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In this article, Michael Porter, the C. Christensen Professor of Business Administration at the Harvard Business School, 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.

Progressive is a leader in providing nonstandard (high-risk) automobile insurance to drivers across America, with a long record of extraordinary profitability. Progressive is facing a challenge in its segment from Allstate, the industry leader, and must decide how to respond.

Today's dynamic markets and technologies have called into question the sustainability of competitive advantage. Under pressure to improve productivity, quality, and speed, managers have embraced tools such as TQM, benchmarking, and reengineering. Dramatic operational improvements have resulted, but rarely have these gains translated into sustainable profitability. And gradually, the tools have taken the place of strategy. As managers push to improve on all fronts, they move further away from viable competitive positions. Michael Porter argues that operational effectiveness, although necessary to superior performance, is not sufficient, because its techniques are easy to imitate. In contrast, the essence of strategy is choosing a unique and valuable position rooted in systems of activities that are much more difficult to match.

The lingering belief that environmental regulations erode competitiveness has resulted in a stalemate. One side pushes for tougher standards, the other tries to roll standards back. The authors' research shows that tougher environmental standards actually can enhance competitiveness by pushing companies to use resources more productively. Managers must start to recognize environmental improvement as an economic and competitive opportunity, not as an annoying cost or an inevitable threat. Environmental progress demands that companies innovate to raise resource productivity--precisely the new challenge of global competition. It is time to build on the underlying economic logic that links the environment, resource productivity, innovation, and competitiveness.

The economic distress of America's inner cities may be the most pressing issue facing the nation. The lack of businesses and jobs in disadvantaged urban areas fuels not only a crushing cycle of poverty but also crippling social problems such as drug abuse and crime. And, as inner cities continue to deteriorate, the debate on how to aid them grows increasingly divisive. The efforts of the past several decades to revitalize inner cities have failed. The time has come to recognize that revitalizing the inner cities will require a radically new approach. While social programs will continue to play a critical role in meeting human needs and improving education, they must support--and not undermine--a coherent economic strategy. The question we should be asking is how inner-city-based businesses and nearby employment opportunities for inner city residents can proliferate and grow. A sustainable economic base can be created in the inner city, but only as it has been created elsewhere: through private, for-profit initiatives and investment based on economic self-interest and genuine competitive advantage.

Health care reform in the United States is on a collision course with economic reality. Most proposals focus on measures that will produce one-time cost savings by eliminating waste and inefficiency. But the right question to ask is how to achieve dramatic and sustained cost reductions over time. What will it take to foster entirely new approaches to disease prevention and treatment, whole new ways to deliver services, and more cost-effective facilities? The answer lies in the powerful lessons business has learned over the past two decades about the imperatives of competition. In industry after industry, the underlying dynamic is the same: competition compels companies to deliver constantly increasing value to customers.

The U.S. system of allocating investment capital is failing, putting American companies at a serious disadvantage and threatening the long-term growth of the nation's economy. The problem involves the external capital allocation system by which capital is provided to companies, as well as the system by which companies allocate capital internally. In global competition, where investment increasingly determines a company's capacity to upgrade and innovate, the U.S. system does not measure up. Reforms that can make the U.S. capital allocation system work include: 1) Improve the macroeconomic environment; 2) Expand true ownership throughout the system so that directors, managers, employees, and even customers and suppliers hold positions as owners; 3) Align the goals of capital providers, corporations, directors, managers, employees, customers, suppliers, and society; 4) Improve the information used in decision making; and 5) Foster more productive modes of interaction and influence among capital providers, corporations, and business units.

Presents some of the dilemmas of gathering competitive information and the appropriate limits for competitive analysis. Raises the issues involved and provides information about actual corporate practice.

Describes the competition between Coca-Cola and Pepsi-Cola. Provides a summary of the history of the soft drink industry prior to World War II, and over the period 1950-1990 in greater detail. Major strategic competitive moves and countermoves are described. Also profiles industry developments, including the Pepsi Challenge, the reformulation of Coca-Cola, and the consolidation of the bottler network. Provides a teaching vehicle for analysis of competitors and strategic rivalry. An updated and revised version of an earlier case.

A four-year, ten-nation study of the patterns of competitive success in leading countries concludes that companies achieve competitive advantage through acts of innovation. A nation's capacity to innovate is affected by four broad attributes, the "diamond" of national advantage: 1) factor conditions; 2) demand conditions; 3) related and supporting industries; and 4) firm strategy, structure, and rivalry. Based on this analysis, government and companies should act as catalysts and challengers, but not get directly involved in competition.

Profiles the household furniture industry in the United States in 1986. Designed for use with Masco Corp. (A) and (B).

Describes the history and corporate position of a large and successful producer of faucets and related household products. Masco is considering entry into the $14 billion furniture industry. Designed to be used with Household Furniture Industry in 1986 in a strategy course on corporate strategy for diversified firms.

Describes Masco's initial entry strategy and is designed as an in-class handout.

Describes the structure of the insulin industry, a treatment for diabetes and Novo's strategy and competitive position in early 1982. The industry is undergoing significant change and Novo must decide how to defend and build its international position. Designed as an early case in global strategy. The class can understand how Novo has competed internationally in the past, how that relates to industry structure, and how industry changes will alter the appropriate way of competing globally. Coalitions of alliances factor into the list of strategic alternatives.

The portable electric power tool market in the United States was approximately $1.1 billion in 1979. There were about a dozen manufacturers competing in the U.S. market, of which five were U.S. companies. Skil was the third largest U.S. competitor. Skil was acquired by Emerson Electric in 1979. Skil was a turnaround situation from Emerson's perspective. The company faced intense competition from Black & Decker and emerging foreign competitors.

Software for note (9-380-175). Spreadsheet model helps students assess potential risks and returns of achieving a viable market position. Calculates the capital requirements for entering the diaper industry under different scenarios. Requires Windows and Excel.

A study of the diversification records of 33 large U.S. companies from 1950 to 1986 shows that diversification--whether through acquisition, joint venture, or start-up--generally has not brought the competitive advantages or profitability expected. Portfolio management, restructuring, transferring skills, and sharing activities are four concepts of corporate strategy that companies most commonly use. Portfolio management no longer works very well in the United States because of its highly developed capital market. Restructuring is merely a stopgap measure that will not build shareholder value over the long term because it usually produces an unwieldy conglomerate. Companies have the best chance of being successful at diversification if they capitalize on the existing relationships between business units by having them transfer skills and share activities. McKinsey Award Winner.

What does international competition mean for competitive strategy? While there is ample literature on the problems of becoming a multinational, the specific strategic needs of established multinationals require closer examination in light of the increasingly competitive international environment. We need to distinguish between multidomestic industries and global industries. If American firms are to catch up with the Japanese, they must strive to achieve global platforms rather than engage in competition on a country-by-country basis. A global strategy requires that a firm rebalance the configuration and coordination of its activities so that comparative as well as competitive advantage is achieved. The increasing globalization of international competition requires strategic responses that overcome country parochialism.

Information technology is more than just computers. It must be conceived of broadly to encompass information as well as a spectrum of technologies that process the information. An important concept that highlights the role of information technology is the "value chain." This concept divides a company's activities into the technologically and economically distinct activities it performs to do business (marketing and delivery to buyers, support and servicing after sale, installation, repair, and parts inventory management, for example).

Focuses on the industry's development and evolution in three principal watch producing countries: Switzerland, the United States, and Japan. Based in part on two earlier cases by F.T. Knickerbocker and H.E.R. Uyterhoeven.