Master Thesis

Title of the Master Thesis

(September 2009)

by

Tobias BaeriswylUnter den Linden 38

1734 Tentlingen Tel. +41/26/555 11 11

Student No.: 01-111-111

supervised by

Prof. Dr. Dirk MorschettChair for International Management – Liebherr/Richemont endowed Chair

Tentlingen, March 13, 2009

Table of Contents i

Table of Contents

List of Abbreviations.......................................................................ii

1. Introduction.................................................................................1

2. Overview on Cluster Theory......................................................2

3. Regional Industry Clusters........................................................33.1. Empirical Evidence.....................................................................................33.2. Typologies of Regional Industry Clusters................................................3

3.2.1. Cluster Typology According To St. John/Pouder...............................33.2.2. Cluster Typology According To Markusen.........................................4

3.3. Players and Elements of Regional Industry Clusters..............................6

4. The Diamond Model of National Competitive Advantage......74.1. Factor Conditions.......................................................................................74.2. Demand Conditions....................................................................................7

5. xyz................................................................................................9

6. ABC............................................................................................10

7. The Next Chapter......................................................................11

8. Conclusion................................................................................12

Bibliography...................................................................................13

List of Interview Partners..............................................................14

List of Abbreviations ii

List of AbbreviationsEoS Economies of Scale

EMS Electronic Manufacturing Service Provider

FDI Foreign Direct Investment

Horeca Hotel/Restaurant/Catering

I/O Input/Output

JV Joint Venture

kg kilogramme

M&A Merger & Acquisition

MNC Multinational Company

NID New Industrial District

OEM Original Equipment Manufacturer

R&D Research & Development

SCAE Specialty Coffee Association of Europe

SME Small and Medium Sized Enterprise

Introduction 1

1. IntroductionIt has long been known that Switzerland, for its relatively small geographic size, has world-leading companies in several different industries. Swiss watch manufacturers, Swiss banks and insurance companies, Swiss chemical and pharmaceutical compa-nies as well as Swiss machine and tools manufacturers are known for their superior quality and reliability. The leading position of Swiss companies in those industries has emerged over different time spans. The emergence of the Swiss watches and banking industries for example dates back to as long as 1700. The Swiss machinery, chocolate and pharmaceutical sectors emerged in the second part of the 19th cen-tury and still rank among the most important value creating industries in Switzerland (Borner et al. 1991, pp. 118 et seq.).

The fact that Switzerland is one of the world’s most prosperous and competitive countries certainly roots to some degree in the success of firms in the traditional Swiss industries such as banking, pharmaceuticals and machinery. Nevertheless, Switzerland has gained significant worldwide market shares in other, non-traditional Swiss industries as well. Porter (1990, pp. 307 et seq.) and Borner et al. (1991, pp. 103 et seq.) identify numerous industries where Switzerland has gained world-class status over the past 50 years.

One of the most recent industries where Swiss companies were able to gain world leadership is in the coffee machine business. Even though Switzerland has a long tradition in coffee roasting and blending and Swiss people are known to be heavy coffee consumers, it is not commonly known that Switzerland is the number 1 pro-ducer of fully-automatic coffee machines worldwide. Thermoplan, Franke, M.Schaerer, Cafina, HGZ, and Egro are six of the world’s nine largest manufacturers of professional fully-automatic coffee machines. Producers of household and semi-professional machines such as Jura and Solis complete the world-leading status of Swiss coffee machine manufacturers (Schilliger, 2007; cited from Krugman, 1981).

Whether the concentration of these world-leading companies in a small country like Switzerland is based on pure chance can be questioned. The aim of this thesis is to research the underlying variables behind this impressive dominance of Swiss coffee machine manufacturers.

Overview on Cluster Theory 2

2. Overview on Cluster TheoryIn times of increasing globalization, transnational companies and flexible production systems, we would expect the importance of firm location to be diminishing. Multina-tional companies (MNC) have their subsidiaries all over the world. This trend is ascend-ing, since cost of shipping goods is getting ever cheaper. “If anything, the tendency has been to see location as diminishing in importance. Globalization allows companies to source capital, goods and technology from anywhere and to locate operations wherever it is most cost effective. Governments are widely seen as losing their influence over competition to global forces” (Porter 1998, p. 197). Keeping this in mind, why is regional concentration of firms still such an important topic in several fields of study, such as in-ternational management, geographic economy or regional development theory?

Another popular term to define a geographically co-located group of firms comes from Porter (1990; 1998). Porter was the first author to use the term ‘cluster’. “Clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions in particular fields that compete but also cooperate” (Porter 1998, p. 197). A range of similar expressions for the same basic phenomenon emerged and led to some kind of confusion in terminol -ogy. “Regional clusters” (Enright 1996; 2000a; 2000b; Hospers/Beugelsdijk 2002), “in-dustrial clusters” (Doeringer/Terkla 1996; Schmitz 2000) and “technology clusters” (St.John/Pouder 2006) are all relating to the same idea. All of these terms, even if they vary in some aspects, have the same underlying assumptions (Malmberg/Sölvell/Zan-der 1996, p. 86):

1. Regional concentration: A large proportion of total world output of manufactured goods is produced in a limited number of highly concentrated industrial core regions.

2. Spatial clustering: Firms in particular industries or firms that are related in other ways, tend to co-locate and thus form spatial clusters.

3. Path dependence: Both, regional concentration and spatial clustering tend to be per-sistent over time.

Some recent topics in cluster theory contain subjects such as clusters and en-trepreneurship (Khan/Ghani 2004; Julien 2007), technology transfer in clusters (Khan/Ghani 2004; St.John/Pouder 2006) and the role of the MNC in fostering regional clus-ters (Rugman 1998; Rugman/Verbeke 1998; 2001; 2004; Rugman/D’Cruz 2000; Enright 2000b).

Regional Industry Clusters 3

3. Regional Industry ClustersAs stated in chapter 2, regional industry clusters contain the three important characteris-tics of regional concentration, spatial clustering and path dependency (Malmberg/Sölvell/Zander 1996, p. 86). According to Porter (1998, p. 198), the existence of clusters attests that some competitive advantage of the firm can lie outside the company’s direct strategic influence. For companies competing in the environment of regional industry clusters, the location of its business units plays a major strategic role.

3.1. Empirical EvidenceIn order to identify a cluster, several methods can be applied. First, a purely qualitative study, based on expert interviews and observations can be conducted. Second, an In-put/Output (I/O) analysis can be used to understand the most important interdependen-cies between sectors and to get a first impression of which industry sectors might build a cluster. Quantitative studies make use of multivariate analysis, triangularization and graph theory, descriptive statistics or factor analysis (Czamanski/Ablas 1979, pp. 62 et seq.). A more profound explanation of methods and ways for identifying industry clus-ters follows in chapter 3.5.

3.2. Typologies of Regional Industry ClustersAs seen in chapter 2, several authors used different terms to express the tendency of related firms to co-locate in geographic proximity. This following chapter aims to clarify some of the elementary characteristics of various cluster concepts. The first part of this chapter contains a cluster typology that uses the resource-based view as an organizing framework (St.John/Pouder 2006, pp. 141 et seq.). In the second part, a typology using the type of firm configuration, internal and external orientation, and governance struc-ture is presented (Markusen 1996, pp. 293 et seq.).

3.2.1. Cluster Typology According To St. John/PouderSt. John/Pouder (2006, pp. 141 et seq.) use a resource-based view as organizing framework for their cluster typology. They distinguish between two generic types of clus-ters – technology-based and industry focused. They notice that these two types of re-gional industry clusters “[…] create very different regional resource profiles over time, accumulate resources in a different manner, cultivate different capabilities, and derive different sources of regional advantage” (St.John/Pouder 2006, p. 141).

The main difference between the two concepts is whether the competitive advantage of the cluster firms has its roots in the industry structure (suppliers, labor, key customers, etc.) or in its key technology. For industry clusters key suppliers, distributors or cus-tomers, as well as a skilled labor force are the main regional resources. For technology

Regional Industry Clusters 4

clusters the main regional resources are technological knowledge of inventors, entre-preneurial insight and research institutions. Furthermore, technology transfer between the cluster members plays a major role in technology clusters (St.John/Pouder 2006, pp. 141 et seq.). Table 1 shows an overview of the two generic cluster types according to St.John/Pouder.

Table 1: Differences of Technology and Industry Clusters

Cluster Type Technology Clusters Industry Clusters

Examples Silicon Valley (California), Austin (Texas)

Dalton (Georgia), Detroit (Michigan)

Regional Resources Inventors with specific tech-

nical knowledge Entrepreneurs with entrepren-

eurial insight Accumulated entrepreneurial

experience through support services

Institutions such as universit-ies, research centers, venture capitalists, networking organ-izations, national labs

Suppliers, distributors, skilled labor

Industry-specific specialists, consultants, service providers

Institutions such as trade as-sociations

Sources of Competitive Advantage:

Technology transfer capability in the region

Diversified markets and ap-plications

1st and 2nd tier suppliers, with related products and services, reduced cost of sup-ply, reduced supply uncer-tainty

Growth Driver New firm formations, spin-offs

from existing companies New suppliers, service pro-

viders, relocating or new com-petitor facilities to access available supply network

Key Regional Vulnerabilit: Uncertainties and risk of en-

trepreneurial boom and bust Tied to the technology life-

cycle

Demand uncertainty of down-stream firm/market

High dependency of the re-gion upon the economic health of one industry

Strategic Analogy Related diversification, with

opportunities for synergy cre-ated through shared re-sources / shared technology

Single industry concentration, with some evidence of vertical integration

Source: Adapted from St. John/Pouder 2006, p.157.

3.2.2. Cluster Typology According To MarkusenA second classification of regional industry clusters takes into account the differences in firm configuration, the degree of internal/external orientation and governance structures. In addition to the traditional Marshallian industrial districts (as described by Marshall 1920; Piore/Sabel 1984), this typology introduces three new forms of regional industry clusters. “A hub-and-spoke industrial district, revolving around one or more dominant, externally oriented firms; a satellite platform, an assemblage of unconnected branch

Large, locally headquartered firm

Small, local firm

Branch office, plant

Satellite platformHub-and-spoke districtMarshallian industrial district

Regional Industry Clusters 5

plants embedded in external organization links; and the state-anchored district, focused on one or more public-sector institutions” (Markusen 1996, p. 293). A schematic model of the Marshallian industrial district, the hub-and-spoke district and the satellite platform are shown in Figure 1.

Figure 1: Schematic Overview of Cluster Types

Source: Marksuen 1996, p. 297.

In Marshallian industrial districts and their extension called the ‘Italianate variant’ of the Marshallian industrial district, small, locally owned companies represent the major play-ers in the cluster. Large local firms and MNCs hardly play any role in the development of a regional industry cluster. Compared to that, in hub-and-spoke districts, the cluster is dominated by one or more large, vertically integrated companies surrounded by suppli-ers. “Another quite different type of industrial district is present in regions where a num-ber of key firms and/or facilities act as anchors or hubs to the regional economy, with suppliers and related activities spread around them like spokes of a wheel” (Markusen 1996, p. 302). Closely related to this type of regional industry cluster is the definition of the flagship firm “[…] that provides strategic leadership and direction for a vertically inte-grated chain of business that operate as a coordinated system or network, frequently in competition with similar networks that address the same end markets” (Rugman/D’Cruz 2000, p. 57). The characteristic of the third category – satellite platforms – can be drawn from its name. “In satellite platforms, business structure is dominated by large, exter-nally situated firms that make key investment decisions. […] Minimal intradistrict trade or even conversation takes place among platform tenants. Orders to and commitments to local suppliers are conspicuously absent” (Markusen 1996, p. 304). The fourth dis-tinct cluster category is the state-anchored district. “[…] is what we call the state-an-chored district, where a public or nonprofit entity […] is a key anchor tenant in the dis-trict. Here, the local business structure is dominated by the presence of such facilities,

Regional Industry Clusters 6

whose locational calculus and economic relationships are determined in the political realm, rather than by private-sector firms” (Markusen 1996, p. 306). Table 3.2 shows the four different kind of regional industry clusters described by Markusen (1996).

3.3. Players and Elements of Regional Industry ClustersAs seen in the previous chapters a variety of different kind of clusters and different defi-nitions of the cluster concept exist. In order to generalize this information overload, the following chapter provides an overview of the most important players and elements in a regional industry cluster. Instruments are illustrated in Figure 2.

Figure 2: The Government’s Cluster Development Instruments

Source: Porter 1998, p. 254.

Clusters

Export promotion

Regulatory reform

Attraction of foreign FDI

Science and technology

policy

Development of specialized

factors

Collection of economic

information

The Diamond Model of National Competitive Advantage 7

4. The Diamond Model of National Competitive Ad-vantage

4.1. Factor ConditionsIn classical trade theory (Heckscher-Ohlin model), differences in production factors are the reason why trade occurs. According to classical trade theory, nations export those goods that make intensive use of the production factors the country is relatively well endowed with. The classical production factors are land, labor and capital. In the dia-mond model, the role of factor conditions is more complex. “The factors most important to competitive advantage in most industries, especially in the industries most vital to productivity growth in advanced economies, are not inherited but are created within a nation, through processes that differ widely across nations and among industries” (Porter 1990, p. 74). According to Porter (1990, pp. 73 et seq.), factor conditions are to be understood in a much broader way than in the classical model. He distinguishes five categories of factor conditions:

Human resources: The quantity, skills and cost of personnel (e.g. skilled labor, cheap labor)

Physical resources: The abundance, quality, accessibility and cost of the nation’s land, natural resources and other physical traits such as location relative to other na-tions or time zones

Knowledge resources: The nation’s stock of scientific, technical and market knowl-edge located in universities, state research institutes, private research facilities, sta-tistical agencies, trade associations and other institutions

4.2. Demand ConditionsAccording to Porter (1990, pp. 86 et seq.), to shape a nation’s competitiveness, the quality of the home demand is much more important than its quantity. Porter notes three attributes of domestic demand that determine national competitiveness in an industry:

Composition of domestic demand: The composition of domestic demand influences how firms perceive and react to buyer needs. The segment structure of demand, the sophistication of domestic buyers and the ability to anticipate buyer needs make the composition of the home demand an important element. In general, the more sophis-ticated and demanding domestic buyers are, the easier it is for a nation to gain com-petitive advantage. “Nations gain competitive advantage in industries or industry seg-ments where the home demand gives local firms a clearer or earlier picture of buyer needs than foreign rivals can have. Nations also gain advantage if home buyers

The Diamond Model of National Competitive Advantage 8

pressure local firms to innovate faster and achieve more sophisticated competitive advantages compared to foreign rivals” (Porter 1990, p. 86.).

Internationalization of domestic demand: The way home demand conditions pull a nation’s products and services abroad is the third important demand factor influenc-ing national competitive advantage. If domestic customers are mobile or are MNCs they can help establishing overseas presence for the firm. In addition, domestic de-mand can have an influencing impact on foreign demand (Porter 1990, pp. 97 et seq.).

It has to be said that not all elements of home demand are equally important. “The most important attributes of home demand are those that provide initial and ongoing stimulus for investment and innovation as well as for competing over time in more and more so-phisticated segments. Examples are especially demanding local buyers, needs that an-ticipate those of other nations, rapid growth, and early saturation” (Porter 1990, p. 99). As with factor conditions, home demand alone can not guarantee sustainable competi-tive advantage. Merely the interplay and mutual reinforcement of demand conditions with the other diamond determinants of a nation can build truly sustainable competitive advantage.

xyz 9

5. xyzChapter 2 with the definition of regional industry clusters already gave a first impression on how important cooperation is. This chapter will start with some theoretical back-ground information on why and how firms actually cooperate. The second subchapter clarifies the phenomenon of co-opetition. This means the simultaneous appearance of competitive and cooperative elements between firms. A comprehensive typology on different cooperation methods, especially the types of alliances forms the last part of chapter 5.

Figure 3: Cooperation Methods According to their Relationship Structure

Source: Morschett 2005, p. 390.

As seen in chapter 3, various forms of cooperation exist in regional industry clusters. Having explained the reasons for simultaneous existence of competition and coopera-tion and the most common motivations for firms to collaborate, the existence of regional industry clusters can be reconstructed from a macroeconomic viewpoint as well as from the perspective of the individual firm.

A

Simple Networks

B

A B

B A

C

C

F

E

D

B A

C

F

ED

Bilateral Relationships Trilateral Relationships

Complex Networks

ABC 10

6. ABCThe empirical part in chapters 6-8 will apply the theoretical concepts to the case of the Swiss coffee machine manufacturing industry. In order to obtain the necessary informa-tion, several expert interviews were conducted. Two managers of Swiss coffee machine manufacturers (Müller, 09.09.2009; Meier, 08.08.2008) were questioned in guided inter-views.

The interviews are first used to prove the existence of a Swiss coffee machine manufac-turing cluster (as defined in the theoretic chapters) and classify it, in accordance to the typologies. Porter’s diamond model will then be applied to show how Swiss manufactur-ers were able to gain a competitive advantage in the coffee machine manufacturing in-dustry. At the end, the different forms of cooperation between competitors, suppliers, customers and other cluster participants is highlighted.

While the coffee consumption per capita during the last years has largely in-creased in Luxemburg, it has slightly decreased in Switzerland (Nestlé, 2009). An overview on the per capita coffee consump-tion development from 2005 until 2007 for selected European countries is provided in table 2. Table 2: Per Capita Coffee Con-sumption in kg

2005 2006 2007

Luxembourg 11.66 13.49 17.72

Finland 12.6 11.92 12.03

Norway 9.61 9.27 9.91

Denmark 8.80 9.09 8.76

Sweden 7.76 8.69 8.22

Netherlands 7.08 7.80 8.64

Switzerland 8.89 7.51 7.96

Source: Nestlé 2009, p. 111.

Regarding the coffee consumption in Switzerland, the Happy Chocolate AG tries to ex-plain this development by the fact that the Swiss hot chocolate consumption per capita is steadily rising. Therefore, the company assumes that hot chocolate may be seen as a substitute of coffee (Smith, 2009a; 2009b).

The Next Chapter 11

7. The Next ChapterChapter 6 showed the empirical evidence of the Swiss coffee machine manufacturing cluster and its development over time. To know that a cluster exists and how it devel-oped is nice to know and interesting but not enough to give recommendations for cluster players. One should further analyze how strong this cluster is and how national competi-tive advantage is determined. Porter’s diamond concept is the model that shows how the conditions in the cluster work as a system and how they lead to national competitive advantage for Switzerland in the coffee machine manufacturing industry. Porter (1990, pp. 69 et seq.) notes that national competitive advantage in an industry is determined by factor conditions, demand conditions, related and supporting industries, and the com-petitive environment in an industry.

The three EMS providers Asetronics, Adaxys and Swisstronics share the market for the electronic modules. The electronics module is the central control unit when it comes to operating the coffee machine. A highly reliable electronics unit guarantees the cus-tomers that everything in the machine from the grinding degree to the pressure of the pistons and the brewing temperature perfectly fits together and always reaches the de-sired standards. Most of the software to operate these electronics also comes from Swiss suppliers such as S-Tec (Humbold, 05.05.2005).

Conclusion 12

8. ConclusionThe existence of the Swiss coffee machine manufacturing cluster is a unique opportu-nity for all players involved. Specialized local suppliers accounting for 80-90 % of the manufacturer’s input play an important role. Coordination with the local supplier network is much easier and gives the manufacturers important advantages. Cooperation be-tween manufacturers and suppliers is based on mutual trust and long-term commitment. The high quality of supplier’s raw materials and components is necessary to manufac-ture the world’s best and most reliable fully-automatic coffee machines. Moreover, the excellent reputation of Swiss machinery, metal processing and electronics companies shaped demand for Swiss coffee machines in an indirect way via the Swiss country im-age. Customers all over the world associate Swiss coffee machines with quality and reliability, thanks to spill-over effects from these industries.

Whether Swiss manufacturers will keep their competitive advantage depends on several factors: Domestic demand, intense rivalry, highly developed engineering and design know-how, cooperation with customers and suppliers, image effects from related and supporting industries, and an overall innovation friendly business climate. These condi-tions makes it very difficult for foreign competitors to catch up with Swiss manufacturers of fully-automatic coffee machines. If this system of mutually reinforcing determinants can be maintained in the future, Swiss coffee machine manufacturers will remain at the edge of competition.

Bibliography 13

BibliographyBrandenburger, Adam; Nalebuff, Barry (1995): The Right Game – Use Game Theory to

Shape Strategy, in: Harvard Business Review, Vol. 73, No. 4, pp. 57-71.

Brandenburger, Adam; Nalebuff, Barry (1996): Co-opetition, New York.

Cafina (2008): Cafina Company Profile, http://www.cafina.ch/ kaffeemaschinen.asp?l=en&s=293, accessed on July 1, 2008.

Doeringer, Peter B; Terkla, David G (1996): Why Do Industries Cluster?, in: Staber, Udo; Schaefer, Norbert; Sharma, Basu (Eds.): Business Networks – Prospects for Regional Development, Berlin, pp. 175-189.

Enright, Michael (2000a): The Globalization of Competition and the Localization of Com-petitive Advantage – Policies Towards Regional Clustering, in: Hood, Neil; Young, Steven (Eds.): The Globalization of Multinational Enterprise Activity and Economic Development, New York, pp. 303-331.

Enright, Michael (2000b): Regional clustering and multinational enterprises – Indepen-dence, dependence or interdependence, in: International Studies of Management and Organization, Vol. 30, No. 2, pp. 114-138

Krugman, Paul (1991): Geography and Trade, Cambridge.

Morschett, Dirk (2005): Formen von Kooperationen, Allianzen und Netzwerken, in: Zentes, Joachim; Swoboda, Bernhard; Morschett, Dirk (Eds.): Kooperationen, Allianzen, Netzwerke, 2nd edition, Wiesbaden, pp. 377-403.

Nestlé (2009): Coffee Consumption Around the World, Internal Document of Nestlé AG.

Smith, Mike (2009a): Chocolate Consumption in Switzerland, Power Point Presentation of Hot Chocolate AG.

Smith, Mike (2009b): Chocolate versus Coffee Consumption in Switzerland, Working Paper of Happy Chocolate AG.

Affidavit 14

List of Interview PartnersMüller, Michael, Director R&D, ABC Machine AG, Bern, Personal Interview, September

9, 2009.

Meier, Marc, President, MNO AG, Zurich, Personal Interview, August 8, 2008.

Schneider, Paul, Vice-President, Coffee 123, Lausanne, Telephone Interview, August 22, 2008.

Zarc, Anna, Head of Business Development, Happy Food AG, Email, July 5, 2008.

Affidavit 15