Micheal Porter On Competitiveness And The Region

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

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

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


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

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.

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


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

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
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 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
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

Note: Clusters listed are the three highest ranking clusters in terms of share of national employment

Columbus, Ohio
Metropolitan Area and Economic Area

Columbus, OH
Metropolitan Area

Columbus, OH
Economic Area


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:
5.0% (rank 142)
in the US:
in the US: 5.9%
5.9%
Unemployment rate, December 2003
Unemployment rate, December 2003
in Columbus:
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:
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.

Employment By Traded Cluster
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

Specialization By Traded Cluster
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+


Specialization By Traded Cluster
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%

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
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

Aerospace Engines
Textiles

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
+46,840
+46,840

Education and Knowledge Creation
1990-2001:
1990-2001:

Metal Manufacturing
Automotive
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

Financial Services Cluster
Specialization by Subcluster


Employment by Sub Cluster


Wages by Subcluster

Indicates national benchmark average wage.


Job Creation by Subcluster

Indicates expected job creation at rates achieved in
national benchmark clusters, i.e. percent change in
national benchmark times starting local employment.

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


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


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 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 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



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



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



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