business clusters: what they are and why they provide a competitive advantage

Have you ever wondered why Wall Street is known for finance or why the California wine industry has been so successful in integrating itself into the global market? In a word: clusters. Clusters are concentrations of complementary organizations, institutions and companies that are components of a given field in a specific geographic location. These conglomerations of talent, finance and resources result in an apex of success that can be contributed to their locally-sourced competitive advantage that improves the innovative capacity of said location. From another perspective, clusters can be considered an alternative way of organizing value chains in that there is both horizontal and vertical integration of the stakeholders.

This unique form of organization creates a microclimate for competition that results in increased productivity for a given area attributed to the shared stimulus and gains. Likewise, the direction of innovation and growth is driven by the speciality of the area, which serves to further catalyze the economic environment and stimulates the formation of new businesses. Such an environment is usually triggered by some form of localized development or innovation, which indicates that the quality of local businesses and the environment in which they are is essential.

Four essential components for the successful development of a cluster are as follows:

  1. An appropriate location
  2. Local engagement
  3. The promotion of and investment in upgrades
  4. Collective cooperation

Once the establishment of a cluster begins, it is then possible to solidify trust via repeated interactions (game theory). The introduction of trust in economic relations results in improved efficiency, effectiveness and flexibility. Additional benefits identified include:

  • Lower search costs and transaction costs as a result of centralized information and labor
  • Increased productivity
  • Easier sourcing and reduced storage/housing costs
  • Improved reputation
  • Access to institutions and public goods
  • Lower risk
  • Reduced

Furthermore, clusters promote robust competition and cooperation due to the fact that:

  • It is easier to measure performance as the competition is close to home
  • Healthy, local rivalries can develop to promote a ‘race of arms’ which stimulates innovation
  • Economies of scale resulting from the collaboration between a number of local actors provides incentives for economic alliances

With all the benefits provided by clusters, it is easy to understand why developing a cluster in any given sector is desirable – especially in the modern, globalized world – in order to provide the advantages necessary to maintaining a competitive edge via the intelligent use of resources and innovative methods. It is, therefore, essential to be adaptive, both internally and externally, in order to avoid rigidity and inertia. Moreover, it is important to recognize that while government interventions are often good intentions, they can also cause stagnation in further development, making it essential for members of these economic communities to develop strategies not only for business success but also for sustainability, resilience and a changing social climate.