Master Programme in Economic Growth,
Innovation and Spatial Dynamics
Spirit Valley Innovation Networks –Diversification and Related
Variety as Drivers for Regional Economic Growth
Lionel Sack
Mail: lionel.sack@gmail.com
Abstract: In the framework of clusters and innovation systems, several scholars have
mentioned the phenomena of related variety and diversification. Variety in specific has
been observed in a number of different industries and agglomerations, but not
extensively examined yet. This study tries to understand innovation in the spiritindustry of the cognac region, recently baptized Spirit Valley, and more specifically
focuses on local firms’ diversification from traditional cognac production. By this, it
points out the generic background of variety and its value for local firms and regional
growth. In the past two decades, new and often very successful products have been
developed by local firms and have had important impacts on the local and global spirit
industry. For this specific industry, the study shows the necessity for combination of
different knowledge types and sources to successfully diversify and compete. It also
reveals the importance of external inputs for the functioning of the local system. In this
sense, it sheds light on the functioning of local innovation and resulting variety in the
particular constellation of a newly innovating, but traditional and historic know-how
based cluster.
Keywords: spirits industry, product innovation, related variety, diversification, cluster, smart
specialization, regional innovation systems, regional policy
EKHR21
Master Thesis (15 Credits ECTS)
July 2011
Supervisor:
Examiner:
Dr. Jerker Moodysson
Dr. Lars Coenen
Website: www.ehl.lu.se
Master Thesis
Lionel Sack – Lund University
Preface
Writing the thesis about Spirit Valley has been an intensive and demanding, but also very interesting
and gratifying task. Since October 2010 I spent a lot of time reading, reflecting, and working on the
topic, while being in good and regular contact with several academics and local professionals. Those
allowed me to significantly progress my understanding of cluster and innovation theory, and,
simultaneously, provided a rich experience of tapping into the “real world” of local firms and
organizations. Throughout the effectuation of the study, I had the most welcoming and friendly
support of regional organizations (CIDS, Atlanpack), local firms (Salomon, Protea France, SVE, Merlet
& Fils, EWG, C. Ferrand, Laclie Spirits, Linea Design, Lise Baccara, Lermium Consulting) and academia
in Lund (CIRCLE, Lund University). Each of these provided me with important feedback, not only in
individual meetings, but also at official events, as with the board of local company representatives
(Bureau CIDS, October 2010), at a meeting in San Sebastian (Regional Innovation Systems and Food,
ORKESTRA, April 2011), at two informal seminars in Lund (Brown Bag, CIRCLE, April & June 2011) and
at the yearly Spirit Valley Forum in Cognac (Atlanpack & CIDS, April 2011). Besides these official
meetings, I had the good fortune of spending much time with colleagues, friends, cousins, brothers,
sisters and other family members that were always ready to share ideas and give unbiased and
honest feedback. The list of people I talked to while developing ideas is certainly very long, but each
of them was important for progress, focus and quality of the study. My principal contacts, which by
their thoughts and support led me throughout the entire thesis process, were Jerker Moodysson as
LU thesis supervisor and Sébastien Dathané as primary local contact at the CIDS. I want to thank you
for supporting my work and investing your time for personal meetings, conversations, high quality
feedback and support with administrative tasks. For administration matters, I should also mention
Jonas Ljungberg, my programme director, who always was a trustful and straightforward help for
many forms and papers that needed to be formulated, signed, stamped and sent between different
institutions. For the thesis itself, specific thanks go to Etienne Hosteing for establishing the initial
contact with the local network, Björn Asheim for introducing my work to the conference in San
Sebastian, Jean-Christophe Boulard for letting me present at the Spirit Valley Forum, Mafalda
Madureira for organizing two Brown Bag seminars at CIRCLE, not to forget all individual
conversations and feedbacks which I had with (in alphabetical order) Alain de Framond, Alexandre
Gabriel, Amélie Hosteing, Anaïs Egré, Annabelle Sack, Anne-Hélène Herbinet, Antoine Bocheux, Arne
Isaksen, Benoit Ordonneau, Bertrand Laclie, Björn Eriksson, Cedric Raynaud, Christian Sack,
Christophe Ferrazzi, Clemens Von Kalckreuth, Emile Chin-Dickey, Frances Fortuin, Francois Hosteing,
Francois-Xavier Leuret, Gilles Merlet, Grégoire Lucas, Jean-Sébastien Robicquet, Jesper Manniche,
Joel Martin, Jon Mikel Zabala, Josephine Rekers, Julien Nau, Lars Coenen, Magnus Nilsson, Marie
Hardel, Marie Sack, Marie-Madeleine Hosteing, Markku Sotarauta, Melissa Proietti, Michel Robinne,
Onno Omta, Paul Hosteing Jun., Philippe Braastad, Pierre-Marie Garcin, Ross Johnson, Rutger de
Graaf, Soizic Madec, Steyn de Haas, Vincent Perrin, Xabier de la Maza, Yohan Curtan. A very special
thank should go to Steyn de Haas, who I spent a lot of time working together while accomplishing the
thesis. We regularly had long and fertile conversations about the topic and gave each other ideas,
feedback and any forms of technological, mental and motivation support during long days and nights
of work at university. Definitely, without all this support and time of friends, family, supervisors,
colleagues and interview partners the outcome and enjoyment of working on the topic would
certainly not have been the same.
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Contents
Preface..................................................................................................................................................... 2
1.
Introduction ..................................................................................................................................... 4
2
Research Design .............................................................................................................................. 5
2.1
Aim and Justification ............................................................................................................... 5
2.2
Scope and Limitations ............................................................................................................. 5
2.3
Available data and methods for data collection ..................................................................... 7
2.4
Initial methods and applied reality.......................................................................................... 8
3. Theoretical framework and previous research: innovation and knowledge networks in the
context of spatial proximity .................................................................................................................... 9
4
5
The Spirit Valley innovation system .............................................................................................. 13
4.1
Introducing the traditional production network ................................................................... 14
4.2
The local knowledge base ..................................................................................................... 15
4.3
Innovation in the spirits industry .......................................................................................... 17
Related variety and product innovation since 1990 ..................................................................... 19
5.1
Tapping into local innovation networks ................................................................................ 20
5.2
Quantifying innovations and innovators ............................................................................... 22
5.3
Three cases: Grey Goose, Hpnotiq and Cîroc ........................................................................ 26
5.4
Assets and capabilities of the network.................................................................................. 28
6
Implications for regional growth ................................................................................................... 29
7
Conclusion ..................................................................................................................................... 33
8
References ..................................................................................................................................... 36
9
Appendix: personal meetings and interviews ............................................................................... 39
10 List of tables and figures................................................................................................................ 40
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1. Introduction
With modern communication technology, individuals and companies are in theory often only a click
of a mouse away from any desired information and any potential business partner. Simultaneously,
global travel and shipping capacities have constantly improved over the past decades while travel
times have been pushed to a minimum. This critical combination has strongly increased the pace of
global trade and economy, from the multinational corporation to the micro-firm level. For some
reason, however, it still seems crucial in many industries to have a physical proximity to trade
partners and competitors. Some academics would even argue that with the requirements of modern
global economy and its rapid exchange of goods and knowledge, this desire of and need for colocation has yet increased (Porter 1998, Malmberg & Maskell 2004). For entering, growing and
remaining in a market, it has become more and more essential for firms to innovate their products
and concepts and to get ahead in global competition. Knowledge exchange and availability of
creative and specialized labour force build the centre of this conception. In this context, scholars in
the field have developed and examined the concepts of local embeddedness (Doloreux 2002, Porter
1998, Asheim 2004), local buzz and global pipelines (Bathelt, Malmberg & Maskell 2004), knowledge
spillovers (Giuliani 2007, Asheim 2006) and regional economies of scale. The resulting greater
concepts of co-location - business clusters and regional innovation systems (RIS) – have had a large
impact in the field since the late 1980s and have been implemented in the agendas of policy makers
and economic forums on national and regional levels. Business agglomerations are tried to be
detected and quantified, organizational platforms are being introduced and active policies for cluster
development are put into practice. Besides the classic cluster examples of Silicon Valley, the
Southern German car industry or Milan fashion design, many less known but very successful
initiatives have been developed on larger and smaller scale. It is highly probable that for each
specialized industry, one can nowadays detect spatial concentrations on national and global levels.
Yet, in some cases scholars have lamented initiative overkill, as clusters are being developed from the
scratch without a critical initial mass or density setting. Such cases have been proved little successful
in numerous examples (Bathelt, Malmberg & Maskell 2004).
The business cluster in the focus of this study has existed for centuries and sustained its value in its
specialized industry since the early 1800s. It is the region of Cognac, recently baptized Spirit Valley by
a regional initiative. This region has, over the past decades and beyond, developed a vital network of
vineyards, distillers, coopers, bottling and packaging firms, trading brands and distributors, not to
forget other connected businesses like marketing agencies, logistic providers or specialized financial
and insurance services. Firms in the region have created strong network-internal and –external
connections and have improved their capacity of specialized product development and market
penetration. Some of the initial supplying sectors, as for instance the local design and packaging
firms, have reached world class in their specialization and are now in some cases independently
embedded in production chains in the global spirit and drink industry. Local cooperage not only
supplies 60% of the French barrel industry, but also sells its products to whisky firms in Scotland or
Port wine producers in Portugal. Some of the bottle producers are currently among the top
performing firms in the cluster, settling their turnover and number of employees in similar or even
higher spheres than some of the largest local cognac-producers. In general, growth in the region has
not only evolved organically or been exclusively linked to the AOC-product of Cognac (appellation
d’origine controlée - designated label of origin). In the past decades it has extended its production
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and used its technical skills for a diversification in distilled alcohols that originally have their
traditions in other parts of the world. Today, besides the traditional Cognac trading brands, Spirit
Valley hosts a number of vodka and other spirit producers that have had a remarkable impact in the
global spirit industry. These new developments, the region’s dynamics and their underlying economic
theories should be investigated in the study.
2 Research Design
2.1
Aim and Justification
The intention of the paper is to provide an understanding of the local production system, its
particularities and capacities and, specifically, its diversifying product innovations from the past two
decades. Yet, the study should go beyond the point of being a pure theoretical analysis; in addition to
its academic value, it should contain some relevant concepts and ideas for local firms and
organizations to further develop cluster policies. In this sense it is ought to – as much for academics,
policy makers and for entrepreneurs - offer an understanding of the cluster’s core assets that have
evolved in the region over time, by examining the local economy’s internal and external dynamics.
For achieving this aim, the study will, in a predominantly qualitative and descriptive way, focus on
the motivations, strategies and performance of product innovators1 within the local network. These
seem crucial in the recent development of Spirit Valley. Their number is limited to some 20-30 of a
total 300 major spirit companies (CIDS 2010, Diane Export 2010). Despite these relatively small
amounts, their recent development indicates that the region has a pool of assets and capabilities
that spawn a general attraction in the spirit industry. Analyzing the new firms’ reasons for arrival in
the region, their economic size, their source of investment, their internal structure and their
embeddedness in local networks provides an insight in the region’s innovation capacity and internal
dynamics. It reveals in a certain way the core location advantages for spirit-related firms but also
some barriers and difficulties while entering the local production network. An important positive
effect of this study is the collection of data about non-cognac products that are created by the local
network of firms. So far, most economic data of the region only covers firms and products that are
directly linked to cognac. Other spirits are, until now, only added up in national level spirit-output
statistics. Consequently, a key element of the study is the collection of economic data about a
representative sample of innovating firms, including measures of production, number of employees
per firm and measures of value added. This data helps getting an overview of the proportions and
performance of local innovators, and allows comparison of innovating firms to traditional cognac
producers and traders.
2.2
Scope and Limitations
The region hosts an extensive amount of very small and medium-sized enterprises and has a
sophisticated value chain system, from grape production through fermentation, distillation, storing
1
As explained at a later stage, product innovators are principally defined as creators of brands other than
cognac
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and bottling to global distribution. Some businesses have a vertical integration of all the different
production steps. However, in the most common business concepts, the integration is separated in
three to four different horizontal stages. These stages are represented by vineyards, distillers,
assemblers, traders (Cognac brands) and distributors (Cognac brands and MNCs). Additionally, the
suppliers tap into the system with their cooperage, packaging and design. Figure 1 illustrates a
simplified structure of company hierarchy in the cluster.
MNCs
Cognac & Spirit
Brands
Distillers/ distilling
vineyards
Packaging &
Design
Cooperage and
other suppliers
Vineyards
Figure 1: Hierarchical structure of Spirit Valley value chains. For the thesis, the central (red) sector will be in the
focus. In this part, most innovation and knowledge exchange is expected; it represents the interface between
market and production and creates the connection between all segments (own scheme)
In the region of Spirit Valley, 5000 people are directly and indirectly employed in the spirit business,
this is excluding the vineyards which have about 10 000 permanent and seasonal employees. The
number of companies is divided in 350 Cognac producers, 200 packaging firms and 50 design
agencies (Atlanpack: 2008). Some vineyards distillate, bottle and sell their own cognac, these
vineyards are included in the 350. However, the largest amount of them (with a few thousand in
number) sells their distillate to the larger Brands who assemble the different distillates to one final
product. Due to these large numbers, samples needed to be taken and the focus narrowed down to
specific categories of businesses. Concerning innovating firms, this task was somewhat simple as
their quantity is manageable (in some cases the definition needed to be clarified, as there are
different production and cooperation models behind the creation of a new product). For suppliers
and traditional cognac producers, the quantity was more of an issue. During the elaboration of the
thesis it seemed most appropriate to narrow down the analysis to a sample of core businesses which
are specifically involved in the processes of product innovation. Hence, the focus was set on the
direct suppliers of innovating firms. These appeared to have the highest rate of spillover, knowledgeexchange and innovation capacity. In the context of product innovation, the local vineyards seemed
unsuitable for detailed analysis. Not only due to their large number, but also as their developments
are rather stable and their direct external influence is limited. They have most commonly been run
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by the same families for decades without fundamental organizational change. On the other side of
the pyramid, the MNCs are supposedly not strongly involved in day-to-day business. Their influence
is most likely visible in external financial investments and long-term strategies for their portfoliobrands. Certainly, the samples also needed to be adapted accordingly to the companies’ willingness
and time to respond. Yet, as the thesis was supported by the local university and an association of
local firms, response rates were rather good.
2.3
Available data and methods for data collection
Some necessary data was already stocked in databases of local institutions. Nonetheless, most of it
was not adapted to the requirements of the analysis. For instance, the BNIC (national
interprofessional cognac organization), stores economic data in terms of output and size about all
cognac producers and their products. This dataset is even available over longer time periods: most of
the data can be tracked over a few decades. However, it lacks information on non-cognac production
in the region. The interviews and meetings with local firms attempted to fill parts of this gap.
Additionally, databases about global developments in the spirit industry were accessible through the
CIDS (International Centre for Spirits). For approaching the topic of variety and diversification in the
local network, several considerations needed to be taken into account. First of all, it was necessary to
detect these innovations. This was done in cooperation with the CIDS, which hosts web databases
about existing product names and countries of origin. Additionally, the CIDS has - analogically to a
library- a so called ‘Spirithèque’, where many of the world’s spirits are physically represented. This
library hosts a large range of locally-developed products and their physical representation allowed
obtaining some initial details: brand name, type of product, type of design, information about
ingredients, and (sometimes) the respective distributing firm. These elements only represented the
basis, and choices needed to be made, concerning which other information would be relevant for the
analysis and how to collect this information. Based on knowledge about the eminent examples of
new products, the following structure was developed: it seemed crucial and logical to try and
understand
-
How the product was initially developed
The origin of the initial investor/creator
The motivation and reasons why coming to Spirit Valley
Which types of knowledge were necessary for initial creation, production and distribution
Which parts of the local network are actually used, i.e. how it is embedded in Spirit Valley
The resulting organizational structure
Its primary outcomes: volume of production, main markets
Getting access to all this information was, realistically seen, not evident; in particular due to business
confidentiality and time restrictions of the involved firms. Being aware of these limitations, I
developed a concept that seemed most appropriate for the research: I prepared a predefined
questionnaire that would be suitable for the expected organizational forms, targeted to the product
creators. In order to save time for the respondents and to secure high response rates, I planned to
visit the firms and to fill in the questionnaires jointly so that any ambiguities in the questions could
be clarified. This procedure had the important advantage, that not only quantitative data, but also
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qualitative/narrative information about story of the product and mindset of the involved firms could
be collected. An additional consideration was how many firms should be contacted, i.e. how many
interviews would be possible in the limited time frame and how the collected information would be
used. The possibilities were: to collect broad information from a maximum of firms, or to collect a
maximum of detailed information from only few firms. The chosen path was a reasonable
combination between both: for a deep understanding of the topic, it seemed necessary to gather
detailed information about the innovation process of individual firms. However, it would only be
possible to put this innovation in the frame of the local innovation network, if having access to a
somewhat larger picture of all developed products. The structure of the analysis reflects this
procedure: it presents an overview on the created products, to then provide some individual
examples that seem valuable for a deeper understanding.
2.4
Initial methods and applied reality
When finally arriving in Spirit Valley and setting up data collection, I made some important
discoveries about systems behind local innovation which required me to adapt parts of the initially
planned methods (including personal interviews and questionnaires). The primary idea was, that new
brands were created by firms as individual entities tapping into the regional network. As I intended to
create a database about newly created brands (product innovations), I targeted all preparation for
data collection towards questionnaires and personal meetings with people from those firms.
However, very soon I realized that the structure behind product innovations was far more complex
than expected. The most common model, as I found out, was that an (often foreign) investor had a
product idea and looked for someone to bring this idea into practice. This idea was then developed
through several local (and sometimes additional external) suppliers and subcontractors, who, in
collaboration, set up the production line. Products that turned out to be successful were often sold
to a larger corporation after some years. These circumstances result in very complex structures
behind the different brands today: for each brand, there is not an individual firm, but usually an
initial investor, a producer of the liquid (distiller, mixologist, etc.), a range of packaging suppliers
(bottle, cork, label, design) and a bottling plant where the final product is assembled. Additionally,
the products are connected to distributors and foreign importers, and in some cases newly owned by
larger corporations. This made the prepared analysis and data collection seem like an unattainable
task, but there were reasonable resolutions to the problem. Through research about the products
and support from the CIDS2, I found out that almost all of the newly developed went through the
production lines of a handful of producers and traders (7 in number - for 44 different products). My
task was then, to contact those distilleries and obtain as much information about the products as
possible. It turned out that they were often the primary local contacts of the foreign investors and
the information they had access to, was extremely valuable and detailed. In the end, I visited 5 of
these 7 main innovators personally. In addition, I visited and interviewed two local consultants, a
design firm, a bottle distributor, two specialized suppliers (aromas & filtered water), and the director
of a cognac brand that was affiliated with one of the missing 2 producers. The resulting database
contains 49 products, of which all necessary information could be collected for 17 (initial creator,
liquid and packaging suppliers, primary distributor, main markets, new owner, selling price, etc.). For
2
CIDS – International Centre of Spirits, Segonzac
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27 products, the data is only partially available, either for reasons of business confidentiality or for
lack of knowledge among the interviewed people. Only for 5 products, no further information could
be found. In addition, I had access to an economic database about local spirit firms (Diane Export
2010), including information about yearly turnover, value added and number of employees since
2001. Also, the CIDS helped me finding statistical data about production volumes for each product.
Data about the three most successful product innovations (Grey Goose, Hpnotiq, Ciroc) can be traced
back to their years of creation. Data about the other products is fragmentary and needed to be
merged with estimations. In total, I visited and interviewed 16 local professionals from different
segments of the network at their production sites within a period of a month. Most of the knowledge
I acquired is based on these interviews, short conversations with other professionals at several
occasions (e.g. Spirit Valley Forum, April 2011) and on longer conversations with staff from the CIDS
where I was located during my stay. The collection of information is far from being complete.
However, some main findings can be deduced from the available data and reflected within the
framework of existing theory. Additionally, I tried to develop individual concepts and schemes that
explain the findings and that allow visualizing key coherences and interrelations. The outcome is
presented in the following chapters, with a review of existing theory on regional innovation systems
and clusters (Chapter 3), an explanation of the established, traditional local production system
(Chapter 4), a perspective into local innovation with and extended focus on product innovation since
the 1990s (Chapter 5) and a short perspective on implications for regional growth (6). In the end, the
findings are concluded (7) and drawn back to the initial aim: contributing to existing theory and
elucidating key aspects of the Spirit Valley innovation system.
3. Theoretical framework and previous research: innovation and
knowledge networks in the context of spatial proximity
The amount of research and practical initiatives concerning clusters and RIS has grown exponentially
in the last two decades. After some initial concepts since the early 1900s, a recent driver is to be
found in the success of Silicon Valley in the 1980s and academic works of prominent scholars as
Porter (1990: 1998) and Saxenian (1996, 2006) with their models of competitive regional advantage
in a globalized economy. In recent years, such models have been further developed, extended and
consequently applied to case studies in various regions of the world. In this context, some renowned
theories are linked to Boschma (evolutionary economics; 1999, 2005), Feldman (innovation and
spillover theories; 1994: 2004), Bathelt, Malmberg & Maskell (localised learning & local buzz
theories; 1999, 2002, 2004) and Asheim & Cooke (regional innovation systems; 1998, 2001, 2002,
2005). The general consensus is, despite some punctual dissents, that co-location and embeddedness
in local networks fosters the economic performance of included economic actors. It tends to create
favorable environments for innovation and creation of new knowledge, while contributing to a
technological progress in the industry.
Typical characteristics of regions
When talking about regions and their economic development it is a general illusion and
misunderstanding that only high-tech networks can be attractive or well performing (Porter
1990:1998; Asheim 2000). In fact, only relatively few regions in the world, are really specialized in
high technology. The much more common setting is a combination of few high-tech and science
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based companies of different sizes, some creative industry firms and a large majority of traditional,
medium and low technology SMEs (Asheim et al 2004). In some cases, the local firms that are
innovating are not rapidly growing while others achieve fast improvements without being specifically
innovative (e.g. service gazelles). Other regions only have low tech SMEs with traditional production
settings. It is general consensus though, that very different types of regional economic settings may
result in similar levels of performance (Bathelt, Malmberg & Maskell 2004; Asheim 2000). For
understanding regional competitiveness, it seems necessary to look at some more specific regional
dimensions: modern approaches focus on a region’s heterogeneity - its diversity and variety - all by
respecting its contingent (e.g. historical, cultural, social, economic, environmental) factors. In this
sense, one may argue that competition is based on unique capabilities and competences that the
region can provide, leading to the concepts of business clusters and regional innovation systems. The
focus is generally set both on present-day competitiveness (process innovation securing high
productivity in existing indusries) and on future competitiveness (focus on product innovation, new
technological trajectories & new emerging industries). For this purpose, radical innovation and
diversification can be seen as the institutional dimension of future competitiveness, incremental
innovation represents the evolutionary dimension (Boschma 2005; Asheim 2006; Tidd & Bessant
2009).
Clusters and the RIS approach
While some scholars proclaimed the “death of distance” arriving with the democratization of the
internet and mobile communication technology since the early 1990s (Cairncross 1995, 1997), a lot
of recent research argues in the opposite direction: regions seem to specialize more and more. In
fact, the perspective that local milieu and proximity are crucial for competitiveness and innovation is
widely acknowledged in the literature (e.g. Malmberg, Sölvell & Zander ; Gertler 2003; Asheim et al.
2007). In this context, Porter’s contribution (1990: 1998) is still of importance, even if somewhat
further developed today. He defines economic agglomerations as clusters, being critical masses of
linked industries and organizations, from small specialized suppliers to large corporations to
universities and political organizations. These critical masses enjoy unusual competitive success in
their particular field and can be detected throughout all different disciplines in global economy.
What happens inside companies is important, but clusters reveal that the immediate
business environment outside companies plays a vital role as well. This role of
locations has been long overlooked, despite striking evidence that innovation and
competitive success in so many fields are geographically concentrated-whether it's
entertainment in Hollywood, finance on Wall Street, or consumer electronics in Japan.
(Porter 1998)
According to this, he defines three broad concepts that generate competitive advantages for regions
and their specialized networks of firms:
First, by increasing the productivity of companies based in the area; second, by driving
the direction and pace of innovation; and third, by stimulating the formation of new
businesses within the cluster. Geographic, cultural, and institutional proximity provides
companies with special access, closer relationships, better information, powerful
incentives, and other advantages that are difficult to tap from a distance. The more
complex, knowledge-based, and dynamic the world economy becomes, the more this
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is true. Competitive advantage lies increasingly in local things - knowledge,
relationships, and motivation that distant rivals cannot replicate. (Porter 1998)
In Porters view and related cluster literature (e.g. Krugman 1991, Lundvall & Johnson 1994) three
main categories of business clusters can be acknowledged: firstly, high tech-oriented clusters, welltailored to the knowledge economy and typically linked to prominent research centers and
universities. Secondly, historic knowhow-based clusters, relying on more conventional and traditional
activities and maintaining their competitive advantage in industry-specific experience. And thirdly,
factor endowment clusters, retrieving their primary advantage from a favorable geographical
position. This can be an adapted climate to a specific type of agriculture, or the availability of
essential natural resources. Spirit Valley and the Cognac region may, in this perspective, seen as a
hybrid between the second and the third.
From clusters to regional innovation systems
While cluster theory describes solely sector-specific concentrations, the regional innovation system
(RIS) approach is also valid for multi-sectoral structures and is differentiated from clusters by its
additional support mechanisms. First steps towards this approach were made since the 1980s by
Freeman (1982) and was followed by several other scholars (e.g. Lundvall 1992, Nelson 1993, Edquist
1997), questioning the mainstream economic perspective on global competitiveness being solely
dependent on relative wages. They proposed an active role of government to generate economic
growth by promoting a dynamic perspective on innovation and interactive learning. Consequences
and positive impacts of the RIS approach were the refreshed view on what constructs ’international
competitiveness’: from low road competition (Freeman, 1982) to innovation-driven competitiveness.
This resulted in national policies of promoting learning and innovation (strong or high road
competition, ibid.) with an active role of government. The ’system’ dimension of the innovation
system approach moved awareness from science and technology policies to policies of interactive
innovation (European Commission 2006). Varieties of RIS have been acknowledged as regional’
systems (Cooke, 1992; Asheim 1995), ’technological’ systems (Carlsson 1995) and ’sectoral’ systems
(Malerba, 1997). Two principal procedures of innovation have been observed and described in the
context of those systems STI (science, technology, innovation), meaning innovation based on
scientific and technological knowledge, and DUI (doing, using, interacting), innovation based on
experience and practical application. Advancements towards a practical applicability of RIS and
cluster theory led to a report by the European Commission (2006) that promotes the concept of
Constructing Regional Advantage (CRA). CRA defines a new strategy for applied regional policies,
encouraging competitiveness in the globalizing knowledge economy by improving the learning
performance of firms and systems. It builds on the innovation system approach but advocates a
more collaborative and pro-active procedure including the meso- and micro-levels in addition to the
macro/system level (Asheim et Al. 2007). It additionally (and in the frame of the thesis importantly)
supports openness and diversity of innovation systems. This openness is suggested for distributed
knowledge networks, differentiated knowledge bases and related variety and should be promoted by
platform-based policies of regional development (European Commission 2006). CRA means creating
competitive advantage from comparative advantage through explicit policy pushes, promoting
Chamberlinian (monopolistic) competition - with focus upon unique assets and product
differentiation (Cooke 2005, Asheim et Al. 2006, European Commission 2006).
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The role and classifications of knowledge
Knowledge creation and innovation occurs in different ways according to industry and specific
context. In its varied dimensions, innovation needs input from different knowledge sources (Tidd &
Bessant 2009) and can, accordingly, be achieved in various different ways. Lundvall (1995), Cooke
(2005), Asheim et Al. (2006) indicate that, a priory, no knowledge type should be regarded as
superior with respect to generating innovation and economic growth. Additionally to the common
differentiation between tacit and codified knowledge, they distinguish between analytical (science
based) synthetic (engineering based) and symbolic (art based) knowledge. The category of symbolic
knowledge was only added later, catering for the increasing importance of creative and cultural
industries. As will be shown throughout the thesis, symbolic knowledge and its combination with
analytical and synthetic knowledge plays a vital role in present-day Spirit Valley innovation. While
analytical knowledge appears least sensitive to proximity (Cooke 2005, Asheim et al. 2006), synthetic
and symbolic knowledge tend to be some of the most sticky resources within clusters and their
knowledge flows and networks are expected to be locally configured (Asheim & Coenen 2005).
Clustered firms tend to rely on informal rather than scientific knowledge sources (business partners,
exhibitions, fairs, magazines, etc.), recruit mostly from nearby companies of the same industry, and
generate new knowledge in learning-by-doing processes or by interaction with other firms in the
network.
Related variety in the cluster context
Related variety, the phenomenon of specialized business networks diversifying their activities by
applying their knowledge to different (but related) production or services, can be observed in various
clusters and regional innovation systems. Southern Germany for instance developed, based on its
engineering capabilities from the car industry, new specializations and services in aeronautics.
Chemical engineers and biotechnologists in Medicon Valley, a pharmaceutical cluster in the Swedish
and Danish Öresund Region, have contributed to recent developments in the food industry. And even
the classic role model of Silicon Valley was initially specialized in military services, before it applied
and adapted its acquired IT-knowledge to personal users. Despite these striking examples and several
mentions in renowned publications (Porter 1990, Krugman 1991, Feldman 1996, Edquist 1997,
Boschma 2004), research about related variety in the context of clusters and RIS has not been
extensive and only been revitalized in recent years. Commonly, variety in local systems can be
distinguished as sourced from knowledge spillovers, called Jacobs externalities (Jacobs 1969,
Pasinetti 1994, Malerba et al. 2003), and as a necessity of portfolio-diversification, protecting the
local industry from external shocks. Frenken et Al (2006) argue that Jacobs externalities and related
variety enhance employment growth and regional economic performance. This observation has been
similarly made in other studies, as by Haug (2004) and Dissart (2003). As opposed to related variety
within sectors, scholars have also defined unrelated variety- as industrial diversification into new
sectors. The analysis in this thesis will focus on diversification within the sector, represented by the
newly diversified spirit industry of the Cognac region.
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4 The Spirit Valley innovation system
What is Spirit Valley and where does it come from? Its historical background - and most of its
present-day reality - is based on the dense network of cognac-producers and suppliers that has
developed in Charente and Charente-Maritime (the two departments of the Cognac region) since the
16th century and that reached global wealth and appreciation in the 19th century. Some individual
winemakers had realized, several centuries ago, that fermenting and distilling the grape juice after
harvesting it would allow them to significantly increase the value of their winery products, that were
at the time far less renowned than those of other wine-producing regions in France. Additionally,
distillation of the product allowed shipment and transportation over longer distances without
rotting, which was an important factor for international trade. The quality of the final product, soon
baptised Cognac after one of the towns in the region, convinced travelling merchants from France
and abroad (notably from Great Britain, Germany, the Netherlands and Scandinavia) to slowly
establish a trade system, using the nearby ports of La Rochelle and Bordeaux as shipment hubs. This
combination of local producers and foreign merchants persisted over time and is still clearly visible
today: many of the large cognac producers and their respective brand names descend from English,
Irish, Norwegian, Dutch and Swedish families3. These families settled in and exported from the region
since the late 18th century, bringing in the necessary knowledge about trade, foreign markets and
cultures, which the winemakers and distillers from the region were deficient in. Still today, with an
export rate of more than 97% of all local spirit production (BNIC 2011), there is a strapping
interdependency between the “viticulteurs” (winemakers) and the “maisons de commerce” (trading
houses). Since 1909, the product of Cognac is limited to a specific geographic area and obtained, in
1938, the precious status of AOC (appellation d’origine controlée – controlled designation of origin).
This status of AOC means in practical terms that the product needs to be grown, harvested,
fermented, distilled and aged in the region (following strict rules of production) in order to be called
Cognac. If any of these steps is not respected, the product becomes a regular Brandy4. Other famous
examples of French AOCs are sparkling wine from Champagne or mustard from Dijon.
The AOC has allowed the region to protect their local production and quality commitment, building
up a spirit production system with a total turnover of 1.6 billion Euro and a yearly output of 144.9
million bottle equivalents (BNIC 2008:2011). This system directly employs approximately 17 000
people; these are composed into 10 500 wine growers, 2 900 people working in distillation and trade
and 3 900 in local supply sectors (bottling, cooperage, cork & stoppers, logistics, etc.; BNIC 2011).
Between the different actors in the region, complex contractual and dependency systems have been
developed and established. While production is effectuated by close to 90% local subcontractors
(BNIC 2011), the markets are extremely global. The most important market is the USA with about
one third of all exports, closely followed by East Asia and Europe. In East Asia, the exact export rates
are not traceable to each country: statistically, Singapore is the highest consumer of Cognac (ahead
of China in total volume), but this is mainly due to the fact that it is used as a hub for further
3
Examples: Hennessy (today by far largest brand in the region with 40% of all cognac production; Richard
Hennessy immigrated from Ireland and created the brand in 1765), Hine (English brand created by spirits
merchant Thomas Hine in 1817) Others: Bache Gabrielsen (Norway, since 1905), Larsen (Grönstedts Sweden,
since 1846)
4
The main global spirit categories are (with raw material in brackets): Whiskies (grain), Rums (sugar cane),
Brandies (grapes), Eau-de-Vie/Schnapps (fruit), Baijius (rice), Gins & Vodkas (any agricultural products, normally
grain)
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shipment to other countries in the surroundings (BNIC 2011). For several reasons, which will be
analyzed and explained in the following chapters, regional firms started to diversify and extended
their production to brandies (since the mid 20th century) and to other distilled spirits (significantly
since the 1990s). Those new products from the region are improving their relative importance and
have become a major source of income for regional producers and suppliers. In this context the
name Spirit Valley has been created and developed in the late 2000s (as an allusion to “Silicon
Valley”) - with the intention of further developing the achieved status of being a globally renowned
centre of spirit innovation.
4.1
Introducing the traditional production network
Before approaching the topic of recent product innovation, it is necessary to understand the source
of this innovation: the traditional value chain for cognac. This value chain can be divided into 4
distinct sections: raw material, processing, conditioning and distribution. The raw material used for
cognac is grape juice, extracted from the yearly harvest of local white wine grapes5. These are grown
on local vineyards in 6 geographically delimited vintages, the Grande Champagne, Petite Champagne,
Borderies, Fins Bois, Bons Bois and Bois Ordinaires. The first three compose the heart of cognac
production and cover an area of approximately 30x40 kilometres. The other three vintages are
extended over a larger area, going from La Rochelle on the Atlantic coast to La Roche Chalais in the
south and Villebois-Lavalette in the East. The total area covers a surface of about 100 x 150km. Each
of the vintages has its own aromatic qualities and most cognac brands blend aromas from different
vintages into their final product. In terms of organizational structure, there are some different typical
constellations: usually the vineyards are family-run businesses that haven’t changed owners over
decades or centuries. In some cases, they are independent economic actors and even distillate, store
and bottle their products by themselves under their own family label. However, the most common
setting is that they are attached to one (or more) larger assembling brands by contract - which allows
them to have a more or less stable yearly sale price and selling ratio, and focus on their own
production. The next step of the value chain is processing of the raw juice. Processing is divided into
fermentation, distillation and aging. Fermentation is the first and shortest of these steps. After yearly
harvest in October, grapes are pressed into juice and then stored in large cisterns and fermented at a
specific temperature with addition of yeast. Fermentation only lasts a few days to some weeks
before the liquid is prepared for distillation. Distillation is, by AOC law, effectuated in traditional
copper pot stills (called “alembic”) and requires refined technology and skilled labour. The distillation
process for cognac is limited to the period after harvest (usually late September) to end of March of
the following year. The grape juice is traditionally distilled twice before it reaches its final
composition and is stored in oak barrels. Those oak barrels initiate the longest of the processing
steps: aging. The minimum age of a cognac going to the market is 2 years. However, most cognacs
are aged much longer and classified in the following age categories: VS (minimum of 2 years), VSOP
(4 years) and XO (6 years). The age limit only specifies the age of the youngest distillate in the blend;
most cognac brands use older blends than necessary to insure the quality of their products. When
the distillate is aged and ripe, the different vintages are assembled by a master blender into a final
product. The art in this process consists in creating a high quality composition of flavours and being
able to reproduce this composition in the following years. After being assembled, it needs to be
5
The grape types used for cognac are, defined by law, Ugni Blanc, Folle Blanche and Colombard. They provide
the necessary aromas for a sophisticated flavour after distillation and, very importantly, are resistant to some
major plagues like the Phylloxera louse that destroyed large parts of cognac production in the late 19 th century
and led the region into an existence-threatening crisis lasting a few decades.
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conditioned (packaged) before going into distribution. As for many other consumer products, the
design and image is getting more and more important. This development has led to a common and
very paradoxical situation in the spirit industry: that the costs for packaging and design of a bottle are
sometimes higher than those for the liquid itself. As a result, local spirit production has over time
generated a network of highly specialized packaging suppliers. Within the packaging sector, one can
find specialists for packaging and design, bottles and glassmaking, labels and serigraphy6, corks and
stoppers, boxes, etuis and other accessories used for the finalization of the product. These days, the
sector itself is dynamic and innovative enough to sell its expertise on a global scale and is by no
means limited to cognac production. Local design agencies regularly develop concepts for large
whisky and vodka producers in Scotland, Eastern Europe, the US and other parts of the world
(Interview: C. Raynaud). And in fact, some of the packaging firms in the region are settled at similar
levels as the largest cognac brands in terms of company size and turnover (Bureau van Dijk, Diane
Export 2010). The bottling assembly lines, where all components of the final product come together,
usually run seven days a week to return high investments for machines and technology. Production in
these quantities requires regular adjustments and improvement of its service components. The large
spirit producers in the region usually include at least parts of the bottling-process within their own
premises. Smaller firms usually outsource this step to subcontractors. The final product, exported at
97% of production (BNIC) goes into national, European and global distribution networks. Local
logistics suppliers have adapted services (e.g. spirit transport insurance) and deliver to European
distribution hubs. As the largest markets for cognac are the US and East Asia, most of the goods,
even for parts of the European distribution are delivered to the ports of Antwerpen and Rotterdam.
Figure 3 in Chapter 4.3 recalls the described value chain, while pointing out the contributions to (and
the sources of) innovation that are relevant in the context of Spirit Valley. Focus will be set on the
processing and conditioning sectors which are key drivers in terms of product innovation.
4.2
The local knowledge base
The physical production of a basic spirit is at present day not a great challenge anymore. It can, with
some elementary investments, be done anywhere in the world. It requires a source of raw material, a
distillery, space for storage and a bottling system for finalization. Spirits can even be bought readydistilled in bulk, refined with some aromas, bottled with an own label and be sold as a new product.
The technical knowledge behind these processes can easily be found through various information
sources and replicated without major limitations. But why and how are producers from the cognac
region, or from “Spirit Valley”, capable to maintain their advantage towards outside producers and
developers? Why is the region a continuous source for successful products in the spirit industry? One important element is, of course, the AOC protection which prevents outside competitors to use
the quality label of “Cognac”. It gives shelter and protection to the established system and has
allowed over decades to maintain and improve production capacity and market shares. But there is a
second vital reason that should be expected when looking at other examples of clusters and related
academic research: the importance and specificities of knowledge and its consequences for
innovation. The knowledge explained above, codified and replicable knowledge, is necessary to
produce. This codified knowledge is spatially independent and can be accessed anywhere in the
world. When anyone has somewhat easy access to codified knowledge, as Malmberg & Maskell
(1999) have put it, it is the use and production of tacit knowledge that allows the creation of unique
capabilities and products. Tacit knowledge is, in consensus with a broad range of innovation
6
Serigraphy: specific way of printing a design on a bottle without using an adhesive label
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researchers (Lundvall & Johnson 1994; Florida 1995; Asheim 1996, 2001; Lundvall & Maskell 2001)
essential for any creative innovation and development of new and pioneering ideas. It tends to be far
more complex to acquire and much more sensible to proximity (Gertler 2003, Asheim 2006). Where
does this complexity come from, and where can tacit knowledge be found in the spirit industry?
Asheim & Gertler (2005) define it as “heavily imbued with meaning arising from the social and
institutional context in which it is produced”, and this context-specific nature makes it sticky to
spatial proximity. In the context of cognac production, this can be illustrated through several
examples. On of these examples is the master blender, the person which is responsible for
assembling the different vintages of eaux-de-vie to a final product. With his tasting and smelling
senses, he has the ability to identify and classify the range of aromas of different vintages and
recombine these aromas to the desired blend. Codified structures, as chemical formulas, are an
instrument in this context, but cannot replace human receptivity. Understandably, it is very difficult
to learn this process from the scratch and from paper. Neither is it possible to explain this knowledge
to a person by distance. It is necessary to be in contact and get familiar with different types of
aromas, to grasp their interconnectivity and to comprehend the consequences of recombination of
different aromatic elements. Similarly developed tacit knowledge can be found in the creative
thinking of a packaging designer, the market knowledge of a cognac and spirits trader, the
generationally-transmitted experience of a winegrower or even the deeper mechanical
understanding of a bottling-technician. The cognac region is, as many other specialized learning
regions, abundant of examples. Additionally, as described in the theoretical framework, tacit and
codified knowledge can be divided into more specific subgroups: synthetic, analytical and symbolic.
Synthetic knowledge stands for engineering skills and the ability to use machines and tools (know
how). Analytical knowledge represents scientific knowledge about components and systems
(sometimes referred to as know why) and symbolic knowledge is reflected in the skill of visualizing
and conceptualizing things.
Figure 2: The local knowledge base - use of synthetic, analytic symbolic knowledge in different segments of the value
chain. The combination of knowledge, essentially between synthetic and symbolic, makes up the largest parts of local
economic activity. (own scheme, based on knowledge bases of Cooke 2005, Asheim et al. 2006)
For the creative system of Spirit Valley, an approximate distribution of these sub-groups of
knowledge is shown in figure 2. Synthetic knowledge can be found in significant amounts in all parts
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of the local value chain, from the vineyard manager over the distiller to the bottle producer and
designer. Symbolic knowledge, crucial in product creation and innovation, is mainly found in the
conditioning sector and to some extent in processing, especially when looking at master blender and
mixologist. Analytical knowledge seems only marginally represented in the region. The local
university provides a small yearly master programme in spirit marketing and law. Research
concerning the production itself (quality and efficiency of wine production, the distillation process,
composition of aromas, etc.) is merely done by some organizations and in cooperation with distant
research centres. References in this context are the Universites of Angers (350km north) and
Bordeaux which provide research and education in oenology7. The larger spirit firms are usually
equipped with teams of analytical chemists in order to fulfill requirements of food safety. Looking at
the composition of synthetic, analytical and symbolic knowledge in the region, one can somewhat
describe Spirit Valley as a DUI (doing using interacting)-innovation environment, as opposed to
regions with a stronger focus on STI (science & technology innovation) like Medicon Valley in
Denmark and Sweden or Silicon Valley in the US. Additionally to the local knowledge about the
creation and technical implementation of products, strong external inputs are required for
knowledge about markets and customers. The larger companies are usually able to obtain relevant
information through their extensive distribution networks and strong connections to corporate
groups. The smaller firms however depend on specialized media and communication channels
(magazines, trade fairs, etc.). One of such channels, fitting, on a small scale, the concept of a ‘global
pipeline’ of Bathelt et al.(2004), is provided by the CIDS8 in Segonzac. The CIDS condenses daily
information and news from the spirits world in an adapted newsletter for local firms and, in this way,
provides crucial knowledge about developments on global markets. Today, this important and very
valuable type of knowledge for the regional network – the knowledge about markets and consumer
culture – is essentially incorporated by traders and export managers of international background.
They know the specificities of the markets, the needs and trends among customers, the relevant
persons in foreign distribution systems and, very importantly, they usually know the languages of
operation. In most of the trading houses one can find such specialists. Despite this important role, it
is not always easy for singular firms to get hold of and to attract such key resources, mainly due to
the region’s distance to larger agglomerations. Bordeaux is 120km south, Paris 500km north-east.
Foreigners who are working in the region today, usually arrived there through industry-specific or
personal networks and relations. The label of “Spirit Valley”, representing the network of local firms
and its innovation capacity, may be a helpful reference to improve attractiveness of the working
environment.
4.3
Innovation in the spirits industry
So far, this paper has been talking about the production system, the emergence of new products and
about the knowledge of the local workforce. The following chapter is attempting to shed a light on
the fundamental content and outcome of the thesis: innovation and the local innovation system.
7
8
Oenology: science of wine making, vine growing and grape-harvesting
CIDS: Centre International des Spiritueux
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Commonly, the first thought when talking about innovation usually regards the product itself. The
Smartphone for mobile communication, the hybrid engine in the automobile industry or the solar cell
for the energy sector are illustrate examples for products and components that have impacted their
fields in recent years. As indicated in the theoretical framework, innovation theory gives a deeper
insight into this topic and implies that not only products can be innovated, but also markets,
processes or organizations. Evidently, companies always strive to develop new products that will
spread out and succeed on the market. But they are ought to put at least as much energy and time
into reducing costs and improving production processes, into reaching new markets with existing
products or into reorganizing their business and external network in order to compete and succeed
within their industry. In Spirit Valley’s local business network, innovations from all these categories
have been introduced from the internal and external sources and further developed by the
concerned actors. Figure 3 illustrates the value chain (explained in chapter 4.1) and sheds a light on
which categories of innovations are most likely to arise in which segments.
Figure 3: the traditional value chain and its main types of innovation. Product innovation and recent diversification are
mainly generated in the processing and conditioning segments, representing the interface between process & market
(own scheme, based on classifications of Tidd & Bessant 2009).
While all these types of innovations are crucial for the success of the local industry, this paper will
focus on product innovation in the past two decades. Hence, it only regards the new products and
brands that have been created by local firms and external investors and that are available on global
markets today. Some of these product innovations depended on initial developments in all segments
of the value chain. However, as products are created and finalized by processing and conditioning
firms, these segments are seen as the main sources of product innovation. The next chapter will dig
deeper into this topic.
In some cases it was not easy to decide whether the new creation was a product or a market
innovation. Two of such examples are the cognacs of ABK6 and Conjure. They have been developed
in the 2000s by local cognac producers with a distinctly new design and brand names that were until
then not common in the cognac industry. They may, in this sense, be seen as product innovations.
However, the liquid content of the bottles is still cognac and has not been essentially changed when
creating the new brand. The essential change was made in the image of the product and in the target
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consumer. Due to this assumption, they are respected as innovative products in the qualitative
analysis, but classified as market innovations and not included for quantitative observation.
5 Related variety and product innovation since 1990
On the basis of the (previously described) local knowledge base and production system, local firms
have been able to create a broad range of new products in the past two decades. Some of these
products, as will be further explained, reached incredible growth rates and are today highly
appreciated on global markets. Initially, this product creation was in most cases not based on
theoretic commitment, but on very pragmatic business requirements and practical considerations.
The strong dependency of local producers on a singular product, cognac, was one of the initial key
motivations for diversification (compare: portfolio-diversification; Pasinetti 1994, Malerba 2003).
Between prospering growth phases, the product has seen extensive crises that brought many of the
local firms to the edge of survival, the last one in the late 1990s. Establishing other products in the
production line would allow firms to become more independent and enhance their own collection of
products. But this could not be achieved without resistance of the large cognac traders in the region.
They saw the traditional culture of the region in danger, and, from a business perspective, were on
the winning side of having strongly dependent subcontractors. The distillery Merlet & Fils, today one
of the prime product innovators of the region, was strongly confronted to this issue when starting to
diversify. At the time in the early 1980s, they were major subcontractor of a large cognac brand and
their approach to products other than cognac brought them vigorous criticism from their purchaser
which led to long and intense reciprocal conflicts (Interview: G. Merlet).
Apart from the strategic decision of independence, there was another practical reason for
diversification: by AOC-implied cognac production law, distillation of the fermented grape juice can
only be effectuated between harvest in late September and the 31st of March of the following year.
This means that the somewhat expensive distillation facilities and employed distillers can only be
actively used during a period of 6 months. While most distillers traditionally work in the vineyards
during summer, some of the professionals decided to use their distilling skills and workforce even
after march. Subsequently, it became common practice in the region to sell some of the distillate as
brandy (without using the specification “Cognac”) which allows producers to bypass AOC regulation
and utilize their production capacities and workforce more efficiently. The next step towards
innovation was the diversification to products other than cognac and brandy. This step is more
complicated to achieve and required more extensive preparation, as distilleries needs to be adapted
to some different requirements and production procedures. Due to the size of investment and due to
the threat of losing trust by the purchasing cognac brands, only few firms took the initial risk.
Technological differences between distillation of cognac and other products are small but not
negligible. Generally, distillers can adapt their skills with a reasonable amount of training (Interview:
J. Martin, G. Merlet). Conditioning and packaging is not a limitation, as small changes in design allow
to brand and market the new products adequately.
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Figure 4: Integration of related variety in the value chain. By using different raw materials, adapting processing
procedures and, in some cases, adding supplementary aromas, new (non-cognac) products can be created. Adjustments
in the system for achieving this variety seem minimal, but require some technological preconditions and, especially, costintensive production-facilities. (own scheme, developed from concepts of Edquist 1997, Malerba 2003, Haug 2004)
Consequently, the few diversifying firms started to use different raw materials for distillation and
produced liquors, vodkas, rums, gins and other alcohols (see figure 4). Diversification started to
become a major factor in the mid-1990s, when for the first time in the region’s history a non-cognac
brand, Grey Goose, took off and became a global player in the spirit business. Other products
followed in the next years and today one can see the region as a regular birthplace and vector for
successful spirit brands. The background, organizational structure and impact of these brands and
products will be analyzed in the chapters 5.1 to 5.6.
5.1
Tapping into local innovation networks
How is a product created and innovated? What are the initial steps before launching production and
preparing distribution? In the context of local innovation this is an important element to understand .
And the subsequent innovation system builds up on this primary phase. Everything starts with an
initial idea and the readiness to invest. Besides a solid financial structure, the creation of a new
product requires adequate commitment and time. Based on experience of producers, the initial idea
may be a concept about a specific market niche, the desire for a specific flavour or mixology, or the
creation of a new (and supposedly groundbreaking) design. (Interviews: G. Merlet, C. Raynaud, J.
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Martin). In any case, the product needs to be developed in its liquid and its solid (or “dry”)
components. Figure 5 describes this initial decision-making process.
Figure 5: Steps of initial product creation. Starting from a basic idea, packaging and liquid need to be defined and
developed, then verified in their technical feasibility. During this feedback process, adequate suppliers are selected for
final production. (own scheme)
Any decision made about liquid and packaging needs to be cross-verified. For instance (besides the
importance of the flavor), colour and transparency of the liquid need to be adjusted to texture,
design and glass colour of the bottle (or vice versa). The cork needs to fulfill (market-specific)
regulations and has to be adapted to habits of the consumer. And many other such details need to be
taken into consideration. Any taken decision needs to be technically verified with potential suppliers:
can the mixology of the liquid be processed in adequate quantities, does the bottle design reliably fit
on the available assembly line, or does the serigraphy or label align with the exact shape? And very
importantly: is the final production cost and organizational structure adapted to the expected sales
income? When these elements are adjusted and verified - a process which may take several months
to more than a year - the final suppliers are selected and production can be set up. It is evident that
the adjustment process is facilitated if the interfering suppliers know each other and can physically
collaborate during the development process; in this context geographical proximity is, among
developing actors, seen as a useful asset. (C. Raynaud, G. Merlet, B. Hardy, S. Madec)
Interesting observations can be made when looking at the first contact of product developers when
firstly tapping into the regional network. Due to time limitations and the need for crosschecking of
often subjective and historically biased information from local firms, this information is not reliably
stored in the created dataset yet. However, for products that have been created so far, different
typical models can be found (Interviews: C. Raynaud, J. Martin, G. Merlet, B. Laclie): the initial idea
may be solely a product name, a composition of aromas or an idea for a new bottle design. According
to this basic idea, the investor contacts a design firm, a mixologist, a distiller or even a bottle
producer. This specialist then develops the product with his abilities and directs the client to the
other necessary elements of the network. As a consequence, some of the now most famous local
product creators have arrived in the region through initial contact with local design firms, spirit
producers or even packaging suppliers.
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Quantifying innovations and innovators
One of the essential tools for understanding local diversification and product innovation is the
quantification of non-cognac products from the region. It not only allows collect statistical data about
innovators and innovations, but also to acquire valuable understanding about the functioning of
product creation and its economic outcomes. A lot of knowledge about the regional network, used in
the other chapters of the thesis, was obtained while creating this database. Due to the fact that firms
are rather discrete about product innovation (threat of copying ideas, constraints from the cognac
industry, etc.), it is certainly not always easy to detect new products. In this sense, it would be an
illusion to think that the created database contains all Spirit Valley products that were brought to the
market. In some cases, only one step of liquid processing or parts of the packaging process are done
in the region and such products are somewhat difficult to find; almost every time when visiting firms
for interviews, a range of additional products that could fit into the concept of the database were
detected. So far, the database includes 49 products. For 17 products of these 49, it contains full
coverage about product creator, producer, packaging suppliers, main markets, year of creation,
changes of ownership and production volume. For 27 products, only part of this data is available,
some are more complete, others less. For 5 products the only available information is that they
physically traverse Spirit Valley at some stage of their production, without any further specifications.
number of new brands
Spirit Valley product innovations
20
18
16
14
12
10
8
6
4
2
0
Vodka
Rum
Gin
Liqueur
1970s
1980s
1990s
2000s
2010s
Figure 6: repartition of product types, innovated and created in the region since the 1980s. Vodkas
and Liquors are the most common products, with 18 and 17 in number (data from: own database)
The following paragraphs describe some of the main outcomes of the database: of the 49 detected
products, there are 18 vodkas, 7 rums, 4 brandies and 3 gins. Additionally, there are 17 products
classified as liqueurs9. Two of them were created in the 1980s, 13 in the 1990s, 29 in the 2000s and
four products so far in the 2010s, the repartition according to product types is shown in figure 6. The
two figures below, 7 & 8, show the development of production volume per unit (cognac brands
accumulated vs. non-cognac brands) since 1990. Three of the largest non-cognac brands, Grey
9
Liqueur: Distilled beverage being bottled with added sugar and flavourings
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Goose, Hpnotiq and Cîroc, which will be further described in chapter 5.3, are independently
represented in the graphs as they compose the major part of local non-cognac production. The other
brands are added up in one number, labeled “other non-cognac”. This should, however, not diminish
their local importance. As for instance Abernathy & Utterback (1978) indicate in their considerations
about innovation, that not every innovation (new product) takes off on the market and for few
successful innovations much larger numbers of trials and start-ups are necessary. Additionally, the
large volumes of the three top non-cognac products (accumulated 4,8 million cases of 9 litre in total)
shouldn’t devalue the production volumes of the ‘smaller producers’. Even firms with volumes of 100
000 cases per year commonly run on yearly turnovers of several million Euro (Diane Export 2010).
Looking at the second graph, the value of non-cognac brands for the region becomes evident. Total
regional spirit production was at about 18 Million cases of 9 litres in 2010, including cognac and noncognac products (see figure 8). The total volume of non-cognac products was of almost 6 Million
cases, which is close to a third of local production. While this correlation is probably not very
surprising to key suppliers in the region (e.g. bottle & cork industry), it may be to regional policies
and external observers. Apart from the Grey Goose production plant the non-cognac production is
rather discrete and hidden in more or less remote distilleries and production sites at reasonable
distance from the principal trading towns of Cognac and Jarnac. Of the main innovating firms, only
the traditional headquarters of Louis Royer, belonging to the Japanese Suntory Group since the early
1990s, are situated in one of these towns, Jarnac. They have, since their acquisition, developed
around 15-20 different liquors and spirits mainly for the Asian market. The most famous and by far
largest brand in the data base is Grey Goose with a production volume largely outnumbering any all
other producers. The production figures, however, are to be used with caution when talking about
regional growth. Grey Goose belongs to the Bacardi-Martini group since 2004 and has since then
outsourced large parts of their production to other regions. Today, only the bottle, bottling process,
blending water and serigraphy are done in Spirit Valley. The local economic impact is, for this reason,
lower than expected. At the local bottling plant, only few technicians are employed. Management
and any decision-making processes are located in the European group-headquarters in Geneva
(Interviews: B.Hardy, E. Hosteing).
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Spirit Valley production volume since 1990
14.0
12.0
Production in mio. cases (9l)
Total cognac brands
10.0
Total non-cognac brands
8.0
Grey Goose
6.0
Hpnotiq
4.0
Ciroc
2.0
Other non-cognac
(estimation)
0.0
Spirit Valley accumulated production volume since 1990
20.0
18.0
Production in mio. cases (9l)
16.0
14.0
Total noncognac
brands
12.0
10.0
Total
cognac
brands
8.0
6.0
4.0
2.0
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0.0
Figure 7 & 8: Production volumes by brand (7) and in total (8) since 1990 (new product data from: own database; cognac
data: BNIC 2011)
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A very important observation from the dataset, already indicated in earlier chapters, is that only a
handful of local producers are really involved in new product creation. These, however, have reached
reasonable size in the past two decades and are today, in terms of turnover, performing at similar or
even higher levels than many of the large traditional cognac brands. According to Diane Export
(2010), six of these producers are among the 15 top-performing spirit producers in the region. Only
the four largest cognac producers (Hennessy, Martell, Courvoisier, Rémy Martin) are clearly ahead of
the newly aspiring group. Other important information from the database lies in the use of the
supply network: what are the common patterns of production, and which parts of the products are
usually fabricated in the region? While many of the new brands are owned by foreign investors or
large corporations, the main regional income is generated in this supply and production chain, which
is also the main source for new employment (Diane Export 2010). Figure 9 visualizes the lot of
products and which parts of them are processed and conditioned locally. Figure 10 describes the
“ordinary case” and gives two examples of more complicated structures.
Figure 9 & 10: Above, sources of investors, use of the Spirit Valley network (Spirit Valley/All products; ratio in %) and
target markets. Below, the “ordinary” case and two examples of more complicated products: Leblon & Nuvo - (own
scheme, source of data: thesis database)
While only 12 of 30 of the product creators and owners are actually from Spirit Valley, the products
themselves are processed by 67% and conditioned 88% in the local network. Only the raw material (5
of 18) and - in parts - the distillation processes (10 of 17) are regularly sourced through external
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providers. This is specifically valid for vodkas, white spirits and rums that either come from other
parts of France (e.g. corn belt in Ile-de-France, 10 products), or from Latin America (3 products). For
these products, the liquid is brought to the region already distilled and in a bulk, to be then refined
by flavours or aging in oak casks and bottled on site. There are, nonetheless, also cases, where only
the liquid is produced and processed in the region to then be exported in a bulk and bottled abroad.
This is the case for some products targeted to the North American market (e.g. Nuvo, figure 10),
which accept this unconventional and costly procedure presumably for being allowed to label their
product “French” or ”made in France”. Others are processed abroad, but conditioned by Spirit Valley
firms, to then be redirected to foreign markets (e.g. Leblon, figure 10).
The label “product from France” is following a general pattern among all new products: Grey Goose
was the first mover in the 1990s creating this label as a unique feature for and being very successful
on global markets - presumably due to the fact that foreign consumers affiliate “French” with
premium aliments and luxury goods. Almost all other products followed this concept and labelled
their brands in a similar way, including “made in France”, “product from France” or “French Vodka”
in important positions of their bottle design. A total of 39 products (of 46) reveal this feature,
opposed to seven products (the rums and cachaças) that indicate Latin American sources of origin (4x
Brazil, 2x Mexico, 1x Barbados), and one liquor indicating Japan. The others lack a label of origin.
Only very few, 3 of 49, additionally use the name “cognac” in their product description. Using this
name is, due to strict AOC protection, very complicated for non-cognac products and needs to go
through extensive verification processes before being approved. It also reflects the general negative
attitude of people from the region towards products other than cognac, which may lead in the
companies trying to avoid any cross-linkages of names. During the innovation process, Spirit Valley
firms and specialists seem particularly valuable for Mixology (94% of all blended spirits), Design (90%
of all new creations), and production of labels and serigraphy (94% of all new products). These steps
require, in concordance with knowledge and innovation theory, probably some of the most
developed tacit skills in the industry. It may in this sense not be surprising that they are specifically
demanded among external investors and product creators tapping into the regional network.
5.3
Three cases: Grey Goose, Hpnotiq and Cîroc
The following section provides three examples of successful products developed in the region since
the mid-1990s. The idea behind this is to give a practical insight into the topic and to allow a
visualization and concretion of theoretical approaches that have been adopted in previous chapters.
The first one of these examples, Grey Goose, is by far the largest and most cited when talking about
innovation from Spirit Valley. Nonetheless, the developments of the two other examples are not less
impressing and give an important insight in the functioning of local networks. Each of the three
products has its own individual story and resulting organizational structure, as much in its early stage
development as in its present-day positioning. However, some basic concepts are certainly similar
and allow an essential understanding of local innovation.
Grey Goose
The story of Grey Goose has almost become an industry-internal tale since the product’s global
breakthrough in the late 1990s. It was created in 1996 by Sidney Frank (aged 77 years), a US26
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American spirits mogul and, at the time, owner of a well developed American distribution network,
which had acquired large success with the distribution of Jägermeister on global markets since the
1970s. In the mid-1990s he had the simple but genius idea of creating an ultra-premium10 vodka
using modern bottle design, high quality ingredients and the label “Distilled and bottled in France”.
At the time, vodkas were commonly produced in Eastern Europe or Scandinavia, and placed in the
low and medium price segments of the market11. Due to very low production costs of vodka (as
opposed to brown & aged spirits) a placement in the premium price segment would generate
exceptionally high margins. Sidney Frank’s idea required sophisticated design and a costly marketing
and distribution strategy, with the aim of convincing the customer of the significant price
differentiation. For the realization of his project he needed a suitable French distiller and bottling
firm, which he found through his personal network and former collaboration with cognac products.
His primary partner was H. Mounier, a cognac-firm that was in financial difficulties at the time but
that had the possibility of producing vodka and giving access to the local network of designers and
packaging suppliers. The resulting bottle, named “Ariane”, was a great success and, in combination
with the sophisticated liquid and an impetuous marketing strategy, reached the market rapidly and
multiplied its production within the first years before being sold to the Bacardi-Martini group for 2.2
Billion US$ in 2004. In the initial phase only local suppliers were implied, including processing,
design, bottle and stopper and filtered water from a specialized local source. Later when BacardiMartini took over, some of the suppliers changed and strategic decisions led to the present-day
situation that only parts of the production remain in the region. H. Mounier strongly profited from
the product’s initial expansion, grew its production capacity and increased its number of employees
from 40 in 1996 to around 90 in the 2000s (Diane Export 2011). However, after the initial boost it
wasn’t able to sustain growth and is, according to involved actors, suffering severe restructuring in
recent years. (Interviews: B. Hardy, E. Hosteing)
Hpnotiq
Hpnotiq, a cognac-based green-turquoise liquor, was initiated in 2000 by the 26-year-old former
tennis professional Raphael Yakoby (200th in ATP ranking). Through a friend of his father’s who
worked in spirits, he was, keen to start up in business, recommended to come to Cognac. There, he
met Gilles Merlet, experienced distiller with adequate production facilities who after some
negotiations agreed on providing the manufacturing while Yakoby was responsible for brand and
distribution (Interviews: J. Martin, G. Merlet). Without any tests or surveys, but a succession of
propositions (and refusals) it took four months to develop the final concept of the product. The initial
brief had looked too much like existing products and Merlet refused to do a “me too”. The
cooperation finally led to a colourful mix of cognac, vodka and a fruit cocktail. The formula was not
registered - as doing so would have, according to G. Merlet, amounted to giving it away. The bottle
design created by a local agency is derived from a special vintage champagne bottle but adapted with
a silkscreen print and a turquoise colour of liquid. Hpnotiq was finally launched in New York in
September 2001, but despite the unfortunate time setting, the product took off within a few months
and exceeded the business forecasts of 10 000 to 20 000 cases12 for the first year (Interview: G.
Merlet) by far. In the end, 165 000 cases were delivered – less than the actual demand, but
production could not keep up. Already at the end of 2002, Raphael Yakoby sold the brand to Heaven
Hill Distilleries, second biggest producer of bourbon in the United States, for the amount of 60
10
Industry-specific term used for vodka indicating the price segment above $30
Below $30
12
Industry-specific measure: 1 case = 12 x 0,7l = 8,4l. (-> 10 000 cases = 84 000l)
11
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Million US$. The new owners managed, through their extended distribution network, to sell 825 000
cases in the second year. Merlet’s production could only keep up by calling up all resources in-house
and among his local suppliers. At peak times, there were up to 4 bottling firms working as
subcontractors in complement to Merlet’s own production line. After the peak in the second year,
sales levelled off to around 500 000 cases. Until 2010, production has been oscillating down to a
yearly production of 350 000 (Interview: G. Merlet).
Cîroc
Ciroc, the third example, is the only one of the three developed by a local professional, JeanSébastien Robicquet. He is owner and CEO of Eurowinegate, a local trading firm that initiated its
activities in the wine business. Cîroc, an innovative type of vodka, could be called a pure Spirit Valley
innovation: not only is the developer local, but also all other elements of creation and production,
even the raw material, which is unusual for local vodkas. Why is that? Contrarily to usual vodkas,
Cîroc uses distilled grape juice as its primary liquid. It is retrieved from different wineries in the wider
region and assembled by a local distillery. The product was created in the mid-2000s in cooperation
with Diageo, a corporate group which supported the idea and which substantially offered the use of
its global distribution network. J.-S. Robicquet had worked for Hennessy and Diageo during his career
and good networks to the American market where he launched Cîroc and where primary sales are
still generated until today. In only 5 years it reached an impressive production volume of 850 000
cases and will, accordingly to business forecasts, reach more than one million in 2011. (Interview: J.S. Robicquet)
5.4
Assets and capabilities of the network
The outcomes of the database and the three examples lead us to assets and comparative advantage
of local firms and their network. As described and analyzed in chapters above, local firms have the
workforce, skills and technological tools to create, develop and produce successful spirits. The region
hosts all types of highly dedicated suppliers and individual specialists which create a vital network for
innovation. Additionally to these skills and technological assets, local firms also have the historically
provided advantage of geographical proximity. Not only does this proximity, in practical terms, allow
faster and less complicated access for potential product creators when tapping into the region, it also
facilitates essential feedback processes within the physical development stage of the product. Design
firms, for instance, need to crosscheck their concepts with packaging suppliers to be sure that the
product will reliably fit into assembly lines; mixologists need to be in direct contact with chemical
analysts for production possibilities of their developed aromas, and distillers or machinists need to
be taught how to finally implement the product in their production lines. Figure 11, derived from
concepts of Asheim et al. (2006), tries to evaluate this asset of proximity: while initial product ideas
and marketing strategies, classified as primarily symbolic knowledge, may be sourced globally, Spirit
Valley firms have strong creative advantages when it comes to the intersection of analytical,
synthetic and symbolic knowledge - and its practical application.
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project
phase
creation of
the product
idea
development
of liquid and
design
establishing
the
production
marketing &
distribution of
the product
mode of
knowledge
symbolic
analytical,
synthetic,
symbolic
analytical &
synthetic
symbolic
actors
involved
global & local
local
local
local & global
Figure 11: intersections of knowledge types in Spirit Valley, creating essential assets for local firms (scheme adapted from
concepts of Asheim et Al. 2006)
Despite this ability of developing and implementing a product, the network still strongly depends on
external input from investors and product creators, who have cultural affiliation to their markets and
access to strong distribution networks. These two elements, knowledge about the customer and
access to a developed distribution system seem essential for any new products to be successful.
6 Implications for regional growth
The concept of innovation and diversification is certainly valuable for the firms themselves, but
should also, as the spirit industry plays a central role in the region’s economy, have an impact on the
regional economic system. Measuring this impact directly is not a simple task and is always blurred
by short-term business developments of driving (or struggling) firms within the system. It isthough,
with some qualitative considerations and basic growth data about firms, be possible to draw some
important conclusions about the general outlines. Due to data limitations, the largest five local
innovating firms in terms of turnover over the time span from 2001 to 2009 were selected, older
data was not available. Those five largest firms (that are all major players in the innovation and
diversification process) have, by their accumulated size of 300 employees, a significant weight on a
local and regional scale. Data is weighed against the largest five local cognac trading firms in order to
give a comparative perspective and diminish the bias of industry-specific growth. For full data, see
figure 13 (next page).
The main conclusions from this dataset in terms of regional impact can be drawn by the change in
turnover, the evolution of total number of employees, and specifically, the proportions of value
added. In the described time period, the leading five cognac firms increased their turnover by 24%
opposed to a growth of 13% among the innovators. Having seen the development of innovated
brands in previous chapter, this proportionally slow growth seems surprising. However, it becomes
less surprising when dissecting the data in its segments and understanding the development of the
included firms. On the one hand, cognac brands have performed fairly well in the 2000s, both due to
efficient and successful strategic management and to rapid growth particularly on Asian markets
(Interviews: A. Bocheux, S. Dathané, V. Perrin). On the other hand the innovating firms are, as they
usually don’t own the created brands themselves, always opposed to the risk of losing their
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production to other locations or production units. This happened to two producers in the mid-2000s,
which created large gaps in their turnover while maintaining the expenses for employees and
technology. Those two brands, one of them having produced Grey Goose, are still in restructuring
phase and suffer from this development. (Interviews: E. Hosteing, B. Hardy) Additionally, new
innovations may be boosted by rapidly arriving trends leading to fast growth in the initial stage. But
these trends, as experience shows, are not always sustained over very long periods. Hpnotiq for
instance, described in a previous chapter, went from 105 000 cases in the first year to 615 000 in the
second and back down to 475 000 in the third year.
Figure 13 (following page): statistics about turnover, value added and number of employees of the
largest five cognac brands (in turnover) vs. the largest 5 innovating firms (data retrieved and adapted
from: Diane Export 2010)
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Such waves and growth curves struggle any medium sized manufacturer and require solid innovation
and resource management. Despite these fluctuations and irregularities in production, the five
innovating firms grew their total number of employees by 8% from 277 to 300, mainly driven by the
three positive performers. Distillerie Merlet & Fils alone, the fastest grower in this period, went from
25 to 43 employees, an increase of more than 70% in only 8 years. At the same time, the cognac
brands decreased their number of employees by 3% (from 1461 to 1417). An explanation for this
may be found in different factors: after the extended cognac crisis in the 1990s, strategic
management led to restructuring of internal resources and reduction of employees. Additionally,
some processes were outsourced to external suppliers and, most importantly, many of the key
management and marketing positions were relocated in the headquarters of corporate groups in
Paris, London and the USA (Interviews: V. Perrin, P. Hosteing). Total cognac brand growth of 24% has,
in this sense, not brought large benefits to the region. This is very different concerning the
innovators: due to their size and much smaller internal economies of scale, they rely much more on
the local network, or as economic geographers would put it, profit from agglomeration economies.
The distribution of value added between cognac brands and innovators indicates this feature: while
the top five cognac brands reveal an average value added of 41%, the innovators only settle at 21%.
This may partly be due to different pricing strategies and the very high sales values of some premium
cognacs. However, relative margins are on average vitally higher for premium vodkas and other
white spirits (Interview: E. Hosteing), especially since the premiumization of Grey Goose. In this
sense, another reason should be decisive for the large differences in value added: the innovating
firms only effectuate parts of the value chain within their own premises; the rest is outsourced to
local suppliers. While a cognac brand usually has its own bottling assembly lines, design departments
and raw material suppliers, medium sized innovating firms don’t have access to such internal
capacities. Consequently, their growth within the region should be expected to have much higher
positive impacts on the local supply network. The number of 300 employees in innovating firms may,
consequently, only represent a fraction of people actually involved in production. One of the
innovating firms pushes the concept of subcontracting to the extreme: it focuses primarily on
conceptual product innovation and brand creation and outsources all physical production steps.
Doing this allows them to be specifically flexible in terms of innovation, but requires solid abilities
and knowledge about markets and foreign trends. It makes them independent from any production
investments (distilleries, storage, etc.) and lets them focus on the pure innovation aspect. If
effectively applied, this concept technically replaces the role of the foreign input being described as
vital for most local firms. The firm has been very successful with this strategy in recent years and is
the creator of several rapidly growing products.
Concerning the other innovating firms, different models can be identified (see also figure 14). Most
of them have invested in on-site capacities, for instance for distillation, aging and bottling; some of
the larger firms even employ their own mixologists, chemists or designers. Consequently, most
innovators are normally located in the centre of the scheme, having some internal and some
outsourced capacities. This is opposed to the large cognac brands that are profiting of internal
economies of scale and not essentially depending on the local network. These different levels of
network-dependency can also be drawn to engagement in the Spirit Valley initiative: it was created
by an association of packaging firms with the aim of attracting more activity to the region. The
packaging firms are strongly dependent on the local production network and, accordingly, support
any type of product innovation and diversification. The large local cognac brands which have a strong
political lobby in the region are not necessarily concerned by the topic and leave it up to the medium
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sized and smaller producers. The innovating firms themselves are, due to their different strategic
positions and mutual competition for resources (foreign investors, subcontractors, raw material), not
always in agreement upon common interests. General consensus so far is that Spirit Valley is to
enhance the internal structure of the system and to attract valuable resources from the outside
(investors, educated workforce, product ideas) by creating a common brand for the network. It may
also help packaging firms by using this brand as a quality label and allow them to attract non-local
spirit producers to use their services.
Figure 14: Different types of business structures within the cluster. Most of the innovators have strong connections with
local business networks and suppliers. This reduces their value added, but provides them with high flexibility and
advantages of interaction. The larger (cognac) firms tend to strongly apply vertical integration. By this, they have higher
value added, but reveal weaker local networks (exception: raw material) and are less flexible when it comes to product
innovation. (own scheme, developed from observations and concepts of Porter 1990, Krugman 1991)
7 Conclusion
The study was structured into three principal segments: understanding theory, explaining the
established network and, essentially, analyzing local product innovation in the context of
diversification from traditional economic activity. In this combination, it provided an overview of
theoretical (expected) versus real (observed) features of the local cluster and pointed out the
complex interplay of local product innovation and recent product diversification. Collected and
analyzed data implies that, for the creation of a (diversified) competitive product, not only the
production facilities, but also a vast range of different skills (types of knowledge) are necessary. Some
of the local knowledge is particularly valuable and requested, but it is the combination of different
specializations and their proximity to each other that make up the essential value of the local
network: being able to create, differentiate, and diversify, in a way that allows to
-
exploit the competitive (cluster-)advantage
decrease dependency on established products
achieve a globally leading position in the industry and become a driver of innovation
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attract the interest of external investors
generate necessary regional dynamics between involved actors.
But the system also has its limitations. Examining the successful products led to the assumption that
the local network strongly depends on some external inputs. These inputs are crucial in terms of
knowledge about markets, access to product ideas and, fundamentally, access to fertile distribution
networks. Only the compound combination of a committed investor, a good product idea, a
sophisticated production system and access to the market seems to secure the competitive position
of regional producers and suppliers. Some of these elements may be improved or attracted by
joining the involved actors into a commonly branded network, as has been done under the name of
Spirit Valley. In terms of regional growth, the new variety and diversification of some innovators
seems to have very positive impacts. Not only does it increase total production volumes. It does,
contrarily to the established cognac firms, even generate new employment and secures involved
firms and suppliers from crises in the cognac industry, which have regularly occurred in the past. By
the strong implementation of the innovating firms in local networks, and their feature of (commonly)
having all management capacities on site (opposed to most MNC-owned cognac firms), they are of
great value for regional development. This development, so far more natural than constructed, could
be supported by local policies by practical measures. Those may be adopted from other learning
regions and clusters, and backed by theoretical approaches of Innovation Systems and Constructing
Regional Advantage.
Validity and value of results, scope for future research
The database about new products from the region was an important step to understand and quantify
product innovation and diversification. Working and creating the database made clear though, that
the list is certainly not complete yet. During each of the interviews with producers and suppliers, new
names of products appeared and needed to be included. The list of 49 products could, for a better
coverage of data, be completed and enhanced (with the realistic conception in mind that some of the
products are voluntarily kept in secret due to network-internal competition or contractual
considerations). Also, all information about the 49 detected products is not entirely collected yet,
mainly due to time limitations of the concerned businesses. However, the collected data so far
reveals some rather clear patterns: for instance concerning the connection between production and
market, the internal production structures of the network, the total weight of innovated products in
the regional production system, and the most valuable sources of knowledge among the suppliers. A
further extension towards a more or less complete dataset could increase the precision and validity
of the results. This extended dataset may also include additional elements that haven’t been
regarded yet. Most products so far were detected and classified because they physically move across
the local system, normally in their liquid and/or dry elements. Data could significantly be extended if
also observing those products that are developed by local design firms and mixologists for clients
outside the regional network, but also for products that are not produced in the region anymore. In
this sense, so far, the database only allows a cross-sectional perspective of products that are still on
the market, with a time component regarding the development of production volume and sales.
There should, however, be some products that failed and that aren’t produced anymore; or other
products that were bought by external firms and that are now produced elsewhere. Detecting such
products and creating an even more detailed database would be a very time consuming task, but
may provide interesting and valuable bases for future research. For instance, one could analyze
product ideas that existed but weren’t realized, understand the reasons behind failure and by doing
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so detect flaws in the innovation network. Another focus could be set upon the product creators and
investors. Getting a deeper understanding about their initial motivations and reasons to come to the
region would be a valuable piece of information for Spirit Valley firms. Moreover, one could analyze
the export of knowledge from the region by individual specialists in different segments of the
innovation system. Mixologists, designers and technicians from the region regularly spread out to
other regions of the world, advancing projects of foreign firms and organizations. By doing so, they
have established some vital external networks and have generated access to new valuable resources
for the region (knowledge exchange, arrival of foreign specialists, access to markets, etc.).This
development could be seen as another application of the phenomena described in Saxenian’s The
New Argonauts (2006). Understanding and quantifying the external systems of cluster-individuals
would be an interesting topic for future research and of high value, both for general agglomeration
theory and for the specific context of Spirit Valley.
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Asheim B. (2006), The Geography of Innovation: Regional Innovation Systems. In: Fagerberg
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Asheim B., Coenen L., Moodysson J. and Vang J. (2007), Constructing knowledge based
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Asheim, B. and Coenen, L. (2005), Knowledge bases and Regional Innovation Systems:
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Atlanpack (2008), Formes de Luxe – Spirit Valley. Territoire d’expertise au service des
spiritueux. Special Issue 2008, Cognac.
Bathelt H., Malmberg A. & Maskell P. (2004), Clusters and knowledge: local buzz, global
pipelines and the process of knowledge creation. Progress in Human Geography,
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38
Master Thesis
Lionel Sack – Lund University
9 Appendix: personal meetings and interviews
Alexandre Gabriel CEO - C. Ferrand (18.5.2011)
Anaïs Egré (former) Marketing Manager – Louis Royer (13.5.2011)
Anne Raimbault Marketing & Sales – Daedalus Design (8.7.2011)
Anne-Hélène Herbinet Export Sales & Marketing – Bouchages Delage (10.8.2011)
Antoine Bocheux Press manager & market watch - CIDS (International Center for Spirits)
(18.4.-20.5.2011, repeated occasions)
Benedicte Hardy Brand Director - Cognac Hardy (20.5.2011)
Benoit de Sutter Purchase Manager – Courvoisier (21.9.2011)
Bertrand Laclie General Manager - René Laclie Spirits (18.5.2011)
Cédric Raynaud Marketing Manager - Linea Design (25.4.2011)
Christophe Ferrazzi Market Manager – Verallia / Saint-Gobain Emballage (16.9.2011)
Christophe Lebbe Resp Cial Administ – Amorim France SAS (19.9.2011)
Eric Voigner General Manager – Daedalus Design (8.7.2011)
Etienne Delpech Master Distiller - Vinet Delpech (22.7.2011)
Etienne Hosteing CEO - Protea France (18.4.2010 – 20.5.2011, repeated occasions)
Gilles Merlet CEO - Distillerie Merlet & Fils (12.5.2011)
Hervé Bache-Gabrielsen CEO – Bache Gabrielsen/Dupuy (22.7.2011)
Jean-Christophe Boulard General Director – Atlanpack (20.4.2011)
Jean-Sébastien Robicquet CEO – Eurowinegate (20.5.2011)
Jérôme Sourisseau Conseiller Général – Ouest Charente (23.9.2011)
Joel Martin Consultant of Raphael Yakoby, creator of Hpnotiq, Nuvo - Lermium Consulting
(11.5.2011)
Julien Nau General Manager – SVE distilleries (4.5.2011)
Louise Viero Export Manager – ABK6 (29.7.2011)
Marie Hardel Purchase Manager - ABK6 (3.5.2011)
Michel Robinne General Manager – Salomon (5.5.2011)
Paul Hosteing Consultant - Quatuor Transactions (14.5.2011)
Philippe Braastad Cellar Master – Birkedahl Hartmann Cognac (12.7.2011)
Philippe Coste CEO – Compagnie de Guyenne (23.8.2011)
Sébastien Dathané General Manager - CIDS (International Center for Spirits) (18.4.–
20.5.2011 repeated occasions)
Soizic Madec Marketing Manager - Lise Baccara (28.4.2011)
Stéphane Gauté Sales Manager – Saverglass (4.8.2011)
Vincent Perrin Purchase manager – Hennessy (19.5.211)
Vincent Robert Sales Manager – Saverglass (4.8.2011)
Wilfred Schumann Export Manager – Frapin (5.8.2011)
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Master Thesis
Lionel Sack – Lund University
10 List of tables and figures
Figure 1: Hierarchical structure of Spirit Valley value chains (own scheme) ______________________________ 6
Figure 2: The local knowledge base - use of synthetic, analytic symbolic knowledge in different segments of the
value chain (own scheme, based on knowledge bases of Cooke 2005, Asheim et al. 2006)_________________ 16
Figure 3: The traditional value chain and its main types of innovation (own scheme, based on classifications of
Tidd & Bessant 2009). _______________________________________________________________________ 18
Figure 4: Integration of related variety in the value chain (own scheme, developed from concepts of Edquist
1997, Malerba 2003, Haug 2004) ______________________________________________________________ 20
Figure 5: Steps of initial product creation (own scheme) ____________________________________________ 21
Figure 6: Repartition of product types (data from: thesis database) ___________________________________ 22
Figure 7 & 8: Production volumes by brand (7) and in total (8) since 1990 (new product data from: thesis
database; cognac data: BNIC 2011) ____________________________________________________________ 24
40