Creating a Competitive Rwanda
Professor Michael E. Porter
Harvard Business School
Kigali, Rwanda
June 2007
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 2006 (World Economic Forum, 2006),
“Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998), 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
Kenya CAON 2007 June-07.ppt
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Copyright 2007 © Professor Michael E. Porter
The Changing Nature of International Competition
Drivers
Market
reaction
•
Fewer barriers to trade and investment
•
Rapidly increasing stock and diffusion of knowledge
•
Competitiveness upgrading in many countries
•
Globalization of markets
•
Globalization of capital investment
•
Globalization of value chains
•
Increasing knowledge and skill intensity of competition
•
Value migrating to the service component of the value chain
• Improving competitiveness is increasingly essential to Rwanda’s prosperity
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Copyright 2007 © Professor Michael E. Porter
Prosperity Performance
Selected Countries
Real PPP-adjusted GDP per
Capita, 2006
$16,000
Botswana
$14,000
South Africa
$12,000
$10,000
$8,000
Gabon
Namibia
Cameroon
$4,000
$2,000
Cape Verde
Swaziland
$6,000
Zimbabwe
(-6.3%)
Cote D’Ivoire
Togo
Eritrea
$0
-4%
-3%
Lesotho
Guinea
MadagascarKenya
Burundi
Malawi
-2%
-1%
0%
1%
Angola
(6.2%)
Mauritius
Chad
Ghana
Rwanda
Tanzania
Nigeria
Mozambique
Uganda, Zambia
Ethiopia
2%
3%
4%
5%
6%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1998-2006
Source: EIU (2007)
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Copyright 2007 © Professor Michael E. Porter
Comparative Economic Performance
Real GDP Growth Rates
Countries sorted by 20012006 annual real GDP
growth rate (CAGR)
Annual growth rate
of real GDP
20%
15%
10%
5%
0%
-5%
-10%
-15%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
ANGOLA
MOZAMBIQUE
TANZANIA
NIGERIA
ETHIOPIA
UGANDA
BURKINA FASO
GHANA
CAPE VERDE
MALAWI
BOTSWANA
NAMIBIA
RWANDA
CONGO (BRAZZAVILLE)
ZAMBIA
SOUTH AFRICA
SENEGAL
SAO TOME AND PRINCIPE
KENYA
BENIN
THE GAMBIA
CAMEROON
MAURITIUS
GUINEA
BURUNDI
LESOTHO
TOGO
SWAZILAND
MADAGASCAR
ERITREA
GABON
COTE D'IVOIRE
ZIMBABWE
Source: EIU (2007)
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Copyright 2007 © Professor Michael E. Porter
Income Inequality
Selected Countries
Gini Index
70
60
50
40
30
20
10
H
ai
ti
Br
So
az
il
ut
h
Af
ric
a
C
h
Ar ile
ge
nt
in
a
M
ex
M
ic
ad
o
ag
as
ca
r
C
hi
C
na
ot
e
d'
Iv
oi
C
am re
er
oo
n
N
ig
er
ia
U
ga
nd
a
Za
m
Bu
bi
rk
a
in
a
Fa
so
G
ha
n
M
au a
rit
an
ia
Be
n
Ta in
nz
an
ia
In
do
ne
sia
Et
hi
op
ia
R
wa
nd
a
0
Note: Most recent Gini index data available for each country (1999 – 2003). Rwanda’s data is from 2000.
Source: World Bank, World Development Indicators, 2007.
Kenya CAON 2007 June-07.ppt
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Copyright 2007 © Professor Michael E. Porter
The Rwandan Economy in 2007
•
Economic growth rates have rebounded strongly since 2003
•
Many areas of the Rwandan business environment have improved
(e.g., communications and IT, education)
•
Established clusters (coffee, tea, tourism) have performed well
However
•
The global economic environment has been favorable
•
Rwanda’s growth rates are still moderate relative to peers
•
Numerous areas of the business environment need further
improvement
•
Strengthening the private sector and increasing public-private
collaboration is essential to achieving the next level of progress
•
Rwanda must dramatically improve its competitiveness
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Copyright 2007 © Professor Michael E. Porter
What is Competitiveness?
•
Competitiveness is determined by the productivity (value per unit of input) with which a
nation uses its human, capital, and natural resources.
– Productivity sets a the standard of living (wages, returns on capital, returns on natural
resources) that a nation can sustain
– Productivity depends on the prices that a nation’s products and services command (e.g.
uniqueness, quality), not just on efficiency
– It is not what industries a nation competes in that matters for prosperity, but how it
competes in those industries
– Productivity requires a combination of domestic and foreign firms operating in the
nation
– The productivity of “local” or domestic industries is fundamental to competitiveness,
not just that of traded industries
– Devaluation does not make a country more competitive
• Only business can create wealth
• Nations compete in offering the most productive environment for business
• The public and private sectors play different but interrelated roles in creating a
productive economy
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Copyright © 2007 Professor Michael E. Porter
Enablers and Indicators of Competitiveness
Productivity
Exports
Inbound
Foreign Direct
Investment
Domestic
Investment
Outbound
Foreign Direct
Investment
Domestic
Innovation
Competitiveness Environment
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Copyright 2007 © Professor Michael E. Porter
Foreign Inward Investment Stocks and Flows
Selected Countries
FDI Stocks as % of GDP,
Average 2002 - 2005
70%
Angola
(94%, 80%)
Gambia
Tunisia
Namibia
60%
Zambia
Eritrea
50%
Tanzania
Nigeria
Lesotho
40%
Swaziland
Morocco
Mozambique
Australia
Canada
30%
Zimbabwe
Malawi
20%
10%
South Africa
Ghana
Rwanda
Mauritius
Cameroon
Kenya
0%
0%
Russia
China
Egypt
Brazil
Ethiopia
Sudan
Uganda
Uganda
Congo
Mali
Senegal
Madagascar
Botswana
Algeria
India
Niger
Libya
5%
10%
15%
20%
25%
30%
35%
40%
FDI Inflows as % of Gross Fixed Capital Formation, Average 2002 - 2005
Source: UNCTAD (2007)
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Copyright 2007 © Professor Michael E. Porter
Inward Foreign Investment Flows
Rwanda, 1990 – 2005
Inward Foreign
Direct Investment,
$M
$9.0
$8.0
$7.0
$6.0
$5.0
$4.0
$3.0
$2.0
$1.0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
$0.0
Note: Data not available for 1994.
Source: UNCTAD (2007)
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Copyright 2007 © Professor Michael E. Porter
Investment Rates
Selected Countries
Gross Fixed Investment as
% of GDP
45
Sorted by 2006 Share
40
35
30
25
20
15
10
5
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
China
Senegal
Ghana
India
Zambia
Namibia
Nigeria
Madagascar
The Gambia
Uganda
Mozambique
Ethiopia
Rwanda
Kenya
Tanzania
Botswana
South Africa
Russia
Cameroon
Brazil
Zimbabwe
Burundi
Malawi
Source: EIU, 2007.
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Copyright 2007 © Professor Michael E. Porter
Determinants of Competitiveness
Macroeconomic,
Macroeconomic, Political,
Political, Legal,
Legal, and
and Social
Social Context
Context
Microeconomic
Microeconomic Competitiveness
Competitiveness
Sophistication
of Company
Operations and
Strategy
Quality of the
Business
Environment
State of Cluster
Development
• A sound 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 competition
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Copyright 2007 © Professor Michael E. Porter
Index of Economic Freedom
1996 - 2007
Free
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Mauritius
Botswana
South Africa
Namibia
Uganda
Madagascar
Brazil
Kenya
Senegal
Ghana
Zambia
Mozambique
Tanzania
India
Malawi
Ethiopia
Cameroon
Lesotho
China
Russia
Mali
Niger
Mauritania
Egypt
Nigeria
Algeria
Rwanda
Chad
Zimbabwe
Libya
Source: Index of Economic Freedom (2007), author’s analysis.
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Copyright 2007 © Professor Michael E. Porter
Improving the Business Environment: The Diamond
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
and Rivalry
Rivalry
z
Factor
Factor
(Input)
(Input)
Conditions
Conditions
z
Presence of high quality,
specialized inputs available
to firms
–Human resources
–Capital resources
–Physical infrastructure
–Administrative infrastructure
–Information infrastructure
–Scientific and technological
infrastructure
–Natural resource availability
z
z
A local context and rules that
encourage investment and
productivity
–e.g., Intellectual property
Demand
Demand
protection
Conditions
Meritocratic incentive systems in
Conditions
businesses and other institutions
Open and vigorous local
z Local demand with improving
competition
sophistication
–e.g., Anti-monopoly laws,
z Local customer needs that
openness to imports
anticipate those elsewhere
z Unusual local demand in
Related
Related and
and
specialized segments that can be
Supporting
Supporting
served nationally and globally
Industries
Industries
z
Access to capable, locally based suppliers
and firms in related fields
• Successful economic development is a process of successive upgrading, in which the
business environment improves to enable increasingly sophisticated ways of competing
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Copyright 2007 © Professor Michael E. Porter
Ease of Doing Business
Rwanda
Ranking, 2006 (of
175 countries)
Favorable
Unfavorable
180
Rwanda’s GNI per capita rank: 168
160
Median Ranking,
Sub-Saharan Africa
140
120
100
80
60
40
20
0
Doing
Business
Starting a
Business
Enforcing
Contracts
Paying
Taxes
Employing
Workers
Dealing Registering Closing a
with
Property Business
Licenses
Obtaining Protecting
Credit
Investors
Trading
Across
Borders
Source: World Bank Doing Business (2007)
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Copyright 2007 © Professor Michael E. Porter
Enhancing Cluster Development
Tourism Cluster in Cairns, Australia
Public
Public Relations
Relations &&
Market
Market Research
Research
Services
Services
Travel
Travel agents
agents
Tour
Tour operators
operators
Restaurants
Restaurants
Attractions
Attractions and
and
Activities
Activities
Food
Food
Suppliers
Suppliers
e.g.,
e.g., theme
theme parks,
parks,
casinos,
sports
casinos, sports
Property
Property
Services
Services
Maintenance
Maintenance
Services
Services
Airlines,
Airlines,
Cruise
Cruise Ships
Ships
Hotels
Hotels
Local
Local retail,
retail,
health
health care,
care, and
and
other
other services
services
Local
Local
Transportation
Transportation
Souvenirs,
Souvenirs,
Duty
Duty Free
Free
Banks,
Banks,
Foreign
Foreign
Exchange
Exchange
Government
Government agencies
agencies
Educational
Educational Institutions
Institutions
Industry
Industry Groups
Groups
e.g.
e.g. Australian
Australian Tourism
Tourism Commission,
Commission,
Great
Great Barrier
Barrier Reef
Reef Authority
Authority
e.g.
e.g. James
James Cook
Cook University,
University,
Cairns
Cairns College
College of
of TAFE
TAFE
e.g.
e.g. Queensland
Queensland Tourism
Tourism
Industry
Industry Council
Council
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
Kenya CAON 2007 June-07.ppt
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Copyright 2007 © Professor Michael E. Porter
The Kenyan Cut Flower Cluster
Trade Performance
Kenyan Cut Flower
Exports in thousand US $
Kenyan Cut Flower
World Export Market Share
4.5%
$250,000
4.0%
$200,000
3.5%
3.0%
$150,000
2.5%
2.0%
Value
Market Share
$100,000
1.5%
1.0%
$50,000
0.5%
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0.0%
1990
$0
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.
Kenya CAON 2007 June-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Kenya’s Cut Flower Cluster
Sources: HBS student team research (2007) - Kusi Hornberger, Nick Ndiritu, Lalo Ponce-Brito, Melesse Tashu, Tijan Watt
Kenya CAON 2007 June-07.ppt
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Copyright 2007 © Professor Michael E. Porter
National Cluster Export Portfolio
Rwanda, 1997-2003
0.008%
Change In Rwanda’s
Overall World Export
Share: 0.00%
Rwanda’s world export market share, 2003
0.007%
Hospitality and Tourism
Agricultural Products
0.006%
0.005%
Transportation
and Logistics
0.004%
0.003%
Metal Mining and Manufacturing
0.002%
Rwanda’s Average World
Export Share: 0.0012%
0.001%
Leather and Related Products
Textiles
Oil and Gas Products
Automotive
Processed Food
0.000%
-0.004%
-0.003%
-0.002%
-0.001%
0.000%
0.001%
0.002%
Change in Rwanda’s world export market share, 1997 – 2003
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.
19
Kenya CAON 2007 June-07.ppt
0.003%
0.004%
Exports of US$10 Million =
Copyright 2007 © Professor Michael E. Porter
Achieving Superior Company Performance
Differentiation
(Higher Price)
Competitive
Competitive
Advantage
Advantage
Lower Cost
20070511 AMP – Final 20070508
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Copyright © 2007 Professor Michael E. Porter
Competitiveness and the Value Chain
Firm Infrastructure
(e.g. Financing, Planning, Investor Relations)
Human Resource Management
Support
Activities
(e.g. Recruiting, Training, Compensation System)
Technology Development
(e.g. Product Design, Testing, Process Design, Material Research, Market Research)
M
Procurement
(e.g. Components, Machinery, Advertising, Services)
Inbound
Logistics
Operations
(e.g. Incoming
Material
Storage, Data
Collection,
Service,
Customer
Access)
(e.g. Assembly,
Component
Fabrication,
Branch
Operations)
Value
a
r
g
Outbound
Logistics
Marketing
& Sales
After-Sales
Service
(e.g. Order
Processing,
Warehousing,
Report
Preparation)
(e.g. Sales
Force,
Promotion,
Advertising,
Proposal
Writing, Web
site)
(e.g. Installation,
Customer
Support,
Complaint
Resolution,
Repair)
i
n
What
buyers are
willing to
pay
Primary Activities
• Competing in a business involves performing a set of discrete
activities, in which competitive advantage resides
20070511 AMP – Final 20070508
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Copyright © 2007 Professor Michael E. Porter
Strategic Positioning
Pollo Campero, Guatemala
Set
Set of
of
Activities
Activities
Value
Value Proposition
Proposition
•• Low
Low cost
cost fast
fast food
food chicken
chicken tailored
tailored to
to the
the
tastes
tastes and
and preferences
preferences of
of the
the Central
Central
American
American customer
customer
•• Service
Service with
with aa “human
“human touch,”
touch,” including
including some
some
table
table service
service
•• Heavy
Heavy and
and distinctive
distinctive marketing
marketing and
and promotion
promotion
–– “An
“An affordable
affordable treat
treat for
for the
the whole
whole family”
family”
–– Frequent
Frequent gimmicks
gimmicks and
and promotions,
promotions, targeting
targeting
every
member
of
the
family
every member of the family
–– Strong
Strong civic
civic pride
pride and
and social
social awareness
awareness
•• Emphasize
Emphasize high
high productivity
productivity in
in the
the labor
labor force
force
through
through incentives,
incentives, education,
education, and
and training
training
•• Engineering
Engineering department
department studies
studies motion
motion to
to
improve
improve restaurant
restaurant efficiency
efficiency
•• Company-owned
Company-owned chicken
chicken farms
farms to
to ensure
ensure high
high
quality
quality raw
raw materials
materials
•• The
The low
low cost
cost strategy
strategy expands
expands the
the market
market
•• Pollo
Pollo Campero
Campero competes
competes effectively
effectively against
against U.S.
U.S. fast
fast food
food companies
companies in
in
Central
Central America
America through
through better
better understanding
understanding of
of local
local customer
customer needs
needs
•• Pollo
Pollo Campero
Campero is
is penetrating
penetrating the
the Latino
Latino segment
segment in
in the
the U.S.
U.S. West
West Coast
Coast
Source: Condo, A. “Internationalization of Firms Based in Developing Countries.” Ph.D. dissertation, Harvard Business School, Boston, 2000.
22
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Copyright © 2007 Professor Michael E. Porter
Rwanda’s Role in the Neighborhood
Kenya CAON 2007 June-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Regional Economic Coordination
Illustrative Policy Areas
Factor
Factor
(Input)
(Input)
Conditions
Conditions
• Improve regional
transportation
infrastructure
• Create an efficient
energy network
• Interconnect regional
communications
• Link financial
markets
Context
Contextfor
for
Strategy
Strategy
and
andRivalry
Rivalry
• Coordinate
• Coordinate
macroecono- antimonopoly
mic policies
and fair
competition
• Eliminate
policies
trade and
investment
barriers within
the region
• Simplify and
harmonize
cross-border
• Facilitate the
movement of students regulations
and paperwork
to enhance higher
education
Demand
Demand
Conditions
Conditions
• Harmonize
environmental
standards
• Harmonize
product safety
standards
• Establish
reciprocal
consumer
protection laws
Related
Relatedand
and
Supporting
Supporting
Industries
Industries
• Coordinate
development of
cross-border
clusters, e.g.
– Tourism
– Agribusiness
– Transport &
Logistics
– Business
services
Regional
Regional
Governance
Governance
• Share best
practices in
government
operations
• Create regional
institutions
– Dispute
resolution
mechanisms
– Regional
development
bank
• Develop a
regional
marketing
strategy
• Harmonize regulatory
requirements for
business
• Coordinate programs
to improve public
safety
Kenya CAON 2007 June-07.ppt
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Copyright 2007 © Professor Michael E. Porter
The Process of Economic Development
Shifting Roles and Responsibilities
Old
Old Model
Model
New
New Model
Model
•• Government
Government drives
drives economic
economic
development
development through
through policy
policy
decisions
decisions and
and incentives
incentives
•• Economic
Economic development
development is
is aa
collaborative
collaborative process
process involving
involving
government
government at
at multiple
multiple levels,
levels,
the
the private
private sector,
sector, universities,
universities,
research
research institutions,
institutions, and
and
business
business associations
associations
• Competitiveness must become a bottom-up process in which many individuals,
companies, clusters, and institutions take responsibility
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Copyright 2007 © Professor Michael E. Porter
Clusters and Economic Policy
Business Attraction
Education and Workforce Training
Export Promotion
Clusters
Market Information
and Disclosure
Science and
Technology
Investments
(e.g., centers, university
departments, technology
transfer)
Standard setting
Specialized Physical
Environmental Stewardship
Infrastructure
Natural Resource Protection
• Clusters provide a framework for organizing the implementation of public policy and public
investments towards economic development
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Copyright 2007 © Professor Michael E. Porter
Role of the Private Sector in Economic Development
•
A company’s competitive advantage depends partly on the quality of
the business environment
•
A company gains advantages from being part of a cluster
•
Companies have a strong role to play in upgrading their business
environment
•
Take an active role in upgrading the local infrastructure
•
Nurture local suppliers and attract foreign suppliers
•
Work closely with local educational and research institutions, to
upgrade their quality and address the cluster’s needs
•
Inform government on regulatory issues and constraints bearing on
cluster development
•
Focus corporate philanthropy on enhancing the local business
environment
•
An important role for trade associations
– Collaboration, cost sharing, and increasing influence
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Copyright 2007 © Professor Michael E. Porter
Rwanda’s Competitiveness Agenda
Business
Business Environment
Environment
Cluster
Cluster Development
Development
• Land use
• Physical infrastructure
– Roads
– Airport
– Economic zones
• Energy
– Renewable
• Urbanization outside of Kigali
• Skills development
• Capacity-building across institutions
• Government efficiency and cross agency
coordination
• Activate a formal cluster development
program led by the private sector
• Established clusters
– Tea
– Coffee
– Tourism
– Niche mining
• Emerging clusters
– Construction and real estate,
logistics, silk, ICT services,
horticulture
Private
Private Sector
Sector
Neighborhood
Neighborhood
• Engage the private sector in economic
development
• Support cooperative private investment
vehicles to jumpstart the private equity
market
Kenya CAON 2007 June-07.ppt
• Initiate actionable economic integration
initiatives with each neighboring country
• Kenya represents an important potential
strategic partner
28
Copyright 2007 © Professor Michael E. Porter
Defining a National Economic Strategy
Value
ValueProposition
Proposition
•
What is the unique competitive position of the nation given
its location, legacy, and existing and potential strengths?
– What roles with neighbors, the region, and the broader
world?
– What unique value as a business location?
– For what types of activities and clusters?
Achieving
Achievingand
andMaintaining
MaintainingParity
Parity
with
withPeers
Peers
Developing
DevelopingUnique
UniqueStrengths
Strengths
• What weaknesses must be addressed to
achieve parity with peer countries?
• What elements of context and the
business environment become crucial
priorities?
• What existing and emerging clusters
should be developed first?
Competitiveness cannot be achieved only by reducing weaknesses, but by building on existing
and potential strengths
Kenya CAON 2007 June-07.ppt
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Copyright 2007 © Professor Michael E. Porter
National Economic Strategy
Singapore
National Value
Proposition
• What roles in regional and
world economy?
e.g., Business, financial, and
knowledge hub of Southeast
Asia
• What unique value as a
business location?
e.g., Highly efficient place to
do business; access to skilled
and hardworking staff
• For what range of clusters,
activities within clusters?
e.g., clusters benefiting from
a business hub but not
dependent on a large home
market or physical proximity
to markets
Kenya CAON 2007 June-07.ppt
Creating Unique
Strengths
Mitigating
Weaknesses
Macro/political/legal/social
e.g., Absence of corruption
Macro/political/legal/social
e.g., Expand cultural attractions
National Diamond
e.g., Singapore’s physical
infrastructure
National Diamond
e.g., Upgrade Singapore’s research
institutions; improve the efficiency of
Singaporean domestic economy
Cluster Development
e.g., Singapore’s logistical services,
financial services, petrochemical
processing, tourism
Cluster Development
e.g., Develop more Singaporean
SMEs to deepen clusters; improve
the number and quality of IFCs
Company Capabilities
e.g., large number of world-class
multinationals with regional
headquarters and significant
operations in Singapore
Company Capabilities
e.g., build the capability of
Singaporean companies and
encourage regional strategies
Geographic Levels
e.g., Growth Triangle, ASEAN
Geographic Levels
e.g., Create friendly relationships
with ASEAN neighbors
30
Copyright 2007 © Professor Michael E. Porter
Toward A Rwandan Economic Strategy
What is Unique about Rwanda?
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Some Implications
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Corruption-free
Stable with social progress
Secure
Clean
Responsive
Unique climate and growing
conditions
Central location on the African
continent
Growing position in tea, coffee,
tourism
Opportunity to lead the region in ICT
and services
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Rwanda must accelerate
improvement of business
infrastructure, the ease of doing
business, and improve Kigali
Rwanda should seize the opportunity
to transform agriculture
Rwanda is unlikely to be competitive
in exporting bulky goods with low
value-to-weight
Air freight and services exports
nullify Rwanda’s logistical
disadvantages
Rwanda must create a positive
image for economic and social
development
“Switzerland of Africa”
Kenya CAON 2007 June-07.ppt
31
Copyright 2007 © Professor Michael E. Porter