Christopher Steele, Global COO and North American President, Investment Consulting Associates (ICA) (Winter 2011)
We tend to hang around people like us. Does the same apply to businesses? The concept of clusters - that similar industries and functions tend to locate near each other - has been with us since Michael Porter's 1998 article, "Clusters and the New Economics of Competition," and even for a time preceding the paper.
But how relevant are clusters in a state of "flat earth" equilibrium? More than half of respondents to Area Development's 2009 Corporate Survey said the presence of activities similar to theirs was a consideration when selecting a site. But have technology and globalization fundamentally changed the need to locate in clusters? And are virtual clusters possible, eliminating the need for physical proximity?
Picture the wine industry in California's Napa Valley; biotech in eastern Massachusetts; entertainment in Orlando, Florida; and auto manufacturing in Eastern Michigan and you have clear examples of clusters. A cluster is a geographic concentration of related industries or functions. This includes the core companies that comprise the industry or function, as well as the institutions, suppliers, vendors, government partners, and industry groups that allow the industry to function at its peak.
For instance, the Massachusetts biotech and pharmaceutical cluster includes:
• Key companies such as Biogen, Genzyme, Novartis, and Amgen;
• Research institutions such as Tufts, Harvard, and MIT;
• Colleges and other higher learning institutions that produce talent;
• Teaching and specialized hospitals such as Beth Israel Deaconess Medical Center, Massachusetts General Hospital, Brigham And Women's Hospital, and Children's Hospital Boston;
• Outsourced partners such as clinical research outsourcers, private labs, and clinics; and
• The Massachusetts Medical Device Industry Council, the Massachusetts Biotechnology Council, and related industry groups.
Most importantly, it also includes supporting entities such as a venture capital industry, specialized business services (legal, management, consulting), and a state government that has implemented programs encouraging life sciences development.
These clusters develop because of the intensive interplay of ideas that makes industry work. They begin at key points where talent, raw materials, and other partners are already in place. Over time, the initial companies intentionally or unintentionally foster the development of spin-off or competitor companies. These offshoots still benefit from the influences that spurred the cluster, but specialize, innovate, or exploit a new application of the basic cluster idea.
The cluster continues to function and grow because it becomes a hub for obtaining important inputs, leveraging the strength of partners, and outsourcing providers. Additionally, they provide an opportunity to leverage highly specialized training and talents.
From a competitive perspective, the cluster permits access to specialized information on the market. This includes general market conditions, technical information, and information on the network of providers and partners. It also provides real-time information on one's competition through direct interaction in the local network. This in itself can drive innovation.
Equally important to innovation within clusters is the role of those who become disaffected with the cluster's original companies and strike out on their own. These visionaries move on to innovate through specialization, or by advancing technology, process, or other competitive aspects of the cluster. Silicon Valley and its many startups provide an excellent example of this trend.
Still, inherent competitive and economic drawbacks exist in clusters and in locating near similar companies. This can include overheating local labor markets or relying excessively on a particular industry (along with a corresponding exposure to economic downturn). Additionally, clusters can sometimes succumb to groupthink, which stifles innovation or lends it false direction. Such was the case with the Detroit car companies of the 1970s and 1980s.
Nevertheless, the economic and industrial cluster template is well established and has functioned as a model for economic development and business attraction for some time. States and regions have tailored training, education, and incentive programs that build on existing clusters or foster the development of new clusters.
Leveling the Playing Field
What if physical location no longer mattered, or mattered much less, to idea exchange or interaction in the value chain? Would a location near one's peers still be valuable? Would the concept of an industry cluster retain meaning in a world of virtual, global interaction? Clearly, technology has changed how we work, collaborate, and innovate. Location matters less than it has in the past, and technology ranging from email and the telephone to cloud computing and shared e-workspaces may overcome the need for physical proximity.
Today, the very nature of work is changing. Workers under the age of 30 will measure their careers by the dozens or hundreds of projects on which they have worked rather than jobs held. Each of these projects will have occurred in an environment of shifting partnerships and teams. The Internet's integrating nature and its various professional networks will enable these shifting alliances, and may remove the need for some formal corporate structures.
This change is already affecting how site selection consultants work. Smaller location consulting teams can now customize solutions for clients that rival or exceed anything that larger, traditional firms can offer.
These cases have no physical proximity need. Still, this specialized form of service- and knowledge-oriented work will not cover all future economic activity. Face-to-face communications, physical interaction, and the transfer of goods and materials will still play critical roles in some industries. However, the need for and value of this interaction will vary depending on the value-adding networks that are involved. Just because e-links are sufficient for one industry does not guarantee that they will satisfy all.
To Cluster - or Not
Technology, virtual networks, and cloud thinking will reduce the need for physical proximity for many industries. Traditional clusters - such as banking, research, software engineering, and information technology - will no longer be so tied to physical interaction and the need for face-to-face meetings.
Other industries will see innovation and the entire value chain dictated by physical proximity to key inputs including raw materials, cheap energy, skilled talent, vendors, and suppliers. These industries will have the greatest need for the support infrastructure of clusters and will continue to seek them out.
Most businesses will probably fall into a growing third category, which will have reduced business needs to be located in a cluster, but which will continue to choose to do so. While significant changes are inevitable, clusters will still provide strong advantages for many industries.