In today’s business world, many developments have taken place. Business operations processes have been improved significantly, for instance, many organizations have embraced the use of internet in various business activities. These include online ordering processes, internet advertisement among others.
Since technological development plays a major role in breaking geographical barriers, it was expected that technological evolution will reduce clustering of organizations. However, this is not the case. The incentives for clustering have remained intact even after perpetual improvements in business operations i.e. various companies still realize the need for clustering.
Reasons why companies still trend to locate themselves near their competitors (and often their outsourcers)
In many cases, various companies tend to locate near their competitors and their outsourcers. Despite of the technological advancement, they still find it useful to locate near their competitors. This is known as clustering. Clusters are concentrations of numerous companies which are interconnected in on one way or another. In most cases, companies forming a cluster produce and supplies products or services to a specific industry. There are many reasons why these companies tend to cluster together.
Economies of scale
By locating near to each other, companies in the same industry can enjoy the benefits of group buying within the area. According to Freixas and Rochet (1997), economies can significantly reduce operational costs through fixed costs and increased returns in transaction technology (20). For instance, when many firms are clustered together, they may form coalition to deposit or withdraw together hence decreasing their operational costs.
Availability of raw material
Another reason why companies locate together is the availability of raw materials. In most cases, many companies especially resource oriented companies tend to locate near their resources of raw materials. This is aimed at reducing the transportation costs. This is more important in case where raw materials are bulkier than the final products.
Firms will also tend to cluster around their outsourcers in order to access cheaper goods and services. For instance, cloth making companies will tend to cluster around a button manufacturing firm. It is not economical for an organization to manufacture all its inputs. It will need to outsource some of its operations in order to minimize their costs.
By locating near their outsourcers, companies can easily communicate. For instance, a dress making company can easily give directions to the button making firm on the design, colour and the best material for making specific set of buttons. This significantly improves the efficiency while reducing costs.
When organizations in a particular field are located together, it increases their ability to innovate. For instance, organizations may join hands in conducting research. Business research is very expensive and it may require an organization to invest a substantial sum of money in order to carry out a successful research.
Many organizations may not afford to conduct research due to financial constraints. This is despite the fact that research can significantly affect the success of an organization. By locating near to each other, firms from the same industry can conduct a joint research in their industry. This will help them in improving their performance at a lower cost. Past studies has shown that companies in clusters are more innovative than isolated organizations (Koch, not dated: 10).
Clustering of firms also increases the level of competition in the market. When companies engages in production of similar goods locate in the same place, they will most probably distribute their final products in the same market. Therefore, customers will have a wide variety of choice.
By assuming that customers will behave rationally, they will tend to choose the product with highest quality level. Therefore, each company from the cluster will put all the efforts to provide the best quality product in the market. Such kind of competition increases the level of innovation in these organizations.
Kuah (not dated), observed that clustering will attract customers through innovations to come and compare quality and prices (5). Customers will prefer to visit an area where they can access wide variety of a particular product. This will reduce the time consumers spend while comparing quality and prices. This can only be achieved through clustering. Firms attract more customers by coming together.
Clustering of related companies has significantly contributed in improving their competitive advantage. The company’s competitive advantage plays a very important role in determining its success. Competitive advantage depends on what a company provides in the market for its buyers.
Innovation plays a significant role in improving an organization’s comparative advantage. Comparative advantage enables an organization to discover unique ways of competing with its competitors. Kuah (not dated) observed that firms in clusters grow faster than the average (10). In other words, clustering of companies increases the ability of firms to expand on their operations.
Another reason why firms have continued to cluster together despite of the technological developments is because of the financial services. In order to carry out its activities, every firm will require the services from banks and insurance. For instance, a company may need to get a loan to expand its business. Firms also need banks to keep their money safe. Therefore, many firms tend to cluster near these services.
Apart from banking services, a firm will also require insurance services. Insurance is very important to a firm in reduction of risks.
By clustering together, various organizations are able to increase their productivity. For instance, it becomes easier for these companies to access public good as well as information which are necessary in business operations. The ability of an organization or a worker to access networks of various kinds is a key component of economic success (Anonymous 2001: 2).
These include the idea networks, financial networks, network of vendors as well as other necessary services. Location that provides all these activities improves on the efficiency while reducing the operational costs. Bekele (2007) observed that organizations in a cluster could improve on their productivity by imitating or emulating each other (61).
According to Kuah (not dated), externalities formed by clustering of the firms facilitates the process of technological development (7). This is because the knowledge accumulated by one firm helps facilitates evolution of technology in other firms.
Other Reasons for Clustering
Strong domestic clusters have also significantly contributed in attraction of the foreign investment. Foreign owned companies have played a very important role in improving the performance of clusters. They come along with new ideas and technology to be emulated by other firms in the cluster.
This has led to upgrading of various companies within a cluster. For small businesses, locating near their competitors is very important. By locating near their competitors and related industries, young companies can accelerate their rate of growth. It is also easier for the young companies to develop their reputation and recognition within the market when located in a cluster.
Different companies may also cluster in order to access transportation facilities. This enables various companies to access their human capital at a lower cost. Research has shown that face to face communication is very important to an organization (Anonymous 2001:1). It is important for the employees or entrepreneurs to come together to solve problems, make decisions and negotiate on various deals regarding an organization.
Therefore, many companies will tend to cluster in one place where mass transit or automobile means of transportation is available, affordable, and reliable to bring people together (Anonymous 2001: 1). People prefer to work in places where they do not have to travel for long.
Many organizations have also been enticed to locate near to each other in order to access the public goods. For instance, firms may chose to locate in a certain place where they can access reliable security. Firms will also tend to cluster in an area where they can access good drainage facilities. It is also cheaper to provide government services when organizations are located near to each other rather than when they are dispersed.
Relevance of External Economies of Scale
Economies of scale are the privileges which an organization enjoy due to its size for instance low costs per unit produced (Cowley, not dated, par 1). When companies are located close to each other, they are able to enjoy the benefits associated with economies of scale. For instance, an organization can afford cheaper inputs. This significantly reduces the operational costs in an organization. Consequently, this increases the organization’s profit margins.
When firms are in clusters, they manage to pass lower cost to their customers. This enables them to provide cheaper goods in the market. Consequently, this increases their share of the market. This discussion has shown that firms in a cluster grow at a very high rate. With time, their inputs will increase and these firms will be able to enjoy bulk-buying economies of scale (Cowley, not dated: par 4). Firms obtain greater discounts and once again reduce their operational costs.
Firms in a cluster also enjoy technical economies. For instance, a cloth-making firm may not be able to afford a button-making machine. However, several firms in a cluster may buy a machine jointly and enjoy services, which they could otherwise not have accessed.
Influence of Environmental Factors on Corporate Structure and Strategy
In every organization, there are various environmental factors, which affect the corporate structure and strategy applied by an organization. Every organization must take into consideration its surrounding environment in order to come up with potent decisions. Strategies applied by similar firms may widely vary depending on the nature of each environment where each firm is located.
The marketing operations of an organization significantly depend on the surrounding environment. The heads of marketing department are obliged to study the nature of the market in order to come up with effective marketing strategies. For instance, if an organization is situated in a cluster with a number of firms producing similar products, it will be important to differentiate their products from those produced by their competitors.
Differentiation strategy enables an organization to create a product that is unique in the entire industry hence winning customers from their competitors (Anonymous, 1994, par 5). Product differentiation is one of the most effective marketing strategies that are significant in clusters.
The level of competitiveness in the market significantly influences the marketing strategies. In a highly competitive world, the marketing strategy, which aims at outselling a product, is critical (Anonymous, 1994, par 6). If an organization’s product is weakest in the network, more resources should be committed at improving the product value.
However, if the firm’s product is the strongest among the others in the network, fewer resources should be devoted in improvements. However, the amount of money invested in improvement of the product will depend on the profitability of such action in that particular market. Sometimes it may be uneconomical to invest more in a certain product.
Another way through which environmental factors affects corporate structure and strategy is through pricing. If an organization applies the market penetration strategy, the prices set should be low (Anonymous, Par 8).
When an organization is not the leader in a certain market, then the leading organizations already have created the expected prices in that market. In this case, an organization must pick the price that does not significantly deviate from those created by the market leaders. In this case, the firm must consider the prevailing prices in making strategies.
The government policies also play a major role in formulation of strategies in an organization. For instance, government may regulate the operational activities of firms in order to protect consumers. In this case, firms must consider these regulations while making decision touching these issues.
Business Planning Process and Policymaking and the Reasons for Change over Time
In every organization, the process of planning and policymaking is very critical. The performance of any business is determined by the strength of the plans and policies implemented by the management. Business plan is the path that leads an organization to its target (Drost 2001: par 1).
When firm is in a cluster, business plan is necessary in directing the firm’s operations in the right direction. An organization can also use a business planning process as a means of creating new business opportunities in the market hence increasing sales (Orchtel, 2009: 1).
While making a business plan, it is important to come up with a name, which integrates with the product dealt with (Drost 2001: par 2). It should sell the product.
While making a business plan, it is also necessary to have a vision and mission. That is, the future of the organization. Other important elements in business planning are the objectives and goals. For instance, a firm in a cluster should set its goals based on the nature of their environment. The goals should be set to specific time lines (Drost 2001: par 4).
SWOT analysis is also important in business planning. Through the SWOT analysis, an organization is able to identify its strengths and weaknesses. It will also be able to identify its threats in the market. This is necessary especially for the firms in clusters as it helps an organization to improve on its performance.
There are several reasons for organizational change. To start with, organizations may change due to technological changes. For instance, machines now do most of the tasks that has been done manually in many firms. Organizations must make changes in their organizations in order to accommodate technological changes.
Another reason for organizational change is due to changes in consumer needs. Customers’ needs are always changing. It is the duty of an organization to make necessary adjustments in order to meet the needs of their clients. For instance, an organization should make an intensive research on the customer needs in order to meet these needs. The success of an organization is determined by its ability to satisfy consumer needs.
Another reason for change over time in organizations is changes in outside regulations that govern an organization. When outside regulations change, firms must change accordingly in order to conform to these rules and regulations.
In conclusion, this discussion has clearly shown that there is a justified need for companies to cluster even in the contemporary business world that is characterized by advanced technological developments. The study has shown that most of the advantages associated with clustering of firms still hold even with technological advancement. Firms still continues to enjoy the benefits of geographical proximity with their competitors.
For instance, firms can still enjoy the advantages of economies of scale when they locate close to other firms in the same industry. Firms are also encouraged to locate close to each other in order to enjoy financial services and other public facilities. Several firms have significantly increased their productivity levels through the combined benefits of advanced technology and clustering. This has significantly contributed to the success of majority of firms.
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Freixas, X., and Rochet, J., 1997. Microeconomics of Banking. New York, MIT Press.
Kuah, A., not dated. Cluster Theory and Practice: Advantages for Small Business locating in a Vibrant Cluster. [Online] available at:
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