ENERGY SECURITY & COMPETITIVENESS: A new approach

By Rodrigo Villamizar Alvargonzalez

[Proposal: one semester university course or short-term executive seminar or lecture for
companies or government institutions based on the methodology outlined in the
forthcoming book “The Ascent of Competitiveness” by Rodrigo Villamizar Alvargonzalez]

During the program students will learn to evaluate the past and future performance of
countries and firms based on new analytical tools that stress Energy Security and
Competitiveness (ES&C) as a result of three key factors: reliability (to minimize
vulnerability), intensity (to increase efficiency) and capability (to strengthen the
availability of “soft” or knowledge resources). In essence, reliability, intensity and
capability are alternative terms for three basic economic concepts: infrastructure,
productivity and technology, respectively. These three component elements are used to
set up a co-integration model that stresses long term impacts as a basis to develop
critically important indices (defined later) which play a fundamental role in assessing and
comprehending the energy situation of any country, region or individual firm. The
methodology used throughout the course is based on the theoretical framework
summarized in the Spring 2008 issue of Economía Exterior.

The content and structure of the course are summarized as follows:

CONTENTS

FIRST PART Introduction

I History – Great Cases and Debates
II What is (and what is not) ES&C
III Method, Econometric model & Graphs
IV The Symbol: A Tree

SECOND PART Data and Results

V The “ES&C forest” of countries
VI The “ES&C forest” of companies

THIRD PART Analysis

VII Infrastructure = Vulnerability
VIII Technology = Capability
IX Productivity = Efficiency or Intensity
X Other Political, Cultural and Social Factors affecting ES&C
XI ES&C and Globalization

CLOSING
XII Conclusions

{Note: A Reading List not included}

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Introduction
Rodrigo Villamizar, a professor of energy economics and management at the Camilo J
Cela University in Madrid, sets out—as part of his most recent book—a practical
application for defining and estimating Energy Security & Competitiveness (ES&C). He
contends that the security of countries, regions and corporations is influenced more by
structural characteristics than by short-run variations. His simple yet solid econometric
model uses three structural variables to define two key indicators, named the Energy
Security Score (ESS) and the Security Strategic Value (SSV). The former measures the
overall amount or degree of energy security that a country or firm has by adding the
values of the three key factors: vulnerability, intensity and capability; the latter (e.g.,
infrastructure, productivity and technology) measures where a country, region or
company must allocate resources in order to maximize the actual levels of ES&C. As
illustrated in Graph 1, the ESS can be tailored either to overall competitiveness or to
energy security competitiveness depending on the specific information fed into the Total
Competitiveness Score (TCS), which will be further explained later. The TCS is used
throughout the course as a yardstick for ranking countries or firms according to the dual
(combined) concept of energy security and competitiveness. Furthermore, the TCS goes
way beyond the realm of energy by constituting a powerful tool to analyze the dynamics
of the three principal determinants of general economic development: productivity,
infrastructure and technology.

Graph 1
The Villamizar Total Competitiveness Score (TCS)
and component parts: productivity, technology, infrastructure
(2003-2004)

100

90
Competitiveness ranking by percent change

80

70

60

50

40

30

20

10

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Productivity Technology Infrastructure

Graph 2 reflects the EES results for a similar analysis using the Competitiveness
Strategic Value (CSV) to compare countries (or firms) according to their potential to
achieve energy independence, strength and efficiency (vulnerability, intensity and
capability). Each of the countries studied were compared to the country that produced the
highest overall score: the United States (=100).

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 Graph 2
Competitiveness Comparison
the World Competitiveness Index and the Villamizar TCS Score
(2003)
Competitiveness ranking of selected countries 100

90

80

70

60

50

40

30

20

10

0
USA

Germany

Japan

France

UK

Korea

China

Malaysia

Thailand

Indonesia

Philippines

Mexico

Brazil

Spain

Argentina

Colombia
Villamizar TCS Score World Competitiveness Index

Curiously enough, recent research in Systems Biology shows that trees in a forest
behave in a similar fashion to the way collective organizations work and therefore the
TCS can be applied to both. The mysterious interaction between the roots (the source of
productivity), trunk (the symbol of infrastructure) and branches (the best representation
of technology) of any tree has helped achieve one of the most remarkable success stories
of the known universe: the resilient development of the most competitive of all species in
the entire living kingdom. Throughout five billion years of evolution, these incredible
creatures have wrestled to maximize all three components that make them “competitive.”
Unexpectedly, countries (or companies) can derive some useful lessons from trees on
ES&C by optimizing ratios which horticulturists call “optimum growth ratios.” Figure 1
represents how interaction between parts of a tree takes place. By the same token, the
factors that pose the steepest hurdles in creating a comprehensive energy security strategy
are no different. The challenges that ES&C managers face in trying to optimize the
amount of energy to make readily available to the economy at market clearing prices face
the same dilemmas that trees face to fulfill their wood and biomass needs in a forest. A
misleading myth of ES&C is that progress is strictly derived from a country’s core
competences without outside interference (e.g., the intervention of external factors). In
fact, a combination of internal and external policies and strategies, regarding the right
mix of vulnerability mitigation, energy intensity enhancement and system-strengthening
capability, results in optimum energy security and environmental protection, which is
how ES&C is actually achieved.

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 Fig. I

Only when a relationship between internal and external policies and strategies is
established can we say that a country, region or firm has an optimum energy security and
environmental protection policy. Without energy security there may not be countries or
companies, and without a safe environment there will be no planet to sustain them. By
mitigating the system’s vulnerability, improving its intensity and potentiating its
capabilities, ES&C is achieved. This requires strategy, reforms and a true assessment of
the externalities involved. Thus, to execute a successful strategy a country or firm must
do the following: 1) focus on a complete strategy, 2) implement energy security
enhancement reforms, and 3) mitigate negative externalities like climate change. The
three pictures below illustrate the ill-effects of ignoring these steps.

1. INCOMPLETE SRATEGY

2. UNFINISHED REFORMS

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3. IGNORING OBVIOUS EXERNALITIES (like the effects of climate change)

Careful econometric analysis reveals that the magic of the marketplace cannot take
care of everything in the arena of ES&C, and that both rational and irrational factors play
a role. This is similar to what occurs in a forest, where nature and nurture interact to
produce an outcome. Core competences and the right combination of factors “cooperate”
in the collective learning of organizations, especially in the capacity to coordinate
productive skills and to integrate them with innovating technologies. Countries do not
reflect the ES&C of companies or vice versa. Both must use a different core of ES&C
that cannot be added up or interchanged to provide growth and development. The
similarities between the ES&C of either a country or a firm with the way a tree grows in a
forest do not stop there. As the illustration in figure II shows, ES&C works through the
interaction of different mathematical functions knitted by algorithms that countries and
firms either do or do not follow. More importantly, each component of ES&C (the roots,
the trunk or the branches and their respective equivalents: intensity, capabilities and
vulnerabilities) plays a dominant role during the growth of a country or firm. As they go
through the three stages of growth, infancy, adolescence and maturity, one determining
factor emerges to drive their development. ES&C policy analysis must, therefore, identify
the stage of development of the country or firm and then select the tool that will provide
the highest level of performance: productivity to increase intensity, infrastructure to
minimize vulnerability, technology to strengthen the capabilities of their productive
systems.

Fig. II

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A Bit of History
Aside from generalized references to ES&C found in works dating back to the 1930s, the
first efforts to define ES&C, which heavily concentrated on the efficiency of productive
processes, were made by Joseph Schumpeter around 1942. Between 1950 and 1970,
economic thinkers led by Alfred Slone (“My Years at General Motors”), Peter Drucker
(“The Age of Discontinuity”), and Robert Solow (“Technical Change and the Aggregate
Production”) gave new vigor to the concept of efficiency by adding to the notion efficacy
and entrepreneurial achievement. It wasn’t until after 1970 that the combination of other
concepts and new frontier ideas like technical innovation, the digital world, the
knowledge economy, and the competitive advantage of nations gave birth to a more
invigorated, albeit more confusing, concept of what we call ES&C.

The advantages of ES&C, understood as those capabilities created, not inherited,

have come to replace comparative advantages, which derive from the mere existence of
natural resources. This process has led to the development of increasingly complex
methods by which to measure ES&C. Such measures are currently heavily concentrated
on the “competitiveness” side of the concept in an area that has been monopolized by the
World Competitiveness Forum and the Harvard Institute of Management and
Development. These institutions have developed the two most widely used indicators: the
Growth Competitiveness Index (GCI) and the Business Competitiveness Index (BCI).
Each index reflects the input of over three hundred variables, including extensive opinion
polls taken of CEOs. In light of this proliferation of variables and variants, the course
teaches how to find a simplified definition of ES&C that can be easily quantifiable
without losing the essence of the objective.

Method
As a model to study Energy Security and Competitiveness, Villamizar focused on cluster
analysis (to reduced the determinant factors to a simple few) and co-integration (to detect
and measures the long run effect of the “stationary” variables). These provided the
starting-point for the definition of the Energy Security Score (ESS) and the Security
Strategic Value (SSV) indicators. Early results from this approach pointed to three sets of
variables to explain the quintessential nature of ES&C: productivity, infrastructure and
technology. These variables allow for the quantification of key energy security problems:
energy intensity (the amount of energy needed to produce $1 of GDP), energy capability
(the potential to increase industrial production by adding energy, labor and capital while
reducing carbon), and vulnerability (the level of energy dependence understood as local
production plus imports minus exports). On the basis of these three groups of variables,
16 countries and 25 multinational corporations were selected to measure and compare
their ES&C situation. The statistical exercise includes the derivation of the mathematical
functions that best fit the growth patterns of each of the component parts that make up the
core definition of ES&C.

The entire procedure bears a strong resemblance to the growth of a tree, with energy
security and competitiveness representing two sides of the same equation. Thus,
infrastructure is as essential to a country to diminish energy vulnerability as a stem (or a
trunk) is to a plant (or a tree) to reach solid development. Technology and productivity,
like branches and roots, respectively, play a vital role in the latter stages of the

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development process, as can be seen in the graphs below. In fact, all three (productivity,
infrastructure and technology) represent the principal drivers of growth. With one caveat,
in each stage of growth a different variable or factor leads the pack; therefore, the policy-
maker or CEO needs to identify it and to concentrate all efforts where the country or
company will obtain the highest benefits for the minimum (cost) reforms and the
fulfillment of their long term strategy.

Graph 3

Competitiveness of Firms
Competitiveness

Graph 4

Firm's Maturity

Infrastructure Technology Productivity Competitiveness of Countries

Competitiveness

Country's Maturity
Infrastructure Technology Productivity

As can be seen in the two graphs for firms and countries above, the three
corresponding functions (trunk, branches and root, or infrastructure, technology and
productivity) play competing as well as supplementing roles whether they are linear,
logarithmic or exponential. Depending where the country or firm is located, the
infrastructure curve can be used to minimize vulnerability, the technology function to
enhance productive capabilities (competitive advantages), and the productivity curve to
improve energy intensity. As already mentioned, the derived ES&C functions of
countries and firms resulted in a combination of exponential, linear and logarithmic
curves from which anyone can obtain the proposed indices and/or ratios (relationships
between the potential and the actual values of each variable). The functional forms
derived were:

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Functions:

For Countries:

ES&C = Exp (T^3) + Exp (P^2) + (I)

For Companies:

ES&C = Exp (T^3) + Ln (P) + Ln (I)

Where T = Technology, P = Productivity, and I = Infrastructure.

Symbols
Architects and engineers have long taken inspiration from nature. In ancient Egypt
columns were modeled on palm trees and desert plants. Building designers ever since
have borrowed the shapes and proportions of natural forms as they strive to achieve
perfection. Some now believe that such biomimicry has more to offer than simply making
machines and buildings look good. They are copying functional systems found in nature
to provide cooling, to generate electricity, or even to desalinate water. The Eden Project,
a highly acclaimed biome structure in England, was inspired in nature. Smart paints
which use a self-cleaning principle borrowed from lotus leaves are now being tested. The
Arab World Institute in Paris, for example, has an array of mechanical, eye-like irises on
its south-facing façade. These open and close to control the amount of light entering the
building, thereby regulating the internal temperature. The Eastgate Center, a shopping
centre in Harare, Zimbabwe, has a mechanical cooling and ventilation systems based on
those found in termite mounds. Self-cleaning glass relies on a principle of microscopic
bumps found on lotus leaves. Solar cells, which mimic photosynthetic processes to
capture light and convert it into electricity, are arguably another form of biomimetic
technology.

New indices
The painstakingly conceived idea behind the behavioral uncertainty of energy security
and its reaction to the effects of productivity, infrastructure and technology (as the prime
drivers) makes ES&C somehow certain. Certainty and uncertainty, and their close
relative—known as rational expectations—are taken into account in the analysis. In
nature as well as in the economy, even a complete model of growth and development
may miss the mark. The distance that separates two countries in terms of energy security
may be illusory if the growth functions where each market participant “rests” are ignored.
That is what makes the two indices so vital. The total Energy Security Score (ESS) and
the Security Strategic Value (SSV) indicators tell us where countries and firms are placed
on the three-dimensional space and the distance that each needs to travel to reach a given
optimum performance level. There is a great deal of usefulness in comparing security and
competitive behavior using both indicators since they tell a coherent story of how the
ES&C of firms and countries have developed and deviated (or not) from their optimal
development path. The ESS results from the sum of the contributions of the three
determinant factors. Furthermore, the SSV, as defined below, provides an appropriate
yardstick for detecting the amount of effort that every country or firm must make to
achieve its highest ES&C potential:

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 100
SSV = [1]
⎡⎣( P ( AP − xP ) + I ( AI − xI ) + T ( AT − xT ) ) ⎤⎦

Where P, I and T are Productivity, Infrastructure and Technology “ratios,” according

to the development phase of the country or firm (infancy, adolescence or maturity), ‘X’ is
the position value of any country or firm resting on any of the three functions, whether on
the “P” curve (Productivity), the “I” curve (Infrastructure) or the “T” curve (Technology).
“A” is the “ideal” value obtained by the country or firm with the highest score of a given
sample. This is not only a fresh way to assess ES&C but it is the most accurate. It allows
us to compare a particular entity to itself as well to its peers. By calculating both the ESS
and SSV we can figure out total ES&C and the distance between the actual value and
“room for improvement.” In short, it gives us the real situation and the corrective
measures that countries and firms need to take in order to move closer to their ideal
competitive path of energy security.

Ratios
In a similar fashion to the way people like to compare the results of athletic competitions
to the results obtained by record-breakers or top performers, ratios found in the way
countries or firms perform go beyond curiosity. In fact, these types of ratios, those
expressed in the comparing of functions at each stage common in the study of nature,
gave birth to the Bonsai art technique. By exploiting specific temporary advantages
provided by one of the three critical elements of the tree (or entity), it is possible to attain
the highest return from a marginal investment. By a similar token, a company or country
can miss its optimum orbit of energy security if it fails to operate on the “optimum”
ES&C path. Indeed, final results from the model show that, from the 16 countries and 25
multinational corporations selected for this analysis, some 92% of companies and 70% of
countries function below their optimum ES&C value by more than 50%.

Assessing an organization’s SSV premium is a relatively simple matter, and it

provides an effective way for managers and policy-makers to interpret the investment
needed to enhance energy security competitiveness by boosting the right component of
their own “tree.” This approach avoids the unnecessary complexity created by previous
studies that see CEOs or finance ministers as pilots racing against ever “decreasing
investment returns.” Instead, this simple model can be used to conduct integral analyses
to answer essential questions: What is the most important source of energy insecurity?
Should a country (or firm) place more importance (e.g., resources) on strengthening
capability (basically achieved through technology and innovation), enhancing efficiency
(obtained by way of productivity increases), or increasing energy independence (obtained
through the mitigation of energy vulnerabilities)? How do we know if we are focusing
our efforts on the right aspect of the energy growth curve? How can we unlock the
company’s cultural and operational competitive advantages in order to turn its raw energy
potential into profitable growth? Can the SSV of countries and companies be increased
via timely improvements in productive infrastructure assets, productivity gain, and
innovation alone?

9
Results
The following illustration shows how a small sample of the ES&C forest looked after
calculating the competitive size and strength of selected firms and countries, as reflected
by the ESS:

Technology

Infrastructure The United States

Productivity

DELL
Brazil

Toyota ABN-AMRO

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 The graphs below give a detailed analysis of the estimated competitiveness of
selected countries and firms; a similar exercise is to be done during the course for ES&C.
In addition to the ESS and the SSV, the individual components of the ESS for each
variable (infrastructure, productivity and technology or iSS, pSS and tSS, respectively)
were calculated to squeeze the maximum potential value from all three characteristics of
the international ES&C forest. When translated into the econometric model, the
combined effects of iSS, pSS and tSS explained over 85% of ES&C.

Ranking of Firms
Total Competitiveness Score (TCS)
Index: (Max: 100)
100

90

80

70

60

50

40

30

20

10

0
ABN-AMRO

Adidas

Apple
WalMart

Coca-Cola

Carrefour
General Electric

Siemens

Philips

General Motors

Sony

John Deere

Eastman-Kodak

Danone

Cemex

Levi’s
IBM

DaimlerCrysler
Microsoft

Inditex (Zara)
Dell

Gap

Compacq
Telefónica
TOYOTA

Ranking of Countries
Total Competitiveness Score (TCS)
Index: (Max: 100)

100

90

80

70

60

50

40

30

20

10

0
Argentina
United Kingdom
Germany

China

Philipins
France

Malasia
USA

Japan

Thailand

Mexico

Spain
Brazil
Korea

Colombia
Indonesia

Conclusion
The following graphs summarize the essence of the quantitative exercise to be undertaken
during the course where each student will be responsible for one country and one firm.
The final overall result should look like the illustrations obtained from the book by

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 ranking countries (and companies) according to their ES&C, instead of just on the basis
of competitiveness.

Country's Maturity
(Technology)

USA

Towards Competitiveness
France
Spain
Japan
United Kingdom
Germany
Malaysia

Korea
Philipines Thailand
Colombia Argentina
Mexico Brazil
China
Indonesia

Country's Maturity Country's Maturity

( Productivity) (Infrastructure)

USA USA

Germany
Japan
Towards Competitiveness

France
Towards Competitiveness

Germany Brazil United Kingdom

Japan
France Korea
Mexico
Argentina
United Kingdom Malaysia
Thailand
Spain Spain
Malaysia Indonesia
Argentina Philipins
China
Indonesia Colombia
Mexico Korea
China Brazil Thailand
Philipins
Colombia

The course provides a comprehensive analysis of how the ESS and SSV can serve
as powerful tools in the study of ES&C at the micro and macro level by following
countries through their development phases (infancy, adolescence and maturity). These
indicators are important because, besides serving to detect and correct the ES&C
trajectory of firms and countries, they provide strategic mechanisms for assessing and
improving policy making and strategic valuations. If the horticulturist can look at the
trunk, roots or branches of a tree and determine what type of fertilizer to apply, the
business analyst can estimate the ESS and SSV indices to determine what needs to be
done in order to maximize a country’s or firm’s energy security competitive gain at each
stage of its development.
END

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