Porter 5 Force Model of Banking Industry

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					  Transition Economies:
Porter Model Comparisons


       Maj Ryan Craycraft
                  Introduction

• Thesis
• Porter Model Explanation
• Case Studies
  – Russia
  – Poland
  – China
• Conclusion
                     Proposition

• If a country is to be successful in the
  global market economy, its domestic
  businesses must be competitive.
• IV: High levels of competitiveness
• DV: Successful Market Economy
                Michael Porter’s Index

• Michael Porter, Harvard Business School has
  developed a competitive index
  – “The Current Competitiveness Index examines the
    microeconomic bases of a nation‟s GDP per capita.”
• Macroeconomic conditions are usually the object
  of study, but although necessary, they are not
  sufficient
• Microeconomic conditions are what actually
  create wealth and “sustainable productivity”
• Comparative in nature
                 Porter’s Model




• Like a business cycle, interactions among
  the previous activities help countries move
  along the macroeconomic country cycle
                     Porter’s Model


                    (Nat’l Corporate Culture)




                                                (Consumers)
(Supply Context)




                     (Indirect Efficiencies)

• Business Environment Diamond, aka “The Diamond”
                               Poland

• Transition Plan:
  – Free Elections
  – Evolve to purely private economy
  – Create the Institutions of a capitalist economy
     •   Rapidly to market economy
     •   Liberalize economic functions (int‟l trade / FDI)
     •   Privatization
     •   Construct Social Safety Net
     •   Mobilize Int‟l Monetary Aid
                Poland’s Successes

•   Solid GDP Growth
•   Stable currency
•   Solid Manufacturing Sector
•   Exports
•   FDI
•   Small / Medium business growth
               Poland’s Challenges

•   Poor Infrastructure
•   Political Instability
•   Small inflation (<5%)
•   Social Safety Net in jeopardy
•   Unemployment (esp. eastern Poland)
•   Debt of 50% GDP (2004)
           Poland in Porter’s Framework




• Moving from Factor Driven to Investment Driven
   • Strong Manufacturing Sector, esp. automobiles
   due to relatively cheap, educated labor force
   •Strong FDI
                   Poland in Porter’s Diamond


                          (Nat’l Corporate Culture)




                                                      (Consumers
(Supply Context)
                                                      $14K PPP)




                            (Indirect Efficiencies)

 •Neutral Achievement
 •Balanced Income and Competitiveness
       Russia: A Middle Income Country

• Also a shock-therapy transition
• #1 CIS country, but behind E. Europe
  countries
  – No EU Charter guidance
                  Russia: Strengths

• Macroeconomic Stability (oil revenue)
  – 7th highest fiscal surplus in 2006
• Cold War capacities
  – Higher education
  – Research institutions spurring innovation
  – Cultural factors that support innovation
• Flexible labor market
                    Russia: Challenges

• Public institutions
• Health factors
   – Infant mortality
   – Life expectancy
• Petrodollars preventing necessary painful
  reforms
• Inflation near 10%
• Technological readiness of business sector
• Low intensity of domestic competition
           Russia in Porter’s Framework




• Classified by WEF in the Efficiency-driven stage
   • “Needs to focus on higher education and training,
   market efficiency and technological readiness”
   • While continuing public institution reform
                 Russia in Porter’s Diamond


                           (Low Competitiveness)




                                                         (Consumers
(Mixed Bag)
                                                         $12K PPP)




                           (Supporting Infrastructure)

 •Overachieving Country
 •High Income compared to low competitiveness index
         China: Commanded Transition

• Slow transition method
• Excess production allowed to go the open
  market
• When private enterprise failed, it was
  cancelled
• Government-controlled financial system
                 China: Strengths

• Macroeconomic indicators
  – High growth rates
  – Low inflation
  – High savings rate
  – Moderate public debt
                   China: Challenges

•   State-controlled banking sector
•   Low penetration of technology in industry
•   Poor secondary / tertiary education system
•   Public and Private institution quality
    – Turning to capital punishment for corruption
    – Burdensom government regulation
    – Poor property rights
    – Judiciary lacks independence
               China in Porter’s Framework




• Moving from capture of cheap labor to need for efficiency to compete
because cheap labor in other places
•Same as Russia‟s recommendations:
    • “Needs to focus on higher education and training, market
    efficiency and technological readiness”
    • While continuing public institution reform
                 China in Porter’s Diamond


                               (Low Technology)




                                                        (Consumers

 (Macro indicators                                      $7.5K PPP)

 Public Institutions)



                          (Supporting Infrastructure)

•Underachieving Country
•Low Income compared to higher competitiveness index
                   Conclusion

• Transition from Factor-driven economy to
  Investment-driven economy has coincided
  with evolution from developing country to
  middle-income, developed country
• New challenge will be to move from
  Investment-driven to Innovation-driven in
  order to sustain growth
                                             References

•   Porter, Michael E. “Enhancing the Microeconomic Foundations of Prosperity: The Current
    Competitiveness Index”

•   Hunter, Richard J. and Leo V. Ryan, “A Transitional Analysis of the Polish Economy: After Fifteen
    Years, Still a „Work in Progress,” Global Economic Journal 5:2, 2005.

•   Economist.com, Poland Country Briefing Factsheet,

•   Marageta Drzeniek, “Russia‟s Competitiveness at the Crossroads”, Paper presented at World
    Economic Forum Russia CEO Roundtable, June 2007,
    http://www.weforum.org/en/events/russia2007/index.htm

•   Economist.com, China Country Briefing Factsheet,

•   Porter, Michael E., World Economic Forum, World Competitiveness Report 2006-2007

				
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