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Michael Porter Keynote - The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness? June 2010
- 1. Reflections on a Hypothesis:
Lessons for Policy, Research, and Corporate Practice
Policy Research
Professor Michael E. Porter
Harvard Business School
Presentation at The Porter Hypothesis at 20 Conference
Montreal, Canada
June 28, 2010
28
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for Strategy and Competitiveness, www.isc.hbs.edu.
20100628 – PorterHypothesis.ppt 1 Copyright 2010 © Professor Michael E. Porter
- 2. Agenda
• How the Porter Hypothesis emerged
• What has changed
• Implications for continuing environmental progress in 2010
• Applying the principles to other societal issues
20100628 – PorterHypothesis.ppt 2 Copyright 2010 © Professor Michael E. Porter
- 3. Origins of the Porter Hypothesis
• Empirical observation
• Learning on the firm and competitive advantage
• Shifti definition of competitiveness
Shifting d fi iti f titi
• New thinking about the role of location in competitiveness
20100628 – PorterHypothesis.ppt 3 Copyright 2010 © Professor Michael E. Porter
- 4. The Firm and Competitive Advantage
The Value Chain
Firm Infrastructure
(e.g. Financing, Planning, Investor Relations)
Human Resource Management
(e.g. Recruiting, T i i
( R iti Training, C
Compensation S t )
ti System)
Technology Development
(e.g. Product Design, Testing, Process Design, Material Research, Market Research) M Value
Procurement a What buyers are
(e.g. Components, Machinery Advertising
(e g Components Machinery, Advertising, Services) r willing t pay
illi to
g
Inbound Operations Outbound Marketing After-Sales i
Logistics Logistics & Sales Service
n
(e.g.
(e g Incoming (e.g. Assembly,
(e g Assembly (e.g.
(e g Order (e.g.
(e g Sales (e.g. Installation,
(e g Installation
Material Component Processing, Force, Customer
Storage, Data Fabrication, Warehousing, Promotion, Support,
Collection, Branch Report Advertising, Complaint
Service, Operations) Preparation) Proposal Resolution,
Customer Writing, Web Repair)
Access) ) site)
)
• All competitive advantage resides in the value chain. Strategy is
manifested in how activities in the value chain are configured and
linked together
20100628 – PorterHypothesis.ppt 4 Copyright 2010 © Professor Michael E. Porter
- 5. What is Competitiveness?
• C
Competitiveness i th productivity with which a nation uses it h
titi is the d ti it ith hi h ti its human,
capital, and natural resources
– Productivity sets the standard of living
– Productivity growth sets sustainable economic growth
• Productivity and prosperity depends on how a nation competes, not what
industries it competes in
• Relentless innovation is necessary to drive productivity growth and
enable standard of living to rise
– Technology, products, and organizational methods
• Nations compete to offer the most productive environment for business
• The public and private sectors play different but interrelated roles in
creating a productive economy
20100628 – PorterHypothesis.ppt 5 Copyright 2010 © Professor Michael E. Porter
- 6. The Role of Location in Competitiveness
Context for
Firm
Strategy
and Rivalry
A local context and rules that
encourage productivity
Factor
– e.g., incentives for capital Demand
(Input) investments, intellectual property
protection Conditions
Conditions
Incentive systems based on merit
Availability of high quality,
y g y Open and vigorous local
p g More sophisticated and demanding local
p g
specialized inputs available to firms competition, especially among customer(s)
– Human resources
locally based rivals
Local customer needs that anticipate those
– Capital resources elsewhere
– Physical infrastructure Unusual local demand in specialized
– Administrative infrastructure (e.g. segments th t can be served nationally and
t that b d ti ll d
registration, permits) Related and globally
– Information infrastructure (e.g. economic
Supporting
data, corporate disclosure) Industries
– Scientific and technological infrastructure
– Natural resources
Access to capable, locally based suppliers and
firms in related fields
Presence of clusters instead of isolated industries
• Many things matter for competitiveness
• Successful economic development is a process of successive upgrading, in which the
business environment improves to enable increasingly sophisticated ways of competing
20100628 – PorterHypothesis.ppt 6 Copyright 2010 © Professor Michael E. Porter
- 7. Clusters and Competitiveness
The Spanish Wind Energy Cluster
Collaborative Design/R&D Facilities Market Participants Institutions
Universities Legislators (national, EU, regional)
Subcomponent Manufacturers Specialized NGOs
S i li d NGO Financiers
Fi i
Turbine Manufacturers Project Developers
Supporting Industries
Wind Farm Construction
(engine, bearing Wind Consultancies
& Operation
p
manufacturers)
Trade Associations
Source: Harvard student team - Emily Bolon, Matthew Commons. Frank Des Rosiers, Paz Guzman, Nicholas Kukrika (2007)
20100628 – PorterHypothesis.ppt 7 Copyright 2010 © Professor Michael E. Porter
- 8. The Process of Economic Development
Old Model New Model
• Government drives economic • Economic development is a
development through policy collaborative process involving
decisions and incentives government at multiple levels,
• Top-down companies, teaching and
research institutions industry
institutions,
associations, and other
institutions for collaboration
• Competitiveness should be a bottoms-up process in which many individuals,
companies, and institutions take responsibility
20100628 – PorterHypothesis.ppt 8 Copyright 2010 © Professor Michael E. Porter
- 9. Developments Since 1991
• Wide acceptance in business
• Learning by regulators
– E.g., outcomes not methods
– Innovation not abatement
• Learning by NGOs
– Some NGOs have made a “business” of environmental improvement
– Collaboration with the private sector
• Profound shift in societal values
BUT
• Zero-sum thinking persists
• Ongoing political challenges
20100628 – PorterHypothesis.ppt 9 Copyright 2010 © Professor Michael E. Porter
- 10. Some Implications for Policy
Find and expand win win opportunities
win-win
• Expand measurement and benchmarking
• Support research and diffusion of learning
• Simplify regulatory p
p y g y processes and make them less costly, less time
y,
consuming, and more transparent
• Pursue consistency and international harmonization of policy
• Harness clusters/collaboration models
• Lengthen time horizons
– C it l markets
Capital k t
20100628 – PorterHypothesis.ppt 10 Copyright 2010 © Professor Michael E. Porter
- 11. Implications for Research
• C f l h li ti l
Careful, holistic, longitudinal case studies
it di l t di
– Matched pairs across geography/settings
• Richer data sets
– Single industry empirical studies
• Methodology defined by the problem
– Lags, learning effects
20100628 – PorterHypothesis.ppt 11 Copyright 2010 © Professor Michael E. Porter
- 12. Implications for Corporate Practice
• Some companies still treat environmental impact as CSR not as a
CSR,
tool to drive innovation and competitiveness
• Use environmental innovation as a tool for strategic positioning,
not just best practice improvement
tj tb t ti i t
• There are numerous opportunities for cluster-based approaches
to improving environmental performance
20100628 – PorterHypothesis.ppt 12 Copyright 2010 © Professor Michael E. Porter
- 13. Defining the Boundaries of Capitalism
Company Social and
Profitability and Economic
Growth Development
• Narrow cost minimization
• Ease of outsourcing relocating and globalizing
outsourcing, relocating,
• Shortening time horizons
• Tradeoff mindset in both companies and stakeholders
20100628 – PorterHypothesis.ppt 13 Copyright 2010 © Professor Michael E. Porter
- 14. Sources of Competitive Advantage: New Learning
Employee
Local
Education
Supplier Base
and Skills
Poverty in
P t i
Worker
a Company’s
Safety
Community
Environmental
Company Gender
Impact Productivity Equity
Employee
Energy Use
Health
Water Use
• Social deficits create economic cost
• External constraints reduce company productivity
20100628 – PorterHypothesis.ppt 14 Copyright 2010 © Professor Michael E. Porter
- 15. Creating Shared Value
Shared Value: Corporate policies and practices that
enhance the competitiveness of the company while
simultaneously advancing economic and social conditions
y g
in the communities in which it operates
• Find and expand the congruence between economic and societal objectives,
p g j ,
rather than assume tradeoffs or the need for redistribution
– Driven by value creation thinking
• Shared value arises from a deeper understanding of the drivers of
competitiveness and competitive advantage
– The opportunities are growing
• Achieving shared value requires new operating practices, new
technologies, and new approaches to competing
• Shared value thinking also applies to government/NGOs
20100628 – PorterHypothesis.ppt 15 Copyright 2010 © Professor Michael E. Porter
- 16. Levels of Shared Value
• Use shared value thinking to reconfigure the value chain to drive
productivity
• Create products that meet social needs
• Build clusters and a supportive local external context to enhance
productivity and create self reinforcing economic development
self-reinforcing
20100628 – PorterHypothesis.ppt 16 Copyright 2010 © Professor Michael E. Porter
- 17. The Purpose of Business
• There is an opportunity to transform thinking and practice about the role of
the corporation in society, using the concept of shared value
• Shared value arises from a deeper understanding of doing business that
transcends narrower conceptions of economic efficiency that have guided
company operations
• Shared value thinking will provide new catalysts for global economic growth
and the next wave of innovation and productivity in the global economy
• Businesses acting as businesses, not as charitable givers, are arguably the
most powerful force for addressing many pressing issues facing our society
• A transformation of business practice around shared value will give purpose
to the corporation and to capitalism itself, and represents our best chance to
legitimize business again
g g
20100628 – PorterHypothesis.ppt 17 Copyright 2010 © Professor Michael E. Porter