Business Clusters offer competitive advantage 

The term business cluster, also known as an industry cluster, was introduced and popularized by Michael Porter in his book The Competitive Advantage of Nations (1990). Cluster Development has since become a focus for many government programs. The underlying concept of business cluster which economists have referred to as agglomeration economies dates back to 1890 in the work of economist Alfred Marshall.

Industry clusters are groups of similar and related firms in a defined geographic area that share common markets, technologies, worker skill needs, and which are often linked by buyer-seller relationships. A cluster can be formed when at least 100 enterprises exist in it and the cluster’s turnover is over 100 million. Units in these clusters function with hired workers. These clusters include a mix of micro, small, medium and a few large firms.

Firms and workers in an industry cluster draw competitive advantage from their proximity to competitors, skilled workforce, specialized suppliers and a shared base of sophisticated knowledge about an industry. At present in India the estimated figure of business clusters is about 400 for modern Small Scale Enterprises and 2000 rural and artisan based clusters in India. As far as export is concerned, these contribute up to 60 percent of India’s manufactured exports. Although location remains fundamental to competition, its role today differs vastly compared to past. Besides location advantage the competition is driven heavily by input costs, locations with some important endowment—a natural harbor for example, or a supply of cheap labor, nearness to port/railway station/airport — these factors add to the comparative advantages while forming clusters.

Silicon Valley: In the mid- to late 1990s several successful computer technology related companies emerged in Silicon Valley in California. This led anyone who wished to create a startup company to do so in Silicon Valley. The surge in the number of Silicon Valley startups led to a number of venture capital firms relocating to or expanding their Valley offices. This in turn encouraged more entrepreneurs to locate their startups there.

In other words venture capitalists (sellers of finance) and the buyers of finance (IT startup firms) “clustered” in and around California.

The cluster effect in the capital market also led to a cluster effect in the labor market. As an increasing number of companies started up in Silicon Valley, programmers, engineers etc. realized that they would find greater job opportunities by moving to Silicon Valley. This concentration of technically skilled people in the valley meant that startups around the country knew that their chances of finding job candidates with the proper skill-sets were higher in the valley, hence giving them added incentive to move there. This in turn led to more high-tech workers moving there. Similar effects have also been found in the Cambridge IT Cluster (UK).

Competition in today’s economy is far more dynamic. Companies can mitigate many input-cost disadvantages through global sourcing, rendering the old notion of comparative advantage less relevant. Instead, competitive advantage rests on making more productive use of inputs, which requires continual innovation

Porter describes the following benefits of doing business in clusters:

Better access to suppliers and flexibility.

•  Access to specialized information through personal relationships.
•  Joint marketing.
•  Local rivalry and peer pressure.
•  Innovation through having information on new markets and technological advances.
•  Complementary products (e.g. tourist attractions).
•  Reputation of an area.
•  Pool of experienced labor.
• Access to institutions and public goods.
• Conducive to new businesses.

Numerous studies show that on an average, a business located in a cluster has a stronger growth and survival rate than those located outside it. This is partly because the physical proximity of the companies facilitates exchanges of information and talent among the competing firms. Clusters normally include highly specialized vendors, service providers, investors, analysts, students, university faculty and staff, trade association members, consultants, and other useful specialists. In addition, industry-specific equipment is often more readily available within a cluster. The clusters draw their strengths from the private sector. Government agencies, both federal and local which offer industry-friendly incentives and regulatory policies to companies that locate in clusters. The government’s motivation is not purely altruistic. Clusters help the economic growth of a region by increasing job creation and increased tax revenues.

The development and upgrading of clusters is an important agenda for governments of developing nations. Cluster development initiatives are an important new direction in economic policy, building on earlier efforts in macroeconomic stabilization, privatization, and market opening, and reducing the costs of doing business.

Example: Panchgani near Pune, Maharashtra is a thriving hub of food processing units today. Pune/Panchgani is surrounded by vast tracts of arable, agricultural land and is known for its agriculture and agro-business. Panchagani’s proximity to urbanized markets such as Mumbai, Nasik, Nagpur, Aurangabad etc, changing food habits and dependence on ready to eat food, cosmopolitan nature of the city, connectivity to JNPT port has made the processed food cluster of Panchagani very famous. It exports jams, jellies, toffees, pickles, chtanis to many foreign countries. Panchagani cluster is developing very fast and is home to about 3000 plus small and micro entrepreneurs. The cluster produces a range of products comprising semi-processed ready mix products, pickles, jams, jellies, squashes & syrups, Ready to Eat/Ready to Cook products ground & processed spices and papad.

Business clusters work on the logic of nature’s basic goodness such as: grapevines that are planted just close enough together are forced to compete for nutrients in the soil. Stress causes the plants to put more energy into their reproductive processes, increasing the quantity and quality of the grapes. The same logic is applied while forming clusters. When businesses are located together in clusters, they strive to get maximum benefits offered in the cluster and hence show better results. Michael Porter claims that clusters have the potential to affect competition in three ways: by increasing the productivity of the companies in the cluster, by driving innovation in the field, and by stimulating new businesses in the field. According to Porter, in the modern global economy, certain locations have special inheritance such as harbor, cheap labor, packaging units in the vicinity to overcome heavy input costs.

With a contribution of 40% to the country’s industrial output and 35% to direct exports, the Small-Scale Industry (SSI) sector has achieved significant milestones for the industrial development of India. Within the SSI sector, an important role is played by the numerous clusters that have been in existence for decades and sometimes even for centuries. According to a UNIDO survey of Indian SSI clusters undertaken in 1996 (later updated in 1998), there are 350 SSI clusters. Also, there are approximately 2000 rural and artisan based clusters in India. It is estimated that these clusters contribute 60% of the manufactured exports from India. The SSI clusters in India are estimated to have a significantly high share in employment generation.

One key factor for the cluster success is the specialization of small firms in same or complementary areas of the production process. Each firm can use its limited resources in its core competency and its operation is complemented by other specializing firms in the supply chain within the cluster. This not only helps individual firms to excel, but also the cluster to flourish. The other important success factor in a cluster is cooperation. When firms help each other together they facilitate (a) sub-contracting: when a firm receives big orders it can sub-contract the order for processing to other firms, (b) flexibility:  when diversity of order types can be achieved involving multiple firms a lot of elasticity can be enjoyed and (c) presence of a good local governance or support institutes encourage inter-firm co-ordination which in turn lowers the entry barrier for new start-ups.

Some Indian SME clusters are so big that they account for 90 per cent of India’s total production output in selected product category. As for example, the knitwear clusters of Ludhiana. Almost the entire Gems and Jewelers exports are from the clusters of Surat and Mumbai. Similarly, the clusters of Chennai, Agra, Kanpur and Kolkata are well known for leather and leather products.

In Indian context clusters have played a significant role in product/service diversification. The clusters in India have been classified as (1) industrial (SME), (2) handloom, (3) handicraft, (4) micro-enterprise (rural and urban) and (5) service-oriented. However, only in recent years with the liberalization of economies, there is a concentrated effort in cluster-growth by Indian government and different support institutions like United Nations Industrial Development Organization (UNIDO), Small Industries Development Bank of India (SIDBI) for promoting the growth of SMEs. Cluster development initiatives include up-gradation of technology, forging of strong intra-cluster network, and networking with external associations.

Paithani Sarees – Paithan: This handicraft sector is very small with not more than hundred workers; they are so specialized that no other places in the world matches their skills and the quality of their output. This is the case of the Paithani sarees cluster in Aurangabad, Maharashtra. It is said that Paithan at one time, was visited by Greek traders, between 400 and 200 BC, during the Satavahana era, for the Paithani weaves. This exquisite Paithani silk soon came to be exported to many countries and was traded for gold and precious stones in barter. Such was its value! According to some sources, this technique possibly came to India from Central Asia and was developed into a fine art in the Deccan region and slowly evolved into the contemporary version you see today. The Peshwa rulers were big patrons of this art and even today among the Maharashtrians women prefer wearing Paithani sarees in marriages and special functions. The classy fabric stands out and is considered as an propitious fabric.

Chanderi Sarees:  Chanderi is a town in Ashok nagar District, Madhya Pradesh. The town of Chanderi has a rich history that was shared between Pratihara kings, Delhi sultans, Mandu sultans, Bundela kings and Scindias of Gwalior. Located on the borders of the cultural regions of Malwa and Bundelkhand, Chanderi fell on an important arterial route to the ancient ports of Gujarat as well as to Malwa, Mewar, Central India and Deccan. Chanderi’s setting made it into a natural fortress. The living tradition of weaving has been prevalent since the past six hundred years and continues to sustain almost half of the population of Chanderi.

The town of Chanderi is divided into mohallas or residential neighborhoods. The mohallas of the different communities of the weavers are important part of the urban morphology. The 13th century Moroccan visitor Ibn Batuta remarked: “it is a big city with thronged market places” like Sadar bazaar. The sadar bazaar of the city is today stocked with shops of delicate and artistic Chanderi sarees. The three storied shops, projecting one over other, originally planned to be on the level with riders on elephants, on horses and on foot, give a unique profile to the street.

The spacious weaver houses were integral to the production of the cloth and its quality. Chanderi houses weavers from Rajasthan, Marwar and Gujrat who are skilled particularly to weave the delicate, silky, colorful Chanderi sarees. The weavers have a unique weaving techniques and requirements. Platforms built outside the houses provide additional work areas and for stretching yarns. Architecture also serves as an inspiration to the craftsmen. The patterns on sarees are largely inspired by ornamentation on buildings.