If we look at the wine industry in Australia or the IT sector in Silicon Valley, California, we see how the development of clusters can improve the prospects of a region or industry, driving productivity, innovation and competitiveness.

What role do social factors play in this process?

Michael Porter has been advocating the power of clusters for many years^[1]. Along with Mark Kramer, he has explored the social dimensions of cluster development.

This is the third and final in a series of articles that looks and Porter & Kramer’s main methods for creating shared value^[2]. The first two were re-conceiving products and markets and redefining value in the productivity chain.

What’s driving this approach?

Clustering is about the geographic concentrations of related businesses, suppliers, distributors or supportive infrastructure. We can all relate to the idea that concentrations of technology-based firms would naturally occur in and around leading educational institutions; or that manufacturing industries would be supported by the development of trades and skills via public and private sector organisations.

Porter & Kramer contend that social issues create internal costs for businesses. For example, poor education in a cluster area will impact on training costs; gender or racial discrimination will reduce the pool of suitable employees; transport infrastructure constraints will drive up costs.

In response, companies can develop strategies that address these social issues and, at the same time, create value for their own shareholders.

Consider the electrical contracting firm, Windsor Electrical in the US state of Maryland, that partnered with a local high school to help provide training in construction trades^[3]. As a result, the company was able to improve the skills of its local labour pool and help create a steady flow of trained electricians.

The company was previously searching in other cities and states for qualified staff and relocating them – a costly exercise.

What can your business or organisation do?

In order to reduce the internal costs of doing business by supporting cluster development, Porter & Kramer suggest:

1. Identifying where deficiencies or gaps exist (eg. training)
2. Focus on those that represent the greatest constraint to your business
3. Determine which areas you are best equipped to influence, either directly or through collaboration.

 
Every business has its key success factors – the core elements that will determine whether it is successful or not. Cluster development can lower the costs of doing business by increasing the size and quality of resources available in the immediate vicinity.

Helping to address social issues contributes to cluster development and, in the process, lowers the costs of doing business. Creating a stronger financial link between community activities and profitability also reinforces and increases the longevity of the activity.

PS. If you’d like to read about more examples of business and community linkages, you can download my white paper on the subject.

[1] Michael Porter, On Competition, Harvard Business School Press, 1998

[2] Porter & Kramer, Creating Shared Value, Harvard Business Review, 2011

[3] The Allen Consulting Group, Global Trends in Skill-based Volunteering, Report prepared for the National Australia Bank, May 2007