“Clusters and the New Economics of Competition” by Porter

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Table of Contents

Introduction
Main body
Conclusion

Introduction

The globalization of the world has allowed companies to source their technology, goods, supplies, and information from remote locations without the need to choose local options. However, the geographic situation of a business remains high due to the existence of clusters on the world’s economic map. Clusters are places with organizations that amass critical competitive success in a specific field. They can vary in size, often spanning across a metropolitan area, a state, a country, or a group of nations. For example, the fashion and design industries of Italy or a wine production system in California are considered to be clusters. These systems include a network of companies, organizations, and institutions that operate in a particular field. A cluster can have suppliers, manufacturers, retailers, universities, governmental institutions, and other elements that contribute to the industry’s activities. Due to their complex structure that does not fit industries’ classifications, clusters can stay unrecognized for a long time.

Main body

Clusters offer companies a comparative advantage and promote cooperation simultaneously. Inside the cluster, rivals compare their prices and products making competition for customer retention more rigorous. On the other hand, the integration of different organizations leads to better vertical cooperation between different levels of industries such as suppliers and manufacturers. Clusters are essential for increasing and maintaining competition because they affect companies’ productivity – the central aspect of competitiveness. Thus, local businesses that compare their quality of services to each other strive to offer better products and improve their processes. The quality of the local environment strongly influences competition as it provides businesses with supplies, customers, and infrastructure. Moreover, clusters drive innovation forward and invite new companies to be established in the area, further contributing to competition and innovation.

It is advantageous for new and established companies to base their primary business in a cluster as it provides a developed infrastructure with resources and clients. For instance, a cluster can have an existing pool of employees that are experienced in the field and have needed knowledge for the firm to avoid additional costs of training. Moreover, it can have suppliers that know which materials are required for the type of business. Thus, clusters are better than vertical integration as they give companies more choices. Furthermore, they attract customers who are acquainted with the quality of the cluster and its range of offered services. Thus, a level of entry in a cluster is low for new companies. Clusters also promote innovation of all its members which further increases the quality of the final product or service.

Conclusion

Clusters can appear due to historical reasons, customers’ needs, the prior existence of suppliers, and chance events. Some innovative companies can develop a cluster around themselves by attracting different businesses into the region. The process of a cluster’s formation leads to the creation of a self-reinforcing cycle that allows the cluster to evolve. The growth of a cluster impacts governmental and educational institutions and promotes change in the region. A merge of two interconnected clusters produces even better results. However, clusters’ success can decline due to changes in customers’ needs, resistance to change, technological discontinuities, and the lack of innovation. In order to sustain a cluster, companies should think about all their parts, including competitors, suppliers, governmental institutions, and employees. Here, collaboration and engagement become increasingly crucial in upgrading the cluster.

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“Clusters and the New Economics of Competition” by Porter

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