Clustering Your Way Out of This Crisis

The other day I came across an article featuring the most beautiful and the ugliest words in the English language. You can find quite a few among the ugly ones but the word I find the ugliest right now, at least as an economist, is “crisis”. I’ve heard this word so many times now that I simply can’t stand it anymore. Anyway, today I’m going to share a couple of ideas with you about how we could get out of the misery we’re in right now. These aren’t new concepts or ideas, there have been dozens, even hundreds of successful examples in the past, but still I find that these methods should be used much more often. One of the main reasons behind the current economic blow-off is the loss of trust among key actors and thus freezing cash streams. What seemed to be self-evident yesterday has just disappeared: unlimited access to cheap money. So, what can we do now?

I think it’s time to turn our attention to more productive sectors than the financial sector itself and try to find an economic structure that is more viable and sustainable than the one that has just collapsed on our heads. This situation calls for something already practiced in several, but still far from enough industries. The buzzword I’m talking about is clustering.

So, what’s that? To give you a short idea, it’s a network of competing-cooperating businesses, governmental and non-governmental agencies and the public in a given region or industry. To give you a simple and quite well known example, think of Hollywood. There are lots of studios, writers, directors, producers, etc. all working together in close cooperation but also competing with each other. Or another great example is Silicon Valley in California. 

Think of the industry you’re in. Do you have lots of suppliers with whom you work in close contact to improve your supply chain and their contribution to it? Do you often poll your clients’ opinion about your products and services and try to incorporate them into your product development and improvement cycle? Then you are already on the way economists call “bottom-up clustering”.

The most interesting thing is that these clusters have several benefits for each participant and only a few disadvantages that can be managed easily.

Let’s see some of their benefits:

1. You are able to share resources so you don’t have to invest into unused capacities. For example, if you’re in agriculture, and you consider purchasing a crop sprayer plane to save time on spraying pesticides or herbicides, you don’t need to invest several hundred thousands of dollars on your own, but you can do the same as a cluster. This way you save money you can use elsewhere to develop your business.

2. You can reel in larger contracts. Imagine: you are the owner of a widget plant which is able to manufacture 100 widgets a day. You’re approached by a potential client who is very huge and offers you the deal you had always been dreaming of. It’s worth hundreds of thousands of dollars and it’s all yours. The only problem is that you need to produce a 180 widgets a day and you need to start immediately to make it on time or else… There is no time at all to expand you capacities and you also have no chance to start looking for a competitor and negotiate with him, check his quality, prepare the paperwork, etc. But this problem can be resolved if you work in a cluster. You can simply distribute the workload among fellow cluster members who are well known to you and to whom you are also a business friend.

3. You can build trust and security. Because you work in a network you can reduce the risk of failure due to shared knowledge and experience but also due to the fact that the risk is distributed among members. People living near you are able to build up specific knowledge and participate in special training programs, thus securing their jobs for themselves and securing highly qualified and specialized labor for your business. Also local banks and financial institutions are going to be more welcoming since they can see their money in safer hands and collateralized by the cluster itself. 

4. You can act as a single entity when purchasing or selling goods and services. When a thousand small businesses purchase from one single vendor they are seldom able to negotiate special conditions or discounts. On the contrary, the vendor itself has to give up some of his economies of scale so the vendor might even be interested in driving these small businesses away and embark some wholesalers and retailers into the supply chain. This makes purchasing more expensive and sales less profitable for you. However, if you’re acting as a cluster, your businesses can speak with one voice and get more favorable terms.

5. The ability to find and share knowledge instantly. I don’t know about you but I have wasted weeks or probably months of my life searching for solutions to small but annoying problems. Wouldn’t it be wonderful to have a common knowledge-base at the disposal of all cluster members and save time so each of you can concentrate on profits.

6. Clusters are more crisis-proof due to their strong relationships and networked structure. Even if one or two members fail (which is less likely than without clusters) it doesn’t force the entire cluster into a disaster. 

7. Critical mass. The age of lone wolves might have come to an end. It’s much better to work in teams. The fact that the Silicon Valley is the world’s most active and attractive IT hotspot is not something that happened by accident. Success is based on the critical mass of creative, entrepreneurial people, financing capabilities, R&D institutions and their cooperation.

But to realize all benefits listed above, you should think in terms of multilateral clusters. It might not be a good idea to create a cluster just for itself; it should be a diversified network of companies that fit well together and are able to work with each other for their common goals. It’s a great chance for you but also your partners so don’t miss it.

Here are a couple of ideas you should consider:

Consult your local chamber of commerce and try to find out if there are already initiatives matching your ideas. 
Talk to your current partners what they think about broadening your co-operation.
Check your contact database for both horizontal and vertical possibilities of integration.
Try to find out if you can get support from your county or state. Several local governments have programs to support you in establishing and managing a cluster.
Establish a vision you can share with other people; try to integrate them into the process.
Be open to discussion and critical thinking. In a cluster everybody should be equal or at least almost equal. 
If you can afford it, try to consult a cluster development professional who can assist you in avoiding common pitfalls and provide you with advice when it’s needed.

Further reading

1. Cluster-based Economic Development (DoC Economic Development Administration)

2. How the Crash Will Reshape America by Richard Florida (2009, The Atlantic Online)

3. Michael Porter – Diamond Model (ValueBasedManagement.Net)

4. Creative Class – Richard Florida’s Homepage

If you have any questions or are interested in learning more about clustering, please, don’t hesitate to contact me.

Gabor Schulz
Business and economic development consultant

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