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Porter - CADE 2010 A Strategy For Sustaining Gro
Porter - CADE 2010 A Strategy For Sustaining Gro
Porter - CADE 2010 A Strategy For Sustaining Gro
Urubamba, Peru
November 12, 2010
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 27, 2009
$5,000
$4,000
$3,000
$2,000
$1,000
$0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009
Note: PPP using Geary Khamis calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database (June 2009)
3
Prosperity Performance
Selected Countries, 1999 to 2009
PPP-adjusted GDP per
Capita, 2009 ($USD)
$ 20,000
United States ($46,460)
Canada ($37,840)
$ 18,000
$ 16,000
Panama
Russia
Mexico Chile Argentina
$ 14,000
Malaysia Trinidad & Tobago Uruguay
Venezuela
$ 12,000
Brazil Dominican Republic
$ 10,000 Cuba
Costa Rica Guatemala
Colombia
$ 8,000 Belize Thailand
Peru
Ecuador
China
$ 6,000
El Salvador
Jamaica Bolivia
$ 4,000 Paraguay Honduras Indonesia
Philippines India
Nicaragua
Vietnam
Laos
$ 2,000 Haiti Cambodia
$0
0% 2% 4% 6% 8% 10% 12% 14%
Export Intensity
Exports as % Selected Countries
GDP, 2009
80%
60%
Belize
50% Paraguay
Honduras Cambodia
Chile
40% Costa Rica
Bolivia
Nicaragua
Jamaica Ecuador China
30% Canada
Russia Uruguay
Mexico Peru
Indonesia Guatemala
20% Dominican Republic El Salvador Argentina
Venezuela India
Colombia
Cuba
10% Haiti Brazil
USA
0%
-20% -15% -10% -5% 0% 5% 10% 15% 20% 25%
HOWEVER
• Growth has been highly heterogeneous across different segments of society and
different parts of the country
Unemployment Performance
Unemployment Selected Countries
Rate, 2009
16%
Improving Deteriorating
Dominican Republic
14%
Jamaica
12% Colombia
India
10% United States
Chile China
Canada
Ecuador Argentina Peru Bolivia
Russia
8% Venezuela Uruguay Philippines Costa Rica
Brazil Nicaragua El Salvador ParaguayIndonesia
Panama Vietnam
6%
Mexico
Trinidad & Tobago
4%
Malaysia
Honduras
2% Thailand
Cuba
0%
-10% -8% -6% -4% -2% 0% 2% 4% 6%
50%
40%
30%
20%
10%
0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010
9
60%
50%
40%
30%
20%
10%
0%
2004 2005 2006 2007 2008 2009
Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010
10
Recent Performance of the Peruvian Economy
• Peru has been one of the most remarkable economic growth stories of the last decade,
both compared to its own historic record and to its peers
• Sound macroeconomic policies since the mid 1990s, trade opening and a supportive
international economic environment have allowed the country to prosper
• Improvements in basic security and political stability provided an important pre-
condition for these achievements
HOWEVER
• Growth has been highly heterogeneous across different segments of society and
different parts of the country
• Lack of diversification and dependence on global commodity markets for natural
resources is exposing Peru to high levels of volatility
Exports as %
GDP, 2009
Export Intensity and Size
140 Selected Countries
Malaysia
120
100
80
60 Panama
Paraguay
Costa Rica
40 Chile
Honduras
Canada
Bolivia Ecuador Mexico Russia
Uruguay Peru Argentina India China
El Salvador
20 Guatemala Venezuela, RB
Dominican Republic Indonesia
Haiti Colombia Brazil United States
-
1 10 100 1,000 10,000
GDP $Billions, 2009 (log scale)
Source: World Bank (2010) 12
Peru’s Export Composition
by SITC categories 1962-2009
Manufactured articles
Chemicals
* In 2009 dollars. Note: Showing standard SITC rev. 1 categories, goods only.
Source: UN Comtrade; authors’ analysis 13
0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business
School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics.
14
Recent Performance of the Peruvian Economy
• Peru has been one of the most remarkable economic growth stories of the last decade,
both compared to its own historic record and to its peers
• Sound macroeconomic policies since the mid 1990s, trade opening and a supportive
international economic environment have allowed the country to prosper
• Improvements in basic security and political stability provided an important pre-
condition for these achievements
HOWEVER
• Growth has been highly heterogeneous across different segments of society and
different parts of the country
• Lack of diversification and dependence on global commodity markets for natural
resources is exposing Peru to high levels of volatility
• Sustained growth will depend on broad microeconomic and institutional improvement
90%
Trinidad and Tobago
80%
70%
Panama
Vietnam
60% Jamaica Chile
Bolivia
50% Belize
Nicaragua
Malaysia Cambodia
40%
Thailand
Laos
30% Venezuela Canada
Ecuador
Argentina Honduras Costa Rica
Guatemala Mexico
El Salvador
20% Peru Brazil
Paraguay Russia Uruguay
Philippines Colombia
Indonesia China Dominican Republic
10% United States
India
Haiti
Cuba
0%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
3.0 Estonia
2.5
South Africa
2.0 Greece
Lithuania
Chile
1.0 Poland Argentina
Saudi Latvia China
Arabia Uruguay
Mexico
Brazil India
0.5
Ukraine Venezuela
Kazakhstan Philippines
Peru Colombia Thailand Turkey
Egypt Kenya Ecuador
0.0
-30% -20% -10% 0% 10% 20% 30% 40%
CAGR of US-registered patents, 2005 – 2009 170 patents =
Source: USPTO, World Bank
17
HOWEVER
• Growth has been highly heterogeneous across different segments of society and
different parts of the country
• Lack of diversification and dependence on global commodity markets for natural
resources is exposing Peru to high levels of volatility
• Sustained growth will depend on broad microeconomic and institutional improvement
• Among the biggest challenges for the country are complacency after years of solid
growth and the relatively mild impact of the global economic crisis
• Strategy means focus: Peru can not improve everything at the same time but
need to prioritize the most pressing issues
• Strategy means choice: Peru can not be good at everything but needs to
define how existing strengths are to be deepened and broadened to provide
specific value to businesses
• Strategy means action: Peru does not need another plan but an action
agenda that drives change through a process and institutional structure
focused on implementation
19
Joint
Peruvian and
Boston
Team
20
Executive Opinion Survey
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
$120,000
UnitedStates
$100,000
$80,000
Canada
$60,000
Mexico
$40,000 Malaysia Russia
Argentina
Venezuela
Uruguay Chile Colombia Peru
$20,000 Brazil Ecuador
Thailand China
Bolivia Indonesia
India
Philippines Vietnam
Cambodia
$0
-2% 0% 2% 4% 6% 8% 10% 12%
Growth of real GDP per employee (PPP-adjusted), 1999 to 2009
Source: authors calculation Groningen Growth and Development Centre (2010)
20100915 – Peru.ppt 23 Copyright 2010 © Professor Michael E. Porter
Determinants of Competitiveness
Microeconomic Competitiveness
Macroeconomic Competitiveness
Social
Infrastructure Macroeconomic
and Political Policies
Institutions
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
•Rich endowment of minerals, fishing resources, forest resources, and fertile land
•Unique environment for fishing resources
Natural •One of the largest concentrations of tropical rainforests in the world
•70 percent of the world's biodiversity
Resources •The Amazon region represents an untapped treasure
25
Determinants of Competitiveness
Microeconomic Competitiveness
Macroeconomic Competitiveness
Social
Infrastructure Macroeconomic
and Political Policies
Institutions
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
• Rule of law
– Security
– Judicial independence
– Efficiency of legal framework
– Business costs of corruption
– Civil rights
Economic Social
Development Development
Microeconomic Competitiveness
Quality of the Sophistication
National State of Cluster of Company
Business Development Operations and
Sophistication
Environment Strategy of Company
Operations and
Macroeconomic Competitiveness Strategy
Social
Infrastructure Macroeconomic • The internal skills,
and Political Policies capabilities, and management
Institutions
practices needed for
companies to attain the
highest level of productivity
Endowments and innovation possible
Determinants of Competitiveness
Microeconomic Competitiveness
Quality of the Sophistication
National State of Cluster of Company
Business Development Operations and
Quality of the Environment Strategy
National Business
Environment Macroeconomic Competitiveness
Social
• The external business Infrastructure Macroeconomic
environment conditions that and Political Policies
Institutions
allow companies to reach high
levels of productivity and
innovation
Endowments
Related and
Supporting
Industries
Determinants of Competitiveness
Microeconomic Competitiveness
Quality of the Sophistication
National State of Cluster of Company
Business Development Operations and
Environment Strategy
Macroeconomic Competitiveness
Social
Infrastructure Macroeconomic
State of Cluster and Political Policies
Development Institutions
Food Restoration/
Suppliers Attractions and conservation
Restaurants activities
(e.g. National Parks,
Property cultural shows) Crafts
Services
Banking Services /
Maintenance Accommodations Transport Foreign Exchange
Services (hotels, hostels, lodges) (land, air, rail and river)
Hospitality
equipment Related clusters
suppliers
Food
Educational and Cluster
Government Agencies
Research Institutions
Health
Cluster
Source: Adapted from HBS student project, 2010
“Peru Tourism Cluster”; Agung, Anand, Bhardan, Ilanos, Nosher
Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990
Competitiveness Master - 2009-04-20.ppt 36 Copyright 2010 © Professor Michael E. Porter
Macroeconomic Policy: Assessment
• Sound policies have allowed Peru’s fundamental macroeconomic stability to steadily
improve over the past decade
• Peru's fiscal stabilization fund provided stability and allowed effective stimulus during the
global crisis
• The economy continues to be highly dollarized with most credits denominated in dollars
– About half of the banking system is currently dollarized and most commodity exports are
priced in US-dollars
BUT
• Peru’s public finances remain overly dependent on commodities, with as much as one
third of tax revenues coming from commodity-related sources
• Peru must set policies that ensured the responsible use of credit
37
Corruption
• One of critical weaknesses constraining Peruvian development
• High corruption is due to weak institutions, poor governance practices and the
excessive influence of private interests
• Corruption cases are usually not reported to authorities
• The institutions perceived to be most corrupt are Congress, the political parties,
the national police, and judicial institutions
38
Rank in Global Corruption Perception Index, 2009
Corruption Index,
2009
Canada
Deteriorating Improving
Low
USA
corruption Uruguay
Chile
Costa Rica
Cuba
Dominican Republic
Argentina
Bolivia
Nicaragua
High Honduras
corruption
Russia
Ecuador
Venezuela Paraguay
Corruption
• One of critical weaknesses constraining Peruvian development
• High corruption is due to weak institutions, poor governance practices and the
excessive influence of private interests
• Corruption cases are usually not reported to authorities
• The institutions perceived to be most corrupt are Congress, the political parties,
the national police, and judicial institutions
Security
• There has been a deterioration of the security situation, mainly due to the
organized crime, illegal drug trade, terrorism and a general decline in public safety
• The influence of drug traffickers is starting to penetrate institutions and the
political system
• Social unrest occurs most often in places where government institutions are
weak
40
Social Infrastructure: Assessment
Education
Health
41
Context for
Firm
Strategy
and Rivalry
Administrative infrastructure
• Peru has made important reforms in simplifying administrative
procedures
Venezuela: 172
Guyana: 100
Colombia: 39 Suriname: 161
Ecuador: 130
Bolivia: 149
Paraguay: 106
Chile: 43
Uruguay: 124
Argentina: 115
100
60
40
20
0
Ease of Doing Getting Credit Protecting Registering Trading Starting a Paying Taxes Closing a Dealing with Enforcing
Business Investors Property Across Business Business Construction Contracts
Borders Permits
Source: The World Bank, Doing Business (2011), GDP rank on GDP per capita, ppp-adjusted
20100915 – Peru.ppt 45 Copyright 2010 © Professor Michael E. Porter
Administrative infrastructure
• Peru has made important reforms in simplifying administrative procedures
Physical infrastructure
• While Peru has increased infrastructure investment in recent years, it lags in electrical
generation capacity, telephone lines, and paved roads relative to its Latin American
peers. Infrastructure services remain expensive
Education and workforce skills
• The education system produces comparatively few graduates in technical areas,
engineering, and physical sciences
• Peru is last in spending on education among its peers
Financial system
• Financial assets are highly concentrated. Four banks hold 83% of all bank loans
–Borrowing costs are high
–The Peruvian pension fund system is characterized by low participation
Science and technology infrastructure
• Peru’s science and technology infrastructure is very weak.
Context for Barriers to trade and investment have been reduced, but labor
Firm market efficiency and local rivalry remain limited
Strategy
and Rivalry
Anti-trust policy
• Peru has an advanced regulatory framework for antitrust. But, implementation is weak
• Peru's domestic industries are highly concentrated, with evidence of oligopolistic practices
and cartels
• A high level of informality in the economy eases counterfeiting and money laundering
Labor market
• Peru’s labor market is highly rigid, ranked by the World Bank as 149 out of 181 economies.
There is no unified labor code in Peru
• High non-wage labor costs deter formal job creation
Demand
Peruvian consumer sophistication is increasing. Consumer
Conditions protection and environmental regulations are in place but not
well enforced
Export industries
• Peru’s exports are highly concentrated on natural resource-based products. These
activities are not well integrated into the local economy and have not generated
local upstream and downstream industrial activities
Presence of suppliers
• There is a lack of local suppliers of machinery, equipment and services. Most e
products and services are imported
• Local production of inputs and machinery is in its infancy and cannot support
advanced export-oriented companies
Cluster Development
• Nascent clusters are present, but there are few cluster initiatives..
• There is a poor tradition of collaboration between the government and the
private sector in the area of cluster development
1.5%
Metal, Mining
and Manufacturing
1.0%
Fishing and
Agricultural Fishing Products
Products
0.5%
Financial Apparel
Peru’s Average World
Services Export Share: 0.22%
Hospitality and Tourism
Communications Publishing and Printing
Services
0.0%
-0.5% 0.0% 0.5% 1.0% 1.5%
Change in Peru’s world export market share, 1997 to 2009 Exports of US$2 Billion =
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
50 Database and the IMF BOP statistics. Copyright 2010 © Professor Michael E. Porter
Peru’s National Export Portfolio
1997 to 2009
0.14%
Transportation Oil and Gas
and Logistics Products and Services
0.12%
Peru’s world export market share, 2009
Furniture
Textiles
0.10% Construction Materials
Chemical Products
Processed Food
0.08%
Plastics
0.06%
Leather &
Footwear Related Sporting Marine
Products & Recreation Equipment
Goods
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.
52 Copyright 2010 © Professor Michael E. Porter
Specialization in Peru’s Regions
Selected Examples
Piura
Agricultural Products: Mangoes,
Lemons, Brown Sugar Syrup
Cajamarca (Bambamarca)
Dairy, Processed Foods
Ancash (Chimbote)
Fishing and Fish Products
Ica
Wine
Cuzco
Tourism
53
Goals
Action Agenda
Implementation Plan
• Abundant natural resources • Privileged access to foreign • Rich culture and history
markets
• Central location in South • Creative and entrepreneurial
America • Open to FDI and capital flows population
A secure,
neutral and
peaceful
country
Enhanced the
Dynamic
Sophistication
regional
of Endowment Preserving Natural and
development
Related Cultural Resources with vibrant
Exports
clusters
Peru’s geographic location, its array of free trade agreements, and its
macroeconomic and political stability make it a natural hub for trade between Latin
America, North America, and Asia
A hub for trade Improve the efficiency and quality of trade enabling
between Latin regulation and infrastructure.
America, Asia, and
North America
Mobilize and develop clusters of trade related services
including logistics and finance
Design shops
Financial
Equipment
Metals Molds (electrical, mining,
etc)
Logistics
Paints and
chemicals Tools Parts
(isolators, etc)
Services Packaging
(lab, etc)
Custom Advisory
Recycling
Software / IT services services
Technology
ology Security
transfer
sfer
Government
ernment Educ
Educational
cational
ti l Busine
Business Multilat
Multilateral
Institutions Institutions Institutions Institutions
Action Agenda
POLICIES
Action Areas
Specific Recommendations
• Public safety is critical
to becoming a trading • Frame an institutional setting where a single institution
hub concentrates efforts to fight drug trafficking and terrorist
activities
• Maintain
improvements - Support market-based income-substitution programs,
achieved in security control of chemical inputs for coca transformation, drug
interdiction, and anti-money laundering efforts
and prevent a
pronounced increased • Reform the police force considering labor regime,
in crime an violence salary and equipment and needs
• Empower security • Strengthen the powers of local mayors as presidents of
institutions and foster local public safety committees in coordination with the
links with the police
community • Engage local communities to prevent social unrest
• Support comprehensive policies - covering crime
prevention, crime investigation, the judicial system, the
jail system, and re-insertion programs.
Action Areas
Specific Recommendations
• Reduce corruption to
thrust domestic
economic activity and • Launch a systematic campaign to reduce corruption
take advantage of and investigate corruption cases
opportunities created
• Simplify rules and regulations to reduce the cases in
through open trade
which corruption can occur
policy
• Foster clean governance in political and business
• Generate a strong
leaders
track record of fighting
against corruption • Improve the quality of the civil service. Support
meritocracy, responsibility, accountability, training and
• Consider its effects on
adequate compensation.
informality and
inequality • Key public officials should be appointed in a process
with the consent of the Congress
POLICIES
CLUSTERS
Transportation and Logistics
Financial Services
Action Agenda
POLICIES
CLUSTERS
Metal Mining and Manufacturing
Hospitality and Tourism
Biodiversity
CLUSTERS
Metalworking
Apparel
Leather
Fishing and Fishing Products
Footwear
Agricultural Products
Wine
International
• Peru will be one of the top two South American countries in volume of trade
with Asia
• Peru will be the first-ranked recipient of foreign direct investment among the
countries along the South American Pacific coast
Regional development
• Peru will have at least seven regional centers of development across the
coastal, highlands and Amazon regions
$12,000
GOAL
$10,000
$8,000
$6,000
$4,000
$0
1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021
Note: PPP using Geary Khamis calculation methodology.
Source: Groningen Growth and Development Centre, Total Economy Database74 Copyright 2010 © Professor Michael E. Porter
Peru will reduce its poverty level to 20 percent
% of Population Under
y Line
the Poverty
GOAL
PAST PRESENT
Source: Compendio Estadístico, Instituto Nacional de Estadistica e Informatica (INEI), 2010; own projections
75 Copyright 2010 © Professor Michael E. Porter
Peru will be one of the top two South American countries in volume
Total trade (USD
of trade with Asia
millions)
GOAL
PAST PRESENT
Education
• Peru will pass from the third to the second tier in the evaluation made by
the OECD Program for International Student Assessment (PISA)
• All high school graduates will be proficient in the English language
Corruption
• The country will pass from "mid-level" to "low-level" for corruption in
the region, as measured by Transparency International's Corruption
Perceptions Index
Cluster Development
• Peru will adopt a cluster-based strategy for development
• Peru will upgrade and develop well-established clusters in mining,
tourism/gastronomy, fishing, agribusiness, and manufacturing
120%
100%
80%
60%
40%
20% PAST
GOAL
0%
2000 2014 2018 2021
Source: OECD Program for International Student Assessment (PISA) 2000. Authors calculations
79 Copyright 2010 © Professor Michael E. Porter
Peru will pass from "mid-level" to "low-level" for corruption in the region, as
measured by Transparency International's Corruption Perceptions Index
% of less corrupted countries
(out of 180 countries)
70%
60%
50%
40%
30%
20%
10%
PAST TODAY GOAL
0%
2006 2007 2008 2009 2010 2014 2018 2021
Source: Transparency Report. 2010 Corruption Perception Index. Authors calculations
80 Copyright 2010 © Professor Michael E. Porter
Implementation Strategy: Sequencing of Policies
• Financial system
• Science and Technology
• Peru has many assets, and already made important policy choices
towards a better future. The results over the last few years are a clear
validation of this course
BUT
• There is much more to do
– Many parts of society and regions of the country have not fully participated
in the country’s recent growth
– Many dimensions of competitiveness remain weak and have to be improved