The Competitive Edge

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A Harvard Prof of Some Fame Has a New Game Plan for the U.S.

Briefings managing editor Glenn Rifkin interviewed Professor Porter at his office on the Harvard Business School campus.

When Professor Michael E. Porter appears for an interview, he offers an apology for his late arrival and then ushers the reporter into his wood-paneled office in Ludcke House on the lush Harvard Business School campus. In shirtsleeves and loosened tie, surrounded by floor-to-ceiling bookshelves and windows, Porter, at 69 still fit, square-jawed and athletic, is tired after a long day. But given a chance to speak about his current work on U.S. competitiveness and corporate strategy, he is quickly revitalized. For a business journalist, a face-to-face conversation with Porter is akin to a basketball junkie going one on one with Michael Jordan. It is a rare chance to learn from the master.

In a field as tedious as economics, Porter rocked the world in the early 1980s with his groundbreaking work using economic theory to explain competitive strategy and how companies could make better choices to achieve competitive advantage. His books were instant bestsellers and he was invited to not only countless C-suites but to meet with presidents, prime ministers and leaders in both the public and private sectors around the world. Porter is that rare academic superstar whose work still resonates today across global marketplaces, influencing corporate leaders and national and regional economic development. The spotlight is still very much on.

Sitting in his book-lined office, one realizes that Porter’s impact is so great that the entire building is his domain. Ludcke House is home to Porter’s Institute for Strategy & Competitiveness, established in 2000 by HBS. The entryway is a shrine to his academic research, his books and articles, and his many awards. “He has influenced more executives—and more nations—than any other business professor on Earth,” wrote Geoff Colvin, senior editor at large of Fortune magazine in a 2012 profile.

But Porter, who built his theory on competitive advantage around five critical forces (see sidebar), happens to have a key concern about one particular superpower losing its edge: the United States. Indeed, for the past five years, he and Professor Jan Rivkin have spearheaded a major project at the Harvard Business School called the U.S. Competitiveness Project that focuses on how everything from high business taxes to ineffective regulation and political gridlock threaten to shrink the country’s influence for good. “There’s just metric after metric that show that we’ve been falling behind in our regulatory complexity, the quality of our infrastructure; our tax system has gotten very disconnected with reality, and nobody wants to fix it,” Porter said.

How do you define competitiveness?
Competitiveness is based on having an advantage in either a superior value, which allows you to differentiate yourself and get a higher price, or innovations that allow you to achieve a lower cost position. So all competitive advantage can be manifested in either higher prices or lower costs. Sometimes, though rarely, you can achieve both, but that’s usually not very stable. So from a company perspective, competitive advantage is relatively concrete. When you’re talking about a country or a city or a region, there you can get tripped up if you try to think about competitiveness the same way as you do for a company.

How so?
What we’ve come to understand is that a country or a region is competitive if it can achieve a higher productivity in how the citizens of that region actually work and generate value in the economy. And productivity is what underpins an improving wage and standard of living. But, we’ve also come to realize that when we think about the competitiveness of a region, we have to think about companies being productive and therefore able to compete with other locations, but we’ve also got to make sure that the average citizen is benefitting as well. And productivity allows both. If we have the right kind of environment, productivity will allow companies to do well even as the worker is doing well. But so much of the discussion about competitiveness is really one or the other. Folks on the right tend to think about lowering wages to be competitive which is kind of crazy because lower wages are a failure. That means that you’re not competitive and you need to take a pay cut.

It’s disincentivizing people.
Yes, it is disincentivizing people. However, it’s also true that if workers are getting higher wages and companies can no longer compete in that location, that’s not competitiveness either. In the U.S. Competitiveness Project, we’ve been focusing on how we can create this shared prosperity for the companies and for the average citizen, the average worker. And then once again, productivity is what allows that to happen.

That is a crucial outcome.
I think this is a profoundly important question. I work around the world, and over the years, I’ve worked with many countries and with national leaders, and this is, frankly, a debate that many countries have. There’s a lot of confusion about this. A lot of people think it’s a zero-sum game, that if companies are going to win then workers have to lose, or the average citizen has to lose. Ultimately, it has to be win-win.

Yes, and it’s such a hot-button issue now with this current election.
Absolutely. And what’s happened to America—and this is work that we’ve now been doing for the last five years on the U.S. Competitiveness Project—is that our economy, starting in the late ’90s and 2000, something fundamentally changed and we got on a different path.

Explain.
We have these things we call disturbing trends, and one of the disturbing trends was that job generation dramatically slowed down starting around 2000. This economy used to be a job machine, and some set of factors ultimately slowed that down. We think that has a lot to do with globalization finally reaching its potential—where many other countries could actually now compete with us because they had raised their skill levels, they’d raised the quality of their infrastructure and they had stripped out some of the worst corruption and complexity. And all of a sudden Thermo Fisher Scientific, which is one of our great Boston companies, when they couldn’t find enough engineers here at reasonable cost, they actually set up a major facility in Lithuania.

Lithuania?
They knew there’d be lots of good engineers there, and they were quite well trained, and they earned 50 percent of the wages. So around the late ’90s and 2000, there had been enough progress in the rest of the world—and frankly not all that much progress in the U.S.—in improving education, improving infrastructure and so forth, that we saw that bend in the curve. And that has continued.

What is the result?
In the U.S., we’ve been failing at creating what we call traded jobs. Those are jobs in industries where we compete internationally such as automotive, airplanes and the like. And all the jobs that we’ve tended to create for the last 15-plus years are what we call local jobs. Those are jobs in health-care delivery, or retailing, or things that are inherently local where we really don’t have to compete. It was pretty unsettling for us to see that, and underlying that we see that wages have stagnated. The median income has actually gone down in real terms, and the need for skills has grown. So, unless you had a college degree or more for the last 15 years or so, you’ve seen very little progress in your wages.

And there are other problems.
At the same time, there’s just metric after metric that show that we’ve been falling behind in our regulatory complexity, the quality of our infrastructure; our tax system has gotten very disconnected with reality, and nobody wants to fix it. There’s just rhetoric on both sides about how I’m right and you’re wrong, and yet every day that goes by we have another inversion, and we lose another company.

How do you fix that?
We simply have to get our corporate tax rate down to 27 or 26 percent, which is not low; it’s just in the ballpark. And we’ve got to fix this international system and install a more territorial system like other countries have so that American companies will bring their capital back here. Right now we are in a mess. So, what we find in the U.S. Competitiveness Project is that we have some compelling strengths in entrepreneurship and risk-capital markets, innovation is strong, and the quality of management is very good; and American companies, particularly the larger companies, are doing pretty darn well on a global basis. But America as a location to do business is not doing well, and that’s not because of hard stuff, it’s because we haven’t made progress in relatively simple things where pretty much everybody agrees we need to.

Is it just politics that keeps it from happening?
Yes. Politics has been one of the major problems—a root cause of why we haven’t fixed some of these things. As this project has unfolded, even though this is not my field, I’m spending more and more time thinking about that. Now, why is that? What’s happened here? How do we think about our political system? Why isn’t it delivering what we want? Why do we have gridlock? The numbers are overwhelmingly low in terms of the respect for government officials by the public and people’s view of how our political system is functioning. I think the Trump phenomenon is the boiling point of the anger about us not actually getting anything done. We’ve been talking about immigration for a decade and we haven’t fixed it because we have a political structure now where the parties really want to win the battle based on their ideology rather than finding a compromise. We can’t compromise anymore.

Has this U.S. Competitiveness Project surfaced any prescriptions? Are you optimistic?
We would say that we’re more optimistic about what the business community can do itself. When we started this work, we very quickly realized that waiting for government was not necessarily going to be the right way to think about it. We spent a lot of our energy on re-educating the business community and how they need to take responsibility here in their communities, and their regions and their cities, and how to do that.

What can businesses do?
There’s a lot business can do, and I think business is in a different place now than they were six or seven years ago. We see more companies voluntarily raising wages for low-income people, re-engaging in training, and lots of participation in regional efforts. But, the most progress, both in business and in government, tends to be at the state and local level. At the federal level, there’s not much to be optimistic about at this particular moment.

Can you recall a similar period of unease in recent history?
The last time we saw anything remotely like this was during that period when Japan was rising. The Japanese companies had clearly found a better way of competing. They were able to achieve unheard-of levels of quality and efficiency compared to us. That was during President Reagan’s administration, and he created a U.S. commission on competitiveness. There had never been one before, and there’s never been one since. A bunch of leaders came together and tried to diagnose what was going on ... and we retook the ball from Japan. ... But, aside from that period, which was not nearly as challenging as the period we’re in today, we’ve never faced the kinds of numbers and lack of progress that we see in America today in probably a hundred years.

Is the lack of business leadership a factor?
We believe that business leadership and some of the established thinking in business definitely got in the way. Companies started seeing themselves as global and unfortunately didn’t realize that just because they were global companies didn’t mean that they could give up and stop investing in their communities, and making sure they had the right suppliers, and the right universities, and the right training and the right people to hire. That was a lesson that many business leaders now have learned. We’re starting to see business shift back in the other direction.

But the negative impact has been dramatic and long-lived.
We saw business leaders trapped in the notion of “My job is to maximize near-term shareholder value,” and so many companies have been winning by cutting rather than by innovating and growing. We saw a lot of outsourcing because the formula seemed so perfect. You could take a $100,000-a-year worker and replace him with a $30,000-a-year worker, and the knee-jerk reaction was that was going to drive profitability. What we’re seeing now is a lot of the outsourcing went too far, and if you actually understand the real math with logistical cost and inventory cost and having to supervise these far-flung operations and so forth, actually the outsourcing didn’t really pay off.

But you believe there’s some reason for encouragement from the business sector.
I’m very encouraged to see the business community, given all the scrutiny and criticism, understands the need to be part of the solution. The understanding of how to do that is improving. We see some progress at the state and local level, and there’s more that can be done.

Such as?
The big challenge we have right now is federal policy. And unfortunately, the federal government controls our national budget, our major entitlement programs, our corporate tax system. Government has a phenomenally big impact on infrastructure. Government sets the trade policy at the federal level. In these critical areas we’ve allowed ourselves to get really out of sync and behind. And, the more I study the political system, we need structural change there. Electing the right candidate isn’t going to solve the problem. It’s way beyond any candidate. It’s been baked into the fundamental structure of how our political system works.

You’ve been teaching and writing about competitive strategy and competitive advantage for more than 35 years, and I wonder how much has changed in all that time.
In general, the kind of work that I do is aggressively aimed at being independent of the moment. And it tries to get at the underlying principles or underlying structures that ultimately result in competitive outcomes and company outcomes. Of course, the technology is always changing, and customer needs are always changing and geography is always changing. But, what we’ve come to believe—and I work very heavily in the outside world with the private sector and the public sector—is that the core strategy concepts are actually very much the same.

The net result, then, is indeed timeless.
The fact that strategy is about choice and deciding what you’re going to do but also what you’re not going to do, many of those key principles, you’d find that the messages are largely the same. But the richness with which we can deploy those ideas has improved. Information technology has had a really pervasive impact on what companies do.

How has that made a difference?
What we came to believe is that the Internet isn’t the big news. That’s been around, we know what it does; it is just connectivity. The fundamental change here is what things can do. That turned out to not only affect products, and product features, functionality, positioning and strategy choices, but it also turned out to have a big impact on how firms operate internally. Because now what we’re seeing is that most manufacturing companies are becoming a hybrid of a software company and a manufacturing company. The previous generations of IT were really great at spurring productivity growth in the firm and in the economy. This is going to actually allow us to deal with many societal issues as well, and do it better.

Does this present opportunity for companies as well as a challenge?
We need to rethink business strategy and business opportunity to reflect the fact that many things that traditionally have been seen as social problems or social issues are actually enormous business opportunities. This is the concept of shared value that we started writing about in 2011. We’re seeing some of the most important kinds of strategic innovation, and the companies that are achieving the fastest growth and gains in market position are companies that are innovators in embracing these new concepts.