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Michael Porter in Nairobi – Part 1: The power of productivity

Jun 27, 2007 Business Daily, Strategy

Professor Michael Porter, world-renowned authority on competitiveness, was in Nairobi this week. He met government leaders and delivered a keynote address to executives and students at the Strathmore Business School. Business Daily asked Sunny Bindra, the Sunday Nation’s business columnist and a member of Strathmore’s Advisory Board, to convey the legendary don’s ideas and recommendations in a three-part series. In his first article, he gives a flavour of Porter’s key ideas.

Michael Porter was in town on Monday, and government mandarins and business students alike lined up to meet him and listen to him. His hosts were Strathmore Business School and the National Economic and Social Council. His keynote address, delivered at the Business School, is likely to resonate in his audience’s mind for some time.

So who is this man? Michael Porter is, without question, the world’s leading authority on strategy and competitiveness. He is a full University Professor at Harvard Business School – a distinction awarded to very few. He runs his own world-renowned institute at Harvard: the Institute for Strategy and Competitiveness. But this is no ordinary academic. He is a pioneer in taking the methods and rigour of the economics discipline to the business world. He founded his own consulting firm, and is an advisor without peer to corporations, governments and presidents.

As you can imagine, it was a great honour to have him in Kenya. He did not disappoint. His address was entertaining, challenging and thought-provoking. He started by saying that he is no expert on Kenya, and then proceeded to give his audience a virtuoso display of facts and figures that left us questioning the definition of the word. This gentleman lives up to his reputation for rigour.

Before we examine his arguments, perhaps some history is in order. Michael Porter rose to fame with the publication of his book, Competitive Strategy. This was followed by the equally impressive Competitive Advantage. During the 1980s, the two books became de rigeur in business schools, consulting firms and enlightened companies all over the world.

With these two books, Professor Porter introduced his famous tools for analysing industries and companies: the Five-Force Model for examining the nature of competition in a given industry; and the Value Chain for understanding how different parts of an organisation can be configured to gain advantage in the marketplace. These techniques are so widely used today that they have become part of the common language of business the world over. Competitive Strategy is now in its 63rd printing.

One of Michael Porter’s most important contributions came a little later, when he penned a landmark essay for the Harvard Business Review in 1996. It was entitled “What is Strategy?” – an odd question, you might think, for something that was seemingly well understood for centuries. Not so. The field of strategy can be an extremely complex and confusing one, even for those who profess to be experts in it. Porter, with his customary lucidity, pointed out that there is an important distinction to be made between strategy and operational effectiveness.

The words still ring in my mind: Strategy is not about doing things better; it’s about doing things differently. It’s about delineating a territory in which you are unique. It’s about making difficult choices, not about being more efficient. Difference is the key to strategy. This is a great lesson for many companies in this part of the world, obsessed as they are with ‘benchmarking’ and adopting ‘best practice’. Making operational improvements on a continuous basis may be necessary, but it is never going to be sufficient. The imitation game is a small-player’s game; the big fish aren’t even in the same pond as you.

The end of that decade was the time of the Internet boom, when the whole world went into a bout of collective insanity. We were in a new paradigm, so many learned figures told us. Capitalism was on another plane, it was claimed, and the old rules did not apply. The Dow-Jones Index would go from 10,000 to 100,000, said the crazier voices – but many believed it. Only two leading voices struck a dissenting note. One was the Sage of Omaha, Warren Buffet himself; the other was Michael Porter.

At the height of the boom, Porter asked us to remember that the Internet is just technology – not strategy itself. The fundamentals still apply, no matter how advanced technology gets. Strategy is still about creating unique value propositions, still about positioning, still about difference and uniqueness. He pointed out that many of the stocks trading at astronomical P/E ratios had no business model, no basis in reality. Indeed, they violated nearly every precept of good strategy.

The rest is history. Stock prices plunged, and Internet stocks plunged precipitously. Some went straight out of business; others took Porter’s advice and began to construct real-world business models and think about their competitiveness and their proposition to customers. Some have prospered again; most did not.

That is what Michael Porter brings to the party. He is the voice of reason, and a man who bases his assertions on solid research, conducted painstakingly over many years. His arguments are logical and clinical. He does not trade in hyperbole or in hubris. Some say he will never write an airport bestseller – but would we ever want him to?

Porter’s third book, The Competitive Advantage of Nations, raised the game even further. It now became apparent that the man was not content with just analysing firms or even industries. He was working on a bigger canvas than most. Like his illustrious predecessor Adam Smith, he was preoccupied with the answer to the question: why do some countries prosper, while others fall behind? That question bothers us greatly here in Kenya. Sometimes, it’s the only question that seems relevant to our lives.

Porter did the hard work for us: he conducted years of research across many countries and hundreds of industries – everything from American software to Italian fabric, English biscuits to German chemicals. His answers were thoughtful and robust: he identified the stages of competitive development through which entire national economies advance and decline. Porter’s research homed in on the fundamental determinants of national competitive advantage in an industry, and how they work together as a system. He explained the important phenomenon of “clustering,” in which related groups of successful firms and industries emerge in one nation to gain leading positions in the world market. Porter’s findings are rich in implications for both firms and governments. He described how a company can tap and extend its nation’s advantages in international competition. He provides a blueprint for government policy to enhance national competitive advantage.

That was the basis for his presentation on “Global Competitiveness”, delivered on Monday at Strathmore. His prescriptions? Fundamentally, that national competitiveness is about productivity. Markets are global, and so is capital. Capital follows opportunity. Where opportunity is good, there will be no shortage of capital. We know this to be true: in the companies I work with in Kenya, there is a long line of investors (local and foreign) wishing to partake in future riches.

But those investors must have a reason to inject capital. They study the business environment in any country, and assess that country’s productivity – the outputs it generates for the inputs consumed. Competitiveness, crucially, is not about low wages: as Professor Porter eloquently pointed out, poverty is about low wages. But we can only achieve sustainable higher wages (and therefore higher standards of living) if we improve our productivity. Prosperity comes from returns, and returns come from uniqueness. Kenya’s success in cut flowers, for example, is because we have taken natural endowments – soil and climate – and added world-beating quality: in flower varieties; in logistics; and in marketing.

Yet the real reason our flowers flourish, said Professor Porter to much applause, is because we did not establish a Flower Marketing Board! Instead, we allowed the industry to open up and develop its own sources of advantage. A crucial driver of that success is competition: the large number of growers, freight forwarders and service providers all jostling for position has led to a natural creation of advantage. This could not have been planned – it could only be enabled.

That lesson must be taken to other sectors. “If you don’t have to compete at home, you’ll never be able to compete abroad” is his famous refrain. It is one we don’t pay enough attention to. World-class performance is never delivered by monopolies, as we discovered to our cost in industry after industry. Why have we lagged behind in agricultural marketing, in ICT, in transportation, in infrastructure? Because we have allowed one or two protected players to call the shots for decades. When competitors are at your heels and the smell of victory is in your nostrils, your creativity will be ignited. That is true of individuals, of firms and of nations.

Tomorrow in Business Daily: A closer look at the sources of national advantage

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