#1Building a Competitive Mexico: The Role of Business Professor Michael E. Porter Harvard Business School COPARMEX National Annual Meeting 2012 Durango, Mexico October 19, 2012 This presentation draws on ideas from Professor Porter's articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), "Building the Microeconomic Foundations of Competitiveness," in The Global Competitiveness Report (World Economic Forum), "Clusters and the New Competitive Agenda for Companies and Governments" in On Competition (Harvard Business School Press, 2008), and ongoing research on clusters and competitiveness. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter. Further information on Professor Porter's work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu#2What is Competitiveness? Mexico is a competitive location to the extent that firms operating here are able to compete successfully in the global economy while supporting high and rising wages and living standards for the average citizen • • Competitiveness is not low wages or a cheap peso Competitiveness depends on improving long-run productivity - Productivity of existing employees High participation of working age citizens in the workforce 2 Copyright 2012 Professor Michael E. Porter 20121019-Mexican Competitiveness Presentation-FINAL#3What Determines Competitiveness? Endowments • Endowments, i.e. natural resources, geographical location, and size, create a foundation for prosperity, but true prosperity is created by productivity in the use of endowments 20121019 Mexican Competitiveness Presentation-FINAL 3 Copyright 2012 Professor Michael E. Porter#4What Determines Competitiveness? Macroeconomic Competitiveness Sound Monetary and Fiscal Policies Human Development and Effective Political Institutions Endowments • · Macroeconomic competitiveness sets the economy-wide context for high productivity to emerge, but is not sufficient to achieve this outcome Endowments, i.e. natural resources, geographical location, and size, create a foundation for prosperity, but true prosperity is created by productivity in the use of endowments#5. What Determines Competitiveness? Sound Monetary and Fiscal Policies Fiscal Policy: Public spending aligned with revenues over time Monetary Policy: Low levels of inflation Economic Stabilization: Avoiding structural imbalances and cyclical overheating Macroeconomic Competitiveness Sound Monetary and Fiscal Policies Human Development and Effective Political Institutions Endowments 20121019-Mexican Competitiveness Presentation-FINAL 5 Copyright 2012 Professor Michael E. Porter#6What Determines Competitiveness? Macroeconomic Competitiveness Human Development Sound Monetary and Fiscal Policies and Effective Political Institutions 20121019-Mexican Competitiveness Presentation-FINAL Endowments CO 6 Human Development and Effective Political Institutions • • Human Development: Basic education, health care, equal opportunity Rule of Law: Property rights and due process Political Institutions: Stable and effective political and governmental processes and organizations Copyright 2012 Professor Michael E. Porter#7What Determines Competitiveness? Microeconomic Competitiveness Quality of the Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Sound Monetary and Fiscal Policies Human Development and Effective Political Institutions Endowments • • • Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition revealed at the level of regions and clusters Macroeconomic competitiveness sets the economy-wide context for high productivity to emerge, but is not sufficient to achieve this outcome Endowments, i.e. natural resources, geographical location, and size, create a foundation for prosperity, but true prosperity is created by productivity in the use of endowments#8What Determines Competitiveness? Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Internal skills, capabilities, and management practices enabling companies to attain the highest level of productivity and innovation possible Macroeconomic Competitiveness Sound Monetary and Fiscal Policies Human Development and Effective Political Institutions 20121019-Mexican Competitiveness Presentation-FINAL Endowments 8 Copyright 2012 Professor Michael E. Porter#9What Determines Competitiveness? The quality of external business environment conditions supporting company productivity, innovation, and growth Microeconomic Competitiveness Quality of the National Business State of Cluster Development Environment Sophistication of Company Operations and Strategy Macroeconomic Competitiveness 20121019-Mexican Competitiveness Presentation-FINAL 9 Sound Monetary and Fiscal Policies Human Development and Effective Political Institutions Endowments Copyright 2012 Professor Michael E. Porter#10Improving the Business Environment Context for Firm Strategy and Rivalry Factor (Input) Conditions • Local rules and incentives that encourage investment and productivity - e.g. incentives for capital investments, IP protection, sound corporate governance standards Open and vigorous local competition - Openness to foreign competition Demand Conditions • Access to high quality business inputs - Qualified human resources - Capital availability - Physical infrastructure - Scientific and technological infrastructure - Strict competition laws Related and Supporting Industries • . Availability and quality of suppliers and supporting industries Sophisticated and demanding local needs - e.g., Strict quality, safety, and environmental standards • • 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 20121019 Mexican Competitiveness Presentation-FINAL 10 Copyright 2012 Professor Michael E. Porter#11What Determines Competitiveness? Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Sound Monetary and Fiscal Policies Human Development and Effective Political Institutions 20121019-Mexican Competitiveness Presentation-FINAL Endowments Concentrations of firms, suppliers, and related institutions in each field to enable productivity and innovation 11 Copyright 2012 Professor Michael E. Porter#12Public Relations & Market Research Services Food Suppliers Property Services What is a Cluster? Tourism Cluster in Cairns, Australia Travel Agents Tour Operators Hotels Local Retail, Health Care, and Other Services Attractions and Activities e.g., theme parks, casinos, sports Local Transportation Souvenirs, Duty Free Restaurants Airlines, Cruise Ships Maintenance Services Banks, Foreign Exchange Government Agencies e.g. Australian Tourism Commission, Great Barrier Reef Authority Educational Institutions e.g. James Cook University, Cairns College of TAFE Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden 20121019 Mexican Competitiveness Presentation-FINAL 12 Industry Groups e.g. Queensland Tourism Industry Council Copyright 2012 Professor Michael E. Porter#131930 First oenology course at Roseworthy Cluster Emergence and Development The Australian Wine Cluster Agricultural College 1955 Australian Wine 1965 1980 1991 to 1998 Australian Wine Bureau established Australian Wine and Brandy Corporation established New organizations 1970 1990 created for education, research, market information, and export promotions Winemaker's Research Institute founded Winemaking school at Charles Sturt University founded 1950s Import of European winery technology Federation of Australia established 1960s Recruiting of experienced foreign investors, e.g. Wolf Bass 1970s Continued inflow of foreign capital and management 1980s Creation of large number of new wineries 1990s and 2000s Surge in exports and international acquisitions Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster - Supplement, Harvard Business School Case Study, 2002 20121019-Mexican Competitiveness Presentation-FINAL 13 Copyright 2012 Professor Michael E. Porter#14Government Policy to Drive Clusters Business Attraction Export Promotion Clusters Market Information and Disclosure Education and Workforce Training Science and Technology Infrastructure (e.g., centers, university departments, technology transfer) Quality standards Specialized Physical Infrastructure Environmental Stewardship Natural Resource Protection . Clusters provide a framework for organizing the implementation of many public policies and public investments directed at economic development 20121019-Mexican Competitiveness Presentation-FINAL 14 Copyright 2012 Professor Michael E. Porter#15Jewelry & Precious Metals Clusters and Economic Diversification Fishing & Fishing Products Textiles Entertainment) Agricultural Products Hospitality & Tourism Prefabricated Enclosures Processed Food Transportation Distribution Business Services Services Furniture & Logistics Building Information Aerospace Vehicles & Defense Fixtures, Equipment & Construction Materials Services Technology Lighting & Electrical Analytical Heavy Construction Services Equipment Instruments Education & Knowledge Creation Medical Devices Publishing Financial Services & Printing Biopharma- ceuticals Chemical Products Apparel Oil & Gas Products & Services Plastics Footwear Leather & Related Products 20121019 Mexican Competitiveness Presentation-FINAL Tobacco 15 Communi- cations Equipment Power Generation & Transmission Forest Products Heavy Machinery Motor Driven Products Production Technology Metal Automotive Aerospace Manufacturing Engines Sporting, Recreational & Children's Goods Copyright 2012 Professor Michael E. Porter#16. Regions and Competitiveness Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas) 20121019-Mexican Competitiveness Presentation-FINAL 16 Copyright 2012 Professor Michael E. Porter#17Gross Domestic Product per Capita, 2010 (in constant 2003 Mexican Pesos) $180,000 $160,000 $140,000 $120,000 Prosperity Performance in Mexican States Campeche (-4.9%, $333,700) Mexico Real Growth Rate of GDP per Capita: Distrito Federal 1.36% Nuevo Leon Tabasco $100,000 Quintana Roo Tamaulipas $80,000 Baja California Chihuahua Colima Coahuila Baja California Sur Querétaro Aguascalientes Sonora Mexico GDP per Capita: $77,212 Jalisco Guanajuato $60,000 Durango Morelos Yucatán Sinaloa San Luis Potosí México Puebla ●Michoacán Nayarit Veracruz Zacatecas Hidalgo $40,000 Tlaxcala Guerrero Chiapas Oaxaca $20,000 $0 -1.5% -0.5% Source: INEGI. Sistema de Cuentas Nacionales de México. 20121019-Mexican Competitiveness Presentation-FINAL 0.5% 1.5% 2.5% 3.5% Real Growth Rate of GDP per capita, 2003-2010 17 4.5% Copyright 2012 Professor Michael E. Porter#18Regions and Competitiveness . . • Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas) Many essential levers of competitiveness reside at the regional level Regions specialize in different sets of clusters and cluster strength drives regional performance 20121019-Mexican Competitiveness Presentation-FINAL 18 110 Copyright 2012 Professor Michael E. Porter#1916.0% Traded Cluster Composition of the Puebla Economy 14.0% 12.0% Textiles Apparel 10.0% 8.0% Employment 2003-2008 Added Jobs Lost Jobs Puebla's national employment share, 2008 Overall change in the Puebla Share of I Mexican Traded Employment: +0.09% Automotive Processed Food 6.0% Furniture Education and Knowledge Creation Forest Products 4.0% Distribution Services Heavy Machinery 2.0% Chemical Products Construction Materials Building Fixtures, Equipment and Services Leather and Related Products Puebla Overall Share of Mexican Traded Employment: 4.20% Information Technology 0.0% -2.0% Porte -1.0% 0.0% 1.0% Change in Puebla's share of National Employment, 2003 to 2008 2.0% 3.0% Employees 5,000 Sourire MicheMapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Contributions by Professor Michael E. Porter Competitiveness#20Regions and Competitiveness . . • Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas) Many essential levers of competitiveness reside at the regional level Regions specialize in different sets of clusters and cluster strength drives regional performance Each region needs its own distinctive competitiveness strategy and action agenda - - Business environment improvement - Cluster upgrading 20 20121019-Mexican Competitiveness Presentation-FINAL 20 Copyright 2012 Professor Michael E. Porter#21Creating a National (and Regional) Economic Strategy National or Regional Value Proposition • What is the distinctive competitive position of the nation / region given its location, legacy, existing strengths, and potential strengths? ― - - What unique strengths as a business location? What roles in the broader region? What types of activities and clusters? Developing Unique Strengths What elements of the business environment can be unique strengths relative to peers/neighbors? What existing and emerging clusters can be built upon? . Achieving and Maintaining Parity with Peers • What weaknesses must be addressed to remove key constraints and achieve parity with peer locations? • Priorities and sequencing are essential to building competitiveness 20121019 Mexican Competitiveness Presentation-FINAL 21 Copyright 2012 Professor Michael E. Porter#22Benchmarking Competitiveness Mexico's Competitiveness Profile, 2011 Macroeconomic Competitiveness 67 Country Competitiveness 61 Microeconomic Competitiveness 49 Political Institutions 76 Macroeconomic Policy 41 National Business Environment 50 Rule of Law 99 Human Development 54 Company Operations and Strategy 49 Mexico's GDP per capita rank is 53rd versus 132 countries Note: Rank versus 132 countries; overall, Mexico ranks 53rd in PPP adjusted GDP per capita and 61st in Global Competitiveness Source: Institute for Strategy and Competitiveness, Harvard University (2011), based in part on survey data from the World Economic Forum. 20121019-Mexican Competitiveness Presentation-FINAL 22 Copyright 2012 Professor Michael E. Porter#23The Role of Business in Social and Economic Development Evolving Approaches • Philanthropy Donations to worthy social causes Volunteering 20121019-Mexican Competitiveness Presentation-FINAL 23 Copyright 2012 Professor Michael E. Porter 23#24The Role of Business in Social and Economic Development Evolving Approaches • Philanthropy Donations to worthy social causes Volunteering • • • Corporate Social Responsibility (CSR) Compliance with community standards Good corporate citizenship "Sustainability" 20121019-Mexican Competitiveness Presentation-FINAL 24 14 Copyright 2012 Professor Michael E. Porter#25The Role of Business in Social and Economic Development Evolving Approaches Philanthropy • Donations to worthy • social causes Volunteering · Corporate Social Responsibility (CSR) Compliance with community standards Good corporate citizenship "Sustainability" • Creating Shared Value (CSV) Integrating societal improvement into economic value creation itself Driving social improvement with a business model Copyright 2012 Professor Michael E. Porter 25 20121019-Mexican Competitiveness Presentation-FINAL#26Societal Needs and Economic Value Creation • . Environmental Impact Community Energy Use Economic Development Water Use Company Productivity Supplier Access and Viability Health Worker Safety Worker Skills Social deficits create economic cost "Externalities" shape internal company productivity Social needs represent the largest market opportunities 20121019 Mexican Competitiveness Presentation-FINAL 26 26 Copyright 2012 Professor Michael E. Porter#27CSR Moving to Shared Value Fair Trade CSV Fair Trade • Paying a higher price to farmers for the same products ● Certification as a fair trade company • Transforming Procurement Collaborate with farmers to improve quality and yield • Supporting investments in technology and inputs • • Higher prices for better quality Higher yield increases quantity produced 20121019-Mexican Competitiveness Presentation-FINAL 27 27 Copyright 2012 Professor Michael E. Porter#28Levels of Shared Value I: Reconceiving needs, products, and customers - Meeting societal needs through products Addressing unserved or underserved customers in your industry II: Redefining productivity in the value chain - Change practices in the value chain to drive productivity by better utilizing resources, employees, and business partners III: Enabling local cluster development - Improving the available skills, suppliers base, and supporting institutions in the communities in which a company operates to boost productivity, innovation, and growth 28 Copyright 2012 Professor Michael E. Porter 20121019-Mexican Competitiveness Presentation-FINAL#29Levels of Shared Value I: Reconceiving needs, products, and customers - Meeting societal needs through products Addressing unserved or underserved customers in your industry II: Redefining productivity in the value chain - Change practices in the value chain to drive productivity by better utilizing resources, employees, and business partners III: Enabling local cluster development - Improving the available skills, suppliers base, and supporting institutions in the communities in which a company operates to boost productivity, innovation, and growth 20121019-Mexican Competitiveness Presentation-FINAL 29 29 Copyright 2012 Professor Michael E. Porter#30Levels of Shared Value I: Reconceiving needs, products, and customers 1 Meeting societal needs through products Addressing unserved or underserved customers in your industry II: Redefining productivity in the value chain - Change practices in the value chain to drive productivity by better utilizing resources, employees, and business partners III: Enabling local cluster development - Improving the available skills, suppliers base, and supporting institutions in the communities in which a company operates to boost productivity, innovation, and growth 20121019-Mexican Competitiveness Presentation-FINAL 30 30 Copyright 2012 Professor Michael E. Porter#31Redefining Productivity in the Value Chain Firm Infrastructure (e.g., Financing, Planning, Investor Relations) Human Resource Management (e.g., Recruiting, Training, Compensation System) Technology Development I (e.g., Product Design, Testing, Process Design, Material Research, Market Research) Procurement (e.g., Components, Machinery, Advertising, Services) Operations Inbound Logistics (e.g., Incoming Material Storage, Data (e.g., Assembly, Component Collection, Service, Customer Access) Fabrication, Branch Operations) Outbound Logistics (e.g., Order Processing, Warehousing, Report Preparation) Marketing & Sales (e.g., Sales Force, Promotion, Advertising, After-Sales Service (e.g., Installation, Customer Support, Complaint Proposal Resolution, Writing, Web site) Repair) • Shared value purchasing • • Energy and resource efficiency Leveraging location of facilities Strengthening local distribution channels. 20121019 Mexican Competitiveness Presentation-FINAL 31 • • M a r g i n Logistical efficiency Enhancing the productivity of lower income employees and improving their wages Improving employee health Copyright 2012 Professor Michael E. Porter#32Levels of Shared Value I: Reconceiving needs, products, and customers - Meeting societal needs through products Addressing unserved or underserved customers in your industry II: Redefining productivity in the value chain - Change practices in the value chain to drive productivity by better utilizing resources, employees, and business partners III: Enabling local cluster development - Improving the available skills, suppliers base, and supporting institutions in the communities in which a company operates to boost productivity, innovation, and growth 20121019-Mexican Competitiveness Presentation-FINAL Copyright 2012 Professor Michael E. Porter 32 32#33The Role of Business in Mexican Competitiveness Action Agenda Improving skills • Create or expand an apprentice program Create or expand a training program Partner with a community college, technical school, or university Supporting innovation and entrepreneurship • • Participate in research collaboratives in company's field Invest in or incubate promising startups related to company's business Upgrading supporting industries Identify and increase sourcing from capable local suppliers Mentor local suppliers to upgrade their capabilities Collaborating on regional business environment improvement Participate in a regional competitiveness initiative in your region Copyright 2012 Professor Michael E. Porter 33 20121019-Mexican Competitiveness Presentation-FINAL#34The Purpose of Business . . Our purpose in business is to create shared value for society, not economic value for its own sake 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 will give rise to far broader opportunities for economic value creation Shared value thinking will drive the next wave of innovation, productivity, and economic growth in Mexico A transformation of business practice around shared value will give purpose to the corporation and represents our best chance to legitimize business again Copyright 2012 Professor Michael E. Porter 34 20121019-Mexican Competitiveness Presentation-FINAL