Michael E. Porter's legacy: Competitiveness and clusters

When Michael Porter entered the discussions about what countries should do to enhance their #competitiveness in the late 1980s, he was met by significant skepticism, at least in the academic community. It didn’t take long for them to point out that countries do not compete like firms do and that competitiveness was indeed a “dangerous obsession” that can lead to a misplaced focus on trade balances and ‘strategic’ trade policy. What did a business school professor know about the broader economy and economic policy?

Quite a lot, it turned out. Porter had studied economics intensively, and the work of industrial economists was in many ways the foundation of his work on market structure and strategy. The fact that he did not follow the mainstream of economists was a choice, not a reflection of insufficient knowledge. Porter brought a unique perspective to the economic debate. His work on companies had given him a deep understanding of the nature of firms. Rather than seeing them as a black box that instantly maximized performance based on external circumstances, he saw the complex interplay between firms’ business environment conditions, the groups of related and supporting industries related to their value chains, and the choices that firms made internally on their strategies and operations.

With his “diamond” framework, Porter offered a holistic perspective on the drivers of productivity differences across locations that moved beyond the traditional debate between those arguing for free markets and those asking for more government investment in assets and capabilities. He provided a framework to diagnose the circumstances in a particular situation to inform effective action to raise prosperity there and then. In such concrete situations, it was seldomly enough to address one factor; a range of interrelated actions were needed to elevate productivity in a sustained way. Academic research instead tended to ask the question of which single factor was most important in explaining productivity levels across time and locations.

Porter built the diamond framework on the foundations of a large array of existing academic research, making the individual pieces accessible in a coherent structure. But he also added additional elements: He identified the sophistication of demand as a critical driver of innovation and eventually productivity growth. This was quite different from the predominant focus on the size of the local market. Porter’s insights were driven by his work with companies and led to an observation that was both surprising and ahead of its times: Stringent environmental regulations could drive productivity growth and enhance competitiveness, if they were designed in appropriate ways.

Porter’s diamond also included “Clusters of related and supporting industries” as one of its core elements. Clusters were not a new idea – agglomerations of related economic activities in specific locations had been know since at least Alfred Marshall. Porter translated these ideas into the realities of the modern economy. He recognized that firms from a small number of locations tended to dominate in many industries. Looking closer, he saw that the superior performance of these firms as they benefited from their deep integration in clusters, where the access to a rich ecosystem of specialized suppliers and service providers enabled higher levels of productivity and innovation. Importantly, these local circumstances shaped the strategies that a company could chose, not simply their efficiency. Clusters emerged and thrived where the business environment provided conditions that were particularly aligned with the needs of these firms, and not simply generically good for business.  Porter’s work on clusters was quite consistent with the research of economic geographers and regional economists.  But in its relation to competitiveness, it deviated from the focus that trade and industrial economists put on the role of economies of scale and the potential of strategic industrial or trade policies to achieve them. 

Porter’s ambition was to influence practice, and his work on competitiveness and clusters was no exception. His “impact model” had three core elements:

1. Develop frameworks and datasets to inform action. Through books and numerous speeches, he communicated his ideas relentlessly around the world. As a co-editor of the WEFs Global Competitiveness Report he spearheaded the creation of a rich source of granular data on competitiveness drivers across locations, organized in a concept-driven framework. With cluster mapping efforts first in the US and then in Europe and many other countries he made data on the geographic footprint of clusters and the cluster composition of locations available.
2. Drive action in regions and countries. Porter and our team worked in many countries to help design growth plans for clusters, regions, and entire nations. This work deployed the concepts and datasets he had developed, providing an example for how to use them (see, for example, the recent Competitiveness Roadmap for India). Porter had a simple rule when assessing opportunities to do such projects: he would get involved when a country was at an important junction in its economic trajectory, when the leadership convinced him that they were intent on change, and where this example could provide lessons also for others.
3. Empower local leaders. Porter quickly noticed that sustained success in upgrading competitiveness depended on local leaders. Even where he had done a study and provided a blueprint for action, nothing much happened if there was no local leadership with the necessary understanding. Porter designed a course on the “Microeconomics of Competitiveness” to empower leaders. The course was offered at Harvard, but Porter came up with a model to achieve wider traction: He invited other universities to teach his course, becoming the MOC network of eventually more than 100 institutions around the globe. MOC affiliates not only taught the course locally, but many of them became thought leaders on competitiveness issues in their own right. Some even created institutes like Orkestra, the Basque Institute for Competitiveness, that became key drivers of change.

Porter became more highly cited than any other economist and received numerous prices and honorary doctorates. And he was in high demand as an advisor to countries and international organizations. But his work also met resistance and misunderstanding. Among economists, there were always those who viewed his work with suspicion, seeing it as just too different from what was traditionally done. Among policy makers, there were “wrong friends and wrong enemies.” The “wrong friends,” often leaders in emerging economies, hoped that Porter would help them find an easy industrial policy path to prosperity, without any hard structural reforms and business environment upgrading. The “wrong enemies,” often Ministers of Finance in advanced economies, feared that subsidies to “create clusters” was what Porter was all about. Both were wrong.     

In his work on market structures and companies, Porter brought economics to strategy. In his work on competitiveness and clusters, he brought strategy to economic policy.

Economists had traditionally focused on fixing market failures and removing relative weaknesses in the business environment. Porter inspired countries to think about their unique value proposition and competitive advantages as a place to do business. He encouraged them to think about the relative strengths they had or could develop.

Porter’s thinking was naturally shaped by the times in which it developed. The competitiveness debate then was about GDP growth and the US finding an answer to the challenge from Japan in an increasingly global economy. Today, this debate is about how to enable shared prosperity that is environmentally sustainable and resilient in the face of an increasingly fractured geopolitical context. The specific answers that Porter developed in the past do not tell us what to do today. But his way of thinking—from his focus on value (not just cost or GDP) and his holistic perspective on the interplay of a wide range of factors to his drive towards impact—remains highly relevant.  In fact, it might be even more needed now, when the problems we face are so fundamental and systemic that they require thinking that is strategic, holistic, and action-oriented.