The Secret Capitals of Small Business.
(FORTUNE Small Business) – Most business capitals shout their names from the hilltops--literally, in the case of Hollywood. Everyone knows which industry dominates that town, and which ones rule Detroit and Houston. But how many could name the capital of socks? Or medical imaging technology? Or firearms? These are among dozens of hidden capitals of vital U.S. industries, each populated by and dependent upon dozens of small companies that both compete and collaborate.
This idea of industry capitals, or "clusters," as academics call them, might seem like a quaint tourist draw for small towns, an excuse, say, for Gilroy, Calif., to throw its annual garlic festival. But they serve an important function in the economy. Overlapping businesses in the same region gain a number of advantages, drawing in more suppliers and customers along with financial institutions that understand the industry. Meanwhile, the labor pool grows to include more workers with special skills and experience. Even on a local scale, sticking together makes economic sense: An "auto mile" of car dealerships or an entertainment district with bars and restaurants can draw more customers, share parking, and pool its marketing dollars to promote the neighborhood.
While business capitals have been around for centuries, they spring up and prosper today for very different reasons. Before computers and modern air travel, says Harvard Business School professor Michael Porter, who studies business clusters, capitals were located near natural resources--such as iron-ore deposits or a deep-water port for shipping goods. Today, Porter says, it isn't natural resources but human resources that make for an industry boomtown. Concentrations of specialized experts may result from a university producing patents on new technology and graduates who understand them, or a large corporation sloughing off workers who see entrepreneurial opportunities their less nimble employer didn't. Silicon Valley is a prime example of a brainpower-based capital, as is our lesser-known find, Orlando, where the University of Central Florida feeds the local virtual-reality industry. Sometimes, as in the case of sports medicine in Birmingham, Ala., a single expert is enough to draw an industry.
Still, you've read the headlines: TELE-COMMUTERS ARE WORKING FROM HOME IN THEIR BUNNY SLIPPERS! A business's location, it is said, no longer matters. "That isn't true," says Porter. "You can't just set up any business in the middle of a cornfield. There are powerful benefits of proximity to a cluster in terms of efficiency and productivity." While you could plunk an aircraft-engineering firm in the middle of Vermont, the experience of hiring topflight employees will be infinitely more frustrating--and less competitive--than if you were to locate in Wichita, the biggest hub for light-aircraft manufacturing in the U.S.
Professor Richard DeMartino, who studies clusters at the Rochester Institute of Technology College of Business in New York, says recent research has gone beyond touting economies of scale and unearthed another benefit--faster innovation: "When you have people in the same area thinking and talking about a particular field, not only do people cooperate, but ideas flow quicker." Workers who change jobs pollinate their new environment with ideas from their old one.
Plenty of cities have unfurled marketing campaigns to turn down-and-out waterfronts into thriving tech clusters. But experience, documented by scholarly research, indicates that many of those efforts are wasted. "The government can't make a cluster," says DeMartino. "It can only support one that already exists." A better idea for economic developers, Porter adds, is to notice the germ of a nascent industry capital and take action. Encourage nearby universities to turn out the kind of graduates that the industry needs. Repeal laws that hinder its growth. Invest in upgrading business-friendly infrastructure, such as roads and airports.
Beyond that support, capitals, including the eight profiled in the following pages, thrive or die by the decisions of their entrepreneurs and how well they cooperate and compete. It may seem counterintuitive, but sometimes it pays to keep your friends close and your competitors closer. --JULIE SLOANE
Deep in the Sunshine State are some 300 companies dedicated to making the virtual seem real in everything from pilot-training software to videogames. About half these businesses are small ones that provide software and services to larger corporations or directly to the military.
The industry has its nexus at the University of Central Florida in Orlando, which has a virtual-reality school, the Institute for Simulation & Training. One of the first such schools in the nation, the institute turns out 100 graduates a year, counting master's and Ph.D. students. Nearby is the simulation training and support branch of Lockheed Martin, which produces combat-training technology. The company subcontracts about half its projects, most of which are military-oriented, to small businesses in the region.
"Everyone's just scattered around the money--the Army and Navy," said Joe Swinski, 40, one of three former UCF researchers who founded Distributed Simulation Technology in 1994. The Orlando company, which has 30 employees and annual revenues of $4 million, makes a computer program known as GL Studio. The software allows multiple users, such as Navy helicopter pilots training in photo-realistic virtual cockpits, to see the same simulation and interact with one another in real time, although their computers might be in different locations--even on different continents. --NATALIE B. RODRIGUEZ
The city may be known for Cattle, but if you know aviation, you know the other Wichita, the one that produces more than half the light aircraft in the U.S.--and 42% of those around the globe. These are the small planes and jets that are marketed to corporate and individual buyers rather than to commercial airlines or the military. In this industry, "no other city in the world compares to Wichita," says Jens Henning, spokesperson for the General Aviation Manufacturers Association.
The big manufacturers all started here, in part because of geography. "Aviation wasn't ever going to take off in Denver," says Duane Smith, research director of the Greater Wichita Economic Development Coalition. "Wichita had plenty of space to land on and no mountains to crash into." An oil boom in the 1920s and '30s helped. Flush with cash and a fascination for newfangled inventions, the city's well-to-do began taking to the air. Cessna was founded in 1927 by a successful used-car salesman named Clyde Cessna. Around the same time Lloyd Stearman founded Stearman Aircraft, which later, as a division of Boeing, produced World War II's workhorse, the B-29. In 1932, Walter Beech started Beech Aircraft, which was acquired by Raytheon in 1980. And in 1962, Bill Lear created Learjet, now a division of Bombardier.
About 300 small businesses provide parts and support to the big multinationals, a number that has been rising recently. Following the economic slowdown of the late 1990s and the attacks of 9/11, the city's largest companies looked to cut costs by outsourcing more parts production and subassembly to the little guys. Among those: Yingling Aviation. Founded in 1946 by local Chevy dealer Vic Yingling, the company is now owned by Lynn Nichols, 50, a local serial entrepreneur. With 84 employees, Nichols's firm is the country's largest independent Cessna parts dealer and service center. Conveniently located across the road from Cessna's headquarters, Yingling became that company's choice to install the flat-panel TVs, mahogany tray tables, and oversized leather loungers that make up the Cessna Caravan's Oasis interior, a $170,000 to $230,000 option. According to Yingling, the Oasis deal will boost its revenues to a projected $20 million this year, a 26% increase over 2004. "It's a big contract for our small company," says Nichols. --ARLYN TOBIAS GAJILAN
Mention Birmingham, and old-timers will think of steel. (The city was once known as "the Pittsburgh of the South.") Sports fans, however, will think of Dr. James Andrews. Over the years, Andrews, 63, has built up the dominant sports-surgery practice in the country, which has boosted the city's visibility and brought athletes from every major sport to Birmingham for treatment. His patient roster reads like a list of Sports Illustrated covers: Houston Astros pitcher Roger Clemens (who had his shoulder repaired by Andrews), golfer Jack Nicklaus (knees), Atlanta Braves pitcher John Smoltz (elbow), New York Jets quarterback Chad Pennington (shoulder), Philadelphia 76ers forward Chris Webber (knees), Michael Jordan, Bo Jackson, Greg Norman, Shaquille O'Neal, Tom Watson, Jennifer Capriati--you get the idea.
Still, if you tear your rotator cuff lifting groceries, he'll see you too. About 15% of Andrews's practice comes from pro athletes, another 10% from college and high school athletes and adult amateurs, and the other 75% from weekend warriors. Last year Andrews and his ten partners at the Alabama Sports Medicine and Orthopaedic Center--including, most notably, Dr. Lawrence Lemak, who is also world renowned--logged 75,000 patient visits and performed 9,000 operations. To see him, patients fly in from as far away as Brazil, Korea, Saudi Arabia, and Britain.
There are other celebrated sports-medicine centers in the U.S., most notably the Kerlan-Jobe Orthopaedic Clinic in Los Angeles and the Steadman Hawkins Clinic in Vail, Colo., both of which treat marquee athletes. However, the Alabama Sports Medicine Center stands out in one very big way: It has a far bigger impact on the local economy.
"Just the out-of-state patients last year produced an economic boost of more than $15 million," says James Smither, president of the Greater Birmingham Convention and Visitors Bureau. "And that is a conservative estimate." Friends and family who accompany patients stay in local hotels (sometimes for weeks) and spend at shops and restaurants in town.
James Wilson III, a friend of Andrews's and owner of the Wynfrey Hotel, where many of the clinic's patients stay, finds visits by members of the Saudi Arabian royal family particularly memorable. "They bring a 747 and an entourage, and they take two or three floors of the hotel," Wilson says. "Sometimes we can't get the dang hotel cleaned, because the maids will go up to the floors where the Saudis are staying to do personal errands. They get $100 tips."
Similarly, says Frank Stitt, owner and chef of the Highlands Bar and Grill, consistently rated one of the finest restaurants in the U.S., "patients who come for, say, a tune-up for their knee with Andrews become regulars at our restaurant. People like masseurs get all kinds of collateral business. It really trickles down."
Andrews grew up in Louisiana and attended Louisiana State University, where he was Southeastern Conference pole vault champion. After earning his medical degree and practicing in Columbus, Ga., he relocated to Birmingham in 1986, lured in part by the region's love of athletics. "Coming here was a natural move," he says. "Birmingham is the sports capital of the South." (Members of the Alabama Sports Hall of Fame include such homegrown legends as Hank Aaron, Willie Mays, Bear Bryant, Joe Namath, and Jesse Owens. Both Andrews and Lemak have been inducted.)
It's not surprising, then, that autographed pictures from many of his grateful patients adorn the walls of Andrews's clinic. "To Doc A. All the best. Thanks for your help. Rocket"--signed Roger Clemens. Or as Bo Jackson wrote, "To Doc. Thanks for being there." But perhaps a signed photo from Byron Chapman Sr. says it best: "Dr. Andrews, thank you for giving me two good knees which enabled me to shoot a round of 69 at the age of 83." --GAY JERVEY
In an age of buff bodies and low-carb lifestyles, the moniker "Fat City" seems a dubious distinction. Yet as the number of obese Americans steadily grows, Durham, N.C., has become a national (and global) center of weight loss. Some 10,000 patients a year come to the city's four major diet clinics (all small businesses). While in town, those visitors spend millions of dollars at the local retailers that cater to them. "If your relationship to food needs to be altered, there's really no better place," says Reyn Bowman, spokesman for the city's Chamber of Commerce. Bowman estimates the city's diet industry brings in some $45 million a year.
Offering everything from plus-sized apartments to low-fat-food markets to custom-made sneakers, Durham's small-business owners have tailored their wares and services to larger-than-average customers. Duke Towers, a luxury apartment complex, has several suites whose furnishings are designed for plus-sized guests. Michael Jordan's Lincoln Mercury auto dealership will order special lift systems to help heavy drivers get in and out of their cars. And certain restaurants are known to provide private rooms to accommodate so-called "spitters"--seriously obese dieters who chew food for the taste but don't swallow in order to avoid the calories.
Walter Cleary, owner of 9th St. Active Feet, a retailer of custom-fitted, physician-prescribed sneakers, estimates that one-third of his store's $2 million in annual revenue comes from obese customers. "You can't be poor and come here to Durham to lose weight," says Cleary, 75, who has traded in the typical upholstered seating at most shoe stores and replaced it with sturdy wooden benches. "We're popular because they can't find shoes that fit them anywhere else."
The diet industry in Durham dates back to the 1940s, when a Duke University physician named Walter Kempner started a low-fat, low-salt diet to help patients with high blood pressure and kidney disease. Noting significant weight loss among patients, Kempner expanded the program and started treating obesity, launching what today is known as the Rice Diet program. "Physicians didn't know how to treat this population," says Gerald Musante, a psychologist who joined Duke in 1970 to counsel Rice Diet patients. "They were abandoned by professionals, who looked upon them as weak."
Musante, now 62, is recognized as the city's first diet entrepreneur. He believed the Rice Diet was unnecessarily restrictive and proposed opening a live-in treatment center where seriously obese patients could also address the behavioral issues behind their weight. The idea was roundly rejected by Duke's administrators. "It was an entrepreneurial concept they didn't understand," Musante says. He forged ahead. In 1977, with a $140,000 bank loan, Musante bought an old house in downtown Durham, where he opened a facility called Structure House, which used a combination of counseling, fitness, and behavior modification. He later moved it to a 21-acre compound nearby. Today the facility draws some 2,000 clients a year, each paying $2,200 a week and staying four to eight weeks. Annual revenue for Structure House is about $8 million
Some of Durham's diet entrepreneurs mix their profit motive with a sense of social mission. For Ira Green, 52, his obesity and his love of business came together in Camp Timber Creek, a for-profit summer facility for obese children. With headquarters in Durham and a campsite in nearby Lenoir, N.C., Camp Timber Creek attracts 100 kids from around the world who pay $800 a week for dietary counseling and exercises aimed at building self-esteem. Once the owner of a local deli, Green says his weight burdens had all but forced him to abandon any entrepreneurial pursuits until he launched Camp Timber Creek two years ago. "I've gone through what the kids are going through," says Green, who once weighed 458 pounds and is now down to 280. "I connect with them." --RON STODGHILL
When Chris and Bruce Bowen founded their custom-firearms company in 1996, they based it in their hometown of Omaha. But sales at Bruce Bowen & Co., which sells its specialty guns for as much as $16,000, began increasing rapidly five years later, as word of their products spread. The Bowens had to expand, and home-state pride couldn't keep them in Nebraska. "We wanted a more economically friendly place, but we also wanted to live in a beautiful place," says Chris. They didn't consider any of the states where giant gun companies have traditionally located--California, Connecticut, or Massachusetts. Instead they chose South Dakota.
Over the past few years, South Dakota has become a haven for small firearms factories, thanks to low taxes, minimal regulations, and gun-friendly residents. At least 18 small companies manufacture guns and gun parts in the state, 16 of them in two cities just 20 miles apart: Sturgis and Rapid City. Sturgis (pop. 6,800) is best known for a motorcycle rally that attracts hundreds of thousands of bikers every August. Yet eight firearms companies call the town home, employing more than 120 workers in what the city estimates is a $3.8-million-a-year local industry. Five of the companies have moved to Sturgis since 2000, and five more are thinking of joining them, according to Dale Hansen, co-chairman of Sturgis Industrial Expansion Corp.
"They have a wonderful economic-development program here, and they actually recruit gun businesses," Bowen says. South Dakota has sought to bring firearms manufacturers to the state since the late 1980s, in part by offering 3% loans for job-creating business ventures. (The city of Sturgis does too.) Both the state and city set up booths at the SHOT Show, the industry's largest convention, to introduce themselves to gun and ammunition manufacturers.
And the state is gun-friendly. (Some might say it's too gun-friendly: South Dakota received a D for its gun laws from the Brady Campaign to Prevent Gun Violence. Only 14 states received lower grades.) South Dakota was the first state to pass a law protecting gun companies from lawsuits. Anyone wishing to buy a gun in the state faces minimal licensing and registration requirements. Small businesses also like South Dakota's taxes--or lack thereof. The state doesn't tax corporate income, personal income, personal property, business inventory, or inheritances.
Word of mouth has been the city's best recruitment tool. Andrew McFarlane, 35, who restores vintage European rifles and shotguns, was based in upstate New York when he met Bruce Bowen at a trade show in 2003. When McFarlane complained that New York was anti-gun, Bowen, 60, encouraged him to explore South Dakota. McFarlane stayed with the Bowens when he visited the following winter. This year he moved his two-man shop to Sturgis. "In New York, the minute I mentioned guns, the doors closed," McFarlane says. "You come out here to the Midwest and everywhere you turn, the people's arms are open." --HANNAH CLARK
MINNEAPOLIS AND ST. PAUL
You can always leave your heart in San Francisco, but if it's in need of real repair, check out the Twin Cities. Heart patients have been heading here since 1952, when doctors at the University of Minnesota in Minneapolis performed the first successful open-heart surgery. That operation established the area as a hub of the cardiac-care industry.
Soon after, the university's entrepreneurially minded physicians, researchers, and engineers left the campus and started creating their own companies. Among them was Earl Bakken, an electrical engineer who had harbored a childhood fascination with the film Frankenstein. Working in his garage with a circuit design he copied out of Popular Electronics, Bakken developed the first battery-operated pacemaker in 1957. Medtronic, the startup he co-founded in 1949 with his brother-in-law, now boasts $9 billion in annual sales of products that range from pacemakers to portable insulin pumps. His venture had its own spillover effect in the region: St. Jude Medical was founded in 1976 by former Medtronic employees and researchers from the university. St. Jude initially sold mechanical heart valves. It now has 8,500 employees and sells to more than 130 countries. According to the state government, Minnesota sells some 95% of the world's cardiac-care devices.
While a few giants dominate the Twin Cities' medical-industrial ecosystem, the area also offers fertile soil for small firms and startups. The region's venture capital industry also helps. Last year VCs invested more than $145 million in promising medical device companies. That represents 39% of all VC investment in the state. Plus there's plenty of talent to draw on. In Minneapolis alone, 13% of the city's population of 383,000 work in the health-care industry, many of them at small physician's offices and clinics. (Some 2,400 such offices line a two-mile stretch of Chicago Avenue.) "The medical infrastructure here was so highly advanced, but the move-in costs were still pretty low," says Ed Rychlick, 37, one of the co-founders of Congestive Heart Failure Solutions, which manufactures a device that stabilizes the balance of blood and other fluids in post-op patients. CHF Solutions was founded in 1999 on the campus of New York City's Columbia Presbyterian Hospital, but it moved to the Minneapolis area in 2002. Since its relocation, it has grown from ten employees to 40. All the new hires were recruited locally. Says Rychlick: "There are few places where the talent pool is as deep or wide." --ARLYN TOBIAS GAJILAN
It's a far cry from Paris, but a small three-town region in central Massachusetts is considered to be this nation's city of lights. The three towns of Charlton, Southbridge, and Sturbridge were the birthplace of fiber optics in the late 1950s and, together, were the world's largest provider of optic fiber for the next several decades. Today the area is home to more than a dozen medical-optics companies, most of which supply the $700 million (and growing) market for endoscopes--flexible tubes fitted with video monitors that allow surgeons to see inside patients' organs.
It all started with American Optical, once one of the largest private employers in Massachusetts, which was founded in Southbridge in the late 19th century. "American Optical was like a university, training all these technicians," says M. Mahmud Awan, a former manager at the company. "Back then the region was second only to Germany when it came to optics." Engineers who had been trained there would later come up with several major innovations in optics, including night-vision goggles and long-distance telephony via fiber-optic lines. But after American Optical was sold to Warner Lambert (now part of Pfizer) in the late 1970s, many of its 20,000 employees were laid off. Engineers and physicists responded by forming their own companies. Awan, 54, now heads the Regional Technology Corp., a business-development organization, and--no coincidence--also founded his own fiber-optics company, Techman International, which manufacturers medical devices such as surgical microscopes.
Optimum Technologies, another medical-optics company in the region, is working with Harvard Medical School to create a better tool for diagnosing cancer. The FDA-approved device can detect precancerous tissue simply by being pressed against the wall of an organ (which is less painful and less invasive than a traditional biopsy). Optimum is finishing clinical trials of the scope and will ramp up production by the end of the year. "Because we manufacture locally, we can offer quicker time to market and better quality control," says CEO Randal Chinnock.
Optim, a 46-employee company in Sturbridge that was founded in 1970, is prototyping what it hopes will be the first flexible endoscope that can be thoroughly sterilized after each procedure. Currently endoscopes can't be sterilized as well as other surgical devices because of certain materials contained in them. That can lead to cross-contamination of diseases between patients. Optim's new system, which should be available sometime next year, uses steam pressure and heat to sterilize the endoscopes and allow them to be reused more safely.
"This whole region only makes 70,000 or 80,000 scopes a year," says Optim CEO Thomas V. Root, while overseas competitors produce far more. "That lends itself to appreciating the handiwork of what we do in this area. I would stack up the skill and scope of the manufacturers here against anyone in the world." --MAGGIE OVERFELT
It makes sense that a city named for a mythological bird would be one of the nation's largest producers of helicopters. Phoenix's roughly $2 billion rotorcraft industry is fueled by about 100 companies, of which more than half are small. They range from mom-and-pop electronics shops to consulting firms such as Worldwide Helicopter Solutions, a company that helps corporate fleet operators maintain their avionics equipment. Other small businesses supply the area's two giants: Honeywell Aerospace, which makes the engines for civilian and military helicopters, and Boeing, whose facility in Mesa, Ariz., produces the Army's AH-64D Apache Longbow attack helicopter.
Phoenix's hot, dry weather--ideal for flying and easier on metal components than other climates--has long attracted the helicopter industry. During World War II the area's three major airports were used for military-aircraft storage and pilot training. In 1986, McDonnell Douglas Helicopter moved from Southern California to Mesa (15 miles east of Phoenix) to take advantage of more open flying space and a lower corporate tax rate. When Boeing merged with McDonnell Douglas (then a $1 billion maker of helicopters) in 1997, the new entity quickly spun off its line of civilian helicopters, which became MD Helicopters. Today MD is a $50 million company whose helicopters are used by many of the nation's police departments.
Alexco, a 170-employee company based in nearby Chandler, Ariz., manufactures metal forms that are fastened onto aircraft body frames to help hold them together. In a market dominated by two big aluminum companies (Alcoa and Universal Alloy), Alexco was started in 1997 by industry veteran Robert Fraley, 70, who came out of retirement when Boeing started calling and asking if he could fill orders more quickly than the large companies. "The aerospace industry was going gangbusters, and we were able to turn orders about three weeks faster," says international sales manager Michael Fraley, 28, Robert's son. A renewed interest in flying--following the slump caused by 9/11--has worked in the company's favor, and Alexco recently signed a three-year contract with Boeing, which the company says has helped double its sales over the past year, to $15 million. The phoenix of mythology would be proud. --MAGGIE OVERFELT