Note: CITES PENDING Disclaimer still in effect on Presidents' Day Weekend...
CLUSTERS PART II
can you intentionally design a cluster?
Last post I very cursorily introduced the central debate of how cluster debates influence economic development theory. "So what?" as would be entirely within your rights to ask. "What does this have to do with the notion of design in business?" And besides my snarky I'm-glad-you-asked time filler, I would say there are two things that are intriguing to me:
1. Can you design a cluster? Meaning: can you intentionally foster the development of a cluster by promoting or introducing the right ingredients? Or is this a serendipitous development much like the Muse may pass one poet by for another seemingly random Romantic for patronage? Can we boil, boil, toil and trouble into innovative frameworks? Or are clusters like
Newton's falling apple, an event that would not have been contemplated had he not chosen to pensively meander in his garden?
2. How does the theory of clusters relate to other design theory? Does it tell us anything intriguing about the new development process or open innovation?
In this post, I will focus on Item One.
DEFINITION - CLUSTER OR CLUMP?
First, what is a cluster? In "Clusters and the New Economics of Competition" Michael Porter defines for us:
"Clusters are geographic concentrations of interconnected companies and institutions in a particular field. Clusters encompass an array of linked industries and other entities important to competition." (Harvard Business Review, Nov-Dec. 1998, p.78)
In essence, clusters are an amalgamation of firms, supporting and related industries, underlying institutions, and even downstream channels that thrive on their close proximity of relationships to raise their level of innovation through competition and cooperation. Often, this may arise due to unusual or sophisticated demand of local customers, sophisticated suppliers, or other historical factors that may have developed favorable conditions or institutions. (Porter, same article)
But the important part is this loose informal network stimulates innovation and productivity. Because, as our dear Alec Hansen says, "Just because you have an aggregation doesn't mean you have a cluster... you may have a clump." Porter identifies 5 areas or ways in which clusters help foster productivity (I will only list them here, not review them):
- Better access to employees and suppliers
- Access to specialized information
- Complementarities (related industries)
- Access to institutions and public goods
- Better motivation and measurement
So how does one identify if it is in a cluster instead of a clump? Even in sophisticated markets, CEOs and other leaders make the mistake of focusing on the short-term price issues and competition in a negative way instead of innovative solutions that help foster healthy cluster-like relationships. The President of Boeing didn't change his notion of the benefits of allowing his suppliers to provide to his competitors as well until he sat down in a strategy meeting instead of a price-negotiation meeting. The ability to supply Airbus would enable them to reach better economies of scale, continue to work down new learning curves as they participated in different deals, and a new sense of trust could be established or strengthened with Boeing. These suppliers could potentially become partners in tackling new problems instead of just negotiators over price. (Example courtesy Alec Hansen) Again, the discussion cannot just be about price. As there are always new frontiers that will lead to outsourcing, this seems a one-way street to the metaphorical ghost town. Meanwhile, healthy competition may be fierce, but in a cluster it also leads to innovation that allows for differentiation and price improvement sophisticated customers are willing to pay for.
CLUSTER DESIGN
Perhaps the easiest way to illustrate how a cluster works without waxing philosophical is to consider the following model from (you guessed it) Porter:
Porter's model shows all the self-reinforcing connections between the competitive structure of an industry, customers and demand, and other industries and inputs. But how can you logically influence such an informal grouping of players? Well, that depends on what kind of economic agent you are. I will espouse the view here that you
can at least put yourself in good fielding for a cluster to develop. Much like Louis Pasteur once said, "In the field of observation, chance favours only the prepared mind." Or economic battleground...
Public Players:
Notice that this version of Porter's model has a little player in the upper-left corner called "government." The idea here is that the structure and health of public goods can provide great benefit or harm to cluster development. Dani Rodrik identified 5 types of institutions that can impact economic growth. (CITE PENDING) Here is where governments can focus on the enabling soil upon which clusters must nourish... while avoiding the tantalizing tendency to directly intervene in determining which industries must be built. Direct government intervention in developing economies has traditionally lead to either protectionism, locational restrictions on economic activity, or other subsidies in particular areas that artificially disperse companies and inhibit cluster growth. This goes against the natural tendency of certain economic actors and talent to congregate. (See earlier posts on the notion of spikiness in the Creative Economy.)
Instead, governments can design the fertile environment by upgrading infrastructure and local talent (through specialized information or learning programs). If they are going to focus on incentives, governments best be careful not to bias the outcome to particular technologies or industries, lest they fall pray to untenable business environments or disruptive technologies.
Private Players and Open Innovation:
But government is not the only agent that can influence the socio-economic fertility of a region for cluster development. Porter outlines several things that individual companies can do regarding their success in fostering clusters. Outside choosing the right locaiton that leads to hidden productivity advantages, companies shoudl engage locally, work collectively, and work at upgrading the cluster. Companies can work with local supliers, provide scholarships to upgrade local talent, or participate in trade associations that move beyond statistics and mere lobbying.
The last notions of working collaboratively are particularly exciting because it directly applies to a single firm the concepts of why competition in a cluster works. One example may be to invest jointly in university-based testing facilities or some other external development that would benefit more than the lone firm. Henry Chesbrough, a professor at UC Berkeley, has researched and coined the term "open innovation" to discuss this path to productivity. As he explains in
Open Innovation: Researching a New Paradigm:
“Open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. [This paradigm] assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology.”
So while the use of open innovation does not have to necessitate a structure that encourages cluster development (e.g., closely held joint ventures), the linkages of these two goals can be mutually supportive and provide an opportunity for self-reinforcing innovation within the industry and related industries. For example, consider the establishment of
IBM's "collaboratories": these proposed small, regional joint ventures would include public partners such as universities or foreign governments in addition to commercial partners. Also, they are designed to tap into "local skills, funding and sales channels in order to get new technology quickly to the marketplace." IBM is able to help develop a particular region (thus creating public spillovers available to all) at the same time it tries to find a creative way to stay ahead of the competition
TO BE CONTINUED...
Good god! Why did you let me rant for so long?
Well, instead of parsing further into the connection between open innovation, clusters, and design (an ongoing theme for me), I'll leave you with some links related to "Co-opetition" (a book referenced by Alec Hansen in my MBA290T.4 class):
-Stan
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