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STRATEGIC DEVELOPMENT:
ADDING VALUE TO COMPETITIVENESS
by
David B. Flood
e-mail: davidbflood@yahoo.com
Draft of October 2004
STRATEGIC DEVELOPMENT:
ADDING VALUE TO COMPETITIVENESS
Preface: The Mitchell Report: Learning the Wrong Lessons
Outline
I. Introduction and Overview
II. Comparing and Contrasting Competitiveness and Strategic Development
III. Building the Dialogue on Strategic Development
a. The Role of Strategy b. Paradigms for Benchmarking c. The Role of Benchmarking
IV. Building the Team for Strategic Development
V. Conclusion
Annexes
1. Differentiating Development Competitiveness and Strategic Development 2. Overview of a Generic Strategic Development Initiative 3. The Development Diamond 4. Examples of Pilot Projects 5. Note on the Author
Preface
The Mitchell Report, a document on USAID’s experience in the area of competitiveness, reflects general thinking as seen from the perspectives of contractors and their clients in field missions around the world and at headquarters. I recently wrote a critique of this report and I thought to include it here as a preface to an essay I wrote called “Strategic Development: Adding Value to Competitiveness.” The essay provides some context for this critique, while the critique introduces some alternative thinking about development competitiveness.
The Mitchell Report: Learning the Wrong Lessons
The “Lessons Learned from the Mitchell Report” are so far removed from actual experience that alignment of any competitiveness activities using these as guidelines will cause more harm than if no activities were undertaken.
Below I have listed the “Lessons Learned” from the Mitchell Report (MR) as summarized by a “Technical Briefing” released by USAID. * My initials (DBF) precede my observations on these “lessons.” * *
MR 1. The most important determinant of success is the “sweat-equity” investment of the cluster participants.
DBF: Good strategy is the most important determinant of success. Only two things measure competitiveness: innovation, and investment. These variables are measurable by meaningful indicators. Sweat-equity may be measured by the buckets used to collect the sweat, but not much else. The economies in which donors support competitiveness generally are long on sweat equity and short on innovation and investment. Sweat equity does not produce investment; good strategy does.
MR 2. The private sector must own and drive the process of cluster development.
DBF: No, this force feeds the private sector to pursue cluster development and to own something they may not need or see the value of owning ( i.e., a cluster) when all they really want is good, money making strategies to lead them. Putting “clusters” before “strategy” is tantamount to a reversal of natural law, where form follows function.
Cluster terminology tends to create lots of unnecessary confusion in fieldwork, as does the competitiveness literature (or jargon) at large when and as applied to development. In fact, a focus on clusters and on clustering too often detracts from the job at hand, which is to reposition industries and sectors into higher-value activities. Clusters, to the extent they are relevant to development, should be driven by consideration of what adds value, where, by/for/with whom, and how. Too often, however, clusters and clustering become ends rather than means, and this explains perhaps why projects that focus on clustering tend not to succeed as well as those that focus on ‘getting the strategy right.’
Clustering is one aspect of the donor drive toward institutionalizing competitiveness. Another feature of this drive is seen in support for “competitiveness councils.” The drive for up-front institutionalization denies one of the key insights of much of the earlier literature on competitiveness related to the importance of the fact that clusters, the preferred organizational vehicle of the cluster competitiveness approach, were ad hoc bodies. In the political economy of the Third World in particular, where ‘policy’ and ‘institutions’ have crowded out a role for strategy, almost any attempt to institutionalize competitiveness tends to run the risk of restoring government to the role of master strategist. When issues of form become the focus before clear strategy emerges, stifling politics and bureaucratization are close behind. Also, one must be careful when adding another institution to the existing overpopulation of development institutions in developing economies.
In summary, good strategic leadership tends to induce ownership amongst those most ready to provide the leadership needed to handle issues of implementation, be they operational or policy-related.
MR3. To gauge success in assisting cluster development and economic growth impact, donors need clearly defined, meaningful performance indicators and regular tracking of implementation - but these have been lacking – to the detriment of demonstrating results.
DBF Money (and the quality of it) is the measure of good strategy.
MR4. Leadership matters. One strong leader can make an enormous difference – and conversely, the lack of a champion can mean an effort’s stagnation or demise.
DBF Strategically-oriented leadership is the missing ingredient. Most places where donors support competitiveness have for a legion of reasons not been supportive of ‘strategy.’ The inference in this “lesson” is on the importance of local leadership, yet the need for leadership must be embodied in those who coach the exercise. They must see their role as catalysts, not merely advisors. Good strategy induces the “right” leadership to come forward.
MR5. Leadership must come from the local community – donor-funded consultants play a facilitative role and cannot be expected to substitute for local leadership. Absence of emerging leadership in a cluster is a warning sign that the cluster may fail to coalesce or progress in spite of outside assistance.
DBF Following on the above, if local leadership is not emerging, then either the strategy is not good enough to lead the way, or the consultants are not sufficiently catalytic, or the local mission is somehow unduly influencing the dialogue.
MR 6. TA should not be provided for clusters with little prospect for private sector ownership of the cluster strategy and activities.
DBF Resources are best allocated in terms of their strategic merits. Often times it is the mission that chooses the client, and distorts things by having to provide TA to “clusters” that would not otherwise be on the scene.
MR7. Cluster development is often hardest in traditional industries.
DBF This is way off-base. Indeed, working with traditional industries is challenging, but the ability to add value in these sectors is generally far more forthcoming -- and the audience far more receptive – than in non-traditional industries. In fact, ‘long tradition’ in a given industry is the opening point for rapid gains in the competitiveness approach to development.
MR8. Don’t over-water the garden. Funneling too much money through a competitiveness initiative may weaken local initiative.
DBF This problem does not occur when, in collaboration with those involved, clear criteria are established for distributing funds.
MR9. Funding activities that primarily benefit only one or a handful of companies should be avoided and funding to cover costs that would normally be assumed by the private sector should not be provided.
DBF This “problem” arises only where too limited a definition of the competitiveness opportunity delimits the audience.
MR10. It may be more challenging to implement cluster-based competitiveness initiatives in transitional economies than in others.
DBF If ‘transitional” is understood to be somewhere between “developed” and “developing,” then transitional economies probably are closer than are developing economies to being able to produce and absorb investment and innovation. Perhaps the skew factor relates to the support of “cluster-based” competitiveness, where support for ‘strategy’ might not ensnare implementation.
MR11. Cluster-based competitiveness initiatives are not a “quick-fix” – they take time to work, so expectations of results should be tempered accordingly.
DBF The competitiveness approach can, if it is strategy driven, produce remarkably fast results. Often what slows things down is the need to approach the initiatives with the baggage of clusters in tow, and the obligations imposed by many missions whereby “quick-fixes” are part of the task order and must be produced in terms of deliverables that do not begin to reflect issues of true strategic merit.
- EG Technical Briefing No.8, April 2004, USAID’s Office of Economic Growth, Washington, DC. * * 20 September 2004.
I. Introduction and Overview
Competitiveness needs to find its way as a tool of economic development. Some argue that current approaches are “too theoretical,” too academic, and too elitist. Others argue that competitiveness seems to respond to donor needs more than to the strategic needs of the productive sectors of a host economy. More likely a variety of reasons explain why competitiveness initiatives in developing countries tend not to have represented an exercise that really helps an economy to grow faster, or better, or to reposition itself into higher-value activities, nor to maximize resource allocation, nor necessarily to represent the will of the people in a community.
Strategic development represents an application and an adaptation of key tenets of competitiveness theory and practice applied to support for broad based economic growth in developing countries. It represents a means for leveraging existing investments in “economic growth” and stimulates investment in hard and soft strategic assets that represent clear value for multiple sectors often operating under diverse political and geographic influences. Investments are concentrated in four core areas that fundamentally affect any sector’s ability to reposition itself. These “four pillars” are human resources, management, infrastructure, and research & development.
Strategic development initiatives take their lead by strategizing with producer groups in a wide range of sectors. The approach builds strategic linkages in and between sectors, in a ‘community’ of interests that involves local, provincial, and federal government bodies, along with a range of other interests both large and small from the local and national scene, and other players as needed from global markets.
Many analysts suggest that by design or default, both donor and public support for competitiveness often is geared to helping low cost producers remain that way. Interventions are focused on quantity not quality, and on upgrading to standards that have long been abandoned by higher value producers. As a result, support for competitiveness ironically often comes at the expense of better paying jobs and so limits the prosperity of the surrounding community. At the same time, there is considerable external price pressure on goods from traditional commodity-based industries and on any diversified production for global consumer markets. The resulting drive to be low cost producers often precludes the possibility of being able to afford investments in upgraded assets. Partially in consequence of this state of affairs, many developing economies find themselves caught in low-cost, low-value (LCLV) traps.
Strategic development offers a possible corrective to the policy-driven approach many developing countries have followed since independence. That approach places form before function and it tends to crowd-out a role for strategy. It often has cast government in the role of master strategist for the private sector. A difficult role for many governments even on the national stage, and one for which they are ill-equipped, the role of strategy assumes even more daunting new challenges in the era of globalization. Strategic development is presented as a tool to enable developing economies to face these challenges with confidence, and to spring LCLV traps meanwhile. I witnessed a revealing exchange between an elected Prime Minister and a leading businessman that provides an indication of the value of strategy. Upon hearing from the businessman at a competitiveness forum that ‘government never listens to industry,’ the head of state said sharply “Government would be glad to listen if industry ever said anything of value.” But for the word, the Prime Minister asked industry for its strategy. Why is this exchange so revealing? Because -- due to the legacy of command economies, industrial policy, and other influences -- very few firms {even big ones} let alone industries’ have strategies in developing countries. (In field exercises this insight develops into an exciting opportunity, and is not perceived as a negative.)
Strategic development initiatives exploit the power of strategy as defined and discussed herein. Strategy leads markets. Strategy not ‘only’ adds value, it creates value, and not ‘just’ more value, but ‘better’ value. Richer communities have better strategies than poorer ones. Good strategy signals good value and it invites new investment without having to promote the need for it. For developing and emerging economies, strategy is a tool of empowerment, because if good strategy is well implemented it creates wealth for communities, not just selected players.The wealth-creating power of strategic development is enhanced by the critical mass that a strategically focused, extended community of stakeholders can bring to bear on the exercise.
Competitiveness is driven by the “twin propellers” of growth: innovation and investment. In strategic development initiatives, the driveshaft to these propellers is recognized as consisting of four components known to be essential to higher value performance in all sectors. As noted earlier, these ‘four pillars’ include human resources, management, infrastructure, and research and development. (In fieldwork, research and development often is understood in terms of product reengineering.)
Strategic development helps to strengthen these pillars strategically as it uses key concepts of competitiveness to guide a sustained and focused dialogue about the requirements for repositioning a community into higher value activities. In keeping with key competitiveness concepts, a focus on differentiation into high value activities in traditional industries in particular is maintained in strategic development initiatives.
Strategic development offers a non-institutional, community-based approach to economic development. It focuses on ends and results, rather than means, mental models and methodologies. Strategic development focuses not on firms or clusters, but on sectors. Firms are relevant to the exercise to the extent that their involvement is seen by others to add-value to efforts to upgrade the larger sector(s) in which they operate. A focus on sectors brings needed critical mass and through it more leverage to bear in terms of influencing the allocation of private and public funds to upgrade selected strategic assets.
Measuring the Dialogue on Strategic Development
The most widespread measure of the value of the dialogue should be found in terms of increased prices paid to producers of any underlying raw material from local processors. These higher producer prices should reflect higher quality standards and greater operating efficiencies for processors and so leading to lower consumer prices, especially for goods and services traded in nearby markets. A longer-term, more indicative measure of the return on strategy as herein discussed would involve application of a multiplier effect taking into account that strategic development focuses on stimulating investment in assets that enable higher value activities to occur in several sectors simultaneously.*
The mantra of strategic development is “Show me the value.” The mandate is to deliver it. Strategic development initiatives lead to the development of pilot projects and a pattern of productive teamwork between private and public sector interests that can guide subsequent efforts to reposition an economy into higher-value activities.
Technical support is rendered over three phases of activities common to strategic development initiatives; (1) strategizing, (2) enabling, and (3) implementing. The overview of a ‘generic’ strategic development initiative is included as Annex 1. A brief description of each phase follows,
Strategizing refers to regularly scheduled dialogue sessions with producer groups in a wide range of sectors and in related and supporting industries. The approach builds strategic linkages in and between sectors, in a ‘community’ of interests that involves relevant governmental bodies and a range of other interests both large and small from the local and national scene, and other players as needed from global markets. The core activities of this phase of the initiative center on workshops and related venues. Sector specialists and others in the project will input relevant benchmarking data on the practices and policies that drive higher levels of performance in offshore models deemed relevant.
Enabling. As discussions progress and strategic dialogue emerges, clear opportunities surface for project support to enable those opportunities by providing project services in support of them (such as short-term technical consultancies, training programs, grants, and associated project ‘tools’).
Implementing. Implementation provides the only means to measure the returns on strategy. Measurement is manageable most readily when pilot projects are launched and supported by project stakeholders.
_______________________________________
- “Satellite” or green accounting techniques value assets in the tourism industry in a manner somewhat similar.
II. Comparing and Contrasting Competitiveness and Strategic Development
Several adaptations to conventional competitiveness theory and approaches render the approach more useful in developing economies. For example, initial assessments of the strategic field are more conducive to action in Third World settings when the very useful “national diamond of competitiveness” developed by Michael Porter is repositioned as “The Development Diamond” (as seen in Annex 2). This simple repositioning helps to lift competitiveness out of its industrial economics mode and renders the approach more useful -- both conceptually and analytically and especially as a dialogue tool -- in non-industrial economies. Used as a dialogue tool, the development diamond tends also to help place the responsibility for better economic performance in the hands of those closest to being able to deliver it.
Focus on Upgrading Traditional Industries
Strategic development favors a focus on strategies that result in higher quality output and higher prices for products and services from traditional industry. This often involves the implementation of strategies that link skills and technologies from “new industries” to traditional industries.
The Relationship between Investment and Innovation
In the literature on competitiveness, four stages of economic development are identified. According to this paradigm, an economy moves up the scale of prosperity from (1) being dependent on available raw materials, next (2) to an investment driven economy where a focus on efficiency becomes important, then (3) to an innovation based economy that focuses on unique values, and finally (4) into the fourth stage, wealth. Many analysts have observed that this progression is not inevitable, that is, that ‘innovation’ may precede ‘investment,’ for example. In strategic development initiatives, given that they tend to operate in poorer economies, it is generally assumed that innovation must precede investment. Strategy is used to identify scope for innovation, and that innovation then is used to invite investment. (Because good strategy communicates clear value, raising funds to cover implementation costs has never presented a problem, even in the poorest economies.)
It is recognized that the commonly required skills for implementing a differentiation (or innovative) strategy include strong product engineering capabilities, long tradition in the industry, and strong capabilities in basic research, among others. A hallmark of the strategic development approach is a focus on differentiation strategies in traditional industries rather than on those that focus on efficiency of production for mass markets. Strategic development initiatives tend to focus on how innovation may be achieved in traditional industries by investing in the ‘four pillars’ of human resources, management, infrastructure and research and development.
Strategic Development Focuses on Sectors, Not on Firms or Clusters
Strategic development is not centered on firms, as are other competitiveness approaches to the micro economy. The approach also is not focused on clusters; rather strategic development focuses on sectors and cross-sectoral strategy. Firms remain relevant to strategic development just as other actors do, that is, by demonstrating their relevance to higher value activities.
Yet, the form by which an economy chooses to organize itself, through private firms or through state owned enterprises, is less important than the strategy that guides implementation of the measures needed to upgrade an economy. In the context of development, adding-value must be viewed from the lens not of individual firms, but in terms of larger social equity considerations and the broader, more traditionally based power of sectors. Strategic development identifies and supports strategies that add value at the intersection of financial returns (to firms) and economic returns (to communities).
Competitiveness has promoted the cluster as the organizational and analytical basis for operation. Cluster formation can indeed represent an essential step in organizing a sector or industry. Yet the focus on forming clusters and their role in development is somewhat misplaced because delivery of higher values occurs not through clusters but through an informal network of Strategy Working Groups (SWOGs) that represent the real workhorses of competitiveness. Cluster formation and cluster leadership tends to involve issues of form while generally strategic development addresses matters of substance before issues of form. A central theme of strategic development is that just as form follows function in natural law, the exercise of pursuing economic growth and development may follow suit.
Cluster terminology tends to create lots of unnecessary confusion in fieldwork, as does the competitiveness literature (or jargon) at large when and as applied to development. Also, a focus on clusters and on clustering too often detracts from the job at hand, which is to reposition industries and sectors into higher-value activities. Clusters should be driven by consideration of what adds value, where, by/for/with whom, and how. Too often, however, clusters and clustering become ends rather than means, and this explains perhaps why projects that focus on clustering tend not succeed as well as those that focus on ‘getting the strategy right.’
A distinction needs to be drawn between 'industry' and 'sector.' Strategic development focuses on sectors. Just as firms are subsets of industries, so industries are subsets of sectors. Whereas "industry" refers to a distinct group of productive enterprises, any given sector may have numerous industries within it. A focus on sectors, then, allows for greater scope to achieve economies of scale in resource allocation in and between industries and sectors. This is an especially important issue of scope in developing economies where inherently thin capital markets suggest the need for greater strategic leverage in terms of resource allocations.
On the Importance of Geography
An emphasis on "geographic concentration" is a hallmark of the cluster approach. Concepts of adding value are only relevant to the extent that benefits are produced "here," so of course geographic considerations are fundamentally important.
The dialogue on strategic development tends to work from discussion of linkages between the “four pillars” at the sectoral level, then up, as it were, to consideration of policy issues relevant at, first, the local level, and then at provincial and federal levels. (For example, a group of milk producers from the dairy sector may identify that the most important way to upgrade the sector is to invest in chilling tanks, in collective collection depots, and in quality labs that will help drive the need for such tanks and for better policies to secure them. This calls forth the need for a milk policy, and the need for enforcing it, so key leads into the agriculture, commerce, and health ministries may be forged with the specific backing of the private sector to invest in a cold chain.)
Transaction Costs
Other approaches to development competitiveness force various issues (e.g., governance, gender equity) to prominence as ends, when in fact such concepts usually are already an intrinsic means of approaches to repositioning for high value performance. Higher value products or services tend to bundle such features as ‘fair trade,’ for example, into the reward structure of price premiums. A focus on means as ends raises the transaction costs of development. The approach under consideration tends to obviate this problem and thus accelerates the pace of development.
The Macro-Micro ‘Controversy’
The fact that development competitiveness in its current state of development is an amalgamated product of macroeconomic and microeconomic theory explains a measure of its controversy. In practice, the macro-micro “controversy” generates more smoke than light. The ability to “be competitive” does not depend upon any particular school of economics – whether macro or micro, market or Marxian. In fact, some leading professionals with experience in development competitiveness hold the opinion that the microeconomics of the exercise are oversold, and that too great a focus on this area of the larger picture has contributed to negative returns on investment in competitiveness. Support for this view may be read in terms of strategic development’s attempt to shift the focus from firms to communities and the upgrading of the productive activities in which they are traditionally involved.
Language Issues
The language of competitiveness is often found to be a barrier to better, community-oriented conversations on strategies for economic growth. My use of the term ‘strategic development’ emerged as an alternative reference to competitiveness as applied to development.
Institutionalizing Competitiveness
There is often a donor-driven effort to want to institutionalize competitiveness in the form of competitiveness councils. One of the key insights of much of the earlier literature on competitiveness related to the importance of the fact that clusters, the preferred organizational vehicle of the cluster competitiveness approach, were ad hoc bodies. In the political economy of the Third World in particular, where ‘policy’ and ‘institutions’ have crowded out a role for strategy, almost any attempt to institutionalize competitiveness tends to run the risk of restoring government to the role of master strategist. When issues of form become the focus before clear strategy emerges, stifling politics and bureaucratization are close behind. Also, one must be careful when adding another institution to the existing overpopulation of development institutions in transitional economies. This is especially cautioned because if they succeed (and even sometimes when they don’t), strategic development initiatives tend to provide new focus and purpose to trade associations, chambers and other bodies.
The Role of Standards
The role of standards as they relate to the subject of competitiveness is a controversial one in its own right -- often times unnecessarily so in the literature on competitiveness. Meeting and sustaining “global productivity standards” is regarded by some as the Holy Grail of competitiveness. Yet, in the context of economic development, these productivity standards may represent the “ceiling” for Third World countries while paradoxically they often at the same time represent the “floor” for sophisticated global players. Another significant problem is associated with this goal; targeting global standards as a strategy for economic development tends to extend the jaws of the LCLV trap, and, with donor assistance, to utilize scare resources in developing countries only to play a never-ending game of catch-up. (Annex 2 provides a further brief discussion of this issue, using The Development Diamond as a conceptual tool for understanding how investing in standards may not be a good strategic choice for a developing economy.) Issues of measurement and associated informational problems run throughout the literature on management, and nowhere, arguably, is the issue more prominent than it is in the area of competitiveness. In general, strategic development differs from other approaches to competitiveness by placing qualitative concerns, such as quality itself, before quantitative concerns. (As if to make this point, the head of a central bank recently remarked that ‘the quality of lending is more important than quantities loaned.’)
Perhaps the key distinguishing feature of strategic development is that its modus operandi is catalytic, whereas other approaches to competitiveness tend to be analytical and/or prescriptive.
III. Building the Dialogue on Strategic Development
a. The Role of Strategy
The creed of strategic development is:
Strategy rules-Vanguards lead-Policy enables Strategy, as defined by Alfred Chandler in his 1962 book, Strategy and Structure, refers to the setting of long-term objectives, the determination of courses of action, and the allocation of resources to achieve the objectives. This provides an excellent definition of ‘strategy’ as used herein. In practice, ‘strategy’ does not need a formal definition or introduction; it becomes clear very quickly that ‘strategy’ involves an on-going exercise of delivering higher value.
A commitment to strategy is what separates strategic development from other approaches to development competitiveness. Strategy leads markets. For Third World and transitional countries to signal that they are market-driven can be a signal that their economies are open for LCLV business. If an economy is strategy driven, on the other hand, then far richer and more inviting signals are sent, and returns are commensurate.
Chandler cautioned that corporations should develop strategies before deciding their structure. Moving the delivery of this message from corporations in industrialized economies (Chandler’s audience) to development planning and management in Third World countries only reinforces the importance of this point. In the context of development, this natural law (form follows function) may be stated as “strategy before policy.” The importance of this law is enshrined in the six words I have adopted as the creed of strategic development.
A focus on “strategy” as discussed here is not meant to convey the idea that “policy” is subordinate to “strategy.” We all appreciate that sophisticated policy, with effective funding and enforcement in place, can and does provide for higher living standards. In strategic development, “policy” is subordinate to “strategy” in observance of natural law and because of the tendency for policy driven-economies to crowd-out a role for strategy and a range of high-value economic activities. While it may seem misleading to developmentalists, in particular, the case for differentiating “policy” from “strategy” is a strong one. The distinction is at once methodological and contextual to the application at hand; the creed’s prioritization better responds to and conforms to conditions in Third World and transitional economies. Given this, in practice it is useful to strategize initially with corporate or private sector stakeholders because they are usually closest to appreciating where and how higher value activities may be generated, and what policies and associated enforcement measures need to be in place to support them. Benchmarking is discussed below as a means to lend direction to this task.
Strategy is about differentiation, and differentiation is about choice. To hearken back to Adam Smith, when he introduced his thinking on economic development and the variability of the wealth of nations, it is perhaps significant to note that in one short reference he used the word ‘different’ two times: “Of the Different Progress of Opulence in Different Countries (emphasis added).” While many people are under the mistaken impression that competitiveness equates with “being low cost,” true competitiveness is driven much less by cost considerations than by innovation and specialization (i.e., differentiation) that allows for premium pricing associated with better quality. Creating value for all stakeholders (who self-select to be involved) -- the key to strategic development – requires a focus on differentiation. In strategic development initiatives, benchmarking, as discussed below, helps to establish a range of options for differentiation, and in so doing, to indicate any associated investments and policies that will facilitate the repositioning exercise. Strategy is, arguably, the value-added by development competitiveness.
b. On Paradigms for Benchmarking
From at least the time Adam Smith wrote about it in “ The Wealth of Nations,” the “different progress of opulence in different countries” has been determined first by the ability of people to provide “plentiful revenue…for themselves,” or strong financial performance and secondly, upon the provision of “a revenue sufficient for the public services,” or strong economic performance. Smith’s description of what we think of today and measure in terms of economic development raises all manner of strategic linkages and gaps. One especially critical gap concerns the issue of value. Value is a prime feedstock of wealth in market economies. Many developing countries find their industries caught in low-cost, low-value traps that substantially explain their lower-than-desired levels of economic performance. Value is created by strategy in market economies. A country’s economic performance may therefore be understood partially as a function of its ability to conceive and implement strategy. Rich countries are long on value-creating strategies and poor countries are short on them.
Current paradigms of national competitiveness hearken directly back to Adam Smith and they provide a platform for benchmarking in the context of strategic development initiatives. Michael Porter’s paradigm of national competitiveness, for example, depicts the performance of an economy as a function of, first, the ability of firms to implement sophisticated operations and strategies, and, secondly, upon the support of an enabling policy environment (emphasis added). Porter’s paradigm updates Smith’s by adding the importance of a stable legal, political, and macroeconomic setting for growth. This paradigm provides the foundation for benchmarking policy and strategy in strategic development.
Benchmarking provides a way to facilitate and structure community dialogue such that a community is able to act upon opportunities to generate higher-value activities. Benchmarking provides external guidelines for development, and when these guidelines are selected on the basis of their intrinsic strategic merit (rather than handed down as policy measures) they become enduring guides to the exercise of strategic development. (Yet as the approach is catalytic and not analytic, strategic development initiatives tend to approach benchmarking not as an exercise in documentation but as an illustrative exercise to guide group strategizing.)
As powerful as it is, still the Smith-Porter paradigm falls short of delivering a useful conceptual model for development in non-industrialized regions. A minor adaptation to Porter’s “national diamond of competitiveness” adds value to the use of this powerful tool in developing economies. (The Development Diamond is presented and discussed in Annex 2.)
Benchmarking the ‘four pillars’ of development across multiple industries and sectors reveals opportunities for shared public-private investments. Such synergy contributes a highly positive multiplier effect as regards public resource allocation. This is an effect that cannot occur when each industry pursues its own agenda. Strategic development seeks to advance development by concentrating on upgrading the ‘four pillars’ common to several traditional and related industries, leading to the development of a shared platform from which a wide range of firms in different sectors may implement their own, more sophisticated strategies. Groups of firms from one or more industries and sectors often are prepared to make investments in such enabling infrastructure because, first, they recognize how the investment will help them to implement their own higher-value strategies, and secondly, it is understood that the investment will not favor one firm or group of them at the expense of another. Investments of this nature add positively to local rivalry and help to build the middle ground in the development gap as presented by The Development Diamond (see Annex 2).
Information, Please
Whereas value is a feedstock of wealth, information is the feedstock of benchmarking. The benchmarking undertaken in strategic development initiatives requires a range of micro-oriented, commercial information that is not usually dealt with in development exercises. The need for information is multiplied by the fact that strategic development is a scale-neutral exercise; it may be pursued at any relevant, operative level (nation, region, or municipality: industry, segment or cluster; small or large firms.) Building information capabilities is often one of the first shared, public-private investment opportunities that presents itself in the context of strategic development initiatives. Good primary data (on available supplies, prices, grades, etc.) is the basis for developing strategy, and so building a sector’s information capacity usually has powerful returns in terms of investments and other economic and financial indicators.
As indicated above, strategic development initiatives begin with focussed discussion and consideration of how other communities engaged in similar productive activities have managed to upgrade their community’s economic performance by securing higher value positions in the markets they serve. This process of informal benchmarking becomes more formalized as (not before) a community’s strategic development initiative moves into the three phases of activity that attend the approach: strategizing, enabling (with technical assistance and policy support and enforcement), and implementation. (Annex 1 provides the overview of a generic strategic development initiative.)
Mega-Trends
In initial group discussions of strategic development, key mega-trends are identified for each sector. Mega-trends are those trends that explain the flow of higher investments and higher-end human capital to a given group of higher-end performers. Typical mega-trends include “health,” “quality,” and “management,” for example. When discussing “quality,” for example, it is often useful to talk about the role of laboratories. When several sectors are present, it becomes evident that a good lab may service the needs of multiple sectors, in much the manner as a computer may be used as a platform for any number of applications. A lab then becomes an investment target for those present. Typically, nobody present is interested in funding a new asset like this “unless or until” government takes action to boost investor confidence by removing particular obstacles. From a political perspective it is persuasive to have several sectors from a given area argue for the likes of state-of-the-art lab, because these leaders and their sectors will represent a significant share of the area’s Gross Domestic Product (GDP). And the private sector’s willingness to co-fund the lab becomes a key driver for identifying what needs to be done in the public sector, and who needs to do it in order to secure the new investment. Focussing the dialogue in this way provides some needed leverage into implementing higher value strategy.
Key to the exercise is the early identification of an investment target or asset that represents a clear stepping stone to the creation of higher value activities and that has the financial support of key players from the sectors involved.
The “4 Ps” of Marketing
When introducing benchmarking at strategic development workshops, it is often useful to review the “4 Ps of Marketing,” being; Place, product, price, and promotion. When an economic community scopes out how other competitive communities have managed to graduate into and maintain higher value performance, that richer community invariably has a higher share of its total investments in “place” rather than in “promotion.” Many of the strategies addressed by strategic development initiatives involve the need for clean water (for processing foods, or for improving feedstock), or “better” energy, for example. Maintaining a focus on “place before promotion” helps the exercise of strategic development deliver better quality for consumers in local and export markets alike.
Benchmarking ‘Strategy’ and ‘Policy’
The mission of strategic development is to help close the gap between strategy and policy in order to create more wealth and enable more rapid and widely spread gains in the standard of living in developing countries.
A first step in this enabling process involves benchmarking and comparing “our industry” and “global industry” in terms of strategy and policy, especially, as noted, in the areas that represent the four strategic pillars of development – human resources, management, infrastructure, and research and development. The comparisons enable gap analysis, which helps to establish a basis for understanding how other communities create more value for their customers and themselves.
Strategy benchmarking represents the first stage of commercial strategizing. Its purpose is to establish how global firms create higher levels of value, and to quantify those values so that they may become markers for the upgrading of “our industry.” Private firms from the same industry or sector working together lead the strategizing exercise initially, and then other stakeholders from other industries, from government, from “global industry” and elsewhere are brought into the process on an as-needed basis. Later, co-leadership emerges between the private and public sectors as strategic development initiatives forge a strategy-policy team that operates with equal effectiveness in both spheres and cross-sectorally.
Policy benchmarking provides a complementary input to strategy benchmarking and it begins the process of strategizing the role of the public sector in the context of strategic development initiatives. It involves an exercise of systematically reviewing the policy environment in competing producer countries to determine if there are any policy measures that may be consistently equated with higher growth rates in sectoral or industry-level productivity in that country or industry. Similarly, policy benchmarking tracks regulatory trends in consumer markets to establish how legislative initiatives there may open new markets or establish new thresholds of competitiveness performance.
Often times policy benchmarking includes review of what the best trade associations do –the polices they lobby for, how they do that, and the range of other services they provide their members in competing producer countries.
Policy benchmarking can advance the development of a menu of policy options that may yield some ideas for legislation to advance the dialogue on competitiveness and strategic development.
Strategy and policy benchmarking are pursued as complementary exercises and the two activities (and any people or other bodies associated with them) operate in tandem, on an ad hoc basis.
Strategic development is oriented to a focus on benchmarking information about how competitive producer’ communities of relevance to those involved have enabled their efforts to be involved in higher value activities. What infrastructure, and what technologies are available “there” that are not so “here?” What skills are in demand if one is to be hired and successful “there?” If entrepreneurs with higher value skills are effectively pushed offshore due to lack of access to better human resources, management, infrastructure and research and development in the local market, then what can “we” learn in terms of how “our” community can attract, develop, retain and upgrade those same skill sets? What investments need to be made to upgrade ‘our’ sector? How can we approach the issue of maximizing resource allocation to and between competing sectors when it is understood that upgrading is to occur amongst them? Benchmarking helps lead the way to answers of questions such as these.
An Introductory Example of Benchmarking
An example may help to illustrate how benchmarking may be applied in the context of a strategic development exercise. Consider the case of a group of firms from one or possibly several industries which has benchmarked R&D (research and development) and established that their combined R&D expenditures are, say, two percent of gross annual turnover (at whatever relevant level, e.g., national industry, regional industry, etc.) where the standard for R&D spending among higher value competitors may be fifteen percent.
Strategy benchmarking provides a means to understand how the ‘global best’ (as targeted by the group doing the strategizing) generates higher value in the R&D area, and the requirements of generating that level of R&D performance in “our industry.” The values issues implicit in identifying “the best” will always involve a substantial degree of subjectivity. This is especially the case in strategic development exercises, because offshore references may represent not a direct target but a point of departure for the differentiation exercise that is at the heart of repositioning an economy. As discussed below, strategy is ‘about’ choice and exercising it by securing higher value positions.
Similarly, from a public policy perspective, benchmarking may establish not just that the public sector’s share of R&D funding is low, but also what the public sector may do provide a more enabling and competitive environment for firms and industries. This may represent a departure from the normal approach to sector level policy formulation in developing countries, whereby policies often are implemented absent of knowledge of the effect they may have had elsewhere.
IV. Teaming for Strategic Development
Good strategy creates better value for all involved. To support the approach, strategic development introduces some new agents to the traditional cast of “doers of development.”
The catalyst. An independent contractor specializing in strategic planning for development, the role of a catalyst is to work with partners invested in activities that generate the “best” returns. On behalf of the vanguards (described below) for and with whom they work, catalysts help to initiate higher-value activities in multiple sectors. A key task of the catalyst is to help determine and maintain the strategic thread that connects these activities in such a way that resource allocation may be maximized by funding inputs that create value directly and indirectly for the sectors of importance to the vanguard. Given this orientation, strategic development has less to do with “choosing clusters” than with making sure that whatever strategies may be pursued will generate ‘the best’ returns for multiple sectors. Because of this, neither the focus nor the value of the catalyst may be understood in anything other than cross-sectoral terms.
The vanguard. In classical military strategy, the vanguard refers to groups who represent the forefront of an action or movement. Experience with competitiveness in developing countries has demonstrated time and again that strategic leadership or inputs may not automatically be assumed to be resident or available in the institutions with which donors typically work as counterparts, for example, in think tanks, at universities, in chambers of commerce, in industry chiefs, elected officials or members of the civil service. One associates with a vanguard in the same manner and spirit in which strategic development engages its constituents, that is, by self-selection, and upon recognition of others in the group that there is value to be added by those who would so self-select to engage in a strategic development initiative.
Strategic development does not seek to be “all inclusive” in terms of representation. The drive to build “rainbow coalitions” is common to development, but it is often inconsistent with the needs of a strategy-driven approach to economic growth, where the criteria for involvement stress that all those involved must add demonstrable value to the exercise of upgrading the community.
Along with the catalyst, the vanguard group must focus on one thing, and one thing only; how to secure higher value activities consistent with a community’s need to raise its standard of living. Membership of the typical vanguard group includes entrepreneurs, artists, civil servants, business people, politicians, anyone, indeed, whom others in the group deem as valuable to the exercise.
Strategy Working Groups (SWOGs)
Recent fieldwork on competitiveness in Thailand, Pakistan and other countries has been conducted successfully without having to introduce cluster terminology or cluster politics. Instead, reference was made to SWOGs (Strategy Working Groups). Because they are driven by the creed of strategic development, SWOGs are good vehicles for keeping a bead on how and where to add value, and when properly managed they lead naturally to inviting participation from related and supporting industries and from relevant related public sector actors as and when needed.
A SWOG typically will represent a cross-section of players from a variety of sectors, including;
-several firms ranging in size involved in production of at least one
of the sector’s main products
-other private firms (brokers, service providers) representing a mix
of the value chains and firms from key related industries, as required
-a university and its Information Technology (IT) and/or engineering
staffs
-representatives of district, provincial, and federal government as
needed
-bodies from civil administration as deemed relevant by the SWOG.
SWOGs represent a means for establishing cross-sectoral linkages into other vital regional and national sectors. They serve as platforms for optimizing resource allocation at sector/industry, regional, national, and extra-regional levels. SWOGs offer the potential for diversifying sources of innovation and investment between and across sectors and they help to sharpen the focus on how to maintain a focus on maximizing resource allocation.
On Tendering for Strategic Development
The approach taken by strategic development relies on tendering in the local economy (to the extent possible) as the means for accessing upgraded goods and services from the local economy. Tendering is also a continuation of strategy itself in that the very development of a tender and the process of tendering represents both a part of and a driver of strategy.
Tendering for upgraded goods and services is central to strategic development initiatives. In strategic development initiatives, requirements for upgrading are identified by producers and producers usually in conjunction with engineers from a local university. This team then writes tender specifications that are put out to tender by SWOGs in the local/regional/national community of suppliers. The approach intends to induce local suppliers of goods and services to the sector to upgrade their output to globally competitive levels while focusing on meeting the requirements of local demand for better inputs. Tendering in this manner induces higher value outputs in the local economy, cuts down of foreign exchange expenditures, and generally builds the home “diamond” in a far more productive manner than do investments in “workforce development” as presently addressed.
Inducing performance through the mechanism of tendering presents different prospects from those that focus on producing better performance by investments in “workforce development,” for example. The donor contribution to “work force development” may produce the required human capital over the longer-term, but that approach cannot compete with the invitation to innovation that tendering by vanguards tends to induce in the context of strategic development initiatives. Nor does the “workforce development” approach as currently rendered necessarily strengthen the home market as does tendering for strategic development.
The Strategic Development Fund (SDF)
In developing economies better credit -- better lending and borrowing -- is part and parcel of better strategy. One approach to get “better” credit and to have this function also drive better strategy is to drive demand in the productive sectors for “government” support for the creation of a revolving credit fund, a Strategic Development Fund (SDF). An SDF is a mechanism that will co-finance, with private sector investors and others, a range of sectorally driven pilot projects that will serve as vanguards to second generation reforms aimed at stimulating accelerated growth with equity in the micro-economy. In addition to co-financing, an SDF will channel short-term technical assistance to facilitate the development of feasible pilot projects.
An SDF relies on ad hoc sectoral SWOGs to develop the specifications for tender bids for the development of pilot projects that meet the criteria of the SWOG and the SDF at large.
Once the winning bid has been selected, a donor-supported project on strategic development would provide selected technical assistance, in the form of expert advisories, as agreed upon between an SDF and it’s core stakeholders, the SWOGs.
Each SWOG will be required to meet the eligibility criteria listed above to engage the SDF.
Once selected, the entities or SWOG behind the winning bid would form a joint-stock company (or other legally constituted private sector entity). This company would oversee the administration and management of the pilot project.
In issuing tenders, each SWOG would be required to address the need for bidders to demonstrate due consideration of the following issues:
-clear definition of the investment opportunity and its estimated costs and benefits.
-the proposed pilot must lead to payment of higher prices to producers in the pilot project.
-the price premium paid to producers will be due to intrinsic quality improvements in the underlying product, primarily, and secondarily, to efficiencies in product marketing at large.
-the proposed pilot project must be benchmarked against a well researched industry model to guide both the operational and policy-support inputs to the pilot exercise.
-the pilot project must leverage concerns of a strategic nature from other related and supporting industries.
-the tender specifications will ask the bidder to scope-out areas for technical assistance, including, specifically, technical assistance inputs involving either public policy and/or commercial operational aspects of;
-human resources, -management, -infrastructure, -research and development.
VII. Conclusion
Strategic development seeks to extend the range of competitiveness- related approaches currently deployed with donor support in developing countries. It identifies a lack of product development as a barrier to the application of competitiveness products that better apply to field conditions. Strategic development is a field-grown product that emerged from experience with introducing concepts on competitiveness in developing countries. The approach invokes a role for some new players, including a catalyst, vanguards and for SWOGs. It is sector based and value driven. With a clear bead on strategy as guided by the tenets of the creed and with the power of the vanguard before them, the on-going delivery of higher value economic activities becomes not just an opportunity, but a reality.
A sustainable approach to development is a mere maintenance diet; higher performance requires a richer and better diet. Strategy is the key ingredient, and “better” development is the chief output of strategic development.
A commitment to strategy is what distinguishes strategic development from other approaches to development competitiveness. Strategy leads markets. For Third World and other transitional countries to signal that they are market-driven can, given the discussion above, be a signal that their economies are open for LCLV business. If an economy is strategy driven, on the other hand, then far richer and more inviting signals are sent, and returns are commensurate. Strategic development provides the means and ends to allow communities to break through the glass ceiling that drives down prices, wages and investment.
Hopefully, strategic development will help to put such illusive, costly, possibly unnecessary and draconian measures as competitiveness’ “absolute productivity standards” back into the shadows of core universal values.
Annex 1. Differentiating Development Competitiveness and Strategic Development
Key distinctions between the approaches include;
a. In strategic development, form follows function; “strategy” before “policy.” b. Competitiveness is analytic; strategic development is catalytic. c. Competitiveness tends to promote ends as means and so inadvertently raises the transaction costs of development. d. Competitiveness is focused on productivity; strategic development shares the concern, but refocuses the issue on inducing rather than producing ‘development.’ e. Development competitiveness is long on policy and institutional reform; strategic development favors repositioning to reform (and seeks to complement and leverage existing investments in reform). f. Strategic development only involves any actor to the extent that they demonstrably add value. g. Competitiveness is limited to dealing in formal markets, with formal institutions; strategic development is able to tap into vast informal markets and into the markets for natural capital, and it is able to engage them as is, that is, without seeking to change them. h. Development competitiveness promotes dialog; strategic development promotes action (and hence is catalytic rather than analytic). i. Development competitiveness focuses on accountability; strategic development is more focused on the short- to mid-term implementation of strategically validated pilot projects. j. Competitiveness is focused on firms, as discussed above, and on clusters; strategic development focuses primarily on SWOGS and sectors, on the transaction as the basic unit of analysis, and on cross-clusteral resource allocation. k. Competitiveness focuses on export economics and global markets; strategic development is more interested in helping communities to “keep the bead on strategy” as the means to tap deliver higher value, regardless if that value is resident in global markets or elsewhere. l. Development competitiveness projects tend to be donor funded whereas strategic development initiatives are funded by the community’s where they occur (these two types of funding need not be mutually exclusive). m. Development competitiveness is contractual in nature, whereas
strategic development is consensual.
Annex 2: Overview of a Generic Strategic Development Initiative
Annex 3: The Development Diamond
One of the key goals of strategic development is to help countries (or regions, municipalities, or other) reposition their economies so that they participate in higher value activities. Porter’s “national diamond of competitiveness” represents a good conceptual tool for getting people to think about strategic opportunities. The tool is rendered more useful to the exercise of benchmarking when it is itself repositioned so that the diamond sits on the factor or supply side. With this facet as its base, then the top of the diamond represents global demand, and the horizontal axes are, on the left, firm strategy, industry structure and rivalry, and on the right, related and supporting industry. In this new position, Porter’s diamond thus becomes the development diamond.
In its new position, the bottom of the diamond is where the low-cost, low-value (LCLV) traps sit. The bottom half of the development diamond is natural-resources heavy, static, and its chief inputs and outputs (raw or semi-processed materials) are labor denominated. Growth is slow and investment opportunities are constrained by a lack of cash flow. Upgrading in the bottom half of the diamond, when it occurs, often proves to be relatively unproductive because it tends to be driven by social policy concerns rather than by economic growth strategy, and it usually is insufficiently funded by the state and does not involve co-funding from the private sector. Thus, the gap widens, or at least remains a fixed and permanent feature of underdevelopment.
The top half of the development diamond is dynamic; greater availability of and access to capital and technology (made possible, inter alia, by strategy) enable the application of local knowledge and this specialization, in particular, allows producers and exporters to get closer to more demanding customers. Knowledgeable producers and knowledgeable consumers are cause and effect of value-creating partnerships in the top half of the diamond.
The bottom half of the development diamond may be thought of as the “old economy,” and the top half as the “new economy.” Strategic development seeks to stimulate growth by enabling traditional, “old economy” industry to merge with and gain support from the “new economy.”
Annex 4: Examples of Pilot Projects
A ready example of a pilot project for strategic development comes from the jewelry sector. Design creates value in jewelry, and it is a value that is missing in the jewelry sector of many developing countries. A design center may represent one component of an overall strategy for the gems and jewelry sector, yet by itself such a center may not constitute a sound, high value strategy. Many a design center has died for failure to create the other values that must be in place to support “design.”
Pilot projects often represent the opportunity to exploit any “Unique Selling Propositions” (or USPs) present in an industry. By themselves, USPs are squandered assets unless they are used as a base upon which industry adds value in the “home” market. Adding value and building competitiveness in the jewelry sector may involve assuring that intellectual property rights are in place and enforced, and that the provision of a range of other high-end trade services are in place support a more sophisticated trade – better cutting of stones, more use of newer technologies to ensure better grading and certification, and other inputs usually associated with name-brand jewelry.
Indeed, in the jewelry industry, as in other brand-sensitive industries, strategic development seeks to enable a SWOG to “bring the brand home,” that is, to add value that presently may not be obtainable in the local market due to an absence of strong linkage between strategy and policy. “Bringing the brand home” to traditional industries in developing countries means that any business operating in “our industry” must have access to the same range and quality of services as those available to the “global best” in their home market.
Another example of a pilot project comes from a traditional plantation crop. A pilot project in this sector could be based on upgrading standards for blending, grading, and technically specifying raw and semi-processed product. Where official pricing policy may not adequately reward quality-conscious producers, the installation of relatively inexpensive color separation technologies on the factory floor of more sophisticated processors may enable them to reward higher quality producers with better prices, without violating or threatening the official price policy. Such upgrading may qualify even the raw product for sales into entirely new markets, where consumers may demand technically specified products rather than ones that pose a risk because of an industry’s reliance on manual grading practices, for example, which create uncertainty about product purity, integrity or its uniformity. The addition of other upgraded trade services, such as bar coding, advanced warehouse and freight forwarding technologies and other trade services may also be integrated on a competitiveness platform. Such upgrades occur as a result of paying attention to strategy, and enabling it with policy; short of strong linkages between them, traditional industry is often constrained to justify the expense of upgrading.
There is a common strategic thread running through these examples, and indeed, throughout strategic development initiatives at large – the importance of upgrading and specialization of traditional industry, and on enabling cross-cluster linkages to leverage underlying investments into true strategic advantage.
Annex 5: Note on the Author
An independent contractor specializing in strategic planning for development, Mr. David B. Flood, an American, has been involved with competitiveness for about twenty-five years. After graduate school, he joined in 1980 one of the first management consulting firms (Strategic Planning Associates) dedicated to corporate strategic planning and competitiveness. While at SPA, Mr. Flood’s major clients were AT&T and one of the top players in the railcar industry. From there he moved to Wall Street where he worked as a commodities trader and project director of the international department of a major brokerage firm. Next he worked as a consultant to the agriculture department of the World Bank, on secondment as an International Affairs Fellow of the Council on Foreign Relations, in New York. He then set-up and managed a market news service for the United Nations International Trade Centre. Mr. Flood started a “mid-tech” company to develop sensors for in-process monitoring of quality for seafoods in partnership with a venture capital firm and a state owned university. Over the last decade Mr. Flood has worked as a consultant on competitiveness to industries and governments in all parts of the world.
Flood has served as chief-of-party on competitiveness projects sponsored by USAID in Sri Lanka (1999-2001), Pakistan (2004), and Bosnia (2004). Additionally he has advised other USAID-supported projects in Thailand, Cambodia, and the Philippines. A range of other competitiveness-related fieldwork has been undertaken (as an independent consultant hired out by various American development consulting firms) by Mr. Flood in numerous other countries, and for a range of other donors including The World Bank, UNIDO, IDB, and others.
This essay was first drafted in November 2002.
Davidbflood 10:13, 5 September 2007 (UTC)
