A Tool for Strategic Change in Organizations

A Tool for Strategic Change in Organizations

Emiliano Duch
First president and founder of The Competitiveness Institute and Managing Director of Competitiveness, a consultancy specializing in bolstering the competitiveness of business clusters.

At IESE’s International Center for Competitiveness (ICC), we understand clusters from a strategic point of view, a perspective that is slowly spreading across the world. The origins of this school of thought date back to 1991 when the Government of Catalonia commissioned a study on the competitive advantages of the region from IESE Professors Josep Faus and Eduardo Ballarín, who asked for help from Michael Porter, with whom I used to work. Since then, around 60 cluster initiatives have been developed around Catalonia with this strategic focus.

Until Porter wrote his book, Competitive Advantage of Nations (1990), local economic development was in the hands of economists and it was never thought that they could affect the business world. In truth, Porter’s book doesn’t focus on local development, rather on knowing why some companies are more competitive in certain countries, but thanks to this work we are beginning to understand the importance of the environment. For the first time, from the point of view of business, the main unit is not seen to be the company alone but rather the sum of the company and the environment it operates in. Therefore, there is now the need and opportunity for business leaders to concern themselves with their environment. All of this means that the analysis of problems is not focused at a national level but rather at the cluster level, which is understood to be an informal unit that groups companies competing in the same sectors and which are usually in close geographical proximity: textile factories near the Catalonian city of Terrassa, or motorcycle manufacturers in the Vallès area of the region, etc.

Our work focusing on this context is based on strategic analysis and adopts the methodology associated with any academic strategy department. Using this approach, business leaders should consider a series of questions:
 
* In which business should or could the companies in my environment compete? Let’s look at the Humber estuary (United Kingdom) fishing cluster as an example (which will be explained in more detail towards the end of this article). Until recently, 80 percent of the fish that was processed was frozen, creating a product with low margins and which is subject to competition from low-cost countries such as China. Therefore, it was not good business. Could they also compete in the "ready to cook" fresh fish meals business? They could, and furthermore, it's a growing sector.
 
* Do they have a competitive advantage in this industry? The answer to this question is usually negative, and this leads to further questions: What are they missing? What skills do they need to achieve that competitive advantage? It may be technological requirements, retailing capacity, know-how, or logistics.
 
*Can they procure what’s missing on their own or do they need outside help? In the English fishing example, if they decided to sell fresh fish, they would need to transport their product by air and they wouldn’t be able to build an airport themselves.
 
* If they can’t do it alone, they need to do it through collaboration and this is where the word “cluster” comes in. It may be in their interest to work as a cluster to create infrastructures or carry out market research but never to sell something collectively, set up selling cooperatives or eliminate competition, since that would be an incorrect interpretation of what a cluster is.

This is also the moment where the government intervenes, asking itself whether it should leave these companies alone or if, on the contrary, they should create a public asset that justifies the public funds needed. Government subsidies should be given along these lines and never allotted for the creation of a cluster. The role of government is to ask business leaders the right questions and to facilitate strategic thinking which they otherwise wouldn’t engage in.
 
Excellence in cluster management

This is the focus that we apply and put forward at IESE, and we have received various acknowledgements for our work, such as the European Cluster Excellence Initiative project -co-financed with the European Union - which we have just begun and which is due to last three years. Twelve countries are taking part (Denmark, Germany, Norway, Austria, France, Hungary, Croatia, etc.), led by IESE’s ICC, with the objective of defining and improving excellence in cluster management.
 
The Humber cluster case: from frozen to "ready to cook" fish

The following is a real example of the application of a cluster initiative, coordinated by Competitiveness in 2003. It illustrates how clusters, initially seen as a lobby for protection and government subsidies to continue competing in a bad business – the frozen fish business – began to be seen as a tool for facilitating strategic change towards a more sustainable business model: the "ready to cook" fresh fish one.

Through the analysis shared with business leaders and the application of the “five forces” concept, which is traditional in strategy, to the business of frozen fish processing, business leaders came to accept that the continued reductions of margins was irreversible. Competition from countries with low costs and substitute products such as chicken at very low prices had emerged. And that low margin would always be captured by the large English supermarket chains.

The alternative for companies in the cluster was clear: move into the segment for fresh fish in a pack containing all the ingredients and "ready to cook." This segment is not only growing in the United Kingdom, but enables the product to be differentiated as a healthy protein. It requires a speedy logistical entry and exit process, an obstacle barring entry to other competitors.  The same barriers that can be observed in the Dutch flower business cluster, the largest logistical center in the world for cut flowers, which only survive out of water for seven days.

Obviously, the companies couldn’t individually create the logistical system that would allow them to change their business model. It was at this point that the cluster initiative employs the word collaboration, limiting it to the construction of public assets or elements in the value chain that enterprises in Humber couldn't do alone. As a result, companies which continue to compete healthily in the market have collaborated to construct a terminal for perishable goods at Humberside Airport, a research center (Humber Seafood Institute), a research center for logistics at Hull University. They are currently tackling the construction of a joint platform costing 50 million euros, which will integrate all the existing markets in the area.

All of this has meant that the cluster companies can sell fish which 72 hours before were swimming in Icelandic waters, all of which can be traced from the fishing grounds to the table. It is no coincidence that one of the cluster companies is now considered one of the 100 best private equity investments in the United Kingdom, no mean feat in a mature sector such as fishing.
 
For more information: “The Humber seafood clustering efforts in Yorkshire”

 
Third edition of the Barcelona Clusters Summer School 

In July, the third edition of the Barcelona Clusters Summer School was held at the IESE’s Barcelona campus. It is a pioneering initiative led by IESE’s International Center for Competitiveness and directed by Emiliano Duch. During the 2-week program, the basics of cluster strategy was explained, both at a theoretical and practical level, and best practices were analyzed. The sessions were given by experts from IESE and other business management schools and by leading professionals (Pascual Berrone, Emiliano Duch, Pankaj Ghemawat , Joan Enric Ricart, Antoni Subirà, Oriol Alcoba, Miquel Barceló, Christian Ketels , Lotte Langkilde, Werner Pamminger, Alberto Pezzi and Jorgen Rosted).

First week sessions were aimed at government employees. Basic theories about competitiveness were explained along with their implications in cluster-based policy development. Moreover, real examples from countries that have applied economic development methods based on clusters, such as Catalonia and Denmark, were explained.

The second week focused on those who work directly with companies (cluster managers). A class on strategy was offered, strategic tools to be applied to a cluster were explained (using the example of southern Sweden) and the experiences of cluster management in the region of Upper Austria and of 22@ in Barcelona were detailed.