michael e porter presentation

Copyright 2016 © Professor Michael E. Porter120160930 – Porter Prize India – V3

Competitiveness and Clusters:Implications for Government and Companies

Professor Michael E. PorterPorter Prize India 2016

Harvard Business School

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 (World Economic Forum), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008), and ongoing research on clusters and competitiveness. 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

http://www.isc.hbs.edu/


Perspectives on the Sources of Company Success

• Competitive advantage resides inside a company

• Competitive success depends primarily on company choices

Internal

• Competitive advantage resides partly in the locations at which a company’s business units are based

• Cluster participation is a major contributor to company success

External


Prosperity PerformanceSelected Countries

High and ImprovingAverage: +1.74%

Average: $25,473

Low but Improving

-2.5% -1.5% -0.5% 0.5% 1.5% 2.5% 3.5% 4.5% 5.5% 6.5% 7.5% 8.5% 9.5%$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

$55,000

$60,000

$65,000

$70,000

$75,000

Australia

Austria

Bangladesh

Belgium

Brazil

Canada

Chile

China

Czech Republic

Denmark

Egypt

Estonia

Finland France

Germany

GreeceHungary

Iceland

India

Indonesia

Iran

Ireland

Israel

Italy

Japan

Latvia

Luxembourg

Mexico

Netherlands

New Zealand

Nigeria

Norway

PakistanPhilippines

PolandPortugal

Russia

SlovakiaSlovenia

South Africa

South Korea

Spain

Sweden

Switzerland

Turkey

United Kingdom

Vietnam

Growth in Real GDP per Capita (PPP $US at 2005 prices), CAGR, 2005-2015

PPP-Adjusted Real GDP per Capita, 2015 ($USD at 2005 prices)

United States

High but Lagging

Low and Lagging


• Competitiveness depends on the long-run productivity of a location as a place to do business

- Productivity of existing firms and workers- Enabling high participation of citizens in the workforce

• Competitiveness is not:- Low wages- A weak currency- Jobs per se

• Successful economic development requires improving competitiveness

A nation or region is competitive to the extent that firms operating there are able to compete successfully in the national and global economy while maintaining or improving wages and living standards for the average citizen

What is Competitiveness?


Macroeconomic Competitiveness

Microeconomic Competitiveness

Sophisticationof Company

Operations andStrategy

Quality of the Business

Environment

State of Cluster Development

Endowments

Human Development and Effective

Public Institutions

Sound Monetary and Fiscal Policies

What Determines Competitiveness?

• Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition, revealed at the level of firms, clusters, and regions

• Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not sufficient to ensure productivity

• Endowments, including natural resources, geographical location, population, and land area, create a foundation for prosperity, but true prosperity arises from productivity in the use of endowments


Assessing the Quality of the Business EnvironmentThe Diamond Model

Context for Firm Strategy and Rivalry

Related and Supporting Industries

Factor(Input)

ConditionsDemand

Conditions

• Sophisticated and demanding local needs– e.g., Strict quality, safety, and

environmental standards– Sophisticated demand in the private

sector or government

• Many things in the business environment matter for competitiveness• Successful economic development is a process of successive upgrading, in which the

business environment improves to enable increasingly sophisticated ways of competing

• Local rules and incentives that encourage investment and productivity– e.g. incentives for capital investment,

IP protection– Sound corporate governance

and accountability• Open and vigorous local competition

− Openness to competition− Strict competition laws• Improving access to high quality

business inputs– Qualified human resources– Capital availability– Physical infrastructure– Scientific and technological

infrastructure– Administrative and regulatory

infrastructure • Availability and quality of suppliers and supporting industries


Ease o

f Doin

g Bus

iness

Ran

k

Protec

ting I

nves

tors

Getting

Cred

it

Getting

Elec

tricity

Trading

Across

Borders

Resolv

ing In

solve

ncy

Regist

ering

Propert

y

Startin

g a Bus

iness

Paying

Taxes

Enforci

ng C

ontra

cts

Dealing

with

Con

struc

tion P

ermits

0102030405060708090

100110120130140150160170180190

Business Environment Indicators Ease of Doing Business Rankings, India

Ranking, 2016 (vs. 189 countries)

Favorable

India’s GDP per capita Rank: 125

Unfavorable

Ease o

f Doing B

usines

s

Overal

l Ran

k

Source: World Bank Report, Doing Business (2016)


• A group of interconnected companies and associated institutions in a particular field, in a particular region, that are mutually reinforcing

Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden

What is a Cluster?

Tourism in Cairns, Australia


Pharmaceuticals in Andhra Pradesh

Source: MOC Student Project 2013

Pharmaceutical Companies(MNCs, Domestic Companies, SOEs)

Chemical Suppliers

Printing & Packaging Material Suppliers

Testing Laboratories

Energy

Suppliers

International Institutions(US FDA, EDQUM in Europe, ISO, ICH,

GLP, GCP, etc.)

Marketers, BDS & Agents

CFA and Stockists

Hospitals

Pharma Resellers

Pharmacies

Distributors / Customers

Multi-lateral Agencies (e.g. WHO)

Pharma Machinery Manufacturers

Law Firms

Transportation & Logistics

Supporting Industry

Financial Inst.

IT / ITES

Related Industries

Medical Tourism

Medical Devices

Agribusiness

Health Insurance

Bulk Mfg. Contract R&D

Formulation Mfg.

Institutions for Collaboration

Industry Associations (BDMA, OPPI,

NDMA, PASS etc)

Education & Research

(Pharma Colleges;

Research Inst. - NIPER, CCMB,

IICT etc)

Government(Central, State, Patent Office)

Government, Regulatory, Quality


Institutions of Collaboration (IFCs)The Australian Wine Cluster

Wine Industry National Education and Training Council

Established 1995 Focus: Coordination, integration, and standard

maintenance for vocational training and education Funding: Government; cluster organizations

Cooperative Centre for Viticulture Established 1991 Focus: Coordination of research and education

policy in viticulture Funding: Cluster organizations

Australian Wine Export Council Established 1992 Focus: Wine export promotion through international

offices in London and San Francisco Funding: Government; cluster organizations

Winemakers’ Federation of Australia Established 1990 Focus: Public policy representation of companies in

the wine cluster Funding: Member companies

Grape and Wine R&D Corporation Established 1991 as statutory body Focus: Funding of research and development

activities Funding: Government; statutory levy

Wine Industry Information Service Established 1998 Focus: Information collection, organization, and

dissemination Funding: Cluster organizations

Source: Porter/Solvell, The Australian Wine Cluster – Supplement, HBS 2002


Why Clusters Matter?

• Clusters increase productivity, operational efficiency, and regional economic performance

• Clusters stimulate and enable innovations

• Clusters facilitate resilience, commercialization, and new business formation

• Clusters reflect the fundamental importance to productivity and innovation of linkages and spill-overs across firms and associated institutions that occur within geographic areas

• Clusters have a powerful impact on the range of strategic options that are available to firms in a given location


Geographic Influences on Competitiveness

• States and regions are the most important economic unit for competitiveness in larger countries, especially countries beyond subsistence development

Regions

States

Nation


• Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas)

The Role of Regions in Economic Development


Prosperity PerformanceIndian States, 2005-2014

Gross Domestic Product per Capita Real Growth Rate, 1999 to 2009

Note: Growth rate is calculated as compound annual growth rate. Source: CEIC.

Gross Domestic Product per Capita Real Growth Rate, 2005 to 2014

Gross Domestic Product per Capita, 2014

(2005 Indian Rupees)

High and Improving

Low and Lagging

India Overall: 45,750₹

India Overall: 6.6%

High but Lagging

Low but Improving

1% 3% 5% 7% 9% 11% 13% ₹ 0

₹ 20,000

₹ 40,000

₹ 60,000

₹ 80,000

₹ 100,000

₹ 120,000

₹ 140,000

₹ 160,000

Andaman & Nicobar Islands

Andhra Pradesh

Arunachal Pradesh

Assam

Bihar

Chandigarh

Chattisgarh

Delhi

Goa

Gujarat

Haryana

Himachal Pradesh

Jammu & Kashmir

Jharkhand

Karnataka

Kerala

Madhya Pradesh

Maharashtra

Manipur

Meghalaya

Mizoram

Nagaland

Odisha

Puducherry

Punjab

Rajasthan

Sikkim

Tamil Nadu

Telangana

Tripura

Uttar Pradesh

Uttarakhand

West Bengal



• Many essential levers of competitiveness reside at the regional level

• Regional economies include both local and traded clusters

• Regions specialize in different traded clusters



Boston, MA-NHEducation and Knowledge CreationFinancial ServicesIT and Analytical InstrumentsBiopharmaceuticals

Los Angeles, CAVideo Production & DistributionApparelMusic & Sound RecordingMedical Devices

San Jose-San Francisco, CAIT and Analytical InstrumentsBiopharmaceuticalsVideo Production & DistributionMarketing, Design & Publishing

New York, NY-NJ-CT-PAFinancial ServicesMarketing, Design and PublishingPerforming ArtsMusic and Sound Recording

Seattle, WAAerospace Vehicles and DefenseIT and Analytical InstrumentsWater TransportationFishing and Fishing Products

Chicago, IL-IN-WIDistribution & E-CommerceTransportation and LogisticsFinancial ServicesUpstream Metal Manufacturing

Denver, COBusiness ServicesMedical DevicesHospitality and TourismOil and Gas Production

Raleigh-Durham, NCLivestock ProcessingVulcanized and Fired MaterialsTextile ManufacturingEducation and Knowledge Creation

Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.

Pittsburgh, PAUpstream Metal ManufacturingCoal MiningElectric Power GenerationVulcanized and Fired Materials

San Diego, CARecreational & Small Electric GoodsBiopharmaceuticalsWater TransportationMarketing, Design & Publishing

Atlanta, GATextile ManufacturingApparelCommunications EquipmentBusiness Services

DallasAerospace Vehicles and DefenseOil and Gas ProductionCommunications EquipmentTransportation and Logistics

Houston, TXOil and Gas ProductionConstruction Products & ServicesUpstream Chemical ProductsEnvironmental Services

16

Cluster Specialization in U.S. Regions



• Many essential levers of competitiveness reside at the regional level

• Regional economies include both local and traded clusters

• Regions specialize in different traded clusters

• The cluster portfolio and strength directly impacts not only regional performance but the path of development



The Evolution of Regional EconomiesSan Diego

U.S. Military

CommunicationsEquipment

Sporting Goods

Analytical Instruments

Power Generation

Aerospace Vehiclesand Defense

Transportationand Logistics

Information Technology

1910 1930 1950 19901970

Bioscience Research Centers

Climate and Geography

Hospitality and Tourism

Medical Devices

Biotech / Pharmaceuticals

Education andKnowledge Creation


Towards a New Economic Development Model• Focuses on competitiveness, not on jobs per se

• Cluster-based, reflecting the core drivers of jobs and wages in today’s global economy

• Bottom-up and regionally based, not only top-down

• Driven by an overall strategy rather than a list of actions

• Data driven and fact based, not political or based on wishful thinking

• Builds on existing and potential regional and local strengths, not just focus on reducing weakness

• Prioritized and sequenced, not treating all weaknesses equally

• Harnesses collaboration across a wide range of actors and institutions, including firms, educational institutions, and new types of economic development organizations, not driven by government

Copyright 2016 © Professor Michael E. Porter2020160930 – Porter Prize India – V3cc

Clusters

Specialized Physical Infrastructure

Natural Resource Protection

Science and TechnologyInfrastructure (e.g., centers, university departments, technology transfer)

Education and Workforce Training

Business Attraction

Export Promotion

• Clusters provide a framework for organizing the implementation of many public policies and public investments directed at economic development

Quality and Environmental standards

Market Information and Disclosure

Organize Public Policy Around Clusters


Cluster-Based Economic Development in India

• The Indian government through the Ministry for SMEs has a history of supporting cluster initiatives

• The focus of these programs is the upgrading of SMEs in traditional sectors, using moderate funds to enable networking and key support activities

• Recently the Indian government has started to collaborate with IIMA and HBS in the systematic mapping of clusters across the country

• Cluster-based approaches are a powerful instrument to design and implement key elements of the Indian government’s agenda for competitiveness upgrading, including the ‘Make in India’ initiative

• Cluster-based development is significantly enhanced by connecting SMEs to larger companies and foreign investors, and engaging the science system

22 Copyright 2011 © Professor Michael E. Porter

Implications for Indian Business Leaders

• Indian firms have a significant stake in improving India’s and state competitiveness

• Business needs to be an active partner with government at multiple levels– Cluster initiatives – Skill development– Supplier development– Collaboration with research institutions

• Engaging with public and private sector partners to create a better environment for productivity and innovation is a crucial strategic priority for Indian business leaders