New Zealand companies need to concentrate more on strategy and innovation if they are to compete in the global economy, says Harvard business professor Michael Porter.
Speaking last week at the high-tech and IT industry brainstorming conference in Auckland, Future Active, Porter told several hundred business people that as an advanced nation New Zealand must innovate. "You can't copy and you can't just bring in other countries' ideas. New Zealand will have to innovate far more than it does today."
He says cost-cutting and increased efficiency are no longer adequate for global competitiveness. New Zealand companies must think strategically and find a unique position in which to compete.
"New Zealand has got reasonably close to achieving best practice [to increase efficiency] but that's not enough. Companies all over the world have been deploying best practice and lower costs."
Porter says while it is good that companies are preoccupied with best practice, ultimately customers will have nothing to choose on except price, because all companies will be the same.
"Companies also need a strategy. Operational effectiveness means running the same race faster than your competitors. Strategy is choosing a different race."
Porter cites Dell Computer as an example of a company that has found a unique position.
"Dell not only looks at best practice but has a clear strategic position, setting limits on its customer group — large corporates and their employees — and also its range of products. It can then tailor activities to its customers, such as building to order and direct selling."
He says although many customers in the computer industry still need resellers and support, Dell has chosen not to participate in this area, although there is business there. "They're not trying to be like Compaq or Sun."
However, for companies to succeed it helps to have a successful economy. Porter says while on the whole New Zealand has the stable government, legal system and macro-economic policies necessary for a good economy, it's the micro-economic policies that create wealth. And on its micro-economic variables this country is failing.
In the "Global Competitiveness Report" which measures macro- and micro-variables in 52 countries, New Zealand was rated number five in 1997 and 13 in 1998 on macro-economic variables, but number 17 on micro-economic variables in 1998.
Porter warned that economies where the micro-economic rating is substantially lower than its macro-economic rating usually go into decline. Examples are Indonesia (14 on macro-economics but 51 in micro-economics) and Thailand (27 on macro and 37 on micro).
He says New Zealand hasn't created the appropriate micro-economic environment for innovation to flourish.
Micro-economic factors include inputs, demand conditions and clustering. Improvement of inputs such as human capital (skilled people) and venture capital is necessary.
"This needs substantial investment by private sector but also by the government. If the government tries to get out [of capital investment ] then noone else will see investment in this area as valuable. This has happened here. Ideology has made us timid to invest in some of these areas."
With demand conditions, "New Zealand software companies will often get advantage from understanding distinctive, stringent and demanding local needs rather than trying to outguess US software firms on what US customers want".
Another micro-economic initiative which Porter was strong on in his 1991 report, "Upgrading New Zealand's Competitive Advantage", is clustering.
Clusters are a geographically proximate group of interconnected companies and associated institutions (broader than industries) which complement and spill-over in terms of technology, skills, information, marketing and customer needs. Most include end product or service companies; suppliers of specialised units, components, machinery and services; financial institutions; and firms in related industries. In software development, Silicon Valley is the obvious example.
"We have found," says Porter, "that if we have a cluster we can be more productive because a lot of the things we need are free. With the right training infrastructure you can get good people free. In a cluster you just have to go out and hire them, they're already skilled and don't need to be trained. You can get a lawyer who 'gets it' in terms of software licensing. That's much cheaper than having to explain everything to your lawyer.
"We often find extraordinary motivation to improve. Best practice gets easily diffused, it's easy to find out what it is and easy to incorporate. Also strategy. You see the guy across the street doing something. You say to yourself why go head to head? I'll take a slightly different position.
"Innovation seems to come more readily in clusters. It's easier to see the gap in the market because all this information is swirling around, and barriers to entry are low because it is easier to find capital and people, etc."
Porter says the government should be supporting clusters, something that it seems to struggle with.
"There is a notion that anything that supports a cluster is industrial policy and that's bad because it's about picking winners. But it should be about helping any cluster. It's not about subsidies but removing constraints.
"The government has to put money into education, it has to support universities, research and development. Government has to recognise that those things must relate to your [enterprise's] needs but the private sector has a role as well.
"There is an important role for industry associations to cluster groups. Often they need to merge some together. In New Zealand there is a tendency for them to sit back and wait for the government programme from Tradenz or whoever. People need to say we can do it ourselves. I think Future Active is an extraordinary step because it's not about getting help from the government but people helping themselves."
Porter thinks that so far New Zealand has undergone structural reforms out of fear and people have been scared and worried about survival.
"This has been a motivator for a lot of companies to make a lot of improvements. We need now to create some excitement about the future — an energising view of what New Zealand could be. We've had a lot of clarity about what New Zealand won't be. The government won't intervene, it won't have state-owned companies. Now you have to look at what New Zealand will do."