On Clusters

The paper on Clusters & New Economics of Competition by Michael E. Porter, to a great extent, is an extension of his acclaimed piece of work titled ‘The Competitive Advantage of Nations’. The papers talks about Clusters – Geographic Concentrations of interconnected companies and institutions in a particular field – and how they play a vital role in a nations competitive advantage in a global economy which exists today. Porter states that companies can now tone down input cost disadvantage through global sourcing and essentially breakaway from the traditional notion of low-cost advantages. He talks about how competitive advantage now rests on productive use of inputs and the advantage of continual innovation for sustenance of competitive advantage for organisations and nations alike.

Porter mentions the importance of clusters with numerous examples from across the globe, ranging from the Italian footwear Industry, to California’s Wine industry, to the IT industry in Silicon Valley and so on. The striking feature here is the number of support and supplementary industries that have formed on account of the inherent advantages offered by the success of a fragment of the entire Cluster. Essentially, clusters play a major role in innovation through continual innovation and contribute to the foci of the cluster through education, marketing, supporting through ancillaries and so on. Further, Clusters are a hotbed for competition, which also contributes a great deal to innovation as intensity in competition drives organisations to focus more on innovations in terms of the durability of their offerings and cost-related advantages. Another significant attribute of clusters is the fact that they provide a bottomless pitcher of employees through the development of institutions of professional training and research. Not only does this allow organisations in the clusters to infuse new talent into their operations, it also ensures availability of workforce on an as-and-when basis.

On further articulation, a clear cut live example of Clusters and their contribution to competitive advantage can be seen in the Automobile Industry Cluster in the New Delhi & NCR area. It started with Maruti-Suzuki’s first production facilities in Manesar, Haryana and now accommodates two Maruti-Suzuki plants, a Hero Honda plant, Honda Motorcycles and Scooters facility, and a plethora of component manufacturers in the Gurgaon-Manesar area near New Delhi, and Honda Siel Motors and Yamaha India in Greater Noida on the other side of the capital. The factors that have attributed to this cluster are the sprouting of component manufacturers such as Sona Steering, Minda, Apollo Tyres et al around the Maruti-Suzuki facility in Manesar, and of further support organisations in areas of Delhi such as Mayapuri Industrial Area. The fact is, however, that the cluster was essentially instigated by the Government with the set up of the Maruti-Suzuki production facility in Manesar back in the mid-1980’s and the various tax and real-estate benefits offered by both the Central and State governments. This allowed for the set-up of a large number of component manufacturers since importing components at the pre-liberalisation era was just not a cost-effective option. Given the high demand for engineering graduates and management professionals, a large number of institutions were set up both by the government and private players to meet the demand through a never-ending supply of manpower. This essentially further motivated more Automobile manufacturers to set up shop around the area because of the logistical, cost and manpower advantages. A similar pattern can be seen at Pune, Maharashtra as well, which was primarily instigated by the setting up of the Tata Motors plant and Bajaj Motors plant, where the best of Automobile manufacturers are setting up shop, from Volkswagen to Daimler AG.

To conclude, the competitive advantage offered by clusters is highly beneficial for both the constituents of the clusters as well as the government as a whole. It is evident that most manufacturers can source parts from countries such as China and South Korea, but they stick to Indian component manufacturers because of the plethora of advantages offered by them.

Reference:

Clusters and the New Economics of Competition