Thailand's Competitiveness: Key Issues in Five Clusters

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Copyright 2003 © Professor Michael E. PorterCAON Thailand 2003 05-04-03 CK.ppt
Preliminary Findings
Thailand’s Competitiveness:
Key Issues in Five Clusters
Christian H. M. Ketels, PhD
Institute for Strategy and Competitiveness
Harvard Business School
Bangkok, Thailand
4 May 2003
This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press,
1990), “Building the Microeconomic Foundations of Competitiveness,” in The Global Competitiveness Report 2002, (World Economic Forum, 2002),
“Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998), and joint
work with the Sasin Graduate School of Business on Thai competitiveness financed by the NESDB. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the
permission of Michael E. Porter.
Further information on Professor Porter’s work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Thailand’s Competitiveness Agenda
The Role of Clusters
• Thailand’s future competitiveness depends on progress in two
dimensions
– Cross-cluster issues affecting the whole economy
–Clusters
• Clusters provide the opportunity to move to a new level of
private-public partnership. They can also be a test-ground for
developing solutions to economy wide problems
However
• Cluster initiatives alone are less effective, if they are not part of a
overarching approach to improve competitiveness on the national
and regional level

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Topics
• The Concept of Clusters
• Key Issues in Five Thai Clusters
• From Analysis to Action

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
The California Wine Cluster
Educational, Research, & Trade
Organizations (e.g. Wine Institute,
UC Davis, Culinary Institutes)
Educational, Research, & Trade
Organizations (e.g. Wine Institute,
UC Davis, Culinary Institutes)
Growers/Vineyards
Growers/Vineyards
Sources: California Wine Institute, Internet search, California State Legislature. Based on research by MBA
1997 students R. Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda.
Wineries/Processing
Facilities
Wineries/Processing
Facilities
Grapestock
Grapestock
Fertilizer, Pesticides,
Herbicides
Fertilizer, Pesticides,
Herbicides
Grape Harvesting
Equipment
Grape Harvesting
Equipment
Irrigation Technology
Irrigation Technology
Winemaking
Equipment
Winemaking
Equipment
Barrels
Barrels
Labels
Labels
Bottles
Bottles
Caps and Corks
Caps and Corks
Public Relations and
Advertising
Public Relations and
Advertising
Specialized Publications
(e.g., Wine Spectator,
Trade Journal)
Specialized Publications
(e.g., Wine Spectator,
Trade Journal)
Food Cluster
Food Cluster
Tourism Cluster
Tourism Cluster
California
Agricultural Cluster
California
Agricultural Cluster
State Government Agencies
(e.g., Select Committee on Wine
Production and Economy)

Clusters and Competitiveness
Clusters increase productivity and efficiency
• Efficient
access
to specialized inputs, services, employees, information, institutions, and
“public goods” (e.g. training programs)
• Ease of
coordination
and transactions across firms
• Rapid
diffusion
of best practices
• Ongoing, visible
performance comparisons
and strong incentives to improve vs. local
rivals
Clusters stimulate and enable innovation
• Enhanced ability to
perceive
innovation opportunities
• Presence of multiple suppliers and institutions to assist in
knowledge creation
• Ease of
experimentation
given locally available resources
Clusters facilitate commercialization
• Opportunities for
new companies
and
new lines of established business
are more
apparent
•
Commercializing
new products
and starting new companies is easier
because of available
skills, suppliers, etc.
Clusters reflect the fundamental influence of
externalities / linkages
across firms and associated institutions in competition

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Levels of Clusters
• There is often an
array of clusters
in a given field in different locations, each with
different levels of specialization and sophistication
• Global
innovation centers
, such as Silicon Valley in semiconductors, are few in
number. If there are multiple innovation centers, they normally
specialize
in different
market segments
• Other clusters focus on
manufacturing,
outsourced
service functions,
or play the
role of regional assembly or service centers
• Firms based in the most advanced clusters often
seed or enhance clusters
in other
locations in order to reduce the risk of a single site, access lower cost inputs, or
better serve particular regional markets
• The challenge for an economy is to move from isolated firms to an array of
clusters
, and then to
upgrade the breadth and sophistication
of clusters to more
advanced activities

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Leading Footwear Clusters
Vietnam/Indonesia
• OEM Production
• Focus on the low cost
segment mainly for the
European market
China
• OEM Production
• Focus on low cost
segment mainly for the
US market
Portugal
• Production
• Focus on
short-production runs
in the medium price
range
Romania
• Production subsidiaries
of Italian companies
• Focus on lower to
medium price range
United States
• Design and marketing
• Focus on specific market
segments like sport and
recreational shoes and boots
• Manufacturing only in
selected lines such as
hand-sewn casual shoes and
boots
Source: Research by HBS student teams in 2002
Italy
• Design, marketing,
and production of
premium shoes
• Export widely to the
world market

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
General
General
General
• Chambers of Commerce
• Professional associations
• School networks
• University partner groups
• Religious networks
• Joint private/public advisory
councils
• Competitiveness councils
• Chambers of Commerce
• Professional associations
• School networks
• University partner groups
• Religious networks
• Joint private/public advisory
councils
• Competitiveness councils
Cluster-specific
Cluster-specific
Cluster-specific
• Industry associations
• Specialized professional
associations and societies
• Alumni groups of core cluster
companies
• Incubators
• Industry associations
• Specialized professional
associations and societies
• Alumni groups of core cluster
companies
• Incubators
Institutions for Collaboration
• Institutions for collaboration (IFC) are
formal
and informal organizations
that
- facilitate the exchange of information
and technology
- conduct joint activities
- foster coordination among firms
• IFCs can improve the business environment
by
-creating
relationships
and level of trust
that make them more effective
- defining of
common standards
- conducting or facilitating the organization
of
collective action
in areas such as
procurement, information gathering, or
international marketing
- defining and communicating common
beliefs and attitudes
- providing mechanisms to develop a
common economic or
cluster agenda

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Clusters as a Tool For Economic Policy
Overview
•A new way of thinking about an economy and organizing economic
development efforts
• Better aligned with the nature of competition and sources of
competitive advantage. Clusters capture important linkages in terms of
technology, skills, information, marketing and customer needs that cut
across firms and industries. Such linkages are fundamental to competition
and, especially, to the direction and pace of innovation
• Recast the role of the private sector, government, trade associations and
educational or research institutions
• Brings together firms of all sizes
• Creates a forum for constructive business-government dialog
• A means to identify common opportunities, not just common problems
• Provides guidance for both economic and social policies

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Topics
• The Concept of Clusters
• Key Issues in Five Thai Clusters
• From Analysis to Action

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Five Clusters in the Thai Economy
Employment and Wages
0
20,000
40,000
60,000
80,000
100,000
120,000
0% 5% 10% 15% 20% 25%
Food/Beverages
Textiles/Apparel
Automotive
Share of Thai Employment, 2000
Wage Level in Baht,
2000
Tourism
Software*
• The five clusters account for roughly 1/3 of Thai employment, with wages more
than twice the national average
Note: Software industry data is for 2001
Source: NESDB Data. Author’s analysis.

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
-1.0% -0.5% 0.0% 0.5%
Source: UNCTAD Trade Data, World Tourism Organization, Author’s analysis.
Change in Thailand’s World Export Share, 1995 - 2000
Thailand’s Export Performance By Broad Sector
1995-2000
Health Care
Food/Beverages
Entertainment
Office
(3.7%, +1.3%)
Personal
Textiles/Apparel
Transportation
Multiple Business
Thailand’s average
goods export share:
1.24%
Thailand’s average change in
world goods export share:
- 0.069%
D
D
= $1.5 billion
export volume
in 2000
+
Petroleum/Chemicals
Materials/Metals
+
World Export Share,
2000
Housing/
Household
• Thailand is losing position in areas of traditional strengths, and grows in others
Power
Semiconductors/Computers
Telecommunications
Defense
Forest Products
Tourism

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Clusters
• Automotive
• Fashion
•Food
•Tourism
• Software

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Automotive Cluster
Overview
• The Thai automotive cluster has the
opportunity
to leverage the existing
breadth of activities to become a significant regional production hub. However,
success is far from automatic
and requires determined action
• The cluster includes a wide breadth of foreign and domestic assemblers, part
producers, and specialized suppliers. It is significant in the Thai economy, but
has a
weak world market position
despite recent growth. Its
productivity level
is low; cost competitiveness is based on low factor input costs
• The strength of the cluster business environment lies in the strong presence of
locally-based suppliers
, the strong
physical infrastructure
, and the access to
the skills of foreign assemblers
• Its weaknesses are the mismatch between available work force skills and
company needs, the lack of innovative capacity, and the distortions to
competition from tariffs and complex tax rates
• Key action areas include the improvement of the cluster business environment
in education, institutions for technology assimilation, and the tariff/tax structures,
the closing of gaps in the cluster, for example production machinery, and the
creation of more effective private sector-led cluster institutions
Source: Based on Sasin-team analysis

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
The Thai Automotive Cluster
Motor-
cycles
Motor-
cycles
Pickup
Trucks
Pickup
Trucks
Components and Module Makers
(1
st
tier)
Engines, Drivetrains, Steering, Suspension, Brake, Wheel, Tire,
Bodyworks, Interiors, Electronics and Electrical Systems
Components and Module Makers
(1
st
tier)
Engines, Drivetrains, Steering, Suspension, Brake, Wheel, Tire,
Bodyworks, Interiors, Electronics and Electrical Systems
Parts (2
nd
& 3
rd
tiers)
Stamping, Plastics, Rubber, Machining, Casting, Forging,
Function, Electrical, Trimming
Parts (2
nd
& 3
rd
tiers)
Stamping, Plastics, Rubber, Machining, Casting, Forging,
Function, Electrical, Trimming
Steel
Steel
Plastics
Plastics
Electronics
Electronics
Rubber&Tires
Rubber&Tires
Testing
Testing
Finance
Finance
Government
Government
Education and
Technical
Institutions
Education and
Technical
Institutions
Associations
Associations
Specialized
Consultants
Specialized
Consultants
Distribution
Distribution
Leather &
Fabric
Leather &
Fabric
Glass
Glass
Tools
Tools
Mold&Die
Mold&Die
Jig&Fixture
Jig&Fixture
Machinery
Machinery
Assemblers
Passenger
Cars
Passenger
Cars
Services
Services
Globally Competitive
Regionally Competitive
Nationally Significant
Nationally Insignificant
Source: Sasin-team analysis

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Change in World Market Share, 1995-2000
Automotive Clusters in the World Economy
Top 25 Exporting Countries by Export Value, 2000
0.0
0.5
1.0
1.5
2.0
2.5
-3% -2% -1% 0% 1% 2%
USA
Japan
Germany
Canada
France
UK
Mexico
Note: RCA is defined as a country’s market share in the cluster divided by the country world market share across all exports
Source: UNCTAD Trade Data. Author’s analysis.
Spain
Italy
Korea
Belgium
Netherlands
China
Austria
Sweden
Brazil
Singapore
Czech R.
Switzerland
Poland
Hungary
Portugal
Finland
Thailand
Australia
Revealed Comparative
Advantage (RCA). 2000
D
D
= $35 billion
export volume
in 2000

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Pick-up Trucks
The Role of Demand Conditions
• Thai consumers predominantly buy pick-up trucks that can be used
for many different commercial and private uses
• Manufacturers react to the demand by offering more varieties of
pick-up truck models in Thailand than in any other national
market
• Thailand has a strong and growing position in the world export
market for pick-up trucks
– This is the only segment (apart from tires and rubber-related
products) in the automotive industry in which Thailand has a
revealed comparative advantage
– Thailand is the largest producer of pick-up trucks worldwide
behind the United States
•An opportunity for Thai companies to extend their capabilities in
the value chain and compete successfully on world markets
Source: Based on Sasin-team analysis

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Action Areas
• Upgrade the
cluster business environment
– E.g., Education
– E.g., Technology assimilation
– E.g., Tariff and taxation structure
• Fill
gaps in the cluster
– E.g., Production machinery
– E.g., Specialized services in testing and certification
• Create
private sector-led cluster institutions
for collaboration
– Collective action of the private sector requires effective supporting
institutional structures
• Cluster participants need to rethink competitiveness
– Real competitiveness is productivity, not “competitive” low wages
– Current thinking accepts a low productivity, low wage equilibrium that will
be unsustainable as the economy progresses
Source: Based on Sasin-team analysis

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Clusters
• Automotive
• Fashion
•Food
•Tourism
• Software

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Fashion Cluster
Overview
• Thailand is home to clusters in textiles/apparels, jewellery/gems, and leather
products. These clusters face
similar challenges
in moving away from being
no-brand suppliers to foreign producers, but they are
not one cluster
• The three clusters are important in the Thai economy, but are all losing
world
market position
from still high levels. The cluster is shallow, concentrating on
the
labor-intensive stages
of production, often using foreign inputs
• The strength of the cluster business environment lies in the availability of an
experienced low- to medium skill work force, the high level of competition
between domestic companies, and in the strong physical infrastructure
• Its weaknesses are the focus on competition based on
low factor input
costs, the low level of cooperation within the clusters’ different production
stages, and the distortions from government
trade policy
• Key action areas include the development of capabilities in the value chain,
especially in marketing, distribution, and branding, the creation of
cluster-wide institutions, the upgrading of government policies in trade
protection and export promotion, and the improvement of
cluster business
environment
conditions in, for example, education and the availability of
machinery
Source: Based on Sasin-team analysis

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Context for
Firm
Strategy
and Rivalry
Context for
Firm
Strategy
and Rivalry
Related and
Supporting
Industries
Related and
Supporting
Industries
Factor
(Input)
Conditions
Factor
(Input)
Conditions
Demand
Conditions
Demand
Conditions
Thai Fashion Clusters
Business Environment Assessment
z
Unsophisticated
home
demand
–
Sophisticated demand for
traditional Thai designs
z
Availability of
specialized
skills
in specific activities
based on old traditions
z
Sufficient
transportation
infrastructure
z
Lack of competent
designers
z
Lack of adequate domestic
research and
development
institutions
z
Weak linkages
between production
stages within the clusters
z
Reliance on imported
production
machinery
z
Dependence on
foreign designs
z
High degree of
competition
,
especially among small- and
medium sized producers
z
Competition based on
price
;
subcontracting
with foreign
companies
z
Comparatively high tariffs for
imported raw materials
Source: Based on Sasin-team analysis

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
-2.5% -2.0% -1.5% -1.0% -0.5% 0.0%
Source: UNCTAD Trade Data. Author’s analysis.
Change in Thailand’s World Export Share, 1995 - 2000
Thailand’s Export Performance in “Fashion” Clusters
1995-2000
Textiles/ Apparel
(without Leather
products)
Thailand’s
average goods
export share:
1.24%
D
D
= $1.5 billion
export volume
in 2000
World Export Share,
2000
Leather
products
Jewellery and
Precious Stones
Thailand’s average change in
world goods export share:
- 0.069%

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Change in World Market Share, 1995-2000
Textiles/Apparel Clusters in the World Economy
Top 25 Exporting Countries by Export Value, 2000
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
-3% -2% -1% 0% 1% 2% 3% 4%
USA
Japan
Germany
Pakistan
(8.9, -0.1%)
France
UK
Spain
Italy
Hong Kong
(6.7, -0.4%)
Netherlands
China
Belgium
Mexico
Brazil
Canada
Korea
Thailand
Australia
Singapore
Turkey
(5.0, +0.1%)
Indonesia
Denmark
Portugal
Switzerland
Malaysia
Revealed Comparative
Advantage (RCA). 2000
Note: RCA is defined as a country’s market share in the cluster divided by the country world market share across all exports
Source: UNCTAD Trade Data. Author’s analysis.
D
D
= $20 billion
export volume
in 2000

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Change in World Market Share, 1995-2000
Jewelry/Diamonds Sub-Clusters in the World Economy
Top 25 Exporting Countries by Export Value, 2000
0
1
2
3
4
5
6
7
8
-4% -2% 0% 2% 4%
USA
Germany
Israel
(31.3, +4.4%)
France
UK
Italy
China
Belgium
Mexico
Singapore
Canada
Thailand
Hong Kong
Turkey
Australia
South Africa*
Switzerland
Malaysia
Revealed Comparative
Advantage (RCA). 2000
*Only 2000 data available
Note: RCA is defined as a country’s market share in the cluster divided by the country world market share across all exports
Source: UNCTAD Trade Data. Author’s analysis.
D
D
Korea
Japan
= $5 billion
export volume
in 2000

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Action Areas
• Increase capabilities in the value chain
– E.g., Design
– E.g., Distribution
– E.g., Marketing
• Create cluster-wide institutions to create linkages between currently
antagonistic stages in the value chain
• Upgrade the cluster business environment
– E.g., Education
– E.g., Presence of machinery suppliers
– E.g., Tariff structure
– E.g., Export promotion
• Despite sharing similar challenges for upgrading competitiveness, a
case-by-case approach will be necessary to develop cluster specific
action plans
Source: Based on Sasin-team analysis

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Clusters
• Automotive
• Fashion
• Food
•Tourism
• Software

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Food Cluster
Overview
• The Thai food cluster faces the
challenge
to move from being a supplier of
commodity food products to distant foreign markets to become a provider of
distinct food products with own brands, access to distribution channels, and
direct understanding of customer needs
• The cluster is important in the Thai economy, but is losing
world market
position from a still high level. Its productivity level is low; companies
compete based on low factor input costs. The cluster is shallow, concentrating
on the
labor-intensive stages
of food processing using both domestic and
foreign raw materials
• The strength of the cluster business environment is the strong physical
infrastructure and the availability of an experienced low- to medium skill work
force
• Its weakness is the focus on competition based on
low factor input costs
, the
lack of innovative product development capacity and control of distribution
channels in distant global export markets, and the low level of coordination
across the cluster
• Key action areas include
streamlining government policy
towards the cluster,
upgrading the business environment, e.g. education and assimilation capability
of modern machinery, and developing capabilities in the value chain
Source: Based on Sasin-team analysis

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Change in World Market Share, 1995-2000
Food/Beverages Clusters in the World Economy
Top 25 Exporting Countries by Export Value, 2000
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
-2.5% -1.5% -0.5% 0.5% 1.5%
USA
Japan
Germany
Canada
France
UK
Spain
Italy
Belgium
(1.3, +4.3%)
Netherlands
China
Austria
Mexico
Brazil
Ireland
Russia
Thailand
Australia
Denmark
Argentina
(5.7, +0.3%)
New Zealand
(6.8, +0.1%)
Indonesia
Malaysia
Chile
Norway
Revealed Comparative
Advantage (RCA). 2000
Note: RCA is defined as a country’s market share in the cluster divided by the country world market share across all exports
Source: UNCTAD Trade Data. Author’s analysis.
D
D
= $40 billion
export volume
in 2000

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Change in World Market Share, 1995-2000
Food/Beverages Clusters in South East Asia
Top Exporters by 2000 Export Value
0.00
0.50
1.00
1.50
2.00
2.50
-0.5% -0.4% -0.3% -0.2% -0.1% 0.0% 0.1% 0.2%
Singapore
Thailand
Philippines
Indonesia
Malaysia
Revealed Comparative
Advantage (RCA). 2000
Note: RCA is defined as a country’s market share in the cluster divided by the country world market share across all exports
Source: UNCTAD Trade Data. Author’s analysis.
D
D
= $3 billion
export volume
in 2000

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Thai Food Export, 2000
Subcluster
Subcluster
World Market
Share
World Market
Share
Change in Share
1995 - 2000
Change in Share
1995 - 2000
Value
(in $1,000)
Value
(in $1,000)
Vegetables, Prepared
Fish, Processed
Rice, Cereals, Prepared
Molasses
Shell Fish, Fresh/Chilled/Frozen
Fruit,Preserved,Prepared
Rice, Cereals
Sugar
Vegetables, Processed
Meats, Processed
Other Animal Food
Starches,Sugars
Fruit, Preserved, Prepared
Vegetables, Preserved
Crude Vegetable Materials
Food Preparation Products
Fish, Fresh/Chilled/Frozen
Fruit Juice
Vegetables
Other Beverages
Spices
Meats, Fresh/Chilled/Frozen
Other Fruits
Fats
Sugar, Processed
Vegetables, Prepared
Fish, Processed
Rice, Cereals, Prepared
Molasses
Shell Fish, Fresh/Chilled/Frozen
Fruit,Preserved,Prepared
Rice, Cereals
Sugar
Vegetables, Processed
Meats, Processed
Other Animal Food
Starches,Sugars
Fruit, Preserved, Prepared
Vegetables, Preserved
Crude Vegetable Materials
Food Preparation Products
Fish, Fresh/Chilled/Frozen
Fruit Juice
Vegetables
Other Beverages
Spices
Meats, Fresh/Chilled/Frozen
Other Fruits
Fats
Sugar, Processed
21.64%
18.48%
16.94%
15.94%
13.83%
12.24%
9.50%
9.29%
7.87%
4.87%
3.26%
3.20%
3.10%
2.68%
2.33%
2.19%
2.04%
1.82%
1.56%
1.44%
1.25%
1.20%
1.16%
1.14%
1.04%
21.64%
18.48%
16.94%
15.94%
13.83%
12.24%
9.50%
9.29%
7.87%
4.87%
3.26%
3.20%
3.10%
2.68%
2.33%
2.19%
2.04%
1.82%
1.56%
1.44%
1.25%
1.20%
1.16%
1.14%
1.04%
-9.42%
2.63%
-3.46%
1.07%
-3.88%
-1.63%
-0.36%
-1.54%
-5.20%
2.97%
0.67%
-0.67%
-0.47%
-0.70%
0.31%
0.36%
-0.48%
-0.50%
-1.18%
-0.23%
0.42%
0.09%
0.34%
0.84%
0.12%
-9.42%
2.63%
-3.46%
1.07%
-3.88%
-1.63%
-0.36%
-1.54%
-5.20%
2.97%
0.67%
-0.67%
-0.47%
-0.70%
0.31%
0.36%
-0.48%
-0.50%
-1.18%
-0.23%
0.42%
0.09%
0.34%
0.84%
0.12%
$4,044
$2,091,233
$1,667,088
$38,723
$1,865,019
$322,397
$83,258
$640,107
$23,689
$349,391
$290,093
$134,215
$66,200
$130,211
$16,727
$324,241
$379,540
$109,842
$261,082
$72,358
$23,674
$427,738
$196,749
$31,924
$50,397
$4,044
$2,091,233
$1,667,088
$38,723
$1,865,019
$322,397
$83,258
$640,107
$23,689
$349,391
$290,093
$134,215
$66,200
$130,211
$16,727
$324,241
$379,540
$109,842
$261,082
$72,358
$23,674
$427,738
$196,749
$31,924
$50,397
Note: Line indicates benchmark for revealed comparative advantage
Source: UNCTAD Trade Data. Author’s analysis.

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Action Areas
• Increase
capabilities in the value chain
by, for example, internationalizing in
new markets
– E.g., Product Development
– E.g., Marketing and Branding
– E.g., Distribution
• Streamline
government policy
towards the cluster
– Coordination unit for policies of the wide range of government agencies
affecting the food cluster
– Concerted strategy for food cluster in international trade talks
• Upgrade the
cluster business environment
– E.g., Education
– E.g., Presence of machinery suppliers
– E.g., Tariff structure
– E.g., Export promotion
• The food cluster covers many different product groups that will often require
specific action, not unlike the different fashion clusters
Source: Based on Sasin-team analysis

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Clusters
• Automotive
• Fashion
•Food
• Tourism
• Software

33
Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Tourism Cluster
Overview
• Thailand’s tourism cluster has grown successfully, but is now facing the
challenge
of securing past success and moving to the next stage. The cluster
needs to move from competing on
assets endowed by nature to assets
created by the cluster
• Tourism is one of the most important clusters in the
Thai economy
. It is
significant internationally, but has lost position recently. The cluster has a
broad range of tourism related activities, but lacks effective cooperation
across the cluster
• The strength of the cluster business environment lies in the access to
beautiful locations and a rich culture, the stiff competition between local
tourist agencies, a generally good
physical infrastructure
, and a broad range
of
related services
in most tourism locations
• Its weaknesses are the focus on price-based competition, the mismatch
between workforce skills and the needs of companies, the lack of common
quality standards and marketing efforts, and selected problems in physical
infrastructure
• Key action areas include creating effective service standards, aligning
educational programs with cluster needs, providing more value-added
attractions, and unifying the cluster’s many institutions to develop a
shared strategic vision
Source: Based on Sasin-team analysis

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Thai Tourism Cluster
Shopping Restaurants
Domestic
transportation
Entertainment
International
transportation
Tour
operator
Tour Agency
Hotels
Food
Food
Souvenirs
Souvenirs
Construction
and building
material
Construction
and building
material
Suppliers
PR & Media
PR & Media
Financial
services
Financial
services
Service providers
Core activities
Education and Training Institute
• The International Hotel
and Tourism Industry
Management School
(I-TIM)
• Dusit Thani College
•…
Education and Training Institute
• The International Hotel
and Tourism Industry
Management School
(I-TIM)
• Dusit Thani College
•…
Government Agencies
• Ministry of Tourism and Sports
• Tourism Authority of Thailand (TAT)
• Ministry of Natural Resources
and Environment
• Ministry of Commerce
•…
Government Agencies
• Ministry of Tourism and Sports
• Tourism Authority of Thailand (TAT)
• Ministry of Natural Resources
and Environment
• Ministry of Commerce
•…
Source: Sasin-team analysis

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
0
500
1,000
1,500
2,000
-16% -12% -8% -4% 0% 4% 8% 12% 16%
% CAGR Receipt/tourist, 1997-2000
Receipt/tourist 2000(USD)
Singapore
Thailand
Australia
Germany
United States
Indonesia
France
Greece
Korea
Egypt
Poland
Hong Kong
Netherlands
Switzerland
UK
Spain
China
Canada
= 1% of world
market share
Source: World Tourism Organization (WTO), Sasin team analysis
Tourism Clusters in the World Economy

36
Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
$1,201.12
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
Economic Performance of the Thai Tourism Cluster
Revenue per Tourist over Time
Source: TAT, World Tourism Organization
In Thai Baht
In US-Dollar
Receipts per
Tourist in
Thailand
$749

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Action Areas
• Create effective
service standards
that reflect the goals of Thai tourism
• Upgrade the cluster business environment
– E.g., Education
– E.g., Value-added attractions
– E.g., Accessibility (airline market regulation, cruise ship facilities, …)
•
Unifying the cluster’s many institutions
to develop a shared strategic
vision
• The reaction to SARS exemplifies the lack of long-term strategic direction
– Developing
domestic demand
is important, but will require a more
long-term approach
– Reducing prices does not alleviate international tourists’ concerns but
erodes the clusters pricing position in the long term
Source: Based on Sasin-team analysis

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Clusters
• Automotive
• Fashion
•Food
•Tourism
• Software

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Software Cluster
Overview
• Thailand’s software cluster is small and has no significant position on
world markets, although some companies are successful in niches like
graphic design. The potential for Thai software is as a cross-cluster
resource for the domestic economy and in services related to other
strong Thai clusters,
• Thai software companies pay high wages, but employee few people
and have insignificant exports. Rather than functioning as a cluster,
Thai software companies operate as suppliers to many different Thai
industries and clusters
• The companies’ business environment has few clear strengths.
Companies have access to software parks, pockets of specialized
skills, and an advantageous geographic location between India and
Japan
• Its weaknesses are the low availability of specialized skills, the weak
information technology infrastructure, the weak science and
technology system (universities, IPR protection), and
unsophisticated local demand
Source: Based on Sasin-team analysis

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
The Role of Software for the Thai Economy
Export Cluster
Export Cluster
•Niches
• Related to other, stronger
clusters
• Need for upgrading the currently
unfavorable cluster business
environment
•Niches
• Related to other, stronger
clusters
• Need for upgrading the currently
unfavorable cluster business
environment
Cross-Cluster Resource
Cross-Cluster Resource
• Enable more effective IT use in
all sectors of the economy
• Need for upgrading the IT
absorption capability of Thai
companies
• Enable more effective IT use in
all sectors of the economy
• Need for upgrading the IT
absorption capability of Thai
companies

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Action Agenda
• Consolidation of government policies related to software in
ministry for ICT
• Liberalization of the telecommunications markets
• Implementation of IT legislation, especially on IPR protection
• Cross-cluster resource
– Initiatives with other industry associations to identify barriers for IT use
– Inclusion of IT education in vocational training programs
• Export cluster
– Further investments in educational programs for programmers and
other specialized employees
– Concerted effort to certify software companies
– Build relations with strong export clusters
– Strengthening of the cluster association
Source: Based on Sasin-team analysis

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Vision fails to set the
right direction for the
cluster
Vision fails to set the
right direction for the
cluster
Vision is removed
from clusters’ current
challenges
Vision is removed
from clusters’ current
challenges
Vision communicates
feasible and
ambitious goal
Vision communicates
feasible and
ambitious goal
Thailand’s Vision: World Leader in Niche Markets
Selected Niches
Food:
Kitchen of the
World
Food:
Kitchen of the
World
Fashion:
Asia Tropical
Fashion
Fashion:
Asia Tropical
Fashion
Tourism:
Asia Tourism
Capital
Tourism:
Asia Tourism
Capital
Automotive:
Detroit of Asia
Automotive:
Detroit of Asia
Software:
World Graphic
Design Center
Software:
World Graphic
Design Center

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Topics
• The Concept of Clusters
• Key Issues in Five Thai Clusters
• From Analysis to Action

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Shifting Responsibilities for Economic Development
Old Model
Old Model
•
Government
drives economic
development through policy
decisions and incentives
•
Government
drives economic
development through policy
decisions and incentives
New Model
New Model
• Economic development is a
collaborative process
involving
government at multiple levels,
companies, teaching and
research institutions, and
institutions for collaboration
• Economic development is a
collaborative process
involving
government at multiple levels,
companies, teaching and
research institutions, and
institutions for collaboration

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Appropriate Roles of Government
in Cluster Development
• A successful cluster policy builds on sound overall economic
policies
• Government should support the development of all clusters, not
choose among them
• Government policy should reinforce established and emerging
clusters rather than attempt to create entirely new ones
• Government’s role in cluster initiatives is as facilitator and
participant. The most successful cluster initiatives are a
public-private partnership

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
The Role of Government in Cluster Development:
Illustrative Cluster-Specific Policies
Related and
Supporting
Industries
Related and
Supporting
Industries
Factor
(Input)
Conditions
Factor
(Input)
Conditions
Demand
Conditions
Demand
Conditions
Context for
Firm
Strategy
and Rivalry
Context for
Firm
Strategy
and Rivalry
• Create specialized
education and training
programs
• Establish local university
research efforts in
cluster-related technologies
• Support cluster-specific
information gathering and
compilation
• Improve specialized
transportation,communications
, and other infrastructure
required by cluster
• Sponsor forums to bring together cluster participants
• Cluster-specific efforts to attract suppliers and service
providers from other locations
• Establish cluster-oriented free trade zones, industrial
parks, or supplier parks
• Eliminate barriers to local
competition
• Focus efforts to attract
foreign investment around
clusters
•Focus export promotion
around clusters
• Organize relevant
government departments
around clusters
• Create streamlined,
pro-innovation regulatory
standards affecting the cluster to
-
reduce regulatory uncertainty
-
stimulate early adoption
-
encourage innovation or new
products and processes
• Sponsor independent testing,
product certification, and
rating services for cluster
products/services
•Act as sophisticated buyer of
the cluster’s products / services

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Cluster Policy versus Industrial Policy
Industrial
Policy
Industrial
Policy
Cluster-based
Policy
Cluster-based
Policy
• Target desirable industries /
sectors
• Focus on domestic companies
• Intervene in competition (e.g.,
protection, industry promotion,
subsidies)
• Centralizes decisions at the
national level
•
All
clusters can contribute to prosperity
• Domestic and foreign companies both
enhance productivity
• Relax impediments and constraints to
productivity
• Emphasize cross-industry linkages /
complementarities
• Encourage initiative at the state and
local level
Distort competition Enhance competition

48
Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
• Create more competition
• Lose employees to spinoffs
• Bid up costs
Company Attitudes Towards Clusters
• Increase efficiency
• Increase flexibility
• Increase information
• Foster innovation
• Most cluster participants are
not direct competitors

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Role of the Private Sector in Economic Development
• A company’s competitive advantage is partly the result of the
local
environment
• Company membership in a cluster offers collective benefits
• Private investment in “public goods” is justified
• Take an
active role
in upgrading the local infrastructure
•Nurture
local suppliers
and attract new supplier investments
• Work closely with local educational and research institutions to upgrade
quality and create specialized programs addressing cluster needs
• Provide government with
information
and
substantive input
on regulatory
issues and constraints bearing on cluster development
• Focus
corporate philanthropy
on enhancing the local business environment
• An important role for trade associations
– Greater influence
– Cost sharing

50
Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Private Sector Influences on Cluster Upgrading
Context for
Firm
Strategy
and Rivalry
Context for
Firm
Strategy
and Rivalry
Related and
Supporting
Industries
Related and
Supporting
Industries
Factor
(Input)
Conditions
Factor
(Input)
Conditions
z
Work with government
to streamline
regulations and modify
them to encourage
innovation
z
Establish local testing
and standards
organizations
z
Establish a cluster-based trade association
z
Encourage local supplier formation and
attract local investments by suppliers based
elsewhere through individual and collective
efforts
z
Market jointly through
trade fairs and delegations
z
Collaborate with
government export
promotion efforts
z
Create directories of
cluster participants
Demand
Conditions
Demand
Conditions
z
Jointly develop specialized
vocational, technical, college and
university curricula
z
Sponsor specialized university
research centers
z
Collect cluster information through
trade associations
z
Maintain close liaison with
infrastructure providers to address
specialized cluster needs (e.g.,
data communications, logistics)
z
Develop courses for managers on
regulatory, quality, and managerial
issues

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Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
New Roles of Industry Associations
• Competitive advantage
resides solely
inside
a
company or in its
industry
• Competitive success
depends primarily on
company choices
• Competitive advantage (or
disadvantage) resides partly in
the
locations
at which a
company’s business units are
based
•
Cluster participation
is an
important contributor to
competitiveness
Traditional Emerging
Traditional Roles
Traditional Roles
New Roles
New Roles
• Lobby government
- Trade and regulations
• Convene meetings for networking
• Lobby government
- Trade and regulations
• Convene meetings for networking
• Negotiate with government
- Trade and regulations
• Information collection and dissemination
- E.g. regular benchmarking
•Joint marketing
- E.g. trade fairs, missions
•Training
- E.g. curriculum for managers
- Close collaboration with outside
educational institutions
- Sponsoring of targeted scholarships
• Research
- E.g university partnerships
- Standard setting and testing
- Specialized research institutes
• Procurement
- E.g. joint purchasing programs
• Environmental
- E.g. demonstration projects
- Research sponsorship
• Negotiate with government
- Trade and regulations
• Information collection and dissemination
- E.g. regular benchmarking
• Joint marketing
- E.g. trade fairs, missions
•Training
- E.g. curriculum for managers
- Close collaboration with outside
educational institutions
- Sponsoring of targeted scholarships
• Research
- E.g university partnerships
- Standard setting and testing
- Specialized research institutes
• Procurement
- E.g. joint purchasing programs
• Environmental
- E.g. demonstration projects
- Research sponsorship
Cluster activation and enabling

52
Copyright 2003 © Professor Michael E. PorterCAON Thailand CLUSTERS 2003 05-05-03 CK.ppt
Cluster Activation
Getting Started
• Bring together cluster companies, trade associations, educational
institutions, and government agencies
• Discuss the present analysis of the clusters
– Identify need for further analysis
– Prioritize critical issues for action
• Organize working groups to develop action plans to address the
critical issues identified
• While the government and outside agencies can provide start-up
support and facilitation, successful cluster efforts tend to be driven
by private sector leaders