Business Clusters

Aug 05, 08 in Business, Internet, Startups

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Last week I posted an article highlighting consumer technology startups in Atlanta with a promise to explain why not many of them make it big.  Here is that explanation.

It stems from the work of Michael Porter.  Porter is the preeminent scholar of our time on the subject of business strategy and competitiveness.  If you have any formal business training you know of his work.  In 1990 Porter wrote The Competitive Advantage of Nations where he introduced the theoretical framework (not only software development uses frameworks) of business clusters. 

A cluster is simply the geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field.  Clusters come in all ages, shapes, and sizes.  Film production in Hollywood, technology in Silicon Valley, and thoroughbred horses in Kentucky, all are examples of clusters.  Heck even the NYC diamond district which mostly comprises one block on one street is a cluster.  Clusters are everywhere and one can easily surmise given the title of the book that clusters create competitive advantage.  And they do.

Well if they do I want some where I live and this of course leads to the question of how clusters are formed.  In a report entitled "Clusters of Innovation Initiative: Regional Foundations of U.S. Competitiveness" funded by the Council on Competitiveness and authored by Porter the following was explained as ways to enhance the development of clusters:

• Clusters can be strengthened by increasing awareness of the cluster among local firms and organizations: Not only must firms be aware of the presence of a local cluster, they must also get together and coordinate activities to improve the cluster’s business environment.  Acceptance of new companies is important if the cluster is to grow quickly and reach a critical mass.
• New firm and cluster opportunities arise at the intersection of existing clusters:  Economic development strategies can leverage these opportunities to diversify a regional economy.
• Anchor companies play a disproportionate role in seeding cluster development:  Anchor companies support cluster development by acting as magnets for other major companies; organizing other companies in the cluster for collective action; supporting projects that improve the local quality of life; and producing numerous spin-out companies, which strengthen key elements of the cluster (emphasis mine).
• Institutions for collaboration can significantly increase the success rate of start-up companies:  Cluster development depends in large part on generating new companies from within a region.  Successful regions almost always have a hospitable environment for start-ups.

Another important finding of this study was the outcome of The Cluster Mapping Project.  The Cluster Mapping Project identified 41 types of clusters in the U.S. economy.  While any given region will have some employment in the vast majority of these clusters, regional economies are typically very strong in only a handful.  So what clusters are present in the broad Atlanta regional economy?

It just so happens that Porter also wrote yet another report entitled "Clusters of Innovation Initiative: Atlanta-Columbus" which answers that question.  Running 168 pages it actually answers that question, though aging a bit, in great detail.  The report identifies financial services, transportation/logistics, and information technology, as strong Atlanta regional clusters.  Yes technology. 

The Atlanta technology cluster was the ninth largest in the United States (population appropriate if you will) and the second fastest growing in the country.  The report further identifies what it calls communications services (think telco and Internet), and software development as strong within the tech cluster.  And believe it or not it even mentions Web development as a well established cluster.

The report lays out the development of Atlanta's technology cluster as such:

Atlanta’s information technology cluster draws its roots from Atlanta’s historical strengths in telecommunications and more recent strength in media companies.   In the 1960s and 1970s, telecom companies like AT&T , GTE, and WorldCom expanded operations as the region grew and telecom expanded throughout the country.  Turner Broadcasting, CNN, and Cox Communications were established in the 1980s to offer both cable service and new television content.  These companies found Atlanta to be fertile ground because of its skilled technical workforce that remained in the area after World War II and the strong flow of new talent provided by Georgia Tech’s industrial and electrical engineering programs.

In the late 1970s and early 1980s two software companies, Management Science America and Peachtree Software, enjoyed strong growth, and when sold to larger companies, made their leadership teams wealthy. The success of these firms and their founders did not result in an immediate boom in software or info tech firms, as was the case in other smaller regions.  Instead, the impact of these firms’ success was somewhat “lost” in the economy of a major metro area where big companies, major banks, and real estate developers were the primary job providers and held public “mindshare.” 

It was not until 1997-98, with the success of MindSpring, one of the first large national Internet service providers, that a widely recognized anchor firm developed.  MindSpring’s success and a growing national market encouraged other Internet-based entrepreneurs to expand businesses based in Atlanta including iXL, a web developer, and Internet Security Services, an Internet security firm.  The business community, universities, media, and existing venture capital firms lined up to support the development of Internet firms in the wake of these successes and the growing recognition that the “new” economy was real. 

And goes on to conclude:

Atlanta’s information technology cluster has thrived over the last five years.  Building from regional strength in software, communications, and financial services, entrepreneurs have established Atlanta as a broad-based IT region. Through state-led investments in research, education and infrastructure, an innovative technology business incubator, and the efforts {of} multiple private sector entrepreneurs, Atlanta has developed a broad-based cluster.  Seeing significant growth only over the past three years, Atlanta got a “late” start in the e-commerce and Internet area of this cluster, but is now home to a number of nationally recognized firms like WebMD, ISS, and MindSpring. The entrepreneurs who started these firms have been critical in the development of the cluster, both through the success of their firms and through the personal and corporate investments they have made in other regional firms.

Now there are some obvious factual errors in the report but really only one that bears correcting for my purpose.  Unlike the folks at MSA and ISS, the entrepreneurs that started iXL, MindSpring, and WebMD have not made broad investments that produced numerous spin-outs within the Internet cluster (for a variety of reasons that are either obvious or best discussed over a beer).  iXL, MindSpring, and WebMD did not act as anchors. And that is the root cause for the lack of a strong consumer Internet cluster producing large and successful companies in Atlanta.

But there is a new hope, which I will discuss next week.