Coming together: success through clustering

The formation of geographical clusters in particular industries or sectors can produce remarkable results. Throughout the world and across a broad range of industries, going at least as far back as the very beginning of the industrial revolution, the clustering of businesses connected with a particular activity has often been the key to higher productivity, increased competitiveness and industrial take-off.

While many clusters have developed almost by accident, both business and governments have come to recognize the benefits provided by this industrial model and are actively fostering cluster creation. While the rewards can be immense, getting it wrong can result in a wasted investment of finance and energy and a setback for the businesses involved. And, while clusters can offer significant benefits to firms in terms of productivity and innovation, they are not all the same. Each type requires different strategies for ensuring that participation results in a positive impact.

The benefits of clustering

Industry clusters are not a new concept. More than a century ago the economist Alfred Marshall pointed out the benefits that could be gained from a location within the same geographical area of many players in an industry sector. But in the last decade the importance of clusters has been increasingly recognized, and clustering has now become a key issue both for businesses looking to improve competitiveness and policy-makers looking to accelerate regional economic development.

The key benefit of clustering is improved competitiveness, which comes through increased productivity, leading to comparative advantage. Being part of a cluster allows companies to operate more productively in sourcing inputs for four reasons:

• Better access to employees and suppliers: companies can tap into an existing pool of specialized and experienced employees, thereby lowering search and transaction costs in recruiting. The presence of a ‘critical mass’ of people with similar skills and interests can also make it easier to attract further talented people from other locations. Similarly, access to a deep and specialized supplier base is provided. Sourcing locally instead of from distant suppliers can lower transaction costs, while proximity improves communication and commitment. Clustering favors a networking organization for companies, interacting with suppliers, clients, partners, R&D institutions and service providers. In addition, cluster networks have greater purchasing power than individual companies.
• Improved access to information: by fostering both formal and informal personal ties, proximity facilitates the flow of information.
• Complementarities: arise when products or services complement one another in meeting customers’ needs. Within the biomedical sector, for example, the testing of new drugs or devices is complementary to the R&D and product development steps.
• Access to public institutions and public goods: public goods enhance productivity in the private sector. The most visible public goods pertain to infrastructures in transportation, real estate, educational programs and testing laboratories, but less tangible public goods such as support for networking and communication can be at least as important.

Clusters also enhance the direction and pace of innovation, which underpins future productivity growth. They can give companies a better understanding of their customers’ needs, having a better window on the market than isolated competitors do, facilitated by the ease of making site visits and frequent face-to-face contact. They also provide the capacity and the flexibility to act rapidly. A company within a cluster can often source what it needs to implement innovations more quickly than others. It can also find logistic or financial support.

Companies also benefits from positive externalities created by knowledge providers such as university laboratories and public or private R&D centers. The technology transfer from fundamental research to applied innovations is facilitated by partnerships and close cooperation.

Seven key success factors for cluster development

In our work in several regions, we have noted seven key success factors to be taken into account in cluster development. All require cooperation between cluster companies and the relevant public-sector agencies. Most require the involvement and support of other players too – universities and training organizations, specialist service providers and so on.

• A diverse and dense industrial network of companies including start-ups, mature companies (medical devices and pharmaceutical companies) and associated services providers.
• Strong scientific and research capabilities with academic and private labs.
• Easy access of all cluster stakeholders to sector-specific infrastructures (e.g. clinical research infrastructure).
• Effective collaboration between stakeholders in the network, especially between private and public research institutions.
• Availability of highly educated human resources with competencies adapted to industrial needs.
• The availability of public and private funding such as seed funds, venture capital and public grants.
• International reputation and visibility.

No one life-science cluster will have all of the necessary factors to the same extent. Indeed, the diversity of clusters across Europe is to be embraced, particularly if the industry is to survive the ebbs and flows that affect various technologies. However, growth can be deterred if key features are absent. For example, as a result of increasing costs and difficulties in recruitment of suitable staff and space constraints, Hematech – a US-based biotech company developing human polyclonal antibodies – relocated from the Biotechnology Park adjacent to the University of Massachusetts in Worcester to Sioux Falls, South Dakota.
A grid of indicators may be used to help benchmark a cluster’s performance against these factors, and hence assess its globally competitive position.

Comparison of four internationally recognized biomedical clusters

We conducted a comparative analysis of four bio-clusters of international size: the Ile-de-France cluster; the Boston region of Massachusetts in North America; the Berlin area in Europe; and Singapore in Asia. They were chosen to cover the main economic zones and for their maturity. For Europe, Berlin is a fast-growing cluster, less mature than Cambridge, Ile-de-France or Medicon Valley. A three-dimensional analysis was conducted based on relevant indicators of each bio-cluster’s general strategy, inventory of strengths and weaknesses, and ambition against a 2010 horizon.

The clusters are representative of three stages of cluster development in the life sciences sector.

The Ile-de-France bio-cluster has arrived at maturity after a growth phase in the early 2000s. The region, which was in the view of some the first biomedical region in Europe, shows a dense industrial network and strong public research. The region around Boston hosts one of the historically most mature bio-clusters, which is widely recognized as a global leader. Boosted by a strong international visibility, the Massachusetts cluster bases its performance on academic excellence and synergies between actors.

After a late start, the Berlin/Brandenburg region cluster became the leading German bio-cluster by number of biotech companies. However, the cluster has suffered from decreasing public state intervention and the international financial constraints that have affected the biotechnology industry.

Steered strongly by the state, the Singapore bio-cluster benefits from solid infrastructure investment, with government willingness to provide physical facilities in anticipation of – rather than in response to – need. Biomedical firms and organizations, although still comparatively few in number, contribute to the dynamism of this bio-cluster.

The maturity of the clusters is reflected in the number of companies. Ile-de-France benefits from a competitive position in terms of the number of jobs in the biomedical sector, and the number of researchers in public organizations is higher than in other recognized clusters. However, the region’s cluster suffers from a lack of biotech companies, despite a population twice as high as Massachusetts or Berlin/Brandenburg.

Size is, of course, not the sole factor of interest and we used the seven key success factors suggested above to examine the competitive position of each cluster.

The Massachusetts biocluster, especially around Boston and Cambridge, reflects four main factors:

• Implementation of government policies since the early 1980s promoting technology transfer from American universities to private actors.
• Focus of scientific efforts in life sciences research and biotechnology.
• Entrepreneurial spirit, creating a genuine biotechnology industry.
• Development of a finance community able to finance company creation as well as providing significant investment in later-stage companies.

Moreover, territorial communities in the Boston area play a coordinating and animating role alongside private initiatives. They also conduct a dedicated real estate policy to meet growing demand for offices and laboratories.

A different picture is presented by the Berlin/Brandenburg area, where public and private scientific capacity and performance lag behind the Ile-de-France or Massachusetts, while the industrial network is less comprehensive, with few large pharmaceutical laboratories. The Berlin cluster is notable for a high level of federal aid and for achieving Germany’s highest number of biotechnology company creations – and a good level of collaboration between public and private organisations. The key lesson is that support needs to focus on the survival, growth and sustainability of firms as well as on their creation.

Singapore is on its way to becoming a regional competitiveness cluster. However, initiated in 2000, it still remains at the embryonic stage. It benefits from the construction of dedicated infrastructure and from a strong international visibility thanks to state policy. Through heavy investment the government has financed the creation of fundamental research institutes in the life sciences. However, scientific universities have difficulties recruiting students and are in the process of attracting European and US-educated staff. Singapore conducts an ambitious human resources strategy to hire both Asian and Western researchers.

The Ile-de-France region is an excellent example of integration along the value chain of therapeutic innovation, which is a major criterion in evaluating the dynamism of a cluster. Indeed, the region hosts a large academic research base, several ‘big pharma’ R&D centers (Sanofi-Aventis, Servier, Ipsen, Serono, GSK), production units, headquarters and a large network for clinical trials. Positioned upstream in the value chain, the Massachusetts bio-cluster’s activity is less extended in clinical research and production, because of high labor and clinical trials costs. On the same model, Berlin focuses more on the first stages of the value chain. The lack of critical mass of international big pharmaceuticals, historically located in other German regions, specifically Bavaria and the Ruhr, explains the relatively low production and marketing contribution to the cluster’s activity. Singapore’s core competencies are currently in clinical development, manufacturing and marketing for Asia of health products but research capabilities are growing rapidly.

Keith Stewart is a Manager in the Healthcare practice of Arthur D Little in the UK. E-mail stewart.keith@adlittle.com. Eric Halioua is a Senior Manager in the Healthcare practice of Arthur D Little in the US. David Brown leads Arthur D Little Ltd’s Technology and Innovation Management practice in the UK. E-mail: brown.david@adlittle.com. François Deneux leads the Healthcare practice of Arthur D Little in France. E-mail: deneux.francois@adlittle.com. François Le Verger is a Business Analyst in the Healthcare & Public Services practice in France.