Clusters and the New Economics of Competition

Michael E. Porter

Article | Harvard Business Review | November – December 1998

Clusters and the New Economics of Competition

Abstract

This article explains how clusters foster high levels of productivity and innovation and lays out the implications for competitive strategy and economic policy. Economic geography in an era of global competition poses a paradox. In theory, location should no longer be a source of competitive advantage. Open global markets, rapid transportation, and high-speed communications should allow any company to source any thing from any place at any time. But in practice, location remains central to competition. Today's economic map of the world is characterized by what Porter calls clusters: critical masses in one place of linked industries and institutions—from suppliers to universities to government agencies—that enjoy unusual competitive success in a particular field. The most famous examples are found in Silicon Valley and Hollywood, but clusters dot the world's landscape. Porter explains how clusters affect competition in three broad ways: first, by increasing the productivity of companies based in the area; second, by driving the direction and pace of innovation; and third, by stimulating the formation of new businesses within the cluster. Geographic, cultural, and institutional proximity provides companies with special access, closer relationships, better information, powerful incentives, and other advantages that are difficult to tap from a distance. The more complex, knowledge-based, and dynamic the world economy becomes, the more this is true. Competitive advantage lies increasingly in local things—knowledge, relationships, and motivation—that distant rivals cannot replicate.

Keywords: Economics; United States;

Format: Print

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Citation:

Porter, Michael E. "Clusters and the New Economics of Competition." Harvard Business Review 76, no. 6 (November–December 1998): 77–90.

Case | HBS Case Collection | August 2020

PayPal: The Next Chapter

Michael Porter, Mark Kramer and Annelena Lobb

Can a social purpose and stakeholder capitalism confer a powerful competitive advantage in the age of COVID-19? For PayPal, the answer is yes. After spinning off from eBay in a 2015 IPO, the company declared its purpose as "democratizing financial services" by ensuring that low-income consumers and small businesses can efficiently and inexpensively manage their money. The company fully lives into this purpose, sending employees out into communities to experience firsthand the indignities and high fees imposed on the unbanked, dramatically lowering the cost of international remittances, enabling small businesses to access working capital without credit checks, and facilitating cross-border purchases for small merchants. The company takes the welfare of each stakeholder group seriously: achieving racial and gender pay equity, raising hourly worker pay and benefits to ensure a living wage, and building a diverse and inclusive culture; working closely with regulators and law enforcement to unearth signs of sex trafficking and terrorism; aggressively removing hate-group transactions; providing $4 billion in credit to hundreds of thousands of small businesses that would never have qualified for bank loans, especially those owned by women and people of color. Together these actions have built a high degree of trust that creates a competitive moat in the otherwise commodity business of online payments. During the pandemic, the company was able to get stimulus funds to individuals and small businesses far faster and less expensively than banks or the SBA, and committed $500 million to investments in black-owned businesses. In the 5 years since its IPO, despite intense competition from major banks and credit card companies, Google, Apple, and countless VC-backed fintech players, the company has more than doubled its users, increased profits and boosted the stock price 500%.

Keywords: Mission and Purpose; Finance; Business and Stakeholder Relations; Social Entrepreneurship; Competitive Advantage; Financial Services Industry;

Citation:

Porter, Michael, Mark Kramer, and Annelena Lobb. "PayPal: The Next Chapter." Harvard Business School Case 721-378, August 2020. View Details

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Clusters and the New Economics of Competition

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