“If I have seen farther than other men, it is because I have stood on the shoulders of giants” – Isaac Newton
The 2021 Formula 1 motor racing season came to the most controversial of conclusions on 12th December 2021 – and although Max Verstappen won his maiden title on the day, the fate of the driver’s championship may well (unfortunately) end up being determined by the courts. What was not so widely commented on is the fact that, for the eighth year in a row, the constructors’ championship – awarded to the team with the most points amassed across the season – went to Mercedes. Formula 1 plays the national anthem of the winning team after each race, and since 2014 the German national anthem has been played 109 times to mark a Mercedes win, a remarkable indication of consistency and, all in all, a remarkable achievement for the German team.
Except, it’s not really a German team. The team is based in Brackley, in Northamptonshire in England. The chassis is made there, and the engine development is done 27 miles away in nearby Brixworth. Why would a German team choose to base its engineering and manufacturing in England? Well, it’s not just any part of England. Red Bull, the team that propelled Verstappen to ten wins and the drivers’ championship in 2021, is based in Milton Keynes, just 25 miles away from Brackley. Both teams are based in the so-called “Motorsport Valley”, a concentration of Formula 1 teams all located within an 80-minute drive of the Silverstone racing circuit. In addition to Mercedes and Red Bull, other teams that called Motorsport Valley home in 2021 were McLaren, Alpine, Aston Martin and Williams. That’s 6 of a total 10 teams in the competition. According to a recent medium.com article (Johnson, 2019), this is just the tip of the iceberg. 4,300 companies, with 41,000 employees and 80% of the world’s high-performance automotive engineering talent is based there.
This represents a remarkably concentrated cluster of talent and expertise. In a highly competitive business, why do companies cluster so closely together?
Clusters often come together because a pioneer, or precursor, industry was based in the area. In our Motorsport Valley example, the area to the North and West of London was a centre for aircraft manufacturing, and the location of many airfields, during and after the Second World War. The skilled aircraft engineers were well suited to the demands of motorsport engineering, the abandoned airfields were ideal for use as test tracks, and a cluster was born. Once a cluster exists, the skills and knowledge become “sticky” and tend to remain in the region even if companies come and go. Whether deliberately or not, know-how and ideas tend to flow between the companies in the cluster, perhaps as staff move between companies or simply if friends working for different companies meet socially after work. If ideas flow, doesn’t knowledge simply become diluted, as everybody shares it, reducing competitive advantage and commoditising the industry? That doesn’t seem to have happened to Mercedes. A commoditised Formula 1 industry would be unlikely to have such a dominant force within it.
Mercedes hasn’t had it all their own way, though. From within the same cluster, Lotus dominated the sport in the 1960s and 1970s, McLaren in the 1980s and Williams had their turn in the 1990s. It seems that a cluster of competing companies and their supporting supply chain allows companies in the cluster to dominate for periods and allows the cluster to be extremely successful over the long term by an informal sharing of knowledge and know-how. At this point you may wonder about Ferrari. They have had plenty of success in Formula 1 despite being relatively remote – although if you look carefully there is evidence of a smaller motorsports cluster in Northern Italy. What appears to have happened with Ferrari is that they were able to engineer the flow of knowledge from Motorsport Valley, by hiring engineers from the UK and by investing in UK engineering companies, in order to build knowledge in and understanding of key technologies, but without knowledge flowing back from Italy to the UK cluster. Taking knowledge but not giving it back meant that in their heyday Ferrari could support and maintain competitive advantage (Jenkins & Tallman, 2012).
Regardless of whether you are Mercedes, or Ferrari, or any of the other teams competing for the championship, it appears that you need access to other players in the industry, whether suppliers or competitors, in order to innovate and reach the top. This isn’t about espionage, stealing secrets or anything illegal. A key part of the innovation process appears to be the importation of ideas from outside the company.
Clusters have many times proven themselves essential to the innovation process. In an excellent TED talk, Steven Johnson talks about how coffee houses of old would bring people together and allow ideas to flourish (Johnson, 2010). Until the end of the 19th century, there existed many small clubs of scientific and literary pioneers who met for social as well as professional reasons, but who inevitably shared ideas (Burns & Stalker, 1961). And as we will see later, Silicon Valley was built at least in part on social interactions. A recent Harvard business review article compares the actions of toddlers as they learn with the actions of new companies trying to enter new markets (McDonald & Eisenhardt, 2020). It notes that instead of trying to compete and outdo each other, they often copy and mimic one another and “any group of them is performing a kind of collective experiment, enabling each one to learn more than he or she could alone”. The authors note that this kind of behaviour is also typical of successful innovators when entering new markets. They give Sidecar, Zimride/Lyft and Uber as examples of new market innovators who grew, and some of whom succeeded, by imitating each other. They grew up together, but not in an industry cluster because there wasn’t an established ridesharing industry at the time. Instead, this was an innovation cluster, whereby the means for successful development of new technology and new markets are available and a number of like-minded pioneers are working in close proximity to each other. Great innovation often comes from existing ideas. Andrew Hargadon puts it really well when he says that where “it may be appealing to focus on the future, breakthrough innovation depends on exploiting the past” (Hargadon, 2003). In other words, it’s often just a question of seeing new applications for existing ideas and technologies. Hargadon gives us another famous example of this: Thomas Edison’s Menlo Park laboratory. Edison’s success came from an ability to see opportunities to recombine existing technology into new products for markets that previously did not exist. His ability to do this came in no small part from his own social network, people he was connected to who were forging their own paths in the emerging world of electric light and power. In short, Edison needed access to the community around him in order to “invent” the lightbulb. This is how innovation clusters work – ideas that may not work in one context have applicability in another and innovation takes place much more quickly. A real, physical, social network is what allows them to propagate. Unlike industry clusters which, as the name implies, focus solely on one industry, innovation clusters work across industries and allow ideas to migrate from one industry, and one market, to another.
A study of Silicon Valley tells us that “innovation clusters… …integrate lessons” from different industries to create new markets (Ferrary & Granovetter, 2009). This study emphasises the importance of proximity and finds that access to many different kinds of entity is required for a start-up to be successful, including universities; large companies; laboratories; venture capital; and a whole variety of professional services. The concentration of all these entities in Silicon Valley helped to launch its success as an innovation cluster.
But Silicon Valley also had something else, something very important. In his book “Rebel Ideas”, Matthew Syed describes the case of Route 128 just outside Boston, Massachusetts (Syed, 2019). For those of a certain age, it’s the route that influenced Jonathan Richman’s song “Roadrunner” (Barton, 2007). More importantly, Route 128 was also the centre of the technology industry in the United States at a time when much of Silicon Valley was still farmland. Gradually, though, Silicon Valley forged ahead and overtook Route 128, once known as “America’s Technology Highway”. The reason? The companies on Route 128 were closed, isolated, held tightly to technology, and their employees had few places to mix socially. The glue that makes clusters sticky was absent. Silicon Valley was the opposite. Facilitated by an abundance of bars, clubs and other hangouts, ideas flowed between individuals and companies, and innovation was primed. It is clear which location was the winner, and it’s equally clear that the success of Silicon Valley resulted from the social migration of ideas, and the cultural environment that enabled it.
Do clusters appear serendipitously, or is it possible to seed them? Actually, both. Increasingly, local and national governments are investing in entrepreneurial ecosystems, designed to create Silicon Valley-like conditions which they hope will spur innovation and creative industries for their population. They are often, but not always, themed around specific industries. My home in Cheltenham, England, sits within two newly-formed entrepreneurial ecosystems. The Golden Valley Development, focused on the town, is looking to build on existing expertise in the area, and use local universities and GCHQ as anchors for an ecosystem in Cheltenham based on the cyber industry (www.goldenvalleyuk.com, n.d.). On a larger scale, covering the south-west of England and South Wales, the Western Gateway aims to bring together talent and academia to “become an internationally recognised powerhouse for innovation in the creative, digital and cyber industries” (western-gateway.co.uk, n.d.).
The World Economic Forum describes eight pillars that it believes make up an entrepreneurial ecosystem (World Economic Forum, 2014). These are:
- Accessible markets
- Talented workforce
- Funding and finance
- Support systems and mentors
- Regulatory framework
- Education and training
- Major universities to act as catalysts
- A supportive culture which celebrates innovation and tolerates risk and failure and has a preference for self-employment and entrepreneurship.
This is very similar to Ferrary & Granovetter’s list, but with the very notable addition of government intervention in a regulatory framework, and I think it’s inevitable that the recovery after Covid-19 will involve more government intervention in the creation of new capabilities and industries in order to rebuild damaged economies. Whether in clusters or ecosystems, it seems that the future of innovation includes an awful lot of cooperation. As useful as they are, though, this cooperation is not confined to clusters or ecosystems. Many successful companies (and I suspect many soon-to-be-successful companies) are reaching out to external partners in a very structured manner in order to grow their own innovation capability while avoiding the mistakes made by the companies along Route 128. This is Open Innovation, and I’ll describe that some more in a future blog.
Before closing, a thought about the future. I recently moderated a panel discussion where we talked about how our recent pandemic-induced reset has spurred innovation – necessity being, as ever, the mother of invention. But that may be a short-lived effect. In his newspaper column (Syed, 2020), Matthew Syed revisited the Route 128 story and pointed out how Covid-19 has made everywhere look like the Massachusetts described in the story above, with employees isolated from social contact and not mixing between, or even within, companies. Much has been said and written about the death of the office and the death of the city, and a future in which knowledge workers stay at home, communicating through Zoom, Teams or some equally impersonal method. I hope, and believe, that (to paraphrase Mark Twain) reports of the death of the office and the city are greatly exaggerated. Given what we know about the importance of social interaction to innovation, the death of the office and the death of the city would also lead to the death of innovation. That would cause much greater economic damage, in the long term, than the shock of 2020. If we want to innovate, we need to find ways to congregate.
“Creating opportunities for people who don't encounter each other normally to meet and talk is key” – Taavet Hinrikus
- Companies often cluster together to gain access to knowledge from other companies and thereby increase their chances of success
- Once formed, clusters tend to be sticky
- Proximity helps, but openness and social interaction are essential
- While industry clusters are focused on one market, innovation clusters allow ideas to migrate between markets
- Innovation clusters provide all the services that start-ups will need along with access to talent, academia and existing large organisations
- Governments are creating and increasingly will be driven to create entrepreneurial ecosystems from the top down, adding favourable regulation to the benefits provided by innovation clusters
- The future of innovation is open and cooperative, in order to innovate we have to find ways to congregate!
References and Further Reading
Barton, L. (2007, July 20). The car, the radio, the night – and rock’s most thrilling song. https://www.theguardian.com/music/2007/jul/20/popandrock5
Burns, T., & Stalker, G. (1961). The Management of Innovation. London: Tavistock.
Ferrary, M., & Granovetter, M. (2009). The Role of Venture Capital Firms in Silicon Valley’s Complex Innovation Network. Economy & Society 38(2), 326-359.
Hargadon, A. (2003). How Breakthroughs Happen. Boston: Harvard Business School.
Jenkins, M., & Tallman, S. (2012). The Shifting Geography of Competitive Advantage: Clusters, Networks and Firms. Journal of Economic Geography, 10 (4) , 599-618.
Johnson, S. (2010, July). Where Good Ideas Come From. https://www.ted.com/talks/steven_johnson_where_good_ideas_come_from?language=en#t-1046522
McDonald, R., & Eisenhardt, K. (2020). The New- Market Conundrum. Harvard Business Review, May-June, 74-83.
Syed, M. (2019). Rebel Ideas. London: John Murray.
Syed, M. (2020, October 25). Shut Bars and You Kill Whole Ecosystems. https://www.thetimes.co.uk/edition/comment/shut-bars-and-you-kill-whole-ecosystems-g9xk0mnf8
World Economic Forum. (2014, January). Entrepreneurial Ecosystems Around the Globe and Early-Stage Company Growth Dynamics – the Entrepreneur’s Perspective. http://www3.weforum.org/docs/WEF_II_EntrepreneurialEcosystemsEarlyStageCompany_Report_2014.pdf
© 2020-21 J M Clegg Ltd
Updated 13 December 2021
Image provided by Pixabay with thanks to randomwinner
Image © Rawpixel.com – stock.adobe.com