With Michael Porter Professor Scholar Consultant

Massachusetts is a place full of professors, but it’s hard to think of one who has had more influence on state government in recent years than Harvard Business School Professor Michael E. Porter. An internationally sought-after thinker about economic competitiveness, Porter helped guide the early efforts of Governor William Weld’s administration, as it sought to steer Massachusetts out of the fiscal crisis that resulted from the recession and – Weld Republicans would say – unsuccessful public policy that marked the end of the 1980s. Porter published The Competitive Advantage of Nations in 1990, and with the help of the consulting firm he co-founded – Cambridge-based Monitor Co. – applied the methods of that book to a local study The Competitive Advantage of Massachusetts, which was released in 1991. Porter’s thinking was essential to the economic strategy that was released in 1993 in a document called Choosing to Compete, regarded by the Weld administration as the blueprint for revitalizing the Massachusetts economy and clarifying the role of state government in such an effort.

The son of a career military officer, Porter came to Massachusetts in 1969 after graduating from Princeton. He got an MBA at Harvard Business School and then a PhD from Harvard’s economics department. He is now at work on two books that grow out of his earlier works on competitive strategy. He continues to advise governments around the world and to work with the Initiative for a Competitive Inner City, a non-profit organization he founded in 1994. (Full disclosure: Porter also is a member of the board of directors of MassINC, the publisher of CommonWealth.) “I’m on a mission to try to understand the underpinnings of economic prosperity,” he told us when we met this winter at his business school office for a talk about the economic ups and downs of the Massachusetts economy. The following is a transcript of our conversation, edited for length.

CommonWealth: Are you tired yet of always having the word “guru” attached to your name?

Porter: It’s funny — I’m very uncomfortable about the word, for a variety of reasons.

CommonWealth: It’s become almost your middle name.

Porter: I first and foremost am a scholar, an academic. I spend the vast majority of my time here in Boston, working at the school, doing research, writing books — and my work is not easy. It’s not easy reading, it’s not light reading, in any sense of the word light. I try to be quite rigorous in what I do. Yet, to me – almost miraculously – there’s this incredibly wide following for the work, both in the business community and now on the government side. It’s that wide following that has led to this guru term. I’d really rather be thought of as a scholar than a guru.

CommonWealth: It struck me as a little bit unusual when I came to realize that you have been doing at least as much work with governments as with business.

Porter: Probably more.

CommonWealth: Has it been frustrating to advise governments where, in that world, you don’t have the same sort of executive authority to make quick decisions as you do in business?

Porter: It is frustrating to work with governments. I actually find the federal government of the United States the most frustrating. I found my work in Massachusetts quite exhilarating in many respects because we have a scale here in Massachusetts which allows things to happen. I find in other countries you often have a group of people who are running the government at any particular moment and those people are deeply focused on getting the right answer. They want to understand competitiveness and how to actually move the ball forward. One of the frustrating things I find about our system in the United States at the federal level is that it is so intensely political. I mean, it’s a system built not on finding the best strategy but on what can you get done through compromise. It’s not data-driven, it’s not objective, it’s not about people able to tell each other the truth and then confront the implications of that. It’s kind of like our judicial system — it’s two adversaries fighting it out, making their best shot at winning over the bystanders, and then somehow that’s blended together in some funny way to move forward. Whereas I think you find in other countries, if you can persuade the President of Costa Rica, or the President of Taiwan, that there’s a deep intellectual flaw in this particular direction they’re taking their economy, they’ll change it.

CommonWealth: Since you’ve had a good deal of time now observing life in Massachusetts, how would you account for the political culture in Massachusetts, at least in the pre-Weld years, where it seemed to be so difficult for government and the private sector to work without antagonizing each other?

Porter: I think in the pre-Weld years the business community felt that the political community was out to essentially undermine their success. First of all, there were massive failures in terms of just the process by which government entities went about doing their jobs. In all parts of government, government just didn’t do a good job in delivering the services it was providing to the private sector. But there was also an attitudinal thing, that business was inherently a little bit, I wouldn’t say bad, but it’s not out to serve the people — somehow there’s a conflict between the citizens and business and we’ve got to be the ones who represent the citizens against the business interests. I think business people saw that in the tax rates they paid, they saw that in the way they dealt with state government, they saw that in the attitudes of government leaders. And they were the ones who were always asked to take all the responsibilities to pay the bills, to pay the taxes. I think what’s happened, miraculously, since 1990, is that that attitude has changed.

CommonWealth: Do you think it’s entirely turned around?

Porter: I don’t think it’s entirely turned around, but I think it’s 75 or 80 percent turned around right now. I think the business community here sees Massachusetts as a dramatically better place to do business today than they did 10 years ago, or eight years ago. I think the Legislature and the Governor and so forth have made many changes to improve the business climate and the business environment in the state.

I also think this economic recovery and this upturn is different than the Dukakis years. The Dukakis years were built on the backs of a construction boom, and on a few large companies that were dramatically raising employment, like Digital Equipment, that grew to be huge companies. This economic upturn is built not on construction at all. Construction is only just starting [again] in this state. This is built on dozens and dozens of small and medium size and now-getting-bigger companies who because of the remarkable assets this region has are growing rapidly and really doing very well globally. We have a situation now where I think the fundamental underpinnings of our economic prosperity are much more robust today than they were in the ’80s. I think the ’80s was a bubble. This isn’t a bubble. This is a sustainable advantage that we potentially have.

We have a variety of weaknesses in our state. We have a workforce problem, big time. Every single business in Massachusetts will tell you today they can’t find high quality workers. The second big problem we have is we have a bunch of distressed communities around the state that are not prospering. And unless we can address that issue, this issue of inequality will fundamentally tear the state apart. I think the third big problem we have in this state… We are not a “commonwealth.” I actually looked it up. A commonwealth is a group of people united by common interests. We in this state don’t behave that way. We have a society here full of mistrust. We have a society full of people who impugn each other’s integrity and motives with incredible, incredible frequency. We work at cross purposes.

I work in all parts of the country now. I work in Kansas City, in Dallas, in Oakland and San Francisco, and Baltimore. There is no major city in America that I’ve encountered that has this culture. In Dallas, if somebody comes up with an idea of how to move the city forward, everybody says, “OK, how can we get that done? Boy, I don’t necessarily agree with that part of it, how could we modify that?” In Boston, if somebody comes up with an idea of how we can move the city forward, “Oh, he’s doing it because of that. It’s not genuine; there’s some self-serving underlying motivation that’s driving that. So let’s attack that.” And I don’t care about whether it’s a football stadium, or the Olympics, or Rosabeth Moss Kanter, my colleague, trying to have a celebration around the turn of the century here. One thing after another, we work at cross purposes; we impugn each other’s integrity.

We had a moment where we kind of got our act together. What worries me is because of this culture we have in this state we will slip back into another bickering phase, where we will start to undermine and erode and tear down the foundation of confidence we’ve built in our economy. It’s really the thing I worry about the most. Particularly in Boston. In the western part of the state I think people have genuine civic pride.… But in this part of the state we have a disease.

CommonWealth: The key question about it is, to what extent does all that stuff you just described really matter? To what extent does it make the difference that Baltimore or Dallas may be more can-do and Boston more politicized? Because I think to the average person out there who looks at where we are in 1997, the economy seems to be strong, we’ve rebounded, we’re probably doing better than New Hampshire and Vermont and all these other places…

Porter: See, we have been can-do for the last seven or eight years.

CommonWealth: But has Massachusetts really chosen to compete or are we just benefiting from a cyclical upturn?

Porter: The tax rates have changed, the unemployment insurance rates have changed, the environmental regulations have changed. There are just literally hundreds of things today that are better than they were six or seven years ago. And they all took hard work. I know — we were at least somewhat involved in many of them. So whatever upturn we have, part of it is a function of some shifts and changes and adjustments in the way we did business in this state. Number two, cyclical upturns are driven by unsustainable things. As far as I can tell, having looked a lot at the economy, none of the industries in which we’re prospering right now are cyclical industries. As you know, we have a service economy. It’s not very cyclically sensitive. It’s not real estate driven; it’s not even manufacturing driven. It’s really a service-driven boom. And then if you look at how we’ve done relative to other parts of the country, we started much worse off and now we’ve kind of outdone the country as a whole and we’ve actually outdone most of the other states that are like us. Yes, there is a cyclical process; yes, that has been a good thing for the state; yes, the booming IPO [initial public offering] market has been particularly exciting for some companies here. Having said that, I personally feel that companies in Massachusetts are competing because of genuine competitive advantage.

CommonWealth: Well I’m not in any sort of position to have a macroeconomic discussion with you, because I’m not educated in it, but what it gets at that I’m interested in is, to what extent do the state and local governments and the state and local policymakers really make a measurable difference? Because I think in the popular mind there is this notion that it has to do with monetary policy in Washington and the general fact that we’re not in a recession anymore nationally. You make the point that in many ways the region and the city can be more important than the nation in creating competitive advantage.

Porter: Right. And there’s lots of data about that — that you can see the differential behavior and prosperity in different parts of the country. I guess I would not want to overstate the impact of government on the economy. It’s not so much that any one policy change made a huge difference to any particular company. I think what’s happened in Massachusetts is that government stopped becoming a negative and became kind of a neutral. And people were no longer anxious about “what was government going to do next?” Or what new bizarre thing would be imposed on business? And I think in that sense, the government changes have been very important in affecting the attitudes, the level of confidence. But I also think at a tangible level, it’s just gotten easier for companies to get things done. To get plants built, to get employees hired.

I remember very vividly back [in] 1989. I remember people saying – with absolute, utter seriousness, including some distinguished writers for The Boston Globe — that this region and this state were in a structural decline. That this was just another repeat of the way it was, you know, back when the textile mills left. So there is a tendency to get very depressed when things are not going well and to get very euphoric when things are going well. What saved us and allowed us to make this recovery here stronger than pretty much any place in the country, and what’s going to allow us to weather the next downturn whenever it comes, are some very compelling, underlying, deeply rooted characteristics of our economy which are well known to you if you’ve read any of the work. And those things are quite unique. Massachusetts has many of the things that most countries are just dying to figure out how they can create. Like the innovation climate and the research universities and the concentration of talent, and the diverse clusters of innovative industries.

CommonWealth: You say you don’t want to overemphasize the effect of government. As an example of government attempts to influence economic development, could we talk for a moment about inner cities? How is the way that you look at the challenge of bringing vitality back to the cities different from the way government programs over recent decades have tried to approach that problem? You’re bringing something new to it.

Porter: Here I think there is a rather radically different view, partly a different view of the problem, but mostly an important [and] different view of the solution. If we look over the last few decades, we’ve tended to look at the distressed communities as primarily a problem that was social in nature. That there was a problem of families and drugs and that we had to provide adequate health care and housing, and that if we invested in those things we could improve the life in these communities and then somehow – and there was a huge gap in the argument – somehow things would get better. What I argue is that it’s just as much an economic as a social problem. That unless there are decent, adequate jobs available to residents of distressed areas, no matter what we do on the social side, we’ll ultimately not get a very high return, because we’ll just have to keep making those social investments forever. And I also make the case that you have to create economic opportunities in the distressed communities; you can’t just get a fleet of buses and bus people to jobs somewhere else. There has to be a viable economic base near where people live, particularly when you have a population that’s having trouble entering the workforce.

The second different approach was to say: As we’ve tried to do “economic development” in inner cities we tended to start by assuming they were devoid of business and that they were riddled with competitive disadvantages. And therefore the only way we could get any economic activity going in inner cities was to provide very large subsidies to get businesses from the outside to locate there and to create empowerment zone programs or enterprise zones or whatever the latest variation of that concept is, which essentially put high-powered incentives to bear to try to distort location choices of firms. They’ll see this wonderful incentive, so instead of locating in Waltham they’ll locate in the inner city. And I argued that that approach, that whole thinking process was doomed to failure — it was self-perpetuating. If you assume that there is a disadvantage, and you subsidize to try to distort the behavior away from true economic behavior, you will create only unsustainable things. I argued that we have to turn the question on its head. Instead of thinking about all the disadvantages, we have to focus on what the economic advantages are of business in these locations. And the interesting thing we discovered as we got more and more into this was not only were there some economic advantages in the four categories I talk about. But we also discovered that there were thousands of existing companies in inner-city areas. So you didn’t have to start from ground zero; you could build from a base. And the businesses that actually were in inner cities were businesses where those advantages were valuable. So there was a rational economic process going on. We had essentially undermined and eroded the economic potential of these locations, often unwittingly through a lot of bad policies, but there was nothing about inner cities that suggested they were obeying some different economic rules.

CommonWealth: Can it be simplified as looking more to make the logic of business work than the logic of government policymakers?

Porter: Well, yes, but government policymakers can either reinforce business logic or work against business logic. In this case government policymakers were working against business logic. Instead of harnessing market forces to work for them, they were trying to defy market forces. Part of this was errors of omission and part of this was just bad policy. An error of omission, for example, is if the most important competitive benefit of an inner-city location is physical proximity to the metropolitan area and the efficiency of delivery and so forth, then you’ve got to put in infrastructure that allows that advantage to be harnessed. Instead, what we find is that infrastructure investments were totally weighted toward other parts of the metropolitan area. And this happens all across the country.

Another intriguing thing that has happened in inner cities: We have two layers of government in inner cities now. We have a layer of government that is the normal layer of government. And then we have another layer that has been created, personified by a whole lot of community organizations. So in some sense you have a double complexity of doing business in inner cities, because you have to in some sense satisfy two levels of government. And that makes it even more complicated to start a company and expand a company. Ironically, it’s much easier to open a business in Waltham than it is to open a business in the inner city, despite the fact that Waltham has a booming economy and plenty of jobs and is not suffering from a low tax base. And there’s an irony there. We’ve created a lot of community organizations because we saw a vacuum of community, so we felt that we needed to help these communities get their act together and organize themselves so they’d be more effective as communities. But unfortunately, some of those organizations have actually made the problem of business development more complicated. You can see how a spiral was created.

What we’ve been trying to do in the work that I’ve been leading and in the Inner City Initiative is to bring a new model and to persuade as many people as we could to be part of that. And I must say I think the tide is definitely starting to turn. I’m convinced now that there’s a growing consensus that this kind of an economic market approach to inner cities is something we simply must try, because the other ways were not working. And I think many of the community organizations are starting to understand this way of thinking and help it work for them as opposed to against them. But it’s complicated.

CommonWealth: I think the way you’ve described it disputes a maybe somewhat cynical view of it that I think is afoot: that part of the problem with cities is that the big business community just isn’t interested in the urban labor pool. That there are reasons they’d rather look to Taiwan and Indonesia for labor than to South Central Los Angeles or in Roxbury.

Porter: This is a good illustration of how to think economically about the problem. First of all, there’s no reason why most major companies should want to be located in inner-city areas. There’s no advantage. If they’re manufacturing widgets, they don’t need to be in the middle of a metropolitan area. Having said that, there are many, many businesses, particularly in services, but in some kinds of manufacturing, where an inner-city location is advantageous. I think what’s now dawning on companies is that the overall labor markets are sufficiently tight in the United States and are likely to be so for the foreseeable future that this workforce pool in inner cities is all of a sudden becoming a valuable asset that people have to figure out ways of accessing. For example, we find companies now – not yet in Boston – but we have examples in other parts of the country where there are inner-city urban industrial parks. You used to have industrial parks out in the suburbs, because that was where you could set up and get a labor pool, and pull the people off the farm or whatever they were doing.

What we find is that the inner-city workforce is not only available but if companies can do the proper screening of the worker – which is more complicated – we find that the workforce is a very loyal workforce and gets very high marks. We’ve done surveys in cities all across the country of inner-city-based companies and talked to them about their workforce. And there’s actually quite a segment of the inner-city workforce that proves out quite well on the job.

We are right now in a process of trying to change the attitudes toward how to deal with these problems. Our view is, let’s get the market working for us, let’s get the private sector investing not because they’re being essentially bribed to by some government program. But let’s focus on why it might be economically rational and then if it’s not economically rational, let’s address what’s making it not economically rational directly. So if it’s a problem of bad infrastructure, let’s fix the infrastructure; if it’s a problem that you have to go through a regulatory morass, let’s fix the regulatory morass. That’s the essence of this approach.

CommonWealth: To shift a little bit, there was a time when you could have become part of the Weld administration, perhaps as secretary of economic affairs. Why didn’t you want to do that?

Porter: I guess I ultimately felt that I could do as much or more to advance the agenda in this state and even the agenda of the Weld administration by having the role that I had, which was chairman of the governor’s council. I’ve always prided myself in having good relationships with virtually every political leader of either party, as well as members of the business community. I felt that becoming part of an administration at a time when we were trying in a very bipartisan way to get our act together… I thought I could be more helpful on the outside.

CommonWealth: It is clear to me that your work and your thinking has influenced the Weld-Cellucci administration. It runs through, I think, some of their economic programs. I wonder if you could explain something to me about the Weld administration that I find just so perplexing at times. On the one hand, there’s been a very positive response to the type of work you’ve done on the competitive advantage of Massachusetts. It’s a moderate, pragmatic, bi-partisan, positive approach to government…

Porter: Right. Constructive.

CommonWealth: Constructive. It doesn’t go along with this notion that government is messing everything up.

Porter: No.

CommonWealth: And yet at the same time you’d hear from Weld when he was on the stump that sort of libertarian coming out, in which he would say that government is in the way all the time, making a mess of things. It was kind of schizophrenic.

Porter: It is kind of schizophrenic. And I guess I can only say I don’t think it was helpful. You’re right. There’s a streak of that that would kind of bubble out. But if you look at the reality of what he actually did, the reality was in some sense much better than the rhetoric. One of the reasons that I’ve spent so much time and enjoyed working with Governor Weld, and I must say I would say the same about [House Speaker] Tommy Finneran or many of the other leaders in the state, was that at the end of the day there was a certain lack of ideological, uh — I don’t know what the right word is. At the end of the day I felt eventually people would try to do the right thing. At least for this moment in history. Because we all had a common purpose here for a while. It was how the hell are we going to get this place back to having enough economic vitality that we can think we’re moving forward for our citizens? And Weld was very much that way. And yet he had this rhetoric… The gift that Governor Weld has is he’s a very, very bright man, and he thinks very deeply, and he has some very good ideas, but yet there [were times] when it would go into the libertarian streak, that I think set it back. But having said that, an awful lot got done.

CommonWealth: I wonder if that ideological tension gave you a flashback to the Reagan administration. You were on the President’s Commission on Industrial Competitiveness and there was the sense, at least in the press, that the work that that commission did kind of got the bum’s rush at the end.

Porter: Well, it did, although ultimately, ten years later, I think in some sense it was a defining moment. That commission really launched the whole competitiveness issue in the United States.

CommonWealth: But it took you in a direction where you were talking about government having a hand in – as opposed to hands-off – economic policy.

Porter: The government is deeply involved in influencing the business environment. In fact, I would go one step further. I would say there’s no relevant distinction between social and economic policy, really. That you can’t have a productive economy without people who are well educated, you can’t have a productive economy without people who are basically healthy. You can’t have a productive economy unless there’s equal opportunity. And my work has tried to argue that there are appropriate roles for government, but they’re not getting involved directly in the competitive process. Not trying to pick industries, not trying to give companies R&D money. Not trying to make loans. This is something we did in this state that I actually disagreed with Governor Weld on. I think we’ve gone too far in the idea of setting up loan pools and venture pools at the state level. I mean, for God sakes, this state has more venture capital per capita than any place in America. We have more angel investors here that are not even measured. Why do we need to get government in the business of doing something that we have a tremendously effective private sector doing?

CommonWealth: I saw that when you were travelling to some Asian countries, maybe Japan, you were billed by your hosts as “the world’s most competitive man.” Is that a better term than guru?

Porter: [Laughs.] Yes, I prefer that one. I don’t know where that term exactly comes from. My early years, my defining quality was athletics, actually. In high school particularly. By the time I got to college I had given up everything except golf, of all things. I ended up being very good at that and competing very successfully in that. But all through high school, I played every sport and I was all-state in two or three of them, so I was very competitive in that sense.

At the business school here, I have become endlessly fascinated with this whole subject of competition, looking at it now from very many dimensions. And I’ve also developed a conviction that competition is a good thing, that rivalry is a good thing. And this has been a very controversial finding in my research.

I haven’t written anything about this yet, but I also believe that the current questioning of capitalism as a system is really off base. The questions of capitalism as a system are questions that have been driven by this inequality issue. That somehow capitalism produces winners but too many losers. When I look at the inequality issue, I see it as not a failure of capitalism but a failure of society and a failure of government. Why is there inequality? There’s inequality for three of four reasons. Number one is because people don’t have skill. Some people have skill and some people don’t and in the global economy you’re going to see tremendous divergence in economic potential. In a closed economy it doesn’t matter so much, because if you’re walled off from the rest of the world, there aren’t that many unskilled workers out there so you don’t really have to worry about them. But in open economy, all of a sudden skill becomes very decisive. Is it a failure of capitalism that we can’t get public schools to give people a decent education? No. That’s a failure of society. Second problem with inequality is the problem of monopoly. We find that rich get richer and poor get poorer when only a few people can control things. In some sense, monopoly is usually a failure of government. It usually happens because of some intervention or some artificial barrier to entry or some government license or some protection that somebody gets.

CommonWealth: I think there is a concern now not so much that we have a competing system that’s better than capitalism, because that’s faded. But there is this concern about the ever-larger concentration of economic power, the conglomeration of all these far-flung companies. I just wonder if you see any way to bring that into the mainstream national discussion. Because the only way it comes up now is from populists, either of the left or the right – Buchanan types – who present it as a question of greed or corporate evil.

Porter: Let me circle around that a little bit and get back to this inequality thing. I could be wrong here, but I don’t think the evidence is showing that the concentration of economic power is going up in the sense that a few companies are dominating. I think actually the opposite is happening. I think there are so many new companies growing up and so many new fields around so many new technologies that I think we’d probably find that the top 100 companies don’t account for a bigger percentage of the economy today than they did 30 years ago. They probably count for less. Because the large companies have not been adding jobs, they’ve not been growing, they’ve been shrinking, they’ve been downsizing. The traditional hysteria around big business was that there were a few big businesses that just controlled the world. I mean, Dun & Bradstreet broke itself into three parts. 3M broke itself into two parts. I think we’re having actually a de-concentration trend in that sense.

But we’re having an inequality trend. So I think the real issue is: Why is this inequality happening? Why are some people doing so much better than others? And is that some inherent evil that will ultimately destroy our society? It’s particularly dangerous in a democratic society where 51 percent carries the election. If 20 percent of the people are earning all the income, and the other 70 percent are not, then the 70 percent are simply going to vote candidates that will take the money away from the 20 percent. What’s always kept our society fertile is the sense that even the people that happen to be in the bottom 20 percent today knew they had a shot at getting up into the top end, or at least moving up.

I’d say there’s another issue that we don’t want to talk about in the United States, and every time I’ve talked about it I’ve gotten slammed. And that’s the issue of the way we have got the incentives organized in our capital markets. Our capital markets, I believe, really have an enormous short-term bias. I think this comes from the tax system, I also think it comes from the fact that we have a whole intermediate class of people which you might call agents, who are actually money managers, who are essentially compensated based on short-term results. I think what’s happening if you look at the data, the rate of long-term investment in our economy is slowly falling. Investment in capital per worker, investment in R&D as a percentage of revenues. I think what happens is if you’re thinking about maximizing short-term income, you do things that I think simply are going to accentuate inequality. So if I were going to deal with inequality, I would be trying to ask myself how could we change the structure and incentives in the capital market, how can we deal with the skills problems, but I wouldn’t be attacking the system itself. I don’t think the problem is the system, I think the problem is essentially the way we’re regulating the system.

And you’re right. The populist says look at this inequality, it’s the system, it’s the big companies, the shareholders making all the profit, and therefore we’ve got to change that. And the way to change that is essentially to take it away from them somehow. What we know is that if we start taking it away through taxes, or if we start forcing companies to keep workers employed that really shouldn’t be employed, then we end up with France, where we have 15 percent unemployment, and we don’t want that either.

Right now we’re in a period where all the cylinders are firing and a lot of good things are happening economically. The threat now has to do with these kinds of systemic issues, and whether we start unwittingly undermining the great strengths of our system by trying to fix them. In Massachusetts I think we have a parallel problem of now that we’re doing well, starting to undermine each other by reducing the constructive, moving forward, let’s get it done, let’s make the compromise, let’s move forward [spirit], which I see eroding in recent years. I guess this is the great ebb and flow of the economy, it’s the great ebb and flow of a state or country. And I hope we can figure out a way to – I hope we can become more of a commonwealth.