Introduction to the Concept of Business Clusters
Category: Business Opportunities
26 Sep, 2016
What is a business cluster?
Business cluster is a group of firms, from same industry connected together in cl
What is a business cluster?
Business cluster is a group of firms, from same industry connected together in close proximity that share common markets, technologies, etc. A business cluster will include suppliers, distributors, primary producers, specialized services in finance, marketing, packaging, education, etc., working in a similar industry and in mostly the same region.
Who introduced this concept?
The clustering concept was popularized by Harvard Business School professor Michael Porter in his book ‘The Competitive Advantage of Nations’. His techniques teach communities to analyze their existing business and industrial bases and build their economic development on those strengths.
Good examples of business clusters include, Detroit’s auto industry, computer chip production in California’s Silicon Valley, the Napa Valley’s wine production, London’s financial sector, Hollywood’s movie production industry, to name a few.
Advantages of business clusters
Many companies facing common challenges and opportunities; together they would be capable of more than they are individually. The common challenges and opportunities that cluster cooperation can influence are found both inside and outside of region.
- Geographical proximity makes it easier for organizations to collaborate on projects such as new product development or cost reduction programs.
- Through supply chain integration, organizations reduce the freight charges. And group purchasing within the clusters enhance the economies of scale.
- Business clusters feature a high concentration of knowledge in a single location, which can positively affect the level of innovation.
- Organizations have access to new knowledge and new markets.
- Organizations can enhance synergies and economies of scale.
- Organizations can get valuable advisory services which they cannot afford individually.
When will business clusters work and what are their limitations
- Clustering concept will work only if there is good labor pool, unique regional attributes, availability and quality of public and private infrastructure, and proximity to input and product markets.
- New clusters can compete with existing clusters only when their starting positions are good, and when workers and firms can relocate rapidly, and in this way localization economies are realized early.
- One more limitation is, it is not easy to establish supportive institutions for firms in clusters.
- Companies that are “regionally minded” — that maintain ties only with players within the same cluster — are four times less likely to innovate than the globally connected. The study found that regional and national clusters are “irrelevant for innovation.”
- Knowledgeable people from various regions who want to succeed by starting new venture should connect to one another by information-sharing networks. Basic infrastructure is always needed, but fancy science parks and big industry are just nice to have.
Failed case of business cluster:
The biotechnology cluster in an Italian region, Lombardy, is a failed case of business cluster. The reasons for the failure of the biotechnology cluster are:
- Structural weakness in the industrial base, in the research and at the institutional level.
- Virtual absence phenomenon of the specialized biotechnology start ups.
- Less number of biotechnology firms in Italy which are less than two dozens.
- Most of the firms are not involved in drug research.
Business clusters have been around for a very long time, not all companies benefit from being in a business cluster, but in many cases businesses did benefit and they are the key to sustained growth, jobs and economic impact.
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