You Don't Need to Be a Harvard Grad to Make Money with This Strategy

Michael Porter is one of the world's leading authorities on the subjects of corporate strategy and the competitiveness of nations. His books and case studies form the foundation for many business school curriculums. As a Harvard Business School professor he has helped many CEO's position their companies for success.

It can be hard to decipher such nebulous topics as strategy since there are so many variables: what's the timeframe? Who are the stakeholders? What are the threats? And so on...

There is no such mystery surrounding China's strategy for world domination right now however. And you don't need to be an Ivy School MBA to understand why you need to care - and how you can potentially profit.

We'll use one of Porter's simple and elegant business school models to explain why - the value chain. In its simplest form, the value chain analyzes the activities through which a country (or company) can gain advantage over its competitors.

There are five value chain activities, and each step up the value chain is supposed to add value above the cost of achieving that next step.

This image from QuickMBA helps explain. As an example in the second activity, the operations of China's economy - for instance the manufacturing sector - adds tremendous value to inbound materials. This activity is what has fueled much of American consumerism over the past 25 years.

In the context of China's goal to become a global economic leader, this simple model means that China is working on 5 fronts simultaneously - all with the goal of moving its entire economy up the value chain to the point where it is a global exporter of technology and high value services.

One recent example of this strategy playing out was the 2005 buyout of IBM's IBM PC business by China's number one computer maker, Lenovo. Lenovo's chairman, Liu Chuanzhi, clearly referred to the acquisition as helping China achieve its strategy to move up the value chain when he commented, "This acquisition will allow Chinese industry to make significant inroads on its path to globalization."

If you think I'm trying to pull some voodoo-magic with this model - don't be so quick to stick a pin in my eye.

You need to care about this if you want to make money investing over the next decade - period.

Right now, companies around the world are trying to figure out how they can be a piece of the puzzle that will help China achieve its goal to create high value goods and services. Not necessarily because they want to help the 1.3 billion people that live in China, but because doing so will help their own company gain advantage over its competitors.

China's progress toward its goal has been astounding. Consider the following comparisons from consulting group Accenture. The 'gap' is the number of years difference between China and the U.S. on four competitive fronts, from low value to high value: OEM (Original Equipment Manufacturer), ODM (Original Design Manufacturer), OBM (Original Branded Manufacturer), and finally to high value services.

The punch-line of this image is that in the 1980's China looked like the United States in 1900 in terms of its manufacturing competitiveness. That's a comfortable 80 year gap for the U.S.

In 2005, China looked more like the U.S. in 1990. That's only a 15 year gap - not quite as comfortable a margin.

And that comparison was from 6 years ago.

The way things are going I wouldn't want to bet against China right now. But I would want to invest in the things that China needs in order to continue to close the gap with the rest of the world.

It should come as no surprise that on the top of the 'recommended investment' list are resources, and more specifically energy sources.

As China looks to move even further up the value chain it needs to acquire raw materials, not only for manufacturing, but simply to keep the power on. It's hard to build a service oriented economy when there's nothing to power the computers and servers.

So what resources does China buy?

The majority of China's imports are fuels, followed by iron ore and copper alloys.

Your investing strategy? Buy shares of strong companies that provide fuels, iron ore, and copper alloys to China and you'll have a shot at moving up along the value chain with the world's most populous country.

You don't need to be a Harvard Business School professor to understand that this strategy will help you achieve investment success. You just need to act.

Further Reading: There is one fuel that eludes the headlines, and China is going after it in a big way. That fuel is Liquefied Natural Gas (LNG). One of LNG's benefits over dry natural gas is that LNG is easy to transport - meaning that shippers can deliver it to China's ports relatively easily.

Right now, China and other undeveloped countries in Asia are lining up supplies of LNG to start being delivered in 2014.

The big boy in this space is Exxon Mobil XOM (Full disclosure: I own shares of XOM in my personal investment account). But you won't see much of a change in the price of Exxon's stock as China starts to take delivery of LNG.

To help investors really cash in on China's drive to increase its competitiveness, Small Cap Investor Pro Lead analyst Tyler Laundon and I recently uncovered a small exploration company with potentially huge LNG reserves. If these reserves are proved to exist, this company will be trying to move up its value chain and start exporting LNG to China and the rest of Asia.

This company is a recent addition to the Small Cap Investor PRO portfolio. So recent in fact that we haven't even had a chance to update the coverage beyond our original research report on the company yet. The report is only for paying subscribers, so you'll want to sign up here - then go to our 'Weekly Letter' section and read 'The Best Oil and Gas Prospects are in the Undeveloped World.