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Birds of a Feather PUBLIC ACCESS

Companies in the Same Field Tend to Cluster in the Same City or Region. Understanding that Could Help Businesses—and Engineers—make Vital Decisions.

[+] Author Notes

Contributor John K. Borchardt has worked in the oil and gas industry for more than two decades.

Mechanical Engineering 133(10), 46-50 (Oct 01, 2011) (5 pages) doi:10.1115/1.2011-OCT-5

Abstract

This article focuses on the benefits of clustering same field companies in the same city or region. The article also discusses that clustering same field companies in same region can help businesses and engineers and in making vital decisions. In addition, interactions and successful partnering among these various organizations can create synergies that increase the productivity of companies, drive the direction and pace of innovation, and stimulate new business start-ups. The concentration of energy businesses along Katy Freeway, Houston is a classic example of what economists call a business cluster, an industry cluster. Investing in technology centers and instituting government-sponsored incentives may persuade firms to locate in a region, however, without the economic culture of collaborative relationships; a collection of companies will never become a true business cluster. The article also highlights that professional organizations can promote fruitful interactions between individuals in an industry and help promote business interests in a cluster.

Article

Is there a city that can claim the title, Energy Capital of the World? It is hard to drive down Katy Freeway, a stretch of Interstate 10 on the city's west side and not believe that Houston couldn’t just as well be named Energy City.

The area, known locally as the Energy Corridor, is home to more than 300 energy industry companies, often in multi-building campuses. Conoco-Phillips and Citgo have their world headquarters here, and giants such as ExxonMobil, Royal Dutch Shell, and BP are represented. The corridor houses oil and gas service firms such as Baker Hughes, Weatherford International, McDermott International, and Foster Wheeler, and dozens of smaller industry players are nestled among them.

More than 73,000 people work in the Energy Corridor, and these workers and executives are well catered to. The Houston Training Center, for instance, offers high-tech classrooms for training classes and meetings. And there are upscale shops and restaurants, hotels, parks, and nature trails.

The concentration of energy businesses along Katy Freeway is a classic example of what economists call a business cluster, an industry cluster, or in deference to the economist who first identified the phenomenon, a Porter Cluster. In his 1990 book, The Competitive Advantage of Nations, Harvard University business professor Michael Porter showed that interconnected businesses, their suppliers, customers, and other associated institutions in a particular industry or technology field often concentrate in one location. In addition, interactions and successful partnering among these various organizations can create synergies that increase the productivity of companies, drive the direction and pace of innovation, and stimulate new business startups.

For the entrepreneur who is thinking about starting a company or a CEO looking to expand his business, understanding why businesses cluster—and thrive from the proximity to one another—is crucial. Like birds of a feather, similar companies tend to flock together, and business leaders ignore that tendency at their own peril.

Although Porter has become identified with the concept, it dates back at least to Alfred Marshall's classic 1980 text, Principles of Economics. And Princeton University economics professor Paul Krugman won his Nobel Prize for work outlining how geographic factors affect trade and the concentration of wealth.

Porter focused especially on activity within a region. Access to a labor force with specialized skills, a desirable location, abundant natural resources, a supportive business infrastructure, and a strong research and development community, he realized, could cause a group of companies to locate and grow in a region. In some cases, face-to-face communication of business leaders can lead to the creation of conditions that aid in this process.

A business professor at University of California, Irvine, Yasuyuki Motoyama, noted that a thriving Porter cluster results from partnerships and successful business relationships among organizations near each other. These relationships create synergies between organizations resulting in business success and economic growth.

Porter showed that interconnected businesses, their suppliers, customers, and other associated institutions in a particular industry often concentrate in one location.

Grahic Jump LocationPorter showed that interconnected businesses, their suppliers, customers, and other associated institutions in a particular industry often concentrate in one location.

“Exploration in successful regions” Motoyama noted, “is industry led, has a high level of interactivity, and has an ultimate goal of creating new collaborative partnerships between business, government, education, and the community to support the infrastructure needs of the industry.”

Sometimes business clusters form around unique geographic features. Available water power, for instance, led to the establishment of mills in the area of Lowell and Lawrence, Mass., which became the center of a textile industry manufacturing cluster in the 18th century. The convergence of railroads and waterways resulted in steel mills popping up along the southern tip of Lake Michigan. Those northern Indiana mills produced steel for railroad equipment manufacturers in nearby Chicago and the rising automobile industry in Michigan.

But the factors that can lead to a business cluster can erode over time, and with them, the cluster itself. As available water power became less important with the advent of steam and then electric power, northeast Massachusetts lost a key advantage for textile manufacturers and the center of the industry migrated, first to the American South, and then overseas, to find cheap labor.

Business decisions can explicitly strengthen some clusters at the expense of others. When BP acquired Amoco and ARCO in the 1990s, the company closed engineering technical centers in California in order to focus engineering development work in new facilities in Houston's Energy Corridor. More recently, Halliburton began constructing buildings on a 94-acre site in Houston to accommodate the relocation of engineering and technology departments from its technical center in Duncan, Okla. Houston's gain is Duncan's loss.

Over many years Boeing has built its own aircraft design facilities and aircraft manufacturing plants in the greater Seattle area. Other businesses, such as precision machining companies and specialty parts suppliers, have located there to serve Boeing, becoming part of an integrated business cluster, just as Porter would have predicted.

With its 787 Dreamliner, however, Boeing settled on a very ambitious design involving extensive use of composite materials to replace steel to produce a lighter-weight aircraft. The plane is intended to have a 17 percent greater fuel efficiency than the metal Boeing 767 it was intended to replace.

To build the Dreamliner, Boeing designed a manufacturing process that would assemble barrel-shaped sections that would then be joined to form a fuselage. And instead of relying on its own facilities and the cluster of businesses in the Seattle area, Boeing decided the airframe would be produced in several large sections by outside suppliers located in distant locations. Finished aircraft sections, complete with all their systems and internals, are flown aboard modified 747s to Boeing's aircraft factory at Everett, Wash., for final assembly, inspection, and flight preparation.

All told, Boeing has 50 supplier contracts, with 28 of the suppliers located outside the United States. The wings and central wing box are produced in Japan. Italy's Alenia makes the horizontal stabilizer while Boeing produces the tail fin in the U.S. Boeing Australia manufactures ailerons and flaps, while Boeing Canada Technology fabricates fairings. France's Latecoere and Sweden's Saab between them make the aircraft's doors, while the Tata Group in India produces floor beams.

Boeing decided to use a global supply network, in part, to help secure financing for the development of the 787 and to land global orders, wrote Richard L. Nolan, a professor of business administration at the University of Washington in Seattle, in the Harvard Business Review. One unintended result, however, is that Boeing's partners in Japan, China, and Europe have gained access to an unprecedented amount of proprietary Boeing technology. Today's partners may be tomorrow's dangerous competitors.

This global outsourcing decreased Boeing's focus on its Seattle area business cluster. While this has opened up the manufacturing and supply contracts to global competition, it has also reduced the company's control over the manufacturing process. Quality control issues and other delays have pushed customer deliveries of the advanced aircraft three years behind the original schedule. The company has had to pay airlines that had ordered Dreamliners billions of dollars in penalty fees for late delivery.

Indeed, instead of dismantling the business cluster concept, the problems with the Dreamliner have forced Boeing to begin building a new cluster. To deal with Dreamliner schedule delays and quality issues, Boeing has attempted to expand an existing aircraft manufacturing cluster in South Carolina. It has acquired two factories in North Charleston from Vought and Global Aeronautica, and the company is constructing a new $750 million, 692,000-square-foot plant for Dreamliner assembly, scheduled for completion in July. The former Vought and Global Aeronautica plants will manufacture the tail section and rear passenger sections of the aircraft. Workers in the new North Charleston plant will then assemble both into a final plane that will be sent to Boeing's original Everett plant for additional work there.

Economists don’t completely understand business clusters. They are everchanging, almost living creatures. “We found that the theory's descriptive and static nature necessitates a dynamic analysis,” Motoyama said. “This requires analysis of not only how a successful cluster is organized today but also how it emerged, what kind of challenges it faced and resolved, and who played a major catalyst role. Such analysis must be longitudinal, case specific, and in depth.”

Local governments may make a conscious decision to create a business cluster, often offering incentives to similar companies to start up or relocate in a region. But business clusters require more than proximity. They need the sort of interconnections that can result in synergies that multiply the benefits of the related companies’ being near one another.

AnnaLee Saxenian, dean of the School of Information at the University of California, Berkeley, compared the interconnectedness of two nascent electronics clusters in her book, Regional Advantage: Culture and Competition in Silicon Valley and Route 128. Both Silicon Valley in California and Route 128 outside of Boston started with cutting-edge firms and world-class research universities. But Saxenian found that Silicon Valley firms collaborated with one another in developing alliances, contracting for components and services, or simply sharing information. Engineers and other professionals in Silicon Valley often changed employers or quit their jobs to start firms of their own. Employees of different firms mixed frequently at local business and social gatherings.

By contrast, Massachusetts firms were highly secretive and self-contained thus reducing inter-company interactions. Leaving one firm for another was considered disloyal and cross-pollination of ideas was stifled. This, Saxenian concluded, put Route 128 at a distinct disadvantage, and the result was that Silicon Valley has become synonymous with electronics and computing.

Investing in technology centers and instituting government-sponsored incentives may persuade firms to locate in a region, but without the economic culture of collaborative relationships, a collection of companies will never become a true business cluster.

For Boeing's Dreamliner, 28 of the suppliers are located outside the United States. The wings are produced in Japan, the ailerons in Australia, the fairings in Canada, and the doors in France and Sweden.

Grahic Jump LocationFor Boeing's Dreamliner, 28 of the suppliers are located outside the United States. The wings are produced in Japan, the ailerons in Australia, the fairings in Canada, and the doors in France and Sweden.

One of the business clusters generating the most economic activity in the United States is the group of petroleum engineering, research, and manufacturing companies centered in Houston. Major oil companies such as ExxonMobil, Shell, ConocoPhillips, Chevron, and BP operate engineering centers there, as do oilfield service companies such as Schlumberger, Halliburton, and Weatherford. Aramco Services Co., a unit of Saudi Aramco, has long maintained Houston offices to facilitate its access to technology and engineering personnel interested in working abroad.

General Electric, which already operates seven facilities in Houston, recently acquired Houston-based energy equipment maker Dresser Inc. for about $3 billion to capitalize on the boom in natural gas.

It isn’t just private companies. Nonprofit professional organizations such as ASME's International Petroleum Technology Institute, The National Association of Corrosion Engineers, and the Society of Petroleum Engineers are either headquartered in Houston or have major offices there. These professional organizations can promote fruitful interactions among individuals in an industry and help promote business interests in a cluster. For instance, local chapter meetings help engineers keep up with technical developments and provide a forum for individuals to meet colleagues from other firms and discuss non-proprietary technical matters. And Houston's petroleum business cluster both attracts and benefits from the steady stream of regional, national, and international industry conferences held in the city.

Houston is also a business cluster for engineering and industrial construction firms. Many of these companies had their start providing services for the petroleum industry. Fluor Corp., for instance, began in 1912 as an engineering and construction firm for the oil industry in Houston. Today, Fluor also works on projects for petrochemical and chemical, power, mining, and other industries. Fluor's competitor KBR (formerly Kellogg Brown and Root) also is headquartered in Houston and serves many of the same industries.

As a consequence of its local expertise in large-scale construction and its proximity to some of the best wind resources in the country, Houston could one day become the center of the wind turbine industry in the U.S. The area near Houston already is the home of several wind energy companies. The Danish firm Vestas Wind Systems maintains its U.S. headquarters in Portland, Ore., but in 2010 completed its North American research center in Houston. The University of Houston recently received a U.S. Department of Energy grant to construct a testing facility for offshore wind turbine materials and components.

Professional organizations can promote fruitful interactions between individuals in an industry and help promote business interests in a cluster. For instance, local chapter meetings help engineers keep up with technical developments and provide a forum to discuss non-proprietary technical matters.

Grahic Jump LocationProfessional organizations can promote fruitful interactions between individuals in an industry and help promote business interests in a cluster. For instance, local chapter meetings help engineers keep up with technical developments and provide a forum to discuss non-proprietary technical matters.

Global petroleum giants still dominate the Houston landscape. But smaller, nimble energy companies find that they reap tangible benefits from locating in a cluster heavily populated by their customers. Carbo Ceramics, which supplies materials used in hydraulic fracturing, relocated its headquarters from suburban Dallas to the Energy Corridor in 2009. Gary Kolstad, chief executive officer of Carbo Ceramics, commented that, with the move, his firm is “sitting amongst our clients.”

Business analyst Brian Uhlmer with Pritchard Capital Partners LLC observed that Carbo now has more access to new technology and oilfield services markets to expand its business. For a company like Carbo, the Katy Freeway is the gateway to the entire world.

But for how long? International competition is already rising. Recent discoveries of large oil fields off the coast of Brazil are coupling with domestic sourcing regulations to create the conditions for a Brazilian petroleum industry cluster. To meet the rules, which require Brazilian companies to provide as much as 65 percent of the products and services for new offshore projects, major oil field service and equipment providers such as Schlumberger, Halliburton, and Baker Hughes are spending about $50 million each to build R&D centers in a technology park at the Federal University of Rio de Janeiro. Last October Petrobras, the giant state-owned oil company, completed a $700 million expansion that doubled the size of its Rio de Janeiro R&D center.

Looking at the Katy Freeway, it may be hard to imagine a time when Houston is not the center of the energy universe. But the people of Lowell, Mass., probably never thought the mills there would close, either.

Copyright © 2011 by ASME
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