Not long ago, Toronto-based woodworking industry consultant Josef Gmeiner was asked by some furniture companies in southwestern Ontario to make recommendations about how to improve their business results, now that the industry was facing stronger competition from China. Gmeiner recommended that the companies take advantage of their physical proximity to form a “cluster” of firms that would pool their know-how and share their knowledge about how to increase competitiveness and profitability. Inspired by the theories of Harvard Business School guru Michael Porter, Gmeiner and the executives of 17 furniture companies – each of which had fewer than 250 employees – then attended a crash four-day training session on how to build a successful cluster. “We went to the conference, and then we shamelessly copied everything,” Gmeiner said.
The organization they created, known as Bluewater Wood Alliance, meets regularly to discuss such issues as best practices for using dry kilns; techniques for improving supply chain management; compliance with provincial health and safety laws; and how to take get companies’ fair share of corporate tax credits. In the future, cluster members may share their costs on outbound and inbound freight, usually shipped by truck. “Every three months we have a network meeting, where we organize presentations that are of interest,” said Gmeiner. “We have more in common than we have against each other.” Nevertheless, the competitors are competitors, and so he adds, “We share manufacturing practices but not secrets of design. We would not let them into our model shops to see our next products.”
Further down the pike, Gmeiner is hopeful that this burgeoning cluster will pay off in real sales outside Canada. In a major step forward, five of the companies in the alliance recently attended a trade show in Dubai as part of an Ontario government trade mission. “We all say that China is killing our Canadian furniture market, but some Canadian companies are expanding into China with high-end furniture. Our goal is not to send just middle of the road products, but only the high value products that people in other countries want to buy.” Initially funded in part by FP Innovations, a not-for-profit forest products research centre headquartered in Pointe-Claire, Quebec, Bluewater has also received research funding from the Wood Manufacturing Council and the Wood Promotions Program of the Ontario Ministry of Northern Development and Mines.
When most people think of “clusters,” they think of huge groups of profitable, leading-edge firms, like those in Silicon Valley or in Canada’s Waterloo-Kitchener area. Does the Bluewater Wood Alliance really qualify as a genuine cluster, despite its modest size and early stage of development? What are clusters, anyway? And what role are they planning in the long-term vision of Canadian government officials and executives to boost productivity and innovation in a wide range of sectors? Ontario, the most populous and industrialized province, is a good place to begin telling that story.
The role of clusters in fostering innovation
Clusters are an important factor in raising innovation, as Harvard Business School professor Michael Porter observed long ago. Porter has noted that the specialized support that comes from access to capable suppliers and related industries spawns further innovation in clustered industries. At the same time, innovation is driven by competitive pressures from sophisticated customers, corporate partners and rivals within the cluster.
In the case of Ontario, which boasts such strong clusters as advanced manufacturing, telecommunications devices, and “clean” (or “green”) technology, the various members of a cluster provide both support for one another, as well as competitive pressure on one another to improve their performance. “People in clusters push each other to make improvements,” said Jamison Steeve, Executive Director of the Institute for Competitiveness & Prosperity, an independent, not-for-profit organization funded by the Government of Ontario. In part, their higher growth rates result from pressure by ever-more demanding and sophisticated consumers, and in part from pressure by other manufacturers within the cluster who are making improvements. “The strong clusters are the ones that increase the wages in the region,” said Steeve. “They are based on more intellectual property and are more heavily traded than local clusters, which have lower wages. You want to grow in traded clusters.
At their best, clusters can contribute to both regional economic growth and regional knowledge growth, according to a report by the Conference Board of Canada. Moreover, because clusters foster innovation, many firms that belong to a cluster often enjoy stronger economic results because it is easier for them to introduce new products, services and/or processes; improve the quality of new products and services; speed up the process of developing and marketing new products; and keep pace with their competitors. Despite such similarities, it’s important to remember that “every cluster is different; and its origins are different,” said Brad Duguid, Ontario’s Minister of Economic Development and Innovation.
Like snowflakes, each cluster is unique in subtle ways. “Michael Porter’s theory about clusters still holds true,” said Mr. Duguid. “Strong clusters provide a huge competitive advantage for an economy, and in Ontario we are fortunate that we have a number of strong clusters. Many of our clusters are among the top three in North America.” Clustered industries tend to co-locate in speciﬁc regions and cities and have the ability to drive productivity through well-paying, high-skill jobs, noted Mr. Duguid. Clustered industries thrive on serving consumers outside their region, including those in international markets. In contrast, dispersed industries are those that are found throughout the local economy, producing goods and services that often do not cross borders. Natural endowment industries – such as oil and gas and forestry—are often located only near areas close to natural resources.
A declining impact on Ontario’s job growth
Nevertheless, although Ontario’s clustered industries have a positive impact on its economy, that impact has been gradually diminishing. In 2002, jobs in Ontario-based clusters accounted for 43.4 per cent of all Canadian clustered industry jobs but by 2010, this share had decreased to 41.2 per cent, largely as the result of the burgeoning economies of the Western provinces, according to data provided by the OECD and Statistics Canada. For example, Alberta’s share of Canada’s total clustered industry workforce grew from 10.7 per cent in 2002 to 12.5 per cent in 2010. In fact, all of the Western provinces have increased their share of national clustered industry employment over this time.
According to a report by the Conference Board of Canada, while genuine clusters promote innovation in a wide range of ways, that process is not a static one. Actually, clusters “evolve through a number of life-cycle stages as they mature,” said the report. “The contributions they make to regional economic growth are affected in part by the life-cycle stage of the cluster” at each stage. The report identified the following four stages of clusters’ life-cycles: Early Stage Clusters; Growth-Stage Clusters; Mature-Stage Clusters; and Renewal- or Decline-Stage Clusters;
“Early-Stage clusters” – such as the Bluewater Wood Alliance in Ontario – are largely focused on the development of knowledge as opposed to the development of revenues. At this early stage, clusters often remain below the radar screen of their competitors because their growth in sales and employment is typically not very dramatic. However, Growth-Stage Clusters are characterized by a rapid influx of firms and people that are attracted to enter the sector because of the emerging opportunities opened, in part, by the cluster. These kinds of clusters are highly visible because both the number of firms in the cluster and the number of employees in it are growing significantly. Mature-Stage Clusters continue to grow but at a less rapid pace. At this stage, the firms in the cluster are often major players in their sector, and there is often some consolidation via mergers and acquisitions. Finally, Renewal- or Decline-Stage clusters are those that can “either reinvent themselves or fade from relevance, either because their target markets have shifted, or as a result of changes in economic trends and technology,” said the report. At this stage in the lifecycle of a cluster, such changes can render irrelevant or obsolete the traditional skills and expertise of a company’s employees, along with the strength and loyalty of its supplier bases.
The long tradition of Ontario clusters
Because of its importance to the Canadian economy, Ontario has long been the leading laboratory for the development of new clusters in both manufacturing and finance, noted Mr. Duguid. The deep historical roots of Canada’s automotive cluster – which extends across the U.S. border to include parts of Michigan – extend back to the Canada-U.S. automotive pact of the 1970s, which enabled vehicle components to move across the border between the two countries free of tariffs, long before a comprehensive free-trade pact was signed between Canada and the U.S. in 1987. Mr. Duguid noted that Ontario is the only jurisdiction in North America that is home to five different automakers: Toyota, Honda, GM, Ford and Chrysler all operate assembly plants relatively close to the U.S. border. Mr. Duguid said that although “a huge supply chain is required to make it work,” the automotive cluster is now a healthy one again. “It looks now that we will have the best year of auto sales ever. Sales are up and jobs are recovering,” Mr. Duguid added, while noting that the total number of jobs in the Ontario-Michigan automotive sector will not recover to pre-recession levels because of new technologies that raise productivity across the supply chain.
What are some of the other major clusters elsewhere around Ontario? Here is an overview of some leading locations and the companies in them.
Markham: Advanced Manufacturing: Home to the offices of over 900 technology and life sciences firms, this suburb of Toronto provides skilled workers and innovative products to both the advanced manufacturing cluster and the automotive technology cluster. IBM is the city’s largest employer, but several multinational companies have their Canadian headquarters in Markham, including Honda Canada, Advanced Micro Devices, American Express, Johnson & Johnson, Apple Inc., Avaya, IBM, Motorola, Oracle, Honeywell and Toshiba.
Among emerging local innovators, Markham-based Novo Plastics Inc. provides a good example. Novo specializes in the advanced manufacturing of engineered components and assemblies for both the automotive and consumer/commercial sectors. For the automotive sector, Novo provides under the hood components and assemblies narrowly focused on HVAC (heating, ventilation and air conditioning), Motor Acoustics and NVH (noise, vibration and harshness). Established in 2006, Novo began as a contract manufacturer, but it gradually transformed itself into a manufacturer of such innovative products, as well as environmentally friendly “Novo ECO2” products, which reduce CO2 emissions and improve fuel economy. Its plastic muffler system is lighter, smaller, and more energy-efficient than traditional steel mufflers.
Ottawa: Information and telecommunications technologies. The concentration of companies in this industry once earned the city the nickname of "Silicon Valley North." Most of these companies specialize in telecommunications, software development and environmental technology. Technology companies such as Nortel, Corel, Mitel, Cognos and JDS Uniphase were founded in the city. After Nortel Networks went bankrupt in 2009, its businesses as well as its patents and patent applications were sold off, generating approximately US$7.7 billion in net proceeds for the benefit of its creditors, and preserving 16,000 jobs for the employees of those companies that acquired those assets. Nortel’s various components were dispersed to firms like Cisco Systems and Huawei. Ottawa also has regional locations for 3M, Adobe Systems, Bell Canada, IBM, Alcatel-Lucent and Hewlett-Packard. Feeding off that knowledge base, for example, Ottawa is developing an e-commerce marketing cluster. A start-up known as 360pi has developed a cloud-based platform that, the company claims, delivers an unprecedented level of price transparency to retailers who use the service. Retailers use 360pi’s intelligence data about millions of product price points, in order to increase their conversion rates of sales prospects; and to raise their profit margins by re-pricing and promoting those products that they have in their inventories but their competitors do not have in theirs. Another innovative Ottawa start-up that combines online technology with marketing savvy is Shopify, which provides small retailers with all the tools they need to create their own online stores. Other hot clusters developing in Ottawa include wireless technology (Amika, BelAir Networks, Bridgewater Systems, Spotwave, TenXc); and clean technology (Ensyn, Iogen, Plasco Energy, Thermal Energy International).
Kitchener/Waterloo: Information technology. Most famous outside Canada as the site of Research In Motion, makers of the BlackBerry smartphone, the Waterloo, Kitchener, Cambridge region is famous for a wide range of mature high-technology firms such as Open Text Corp. (enterprise information management applications); Sandvine (network policy control applications), and MKS (software engineering tools). Many other high-tech companies that have their headquarters elsewhere, also have taken advantage of the concentration of high-tech employees and researchers in the Waterloo area (including those at the University of Waterloo), to operate their own research and development centres in this region. Sybase, Google, Oracle, Intel, McAfee, NCR Corporation, Electronic Arts and Agfa are among the large, international technology companies with development offices in Waterloo.
One emerging cluster is digital imaging products. In addition to more mature firms such as Christie Digital, Agfa, DALSA and Client Outlook, a younger firm known as Cineflow has attracted attention more recently by developing proprietary technology that lets film directors record, edit and store footage digitally on a server. As a result, filmmakers can more easily work with their content, and reformat it for multiple platforms – quickly, inexpensively and while maintaining image quality. John Coghill, CEO of Cineflow, credited the experience that he and his team acquired at DALSA, a Waterloo-region leader in innovative digital image. Coghill said, “Film and tape are cumbersome and expensive, and they make it hard to re-purpose content for devices such as tablets and phones. That’s why moviemakers are switching to digital.” Known as “file-based tapeless workflow,” Cineflow’s technology aims to transform motion film production “the same way digital technology revolutionized photography a year ago,” said Coghill, when he introduced the technology to the industry in Las Vegas in 2011. Cineflow has attracted $500,000 from the province of Ontario through its Investment Accelerator Fund.
Thunder Bay: Medical Imaging. In the city of Thunder Bay, the local business community is “extremely excited” about the potential to establish a cluster of advanced medical imaging firms, Mr. Duguid. Dr. John Rowlands and his team at Thunder Bay Regional Research Institute, have developed an inexpensive, efficient and portable alternative to digital X-rays that produces only a fraction of the radiation exposure. The technology is of being brought to market under the name XLV Diagnostics Inc. Dr. Rowlands has compared the benefits of this new technology to the benefits that were produced when the film industry switched to digital cameras. Ontario Institute for Cancer Research, Sunnybrook Research Institute, and MaRS Innovation have joined forces to launch the new start-up. Based in Toronto, MaRS Innovation is a non-profit organization with its own independent industry-led Board of Directors. It is funded by the Government of Canada’s network of Centres of Excellence and contributions of its member institutions. According to Dr. Rowlands, his company’s technology will have a broad range of applications in radiography, but will be less expensive to manufacture than current imaging tools in the industry. The goal is to use the XLV technology in rural Canada first, then expand its use into emerging markets such as China and India – places where many people don’t have access to these life-saving tools.
Organic versus government-generated clusters
Another important distinction is between those clusters that grow organically in a location, and those are created intentionally by governmental organizations and business associations in a deliberate effort to take advantage of an area’s specific strengths. Although most of Ontario’s clusters have emerged organically, “we are now working with aligning government leaders, business leaders, academia and labour to focus on ways to strengthen the clusters that are very strong,” said Mr. Duguid. For example, he noted, government policy spawned the emergence of the clean technology sector that has spread out across the Ontario landscape. Like many other clusters, Ontario’s clean tech cluster comprises both large companies – such as GE Canada and Siemens Canada, and start-up firms like Ponds Biofuels. Last July, the Canadian government announced plans to invest nearly $1 million in an algae pilot facility under development by Pond Biofuels at the St. Marys Cement Inc. plant. The funding, which was been awarded by the Federal Economic Development Agency for Southern Ontario, will allow the first phase of the pilot project to be completed. The facility will use local algae varieties sourced from the Thames River to convert the carbon dioxide present in the cement plant’s flue gas emissions into algae biomass, which can then be used to produce biofuel or food products.
After emerging organically from such companies as the clean water tech firm Trojan Technologies, provincial and local governments set out to transform the sector into a true cluster about seven years ago. Now, with the help of this cluster, the Ontario government expects to free the province of all dependence on coal by 2014. “We need to get off coal, and we are already 95 per cent of it,” said Mr. Duguid, thanks in part to the emergence of this cluster.
To be continued in the January 21 issue of Canadian Sailings.