Plowing the Sea. Nurturing the Hidden Sources of Growth in the Developing World.

by Michael Fairbanks & Stace Lindsay Foreword by Michael E. Porter Harvard Business School Press, 1997

Michael Fairbanks and Stace Lindsay argue that the tremendous advantages developing nations have in natural resources, inexpensive labor, and fertile soil have actually kept these nations poor. Their advantages easily imitated in other areas around the world have not been sufficient engines for growth. Billions of dollars have been spent to eradicate poverty; still these regions remain as dependent as ever on volatile natural resource exports and foreign aid. Plowing the Sea is the authors attempt to unearth and nurture the hidden sources of growth knowledge, innovation, and human capital that remain untapped in developing countries. Chapter One: Avoid Overreliance on Basic Factors Summary from book p. 37 The belief we examined first in the story of the Colombian flowers and have explored in greater detail here -- that countries and companies can compete globally based on factor advantages such as natural resources, cheap wages, or geographic location--dominates economic activity throughout the developing world. The challenge that business and political leaders of those countries face is two-fold: (1) to develop more sophisticated sources of advantage that are not so easily imitated, and (2) to realize that depleting natural resources and suppressing wages will not lead to sustainable, long-term wealth creation. It is critical for leaders to develop the capacity to think about the future and to move out of such unattractive "factor-based" industries. That will require a fundamental reassessment of how competitiveness is understood. The sources of growth for developing nations are hidden behind the abundance of natural resources that so many of them possess. Chapter Two: Improve Understanding of Customers Summary from book page 46-47 There are three fundamental reasons the Colombian leather industry leaders had worked themselves into such a difficult position: 1. They had not taken an explicit position about choosing customer segments. 2. They did not try to understand customers' different needs. 3. They did not seek the most attractive customers that they could serve. In the days when the local markets were protected and export markets were easier to penetrate because of favorable exchange rates and government incentives, the issues listed above were not so critical. They are now. Firms that fail to choose specific segments are essentially enabling the competition to choose for them. Whether we are discussing state-owned tourism in the Colca Valley of Peru, or the leather sector in Colombia, very predictable and consistent patterns will result. In failing to choose the most attractive segments that they can serve, those firms will be forced into segments where average margins are lower, where competition on cost will be fierce, and where dependence on exogenous variables such as exchange rates will be high. These are the patterns associated with competing in basic-factor-dependent industries, and they are inconsistent with creating a high and rising standard of living for the average citizen. Moreover, there will continue to be little incentive for innovation or cooperation among industry participants because they will perceive that the number of customers is limited and that one firm can succeed only if another is not. The ability to create wealth, in other words, tends to be viewed as finite. Furthermore, firms will redouble their efforts to ensure that the government is providing them every source of advantage to continue competing in these unattractive segments. The eyes of the productive sector will be on the government--not on the market--and that will further reinforce the pattern of not proactively choosing the best segments in which to compete. Chapter Three: Know Your Relative Competitive Position Summary from book page 59-60 It is important for firms to analyze their position relative to competitors for three main reasons: (1) it can facilitate productive dialogue between the public sector and the private sector; (2) it can help firm managers make more informed choices; and 3) it can help firms anticipate areas where they may be vulnerable to the competition. There are two components to relative position analysis that we should make explicit. First, it is important to understand a given firm's basis of competition--meaning, is it competing on costs, or competing as a differentiated player who can charge more for the product by adding unique value for the consumer? If the basis of the competition is cost, then relative cost position analysis is most critical. If the basis of the competition is differentiation, then analysis of customer satisfaction relative to the competition is most critical. Either way, the challenge is to know and understand one's own position in order to develop a clear view of how likely success is in the competitive battlefield.

The second critical point regards competitors. "Competition never occurs in a vacuum." And a lack of knowledge about the goals and capabilities of the competition to serve the customers may leave a firm very vulnerable. A theme that we repeat often in our discussions and seminars is that, when it comes to market demand, developing nations have to upgrade themselves from being responders to seekers, and ultimately, to creators. Instead of extracting and exporting the basic wealth of their countries--again, a strategy that other countries can usually imitate and therefore vulnerable to price fluctuations and exchange-rate management--firms need to learn how to understand demand and the dynamics of competition better so that they might find more attractive customer segments. That is what we mean by seeking. Furthermore, if firms in developing countries understood customer preferences so intimately that they could anticipate them, and perhaps even help shape them, that would mean they were becoming creators. The high-end fashion producers in Italy are creators in the sense that what they make tends to shape the tastes and preferences of consumers, and influence competitors, in a portion of their market. Very often, they make excellent profit margins doing just that. The essence of this upgrading process is in becoming competent at ascertaining relative position. As we have said, the lack of this knowledge is one of the reasons firms in developing countries find themselves competing in unattractive industry segments. It is also preventing the type of high-quality discussion that needs to take place between senior public and private sector decision makers as they make increasingly complex decisions about opportunities that will come and go with increasing rapidity. With a clear understanding of relative position, however, those decision makers will be able to begin creating their own opportunities that provide even greater reward. Chapter Four: Know When and When Not to Integrate Summary from book page 74-75 Exporters from the developing world face a wide variety of challenges regarding not only the production of their goods, but also those goods' distribution and sales. Wide variations in the macroeconomic environment, political and social instability, inconsistent government policies, and poor infrastructure are the problems most often associated with poor export performance. Correcting those problems is a prerequisite to creating sustainable and profitable growth in many exporting industries, but it is not enough. The many strategic challenges that firms face cannot be postponed any longer; as companies wait to make decisions about critical strategic issues, they actually cede control of their future to more nimble competitors, and to buyers. If exporting firms in the developing world are to have any hope of capturing more of the economic rewards they now create for others, they must address the three problems we have just discussed: poor knowledge of channel needs, a failure to leverage channels, and a failure to capture market feedback. Because exporters rely on brokers and distributors who typically do not pass along valuable information about market trends and dynamics, they are inherently less able to understand customers' needs than either the brokers or the competition can. That reduces their ability to differentiate themselves in the marketplace through service, better understanding and fulfillment of customers' needs, or an ability to anticipate market trends. In light of the changing market dynamics, that also poses a problem because exporting firms tend to be relatively unaware of the relative performance of their competition in key market areas, which could mean they will face some unexpected and painful realizations about their industry's development down the road. Lack of forward positioning contributes to yet another problem we have observed: groups of companies in the same industry are unable to cooperate with each other to improve the consistency of supply, the quality of products, and the scale needed to export efficiently. That fact has hampered the growth of dynamic groups of industries that could help upgrade the broader competitive environment. We call those kinds of dynamic industry groups clusters, and we will examine their value in more detail in the next chapter when we discuss the specific problem of interfirm cooperation. Poor thinking about forward integration is part of a system engendered by other patterns we discuss in this book. For example, a tradition of depending on natural resource based products -- what we have called factor or comparative advantages-- forces competition to be based simply on price and scale. That, combined with a historic dependency on government policies to facilitate exports, has inhibited firms' ability to think "outside of the box" about how to distribute their products. Forward integration would go a long way to mitigate some of the challenges facing firms and industries in developing nations, and for this reason we consider it an underutilized strategy; another hidden source of growth. Chapter Five: Improve Interfirm Cooperation Summary from book page 91-92 The three stories recounted in this chapter -- soy, fruit juice, and alpaca -- are actually the same story in one sense: they demonstrate that a company's competitiveness often depends heavily on the competitiveness of other firms and institutions in the same industry. That interdependence can be a source of weakness or strength, depending on the collective competitiveness of an industry cluster. When thinking about implementing a sound strategy, companies must explicitly understand where their strategies are vulnerable to the actions of suppliers and buyers, and ensure that the chains of companies behind a product are all working together. Without strong related and supporting industries, achieving sustainable competitive advantage in the developing world will be much more difficult than it should be. In the past, it may have made sense not to cooperate, but in the increasingly competitive global economy, firms must seize the opportunity to create the conditions where buyers and suppliers no longer insist "Es la culpa de la vaca." Chapter Six: Overcome Defensiveness Summary from book page 102 Overcoming defensive behavior is critical to the success of all enterprises, not just those in the developing world. To seize the opportunities identified in previous chapters, business and government leaders will need to develop more sophisticated sources of advantage. Gone are the days when cheap labor and access to raw materials - very visible and accessible advantages - will allow sustained success. Gone are the days when it is worthwhile to argue publicly about how to allocate finite resources. The challenge in the 21st century will be to work together to create sustainable sources of growth in a way that neither degregates the environment nor exploits human beings. This cannot be done in highly defensive environments. Today's sources of competitive advantage are more subtle than yesterday's. They are based

on human relations, on productive reasoning, on trust, on cooperation. They are hidden sources of advantage that we must learn to develop. Chapter Seven: Avoid Paternalism Summary from the book page 117-118 Two choices: Breakfast with the Minister or Reshaping the Industry In Bolivia, we once gave a presentation to several hundred business and government leaders in a grand hall, darkened except for the raised stage on which we were speaking. After relating some preliminary analysis about the country's export performance, some survey results about patterns of decision making, and some hypotheses concerning the future of the country, we stated that the business people in the audience had two choices going forward. The first choice was that they could simply wake up tomorrow and take to breakfast whichever Minister had an interest in their particular industry. "You know the Minister," we said, "your wife knows the Minister's wife, your children baby-sit for the children of the Minister, and on weekends you give a friendly nod to the Minister from across the tennis court at the club or on the golf course. You can take the Minister to breakfast and ask him for a favor. That's one choice." "But there's another choice," we continued. And we asked that someone in the audience articulate what was that choice. From the back of the room, a man raised his hand timidly and addressed us from deep within the anonymity of the darkened hall. "We can take the Minister to lunch." And the audience laughed in a sublime moment of self-recognition. Choice number two is not that business people can have one meal or another with a Minister, but that they can try to reframe their perspective so they do not interpret events from a paternalistic frame. Specifically, they can learn how to judge the attractiveness of industry structures, they can work on developing their competitive environment to improve their relative position inside those industry structures, they can focus on learning about competitor behavior and customer preferences. In a phrase, they can learn how to reshape the industry structure around themselves. And once they have accomplished that, maybe they will represent a new model of a relationship between the government and the private sector. Chapter Eight: Strategic Actions Summary from the book page 133 Strategy is deciding to decide. It is making discrete choices along clear dimensions and is a critical first step to nurturing the hidden sources of growth about which we are writing. Not making choices is, indeed, allowing others to make choices for you. More than once we have shown a client his relative competitive position on a map with all of their competitors only to hear, "We didn't decide to be there." Our response is always the same: "No you didn't, but your competitor decided for you." Competing by making better choices about where to compete, how to compete, what products to produce - this is the way to build sustainable sources of advantage. The next chapter looks more deeply into the type of learning required so that firms can begin to make informed choices and take timely action. Chapter Nine: Firm-Level Learning Summary from the book page 169-170 As the Cervantes quote at the beginning of the chapter suggests, learning is not without "inconveniences". He mentions "dizziness in the head" and "weakness in the stomach" among others. Our view is that it is more costly not to do the learning. The "three C's" in this chapter are the types of learning that inform the strategy choices that firms get to make. That type of learning can be one of the great points of leverage in mitigating the problems inherent in the seven patterns and turning them into opportunities for growth. Customer learning, for example, will help firms rely less on factor conditions as they learn that they are often competing from within a poor "five forces," with high rivalry and little ability to influence customer behavior. Understanding costs and competitors has the effect of improving relative position, by understanding the sources of sustainable competitive advantages, and fundamental weaknesses that need to be worked on. The combination of all three C's allow firms to make a decision about their capacity and the desirability to forward integrate, and provide the basis for interfirm cooperation. Perhaps the most innovative use of this type of firm-level learning is the capacity to inform the government-private sector dialogue about the realities of the international competitive context, which provides an opportunity to overcome paternalistic behavior. That does not mean that government should use that information to take an overtly interventionist role; however, at present so much of the dialogue between the government and the private sector is colored by poor information that the results is often negative attributions and defensiveness. Improved, strategic-type learning could focus a country's leaders on creating sustainable, non-imitatable advantages that can position local firms closer to end-users. The benefits will include the formation of international alliances and the creation of high and rising value for increasingly sophisticated customers who are willing to pay more money for the unique value they perceive. Learning like this creates informed choice, which improves competitive positioning, and turns the seven patterns into sources of advantage. Chapter Ten: Steering Mechanisms Summary from the book page 186-187 In the Andean region, constantly changing development strategies and inconsistent public policies over time have created organizational and administrative steering mechanisms that tend to reinforce -- in fact to help create--the seven patterns that we have observed. Competition based on basic factors is reinforced when there is neither confidence in how the government will behave in the future nor a qualified human resource pool from which to draw. When faced with that dual problem, firms tend to mitigate their risk by choosing industry segments that have low barriers to entry and exit. They tend to maximize short-term gains because they have no confidence that any investment in the long-

term will be fruitful. That creates a reinforcing pattern: firms actively encourage the government to ensure they are at least able to achieve short-term gains, which translates into strong lobbying efforts and often antagonism toward the government when it is not responsive to their needs. That breeds paternalism and defensiveness. Import substitution policies which limit competition make it unnecessary for firms to understand their customers and their competitors. This in turn makes it difficult to choose good segments in which to compete and limits the need for knowledge about relative competitive advantage. Finally, import-substitution-oriented steering mechanisms have inhibited the development of strong clusters because firms do not need to cooperate in order to succeed in those highly regulated environments. As we suggested earlier, there have been several contributing factors to the inability thus far of firms in the Andean region, and in developing countries in general, to change the seven patterns into opportunities for economic growth and social equity. We have attempted to make a case that a major reason has been the rapidly changing national development strategies and unpredictable steering mechanisms that limit long-term strategic thinking and investment in innovation. If leaders of developing countries can begin to develop informed and explicit national development strategies and make steering mechanisms consistent and predictable, they will help create environments more conducive to long-term thinking and investment. This, in turn, will encourage better choices and a higher level of learning at the firm level that will ultimately lead to the development of more productive firms and industries competing in better ways. Chapter Eleven: Mental Models Summary from the book page 219-220 We have attempted to do some complex things in this chapter to begin to understand some of the prevailing beliefs about wealth creation and distribution in an uncertain country. First, we have used the example of Venezuela because, at the moment, it is a country with a great amount of uncertainty, and, as such, is a rich environment for learning. Second, we have introduced a methodology for determining how to know a little better "who is out there" through our discussion of the five very different segment groups that we identified in Venezuela and believe exist in many countries. We described these groups and the views and "mental models" they embody, with a view toward learning what it is that may unify them behind a shared vision. Finally, we reintroduced the "Seven Patterns" described in the first part of this book and examined the perspectives which may be driving these patterns, and inhibiting wealth creation. We have seen that creating wealth is no longer about macroeconomics and the advantages with which countries are born. It is more complex, involving a wide array of steps, such as building integrated frameworks based on cutting-edge concepts of measuring results, categorizing the scope of strategy choices, understanding institutional dynamics, making paradigms explicit, and understanding how and when paradigms become obsolete. Most importantly, creating wealth in the future will involve pulling the integrated frameworks referred to above together, and incorporating a fundamental understanding of "who is out there," what they believe, and how one structures a process to move them to shared understanding. As the quote with which we began this chapter suggests, everything now (including wealth creation) really is human relations. Chapter Twelve: The Hidden Sources of Growth Summary from the book page 238 How do we understand the invisible effects of the seven patterns on productivity? -- The answer is through use of mental models, many of which we examined in the chapter on divisiveness; institutional efficiency which we studied in the chapter on steering mechanisms; knowledge-capture along the dimensions of the scope and positions of strategy; and the three C's. These components of change, informed by the paradigm of high-productivity, create the conditions for exponential, and even explosive growth in wealth generation and distribution. But there is yet another challenge: How can these components of exponential productivity growth fit together into an overarching framework for positive change? And we leave that for the final chapter. Chapter Thirteen: A Framework for Action Summary from the book page 262 The moral authority in an innovation-based environment will come from the wisdom of the leader to manage the other preconditions for change: electrifying and then clarifying for the electorate the new moral purpose of an innovationbased, upgrading economy girded by the high and rising standard of value created by the average citizen. This leader will facilitate the development and use of hard and soft technologies for change and learning. He or she will create a broad degree of real and sustained ownership of change among the political base, the opposition, and the increasingly complex populace. It is ironic for us to think that all of the preconditions for change to a new framework for wealth creation and distribution now exist, except perhaps that our present leadership may still not recognize the possibilities inherent: the hidden sources of growth.