Micheal Porter On Competitiveness And The Region
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  • 1. The Competitive Advantage of Regions Professor Michael E. Porter Institute for Strategy and Competitiveness Harvard Business School Prepared for The Columbus Partnership Retreat John F. Kennedy School of Government February 27, 2004 This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report 2001, (World Economic Forum, 2001), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998), the Clusters of Innovation Initiative, a joint effort of the Council on Competitiveness, Monitor Group, and Professor Porter. Additional content is drawn from the work of the Initiative for a Competitive Inner City, www.icic.org. 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. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu
  • 2. TOPICS • Foundations of regional competitiveness • A new model for inner city revitalization Columbus Partnership Presentation 2004.02.27 RB 2 Copyright © 2004 Professor Michael E. Porter
  • 3. What is Competitiveness? • Competitiveness is determined by the productivity with which a region uses its human, capital, and natural resources. Productivity sets a region’s standard of living (wages, returns to capital) – Productivity depends both on the value of products and services (e.g. uniqueness, quality) as well as the efficiency with which they are produced. – It is not what industries a region competes in that matters for prosperity, but how firms compete in those industries – Productivity in a region is a reflection of what both domestic and “foreign” firms choose to do in that location. – The productivity of “local” industries is of fundamental importance to competitiveness, not just that of traded industries • Regions compete in offering the most productive environment for business • The public and private sectors play different but interrelated roles in creating a productive economy Columbus Partnership Presentation 2004.02.27 RB 3 Copyright © 2004 Professor Michael E. Porter
  • 4. Productivity, Innovation, and the Business Environment Context for Context for Firm Firm Strategy Strategy and Rivalry and Rivalry A local context and rules that encourage investment and sustained upgrading Factor –e.g., Intellectual property Factor Demand (Input) protection Demand (Input) Meritocratic incentive systems Conditions Conditions Conditions Conditions across all major institutions Open and vigorous competition Presence of high quality, among locally based rivals Sophisticated and demanding local specialized inputs available customer(s) to firms Local customer needs that anticipate –Human resources those elsewhere –Capital resources Related and Related and Unusual local demand in specialized –Physical infrastructure Supporting Supporting segments that can be served –Administrative infrastructure Industries Industries nationally and globally –Information infrastructure –Scientific and technological Access to capable, locally based suppliers infrastructure and firms in related fields –Natural resources Presence of clusters instead of isolated industries • Successful economic development is a process of successive economic upgrading, in which the business environment in a nation or region evolves to support and encourage increasingly sophisticated ways of competing Columbus Partnership Presentation 2004.02.27 RB 4 Copyright © 2004 Professor Michael E. Porter
  • 5. Clusters and Competitiveness Winemaking Winemaking The California Wine Cluster Equipment Equipment Barrels Barrels State Government Agencies Grapestock (e.g., Select Committee on Wine Grapestock Production and Economy) Bottles Bottles Fertilizer, Pesticides, Fertilizer, Pesticides, Herbicides Herbicides Caps and Corks Caps and Corks Grape Harvesting Grape Harvesting Equipment Equipment Labels Labels Wineries/ Wineries/ Growers/Vineyards Growers/Vineyards Processing Processing Public Relations and Public Relations and Irrigation Technology Facilities Facilities Irrigation Technology Advertising Advertising Specialized Publications Specialized Publications (e.g., Wine Spectator, (e.g., Wine Spectator, Trade Journal) Trade Journal) California California Agricultural Educational, Research, & Trade Educational, Research, & Trade Tourism Cluster Tourism Cluster Agricultural Organizations (e.g. Wine Institute, Organizations (e.g. Wine Institute, Cluster Cluster UC Davis, Culinary Institutes) UC Davis, Culinary Institutes) Food Cluster Food Cluster 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. Columbus Partnership Presentation 2004.02.27 RB 5 Copyright © 2004 Professor Michael E. Porter
  • 6. Shifting Responsibilities for Economic Development Old Model Old Model New Model New Model •• Government drives economic Government drives economic •• Economic development is a Economic development is a development through policy development through policy collaborative process involving collaborative process involving decisions and incentives decisions and incentives government at multiple levels, government at multiple levels, companies, teaching and companies, teaching and research institutions, and research institutions, and institutions for collaboration institutions for collaboration Columbus Partnership Presentation 2004.02.27 RB 6 Copyright © 2004 Professor Michael E. Porter
  • 7. Composition of Regional Economies United States, 2001 Natural Resource- Natural Resource- Traded Clusters Traded Clusters Local Clusters Local Clusters Driven Industries Driven Industries Share of Employment 31.6% 31.6% 67.6% 67.6% 0.8% 0.8% Employment Growth, 1990 1.7% 1.7% 2.8% 2.8% -1.0% -1.0% to 2001 Average Wage $46,596 $46,596 $28,288 $28,288 $33,245 $33,245 Relative Wage 133.8 133.8 84.2 84.2 99.0 99.0 Wage Growth 5.0% 5.0% 3.6% 3.6% 1.9% 1.9% Relative Productivity 144.1 144.1 79.3 79.3 140.1 140.1 Patents per 10,000 21.3 21.3 1.3 1.3 7.0 7.0 Employees Number of SIC Industries 590 590 241 241 48 48 Note: 2001 data, except relative productivity which is 1997 data. Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School
  • 8. Specialization of Regional Economies Select U.S. Geographic Areas Denver, CO Denver, CO Chicago Chicago Leather and Sporting Goods Leather and Sporting Goods Communications Equipment Communications Equipment Oil and Gas Processed Food Boston Boston Oil and Gas Processed Food Aerospace Vehicles and Defense Heavy Machinery Analytical Instruments Analytical Instruments Seattle-Bellevue- Seattle-Bellevue- Aerospace Vehicles and Defense Heavy Machinery Education and Knowledge Creation Education and Knowledge Creation Everett, WA Everett, WA Wichita, KS Communications Equipment Communications Equipment Aerospace Vehicles and Aerospace Vehicles and Wichita, KS Pittsburgh, PA Pittsburgh, PA Defense Defense Aerospace Vehicles and Aerospace Vehicles and Construction Materials Construction Materials Fishing and Fishing Fishing and Fishing Defense Defense Metal Manufacturing Metal Manufacturing Products Products Heavy Machinery Heavy Machinery Education and Knowledge Education and Knowledge Analytical Instruments Analytical Instruments Oil and Gas Oil and Gas Creation Creation San Francisco- San Francisco- Oakland-San Jose Oakland-San Jose Bay Area Bay Area Communications Communications Equipment Equipment Agricultural Agricultural Raleigh-Durham, NC Raleigh-Durham, NC Products Products Communications Equipment Communications Equipment Information Information Information Technology Information Technology Technology Technology Education and Education and Knowledge Creation Knowledge Creation Los Angeles Area Los Angeles Area Apparel Apparel Atlanta, GA San Diego Atlanta, GA Building Fixtures, Building Fixtures, San Diego Construction Materials Leather and Sporting Goods Construction Materials Equipment and Equipment and Leather and Sporting Goods Transportation and Logistics Power Generation Transportation and Logistics Services Services Power Generation Houston Houston Business Services Education and Knowledge Business Services Entertainment Entertainment Education and Knowledge Heavy Construction Services Heavy Construction Services Creation Creation Oil and Gas Oil and Gas Aerospace Vehicles and Defense Aerospace Vehicles and Defense Note: Clusters listed are the three highest ranking clusters in terms of share of national employment Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 8 Copyright © 2004 Professor Michael E. Porter
  • 9. Columbus, Ohio Metropolitan Area and Economic Area Columbus, OH Metropolitan Area Columbus, OH Economic Area Columbus Partnership Presentation 2004.02.27 RB 9 Copyright © 2004 Professor Michael E. Porter
  • 10. Economic Performance Indicators Columbus Metropolitan Area Economic Performance Economic Performance Innovation Output Innovation Output Employment11, 2001 Employment , 2001 Patents per 10,000 employees, 2001 Patents per 10,000 employees, 2001 in Columbus: in Columbus: 773,508 (rank 37)22 773,508 (rank 37) in Columbus: in Columbus: 4.69 (rank 149) 4.69 (rank 149) % of US: % of US: 0.67% 0.67% in the US: in the US: 7.71 7.71 Employment growth per year, 1990 to 2001 Employment growth per year, 1990 to 2001 in Columbus: in Columbus: 2.45% (rank 117) 2.45% (rank 117) Growth in patents per year, 1990 to 2001 Growth in patents per year, 1990 to 2001 in the US: in the US: 1.91% 1.91% in Columbus: in Columbus: 5.0% (rank 142) 5.0% (rank 142) in the US: in the US: 5.9% 5.9% Unemployment rate, December 2003 Unemployment rate, December 2003 in Columbus: in Columbus: 4.1% (rank 93) 4.1% (rank 93) in the US: in the US: 5.4% 5.4% Traded establishment formation, 1990 to 2001 Traded establishment formation, 1990 to 2001 in Columbus: in Columbus: 4.2% (rank 125) 4.2% (rank 125) Average local wages, 2001 Average local wages, 2001 in the US: in the US: 4.0% 4.0% in Columbus: in Columbus: $27,511 (rank 53) $27,511 (rank 53) in the US: in the US: $28,288 $28,288 Columbus as % of US: Columbus as % of US: 97.2% 97.2% Average traded wages, 2001 Average traded wages, 2001 in Columbus: in Columbus: $ 43,501 (rank 53 )) $ 43,501 (rank 53 in the US: in the US: $ 44,956 $ 44,956 Columbus as % of US: Columbus as % of US: 96.8% 96.8% Traded wage growth per year, 1990 to 2001 Traded wage growth per year, 1990 to 2001 in Columbus: in Columbus: 5.27% (rank 100 )) 5.27% (rank 100 in the US: in the US: 4.53% 4.53% 1 Employment data includes all employees on firm payrolls; excludes government and agricultural employees and the self-employed. 2 Ranks are among 318 US metro areas. Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 10 Copyright © 2004 Professor Michael E. Porter
  • 11. Employment By Traded Cluster Columbus Metropolitan Area Rank in US Financial Services 16 Business Services 35 Distribution Services 29 Education and Knowledge Creation 46 Hospitality and Tourism 52 Heavy Construction Services 48 Transportation and Logistics 45 Metal Manufacturing 31 Processed Food 30 Plastics 18 Communications Equipment 10 Construction Materials 1 Publishing and Printing 41 Automotive 48 Chemical Products 22 Production Technology 32 Information Technology 44 Entertainment 59 Building Fixtures, Equipment and Services 51 Analytical Instruments 61 Lighting and Electrical Equipment 21 Motor Driven Products 39 Heavy Machinery 48 Prefabricated Enclosures 36 Power Generation and Transmission 44 Biopharmaceuticals 51 Furniture 72 Medical Devices 89 Forest Products 114 Agricultural Products 95 Apparel 106 Oil and Gas Products and Services 80 Jewelry and Precious Metals 57 Leather and Related Products 83 Footwear 17 Aerospace Vehicles and Defense 94 Textiles 138 Sporting, Recreational and Children's Goods 131 Tobacco 72 Fishing and Fishing Products 93 Aerospace Engines 149 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 Columbus MA overall employment rank = 37 of 318 Employment, 2001 Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 11 Copyright © 2004 Professor Michael E. Porter
  • 12. Specialization By Traded Cluster Columbus Metropolitan Area 3.5% 3.0% Construction Materials 2.5% Share of Communication 2.0% Equipment National Cluster Employment in 2001 Chemical Products 1.5% Financial Services Plastics Distribution Services 1.0% Lighting and Columbus Metro Area Business Services Footwear Electrical Equipment Share of National Employment: 0.67% 0.5% Motor Driven Power Generation Products Education and and Transmission Knowledge Transportation and Logistics Creation 0.0% -0.70% -0.35% 0.00% 0.35% 0.70% 1.05% 1.40% Change in Share, 1990–2001 Employment: = 0–999 = 1,000–3,999 = 4,000–7,999 = 8,000–29,999 = 30,000+ Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 12 Copyright © 2004 Professor Michael E. Porter
  • 13. Specialization By Traded Cluster Columbus Metropolitan Area 1.4% 1.2% Financial Services Chemical Products Plastics 1.0% Lighting and Distribution Electrical Services Equipment Share of National 0.8% Business Services Metal Cluster Manufacturing Production Technology Transportation and Employment Processed Food Logistics in 2001 0.6% Publishing and Printing Heavy Construction Services Heavy Machinery Automotive Hospitality an Prefabricated Education and 0.4% Building Tourism Information Enclosures Knowledge Analytical Fixtures, Technology Creation Entertainment Instruments Equipment & Services Furniture 0.2% Tobacco Aerospace Vehicles and Sporting, Recreational and Children’s Goods Defense Apparel 0.0% -0.4% -0.3% -0.2% -0.1% 0.0% 0.1% 0.2% 0.3% 0.4% Change in Share, 1990–2001 Employment: = 0–999 = 1,000–3,999 = 4,000–7,999 = 8,000–29,999 = 30,000+ Columbus Metro Area Share of National Employment: 0.67% Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 13 Copyright © 2004 Professor Michael E. Porter
  • 14. Job Creation, 1990-2000 -5,000 0 5,000 10,000 15,000 20,000 25,000 Financial Services Business Services Transportation and Logistics Distribution Services Communications Equipment Heavy Construction Services Information Technology Hospitality and Tourism Columbus Partnership Presentation 2004.02.27 RB Entertainment Benchmark for traded job creation= +47,872 Construction Materials Power Generation and Transmission Prefabricated Enclosures Plastics Lighting and Electrical Equipment Furniture Apparel Medical Devices Tobacco Sporting, Recreational and Children's Goods 14 Processed Food Jewelry and Precious Metals Production Technology Biopharmaceuticals Footwear Fishing and Fishing Products Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Aerospace Engines Textiles Columbus Metropolitan Area Forest Products Agricultural Products Leather and Related Products Job Creation By Traded Cluster Heavy Machinery Oil and Gas Products and Services Building Fixtures, Equipment and Services Chemical Products Publishing and Printing Aerospace Vehicles and Defense +46,840 +46,840 Education and Knowledge Creation 1990-2001: 1990-2001: Metal Manufacturing Automotive Analytical Instruments Net traded job creation, Net traded job creation, Motor Driven Products Indicates expected job creation at rates achieved in national benchmark clusters, i.e. percent change in national benchmark times starting local employment. Copyright © 2004 Professor Michael E. Porter
  • 15. Financial Services Cluster Specialization by Subcluster Columbus Metropolitan Area Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 15 Copyright © 2004 Professor Michael E. Porter
  • 16. Financial Services Cluster Employment by Sub Cluster Columbus Metropolitan Area Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 16 Copyright © 2004 Professor Michael E. Porter
  • 17. Financial Services Cluster Wages by Subcluster Columbus Metropolitan Area Indicates national benchmark average wage. Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 17 Copyright © 2004 Professor Michael E. Porter
  • 18. Financial Services Cluster Job Creation by Subcluster Columbus Metropolitan Area Indicates expected job creation at rates achieved in national benchmark clusters, i.e. percent change in national benchmark times starting local employment. Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 18 Copyright © 2004 Professor Michael E. Porter
  • 19. Inner City Economic Revitalization Premises of the New Model Traditional Model New Model Create Jobs and Reduce Poverty Wealth Focus on Focus on Competitive Deficiencies and Advantage and Social Needs Investment Economic Space: Economic Space: Neighborhood Region Lead: Lead: Government Private Sector Columbus Partnership Presentation 2004.02.27 RB 19 Copyright © 2004 Professor Michael E. Porter
  • 20. Competitive Advantages of the Inner City Strategic location Located near central business district Close proximity to regional transportation Underutilized Underserved networks workforce local market Inner City Large and diverse Large pool of available workers consumer and amid long-term labor business market shortages Linkage to industrial/ currently being under- regional clusters served • E.g., back-office support to clusters such as entertainment and financial services Columbus Partnership Presentation 2004.02.27 RB 20 Copyright © 2004 Professor Michael E. Porter
  • 21. The Role of Inner Cities in Regional Prosperity • Equity • Inner city vitality frees up resources now required to address social and economic disadvantage • Enhances the return to public investment in transportation infrastructure, expands the housing stock, and mitigates urban sprawl • Eases constraints to regional economic growth through utilizing the inner-city’s labor force, land, and infrastructure more fully • More efficient spatial organization of regional industry • Substantial growth and profit opportunities in the inner city itself Columbus Partnership Presentation 2004.02.27 RB 21 Copyright © 2004 Professor Michael E. Porter
  • 22. Columbus Inner City 2001 Columbus Inner City Key Facts • Inner city Columbus is home to 188,000 residents or 26% of the city's total population. • Inner city Columbus is home to over 6,000 establishments employing 37,000 workers. • Employment growth of negative 1.3% in Inner City Columbus is far below the rest of the MSA (+4.2%). • The largest industry clusters in inner city Columbus: Local Commercial Services Local Health Services 0 1 2 4 6 Local Real Estate, Construction, and Development Miles Local Hospitality Establishments Financial Services Legend Green = Inner City Areas White = Columbus boundary Source: State of the Inner City Economies Project, Initiative for a Competitive Inner City Columbus Partnership Presentation 2004.02.27 RB 22 Copyright © 2004 Professor Michael E. Porter
  • 23. Columbus Inner City 2000 Resident Prosperity Income Distribution (% Households in Range) Inner City Rest of City Rest of MSA 35% Population Size 187,743 523,901 828,513 30% Median Household $25,333 $43,089 $52,338 Income 25% Unemployment Rate 9.7% 3.5% 3.3% 20% High School/ 68% / 14% 89% / 34% 88% / 29% College Attainment 15% Minority 55% 25% 7% Population 10% Population 25 59% 63% 66% and under 5% Homeownership Rate 39% 50% 75% 0% Income Density $15k and 15k-30k 30k-45k 45k-75k 75k and 57 73 7 ($MM per sq. mi.) below above Source: US Census 2000; ICIC Analysis Source: US Census 2000; ICIC Analysis Source: State of the Inner City Economies Project, Initiative for a Competitive Inner City Columbus Partnership Presentation 2004.02.27 RB 23 Copyright © 2004 Professor Michael E. Porter
  • 24. Columbus Inner City 2001 Business Vitality Inner City Rest of City Rest of MSA Total 36,533 352,978 367,162 Employment Total 6,095 10,083 21,215 Establishments Employment Growth (1995– -1.3% 1.6% 4.2% 2001)CAGR Establishment Growth 0.2% 0.2% 4.4% (1995–2001) CAGR Nominal Payroll Growth 2.7% 6.0% 9.0% (1995–2001) CAGR Business Startups 5.3% 5.8% 5.4% (>1 year old) Bankruptcies (per 1000 2.0 2.9 2.6 establishments) Source: US Census Zipcode Business Pattern Data and Dun & Bradstreet; ICIC Analysis Source: State of the Inner City Economies Project, Initiative for a Competitive Inner City Columbus Partnership Presentation 2004.02.27 RB 24 Copyright © 2004 Professor Michael E. Porter
  • 25. Columbus Inner City 2001 Inner City Employment Growth VS. Inner City Share of MSA Employment (Largest 15 Inner City Clusters by Employment) 20% 15% Transportation Local Hospitality Establishments and Logistics 10% Local Local Real Estate, 1998-2001 Financial Construction, Heavy Local Community & Civic Organizations Inner City 5% Services & Development Construction Education and Knowledge Business Services Columbus Services Creation Employment 0% 1 2 CAGR Local Food & Local Entertainment & Media -5% Beverage Processing & Local Commercial Financial Services Distribution Local Health Services Services -10% 10% 20% 30% 40% 50% 2001 Columbus IC Share of Columbus MSA Employment Note: 1 = Local Motor Vehicle Products and Services; 2 = Distribution Services; Bubble Size Corresponds to Cluster Employment Source: US Census Zipcode Business Patterns 1998 & 2001; ICIC Analysis Source: State of the Inner City Economies Project, Initiative for a Competitive Inner City Columbus Partnership Presentation 2004.02.27 RB 25 Copyright © 2004 Professor Michael E. Porter