Cluster Power

Common wisdom holds that in this increasingly wired world, distance no longer matters much and nearly any business can now become global. Here is a caveat and a counterproposal: First, making smart geographic choices, whether in the United States or abroad, is getting trickier, not simpler. Second, knowing how to create competitive advantage out of the local business environment is becoming more strategically important than ever.

Choosing the best place to do business nowadays requires much more than just observing those three famed, golden rules of retailing–location, location, location. The rules for the future are really about locating the heart and brains of a business in a specific place for a broader, strategic reason: to create synergies from a complex web of relationships stretching far beyond a single company. It is about synergy from sinking corporate and community roots together in the same location. Because in spite of all the IT innovations that have created global networks, opened up developed and emerging markets, encouraged wave after wave of international mergers and globalized consumer culture, what matters now–and will matter even more in the future–are genuine, tangible relationships.

These relationships include, but go well beyond, the usual notions of supply and value chains. Industrial clusters, as these networks of relationships are known, link competing businesses and competing suppliers with collaborative research institutions, public and private sources of financing, government regulatory and development agencies, and new institutions built for the sole purpose of organizing and energizing these relationships. Clusters could rely on IT to operate across countries or continents. And some are beginning to do so. But the essence of the cluster concept is business and personal relationships that need proximity, continuity and both informal and formal channels of contact in order to flourish.

“Relatively few companies think overtly about clusters, but that’s beginning to change,” says Michael Enright, a former Harvard Business School professor currently teaching at the University of Hong Kong and an expert on clusters. “In fact, you find the phenomenon is quite widespread,” he says, because many clusters developed naturally–some over decades–before the current wave of strategic cluster formation began. In the most competitive of the developed and emerging market nations, companies that belong to clusters are changing their approaches to product development, manufacturing, marketing, research, recruitment and training.

Partners, Big and Small Consider the philosophy of Swedish communications giant Ericsson, which has opened a new unit in the multimedia and Internet-content cluster in lower Manhattan known as Silicon Alley. “The reason for us being in Silicon Alley is that we are tapping into the entrepreneurship and the energy of companies that are working here,” says Donna Campbell, director of Ericsson’s CyberLab, the new 5,000-square-foot rapid prototyping facility that opened in May. The lab is a bridge for startups and smaller companies to partner with the Stockholm, Sweden-based Ericsson, a 100,000 employee company that would otherwise overwhelm such potential allies, she says. Other high-tech companies such as Sun Microsystems Inc., Nokia and Data General Corp. are also among the new arrivals. Ericsson can offer smaller companies its global marketing and distribution talents and brand recognition. “One of the main reasons [for being in Silicon Alley] is to learn and emulate some of the biggest advances that are coming from small entrepreneurs. And that’s a reason for physically being here–you have to be part of the community,” Campbell says.

Community is a word often used by executives involved in cluster strategy. They’re not talking about good citizenship or social action. Instead, cluster strategists see companies as part of an extended business family that pools the resources and benefits of their shared location. Bob Breault, chairman of Breault Research Organization Inc. of Tucson, Ariz., says that thanks to the creation of the Tucson optics cluster, more than 170 small high-tech companies in Arizona can do business with the strength of a multinational. “The global economy is about networking and partnering. But what about a company like mine?” Breault asks. “Individually, it’s not [global]. But we go to Thailand or Scotland as a group and say, ‘Hey, I’ve got a billion bucks [in combined revenues].'”

Just as important, he says, is cooperation among competitors who probably wouldn’t develop close relationships if they weren’t part of the optics cluster. “I got a call yesterday from a fierce competitor–but a friend–in the cluster and he’s setting me up next Monday morning for a contract that doesn’t fit his bill but fits mine, and we’ll do it together. He’ll do something for the client, and so will I,” Breault says.

Near Is Better Than Far Although many of the largest companies are building global networks of suppliers, executives at these companies find that the supply chain innovations that blossom in clusters would probably not develop among companies cooperating over great distances. Yamaha Europe, the Milan, Italy-based motorcycle unit of the Japanese manufacturer, has about a one-third share of Europe’s annual sales of 1.2 million scooters. These ubiquitous, low-horsepower motorbikes transport everyone from students to business people through the ancient, narrow streets of European cities. Marco Zamparini, Yamaha’s purchasing director, is working with his competitors in northern Italy–Piaggio, Aprilia and Honda–to share suppliers. Ultimately, they hope to reduce the number of suppliers, which Zamparini says will boost the production efficiencies of the remaining group. The savings from this change will be shared throughout the supply chain. “All of us manufacturers used to work alone. Now I know my colleagues at Honda and Aprilia. If I have a problem I can pick up the phone,” Zamparini says. The companies in the European motor scooter cluster are working with Cluster Competitiveness, a consulting firm in Barcelona, Spain. The firm leads them through the new arrangement and is further boosting cooperation among the competitors by expanding their network outside of Europe. Last November, Zamparini recalls, “All of us visited Honda, Yamaha and Suzuki and their suppliers in Japan, to benchmark how they work with suppliers. Now there is personal feeling between us.” When they returned to Italy, they sat down with local suppliers and began discussing how to make some of the improvements in quality, lead time and other production issues that they observed in Japan. Cluster Competitiveness led the Barcelona electronics cluster on a similar knowledge-gathering trip to Singapore.

John Tracy, president of Optipower Corp., a maker of semiconductor diode lasers in Tucson, says that thanks to the optics cluster, his company has developed a relationship with a firm “that designs critical components inside our products. If there hadn’t been a cluster and both companies weren’t here, would we have found each other? Maybe. But the networking that occurs in cluster activities is pretty valuable–we met at a meeting of the cluster.”

Tracy says Optipower, a subsidiary of Spectrophysics Lasers Inc. of Mountain View, Calif., moved from the Los Angeles area to Tucson largely because of the optics cluster. And as the cluster has grown, so has Optipower, from 10 people at its founding five years ago to an estimated 270 by the end of this year.

Government Support The first clusters, such as leather tanning and textile clusters in Europe, predate the Industrial Revolution by centuries. Academics, such as Michael E. Porter of Harvard University, began studying cluster strategy a decade ago. But it has only been more recently, at a time when governments from Washington to Paris to Tokyo are looking for ways to give their economies an edge, that clusters have begun drawing substantial attention and money from policymakers and legislators. The U.S. federal government and state legislatures, and national and provincial governments abroad–usually in partnership with the private sector–are working to establish new industrial clusters and strengthen the dozens that exist worldwide. Agencies engaged in cluster policy include the U.S. Commerce Department, the United Nations, the State of New York and the Organization of Economic Cooperation and Development (OECD) in Paris. All want to make clusters a leading tool of companies and industries to foster competitiveness.

As might be expected from a business strategy that attempts to bring the public and private sectors together, government sponsorship or involvement in clusters often meets with skepticism. Like many business people, Bob Breault of the Tucson optics cluster did not know anything about clusters when he was recruited at an economic development meeting of state and university officials and business people in Arizona. “Somebody pointed a finger at me and said, ‘You’re an example of a cluster [member],’ and my dander went up. He could have been saying you’re a parasite because I didn’t know what a cluster was,” Breault recalls. He shied away from similar government approaches for six months before agreeing to become involved. Now he is a self-styled cluster evangelist who has traveled to 15 U.S. states and 13 countries to speak to industry groups about the strategy.

Technology Innovation and Transfer Brian Bosworth, a principal at Regional Technology Strategies Inc. in Belmont, Mass., is a proponent of clusters who believes that cluster strategy is not yet fulfilling its promise. Along with Breault and other cluster proponents, he advocates greater cooperation among all the institutions involved in the strategy. “The theory is good, but there’s a disjuncture between theory and practice. If it is such a good idea for firms within a cluster to realize economies of scale and improve innovation, then why don’t those firms seek to optimize these cluster relationships and invest more aggressively in institutions that allow them to explore the underlying technologies that propel all their businesses?” he asks.

Bosworth’s call for invigorated cluster organization is being answered in Connecticut, where the state legislature passed a bill this spring to fund the creation of several clusters. One of the co-chairs of the state’s manufacturing cluster, one of several pre-existing clusters that has won state government support, is Dan Dechamps, CEO of Trumpf Inc. in Farmington, Conn. Dechamps says his company has already profited from membership in the cluster. Trumpf, a $180 million machine-tool maker, has shortened its cycle time from five days to two by adopting lean manufacturing techniques from another cluster member. “You’re less inclined to share business practices if you’re not in a cluster that can show you examples of how it’s done,” says Dechamps. “You have an exchange of what does and doesn’t work. The most convincing thing is if you see the result in another company.” Dechamps got the lead by attending a cluster-sponsored manufacturing seminar where he met the CEO of West Hartford, Conn.-based Wiremold Co., which gave a presentation. “We are not in the same business, but in substance we have identical problems to overcome. Only our working conditions and prerequisites are different,” Dechamps says.

By agreement among business leaders and policymakers, Connecticut’s manufacturing cluster is now being broken up into narrower categories, such as aerospace. Dechamps believes this new arrangement will yield further cooperation, such as common purchasing and marketing, between companies within the categories. A lot of suppliers that cater to the same large companies around the world and don’t necessarily cooperate with each other now can begin to do so, he says.

But as much as cluster strategy can spawn technological innovation, it can also reveal when technology may not be appropriate. Take the case of some of the original clusters in northern Italy, such as Prato, outside Florence, where about 60,000 companies and 300,000 people work in wool textiles. “That cluster has been there in one form or another since A.D. 1100,” says Enright. “What regional governments are doing these days is to recognize that [clusters] exist and through policy either try to create clusters that will be [financially] self-sustaining or accelerate the process [of cluster cooperation]. The irony is that in some of these cases attempts to use information technology [to improve linkages] have failed miserably.”

For 12 years, Enright says, the local government in Prato tried to convince all the small businesses to participate in the computerized ordering and information systems that the government had installed. “They ended up being terminals no one used. The information flows were already so efficient, from face-to-face interaction and telephone, that they didn’t need them. And relatively few firms wanted to broadcast what they considered sensitive information.”

Brainpower Appeal Perhaps the most universal magnet that brings businesses into clusters is brainpower. In some cases, clusters have actually been spawned from private sector spinoffs of university research, such as the high-tech clusters in Silicon Valley, Boston’s Route 128 and the Tucson optics cluster. These spinoffs were often joined by existing private companies that saw opportunity in the emerging cluster. In a new twist on this pattern, Columbia University, Cornell University and Polytechnic University in Brooklyn have recently opened branches in New York’s Silicon Alley to strengthen ties to that cluster.

For some multinational companies, like BASF AG, a $97 billion chemical company based in Ludwigshafen, Germany, location anywhere but in a cluster with a top-notch research base is unthinkable. When the German government outlawed genetic engineering a decade ago, the company quickly narrowed its list for a new worldwide biomedical research unit to the San Francisco Bay area and eastern Massachusetts. “We needed a place where the local community had the appropriate attitude toward biotech research,” says Robert Kamen, president of BASF Bioresearch Corp., which chose to locate in a biotech industrial park in Worcester, Mass. “The biotech park is here because the University of Massachusetts Medical School is here. The cluster includes the medical school. Some of our staff have adjunct teaching positions with departments there.”

The BASF unit relies on the concentration of biotech scientists in the Greater Boston area to assure itself a supply of top talent for its pharmaceutical discovery research in oncology and immunology. “Biotech production is a pretty limited profession. We’ve recruited mostly out of the local biotech industry,” Kamen says.

The Future: Clusters of Clusters? Despite the success of the cluster strategy, there will likely be a shakeout sometime soon among clusters from different countries that compete in the same industry, says Emiliano Duch, founder of Cluster Competitiveness. So the latest and most difficult twist in cluster strategy will be to link and preserve the best companies in several clusters and get them to work together, he says. Members of the three motor scooter clusters in Spain, Italy and France are the first to participate in a pilot strategy that will attempt to integrate the best companies in these clusters. The project is partially funded by the European Commission, the executive body of the Brussels-based European Union. He predicts similar initiatives for several aviation clusters in Europe.

Because clusters rely on lots of personal contact, that means frequent travel for cluster participants from different countries. “We’ve had meetings constantly in all three languages,” Duch says. The end result, he hopes, will be pocket-size multinationals. In the motor scooter project, the engineering and design will be based in the Bologna cluster, which has the strongest capabilities in that area among the three countries, while the manufacturing will be done in France and Spain. Already, he says, sharing information among three companies within the cluster has reduced the product development cycle time of plastic molds–the time from a designer’s sketch to production–to 10 months from a European industry average of 14 to 15 months. “Even the Japanese can’t beat that,” he says. end