Introduction

A preliminary proposal for development of an industry cluster in a subregion of SE Queensland was recently  prepared. This discussion paper re-presents that proposal as a possible generic process for developing the 'XYZ' industry cluster in the 'ABC' region. The proposal includes:

• the 'Seven Secret of Failure' in developing an industry cluster - often corresponding to traditional tactics;
• alternative tactics for each of the Seven Secrets of Failure, which should yield better results; 
• a suggestion of how to link those alternative tactics into a work program. [The suggested process is quite different from conventional methods for concept development which seek to define the concept (ie in effect to 'build a project from the fence in') as it involves a process to first stimulate and enable potential stakeholders to discover value in a concept - in effect to 'build a project from the fence out']; and
• a theoretical foundation for the suggested process.

The suggested generic process is based on practical experience with attempts at 'strategic market management' that were reasonably successful in identifying potentially-productive economic options - though outcomes were ultimately constrained by politicians' belief that it was up to them to dictate those outcomes rather than allow market demand to do so.

The Concept

The concept is of a strong cluster of XYZ-related industry (eg ....... ), commerce (eg traders-exporters, ........ ), services (eg specialised infrastructure,  business services, finance, suppliers to XYZ industry and commerce, associations, other  services, education, training, research), government functions (eg regulation), real estate (eg buildings, ... ) and tourism (...... ).

This concept is plausible because of ABC's (natural attributes) and the existence of an embryonic cluster of functions which could provide the base to build on.

The Seven Secrets of Failure

The best way to illustrate what is required for success in stimulating such an industry cluster is to outline the seven 'secrets of failure'. 

The first 'secret of failure'  is to focus on real estate. The problem with an emphasis on the real estate which such a cluster might locate on can be illustrated by the cargo-cults amongst isolated tribes in New Guinea who used to build 'airfields' and place replica 'airplanes' on them to entice over-flying aircraft to land and unload their 'cargo' - which the natives believed was rightfully theirs.  What they should have done was to learn something about commerce, set up trading-posts and develop links to traders in other areas. Eventually someone would have said 'We need to be able to land planes in that area - so lets build an airfield'. Then real airfields and cargo would have come.

The traditional method for trying to entice industry to locate in Queensland has been like the cargo-cultists, ie provide industrial estates in the hope that 'low-flying industries' will see them and decide to land.  In the ABC case, rather than providing real estate (eg an XYZ precinct) the focus should be on the knowledge and skills of enterprises and on organizations relevant to an XYZ industry cluster so that such entities are developed in ABC to the point that they have a competitive advantage.  As they start to grow and expand a related XYZ industry precinct might be seen as useful, and attract investment.

The second 'secret of failure' is to concentrate on attracting outside investment. Because of competition from low-wage regions for industry location, there are generally NO footloose industries which are highly productive (ie likely to raise ABC's  per-capita incomes). Also any firm which is artificially attracted will tend to just move on when it gets a better offer.  The secret of success is to build on the embryo of the XYZ industry cluster which already exists.   This involves a significant difference in approach. Rather than gathering information about ABC to provide to outside investors, ABC  should (through appropriate institutions - ie those which are NOT politically accountable) gather and digest information about world-wide market and technological opportunities relevant to XYZ. This will build competitive advantages in ABC firms - thus allowing them to invest and expand, and attracting others to invest in their vicinity.   The big difference is that development of an industry cluster starts as a learning process, rather than as an investment process.

The third 'secret of failure' is to politically 'push' for the creation of the various components of an industry cluster.  This guarantees that (a) such elements are artificial and will be unable to survive without ongoing subsidy, and (b) those elements will not work together to make an integrated and functioning whole. What will work is to allow the elements of the industry cluster to be grow in response to the 'pull' of the market (which can include government's requirements to efficiently carry out its functions), as competitive advantages emerge in ABC. 

The fourth 'secret of failure is similar and involves providing strong political leadership. This guarantees that the process has a 'political' orientation. In other words the goals sought will tend to be what the interests (eg firms in the industry cluster) which have political links want, rather than what their CUSTOMERS would want. The latter orientation is essential to make the cluster economically productive and commercially viable. What will work is to provide encouragement and a framework for leadership by entities which are neither politically oriented, nor government agencies.

Closely related to the fourth 'secret of failure' is to allow those with the strongest established positions in a potential industry cluster to control its development, as this increases the risk of the process becoming political (ie of outcomes being determined by 'who-you-know' rather than 'what-you-can-do').

The fifth 'secret of failure' is to provide government assistance to firms where market failures are identified. This guarantees: that poor quality 'assistance' is provided to create the impression of success; that any firms that grow with such support are liable taken over later because they lack the strength to survive in the face of heavyweight competition; and that market failures (which will initially be very real) are locked in (because real support is squeezed out) and ABC's economy is prevented from developing. What will work is to: highlight areas where market failures exist (eg where there are gaps in the facilities and services required within the potential cluster); undertake research into enterprising options to fill  gaps, and; bring this opportunity to the attention of potential service providers.

The sixth 'secret of failure' is for government to plan the development of the industry cluster and prepare a benefit / cost analysis as a basis for a decision by government about support to be provided. This guarantees that no one else can take any initiatives. What will work is to (a) assume that NO special government support is to be provided and (b) to manage / stimulate the market - so that information about opportunities becomes more readily available and anyone can take related initiatives. When such methods have been used previously it has been found the potential benefits of a proposal can rapidly escalate through independent initiative to link the concept to others' existing plans (ie the benefit cost ratio can be dramatically increased rather than just being measured).

The seventh 'secret of failure' is similar. Keep all information confidential until the proposal has been finalized.  Once again the effect of this is to ensure that no one can take any initiatives until a committee (or a minister) has decided what is to happen. What is better is to ensure that information about what is going on is widely available (including the names of those involved, information collected, working documents) and that the process does not require insider decisions. The latter can be achieved if the process results in an indicative plan which defines what the concept might be like, rather than exactly what it will be. 

The seven 'secrets of failure' are of course what has often the practice for 'industrial development' in Queensland. Thus somewhat different tactics need to be used if success is to be achieved.

How it could be done

Development of an XYZ  industry cluster at ABC  might be accelerated by a two stage process involving (a) concept development and (b) institutional development through concept refinement.

Stage 1: Concept Development could involve:

• identification of a concept that potential stakeholders in XYZ (ie participants / suppliers / customers / otherwise interested parties) find compelling / worth considering. This can emerge from a proposal by, or consultation with, experienced stakeholders or perhaps from technical literature that addresses their fields of interest;
• a sponsor's (eg government) commission to an organization which has a natural interest in an XYZ industry cluster at ABC to (a) select a convenor for a Stage 1 steering committee (b) engage a Stage 1 project manager (c) provide secretarial support to the steering committee and (d) maintain a publicly accessible file on which all information connected with the project is available. The role of the project manager would be to (a) provide information about the project as a whole as required - including information to the media (b) liaise with and promote effective cooperation amongst the steering committee, and the other seven research organizations and (c) report on the project as a whole at its conclusion
• a sponsor's  commission to eight credible organizations / individuals with a potential to contribute to an XYZ industry cluster to simultaneously research and report after 3 months on respectively (1) the existing XYZ industry functions of ABC - including their strengths and weaknesses (2) global trends in XYZ industries and their markets (3) technological and market opportunities for an XYZ industry cluster at ABC (4) XYZ industry clusters elsewhere (including their characteristics, strengths, weaknesses, and complementarity) (5,6) two independently produced outlines of how an XYZ industry cluster might develop at ABC (7) community, environmental and public policy issues and (8) managing the development of an XYZ industry cluster - including an analysis of benefits to potential catalysts from leading its development in Stage 2.  Commission 8 might usefully be combined with the role of the Stage 1 project manager. The eight organizations commissioned would be required to (a) participate in the steering committee (b) liaise with one another and (c) communicate openly with any member of the public about the project
• identification (through networking) of organizations / individuals having a potential interest in an XYZ  industry cluster at ABC. From this (a) a contact list would be prepared - and constantly updated (b) all persons on the list would initially be given: a copy of the contact list, an outline of the Concept Development process, the names of those commissioned in Stage 1, and information about the publicly accessible file (c) following completion of the project, all persons on the contact list would be given: a copy of the updated contact list and a synopsis of the conclusions of all studies and how detailed information might be obtained.
• a public meeting, to provide the regional community with access to information about the investigations, and to allow stakeholders to access community ideas and concerns about the concept.

The most important part of the work on Stage 1 would however have nothing to do with any of the above activities. It would involve internal evaluation, mainly by organizations on the contact list, of opportunities which a stronger XYZ industry cluster at ABC would offer to themselves and discussions about this amongst those organizations and their contacts.  The goal of State 2 would be to allow the results of their work to begin to be crystallised.

In selecting organisations / individuals to commission for the above indicative indicative R&D roles, it is wise not just to select those with the strongest roles in the embryonic cluster - as doing so will tend to reinforce their dominance and risk allowing the process to be captured politically by dominant interests. Rather organisations / individuals should be selected who are seen to have sound future potential - but not the strongest established position.  Those who do have the strongest positions in the embryonic cluster should have no trouble keeping up from the sidelines.

Stage 2: Institutional Development through Concept Refinement. Stage 2 would initiate institutional arrangements which can actively accelerate development within the embryonic XYZ  industry cluster on an ongoing basis. 

The process would involve inviting entities, which are interested in and potentially capable of, taking an active ongoing catalytic role:

• to seek enterprising proposals (ie those which assume NO special government contributions) for the implementation of opportunities for components of an XYZ industry cluster arising from the work done in Stage 1, and 
• to undertake further investigations related to the XYZ industry cluster.

Establishing the Process

Experimentation with a wide variety of such processes could usefully be encouraged by governments in the first instance, so that models can be found that are most likely to be workable.  This could involve stimulating experiments in stimulating various different types of economic functions, in various regional contexts and by different types of catalytic agencies using methods that they themselves design.

However beyond the experimentation stage the initiative to start such a specific development process could come either from a financial sponsor (eg a government or a strategic stakeholder), or from an organization that has a natural interest in catalyzing an XYZ industry cluster at ABC.

Qualified catalytic entities to support management of the above process might include: (a) a group of firms from within the embryonic XYZ industry cluster (b) a business association / Chamber of Commerce (c) an industry institute linked with a university (d) a financial institution with a specialist interest in the particular cluster (e) respected community leaders (f) service providers to the embryonic XYZ industry cluster (g) organizations with key landholdings (or other strategic assets) which might benefit from an XYZ industry cluster - see below or (h) a regional development association, etc.

Before proceeding with such a process it would be wise to undertake a small scoping study to more clearly describe the opportunity and the ABC context, and firm up the above proposal after discussions with relevant organizations.  It is very likely that there are already organizations with an interest in such opportunities with whom alliances might be developed in advancing the proposal.

The investigation and developmental  work of such potential catalytic institutions might be subsidized by a sponsor - on a steadily declining basis - for a period of 3-5 years. The overall cost to a financial sponsor of such a process over 3-5 years should be no more than $....

The potential of such a process to benefit persons with strategic positions in relation to a potential industry cluster (eg suppliers to the industry, those with key land holdings) should be considered as a source of financial sponsorship.

The suggested process involves accelerating 'learning' within an industry cluster which can contribute to competitive advantages which raise the productivity  of firms (ie lift business and employee incomes). Thus this has the potential to be VERY profitable to those with strategic land-holdings (as the value of land is directly linked to the income of residents and firms which have access to the land).  For those who have access to potential gains in the value of substantial land holdings,  and the skills required to 'manage the market',  financing such an economic strategy could be a profitable investment. It can be noted that strategic land holders can benefit even if economic development does not actually occur on their property.  Similar conclusions probably apply to the holders of other strategic assets.

It would be highly desirable to, and in many circumstances it should be possible to, initiate such a process without government financial support. However it would appear desirable to seek understanding and support from governments of any completely independent cluster development process.

At the end of 5 years progress should be assessed.

Theoretical Foundation

The theory of how such a process could contribute to the creation of sustainable competitive advantages for firms in an industry cluster (and thus increase the economic value added in associated enterprises, and in the regional economy) is outlined  in Defects in Economic Tactics, Strategy and Outcomes and in SEQ 2001 A Plan for an Under-developed Economy. It is also presented in more detail in Transforming the Tortoise: A Breakthrough to Improve Australia's Place in the Economic Race?.

In simple terms, this suggests that systematically re-aligning the arrangements within an industry cluster with emerging market and technological opportunities can create transient competitive advantages and raise the productivity of the enterprises involved, just as innovation within a single enterprise can do.

John Craig
Centre for Policy and Development Systems
December 2000