Porter’s Theory of Clusters
In the world where everything’s increasingly online, does
Today’s economic map of the world is dominated by what I
call clusters: critical masses – in one place – of unusual
competitive success in particular fields.
Examples – Silicon Valley (Tech), Hollywood
(Entertainment), Wall Street (Finance), Japan (Consumer
Clusters are not unique, however; they are highly typical –
and therein lies the paradox; the enduring competitive
advantages in a global economy lie increasingly in local
things – knowledge, relationships, motivations – that distant
rivals can’t match.
Clusters and the New Economics of Competition, Michael Porter, HBR, Nov-Dec 1998
Geographic concentrations of interconnected companies
and institutions in a particular field, including suppliers,
channels, customers, manufacturers and government and
other institutions like universities, etc.
Clusters promote both competition as well as cooperation,
and offer advantages of efficiency, effectiveness and
Clusters help in innovation in a field and new business
California Wine Cluster: 680 commercial wineries +
thousands of grape growers + vendors + university + wine
Are these Indian clusters?
TV Serials: NOIDA
IT Hub: Bangalore
IIT Coaching: Kota,
1943: Lockheed’s Skunkworks
1948: 3M’s 15% Program
2004: Google’s 20% Program
2016: Facebook’s Area 404
Build 20, MIT
Bletchley Park, WW2
Florence, Italy (Medici Effect) – we discussed in an earlier class
In 1943, the U.S. Army’s Air Tactical Service Command (ATSC) met with
Lockheed Aircraft Corporation to express its dire need for a jet fighter to
counter a rapidly growing German jet threat.
One month later, a young engineer by the name of Clarence "Kelly" L.
Johnson and his team of young engineers hand delivered the XP-80 Shooting
Star jet fighter proposal to the ATSC. Quickly the go-ahead was given for
Lockheed to start development on the United States' first jet fighter effort. It
was June of 1943 and this project marked the birth of what would become the
Skunk Works® with Kelly Johnson at its helm.
The formal contract for the XP-80 did not arrive at Lockheed until October
16, 1943; four months after work had already begun. This would prove to be a
common practice within the Skunk Works. Many times a customer would
come to the Skunk Works with a request, and on a handshake the project
would begin, no contracts in place, no official submittal process.
Kelly Johnson and his team designed and built the XP-80 in only 143 days,
seven less than was required.
The name Skunk Works®
It was the wartime year of 1943 when Kelly Johnson brought together a hand-picked
team of Lockheed Aircraft Corporation engineers and manufacturing people to rapidly
and secretly complete the XP-80 project. Because the war effort was in full swing there
was no space available at the Lockheed facility for Johnson’s effort. Consequently,
Johnson's organization operated out of a rented circus tent next to a manufacturing
plant that produced a strong odor, which permeated the tent.
Each member of Johnson’s team was cautioned that design and production of the new
XP-80 must be carried out in strict secrecy. No one was to discuss the project outside the
small organization, and team members were even warned to be careful how they
answered the phones.
A team engineer named Irv Culver was a fan of Al Capp's newspaper comic strip, "Li'l
Abner," in which there was a running joke about a mysterious and malodorous place
deep in the forest called the "Skonk Works." There, a strong beverage was brewed from
skunks, old shoes and other strange ingredients.
One day, Culver's phone rang and he answered it by saying "Skonk Works, inside man
Culver speaking." Fellow employees quickly adopted the name for their mysterious
division of Lockheed. "Skonk Works" became "Skunk Works."
The once informal nickname is now the registered trademark of the company: Skunk
What sets the Skunk Works® apart is its unique approach created by
founder Kelly Johnson. ‘Kelly’s Rules’ are still in use today as
evidenced by the small empowered teams, streamlined processes and
the culture that values the lessons learned when you are bold enough
to attempt something that hasn’t been done before.
Our unique organization started in 1943 when visionary Clarence
“Kelly” Johnson got the green light to create an experimental
engineering department to begin work on the secret
XP-80 Shooting Star jet fighter. Johnson and his team designed and
built the XP-80 in only 143 days, seven less than was required. It was
this project that marked the birth of what would become the Skunk
Works with Kelly Johnson at its helm.
What allowed Johnson to operate the Skunk Works so effectively and
efficiently was his unconventional organizational approach. He broke
the rules, challenging the current bureaucratic system that stifled
innovation and hindered progress. His philosophy is spelled out in his
"14 rules and practices.”
Kelly’s 14 Rules
1. The Skunk Works manager must be delegated practically complete control of his program in all
aspects. He should report to a division president or higher.
2. Strong but small project offices must be provided both by the military and industry.
3. The number of people having any connection with the project must be restricted in an almost
vicious manner. Use a small number of good people (10% to 25% compared to the so-called
4. A very simple drawing and drawing release system with great flexibility for making changes
must be provided.
5. There must be a minimum number of reports required, but important work must be recorded
6. There must be a monthly cost review covering not only what has been spent and committed but
also projected costs to the conclusion of the program.
7. The contractor must be delegated and must assume more than normal responsibility to get
good vendor bids for subcontract on the project. Commercial bid procedures are very often
better than military ones.
8. The inspection system as currently used by the Skunk Works, which has been approved by both
the Air Force and Navy, meets the intent of existing military requirements and should be used
on new projects. Push more basic inspection responsibility back to subcontractors and vendors.
Don't duplicate so much inspection.
Kelly’s 14 Rules
9. The contractor must be delegated the authority to test his final product in flight.
He can and must test it in the initial stages. If he doesn't, he rapidly loses his
competency to design other vehicles.
10. The specifications applying to the hardware must be agreed to well in advance of
contracting. The Skunk Works practice of having a specification section stating
clearly which important military specification items will not knowingly be complied
with and reasons therefore is highly recommended.
11. Funding a program must be timely so that the contractor doesn't have to keep
running to the bank to support government projects.
12. There must be mutual trust between the military project organization and the
contractor, the very close cooperation and liaison on a day-to-day basis. This cuts
down misunderstanding and correspondence to an absolute minimum.
13. Access by outsiders to the project and its personnel must be strictly controlled by
appropriate security measures.
14. Because only a few people will be used in engineering and most other areas, ways
must be provided to reward good performance by pay not based on the number of
Minnesota Mining and
Manufacturing Co. (3M)
3M was born in 1902 as a small-scale mining venture. The
five founders had a simple goal: to harvest a mineral known
as corundum from a mine called Crystal Bay.
Ultimately, the mine didn’t produce much corundum, but
something more important was born that year: the spirit of
innovation and collaboration that forms the foundation of
today’s 3M. The fledgling company turned to other
materials and other products, building up sales little by
little. Technical and marketing innovations began to
produce success upon success.
Today’s 3M is responsible for 60,000 products used in
homes, businesses, schools, hospitals and more. One third
of 3M’s sales come from products that were invented within
the past five years.
William L. McKnight, who served as 3M chairman of the board from
1949 to 1966, encouraged 3M management to "delegate responsibility and
encourage men and women to exercise their initiative."
His basic rule of management was laid out in 1948:
"As our business grows, it becomes increasingly necessary to delegate
responsibility and to encourage men and women to exercise their initiative.
This requires considerable tolerance. Those men and women, to whom we
delegate authority and responsibility, if they are good people, are going to
want to do their jobs in their own way.
"Mistakes will be made. But if a person is essentially right, the mistakes he or
she makes are not as serious in the long run as the mistakes management will
make if it undertakes to tell those in authority exactly how they must do their
"Management that is destructively critical when mistakes are made kills
initiative. And it's essential that we have many people with initiative if we are
to continue to grow.”
1948: “15%” program was born, allowing employees to
dedicate almost a full day a week to their own projects,
following their ideas and seeing what came of them.
1974: Art fry came up with “Post It” – the most famous
outcome of its 15% program
Many of its 22,800 patents came from this program
It is available to everyone. Who knows who will come
up with the next Post It?
However, the success is not due to the “15%”. It is the
culture – embrace new ideas, tolerate failures.
What happened when Six
Sigma came to 3M?
Six Sigma was popularized in the late 1990's and introduced into
3M by former CEO James McNerney, a former GE executive. It
involves a set of process tools designed to eliminate production
defects and wastage, and raise efficiency.
"The Six Sigma process killed innovation at 3M," said Nicholson.
"Initially what would happen in 3M with Six Sigma people, they
would say they need a five-year business plan for [a new idea].
Come on, we don't know yet because we don't know how it works,
we don't know how many customers [will take it up], we haven't
taken it out to the customer yet."
However, the 3M ambassador pointed out he had nothing against
the Six Sigma, but felt it was not ideal for the creative process.
Building 20, MIT
A temporary wooden structure hastily erected during WW2 on the
central campus of MIT
Housed the radiation lab (“Rad Lab”) and worked on
electromagnetic, microwave, etc. at one time 20% of the physicists
in UR and 9 Noble Laureates work at Building 20
No one department onwed it…it hosted Acoustics, adhesives, Air
Science, flight Control, Nuclear Science, Lighting Design, Plastics
Lab, Radiological Lab, and later…Ice Research, Railroad,
Lingustics, Electronics Photography, Humanities, Atomic Energy,
etc...and eventually... Music, Biotech, Graphic Arts,
After WW2, continued as “magical incubator” till it as shut down
Amar Bose and Noam Chomsky were among its famous occupants
What made it special?
It was the worst building – it leaked, thin plywood walls,
froze in winters, scorching in summers, confusing to
navigate, bad acoustics, poorly lit, had no fire-clearance,
etc…It was only a temporary will WW2 but continued...
But....development of high-speed photography, modern-
theory linguastics, single-antenna radar, microvawes,...
Its “limitations” became its strength for collaboration and
innovation. There were no divisions, no class distinctions,
A 1945 statement by the Department of Defense noted that
the research in the Rad Lab
”pushed research in this field ahead by at least 25 normal
Bletchley Park, WWII
Until 1989, Britain’s best-kept secret from WW2!
Government Code and Cypher School (GC&CS) studied
and devised methods to enable the Allied forces to decipher
the military codes and ciphers that secured German,
Japanese, and other Axis nation’s communications. The
result of which was the production of vital intelligence in
advance of military operations.
Bletchley Park also heralded the birth of the information age
with the industrialisation of the codebreaking processes
enabled by machines such as the Turing/Welchman Bombe,
and the world’s first electronic computer, Colossus.
The most famous of the cipher systems to be broken at
Bletchley Park was the Enigma.
Operation Ultra was designed to break Enigma. German’s cypher
machine Enigma changed the code daily – so there were 159
million million million possible settings!
Starting Aug 1938, the first success came on 23 Jan 1940 when the
German Army administrative key was unravelled, known as “The
The process of breaking Enigma was aided considerably by a
complex electro-mechanical device, designed by
Alan Turing and Gordon Welchman. The Bombe, as it was called,
ran through all the possible Enigma wheel configurations in order
to reduce the possible number of settings in use to a manageable
number for further hand testing.
Eventually build “Colossus” – world’s first semi-programmable
electronic computer a full two years before Americans built
Employed 12,000 code breakers and staff! (3/4th were
Heavily recruited from Oxford and Cambridge
Got help from the Polish who has broken some earlier
Led to sinking of Bismarck, the German destroyer
It is believed that the success of Bletchley Park
shortened the duration of WW2 by 2-3 years!
Google Founder’s Letter 2004
“Google employees have “20 percent time” -
effectively one day per week - in which they
are free to pursue projects they are
passionate about and think will benefit
Google. The results of this creative effort
already include products such as Google
News, Google Suggest, and Orkut - products
which might otherwise have taken an entire
start-up company to create and launch.”
Key successes: AdSense, Gmail, Google Transit, Google
Talk, Google News, Google Now, Project Cardboard
(“Mockulus Thrift”), Google Sky, Google Art Project,
Changed in 2012…not killed but made a bit more
stringent? (some people mock it by saying it is 120%
Facebook Area 404
“These labs have all served their respective teams well, but over
time we started to see that when engineers from different teams
came together and shared their expertise, we could make even
faster progress on the projects they were working on — engineers
in the Connectivity Lab learned from our experts in failure
analysis to create high-quality prototypes early in the testing
process, the networking team worked with the FSO team on
breakthroughs in wireless transmission of data, and so on. We
wanted to create more opportunities for these teams to come
together; we needed a big, open space to complement our
custom labs. So we built one, and we call it Area 404 — named
for our teams wanting a space just like this one, but one wasn't
found; now it's found, and we lovingly refer to the space as Area
Facebook Area 404…
This new 22,000-square-foot lab is located in our Menlo Park
office, and it's outfitted with state-of-the-art machine tools
and test equipment. With this new space, we can now
handle the majority of our modeling, prototyping, and
failure analysis in-house, decreasing each iteration of the
development cycle from weeks to days. Even more
important, the space has room for all teams, with more than
50 workbenches in the main area. Connectivity Lab,
Oculus, Building 8, and our Infrastructure teams can now
work collaboratively in the same space, learning from one
another as they build.
in $538 and
Start-up Nation: Israel
Highest concentration of engineers and R&D spending in
Highest density of startups in the world – 1 per 1,844
Per capita venture capital investments were 2.5x of US (and
350x of India)
More patents per person than any other nation
Most scientific papers per capita than any other nation – 109
per 10,000 people.
In 25 years, Israel increased its agricultural yields 17 times.
Start-Up Nation: Dan Senor and Saul Singer, 2009
Adversities since its creation
Fight for survival was key
Immigration from 70 countries (2x population in first
Contrary to popular belief, defense and security tech is
less than 5% of Israel’s GDP
Persistence, especially in the face of hostile neighbors,
inclement climate. Perhaps this led to more in telecom and
internet because there was no “border” stopping here.
Informal and nonhierarchical cultures, not very disciplined –
they are educated to challenge the obvious, ask questions,
debate everything, innovate. IDF is deliberately understaffed
at senior levels – leading to more initiative at lower levels.
Cultural tolerance for “intelligent failures” – all
performance, good or bad, are value-neutral
IDF Reservists created a whole new network of people
without class hierarchies – you are not defined by what your
rank is but what you are good at.
The Israeli military tradition is to become traditionless.
Don’t be wedded to an idea just because it worked in
Military past is more important than academic past
Thanks to conscription, by the time you come to
workforce, you have already had incredible experiences,
responsibilities, maturity, etc.
Due to military experience, everyone knows everyone!
Why not Singapore or Dubai?
Singapore’s leaders have failed to keep up in a world
that puts a high premium on a trio of attributes
historically alien to Singapore’s culture: initiative, risk-
taking and agility
(In Korea) fear of losing face…one should not be
exposed while failing...Israelis seem to be on ther other
side of the spectrum. They don’t care about the social
price of failure and they develop their projects
regardless of the economic or political situation.
Dubai has built large successful service hubs...but not
thriving innovation clusters.
“Rosh gadol” vs. “Rosh katan”
Rosh gadol = big head
Following orders but doing so in best possible way, using
judgment, and investing whatever effort is necessary.
Emphases improvisation over discipline, and challenging the
chief over respect for hierarchy.
Rosh katan = little head
Interpreting orders as narrowly as possible to avoid taking on
responsibility or extra work
This behavior is shunned!
Everything in Singapore runs counter to rosh gadol!
Singapore differs dramatically from Israel both in its order
and in its insistence on obedience. Singapore’s politeness,
manicured lawns, and one-party rule have cleansed the
fluidity from its economy.
Kibbutzsim. Tough land. Led to innovations in water
recyling and fish farming!
Immigrants. Law of Return. Many were well-educated.
Immigrants = entrepreneurs. Immigration is a national
Diaspora, Brain drain => brain circulation
Govt support for startups. Yozma.
Arab block and betrayel by Charles de Gaulle lead to
self-reliance, improvisation, multiskilling,
Creative spaces, throughout history, have been
extremely successful in shaping the economic climate
of those regions.
Clusters create a robust interlock of companies,
universities, markets and talent and catalyse the
innovation and entrepreneurial activities.
Creatives spaces are the force-multiplier that can
significantly boost up and transform creative initiatives
into serious economic clusters.