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Cluster Logic

By Stuart Crainer and Des Dearlove

Brightline Initiative BlogAnker Boye is the charismatic Mayor of Odense, Denmark’s third largest city.  It is a city in transition. “The City of Odense is rethinking itself from a city based on traditional industry to a city based on technology and knowledge,” says Boye.

With a population of 190,000 Odense is situated at the heart of Denmark.  The city has a long tradition at being at the forefront of ideas.  An English Benedictine monk, Aelnoth, based at the city’s St. Knud’s Monastery wrote Denmark’s first literary work in 1100 and, in 1482, a German printer, Johan Snell, printed the first two books in Denmark at the invitation of Odense’s clergy. The city is still best known as the birthplace of Hans Christian Andersen.

Today, the University of Southern Denmark, the broadcaster TV2, and more than 80 innovative companies in the robotic, component, integration and automation sectors are based in Odense, now the world’s third largest hub in the robotics industry. Over the next 10 to 15 years, it is planned that investments totaling 4.5 billion euros will transform Odense into an internationally renowned city of knowledge.

It now appears natural for regions and cities such as Odense to specialize in certain types of activity.  Knowledge and experience can be pooled, as can natural resources.  Think of the Industrial revolution in England and the cluster of textile companies in Lancashire and Yorkshire.  Such was the level of specialization here that an entire town – Darwen in Lancashire – was dedicated to making loin cloths for India.  Of course, when the Indians started making their own loin cloths, the town virtually ground to a halt overnight.

The decision taken at Miletus in Ancient Greece (around 500 BC) to specialize in wool and associated products may have been one of the earliest examples of regional specialization.  Now, of course, we have Silicon Valley, Silicon Glen, Silicon Fen and various other regions identified with particular industries.

Research by Harvard Business School’s Michael Porter has examined the role of such areas in national competitiveness.  Porter’s research initially covered ten countries: the UK, Denmark, Italy, Japan, Korea, Singapore, Sweden, Switzerland, the US and Germany (then West Germany).  Porter has since extended his study to include Japan, India, Canada, New Zealand, Portugal and the state of Massachusetts.

Porter sought to examine what makes a nation’s firms and industries competitive in global markets and what propels a whole nation’s economy to advance.  “Why are firms based in a particular nation able to create and sustain competitive advantage against the world’s best competitors in a particular field?  And why is one nation often the home for so many of an industry’s world leaders?” he asked.  “Why is tiny Switzerland the home base for international leaders in pharmaceuticals, chocolate and trading?  Why are leaders in heavy trucks and mining equipment based in Sweden?”

Porter returned to first principles – but not to Miletus.  “The principal economic goal of a nation is to produce a high and rising standard of living for its citizens.  The ability to do so depends not on the amorphous notion of “competitiveness” but on the productivity with which a nation’s resources (labor and capital) are employed,’” he wrote.  “Productivity is the prime determinant in the long run of a nation’s standard of living.”

Porter identified a central paradox.  It is a paradox which confirms the management wisdom of the ancient Greeks.  Companies and industries have become globalized and more international in their scope and aspirations than ever before.  This, on the surface at least, would appear to suggest that the nation has lost its role in the international success of its firms.  “Companies, at first glance, seem to have transcended countries.  Yet what I have learned in this study contradicts this conclusion,” said Porter.  “While globalization of competition might appear to make the nation less important, instead it seems to make it more so.  With fewer impediments to trade to shelter uncompetitive domestic firms and industries, the home nation takes on growing significance because it is the source of the skills and technology that underpin competitive advantage.”

Porter’s conclusion was that it is the intensity of domestic competition which often fuels success on a global stage.

Using Porter’s work, the decision taken in Miletus would have been driven by factor conditions (these once would have include natural resources and plentiful supplies of labor; now they embrace data communications, university research and the availability of scientists, engineers or experts in a particular field); demand conditions (if there is strong national demand for a product or service this can give the industry a headstart in global competition); related and supporting industries (industries which are strong in a particular countries are often surrounded by successful related industries).; and firm strategy, structure and rivalry – domestic competition fuels growth and competitive strength.

This was originally published in What we mean when we talk about strategy by Stuart Crainer and Des Dearlove (Infinite Ideas, 2016).

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