Business Clusters: Building on Local Strengths

by Fred D. Baldwin

Lance Hummer recalls glancing at inexpensive cabinets on display at a hardware store in Appalachian Pennsylvania. They contained particleboard manufactured at a northwestern Pennsylvania plant only a few miles away, but the cabinets themselves had been produced abroad.

Hummer, who works for the Erie-based Northwest Pennsylvania Industrial Resource Center (NWIRC), recognized Appalachian economic history in microcosm. The cabinets were only one of many examples of locally produced raw materials exported outside the Appalachian Region to be made into consumer products, many of which return to the area for final sale. Hearing Hummer tell that story, a listener in the wood business nods: "It's a global economy, but it would be good to keep some of that value closer to home."

That's the goal of the Appalachian Regional Commission's (ARC) support for "business clusters"—helping communities add value close to home and create jobs in the process. Economists define a business cluster as a concentration of related businesses, with common interests and with channels of communication among themselves. You might think business clusters need no help to form because, to a large extent, similar businesses cluster naturally. Sawmills, obviously, are located near forests. High-tech industries are apt to develop near first-class universities. Dealers in specialized wares—garden produce, jewelry, or rugs—have always tended to set up market stalls near each other, recognizing that vendors may compete with each other yet share a common interest in being found easily by their customers.

The cluster concept, however, involves more than physical proximity. The proliferation of sawmills throughout northwestern Pennsylvania doesn't reduce the odds that wood from a tree grown in Forest County will travel halfway around the world and return for sale as furniture. ARC's support for business clusters is based on a view of an industry group as a system, with active communication between members and shared need for and use of common resources, including specialized services and infrastructure. This leads to a search for points of leverage where modest public-sector investments can help an industry support enterprises that add value to raw materials in different ways and at different stages in the manufacturing process.

Improving Effectiveness

In his 1997 study Exports, Competitiveness, and Synergy in Appalachian Industry Clusters, Stuart A. Rosenfeld of Regional Technology Strategies, a consulting firm based in North Carolina, suggests several ways in which public-sector groups can improve cluster effectiveness. Most involve providing assistance with promotion and marketing, with meeting export requirements, and with developing improved information flows within the cluster. The report also emphasizes the need to identify critical problems facing a cluster as a system.

Does this mean that public-sector agencies should try to pick industry groups that look like future winners or that labor-market projections suggest will employ the most people? Not at all, says Rosenfeld. Just as "all politics is local," so is the kind of economics that matters most to people in any given corner of Appalachia. The cluster concept involves identifying industry groups that have evolved on their own because of favorable local conditions (such as the presence of raw materials, a transportation hub, and research facilities) and then asking industry representatives, "What would it take to turn this loose grouping of firms into a system that actually starts attracting new resources?"

The NWIRC's Wood Cluster Initiative offers one example of the cluster concept in practice. The NWIRC, which works to improve the competitiveness of small and medium-sized manufacturers in 13 counties, tailors its services to address the needs and capabilities of industry clusters. The Wood Cluster Initiative aims to create an improved environment for northwestern Pennsylvania's wood industry in a number of ways:

• promoting and developing technical-school programs to train workers for the wood industry;
• helping individual businesses plan and carry out their own plant-specific training programs;
• providing assistance with acquisition of valuable credentials, such as certification that wood products have been harvested in an environmentally responsible manner;
• giving assistance with international marketing; and
• facilitating communication among firms that may be able to do business with each other (as suppliers, customers, or partners).

The forest-products industry and related industries provide jobs for 148,000 Pennsylvanians, according to the Pennsylvania State Data Center. While the inventory of harvestable hardwood timber has actually increased over the past two decades, the wood-products workforce has declined, partly because of automation but also because of a scarcity of workers with needed skills. Managers at a sample of northwestern Pennsylvania firms say they start untrained workers at about $7 to $8 per hour and move them up rapidly to wages between $11 and $15 per hour. These aren't high wages compared to those in many manufacturing industries, but they're well above the pay rates for many service-sector jobs.

Competitive Rates for Skilled Workers

"If you could give me a kid," says Dennis Hickman, vice president of Hickman Lumber Company, "who could come out of school knowing how to grade lumber or sharpen a saw, I'd be glad to start him out at a competitive rate."

You'll hear the same story from David Haag, co-owner of Allegheny Wood Works, a manufacturer of hardwood doors in Lake City (in Erie County). The four-year-old business has 12 employees and turns out close to 75 doors a week. Haag expects that figure to grow to 100 doors a week if he can find good workers.

"One of the key problems we've had is getting trained employees," Haag says. "If we had a guy walk in here who said, 'I know how to use saws and shapers,' I'd hire him on the spot, even if we didn't have a need for him right away."

In response to that problem, the NWIRC, area educators, wood industry representatives, and the Pennsylvania College of Technology have collaborated on a high school curriculum to provide foundation skills in the forest and wood industry. Eighteen school districts are now beginning to use the curriculum. Bob Piemme, vocational director for the Corry Area School District, says that his high school's program now has 37 students in an entry-level course, and the school sees subsequent units as vehicles for giving students advanced credit at postsecondary technical schools.

Skills training was also an issue with International Timber and Veneer (ITV), a relatively new company coping with the problems of rapid growth. ITV opened a plant in Jackson Center (in Mercer County) not quite five years ago. Spike Mancuso, ITV's director of human resources, says that today the company employs about 150 workers, and its operations now require three shifts.

"Finding top-quality employees," Mancuso says, "is even harder than finding top-quality logs. So we try to promote from within. We have people who are hard workers and have some expertise, but they lack formal training."

The NWIRC helped ITV make connections with a regional branch of the Pennsylvania State University. ITV pays a dozen or so of its supervisors and potential managers to come into the plant on Saturday mornings every few months, to take classes in problem-solving, teamwork, and human relations skills.

Building Strength in Clusters

In the wood industry, one firm's scrap often becomes another firm's raw material; for example, bark scraped from raw logs may be sold to landscapers and plant nurseries. Capturing the highest-value use of these materials depends on being able to reach the right customer. Clean sawdust and wood chips may fetch their best price when sold for particleboard, but if there's no particleboard manufacturer within reasonable shipping distance, the materials may end up being sold with rough bark as mulch.

As for the wood itself, a log may be put to many uses, some more profitable than others. A knot-free piece of clear maple may get a decent price when sold for office furniture, but it may be still more valuable as veneer. Short lengths of oak may be sawn into small blocks for parquet flooring, but some pieces may be worth more for other, specialized uses. Using top-quality wood for low-grade products is like using platinum to make pennies. But squeezing the last bit of value out of the material depends on the existence—and often the proximity—of many specialized producers.

However, a business occupying one market niche within a cluster may help firms in other niches profit, even when no direct business relationships exist. ITV is one such an example. Although ITV itself does not buy logs, its customers do. While they can buy the logs from anywhere they wish, the presence of a veneer operation in northwestern Pennsylvania improves the chances that they'll buy from somewhere nearby to reduce shipping costs. As a result, area timber owners and sawmills are more likely to be able to sell their top-quality logs to customers willing to pay top dollar. This can mean a price three times higher than that paid for even furniture-grade lumber.

The Importance of Value-Added

A specialty manufacturer can add value to locally produced raw materials, even if its own output doesn't go directly to the retail market. The Corry (Warren County) plant of Thompson Maple Products is a case in point. Thompson's whole business depends on finding ways to maximize the value of logs or rough-cut lumber.

Thompson produces "dimension-cut" wood. If you took many random samples of the mill's output and then mixed them together, you could fill a huge toy box with boards, blocks, and dowels, varying considerably in shape and size. From them, Thompson's customers make a mind-boggling array of consumer products or product parts—paper-towel rollers, baseball bats, lamp bases, hockey sticks, steak knife handles, and even bassoon casings.

"Our customers," explains Chuck Thompson, the firm's plant manager, "don't want to buy a load of lumber and have 90 percent of it be unusable. So we machine lumber into component parts ready to be made into somebody else's product. We don't make the guitar neck. We make the wood blank that becomes a guitar neck."

On Thompson Maple's plant floor, you can watch a computer-controlled machine scan a board and calculate where and how often to cut it so as to maximize the yield of usable wood, as defined by customers' needs. Suppose, for example, that two medium-length pieces are worth more than three short pieces, but there's not enough good wood for two such cuts. Is there perhaps a way to make one medium piece and two short pieces? Maybe a leftover piece will work perfectly for another customer. "We're trying to cut the highest dollar value we can out of each log or piece of lumber," Thompson says.

At the end of July 2001, the NWIRC reported having provided technical assistance to 48 companies. It had also helped set up seven training programs in which over 1,500 individuals participated; and conducted a survey of industry needs and assisted with a wide range of strategic planning and promotional activities.

As an increasingly wide range of wood-related businesses succeed, more value from hardwood sales remains within Appalachian Pennsylvania. Allegheny Wood Works now sells doors throughout the United States, and it is exploring ways to enter the foreign export market. Thompson Maple already sells worldwide, and about 30 percent of its $6–7 million in annual sales comes from abroad. A whopping 80 percent of ITV's Mercer County plant's veneer is sold for export. And, as already noted, the presence of these businesses helps local timber owners and mill operators compete for a wider range of customers. As some economists have noted, a cluster doesn't just add resources; it attracts them.

"A cluster strategy," Stuart Rosenfeld writes, "is not about choosing and targeting industries based on their potential. It is about understanding that individual businesses do not operate in isolation but as parts of a larger system. . . . It is appreciating that local, interconnected systems will mean more jobs and wealth to regional economies than businesses linked to distant systems, and that government can help the system function more smoothly and effectively."

Fred D. Baldwin is a freelance writer based in Carlisle, Pennsylvania.