The Industry Clusters - Term Paper Example

The Emergence of Industry Clusters; Theory & Evidence Table of Contents Table of Contents 2 Introduction 3 Key Particulars Related To Industry Clusters 4 Theories of Origin and Emergence of Industry Cluster 7 Employment Growth 11 11 Plan or Strategy Recommendation 13 References 16 Introduction Clusters are considered as small groups of interconnected industries that drive the wealth formation of a particular area, mainly through export of goods and services. The concept of clusters may be utilised as an evocative tool for the economic development of the area thereby improving the competitiveness and the dynamics of the region. It also enhances the opportunities of high revenue jobs for the individuals resulting in the growth of the area. On the other hand, the term ‘industry cluster’ is referred to as the geographic absorption of interconnected businesses, suppliers and associated organisations in a particular field (Cilibrasi & Vitanyi, 2005). The industry clusters are primarily considered so as to enhance the productivity and the profitability of the organisations which would augment the corporate image and the customer loyalty among other competitors in the markets. It would be beneficial for an enterprise to cope up with the competitive challenges of the varied situations and conditions. Therefore, it is also known as competitive cluster or Porterian cluster (Sandiego Association of Governments, n.d.). In addition, an industry cluster also enhances the probability of skilled workers at a quite lower rate as compared to other market scenarios, infrastructure facilities, and distribution facilities among others. Apart from this, an industrial cluster also reduces the business and the financial risks as well as offers flexibility in the management decision processes of the enterprises thereby improving the profit margins of the organisations. Thus, it can be affirmed that industry clusters augment the potency of particular regions thereby enhancing the business opportunities (Smith, n.d.). This is an essay highlighting the appearance, role and benefits of ‘industry clusters’ in semiconductor industry of Silicon Valley, automobile industry Detroit and German Laser industry so as to evaluate the importance of the term in a concise manner. This assignment is divided into five phases including introduction, key particulars related to industry clusters, relevant theories on the origin and emergence of industry clusters, plans and policy recommendations and finally conclusion. Key Particulars Related To Industry Clusters Industry cluster is defined as the group of interrelated companies and industries mainly found in the micropolitan areas, but each cluster is unique in size, core potencies and dealings. The industry clusters are the groups of firms in a specific geographical region that share a universal market, technologies, workers’ skill and are also linked with the buyer-seller relationships. It makes an area competitive as well as a viable location for the development of varied industries. According to Klepper (2010) industry clusters are vibrant entities which might change depending upon the existing industries or on the exterior conditions. These are the geographic deliberations of competing, opposite, or inter-reliant firms and industries that might perform business operations with each other or with exterior enterprises. The firms present in the cluster may be aggressive and cooperative in nature. This is due to the fact, that at the initial stages of development, the area or market is entirely new and the rivals are also quite less as compared to others. Thus, it can be affirmed that no explicit benefit is offered by any specific region or market at the preliminary stages of development of clusters. However, after the establishment of the cluster, the area becomes competitive as well as feasible for business prospects which enhance the economic growth of the area. As a result, it attracts new industry entrants, which increases the competitiveness of the region. This can also be apparently observed in case of semiconductor industry of Silicon Valley, automobile industry of Detroit and German Laser industry. Hence, it can be evidently revealed that the region of a cluster is not so responsible for its development rather the cluster makes the area viable for others (Klepper, 2010). Klepper (2010) also mentioned that each of the above mentioned industries such as semiconductor industry of Silicon Valley, automobile industry of Detroit and German Laser industry entered the specific markets after viewing the success path of the early excellent performers. The ‘Fairchild Semiconductor’, is one of the market leaders of this sector manufacturing integrated circuits (IC) which acted as the inspiration for Silicon Valley to enter into this market so as to enhance the revenue as well as corporate image among others. Similarly, the performance of ‘Olds Motor Works’ in the Detroit area also inspired the growth and development of the industry of Detroit. Thus, it can be revealed that the performance and growth of these industries improved the potentiality of the area, which engrossed numerous new entrants. Thus, the area became competitive as well as opportunistic among other regions. Hence, it can be depicted that the main responsible aspect for the development of the area is the progression of the existing industries rather than other factors (Klepper, 2010). Buenstorf & Geissler (2008) highlighted that ‘clusters’ are one of the prime factors responsible for the growth and development of a particular area or region. However, the firms entering a cluster might vary in size and volume. This is because the increased potency and advancement might attract both small as well as big industry players in order to augment their revenue and position in the market. Along with this, it would also enhance the corporate image and the brand identity in the market thereby improving financial structure of the company. The similar picture is observed in case of semiconductor industry of Silicon Valley within the years of 1950 to 1980 (Buenstorf & Geissler, 2008). In the year 1950, the population of Silicon Valley accounted to approximately 1.3 million which increased by about four times from the existing population. The prime cause behind this is due to the huge entry of about 100 semiconductor firms in the next 30 years due to high business opportunities. As a result, the total turnover of the firms of Silicon Valley increased from 43% to 48% in the next five years. This shows that increased opportunities and competition among the business players in the market enhanced the turnover of the Silicon Valley enterprises, which also improved the economic condition of the area (Buenstorf & Klepper, 2008). Similarly, the growth of the Detroit area also improved due to the entry of 100 automobile firms involving most of the industry leaders of the automobile sector. This enhanced the market share and the viability of the business prospects of that area as well as improved the turnover of the industry. This led to the growth of the economic condition of the area and improved the opportunities of job for the individuals. Apart from this, the area of German laser industry also became more attractive and challenging due to the entry of numerous companies with the motto of enhancement of revenue and position among competitors in the market. However, majority of the original entrants of Silicon Valley, Detroit area and in the laser industrial area of Germany are created from spinoffs which later became the significant market leaders of the specific sectors. Spinoff is the form of divestiture and this concept is mainly used to enhance the market share and the profitability of the business. The process of spinoff came into existence from the early ideal performers of the industries of Detroit, Silicon Valley and laser industry of Germany. This made the area much more competitive as well as demanding for the other market competitors. Thus, it can be avowed that maximum numbers of industries entering these areas are developed through spinoffs who are mainly inspired by the expansion and profitability of the parent industries (Klepper, 2009). Therefore, spinoff helped to augment the economic condition of the area thereby improving the living standards of the individuals. Moreover, the spinoffs also amplified the future prospects of the existing industries as well as lowered the business and financial risk of the industries. As a result, the reliability and the satisfaction level of the customers are improved thereby increasing the returns of the industries of the clusters (Shields & et. al., 2004). Thus, it can be depicted that the entry of new industries in a particular cluster enhances the probability of business prospects of that region as well as improves the market image of the organisations. Theories of Origin and Emergence of Industry Cluster Clusters are a group of interconnected members located in a specific region in order to gain advantage of the common market, technology, workforce and raw materials among others. On the other hand, industry cluster is a group of enterprises operating in the same sector and in the similar region with identical product lines or services. It is one of the strategic theories utilised in today’s economy. According to Klepper (2010), it can be clearly depicted that the improvement of an industry cluster would be possible only due to entry of the varied new industries owing to the increased competitiveness of a particular region. On the basis of the above discussion, it is apparent that the theory of new entrants is one of the significant factors responsible for the development and expansion of an industry cluster of a specific region (Klepper, 2010). Apart from this there also exists certain other theory such as theory of re-enforcing which also proves beneficial for the augmentation of industry clusters. Nevertheless, the theory of new entrants proved to be much more valuable for the establishment of industry clusters rather than others. Due to the increased competitiveness of the Silicon Valley, numerous new entrants became attracted in spite of diverse sectors in the market (Alfaro & Chen, 2010). Moreover, many firms established due to spinoff from the parent company with the interest to enhance their sole profit margin as well as to develop a universal brand identity apart from the parent concern. Due to huge number of spinoffs, the areas of Silicon Valley, Detroit area and Germany’s laser industrial area became more reputed and eye-catching among other competitors. Moreover, spinoffs not only enhanced the profitability and distinctiveness of the existing firms but also improved the job opportunities and the financial condition of the area (Rogers & Larsen, 1984). The concept of spinoff is mainly observed in the automobile, semiconductors, laser industry and in tire manufacturing enterprises of Ohio. In all these places, the senior level employees mainly attempted to depart from the parental organisation with the aim to establish their entrepreneurship in the same product segment. This would surely improve the profit margin but shrink the business and the market risk (Franco & Filson, 2006). Moreover, the entrepreneurship policy is utilised by the better performing firms as well with the aim to improve the durability and the dependency of the customers thereby attracting new consumers so as to enhance the sustainability in the long run (Cassiman & Ueda, 2006). In addition, the intra-industry spinoffs are more reliable than the ‘de novo’ or new start-ups, due to lower business and financial risks as a result of apparent knowledge about the market trends, possibilities and due to high competency skills, technologies and capabilities. This is rather challenging for both the diversifiers and new introducers. Thus, it can be avowed that spinoffs strategy augmented the joint market share of the spinoffs and the parental organisations which proved quite beneficial for the enterprises (Klepper & Thompson, 2009). Similarly, the other significant theory is re-enforcing mechanisms. Klepper (2010) also focuses a vital re-enforcing mechanism criterion which involves that a superior performing firm might create better operating spinoffs at an advanced rate than others. This can be possible with the help of both intra and inter spinoffs (Klepper, 2010). The above description is observed in the case of venture capitalists (VC) companies of Silicon Valley. This signifies that with the higher quantity of new start-ups in a specific region, the probability of venture capitalists in those regions enhances. Thus, the increased attention of venture capitalists in the region thereby eases the external funding possibilities resulting in increased chances of spinoffs of the employees from the parental firms to set up new businesses (Porter & Stern, 2010). On the other hand, VC would also augment the number of inventive firms in the region thereby increasing the prospects of attraction of new talents towards the region. This would result in establishment of new firms resulting in high potency of parent intermediaries ensuing easy monetising of the new innovations. This proves rather advantageous for the new firms (Chesbrough, 2006). Similarly, the inter spinoffs, which means those diversified from other sectors are also responsible for the improvement of the industry clusters of a specific area (Higgins & et al., 2006). Thus, spinoffs enhance the competitiveness of a specific industry cluster thereby improving the number of contenders which augments the effectiveness and efficiency of the industries of those regions. Hence, it can be depicted that due to huge number of spin-offs, the competitiveness of Silicon Valley has enhanced resulting in the growth of employment rate and technology thereby accelerating the wages of the employees as well as the economic growth of the area (SVEDA, 2009). This can be clearly observed in the below figures. Economic Growth of Silicon Valley Source: (SVEDA, 2009) Employment Growth Source: (Mann & Nunes, 2009) Technology and Employment Growth Source: (Mann & Nunes, 2009) Source: (Mann & Nunes, 2009) Plan or Strategy Recommendation In this era of globalisation and industrialisation, it is advantageous to become a part of a reputed industry cluster as it facilitates in enhancing the profit, thus attenuating the risk of the business. However, it would be more feasible to enter the industry cluster as an inherent spinoff, comprising of the prior knowledge about the trends and the inclinations of the markets. This would rather prove valuable for sustaining of the business in the long run (Lécuyer, 2007). Inherent spinoff would rather enhance the reliability and dependency as well as market share among others in the market. Enhancement of consistency of an organisation would augment the corporate image and the brand identity thereby attracting additional customers in the market. Thus, it can be recommended that the strategy of inherent spinoff could be followed by the firms attempting to enter into an apparent industry cluster. Moreover, if the number of new entrants increases in a particular area then it would make higher the probability of venture capitalists (VC) in that region. This would help with the external funds, thereby facilitating the new entrants. This external revenue would act as the incentive to start the new businesses (Gilson, 1998). Venture capitalists would also result in the development of new entrepreneurial culture thereby attracting new skilled workers and experienced workforce so as to introduce innovative products and services in the market to augment the demand of its products. This can be clearly observed in case of Fairchild Semiconductor of Silicon Valley which introduced new R&D centres. This led to the development of innovative equipments as well as technologies which improved the probability of spinoffs in Silicon Valley. Apart from this, in order to retain the skilled workers in the industry, the entrepreneurs could introduce the policy of “non-compete” or “covenant not to compete” clause (CNS), which prohibits the employees to work or start-up a new firm in the same segment for a certain period of time. Moreover, it also helps an individual employee to acquire more skills and competencies which would be beneficial for the enhancement of the industry, in which the person is engaged. Therefore, it lowers the opportunities of the new entrants as well as increases the competitiveness among the existing firms. It would be beneficial for the existing enterprises to satisfy customers’ demands and needs by offering them innovative products and services. Thus, the competencies of the existing firms would increase thereby enhancing the creativeness, which is the underlying idea of polya urn model. The other significant aspect that the recommended solutions can bring in is related to employee mobility in the industrial clusters (Hyde, 2003). Thus, industry cluster would improve the potentiality and distinctiveness of the enterprise in the market among others. Therefore, industry cluster would be one of most feasible options to sustain in the long run. Conclusion Conclusively, it can be avowed that industry cluster is one of the significant concepts, which helps in the improvement of the profit margin and the market share of the enterprises. Moreover, it also facilitates in attracting new industry entrants as well as skilled and experienced workforce in the enterprise at a quite lower cost due to high competitiveness. Apart from this, it helps to establish an identical distinctiveness in the market of the same segment rather than the parent organisation. Therefore, it can be apparent to follow the strategy of inherent spinoffs as well as CNS clause so as to sustain in the market on the long run. This would facilitate in the enhancement of the corporate image and brand identity among others in the market. Moreover, it would also be easier to attain specialised and skilled workers at a quite reasonable cost which may be beneficial for the enterprises to introduce innovative product lines. In future, the study of improvement of technological aspects can be a major factor for study in order to increase the viability of industry clusters on a global basis. Hence, it can be affirmed that industry cluster would be the most realistic option for the industrial firms to remain competitive for the longer span of time. References Alfaro, L. & Chen, M., 2010. The Global Agglomeration of Multinational Firms. Foreign Investments. [Online] Available at: http://www.freit.org/workingpapers/papers/foreigninvestment/freit117.pdf [Accessed February 09, 2012]. Buenstorf, G. & Geissler, M., 2008. The Origins of Entrants and the Geography of the German Laser Industry. Agglomeration, Spillovers, Heritage and Entry. [Online] Available at: https://papers.econ.mpg.de/evo/discussionpapers/2008-14.pdf [Accessed February 09, 2012]. Buenstorf, G. & Klepper, S., 2008. Heritage And Agglomeration: The Akron Tyre Cluster Revisited. Overview of the Evolution of the US Tyre Industry. 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