Porter, M. E. 1998. Clusters and the New Economics of Competition

Economic geography in an era of global competition poses a paradox. In theory, location should no longer be a source of competitive advantage. Open global markets, rapid transportation, and high-speed communications should allow any company to source anything from any place at any time. But in practice, Michael Porter demonstrates, location remains central to competition. Porter introduced a new concept in the dictionary of competition: the cluster model. He suggested that future competitive advantage will be determined by the ability of firms to exploit the resources available in the “cluster” network in which they operate, rather than being determined by greater efficiencies in the sourcing of inputs.

Summary

In his paper, Porter proposed that the economic map of the current world is dominated by “clusters”: geographic concentrations of linked businesses that enjoy unusual competitive success in their field. He implied that the direct business environment outside a company plays a vital role in determining how a company creates competitive advantage.

Clusters encompass an array of intertwined industries and other entities important to competition. That also includes suppliers of inputs such as components, machinery, and services. Clusters also extend downstream to channels, customers, and across manufacturers of complementary products, as well as companies in industries related to the field of the firm by skills, technologies, or common inputs. Clusters work in a way driven by trust and coordination. Firms working within one cluster share something; close proximity. It can be compared to ethnical cultures, in a way; if you are Korean, for example, and you work in the US; chances are you are most likely to interact with Koreans within your region or field, to achieve commons interests and, in result, increase market efficiency. The reason you would feel closer to a stranger from Korean origins than an equally complete stranger from another ethnicity is what you share in common, which tricks the mind into unreasonably believing that you could trust that person more. In the same way, compared with market transactions among dispersed and random buyers and sellers, the proximity of firms in one cluster and the repeated exchanges between them fosters communication, coordination, innovation, and trust.

Why Clusters?

- Reduce costs: clusters can help reduce costs in many ways, such as local sourcing, resource sharing, and minimizing the