Competitiveness and Company Strategy:

Issues for Brazil

Professor Michael E. Porter

Institute for Strategy and Competitiveness
Harvard Business School

ExpoManagement
Sao Paulo, Brazil
November 4, 2003

This presentation draws on ideas from Professor Porters articles and books, in particular, The Competitive Advantage of Nations (The Free Press,
1990), The Microeconomic Foundations of Economic Development, in The Global Competitiveness Report 2002, (World Economic Forum, 2003),
Clusters and the New Competitive Agenda for Companies and Governments in On Competition (Harvard Business School Press, 1998), and the
Clusters of Innovation Initiative (www.compete.org), a joint effort of the Council on Competitiveness, Monitor Group, and Professor Porter. 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
GCR Brazil 2003 10-09-03 CK.ppt 1 Copyright 2003 Professor Michael E. Porter
 Perspectives on Firm Success

Internal External

Competitive advantage Competitive advantage (or

resides inside a disadvantage) resides partly in the
company proximate environment in which a
companys business units operate
Cluster participation
Competitive success Company choices are strongly
depends primarily on influenced by location
company choices

GCR Brazil 2003 10-09-03 CK.ppt 2 Copyright 2003 Professor Michael E. Porter
 Competitiveness and Productivity

Competitiveness is determined by the productivity with which a nation, region, or

cluster uses its human, capital, and natural resources. Productivity sets a nations or
regions standard of living (wages, returns on capital, returns on natural resources)

Productivity
Productivity Competitiveness

Innovative
Innovative Capacity
Capacity

The most important sources of prosperity are created not inherited

Productivity does not depend on what industries a region competes in,
but on how it competes
The prosperity of a region depends on the productivity of all its industries
There are no low-tech industries, only low-tech firms
GCR Brazil 2003 10-09-03 CK.ppt 3 Copyright 2003 Professor Michael E. Porter
 Comparative Economic Performance

12,000

10,000 Argentina
Chile
Trinidad & Tobago
Mexico
8,000 Panama
GDP per Brazil Costa Rica
capita
(PPP Uruguay
adjusted) 6,000 Colombia
in US-$,
2002 Venezuela Dominican Republic
Peru
Guatemala
4,000
Jamaica Ecuador
Paraguay Bolivia El Salvador
2,000 Honduras Nicaragua

0
-2% -1% 0% 1% 2% 3% 4% 5%
Compound annual growth rate of real GDP per capita, 1990-2002

Source: EIU (2003)

GCR Brazil 2003 10-09-03 CK.ppt 4 Copyright 2003 Professor Michael E. Porter
 International Patenting Output
Annual U.S. patents
per 1 million
population, 2001
400

350 USA

300

250 Taiwan

Japan
200 Sweden
= 10,000
Germany
150 Israel patents
Finland granted in
2001
100 Canada Singapore
UK South Korea
Ireland
50 Australia
New Zealand Brazil
0
0% 10% 20% 30% 40%
Compound annual growth rate of US-registered patents, 1990 - 2001

Source: US Patent and Trademark Office (www.uspto.gov). Authors analysis.

GCR Brazil 2003 10-09-03 CK.ppt 5 Copyright 2003 Professor Michael E. Porter
 International Patenting Output
Selected Latin American Countries

Annual U.S. patents per 1

Average Growth Rate of
million population, 2001 Countries shown: 7.9%
1.6

1.4
Argentina

1.2 Venezuela

1.0 Mexico
Costa Rica
0.8 Chile Patents per
Capita for total
of Countries
0.6 Brazil shown: 0.71

0.4 Jamaica
Ecuador
Colombia
0.2
Peru
0.0 = 15
patents
-5% 0% 5% 10% 15% 20% granted in
Compound annual growth rate of US-registered patents, 1990 - 2001 2001

Note: Other Latin American countries have negligible rates of US patenting

Source: US Patent and Trademark Office (www.uspto.gov). Authors analysis.
GCR Brazil 2003 10-09-03 CK.ppt 6 Copyright 2003 Professor Michael E. Porter
 Comparison of U.S. Patenting
1997 - 2001

Rank
Rank Brazilian Institution Patents Massachusetts Institution Patents

1 PETROLEO BRASILEIRO 58 MIT 518

2 CARRIER CORPORATION 29 MASS GENERAL HOSPITAL 296
3 EMP. BR. DE COMPR. 17 EMC CORPORATION 269
4 METAGAL INDUSTRIA 10 DEC 261
5 CO. VALE DO RIO DOCE 10 POLAROID CORPORATION 213
6 PRAXAIR TECHNOLOGY 8 ANALOG DEVICES, INC. 167
7 SMAR RESEARCH CORP. 6 MILLENNIUM PHARMAC. 165
8 TELECOM. BRASILEIRAS 5 HARVARD UNIVERSITY 150
9 ELC PRODUTOS DE SEG. 4 COMPAQ COMPUTER 147
10 FORJAS TAURUS S/A 4 SUN MICROSYSTEMS, INC. 143
11 SABO INDUSTRIA E COM. 3 BOSTON SCIENTIFIC CORP. 135
12 TECUMSEH PRODUCTS 3 ACUSHNET COMPANY 130
13 EXOGEN, INC. 3 GENETICS INSTITUTE, INC. 127
14 HENKEL CORPORATION 3 GILLETTE COMPANY 112
15 AEROMOVEL 3 BRIGHAM & WOMEN'S HOSP. 107
16 INDUSTRIAS ROMI S.A. 3 RAYTHEON COMPANY 101
17 MAQUINAS AGRICOLAS 3 GENERAL ELECTRIC COMPANY 99
18 METAL LEVE S.A. 2 HEWLETT-PACKARD COMPANY 96
19 METALGRAFICA ROJEK 2 CHILDREN'S MEDICAL CENTER 93
20 WHITAKER CORP. 2 QUANTUM CORP. (CA) 93

Source:Global Competitiveness Report 2003

GCR Brazil 2003 10-09-03 CK.ppt 7 Copyright 2003 Professor Michael E. Porter
 What Causes Competitiveness?

Macroeconomic,
Macroeconomic, Political,
Political, Legal,
Legal, and
and Social
Social
Context
Context for
for Development
Development

Microeconomic
Microeconomic Foundations
Foundations of
of Development
Development

Sophistication
Sophistication Quality
Qualityof
ofthe
the
of
ofCompany
Company Microeconomic
Microeconomic
Operations
Operationsand
and Business
Business
Strategy
Strategy Environment
Environment

A sound macroeconomic, political, legal, and social context creates the

potential for competitiveness, but is not sufficient
Competitiveness ultimately depends on improving the microeconomic
capability of the economy and the sophistication of local companies and
local competition
GCR Brazil 2003 10-09-03 CK.ppt 8 Copyright 2003 Professor Michael E. Porter
 Productivity and the Business Environment
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
and Rivalry
Rivalry
z A local context and rules that
encourage investment and
sustained upgrading
Factor e.g., Intellectual property
Factor Demand
(Input) protection Demand
(Input) Conditions
Conditions z Meritocratic incentive system Conditions
Conditions across institutions
z Open and vigorous competition
z Presence of high quality, among locally based rivals z Sophisticated and demanding
specialized inputs available local customer(s)
to firms z Local customer needs that
Human resources anticipate those elsewhere
Capital resources Related
Related andand z Unusual local demand in
Physical infrastructure Supporting
Supporting specialized segments that can be
Administrative infrastructure Industries
Industries served nationally and globally
Information infrastructure
Scientific and technological z Access to capable, locally based suppliers
infrastructure and firms in related fields
Natural resources z Presence of clusters instead of isolated
industries

Successful economic development is a process of successive economic upgrading, in which

the business environment in a nation evolves to support and encourage increasingly
sophisticated ways of competing
GCR Brazil 2003 10-09-03 CK.ppt 9 Copyright 2003 Professor Michael E. Porter
 The California Wine Cluster Winemaking
Winemaking
Equipment
Equipment

Grapestock
Grapestock Barrels
Barrels
State Government Agencies
(e.g., Select Committee on Wine
Production and Economy)
Fertilizer,
Fertilizer, Pesticides,
Pesticides, Bottles
Bottles
Herbicides
Herbicides

Grape Caps
Caps and
and Corks
Corks
Grape Harvesting
Harvesting
Equipment
Equipment

Labels
Labels
Irrigation
Irrigation Technology
Technology Wineries/Processing
Wineries/Processing
Growers/Vineyards
Growers/Vineyards Facilities
Facilities Public
Public Relations
Relations and
and
Advertising
Advertising

Specialized
SpecializedPublications
Publications
(e.g.,
(e.g.,Wine
WineSpectator,
Spectator,
Trade
TradeJournal)
Journal)

California
California Educational,
Educational, Research,
Research, && Trade
Trade Tourism
Tourism Cluster
Cluster
Agricultural
Agricultural Cluster
Cluster Organizations
Organizations (e.g.
(e.g. Wine
Wine Institute,
Institute,
UC
UC Davis,
Davis, Culinary
Culinary Institutes)
Institutes)

Food
Food Cluster
Cluster
Sources: California Wine Institute, Internet search, California State Legislature. Based on research by MBA 1997 students R.
Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda.

GCR Brazil 2003 10-09-03 CK.ppt 10 Copyright 2003 Professor Michael E. Porter
 Leading Footwear Clusters
Romania
Portugal
Production subsidiaries
Production
of Italian companies
Focus on short-
Focus on lower to
production runs in the
medium price range
medium price range

Italy
Design, marketing,
and production of
premium shoes
Export widely to the
world market

United States Vietnam/Indonesia

Design and marketing OEM Production
Focus on specific market China Focus on the low cost
segments like sport and OEM Production segment mainly for the
recreational shoes and boots Focus on low cost European market
Manufacturing only in segment mainly for the
selected lines such as hand- US market
sewn casual shoes and boots

Source: Research by HBS student teams in 2002

GCR Brazil 2003 10-09-03 CK.ppt 11 Copyright 2003 Professor Michael E. Porter
 The Costa Rica Information Technology Cluster

Electronic Assembly

Specialized
Specialized Packaging
Packaging Computer
ComputerSoftware
Software
(e.g.,
(e.g., plastics,
plastics, corrugated
corrugated
materials) (e.g.,
(e.g., ArtinSoft)
ArtinSoft)
materials) Other
Electronic Components
(e.g., circuitboards)

Passive
Electronic Components
(e.g., inductors, transistors)
Specialized
SpecializedChemicals
Chemicals Venture
Venture Capital
Capital Firms
Firms

Semiconductor Production

Specialized
Specialized Academic
Academic and
and Training
Training State
Institutions StateGovernment
GovernmentAgencies
Agencies
Institutions (e.g.,
(e.g., (e.g., export and investmentspromotion
export and investments promotion
(e.g.,Instituto
InstitutoTecnolgico
Tecnolgicode deCosta
CostaRica,
Rica, agencies:
Instituto Nacional de Aprendizaje)
Instituto Nacional de Aprendizaje) agencies:Cinde
Cindeand
andProcomer)
Procomer)

Source: Niels Ketelhohn research for Professor Michael E. Porter

GCR Brazil 2003 10-09-03 CK.ppt 12 Copyright 2003 Professor Michael E. Porter
 Influences on Competitiveness
Multiple Geographic Levels

World Economy

Broad Economic Areas

Groups of Neighboring
Nations

Nations

States, Provinces

Cities, Metropolitan
Areas

GCR Brazil 2003 10-09-03 CK.ppt 13 Copyright 2003 Professor Michael E. Porter
 Shifting Responsibilities for Economic Development

Old
Old Model
Model New
New Model
Model

Government
Government drives
drives economic
economic Economic
Economic development
development is is aa
development
development through
through policy
policy collaborative
collaborative process
process involving
involving
decisions
decisions and
and incentives
incentives government
government at at multiple
multiple levels,
levels,
companies,
companies, teaching
teaching and
and
research
research institutions,
institutions, and
and
institutions
institutions for
for collaboration
collaboration

GCR Brazil 2003 10-09-03 CK.ppt 14 Copyright 2003 Professor Michael E. Porter
 Brazils Competitive Position

Ranks 30 overall in the Business Competitiveness Index

Second highest Latin American country after Chile, but on a
negative trend since 2001
Company operations and strategy (currently ranked 26) is
consistently ranked higher than business environment (ranked
35)

Key competitive advantages

Cluster presence; but largely a legacy of a closed economy
Local competition
Strong regional governments

Key competitive disadvantages

Trade barriers
Human resource weaknesses
Cumbersome and inefficient administrative infrastructure
Weaknesses in the physical infrastructure
Inequality

GCR Brazil 2003 10-09-03 CK.ppt 15 Copyright 2003 Professor Michael E. Porter
 Implications for Brazilian Companies

Create a regional company strategy

Build the cluster

Take a leadership role in economic development

Link corporate philanthropy to the competitive context

GCR Brazil 2003 10-09-03 CK.ppt 16 Copyright 2003 Professor Michael E. Porter
 Brazils Exports By Destination
1997-2001
Change in Share,
1997-2001:
100%

Europe -1.0%
80%

60%
North America +6.8%

40%

Latin America -4.5%

20%

Asia -2.0%

0%
1997 1998 1999 2000 2001

Source: UNCTAD Trade Data. Authors analysis.

GCR Brazil 2003 10-09-03 CK.ppt 17 Copyright 2003 Professor Michael E. Porter
 Internationalization Strategy
Hilasal

Set
Set of
of
Value
Value Proposition
Proposition Activities
Activities

High
High quality,
quality, fashionable
fashionable printed
printed towels
towels Highly
Highly customized
customized products
products with
with rapid
rapid delivery
delivery
designed
designed for
for global
global markets
markets R&D
R&D located
located at
at production
production sites
sites to
to enable
enable rapid
rapid
implementation of technology improvements
implementation of technology improvements
Design
Design groups
groups organized
organized to to provide
provide fast
fast response
response
to
to custom
custom orders
orders
Bilingual
Bilingual sales
sales office
office based
based in in Miami
Miami
Manufacturing
Manufacturing located
located inin El
El Salvador
Salvador and and Mexico
Mexico
to
to minimize
minimize costs
costs while
while maintaining
maintaining close
close access
access
to
to the
the U.S.
U.S. market
market
State-of-the-art
State-of-the-art computer
computer systems
systems to to track
track
customer orders from design to
customer orders from design to shipping shipping
Highest
Highest quality
quality machinery,
machinery, equipment,
equipment, cotton,
cotton, and
and
dyes
dyes sourced
sourced from
from Europe
Europe andand the
the U.S.
U.S.

Firm -based competitive

Firm-based competitive advantage
advantage in in aa particular
particular segment
segment
Hilasal
Hilasal developed
developed aa successful
successful differentiation -based positioning
differentiation-based positioning

Source: Condo, A. Internationalization of Firms Based in Developing Countries. Ph.D. dissertation, Harvard Business School, Boston, 2000.
GCR Brazil 2003 10-09-03 CK.ppt 18 Copyright 2003 Professor Michael E. Porter
 Public / Private Cooperation in Cluster Upgrading
Minnesotas Medical Device Cluster

Context
Context for
for
Firm
Firm
Strategy
Strategy
and
and Rivalry
Rivalry
Aggressive trade associations
(Medical Alley Association, High
Tech Council)
Effective global marketing of the
Factor cluster and of Minnesota as the
Factor The Great State of Health Demand
(Input) Demand
(Input) Full-time Health Care Industry Conditions
Conditions Conditions
Conditions Specialist in the department of
Trade and Economic Development

Joint development of vocational- State sanctioned

technical college curricula with the reimbursement policies
medical device industry to enable easier adoption
Minnesota Project Outreach exposes and reimbursement for
businesses to resources available at innovative products
university and state government Related
Related and
and
agencies Supporting
Supporting
Active medical technology licensing Industries
through University of Minnesota Industries
State-formed Greater Minnesota Corp.
to finance applied research, invest in
new products, and assist in technology
transfer
GCR Brazil 2003 10-09-03 CK.ppt 19 Copyright 2003 Professor Michael E. Porter
 The Australian Wine Cluster
Trade Performance
Australian Wine Australian Wine
Exports in million US World Export Market
Dollars Share
$1,000 8%
$900 7%
$800
6%
$700
$600 5%
Value
$500 4%
Market Share
$400 3%
$300
2%
$200
$100 1%

$0 0%
1995 1996 1997 1998 1999 2000

Source: UN Trade Statistics

GCR Brazil 2003 10-09-03 CK.ppt 20 Copyright 2003 Professor Michael E. Porter
 The Australian Wine Cluster
History

1930 1965 1980 1991 to 1998

First oenology Australian Wine Australian Wine New organizations
course at Bureau and Brandy created for education,
Roseworthy established Corporation research, market
Agricultural established 1990 information, and
College 1955 1970 export promotions
Winemakers
Australian Wine Winemaking Federation of
Research school at Australia
Institute founded Charles Sturt established
University
founded

1950s 1960s 1970s 1980s 1990s

Import of Recruiting of Continued inflow Creation of Surge in exports
European winery experienced of foreign capital large number and international
technology foreign investors, and of new wineries acquisitions
e.g. Wolf Bass management

Source: Michael E. Porter and rjan Slvell, The Australian Wine Cluster Supplement, Harvard Business School Case Study, 2002
GCR Brazil 2003 10-09-03 CK.ppt 21 Copyright 2003 Professor Michael E. Porter
 Role of the Private Sector in Economic Development

A companys competitive advantage is partly the result of the local

environment
Company membership in a cluster offers collective benefits
Private investment in public goods is justified

Take an active role in upgrading the local infrastructure

Nurture local suppliers and attract new supplier investments
Work closely with local educational and research institutions to
upgrade quality and create specialized programs addressing
cluster needs
Provide government with information and substantive input 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
Cost sharing
GCR Brazil 2003 10-09-03 CK.ppt 22 Copyright 2003 Professor Michael E. Porter
 The New Role of Corporate Philanthropy

Where to Focus How Companies Should

Corporate Philanthropy Invest in Philanthropy

Social Companies
Companies should
should give
give
Social and
and economic
economic not
goals
goals can
can be
be addressed
addressed not just
just money
money but
but
simultaneously leverage
leverage the
the companys
companys
simultaneously by
by unique
improving
improving aa companys
companys unique capabilities
capabilities in
in
competitive support
support ofof social
social causes,
causes,
competitive context
context far
far exceeding
exceeding thethe impact
impact
possible
possible byby individuals
individuals

GCR Brazil 2003 10-09-03 CK.ppt 23 Copyright 2003 Professor Michael E. Porter
 Philanthropy's Impact on the Competitive Context
Advanced Micro Devices
Context
Contextfor
for
Firm
FirmStrategy
Strategy
and Rivalry
and Rivalry
Factor
Factor Demand
Demand
(Input)
(Input) Conditions
Conditions
Conditions
Conditions

Related
Relatedand
and
Supporting
Supporting
Industries
Industries

z Advanced Micro Devices (AMD) is a leading semiconductor manufacturer

z Due to labor constraints, AMD has difficulty finding skilled workers for its semiconductor
fabrication facility in Austin, TX. The cost of recruiting and filling these positions was up
to $12,000 per person
z AMD invested in the development of a regional training and apprenticeship program for
minority students from low-income areas called Accelerated Careers in Education

Social
Social Benefits:
Benefits: Nearly
Nearly all
all of
of the
the programs
programs graduates
graduates received
received jobs
jobs or
or continued
continued on
on to
to
higher
higher education
education
Economic
Economic Benefits:
Benefits: 55%
55% of of the
the graduates
graduates came
came to
to work
work for
for AMD,
AMD, saving
saving recruitment
recruitment and
and
training
training costs
costs that
that more
more than
than paid
paid for
for the
the program.
program. The
The program
program has
has also
also expanded
expanded the
the pool
pool
of
of qualified
qualified job
job candidates
candidates forfor the
the future.
future.
Source: Business Development: Aligning Corporate Performance with Community Economic Development to Achieve Win-Win Impacts, The Center for
Corporate Citizenship at Boston College
 Selected References
The Competitive Advantage of Nations, New York: The Free Press, 1990

Clusters and the New Competitive Agenda for Companies and Governments in On Competition, Boston:
Harvard Business School Press, 1998

The Microeconomic Foundations of Economic Development, in The Global Competitiveness Report 1998-
99, (World Economic Forum, 1998)

The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity in The Global
Competitiveness Report 2000-01, New York: Oxford University Press, 2000

Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index in The Global
Competitiveness Report 2001-02, New York: Oxford University Press, 2001

Building the Microeconomic Foundations of Prosperity: Findings from the Microeconomic Competitiveness
Index in The Global Competitiveness Report 2002-03, New York: Oxford University Press, New York: Oxford
University Press, 2002

The Economic Performance of Regions, Regional Studies, 37(6&7), 2003: 549678.

Location, Competition, and Economic Development: Local Clusters in a Global Economy, Economic
Development Quarterly, February 2000, 15-34.

Locations, Clusters, and Company Strategy in The Oxford Handbook of Economic Geography, (G. L. Clark,
M.P. Feldman, and M.S. Gertler, eds.), New York: Oxford University Press, 2000

GCR Brazil 2003 10-09-03 CK.ppt 25 Copyright 2003 Professor Michael E. Porter
 Selected References (continued)
Attitudes, Values, Beliefs and the Microeconomics of Prosperity, in Culture Matters: How Values Shape
Human Progress, (Harrison, Huntington, eds.), New York: Basic Books, 2000

U.S. Competitiveness 2001, (with Debra van Opstal), Washington, DC: Council on Competitiveness,
2001

Innovation Lecture, published by the Dutch Ministry of Economics, 2001

National Report: Clusters of Innovation Initiative, (with the Council on Competitiveness, Monitor Group,
and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2001

Clusters of Innovation Initiative: San Diego Report, (with the Council on Competitiveness, Monitor Group,
and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2001

Clusters of Innovation Initiative: Wichita Report, (with the Council on Competitiveness, Monitor Group,
and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002

Clusters of Innovation Initiative: Research Triangle Report, (with the Council on Competitiveness,
Monitor Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002

Clusters of Innovation Initiative: Pittsburgh Report, (with the Council on Competitiveness, Monitor Group,
and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002

Clusters of Innovation Initiative: Atlanta Report, (with the Council on Competitiveness, Monitor Group,
and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002

The Competitive Advantage of Corporate Philanthropy, (with Mark Kramer), Harvard Business Review,
December 2002

GCR Brazil 2003 10-09-03 CK.ppt 26 Copyright 2003 Professor Michael E. Porter