm Strategy Firm Strategy and Rivalry and Rivalry

Factor Factor (Input) (Input) Conditions Conditions

Demand Demand Conditions Conditions

• Availability of local suppliers and support services (Sysco’s locally grown produce; Nestlé’s milk collection dairies) • Access to partner firms in related fields • Access to a cluster instead of isolated firms and industries

Related and Related and Supporting Supporting Industries Industries

• Nature of local demand (e.g. appeal of social value propositions: Whole Foods’ customers) • Fair and demanding regulatory standards (California auto emissions & mileage standards) • Local needs that can be served nationally and globally (Urbi’s housing financing, Unilever’s “bottom of the pyramid” strategy)

• Competitive context is often influenced by or inextricably linked with social conditions
Source: Michael Porter, The Competitive Advantage of Nations, 1990
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Creating a Corporate Social Agenda
Social Dimensions of Competitive Context
• Strategic philanthropy that improves salient areas of competitive context

Generic Social Impacts
• Good citizenship

Value Chain Social Impacts
• Mitigate harm from value chain activities

Responsive CSR

• Transform value chain activities to benefit society while reinforcing strategy

• Create a social dimension of the value proposition

Strategic CSR

• The impact of CSR is greatest when responsive CSR, value chain social impacts, and investments in competitive context are integrated
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Strategic CSR: ChoicePoint
• ChoicePoint’s core business is providing personal identification, screening, and credit verification
– e.g., employment background screening, credit verification, DNA identification, drug testing

• The company’s CSR program focuses on providing identification and verification services and advice to social organizations:
– e.g., background checks of volunteers working with children – Identity verification for disaster victims – Assisting NGOs to find missing children and prevent identity theft

• ChoicePoint’s CSR is aligned with its founding principle: creating a safer and more secure society through responsible use of information • ChoicePoint leverages its skills, data, technological knowledge, and staff to maximize social benefit • CSR activities are not just charity but improve the company’s capabilities around identity issues
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Strategic CSR: Nestlé in India
• Nestlé’s entered the poor Moga region of India in 1962 • Local milk supply was hampered by small parcels of land, poor soil, periodic droughts, animal disease, and lack of a commercial market • Nestlé established local milk purchasing organizations in each town • Nestlé invested in improving competitive context
– Collection infrastructure such as refrigerated dairies was accompanied by veterinarians, nutritionists, agronomists, and quality assurance experts to assist small farmers – Medicines and nutritional supplements were provided to improve animal health – Monthly training sessions were held for local farmers – Wells to secure water supply for animals were dug with financing and technical assistance from Nestlé

• Nestlé has built a productive milk cluster in Moga, buying milk from more than 75,000 farmers through 650 local dairies

• Moga has dramatically improved social conditions • Nestlé has developed a long-term competitive advantage in the milk cluster
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The Moral Purpose of Business
• The most important thing a corporation can do for society is to contribute to a prosperous economy • Only business can create wealth; other institutions in society are principally involved in redistributing wealth or investing it to meet human needs • Business has the tools, capabilities, and resources to make a far greater positive impact on social issues than most other institutions • Corporations depend on a healthy society to sustain competitiveness • Business is more transparent and more accountable than most foundations and NGOs • Corporations are not responsible for all the world’s problems, nor do they have the resources to solve them all
– Business has no need to be defensive about its role in society

• Each company can and should identify the particular set of societal problems that it is best equipped to help resolve, and from which it can gain the greatest competitive benefit • Addressing social issues through shared value strategies will lead to selfsustaining solutions • Using these principles, businesses can have a greater impact on social good than any other institution or philanthropic organization
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