MP1208 Presentation - English

1 Copyright 2007 © Professor Michael E.
Porter
Global Competitiveness and
Competitive Advantage of Vietnam
Professor Michael E. Porter

Harvard Business School
Ho Chi Minh City, Vietnam

December 1, 2008
This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive
Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard Business
Review, March 2001); and a forthcoming book. 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. Version: November 18, 2008, 3pm
2 Copyright 2007 © Professor Michael E. Porter

Company Strategy

Agenda
• The Economic Foundations of Competition
• Principles of Strategy

How Managers Think About Competition
COMPETING
COMPETING TO
TO BE
BE THE
THE COMPETING
COMPETING TO
TO BE
BE
BEST
BEST UNIQUE
UNIQUE
• The worst error in strategy is to compete with rivals on the same

dimensions

Flawed Concepts of Strategy
• Strategy as action
– “Our strategy is to merge…”
– “… internationalize…”
– “… consolidate the industry…”
– “… outsource…”
– “…double our R&D budget…”
• Strategy as aspiration
– “Our strategy is to be #1 or #2…”
– “Our strategy is to grow…”
– “Our strategy is to be the world leader…”
– “Our strategy is to provide superior returns to our shareholders…”
• Strategy as vision
– “Our strategy is to best understand and satisfy our customers’
needs…”
– “… provide superior products and services…”
– “…to advance technology for mankind…”
Vision Statements
Autodesk
Transforming business by design
Avon
To be the company that best understands and satisfies the product, service and
self-fulfillment needs of women – globally.
Goodyear Tire and Rubber

Become a market-focused tire company providing superior products and
services to end-users and to our channel partners, leading to superior
returns for our shareholders.
Lafarge
To be the undisputed world leader in building materials
Marriott International, Inc.

To be the number one lodging company in the world.

Setting the Right Goals
• Good strategy starts with setting appropriate financial goals for the company
• The fundamental goal of a company is superior long-term return on

investment
• Growth is good only if superiority in ROIC is achieved and sustained
– ROIC threshold
• Profitability must be measured realistically, capturing the actual profits on the
full investment
• Profitability metrics besides ROIC (e.g., return on sales; ebitda
margin; pro-forma earnings; and cash flow margin) are risky
for strategy
• Prevalent accounting adjustments to reported profitability

(e.g., writeoffs, restructuring charges) can obscure true
economic performance
• Goodwill must be treated as part of investment
• Setting unrealistic profitability or growth targets can undermine strategy

Economic Foundations of Competition
• The fundamental unit of strategic analysis is the business or industry

− Defining the relevant industry is important to strategy
• Company economic performance results from two distinct causes
Relative
Relative Position
Position
Industry
Industry Within
Within the
the
Structure
Structure Industry
Industry
- Overall Rules of Competition - Sources of Competitive Advantage
• Strategic thinking must encompass both

Disaggregating Economic Performance:
Industry vs. Position
35%
31.6%
30%
27.8% ‘Invested capital less
Return on 25% excess cash’ is the
Invested average of the
Capital beginning period and
1993-2007 20% the ending period
values. Excess cash is
calculated by
15%
13.6% subtracting cash in
10.5% excess of 10% of
10% annual revenue.
5%
0%
Revlon Paccar
Industry Average
Source: Compustat (2008), author’s analysis

Profitability of Selected U.S. Industries
1993–2007
Soft Drinks
Prepackaged Software
Pharmaceuticals
Perfume,Cosmetic,Toilet Prep
Advertising Agencies
Distilled Spirits
Semiconductors
Surgical and Medical Instruments
Mens and Boys Clothing
Household Appliances
Tires ROIC = Earnings before
Malt Beverages interest and taxes
Child Day Care Services divided by invested
Household Furniture capital less excess cash
Drug Stores
Grocery Stores
Cookies and Crackers
Iron and Steel Foundries
Mobile Homes
Bakery Products
Oil and Gas Machinery
Book Publishing
Average industry ROIC
Wine and Brandy
Laboratory Equipment in the US:15.1%
Engines and Turbines
Soft Drink Bottling
Hotels
Knitting Mills
Airlines
Catalog, Mail-Order Houses
0% 5% 10% 15% 20% 25% 30% 35% 40%

Return on invested capital, 1993–2007 average
Note: ‘Invested capital less excess cash’ is the average of the beginning period and the ending period values. Excess cash is calculated by subtracting
cash in excess of 10% of annual revenue.
Source: Compustat (2008), author’s analysis
Determinants of Industry Profitability
Threat of Substitute
Products or Services
Bargaining Power Rivalry Among Bargaining Power

of Suppliers Existing of Buyers
Competitors
Threat of New
Entrants

Strategy and Industry Structure: Heavy Trucks
Threat
Threat of
of Substitute
Substitute
Products
Products or
or
Services
Services
• Railroads
• Water transportation
Bargaining Rivalry
Rivalry Among
Among Bargaining
Bargaining Power
Power
Bargaining Power
Power
of Existing
Existing of
of Buyers
Buyers
of Suppliers
Suppliers
Competitors
Competitors
• Large independent • Heavy price • Large fleets
suppliers of engines competition on • Leasing companies
and drive train standardized models • Small fleets and owner
components operators
• Unionized labor
Threat
Threat of
of New
New
Entrants
Entrants
• Many truck producers

are assemblers

Paccar Competitive Positioning
• Focus on owner-operators
• Design trucks with special features and amenities
• Customization and build-to-order
• Achieve low truck operating costs
• Offer extensive roadside assistance to truckers

Strategy and Industry Structure: Foodservice Distribution
Threat
Threat of
of Substitute
Substitute
Products
Products oror Services
Services
• Go direct
• Use retail / warehouse channels
Rivalry
Rivalry Among
Among Bargaining
Bargaining Power
Power
Bargaining
Bargaining Power
Power of
of Existing
Existing of
of Buyers
Buyers
Suppliers
Suppliers Competitors
Competitors
• Food processors • Distributors • Restaurants
• Food cooperatives –Purchasing • Schools
• Farmers –Warehousing • Hospitals
–Delivery
• Cafeterias
• Other food service
Threat
Threat of
of New
New establishments
Entrants
Entrants
• Low barriers to entry

Reshaping Industry Structure
Foodservice Distribution
• Offering value-added services
• Offering private-label products
• Moving to national procurement contracts
• Increasing the use of sophisticated information technology

Determinants of Relative Performance
Differentiation
(Higher Price)
Competitive
Competitive
Advantage
Advantage
Lower Cost

Foundations of Competitive Advantage
The Value Chain
Firm Infrastructure
(e.g. Financing, Planning, Investor Relations)
Human Resource Management

Support (e.g. Recruiting, Training, Compensation System)
Activities
Technology Development
(e.g. Product Design, Testing, Process Design, Material Research, Market Research) M
Value
Procurement a
(e.g. Components, Machinery, Advertising, Services) r What
g buyers are
Inbound Operations Outbound Marketing After-Sales i
willing to
Logistics Logistics & Sales Service pay
n
(e.g. Incoming (e.g. Assembly, (e.g. Order (e.g. Sales (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)
Primary Activities
• Competing in a business involves performing a set of discrete

activities, in which competitive advantage resides
Defining the Value Chain
Homebuilding
Firm Infrastructure

Activities
Technology Development
(e.g. Product Design, Testing, Process Design, Materials Research, Market Research) M
Value
Procurement a
(e.g. Materials, Subcontracted Labor, Advertising, Services) r What
g buyers are
Land Acquisition Construction Marketing Closing After-Sales i
willing to
& Development & Sales Service pay
n
(Identify attractive (Design, (Lead generation, (e.g. Customer (e.g. Warranties,
markets, Secure Engineering, Model home Financing, Customer
land, Procure Schedule and display, Sales Contract, Title, Complaints)
entitlements and manage force, Customer Closing)
permits, Prepare construction selection of
site) process) personalized
options)
Primary Activities
• There are different ways of configuring the value chain in the same industry

Strategy For Non-Profits
The Museum Value Chain
Firm Infrastructure
(e.g. governance, planning, budgeting, information tech., facilities)
Fundraising
(e.g. earned revenues, proposals, solicitations, events, donor relations)
(e.g. recruiting, training, compensation system)
Program and Content Development S
(e.g. scholarship, exhibit design, market research)
u
Educational Programs r
(e.g. local school outreach, adult classes, special tours)
p
Social
Benefits
Assembly and Exhibition Hospitality Marketing Visitor / l
Preservation Services & Sales Constituency u
Services s
(e.g., acquisition, (e.g., curating, (e.g., shops, (e.g., (e.g., member
authentication, display, support restaurants, promotion, outreach,
cataloguing) materials) maintenance) advertising, special events)
catalogs)

Agenda
• The Economic Foundations of Competition
• Principles of Strategy

Achieving Superior Performance
Operational Effectiveness is Not Strategy
Operational Strategic
Effectiveness Positioning
• Assimilating, attaining, and • Creating a unique and

extending best practices sustainable competitive
position
Do the same thing better Do things differently to achieve

a different purpose

Five Tests of a Good Strategy
•• A
A unique
unique value
value proposition
proposition
compared
compared to
to other
other organizations
organizations
•• A
A different,
different, tailored
tailored value
value chain
chain
•• Clear
Clear tradeoffs,
tradeoffs, and
and choosing
choosing what
what
not
not to
to do
do
•• Activities
Activities in
in the
the value
value chain
chain that
that fit
fit
together
together andand reinforce
reinforce each
each
other
other
•• Strategic
Strategic continuity
continuity with
with continual
continual
improvement
improvement in
in realization
realization

Strategic Positioning
IKEA, Sweden
Distinctive
Distinctive
Value
Value Proposition
Proposition Activities
Activities
• Young, first time, or price-sensitive buyers who • Modular, ready-to-assemble, easy to package
want stylish, space efficient and scalable designs
furniture and accessories at very low price • In-house design of all products
points. • Wide range of styles displayed in huge
warehouse stores with large on-site inventories
• Self-selection
• Extensive customer information in the form of
catalogs, explanatory ticketing, do-it-yourself
videos, and assembly instructions
• Ikea designer names attached to related
products to inform coordinated purchases
• Long hours of operation
• Suburban locations with large parking lots
• On-site, low-cost, restaurants
• Child care provided in the store
• Self-delivery by most customers

Defining the Value Proposition
What
What Which
Which
Customers?
Customers? Needs?
Needs?
• What end users? • Which products?

• What channels? • Which features?
• Which services?
What
What Relative
Relative
Price?
Price?
• Premium? Discount?
• A novel value proposition often expands the market

Enterprise Rent-A-Car
Distinctive
Distinctive
Value
Value Proposition
Activities
• Home-city replacement cars for drivers • Numerous, small, inexpensive offices in each
whose cars are being repaired or who need metropolitan area, including on-premises offices at
major accounts
an extra vehicle, at low rates (30% below
airport rates) • Open during daylight hours
• Deliver cars to customers’ homes or rental sites,
or deliver customers to cars
• Acquire new and older cars, favoring soon-to-be
discontinued older models
• Keep cars six months longer than other major
rental companies
• In-house reservations
• Grassroots marketing with limited television
• Cultivate strong relationships with auto
dealerships, body shops, and insurance adjusters
• Hire extroverted college graduates to encourage
community interaction and customer service
• Employ a highly sophisticated computer network
to track the fleet

GOL Airlines, Brazil
Distinctive
Distinctive
Value
Value Proposition
Activities
• Convenient, basic airline service between 41 • No-frills service

Brazilian and nearby international cities at very
low prices, competing with bus transportation • Many flights during late night hours
• Price sensitive business (60%) and leisure • Good time performance

travelers • Single aircraft type (Boeing 737s)
• 80% reservations made via the Internet
• Quick airport turn-around
• Utilize aircraft more hours per day

Making Strategic Tradeoffs
• Tradeoffs occur when strategic positions are incompatible

– The need for a choice
Sources of Tradeoffs
– Incompatible product or service features / attributes
– Differences in the best configuration of activities in the value chain to
deliver the chosen value proposition
– Inconsistencies in image or reputation across positions
– Limits on internal coordination, measurement, motivation, and control
• Tradeoffs make a strategy sustainable against imitation by established

rivals
• An essential part of strategy is choosing what not to do

Strategic Tradeoffs
Neutrogena Soap (1990)
• Forgo cleaning, skin softening, and deodorizing

features
• Choose higher costs through the configuration of:

– packaging
– manufacturing
– detailing
– medical advertising
– skin research
• Give up the ability to reach customers via:

– promotions
– television
– some distribution channels

Strategic Tradeoffs
IKEA, Sweden
IKEA
IKEA Typical
Typical Furniture
Furniture Retailer
Retailer
Product Product
• Low-priced, modular, ready-to-assemble • Higher priced, fully assembled products
designs
• No custom options • Customization of fabrics, colors, finishes,
and sizes
• Furniture design driven by cost, • Design driven by image, materials, varieties
manufacturing simplicity, and style
Value Chain Value Chain

• Centralized, in-house design of all products • Source some or all lines from outside
suppliers
• All styles on display in huge warehouse stores • Medium sized showrooms with limited
portion of available models on display
• Large on-site inventories • Limited inventories / order with lead time
• Limited sales help, but extensive customer • Extensive sales assistance
information
• Long hours of operation • Traditional retail hours

Typical Thinking on the Sources of Competitive Advantage
•• “Key”
“Key”Success
SuccessFactors
Factors
•• “Core”
“Core”Competencies
Competencies
•• “Critical”
“Critical”Resources
Resources
• Competitive advantage is seen as concentrated in a few parts of the

value chain

Mutually Reinforcing Activities
Zara Apparel
Word-
Word-of-
of- Cutting-
Cutting-
mouth Customers edge fashion
marketing chic but at moderate
and repeat cost-
cost- price and
buying conscious quality
Wide
range of Global
styles team of
trend-
spotters
Very
Majority of Advanced
Little media frequent
production production
advertising product machinery
in Europe
changes
Extensive
use of
Prime store store sales
locations in data
high traffic Very
areas Tight
flexible
coordination
JIT delivery with 20 production
wholly-owned system
factories
• Fit is leveraging what is different to be more different

Source: Draws on research by Jorge Lopez Ramon (IESE) at the Institute for Strategy and Competitiveness, HBS
Strategic Continuity
• Continuity of strategy is fundamental to sustainable competitive advantage

– e.g., allowing the organization to understand the strategy
– building truly unique skills and assets related to the strategy
– establishing a clear identity with customers, channels, and other outside entities
– strengthening fit across the value chain
• Reinvention and frequent shifts in direction are costly and confuse the
customer, the industry, and the organization
• Maintain continuity in the value proposition
• Continuously improve ways to realize the value proposition

– Strategic continuity and continuous change should occur simultaneously. They are not
inconsistent
• Continuity of strategy allows learning and change to be faster and more effective

Barriers to Strategy
Flawed Management Thinking
• Misunderstanding of strategy principles
• Poor industry definition obscures the arena in which competition

actually takes place
Industry Convergence Pressures

• Labor agreements or regulations constrain price, product, service or
process alternatives
• Industry conventional wisdom leads all companies to follow common

practices
• Customers ask for incompatible features or request new products or

services that do not fit the strategy

Barriers to Strategy
Internal Practices
• Inappropriate goals and performance metrics bias strategy choices

– Size over profitability
– Short time horizon
• Rapid turnover of leadership undermines strategy in favor of short-

term performance
• A desire for consensus blurs strategic tradeoffs
• Inappropriate cost allocation leads to too many products, services,

or customers
• Outsourcing makes activities homogenous and less distinctive

Internal Barriers to Strategy
Neutrogena Soap (2005)
• Prior to the 1990’s Neutrogena was the

number one brand recommended by
dermatologists
• Neutrogena had a relatively narrow target
market but deep penetration and high
customer loyalty
• Beginning in the early- to mid-1990’s, new
growth-oriented management shifted
Neutrogena from a dermatologist-focused
marketing concept to mass market television
advertisements and celebrity endorsements
• Neutrogena lost market share while
Gallderma’s Cetaphil captured the loyalty of
dermatologists, and prospered
Source: Draws on research conducted at the Institute for Strategy and Competitiveness and interviews conducted with a former Neutrogena executive.

Finding a Unique Strategic Position
Segmenting the Industry

(not just the Market) Exploiting Tradeoffs
• Creatively segmenting product • Identifying tradeoffs in the value
varieties, customer groups, and proposition or in the value chain
purchase occasions
Leveraging Unique Activities Capitalizing on Industry Dynamics

• Building off activities with true • Identifying strategic positions opened
uniqueness up by industry structural changes
• Looking for new activity configurations
and combinations
• Migrate toward the chosen strategic position

• Focus incremental investments on reinforcing the chosen strategy

Segmentation and Strategic Positioning
Automobile Insurance
Progressive
Progressive Geico
Geico
Customer Group Customer Group
• High-risk drivers shunned by standard • “Preferred”, lowest risk drivers
automobile insurers
Set of Activities Set of Activities

• Distribution primarily through independent • Direct customer interaction through direct mail,
agents telephone, and the Internet
• Sales force that educates independent agents in • Sophisticated direct mail targeting low risk
complex information gathering techniques households
• 30-year database on high-risk drivers • 35+ year database and modeling utilities on
preferred drivers
• Complex rating scheme
• Complex rating and pricing system
• 14,000 different prices
• Heavy advertising to drive requests for rate
• 50-300% premium pricing over standard
quotes (“I’ve got good news.”)
segment
• Quote rates to only 50% of customers who
• Adjusters work from offices on wheels to provide
inquire about coverage
immediate response. Adjusters trained and
empowered to write out check at scene of • 15-20% lower prices than competition
accident • Network of insurance adjusters with cell phones
• Steep incentives to make a 4% underwriting working out of own vehicles for immediate
profit response
• Conservative, liquid investment portfolio • 24-hour customer service to handle sales, policy
inquires, and claims
• Conservative, liquid investment portfolio
Enterprise Rent-A-Car
Distinctive
Distinctive
Value
Value Proposition
Activities
• Home-city replacement cars for drivers • Numerous, small, inexpensive offices in

whose cars are being repaired or who need metropolitan areas, including on-premises offices
at major accounts
an extra vehicle, at low rates (30% below
airport rates) • Open during daylight hours
• Deliver cars to customers’ homes or rental sites,
or deliver customers to cars
• Acquire new and older cars, favoring soon-to-be
discontinued older models
• Keep cars six months longer than other major
rental companies
• In-house reservations
• Grassroots marketing with limited television
• Cultivate strong relationships with auto
dealerships, body shops, and insurance adjusters
• Hire extroverted college graduates to encourage
community interaction and customer service
• Employ a highly sophisticated computer network
to track its fleet

The Process of Developing Business Unit Strategy
• Strategy should be developed and periodically reviewed in a formal
process rather than being left to occur spontaneously
– The process need not be highly structured
• Strategy development is best done in a multifunctional team
including the general manager and heads of important functions
• The role of the strategic planning executive or department is to
serve as staff to the team, not be responsible for strategy
development
• The strategy team itself should be relatively small to ensure frank
and productive discussion between the leader and senior peers
– Strategy development involves making tradeoffs and exploring options
that can be unsettling and disruptive if lower level people are involved
– Other managers can be invited for particular meetings/input
• The strategy team should conduct its work jointly rather than
delegating components of the strategy to functional areas
Communicating a Strategy
• Strategy involves everyone in an organization, not just top management
• The benefits of strategy are greatest when it is communicated widely in the

organization
• Communicating strategy requires a simple and vivid way of describing the

essence of the company’s unique position
– Symbols of the strategy are invaluable tools
– Repetition
• The basic strategy and value proposition must also be communicated to

customers, channels, suppliers, and financial markets
– What about confidentiality?
• Leaders should not assume that subordinates understand the strategy, or that
they agree with it
– Help each organizational unit translate the strategy into implications for its own
mandate
• Individuals who do not ultimately accept the strategy cannot have an ongoing
role in the company

The Role of Leaders in Strategy
• Drive operational improvement, but clearly distinguish it from strategy
• Lead the process of choosing the company’s unique position

– The CEO is the chief strategist
– The choice of strategy cannot be entirely democratic
• Communicate the strategy relentlessly to all constituencies

– Harness the moral purpose of strategy
• Maintain discipline around the strategy, in the face of many distractions.
• Decide which industry changes, technologies, and customer needs to

respond to, and how the response can be tailored to the company’s strategy
• Measure progress against the strategy using metrics that capture the
implications of the strategy for serving customers and performing particular
activities
• Sell the strategy and how to evaluate progress against the strategy to the
financial markets
• Commitment to strategy is tested every day

Strategy in Economic Downturns
• Create a positive agenda
• Refocus on strategy
• Return to economic fundamentals
• Downsize to a strategy, not across the board
• Do not overreact to distressed industry conditions
• Use the downturn to get things done that would be more difficult in normal times
• Position for long term economic performance, not near term stock price
• Seize opportunities for discontinuities which are more likely to emerge
• Strategy is more important in downturns, not less

Vietnam’s Competitiveness
and the Role of the Private Sector

The Need For An Economic Strategy
• Vietnam has experienced an impressive growth over the last two

decades
• However, reforms so far are insufficient to move Vietnam to a middle

income economy
• The next several years will determine whether Vietnam will follow the
experience of Korea, or the Philippines
• Vietnam’s reform have been piecemeal and reactive
• Improving Vietnam’s standard of living will require a long term

economic strategy
– A set of interrelated policy changes, institutional structures, and

rigorous implementation mechanisms

Agenda
• Understanding Vietnam’s Economic Performance
• Assessing Vietnamese Competitiveness
• Identifying Action Priorities
• Organizing for Competitiveness
• Creating an Economic Strategy
• Integrating Corporate Social Responsibility

Prosperity Performance
PPP-adjusted GDP
Selected Countries
per Capita, 2007
$45.000
USA
Ireland
$40.000 Singapore Hong Kong
Switzerland
Netherlands Iceland
Canada Australia
$35.000 Austria Sweden
Germany UK Finland Taiwan
France Japan
$30.000 Bahrain
Italy Spain Greece
New Zealand Slovenia

$25.000 Israel
Korea Czech Republic
Saudi Arabia
Portugal
$20.000 Estonia
Hungary Slovakia
Lithuania Latvia
$15.000 Poland
Croatia Russia
Malaysia Argentina
Mexico Chile Romania
$10.000 Brazil
Costa Rica
South Africa Turkey
Thailand
Colombia Vietnam China
$5.000 Egypt Indonesia Sri Lanka
Philippines Pakistan India
Nigeria Bangladesh Cambodia
$0
0% 2% 4% 6% 8% 10% 12%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2003-2007
Source: EIU (2008), authors calculations
Labor Force Utilization
Labor Force
Participation Rates, Selected Countries
Participation Rate, 2007
65%
Singapore (6.16%)
China
60%
Iceland
Norway
Thailand Vietnam
55% Canada Hong Kong
Portugal Australia
Japan Sweden Russia
Germany Czech Rep. New Zealand Ireland
Latvia
50% USA UK Finland
South Korea Spain
Brazil Slovakia
Lithuania Taiwan
Indonesia
India Slovenia
45% France
Poland Bangladesh
Romania Chile
Austria
Italy Hungary
Colombia Mexico Argentina
40% Malaysia
Sri Lanka Philippines
Nicaragua
Morocco
35%
Bulgaria
Turkey
Pakistan
30%
-3% -2% -1% 0% 1% 2% 3% 4% 5% 6%
Change in Labor Force Participation Rate, 2003-2007
Source: Economist Intelligence Unit (2008)
GDP per employee
Comparative Labor Productivity
(PPP adjusted US$), Selected Countries
2007
USA
Hong Kong
Ireland
France
Norway Finland
UK Sweden
Australia
Canada Denmark Singapore
Italy Austria Japan Taiwan Estonia
Iceland
Germany Israel
Switzerland South Korea
Spain Greece
New Zealand Slovenia
Portugal Saudi Arabia Slovakia Latvia Venezuela

Chile
Poland Malaysia
Turkey Lithuania
Argentina Belarus
Czech Republic
Croatia Hungary Kazakhstan
Mexico Colombia
Syria Costa Rica Bulgaria Russia
Tunisia Thailand
Iran Peru Sri Lanka
Ecuador Egypt South Africa China
Yemen Brazil Indonesia Ukraine
Pakistan Philippines
Dominican Republic India
Nigeria
Cambodia
Cote d’Ivoire Senegal Bangladesh
Kenya Ghana Vietnam Ethiopia
Compound annual growth rate (CAGR) of real GDP per employee

(PPP-adjusted), 2003-2007
Source: authors calculation Groningen Growth and Development Centre (2008)

Contribution to
Decomposition of Vietnamese Growth
Annual GDP
growth (%)
10%
Capital Labor TFP
8%
6%
4%
2%
0%
-2%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Ohno (2008)
Domestic Fixed Investment Rates
Gross Fixed Investment Selected Countries
as % of GDP (2007)
36%
China (40.4%) Latvia
India
34% Vietnam
32% Estonia
Croatia Spain
30% Kazakhstan
Korea Slovenia Sri Lanka Iceland
28%
Australia Slovakia
Romania
Thailand
Lithuania
26% Colombia
Singapore Greece Indonesia
Ireland Venezuela
24% Czech Republic Tunisia
Japan Argentina
New Zealand Ukraine Denmark
Canada Poland
22% Portugal Malaysia Italy Mexico Cambodia Egypt Pakistan
Hungary Austria France Russi Turkey
20% Hong Kong Chile Finland aKenya South Africa
Netherlands
Saudi Arabia Norway Sweden
18% Germany UK Brazil
Dominican Republic
16%
USA
Philippines
14%
-4% -2% 0% 2% 4% 6% 8% 10% 12%
Change in Gross Fixed Investment (as % of GDP), 2003 - 2007

Note: Includes inbound FDI
Source: EIU, 2008
Inbound Foreign Investment Performance
Stocks and Flows, Selected Countries
Inward FDI Stocks as % of
GDP, Average 2003 - 2007
80% Netherlands Estonia

Singapore
(160.1%, 64.7%)
70%
Vietnam Hungary Chile

60%
Switzerland
New Zealand Sweden
Slovakia
Czech Republic
50%
Denmark
Portugal Cambodia
40% UK
Spain Thailan Philippines
Australi Canad d Latvia
a
South Africa a Poland Iceland (46.7%)
Finland Lithuania France Israel
30% Colombia
Laos Mexico
Norway Austria
Slovenia Brazil Russia
20% Germany Turkey
Greece Italy Malaysia
South Korea USA Saudi
China Pakista
10% Indonesia Arabia
n
Indi
Japan a
0%
-5% 0% 5% 10% 15% 20% 25% 30% 35% 40%
FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007
Source: UNCTAD, World Investment Report (2007)
Export Performance
Exports as Share of
GDP (in %, 2007)
Selected Countries
100%
Malaysia (116.4%)
90% Slovakia
Belgium Hungary
Czech Republic
Ireland
80%
Thailand Estonia
Netherlands Vietnam
70% Slovenia Slovenia
Cambodia
60% Bulgaria
Austria
Saudi Arabia Lithuania
Switzerland
50% Kazakhstan Croatia Philippines
Tunisia South Korea
Latvia Finland Germany
Ukraine Norway Chile
40% South Africa Poland China
Egypt
Canada Russia Indonesia
Sri Lanka France Portugal
30% Venezuela Mexico
New Zealand Italy
Dominican Republic Argentina UK
Turkey Colombi
20% India Bangladesh
Australia Spain a
Pakistan Brazil Japan
USA
10%
0%
-15% -10% -5% 0% 5% 10% 15% 20% 25% 30%
Change of Exports as Share of GDP, 2003 to 2007
• Imports as a share of GDP are equally high

Source: EIU (2008), authors’ analysis
Vietnam’s Exports By Type of Industry
World Export Market
Share (current USD)
Processed Goods
0,8% Semi-processed Goods
Unprocessed Goods
0,7% Services
TOTAL
0,6%
0,5%
0,4%
0,3%
0,2%
0,1%
0,0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: UNComTrade, WTO (2008)
Vietnam’s Cluster Export Portfolio
2000-2006
5%
Change In Vietnam’s Overall Footwear (5.68%, 1.91%)
Growth In World Export Share:
0.25%
Fishing and Fishing
Products
4%
Vietnam’s world export market share, 2006
3%
2% Appare
l
Coal & Briquettes
Furnitur
1% Textiles e
Plastics
Vietnam’s Average World
Tobacco Export Share: 0.31%
0%
-0,3% -0,1% 0% 0,1% 0,3% 0,5% 0,7% 0,9% 1,1% 1,3% 1,5%
Change in Vietnam’s world export market share, 2000 – 2006
Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Exports of US$1.1 Billion
Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the =
IMF BOP statistics. 55 Copyright 2007 © Professor Michael E. Porter
Agenda

What is Competitiveness?
• Competitiveness depends on the productivity with which a nation uses

its human, capital, and natural resources.
– Productivity sets the sustainable standard of living (wages, returns on
capital, returns on natural resources)
– It is not what industries a nation competes in that matters for prosperity, but
how productively it competes in those industries
– Productivity in a national economy arises from a combination of domestic
and foreign firms
– The productivity of “local” or domestic industries is fundamental to
competitiveness, not just that of export industries
• 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

Determinants of Competitiveness
Microeconomic Competitiveness
Quality of the Sophistication

National State of Cluster of Company
Business Development Operations and
Environment Strategy
Macroeconomic Competitiveness
Social
Infrastructure Macroeconomic
and Political Policies
Institutions
Natural Endowments
• Macroeconomic competitiveness creates the potential for high productivity, but is

not sufficient
• Productivity ultimately depends on improving the microeconomic capability of
the economy and the sophistication of local competition
Wage Level Comparison
Monthly Minimum Wage Selected Countries
USD, log scale, 2008
$3,000
Denmark
Ireland
United Kingdom Germany Sweden
Italy Japan / Belgium / France
AustriaNetherlands
$1,000 Spain New Zealand
Greece Australia
Slovenia Taiwan
Portugal Cyprus Singapore
Korea
Poland Slovakia Czech Republic
$500 Hungary
Estonia
Lithuania
Romania Latvia
Malaysia
$100 Bulgaria Thailand

China
Philippines Indonesia
$50
Cambodia
Vietnam
$0
Global Competitiveness Index Score, 2008
Source: Global Competitiveness Report, 2008; EuroStat, 2008; Philippines Department of Labor and Employment,
2008 59 Copyright 2007 © Professor Michael E. Porter
Rate of Competitiveness Improvement
Low Income Countries, 2002 - 2007
BCI Value, 2007
High
India
Indonesia
Sri Lanka
El Salvador Vietnam
Pakistan
Tanzania Nigeria Gambia Honduras
Uganda Mali
Madagascar
Zambia Zimbabwe Nicaragua
Ethiopia
Mozambique Bangladesh
Paraguay Bolivia
Low
Chad
Below average Average Above average
Dynamism Score, 2002 - 2007

Source: Global Competitiveness Report 2007
Social Infrastructure and Macroeconomic

Political Institutions Policies
• Basic human capacity • Fiscal policy

– Basic education – Government surplus/deficit
– Health system – Government debt
– Savings / Investment rates
• Political institutions • Monetary policy

– Political freedom – Inflation
– Voice and accountability – Interest rate spread
– Political stability
– Centralization of economic policymaking
– Government effectiveness
• Rule of law
– Judicial independence
– Efficiency of legal framework
– Civil rights
– Business costs of corruption
– Reliability of police
– Prevalence and costs of crime

Vietnam’s Position
Social Infrastructure and Macroeconomic

Political Institutions Policies
Basic health and education Fiscal policy

+ Solid provision of basic services + Government budget and debt at acceptable
– Increasing concerns about the quality of levels
these public services – Government budget still reliant on foreign aid
Political institutions Monetary Policy

+ High levels of political stability – High levels of inflation
+ Increasing decentralization of economic
policy responsibilities
– Little effective policy dialogue
– Corruption remains a significant challenge
Rule of law
+ Quality of laws tends to be good
– Effectiveness of implementation remains
weak

Governance Indicators
Selected Countries
Best
country in
the world Voice and Accountability
Political Stability
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
Index of
Governance
Quality,
2007
Worst
country in
the world
an
ia
nd
h
a
ia
a
sia
a
m
ka
n
n
il
os
s
e
a
az
es
re
ta
n
si
ne
pa
or
di
d
es
na
la
iw
an
hi
La
ay
In
us
bo
kis
Ko
Br
ap
ad
pi
Ja
ai
on
et
Ta
iL
R
al
ilip
am
Th
Pa
ng
l
Vi
h
ng
M
Sr
In
ut
Ph
Si
Ba
So
Note: Sorted left to right by decreasing average value across all indicators. The ‘zero’ horizontal line corresponds to the median country’s average value across all
indicators.
Source: World Bank (2008)
Corruption Perception Index, 2007
1 Finland New Zealand
Deteriorating Iceland Sweden Improving
Switzerland
Low Canada Norway
corruption UK
Hong Kong Austria Germany
Ireland Japan
United States France
Chile Spain Uruguay
Portugal Estonia Slovenia
Israel Taiwan
Hungary Czech Republic
Italy Malaysia South Korea
South Africa
Lithuania Slovakia Latvia
Rank in Jordan
Global Greece
Tunisia Poland
Corruption Croatia Turkey
Index, Colombia Romania
2007 Peru Brazil Mexico China India
Senegal
Panama Thailand Tanzania

Argentina
Egypt
Uganda
Ukraine
Vietnam
Philippines
Pakistan
High Cote d’Ivoire Russia Indonesia
corruption Zimbabwe Nigeria
91 Venezuela Bangladesh
-20 -15 -10 -5 0 5 10 15 20

Change in Rank, Global Corruption Report, 2007 versus 2001
Note: Ranks only countries available in both years (91 countries total)
Source: Global Corruption Report, 2007
Microeconomic Competitiveness: Quality of the
Business Environment
Context
Contextforfor
Firm
Firm
Strategy
Strategy
and
andRivalry
Rivalry
 Local rules and incentives that

encourage investment and
productivity
Factor – e.g. incentives for capital
Factor Demand
(Input) investments, intellectual property Demand
(Input) protection Conditions
Conditions Conditions
Conditions  Vigorous local competition
 Access to high quality – Openness to foreign and local  Sophistication of local
competition
business inputs customers and needs
– Human resources – e.g., strict quality, safety,
– Capital availability Related
Relatedand
and and environmental
– Physical infrastructure Supporting
Supporting standards
– Administrative infrastructure Industries
Industries
(e.g. registration, permitting)
– Information and transparency  Availability of suppliers and
– Scientific and technological supporting industries
infrastructure
• 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
Vietnamese Business Environment
Vietnam’s Relative Position 2008
Competitive Advantages Competitive Disadvantages
•• Communications
Communicationsinfrastructure
infrastructure •• Government
Governmentintervention
intervention(rank
(rank119)
119)
(rank 72)
(rank 72) ––E.g., SOE market dominance
E.g., SOE market dominance
––E.g.,
E.g.,quality
qualityofofthe
thetelephone
telephone
infrastructure
infrastructure
•• Local
Localcompetition
competition(rank(rank75)
75) •• Trade
Tradebarriers
barriers(rank
(rank113)
113)
––E.g.,
E.g.,intensity
intensityofoflocal
local ––E.g.,
E.g.,level
levelofofimport
importtariffs
tariffs
competition
competition
Note: Rank versus 130 countries; overall, Vietnam ranks 102nd in 2008 PPP adjusted GDP per capita and 76th in New Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2008)
Rank (157
Openness to Trade
countries) Selected Countries, 2008
160
140
Vietnam
120
100
80
60
40
20
0
New Zealand
Germany
Indonesia
Hong Kong
Sri Lanka
Japan
India
Vietnam
United States
Brazil
South Korea
Singapore
Taiwan
China
Cambodia
Russia
Philippines
Laos
Malaysia
Pakistan
Thailand
• Vietnam’s lack of openness will retard further competitiveness upgrading

Source: Index of Economic Freedom (2008), Heritage Foundation
Vietnamese Business Environment
Vietnam’s Relative Position 2008
Competitive Advantages Competitive Disadvantages
•• Communications
Communicationsinfrastructure
infrastructure •• Government
Governmentintervention
intervention(rank
(rank119)
119)
(rank 72)
(rank 72) ––E.g., SOE market dominance
E.g., SOE market dominance
––E.g.,
E.g.,quality
qualityofofthe
thetelephone
telephone
infrastructure
infrastructure
•• Local
Localcompetition
competition(rank(rank75)
75) •• Trade
Tradebarriers
barriers(rank
(rank113)
113)
––E.g.,
E.g.,intensity
intensityofoflocal
local ––E.g.,
E.g.,level
levelofofimport
importtariffs
tariffs
competition
competition
•• Energy
Energyinfrastructure
infrastructure(rank
(rank109)
109)
––E.g., quality of electricity supply
E.g., quality of electricity supply
•• Access
Accesstotofinance
finance(rank
(rank109)
109)
––E.g.,
E.g.,financial
financialmarket
marketsophistication
sophistication
•• Innovation
Innovationinfrastructure
infrastructure(rank
(rank99)
99)
––E.g., patents per capita
E.g., patents per capita
•• Logistical
Logisticalinfrastructure
infrastructure(rank
(rank96)
96)
––E.g., quality of roads
E.g., quality of roads
Note: Rank versus 130 countries; overall, Vietnam ranks 102nd in 2008 PPP adjusted GDP per capita and 76th in New Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2008)
Cost of Doing Business
Ranking, 2008
(of 181 countries)
Favorable
Vietnam, 2008 Unfavorable
Median Ranking,
East Asia and Pacific
Vietnam’s per capita GDP rank: 70th
• Especially in land ownership in rural areas significant problems remain

Source: World Bank Report, Doing Business (2008)
State-Owned Enterprises (SOEs) in Vietnam
• SOEs continue to play a dominant role in the Vietnamese economy,
despite the commitment to privatization
• Government oversight of these companies and their spending is
limited and largely reactive
• The costs of slow progress on privatization are high for Vietnam’s
competitiveness
– Retards entry of new private companies
– Creates risks of corruption
– Can exacerbate economic volatility through excessive investment
financed through soft credit
• An effective privatization program strategy for Vietnam must shift
economic structure, not just change ownership
– Privatization must go hand-in-hand with market opening and policies to
curtail anti-competitive practices
– Owners are needed that contribute new capital and skills
– Minority stakes can distribute ownership more widely
State of Cluster Development
Tourism Cluster in Cairns, Australia
Public
Public Relations
Relations && Local
Local retail,
retail,
Market
Market Research
Research Travel health
health care,
care, and
and
Travel agents
agents Tour
Tour operators
operators
Services
Services other
other services
services
Food
Food Local
Local
Suppliers
Suppliers Attractions
Attractions and
and Transportation
Transportation
Restaurants Activities
Activities
Restaurants e.g.,
e.g., theme
theme parks,
parks,
casinos, sports
casinos, sports
Property
Property Souvenirs,
Souvenirs,
Services
Services Duty
Duty Free
Free
Airlines,
Airlines,
Hotels
Hotels Banks,
Banks,
Maintenance
Maintenance Cruise
Cruise Ships
Ships
Foreign
Foreign
Services
Services Exchange
Exchange
Government
Government agencies
agencies Educational
Educational Institutions
Institutions Industry
Industry Groups
Groups
e.g.
e.g. Australian
AustralianTourism
Tourism Commission,
Commission, e.g.
e.g. James
James Cook
Cook University,
University, e.g.
e.g. Queensland
Queensland Tourism
Tourism
Great
Great Barrier
Barrier Reef
Reef Authority
Authority Cairns
Cairns College
College of
of TAFE
TAFE Industry
Industry Council
Council
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
Vietnam’s Cluster Export Portfolio
2000-2006
5%
Change In Vietnam’s Overall Footwear (5.68%, 1.91%)
Growth In World Export Share:
0.25%
Fishing and Fishing
Products
4%
3%
2% Appare
l
Coal & Briquettes
Furnitur
1% Textiles e
Plastics
Vietnam’s Average World
Tobacco Export Share: 0.31%
0%
-0,3% -0,1% 0% 0,1% 0,3% 0,5% 0,7% 0,9% 1,1% 1,3% 1,5%
Vietnam’s Cluster Export Portfolio cont’d
2000-2006
1,0%
Change In Vietnam’s Overall
Growth in World Export Share:
0.25%
0,8%
Agricultural Products
Leather and Related Products
Oil & Gas

0,6%
Building Fixtures and Equipment
Textiles
0,4%
Sporting, Recreational
and Children's Goods Vietnam’s Average
Construction Materials
World Export
Total Communications Equipment Share: 0.31%
Services
Processed Foods
Publishing and Printing Lighting and Electrical Equipment
0,2% Chemical Products Motor Driven
Medical Devices
Forest Products
Products
Information Power and Power Generation Equipment
Entertainment
Technology Prefabricated Enclosures and Structures
Jewelry, Precious Metals and Collectibles Metal Mining and Manufacturing
Analytical Instruments Production Technology
Biopharmaceuticals Automotive
0,0%
-0,10% -0,05% 0,00% 0,05% 0,10% 0,15% 0,20% 0,25% 0,30%
Not reported Share of World Exports by Cluster
< 0.07%
Vietnam, 2000
0.07 – 0.15%
Fishing &
0.16 – 0.31% Textiles
Fishing Entertainment
Hospitality Prefabricated
0.31 – 0.62% Products Enclosures
& Tourism
Agricultural
0.62- 1.24% Products
Transportation
> 1.24% Building Furniture
& Logistics
Distribution Aerospace Fixtures, Construction
Services
Information Vehicles & Equipment & Materials
Defense
Tech. Lightning &Services Processed
Jewelry & Heavy
Business Construction Food
Services Analytical Electrical
Precious Services
Education & Instruments Equipment
Metals Knowledge Medical Forest
Power
Creation Communi- Generation Products
Financial Devices
Services cations
Publishing
& Printing Biopharma- Equipment Heavy
Machinery
ceuticals Motor Driven Production
Chemical Products Technology
Apparel
Products Tobacco
Leather & Oil & Automotive
Related Gas Aerospace Metal
Plastics Engines Manufacturing
Products
Footwear Marine
Sporting
& Recreation Equipment
Goods
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both
directions.
Not reported Share of World Exports by Cluster
< 0.07%
Vietnam, 2006
0.07 – 0.15%
Fishing &
0.16 – 0.31% Textiles
Fishing Entertainment
Hospitality Prefabricated
0.31 – 0.62% Products Enclosures
& Tourism
Agricultural
0.62- 1.24% Products
Transportation Building Furniture
> 1.24% & Logistics
Distribution Aerospace Fixtures, Construction
Services
Information Vehicles & Equipment & Materials
Defense
Tech. Lightning &Services Processed
Jewelry & Heavy
Business Construction Food
Services Analytical Electrical
Precious Services
Education & Instruments Equipment
Metals Knowledge Medical Forest
Power
Creation Communi- Generation Products
Financial Devices
Services cations
Publishing
& Printing Biopharma- Equipment Heavy
Machinery
ceuticals Motor Driven Production
Chemical Products Technology
Apparel
Products Tobacco
Leather & Oil & Automotive
Related Gas Aerospace Metal
Plastics Engines Manufacturing
Products
Footwear Marine
Sporting
& Recreation Equipment
Goods
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both
directions.
Geographic Levels and Competitiveness
World Economy WTO
Broad Economic Areas Asia
• The business environment at a given

Groups of location is the cumulative outcome
Southeast Asia
Neighboring Nations of policy at all geographic levels
• Many competitiveness drivers occur
at the regional and local level
Nations Vietnam • The allocation of competitiveness
responsibilities across geographic
levels is a crucial policy challenge
States, Provinces Vietnamese provinces
Metropolitan and Rural Areas Ho Chi Minh City

Specialization of Regional Economies
Selected U.S. Geographic Areas
Denver,
Denver,COCO Chicago
Chicago
Leather
Leatherand
andSporting
SportingGoods
Goods Communications
CommunicationsEquipment
Equipment
Oil and Gas Processed Boston
Boston
Oil and Gas ProcessedFood
Food Analytical
Seattle-Bellevue- Aerospace
AerospaceVehicles
Vehiclesand
andDefense
Defense Heavy
HeavyMachinery
Machinery AnalyticalInstruments
Instruments
Seattle-Bellevue- Education
Everett, EducationandandKnowledge
KnowledgeCreation
Creation
Everett,WA
WA Communications
Aerospace CommunicationsEquipment
Equipment
AerospaceVehicles
Vehiclesand
and Wichita,
Wichita,KSKS Pittsburgh,
Pittsburgh,PAPA
Defense Aerospace Construction
ConstructionMaterials
Defense AerospaceVehicles
Vehiclesand
and Materials
Fishing
Fishingand
andFishing
Fishing Defense Metal
MetalManufacturing
Manufacturing
Defense
Products Heavy Education
Educationand
andKnowledge
Products HeavyMachinery
Machinery Knowledge
Analytical
AnalyticalInstruments Oil Creation
Instruments Oiland
andGas
Gas Creation
San
San Francisco-
Francisco-
Oakland-San
Oakland-San Jose
Jose
Bay
Bay Area
Area
Communications
Communications
Equipment
Equipment
Agricultural
Agricultural Raleigh-Durham,
Raleigh-Durham,NC NC
Products
Products Communications
CommunicationsEquipment
Equipment
Information
Information Information
InformationTechnology
Technology
Technology
Technology Education
Educationand
and
Knowledge
KnowledgeCreation
Creation
Los
Los Angeles
Angeles Area
Area
Apparel
Apparel Atlanta,
San Atlanta,GA
GA
Building
Building Fixtures,
Fixtures, SanDiego
Diego Construction
ConstructionMaterials
Materials
Equipment
Equipment and
and Leather
Leatherand
andSporting
SportingGoods
Goods Transportation
Power Generation Transportationand
andLogistics
Logistics
Services
Services Power Generation Houston
Houston Business
Education BusinessServices
Services
Entertainment
Entertainment Educationand
andKnowledge
Knowledge Oil
Oiland
andGas
GasProducts
Productsand
andServices
Services
Creation
Creation Chemical
ChemicalProducts
Products
Heavy
HeavyConstruction
ConstructionServices
Services
Note: Clusters listed are the three highest ranking clusters in terms of share of national employment.
Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School, 11/2006.
Vietnam Provincial Competitiveness Index, 2006
Excellent
High Performing
Mid-high
Average
Mid-low
Low Performing
Source: Vietnam Provincial Competitiveness Index 2006 (USAID)

The Neighborhood
Southeast Asia
• Vietnam has a central position between ASEAN and China

Economic Coordination Among Neighbors
Enhancing Productivity
Factor
Factor Context
Contextfor
for Related
Relatedand
and Regional
Regional
Demand
Demand Macroeconomic
Macroeconomic
(Input)
(Input) Strategy
Strategy Supporting
Supporting Strategy
Strategy&&
Conditions
Conditions Competitiveness
Competitiveness
Conditions
Conditions and
andRivalry
Rivalry Industries
Industries Governance
Governance
• Improving regional • Eliminating • Harmonizing • Facilitating cross- • Coordinating • Creating a

transportation trade and environmental border cluster programs to regional marketing
infrastructure investment standards upgrading, e.g. improve public program
barriers within safety
• Creating an efficient • Harmonizing – Tourism • Sharing best
the region
energy network product safety • Coordinating practices in
– Agribusiness
• Simplifying and standards macro-economic government
• Enhancing regional
harmonizing – Transport & policies operations
communications • Establishing
cross-border Logistics
and connectivity reciprocal • Creating regional
regulations and
consumer – Business institutions
• Linking financial paperwork
protection laws services – Dispute
markets
• Coordinating resolution
• Opening mechanisms
• Opening the anti-
government – Regional
movement of monopoly and
procurement development
students for higher fair
within the region bank
education competition
policies • Developing a
• Harmonizing
administrative regional
requirements for negotiating
businesses position with
international
organizations

Agenda

Stages of National Competitive Development
Shifting Policy Imperatives
Factor -Driven
Factor-Driven Investment
Investment-- Innovation
Innovation--
Economy
Economy Driven
Driven Economy
Economy Driven
Driven Economy
Economy
Low Cost Inputs Productivity Unique Value

• Macro, political, and legal • Increasing local competition • Advanced skills
stability • Market openness • Scientific and technological
• Efficient basic • Advanced infrastructure institutions
infrastructure • Incentives and rules • Incentives and rules
• Lowering regulatory costs encouraging productivity encouraging innovation
of doing business • Cluster formation and • Cluster upgrading
activation
Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990
Competitiveness Action Agenda: Key Priorities
Continue Existing Efforts Fundamental Reform
• Reduce corruption • Human resource

development at all levels
• Improve infrastructure • Reform of SOEs
• Deepen financial market • Cluster development

reforms
• Impose regulatory
attractiveness

Reducing Corruption
• The government has repeatedly committed itself towards reducing

corruption; and some action has been taken
• Evidence reveals little progress
• Vietnam needs to target corruption as a crucial barrier for growth and

design an integrated strategy to tackle its occurrence
Action priorities
• Reduce the potential for corruption through simplified regulations, use
of modern information technology, and improved SOE governance/
privatization
• Set clear guidelines and reporting requirements for management of
SOEs
• Demonstrate a commitment for transparency, including support for a
strong press
Improving Infrastructure
• Significant infrastructure investments have been made in recent

years
• Evidence on their impact is mixed as best. There is significant
duplication of efforts and companies complain about serious
bottlenecks
• Vietnam needs to better target infrastructure investments to meet

the needs of its growing economy
Action priorities
• Establish a national fund for key infrastructure projects to be
implemented under the supervision of the Prime Minister’s office
• Utilize matching funds incentives to improve effectiveness if
investments by provincial governments
• Create a public-private council to advise on spending priorities

Deepening Financial Markets
• Vietnam has made clear progress on opening up financial markets,

more recently also to foreign companies as part of the WTO agreement
• But the weakness of Vietnam’s financial markets even before the
global crisis, and the financing constraints faced by private
companies, indicate that serious challenges remain
• Vietnam needs to develop a modern regulatory and institutional

structure to enable an effective financial system
Action priorities
• Continue opening financial markets in line with WTO commitments
• Create an effective, independent financial regulator, using outside
help as needed
• Establish a development bank to develop financing tools for private
SMEs
Regulatory Reform
• Regulatory reform has been on the Vietnamese policy agenda for

some time, especially over the last five years
• Despite some progress, the overall regulatory burden on businesses
and citizens remains high with no clear societal benefits
• Vietnam needs a fundamentally new approach to regulatory reform

and assessment of new regulations
Action priorities
• Aggressively pursue the work on regulatory reform initiated with
foreign donors
• Improve institutional capacity to evaluate and administer regulations,
not just the rules themselves
• Include an obligatory assessment of the administrative burden on
business in the process of introducing new laws and regulations
Human Resource Development
• Enrolment rates have increased significantly but quality is low and

Basic skills fail to meet company needs
• Vietnam needs to dramatically improve educational quality, through
education setting standards, improving curricula, and involving the private
sector in governance
• Vietnam lacks a skills training system

• Companies have launched own training efforts to address skill
Vocational
bottlenecks
training • Vietnam needs a clear program for cluster-based workforce
development
• The number of universities has increased but quality is low and skills
do not match company needs
Higher • Higher university education standards must be set and enforced,
education drawing on international experts
• Vietnam needs to develop a plan and enabling institutions for
assimilation of global technology

Restructuring of State Owned Enterprises
• The government has an explicit policy to promote private enterprise but there is
deep-seated ambivalence towards privatization
• Without a thorough reform of the SOE sector, there is little hope for Vietnam to
reach the next level of economic development
• Create independent boards of directors
SOE • Implement transparent financial reporting
governance • Define clear financial objectives
– Set corporate charters
• Remove existing trade, investment, and artificial entry barriers

Competition in
protecting SOEs
markets with • Establish strong, independent regulatory bodies
SOEs • Support start-ups and spin-offs from SOEs
• Create clear legal conditions for privatization

Privatization • Define explicit objectives for privatization process
• Create a dedicated structure for implementing privatization
• The creation of SOE groups is not a solution and can exacerbate problems if
no other reforms are being implemented
Cluster Development in Vietnam
• Vietnam’s clusters currently tend to be narrowly focused on
individual products
• There is limited collaboration among companies, suppliers and other

institutions
– Some clusters, like coffee, have the potential to significantly increase their
performance if they adopt a collaboration approach
• Cluster-based development thinking is crucial in improving the delivery

of other economic policies
– Workforce skill development around clusters
– FDI attraction/industrial zones around clusters
– Cluster-based regional development initiatives
– Quality and technology transfer organization for each cluster
• Policy should upgrade all existing and emerging clusters, not choose
among them
Clusters and Economic Policy
Science and Technology
Education and Investments
Workforce Training (e.g., centers, university
departments,
Management Training technology transfer)
Standard setting and

FDI/Business Attraction quality initiatives
Clusters
Export Promotion Market Information
and Disclosure
Environmental
Industrial parks and Stewardship
free trade zones
Physical Natural Resource
Infrastructure Protection
• Clusters provide a framework for implementing public policy and

organizing public-private collaboration to enhance competitiveness
Clusters and Economic Diversification
Develop
DevelopRelated
RelatedClusters
Clusters
Turn
TurnNiche
NicheProducts
ProductsInto
Into Build
BuildClusters
ClustersAround
Around
Deepen
DeepenExisting
ExistingClusters
Clusters Clusters
Clusters MNCs
MNCs
Upgrade
UpgradeExisting
ExistingExport
Export
Products and Services
Products and Services

Upgrading Vietnamese Niche Positions, 2006
Industry
Change in
Cluster World Share of Export Value (in
Cluster Subcluster Industry Share (1997-
Export Share World $thousands)
2006)
Exports
Rubber Natural rubber, balata and similar natural gums 7.82% 3.40% $ 1,137,205
Plastic Waste Reclaimed unhardened rubber; waste 1.88% 1.87% $ 6,084
Plastics 0.490%
Plastic Products Plastic sacks, bags 1.55% 0.65% $ 150,234
Rubber Synthetic rubber 1.13% 1.13% $ 143,316
Sporting, Motorcycles and Bicycles Parts of other motorcycles 1.42% 1.22% $ 60,962
Recreational and 0.361%
Children's Goods Motorcycles and Bicycles Bicycles and other cycles, non-motorized 1.27% -1.56% $ 49,628
Communications Specialty Office Machines Parts for calculating, accounting machines 23.04% 23.04% $ 444,384
0.284%
Equipment Electrical and Electronic Components Insulted wire, cable and conductors 1.07% 0.72% $ 705,725
Specialty Foods and Ingredients Starches, inulin and gluten 7.93% 6.23% $ 148,445
Food Products Machinery Distilling, rectifying plant 2.64% 2.64% $ 19,449
Specialty Foods and Ingredients Vegetable saps, extracts 0.90% 0.50% $ 9,193
Processed Food 0.260%
Dairy and Related Products Milk, concentrated or sweetened 0.84% -0.22% $ 89,315
Specialty Foods and Ingredients Yeasts 0.81% 0.27% $ 7,962
Specialty Foods and Ingredients Homogenized food preparations 0.76% 0.59% $ 4,888
Glass Drawn, float, cast glass, worked 6.39% 6.37% $ 78,185
Lighting and
0.256% Electrical Parts Other inductors 3.20% 2.86% $ 137,477
Electrical Equipment
Electrical Parts Other electric transformers 1.17% 0.68% $ 63,386
Motor Driven Motors and Generators Electric motors<=37.5w 1.88% 1.15% $ 150,425
0.156%
Products Appliances Sewing machines and parts 1.21% 0.26% $ 45,749
Entertainment and Audio Equipment Loudspeakers, unmounted 1.41% 1.40% $ 39,964
Reproduction 0.125%
Equipment Audio Equipment Electric sound amplifiers 1.07% 1.07% $ 8,745
Information Peripherals Input or output units 1.01% 1.01% $ 653,740
0.121%
Technology Electronic Components and Assemblies Printed circuits 0.36% -0.43% $ 85,738
Electronic Components TV picture tubes, CRTs 1.26% 1.23% $ 53,690
Analytical
0.047% Electronic Components Other electronic valves, tubes 0.35% -0.50% $ 12,186
Instruments
Process Instruments Gas meters 0.34% 0.34% $ 1,415
Fabricated Plate Work Steam generating boilers, super-heated water boilers; and parts
1.35% 1.35% $ 53,010
Production
0.046% Process Equipment Components Articulated link chain and parts 0.45% 0.31% $ 7,292
Technology
Machine Tools and Accessories Cutting blades for machines 0.42% 0.38% $ 7,501
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.
Agenda

The Process of Economic Development
Shifting Roles and Responsibilities
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
• Competitiveness must become a bottoms-up process in which many individuals,

companies, and institutions take responsibility
• Every community and cluster can take steps to enhance competitiveness

Government and the Process of Economic Development
• Competitiveness is affected by a myriad of government entities

– Multiple agencies and departments (e.g. finance, trade, education, science
and technology, commerce, regional policy, energy, agriculture)
– Multiple levels of government (nations, states, cities, etc.)
– Intergovernmental relations with neighboring countries affect
competitiveness
• Competitiveness is rarely the sole agenda of any government agency
• Coordinating structures are needed that brings together the ministries

and departments necessary to formulate and implement an economic
strategy
• Explicit mechanisms are needed to engage the private sector in dialog
about policy priorities and implementation progress

Organizing for Competitiveness in Vietnam
Recommendations
• Create effective, independent regulatory organizations
• Improve economic policy at the provincial level
• Improve mechanisms for public-private discussion and collaboration
• Enhance strategic planning and program management capacity in

the central and provincial governments
• Develop a national economic strategy process to guide priorities in

improving the business environment

Regional Development in Vietnam
• Vietnam’s provinces are developing at different rates; prosperity levels

between the richest and poorest regions differs greatly
• Political power and responsibility for economic development has been
decentralized to the provinces, who apply to the national government for funds
• Provinces have adopted unfocused growth strategies with much duplication
and little specialization across provinces
• Provinces have insufficient technical capacity for policy design and
implementation
• Each province should be charged with developing an economic plan based on

its unique strengths and potential
• Each province should be expected to publicly report on implementation

Competitiveness Institutions
• Economic strategy unit in the Prime Minister’s office

– Regularly updating on progress
– Lead a formal planning and program management process involving all
agencies
• Public-private competitiveness council
• Vietnam Competitiveness Institute

– To conduct analyses, benchmark vs. other countries, and train
government leaders
– Joint national and provincial
• Enhanced role of business associations

Agenda

Defining an Economic Strategy
National
NationalValue
ValueProposition
Proposition
• What is the unique competitive position of the nation or

region 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
Developing
DevelopingUnique
UniqueStrengths
Strengths with
withPeers
Peers
• What elements of context and the • What weaknesses must be addressed to
business environment are crucial achieve parity with peer countries?
priorities?
• What existing and emerging clusters
should be developed first?
• Priorities and sequencing are a necessity in economic development

The Need for an Economic Strategy
• The Vietnamese government follows largely an evolutionary and

reactive approach in response to crises and specific problems
• Foreign aid inflows are fragmented and driven by donor-priorities
• This approach has been successful in achieving success in factor-
based economic development, but will be insufficient to move to a
new stage
• Government needs leads in a broad-based discussion on a new

economic strategy that sets priorities for improvements in the
business environment and institutions
– Internally, the government needs to increase its technical capacity to
support such a strategic dialogue, for example through a strategy unit in
the Prime Minister’s office

Agenda

Implications for Companies
• 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 create specialized programs addressing 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

– Greater influence if many companies are united
– Cost sharing between members

Corporate Social Responsibility
A Growing Agenda
• External pressures for CSR continue to grow
• Numerous organizations monitor, rank, and report social

performance
• The legal and business risks are great for companies engaging in
practices deemed unacceptable
• CSR is increasingly important to business leaders, yet the concept

and its justifications remain unclear
• Few companies have integrated society into strategy in a way that

reinforces competitive advantage for the business

Integrating Strategy and Society
Economic Social
Objectives Objectives
• There is an inevitable link between a business and society

• The health of a society depends on having competitive companies that can create
wealth and support high wages
• The competitiveness of companies depends on the surrounding community
− E.g., educated and skilled employees
− Safe working conditions
− A transparent, corruption-free business environment
− A sense of equal opportunity
− Low levels of environmental degradation (productive use of physical resources)
• Companies can positively affect many social issues
• There is a long-term synergy between economic and social objectives

• To maximize this synergy, business decisions and social policies must follow the
principle of shared value
– Company competitiveness and social conditions must benefit simultaneously

The Role of Business in Social Issues
• Business cannot solve all of society’s problems, nor bear the cost of
doing so
– There are many worthy causes
• Business must approach its social agenda proactively and
strategically
• Business must address society and social issues where it can add the
most value
• Where is a company able to have the greatest impact on social issues

versus other institutions?
Social Benefits
Social Value =
Resources Expended

Inside-Out Links with Society
Value Chain Social Impacts
• Employee education and job
• Relationships with universities training
• Ethical research practices • Financial reporting practices
• Safe working conditions
(e.g. animal testing, GMOs) • Governance practices
• Transparency • Diversity and discrimination
• Product safety
• Use of lobbying • Health care and other benefits
• Compensation policies
• Layoff policies
Firm Infrastructure

Activities Technology Development
(e.g. Product Design, Testing, Process Design, Material Research, Market Research)
M
• Procurement practices Value
Procurement a
(e.g. bribery, child labor, (e.g. Components, Machinery, Advertising, Services) r What
conflict diamonds, pricing to g buyers are
farmers) Inbound Operations Outbound Marketing After-Sales i willing to
Logistics Logistics & Sales Service n pay
• Use of particular inputs (e.g. Incoming
(e.g. animal fur) Material (e.g. Assembly, (e.g. Order (e.g. Sales Force, (e.g. Installation,
Storage, Data Component Processing, Promotion, Customer
• Conservation of raw materials Collection, Fabrication, Warehousing, Advertising, Support,
• Disposal of obsolete products
Service, Branch Report Proposal Complaint
• Recycling Customer Operations) Preparation) Writing, Web Resolution, • Handling of consumables
Access) site) Repair)
(e.g. motor oil, printing ink
• Customer privacy
Primary Activities
• Emissions and waste • Marketing and advertising (e.g. truthful

• Biodiversity and ecological advertising, advertising to children)
• Transportation impacts impacts • Pricing practices (e.g. price
(e.g. emissions, congestion, • Packaging use and
• Energy and water use discrimination among customers,
logging roads) disposal
• Worker safety and labor anticompetitive pricing practices, pricing
(e.g. McDonald’s clamshell)
relations policy to the poor)
• Transportation impacts
• Hazardous materials • Consumer information
• Every activity in the value chain touches on communities in the locations where a
company operates. These impacts can be positive
108
or negative.
Copyright 2007 © Professor Michael E. Porter
Identifying Shared Value
Outside-In Social Impact on the Company
• Fair and open local competition (e.g., the
absence of trade barriers, fair regulations)
• Availability of qualified human resources • Intellectual property protection
(Marriott’s job training) • Transparency (e.g., financial reporting,
• Access to specialized training programs corruption: Extractive Industries
• Efficient physical infrastructure Transparency Initiative)
• Efficient permitting and regulatory practices • Rule of law (e.g., security, protection of
• Availability of scientific and technological property, legal system)
Context
Context for
for • Meritocratic incentive systems (e.g.,
institutions (Microsoft’s Working Connections;
Nestlé’s knowledge transfer to farmers)
Firm
Firm Strategy
Strategy antidiscrimination)
• Sustainable access to natural resources and
and Rivalry
Rivalry
(GrupoNueva’s water conservation)
• Efficient access to capital
Factor
Factor Demand
Demand
(Input)
(Input) Conditions
Conditions
Conditions
Conditions
• Nature of local demand (e.g. appeal of

social value propositions: Whole Foods’
Related
Related and
and customers)
Supporting
Supporting • Fair and demanding regulatory
Industries standards (California auto emissions &
• Availability of local suppliers and support Industries mileage standards)
services (Sysco’s locally grown produce; • Local needs that can be served
Nestlé’s milk collection dairies) nationally and globally (Urbi’s housing
• Access to partner firms in related fields financing, Unilever’s “bottom of the
• Access to a cluster instead of isolated pyramid” strategy)
firms and industries
• Competitive context is often influenced by or inextricably linked with social conditions

Source: Michael Porter, The Competitive Advantage of Nations, 1990
Creating a Corporate Social Agenda
Social Dimensions
Generic Value Chain Social
of Competitive
Social Impacts Impacts
Context
• Good citizenship • Mitigate harm from • Strategic philanthropy

value chain activities that improves salient
areas of competitive
context
• Transform value chain • Create a social

activities to benefit dimension of the value
society while proposition
reinforcing strategy
Responsive CSR Strategic CSR
• The impact of CSR is greatest when responsive CSR, value chain social
impacts, and investments in competitive context are integrated
Strategic CSR: ChoicePoint
• ChoicePoint’s core business is providing personal identification,

screening, and credit verification
– e.g., employment background screening, credit verification, DNA identification,
drug testing
• The company’s CSR program focuses on providing identification and
verification services and advice to social organizations:
– e.g., background checks of volunteers working with children
– Identity verification for disaster victims
– Assisting NGOs to find missing children and prevent identity theft
• ChoicePoint’s CSR is aligned with its founding principle: creating a

safer and more secure society through responsible use of information
• ChoicePoint leverages its skills, data, technological knowledge, and
staff to maximize social benefit
• CSR activities are not just charity but improve the company’s
capabilities around identity issues

Strategic CSR: Nestlé in India
• Nestlé’s entered the poor Moga region of India in 1962
• Local milk supply was hampered by small parcels of land, poor soil, periodic
droughts, animal disease, and lack of a commercial market
• Nestlé established local milk purchasing organizations in each town
• Nestlé invested in improving competitive context
– Collection infrastructure such as refrigerated dairies was accompanied by
veterinarians, nutritionists, agronomists, and quality assurance experts to assist
small farmers
– Medicines and nutritional supplements were provided to improve animal health
– Monthly training sessions were held for local farmers
– Wells to secure water supply for animals were dug with financing and technical
assistance from Nestlé
• Nestlé has built a productive milk cluster in Moga, buying milk from more than
75,000 farmers through 650 local dairies
• Moga has dramatically improved social conditions

• Nestlé has developed a long-term competitive advantage in the milk cluster

The Moral Purpose of Business
• The most important thing a corporation can do for society is to contribute to a
prosperous economy
• Only business can create wealth; other institutions in society are principally
involved in redistributing wealth or investing it to meet human needs
• Business has the tools, capabilities, and resources to make a far greater
positive impact on social issues than most other institutions
• Corporations depend on a healthy society to sustain competitiveness
• Business is more transparent and more accountable than most foundations
and NGOs
• Corporations are not responsible for all the world’s problems, nor do they
have the resources to solve them all
– Business has no need to be defensive about its role in society
• Each company can and should identify the particular set of societal
problems that it is best equipped to help resolve, and from which it can gain
the greatest competitive benefit
• Addressing social issues through shared value strategies will lead to self-
sustaining solutions
• Using these principles, businesses can have a greater impact on social good
than any other institution or philanthropic organization

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1 Copyright 2007 © Professor Michael E.

Professor Michael E. Porter

Ho Chi Minh City, Vietnam

2 Copyright 2007 © Professor Michael E. Porter

3 Copyright 2007 © Professor Michael E. Porter

• The Economic Foundations of Competition

4 Copyright 2007 © Professor Michael E. Porter

• The worst error in strategy is to compete with rivals on the same

5 Copyright 2007 © Professor Michael E. Porter

Goodyear Tire and Rubber

Marriott International, Inc.

7 Copyright 2007 © Professor Michael E. Porter

• The fundamental goal of a company is superior long-term return on

• Prevalent accounting adjustments to reported profitability

• Goodwill must be treated as part of investment

• Setting unrealistic profitability or growth targets can undermine strategy

• The fundamental unit of strategic analysis is the business or industry

- Overall Rules of Competition - Sources of Competitive Advantage

• Strategic thinking must encompass both

9 Copyright 2007 © Professor Michael E. Porter

Source: Compustat (2008), author’s analysis

0% 5% 10% 15% 20% 25% 30% 35% 40%

Bargaining Power Rivalry Among Bargaining Power

12 Copyright 2007 © Professor Michael E. Porter

• Many truck producers

13 Copyright 2007 © Professor Michael E. Porter

• Design trucks with special features and amenities

• Customization and build-to-order

• Achieve low truck operating costs

• Offer extensive roadside assistance to truckers

14 Copyright 2007 © Professor Michael E. Porter

• Low barriers to entry

15 Copyright 2007 © Professor Michael E. Porter

• Offering value-added services

• Offering private-label products

• Moving to national procurement contracts

• Increasing the use of sophisticated information technology

16 Copyright 2007 © Professor Michael E. Porter

17 Copyright 2007 © Professor Michael E. Porter

Human Resource Management

• Competing in a business involves performing a set of discrete

Human Resource Management

19 Copyright 2007 © Professor Michael E. Porter

20 Copyright 2007 © Professor Michael E. Porter

• The Economic Foundations of Competition

21 Copyright 2007 © Professor Michael E. Porter

• Assimilating, attaining, and • Creating a unique and

Do the same thing better Do things differently to achieve

22 Copyright 2007 © Professor Michael E. Porter

23 Copyright 2007 © Professor Michael E. Porter

24 Copyright 2007 © Professor Michael E. Porter

• What end users? • Which products?

• A novel value proposition often expands the market

25 Copyright 2007 © Professor Michael E. Porter

26 Copyright 2007 © Professor Michael E. Porter

• Convenient, basic airline service between 41 • No-frills service

• Price sensitive business (60%) and leisure • Good time performance

27 Copyright 2007 © Professor Michael E. Porter

• Tradeoffs occur when strategic positions are incompatible

• Tradeoffs make a strategy sustainable against imitation by established

28 Copyright 2007 © Professor Michael E. Porter

• Forgo cleaning, skin softening, and deodorizing

• Choose higher costs through the configuration of: