Work On Industrial Clusters by Michael Porters - Literature review Example

Michael Porter’s (1998) Work On Industrial Clusters Michael Porter’s (1998) Work On Industrial Clusters Introduction Clusters can be described as the geographic concentrations of interconnected institutions, organizations and companies in certain fields present in a nation, state or region (Wear 2008, p. 197). Typically, clusters come into being because they facilitate the productivity of companies through the influence of local assets and the existence of like institutions, firms and infrastructure that are around them. By their ability to offer constructive ways of changing the nature of dialogue between private and public sectors, clusters provide firms with the competitive advantages of exploiting the available resources in the local networks that they operate. According to Michael Porter, long-term competitive advantages in an economy that is considered global will be found in local things such as motivation, relationships and knowledge that cannot be matched by distant competitors. Michael Porter’s work has shown that competiveness can be enhanced in the modern and increasingly dynamic, knowledge-based and complex economy by clusters. This paper will discuss the main features of Michael Porter’s cluster model and the advantages it offers business and the society. The cluster model is an economic phenomenon concept perceived from the context whereby many business organisations collaborate and compete simultaneously in order to realise various economic advantages. Porter defined clusters as geographically related concentrations of institutions and companies linked by a common area of interest. Within a cluster, the value chain will extended downwards towards the customers and laterally towards the manufacturers of complementary products. Clusters can better be understood by being viewed as dynamic arrangements founded on the creation of knowledge, innovation and increasing returns rather than being considered as fixed flows of goods and services. The clusters will characteristically encompass arrays of linked fields in an industry and the associated entities that determine competition (Wear 2008, p. 198). Examples of the associated entities include suppliers and providers of specialised inputs and services respectively. From this, the first key feature of Porter’s cluster model can be seen to be the suggestion that the future competitive advantage of a firm will not be the function of efficient sourcing of inputs. Rather, the competitive advantage will be determined by the firm’s capability to exploit and take full advantage of the resources that the local network of firms and individuals (or cluster) that they operate in provides. From this understanding, Porter’s cluster model is a representation of an alternative way of how the value chain can be organised and placed between markets and vertical integration. Unlike market transactions that are seen in dispersed markets characterised by random sellers and buyers, there is fostered trust, communication, innovation and coordination facilitated by the proximity of businesses in a cluster. In most urban agglomeration, one can readily perceive the cluster effect since majority of the business establishments spontaneously tend to group (cluster) themselves together by category (Boja 2011, p. 36). For example, rather than being isolated from competitors, one will most likely find, say, shoe shops lining up an entire street. Examples of clusters that are recognised worldwide include information and communication technology in Boston and Silicon Valley, California’s wine industry and the Hollywood and Bollywood film industries. Economic research has also provided models applicable to lower economic regions at levels that can identify and start cluster initiatives. Such research has explained the rationale behind and key features of clusters (Boja 2011, p. 42). It has been shown that most of the national or global industrial and economic areas are concentrated in a limited number of regions because firms that operate in common domains have a tendency of locating in common areas. Then, the position of the firms in economic agglomeration will persist and provide more opportunities for longer business life because innovation processes are more emphasised as compared to isolated firms. Typically, clusters will offer businesses the advantage of larger pools of specialised workforces and general labor in an environment of reduced financial, transport and time expenses while facilitating the easy and convenient transfer of information. Cluster members can be seen to share the same culture and, technically, business objectives in a way that establishes and develops trust relations among them. Further, the development of clusters is considerably impacted on by the social capital each member provides. This particular feature makes clusters unique because it cannot be built by artificial techniques as applies to technological capital which can be acquired. Clusters impact on the competition because they stimulate the formation of new businesses (Ackroyd 2011, p. 19). Essentially, that will further expand and strengthen the existing cluster because they drive the rate and direction of innovation and increase the productivity of firms in an area. When a firm becomes part of a cluster, it gains the capacity to operate more efficiently and productively because it gains improved access to suppliers, employees and, more importantly, specialised information. Further, there is better access to complementarities between businesses, public goods, institutions, motivation and measurement of results (Porter 2000, p. 14). Firms that operate in clusters have the advantage of tapping into existing resources of experienced labour forces and reducing the costs of recruiting. Another significant advantage is the capacity of clusters to furnish businesses with efficient ways of obtaining crucial inputs from well-placed and specialised supplier bases. For example, when manufacturing firms can locally source partially completed components, the need for inventory and market entry costs will be reduced while the risk of suppliers reneging on commitments or overpricing are minimised. Clusters will typically facilitate the creation of proactive jobs rather than the passive acceptance of loss of jobs that is characteristic of outsourcing. More importantly, rather than just cutting costs, clusters add value by the localising of industries. In such environments, there is long-term growth rather than short-term returns on investment and high-trust relational contracting exists in the place of low-trust adversarial contracting. Therefore, clusters provide the advantage of enhancing competitiveness in an increasingly dynamic and modern, knowledge-based economy (Boja 2011, p. 41). As shown above, being located in a cluster will provide a business with superior access at lower costs to specialised inputs which include components, personnel, business services and machinery. In contrast, such access may not be as easy in situations of vertical integration or those that use inputs obtained from distant locations or even in formal alliances that have outside entities. This is a feature that affords clusters spatial organisational forms that are inherently more effective and efficient ways of putting together inputs than the available alternatives so long as there is an availability of competent local suppliers (Porter 2000, p. 16). Although it may be necessary to source outside of the cluster in cases where there are no competent local suppliers, it is not the first best outcome. With the inherent benefits clusters provide, there are strong forces that encourage the development and upgrading of local suppliers and member businesses are provided with the incentive to encourage and support the entry of new suppliers. They also have the incentive to encourage and support the initiative of distant suppliers investing locally. This will often give rise to another feature that is actually an effect of clusters. Both the participants’ and the market’s price-independent inclinations will be informed by the perception of each participant of the others. This is as opposed to the market being the sum of the actions of all the participants as is the usual case outside clusters. Clusters have a significant role in a business’ capacity to innovate. Lower costs of experimentation, enhanced flexibility and innovation flexibility are amomg the key characteristics found in clusters and they enhance a firm’s productivity (Porter 2000, p. 17). Sophisticated buyers and the key market will typically be part of a cluster and this means that businesses that are inside a cluster will have the advantage of a better perspective of the market than their isolated competitors. Being in a cluster will give a business the advantage of being able to act upon customer requests much faster. This can best be explained by the fact that supplier flexibility develops with time after numerous exchanges of favors between firms that arises from the closeness built by the cluster. For example, such closeness of firms in a cluster will lower costs of experimenting new innovations and sufficiently delay large commitments up to a point where they are assured launching the innovation will have beneficial results. Considering a specific example, it can be seen that a firm that manufactures furniture creates a unique environment of a collection of skilled woodworkers with close relationships and closely-woven social networks that support their own norms of behavior. Another relevant example is the California wine cluster which comprises over 600 commercial wineries and thousands of wine grape growers supported by an extensive complement of industries (Porter 1998, p. 78). The cluster is mainly made up of suppliers of labels, barrels, harvesting and irrigation equipment and grape stock. There are also extended linkages to other clusters such as tourism, agriculture and food and restaurant. Basically, this example demonstrates the self-sustaining feature of clusters by its ability to link to other clusters with which they mutually operate and co-exist. Studies have shown that majority of new businesses grow up within existing clusters as compared to isolated locations (Porter 2000, p. 19). This observation explains both the characteristics and advantages of a cluster. First, from the perspective of a cluster, a new business will be able to identify and recognise perceived marketplace gaps. Then, there will be significantly lower entry barriers as compared to the situation outside the cluster since the cluster will readily avail labour, inputs, skills and other resources at its location. Third, the new business will have the advantage of significant local markets to which they can markets their products and services. Typically, groups that are closely-woven as clusters are will show supportiveness towards the entrepreneurial ambitions of their members (Porter 1998, p. 81). Therefore, the necessary environment facilitating a start-up will be provided by members of a cluster and will often include skilled labour. As earlier stated, cluster members can perceive product and service gaps that they can use to build their businesses through collaboration with other members and especially new entrants that offer new opportunities. For example, clusters have the capacity to play the role of local markets, which makes it easier for start-ups to take full advantage of already established relationships of other members. Then, they provide businesses with the ability to compete and at the same time cooperate mainly because they belong to different dimensions and different players (Porter 1998, p. 79). As earlier mentioned, the feature of improved access to specialised information is the result of the accumulation of extensive technical and market information within the local institutions and businesses in a cluster. Such information can then be accessed better and at lower costs, which allows businesses to improve their existing productivity by bringing them closer to the frontier of productivity (Porter 2000, p. 19). The influences clusters have on competition are a function of networks of firms and individuals and personal communications and relationships. However, this feature does not necessarily mean that clusters will automatically develop into effective concepts. Rather, it is an implication that cultural norms and both informal and formal organising mechanisms will significantly affect the development of clusters. Hence, an explanation of the concentration of businesses from the perspective of economies of agglomeration is that they arise either due to diversified urban economies or as an influence of the industry level (Boja 2011, p. 35). The treatment of most agglomeration economies stems from the minimisation of costs made possible by the proximity to both inputs and markets. However, the globalisation of sources of supply, technology and markets in the modern environment undercuts such explanations. Presently, there is a shift by the character of economies of agglomeration away from urban areas and narrower industries towards the cluster level. According to Porter (2000, p. 20), comparative advantage in the modern global environment is less relevant the competitive advantage. His definition of comparative advantage as the way certain locations are specially endowed and competitive advantage as how businesses use productive inputs and innovation explains the relevance of competitive advantage. To support this argument, innovation has been shown to be a key feature of clusters in which economic activities are engrained in social activities (Wear 2008, p. 195). Porter’s work shows that the social element holds clusters together and that there is considerably more innovation happening in rural communities that are characterised by stronger networks of interpersonal relations. Therefore, viewed from the wider perspective rather than the rural community setting, business clusters essentially form geographical locations that benefit businesses with resources and competences that are inherently designed to reach certain critical thresholds. That threshold will provide certain branches of economic activities with key positions and critical sustainable competitive advantages over areas and global supremacy in their respective industry (Boja 2011, p. 39). Once again, the example of Hollywood and Silicon Valley can elaborate this explanation. Conclusion Clusters have been shown to be geographic concentrations of interconnected institutions, organizations and companies in certain fields present in a nation, state or region that come into being because they facilitate the productivity of companies. This is through the influence of local assets and the existence of like institutions, firms and infrastructure that are around them. The cluster model is an economic concept perceived from the context in which many business organisations collaborate and compete simultaneously in order to realise various economic advantages. Examples of globally recognised clusters include information and communication technology in Boston and Silicon Valley, California’s wine industry and the Hollywood and Bollywood film industries. The main advantages of clusters include growth in productivity, increasing the innovative capacity of participants and stimulating new formations of business that support the cluster’s innovation and expansion. References Ackroyd, S 2011, Post bureaucratic manufacturing: the post war organization of British firms’ in Clegg, S., Harris, M. and Hopfl, H. (eds) Managing Modernity: Beyond Bureaucracy, Oxford University Press, Oxford. Boja, C 2011, ‘Clusters models, factors and characteristics’, International Journal of Economic Practices and Theories, vol. 1 no. 1, pp. 34-43. Porter, M 1998, ‘Clusters and the new economics of competition’, Harvard Business Review, November/December 1998, pp. 77-90. Porter, M 2000, ‘Locations, competition and economic development: local clusters in a global economy’, Economic Development Quarterly, vol. 14, no. 1, pp. 15-20. Wear, A 2008, ‘Innovation and community strength in Provincial Victoria’, Australasian Journal of Regional Studies, vol. 14, no. 2, pp. 195-199. Read More