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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
Copyright 2016 © Professor Michael E. Porter220160930 – Porter Prize India – V3
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
Copyright 2016 © Professor Michael E. Porter320160930 – Porter Prize India – V3
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
Copyright 2016 © Professor Michael E. Porter420160930 – Porter Prize India – V3
• 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?
Copyright 2016 © Professor Michael E. Porter520160930 – Porter Prize India – V3
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
Copyright 2016 © Professor Michael E. Porter620160930 – Porter Prize India – V3
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
Copyright 2016 © Professor Michael E. Porter720160930 – Porter Prize India – V3
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)
Copyright 2016 © Professor Michael E. Porter820160930 – Porter Prize India – V3
• 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
Copyright 2016 © Professor Michael E. Porter920160930 – Porter Prize India – V3
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
Copyright 2016 © Professor Michael E. Porter1020160930 – Porter Prize India – V3
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
Copyright 2016 © Professor Michael E. Porter1120160930 – Porter Prize India – V3
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
Copyright 2016 © Professor Michael E. Porter1220160930 – Porter Prize India – V3
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
Copyright 2016 © Professor Michael E. Porter1320160930 – Porter Prize India – V3
• Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas)
The Role of Regions in Economic Development
Copyright 2016 © Professor Michael E. Porter1420160930 – Porter Prize India – V3
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
Copyright 2016 © Professor Michael E. Porter1520160930 – Porter Prize India – V3
• Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas)
• 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 Role of Regions in Economic Development
Copyright 2016 © Professor Michael E. Porter1620160930 – Porter Prize India – V3
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
Copyright 2016 © Professor Michael E. Porter1720160930 – Porter Prize India – V3
• Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas)
• 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 Role of Regions in Economic Development
Copyright 2016 © Professor Michael E. Porter1820160930 – Porter Prize India – V3
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
Copyright 2016 © Professor Michael E. Porter1920160930 – Porter Prize India – V3
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
Copyright 2016 © Professor Michael E. Porter2120160930 – Porter Prize India – V3
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