1.
Copyright 2016 © Professor Michael E. Porter120160930 – Porter Prize India – V3
Competitiveness and Clusters:
Implications for Government and Companies
Professor Michael E. Porter
Porter 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

2.
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

3.
Copyright 2016 © Professor Michael E. Porter320160930 – Porter Prize India – V3
Prosperity Performance
Selected Countries
High and ImprovingAverage: +1.74%
Average: $25,473
Low but Improving
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE][CE…
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRA
NGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE][CELLRANGE]
[CELLRANGE]
[CELLRANGE][CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
$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
$75,000
-2.5% -1.5% -0.5% 0.5% 1.5% 2.5% 3.5% 4.5% 5.5% 6.5% 7.5% 8.5% 9.5%
PPP-Adjusted Real
GDP per Capita, 2015
($USD at 2005 prices)
Growth in Real GDP per Capita (PPP $US at 2005 prices), CAGR, 2005-2015
United States
High but Lagging
Low and Lagging

4.
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?

5.
Copyright 2016 © Professor Michael E. Porter520160930 – Porter Prize India – V3
Macroeconomic Competitiveness
Microeconomic Competitiveness
Sophistication
of Company
Operations and
Strategy
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

6.
Copyright 2016 © Professor Michael E. Porter620160930 – Porter Prize India – V3
Assessing the Quality of the Business Environment
The Diamond Model
Context for
Firm Strategy
and Rivalry
Related and
Supporting
Industries
Factor
(Input)
Conditions
Demand
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

7.
Copyright 2016 © Professor Michael E. Porter720160930 – Porter Prize India – V3
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
160
170
180
190
Business Environment Indicators
Ease of Doing Business Rankings, IndiaRanking, 2016
(vs. 189 countries)
Favorable
India’s
GDP
per capita
Rank: 125
Unfavorable
Source: World Bank Report, Doing Business (2016)

8.
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

9.
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

10.
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

11.
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

12.
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

13.
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

14.
Copyright 2016 © Professor Michael E. Porter1420160930 – Porter Prize India – V3
Prosperity Performance
Indian 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
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLR…
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELL…
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
₹ 0
₹ 20,000
₹ 40,000
₹ 60,000
₹ 80,000
₹ 100,000
₹ 120,000
₹ 140,000
₹ 160,000
1% 3% 5% 7% 9% 11% 13%

15.
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

16.
Copyright 2016 © Professor Michael E. Porter1620160930 – Porter Prize India – V3
Boston, MA-NH
Education and Knowledge Creation
Financial Services
IT and Analytical Instruments
Biopharmaceuticals
Los Angeles, CA
Video Production & Distribution
Apparel
Music & Sound Recording
Medical Devices
San Jose-San Francisco, CA
IT and Analytical Instruments
Biopharmaceuticals
Video Production & Distribution
Marketing, Design & Publishing
New York, NY-NJ-CT-PA
Financial Services
Marketing, Design and Publishing
Performing Arts
Music and Sound Recording
Seattle, WA
Aerospace Vehicles and Defense
IT and Analytical Instruments
Water Transportation
Fishing and Fishing Products
Chicago, IL-IN-WI
Distribution & E-Commerce
Transportation and Logistics
Financial Services
Upstream Metal Manufacturing
Denver, CO
Business Services
Medical Devices
Hospitality and Tourism
Oil and Gas Production
Raleigh-Durham, NC
Livestock Processing
Vulcanized and Fired Materials
Textile Manufacturing
Education and Knowledge Creation
Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.
Pittsburgh, PA
Upstream Metal Manufacturing
Coal Mining
Electric Power Generation
Vulcanized and Fired Materials
San Diego, CA
Recreational & Small Electric Goods
Biopharmaceuticals
Water Transportation
Marketing, Design & Publishing
Atlanta, GA
Textile Manufacturing
Apparel
Communications Equipment
Business Services
Dallas
Aerospace Vehicles and Defense
Oil and Gas Production
Communications Equipment
Transportation and Logistics
Houston, TX
Oil and Gas Production
Construction Products & Services
Upstream Chemical Products
Environmental Services
16
Cluster Specialization in U.S. Regions

17.
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

18.
Copyright 2016 © Professor Michael E. Porter1820160930 – Porter Prize India – V3
The Evolution of Regional Economies
San Diego
U.S. Military
Communications
Equipment
Sporting Goods
Analytical Instruments
Power Generation
Aerospace Vehicles
and Defense
Transportation
and Logistics
Information Technology
1910 1930 1950 19901970
Bioscience
Research
Centers
Climate and
Geography
Hospitality and
Tourism
Medical Devices
Biotech / Pharmaceuticals
Education and
Knowledge Creation

19.
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

20.
Copyright 2016 © Professor Michael E. Porter2020160930 – Porter Prize India – V3cc
Clusters
Specialized Physical
Infrastructure
Natural Resource Protection
Science and Technology
Infrastructure
(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

21.
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.
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