Organisational Cultures: Networks, Clusters, Alliances

Table of contents

Executive Summary

Table of contents

List of Abbreviations

List of Figures

List of Tables

1 Problem Definition

2 Objectives

3 Methodology

4 Networks

4.1. What is an Organisation Network?

4.2. Reasons for Organisation Networks

4.2.1. External Reasons

4.2.2. Internal Reasons

4.3. Types of Organisation Networks

4.3.1. Intra-Organisation Networks

4.3.2. Inter-Organisation Networks

5 Clusters

5.1. What is a Cluster?

5.1.1. Cluster – The Term

5.1.2. Dissociation from the Term Network

5.2. Strategic Business Clusters

5.2.1. Formation and Types of Business Clusters

5.2.2. More than an Accumulation of Alike Companies

5.2.3. Cluster Membership as Strategic Advantage

5.2.4. International Business Clusters?

5.3. Examples for Business Clusters

5.3.1. Cluster EnergieForschung.NRW

5.3.2. ACstyria Autocluster GmbH

6 Alliances

6.1. What is an Alliance?

6.2. Difference between Alliances

6.2.1. Primary Differentiation

6.2.2. Pyramid of Alliances

6.3. Integration of Alliances in Companies Strategies

6.4. Preparation of a Business Alliance

6.5. Examples for Strategic Alliances

6.5.1. Automobile Industry

6.5.2. Airlines

6.6. Future of Alliances

7 Results

8 Conclusion

9 Bibliography

Executive Summary

“The organisation network consists of different nodes and interconnections of the participating network partners. In relationship of their mutual interactions these interconnections, which transmit power, information, money or raw material, are loose or tight”, defines Thorelli in 1986 (Thorelli 1986, p. 37 ff).

By means of the mutual interactions of the organisation network one or several markets are covered. Thus, the network has to be strategically organised according to the common organisation network strategy and additional factors.

In general, the field of activities of the network members overlaps to a certain degree. In this respect especially three areas are important:

- the type and field of business
- the range of products or services
- the attracted field of customers

The less the overlapping of activities the higher is the chance for synergetic effects inside the organisation network and the better is the stability of the network connections.

External and internal reasons are important for the development of organisation networks:

Major external reasons are the progress of information technology as well as the distribution of the Internet, which lead to the development of social networks. Often these social networks are the basis for the development of organisation networks.

On the economical field, which is driven by the external reasons and impacts a fast change of market’s and customer’s demand. This fast change claims to flexible productions on international markets at last, which are additional external reasons for the development of organisation networks.

Major internal reasons for the development of organisation networks are the need for companies to meet the changing demand by a fast corporate introduction of innovations and optimised costs and quality. Unless this important goal could not be achieved by own corporate strength the company has to optimise its structure by building an intra-organisation network, join an inter-organisation network or build alliances with other companies.

After covering the local market, the single company has to go international. There are several strategies for an international approach. According to Sain an international organisation has to develop its own corporate strategy in the following way (Sain 2009, p. 23):

- Develop the core strategy. Base for sustainable strategic advantage.
- Internationalising the core strategy. Through international expansion of activities and adaptation of the core strategy.
- Globalising the international strategy. Global integration.

More improved forms of international business offer the transnational company, which becomes an Integrated Network in its optimised form.

By joining inter-organisation networks the single company becomes part of a regional network / cluster or a strategical network according to Sydow (Sydow 1992b, p. 252). The major importance of a strategical network lies in its strategical leadership by a large-scale enterprise. Consequently, the business area the network is engaged in is predominantly determined by this enterprise.

The Japanese Keiretsus are well-known examples for strategical networks.

The literal interpretation of the term cluster says in general that it is a mass of single components which are forming a whole. Schramm-Klein (2005, p. 535 f) noted that there is no standardised determination for the term cluster because of the great variety of interpretations. In economics literature that deals with the topic strategic management you will almost exclusively find the interpretation of Michael, E. Porter for the term cluster. This assignment will be also based on the definition of Porter.

Porter (1998, p. 4) defined cluster as “geographically proximate groups of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities”.

Business clusters are more than an accumulation of alike companies. Having a first view at a business cluster, you may associate the following with the members of the cluster (Schiele 2003, p. 27):

Members of a business cluster are companies that …

… are more profitable than others in their business

… all belong to the same business

… are all located in the same region

On the one hand this first view approves the definition which is basis of this part of the assignment, the definition of Michael E. Porter. On the other hand there is one new fact that has to be analysed, the association that members of clusters are more profitable or let us say more successful than others.

Demanding customers, rivalling companies, competitive suppliers and supporting infrastructure makes cluster members more competitive than others. Companies outside the cluster often realise the demand for innovation too late because they do not feel the force to develop their products and services at such an early stage as the cluster members do.

In times of globalisation the question arises: Is it possible to form an international business cluster? Over and over again you read and hear about local clusters. Being local, in a geographical proximity is also an important fact for the definition of the term cluster.

Schiele (2003, p. 72) did not find any really existing international clusters. He pointed out that geographical proximity has also a cultural dimension. Therefore international clusters are not formed.

Globalisation demands the internationalisation of cluster. That means that clusters should support their members in doing international business. Therefore, the cluster is often part of an international network.

Strategic alliances can take a variety of forms, ranging from an arm’s-length contact to a joint venture. But the core of a strategic alliance is an inter-firm co-operative relationship that enhances the effectiveness of the competitive strategies of the participating firms by the trading of mutually beneficial resources such as technologies, skills, etc.

Typical Alliances are:

- Sales Alliances
- Solution-Specific Alliances
- Geographic-Specific Alliances
- Investment Alliances
- Joint Venture Alliances

The ‘Pyramid of Alliances’ gives an even detailed view on this subject.

To make an alliance work, the whole alliance must be integrated in the company’s strategy of all participating firms.

But how to prepare an alliance? Business expert Larraine Segil suggests an easy to follow 15-step-plan to prepare a strategic business alliance.

In some industries, alliances have been the standard for a long time.

Carmakers mainly use alliances to:

- manufacture certain car parts
- combine their R & D activities
- concentrate their sales activities

Another industry were alliances are common is the airline industry. The airlines focussed mainly on strengthening and expanding their market presence through providing transport possibilities to ample destinations around the world.

At the moment there are three major airline alliances existing worldwide:

- Star Alliance (24 partner) (Star Alliance 2009)
- Sky Team (13 partner) (Sky Team 2009)
- oneworld Alliance (10 partner) (oneworld 2009)

In the future there will be some difficult global problems to tackle. These challenges can only be solved by cross border acting strategic company alliances or/and strategic alliances with or between governments.

But not only the ‘big problems’ are a challenge for firms, the competition in nearly all business sectors is getting tougher every year. To be even more competitive as the competitors, further cost reduction and new business solutions are in demand.

Therefore, the number of alliances will definitely grow further in the subsequent years.

List of Abbreviations

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List of Figures

Figure 1: Networks – here social networks (Source: Verst 2009)

Figure 2: The Integrated Network (Source: Bartlett, Ghoshal 1990, p. 119)

Figure 3: The Mitsui Keiretsu (Source: WTEC 2009)

Figure 4: Network strategies (Source: Sydow 1992a, p. 27)

Figure 5: Development of local business conglomerates (Source: Own interpretation)

Figure 6: The Determinants of National Advantage (Source: Porter 1998, p. 72)

Figure 7: Members of ACstyria (Source: ACstyria.com)

Figure 8: Pyramid of Alliances (Source: The Lared Group)

Figure 9: Airline Alliances in 1999 and 2009 (Source: Own Interpretation)

List of Tables

Table 1: Organisational characteristics (Source: Bartlett, Ghoshal 1990, p. 92)

Table 2: Regional and strategical networks (Source: Sydow 1992b, p. 252)

1 Problem Definition

There are big problems coming towards single companies nowadays. The progress of information technology and the distribution of the Internet as well as the changing demand of customers, especially for no standardised products force them to react immediately.

Their problems are:

- How can they reach the state of flexibility to meet the changing demand?
- How can they compete within a market with increasing innovations of products and decreasing product life-cycles?
- How can they acquire the necessary capital, technology and know-how to compete?
- How is it possible to optimise their corporate structures and achieve synergetic effects?

2 Objectives

The objectives of this assignment are to help the single companies out of their miserable situations and to present them interesting answers to the questions raised above. Of course these answers are already in use and approved by reality.

3 Methodology

- Reference book research

- Internet research

4 Networks

4.1. What is an Organisation Network?

Today networks become more and more omnipresent in daily life: In private life people join social networks to communicate, establish friendships, find partners etc., in business life they work with computer networks, the corporate intranet and the Internet. Thus, especially the information technology has coined the term “network” and defined it as a “logical alignment and type of interconnections between communication partners in a net, which transmits communications inside or outside a building.” (Sellien 1988, p. 570).

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Figure 1: Networks – here social networks (Source: Verst 2009)

This definition serves as a basis for business administration, where several approaches to the term organisation network exist.

Organisation Networks

Thorelli made a very good and well accepted approach in 1986. He defines, “the organisation network consists of different nodes and interconnections of the participating network partners. In relationship of their mutual interactions these interconnections, which transmit power, information, money or raw material, are loose or tight.” (Thorelli 1986, p. 37 ff).

By the means of the mutual interactions of the organisation network one or more markets are covered. Thus the network has to be strategically organised according to

- the common organisation network strategy.
- the positioning of the single companies inside the organisation network.
- the positioning of the different brands.
- the diversification.
- the market channels.
- the vertical integration, which means integration of up- and downstream manufacturing levels.
- internationalisation.

In general the field of activities of the network members overlaps to a certain degree. In this regard especially three areas are important:

- the type and field of business
- the range of products or services
- the attracted field of customers

The less the overlapping of activities the higher the chance for synergetic effects inside the organisation network is and the better the stability of the network connections are. So in fact there is a small competition between the network members, but no real resource competency. Consequently the network members keep their autonomy of decision.

4.2. Reasons for Organisation Networks

4.2.1. External Reasons

In the post-industrial society a lot of fundamental changes of the corporate environment happen, which lead to the development of the complex but flexible corporate structures of organisation networks. Alter and Hage identify five general effects, which are especially responsible for the increasing constitutions of networks (Alter, Hage 1993, p. 38 ff):

General Effects:

1. The progress of information technology and the distribution of the Internet and their diffusion into daily life have a major effect on the development of organisational networks.

By these means people become informed about nearly any information or news all over the world. This knowledge offer people new opportunities of creating new social fields and positioning inside. They want to exchange and discuss the new information of their fields of interest with new communication partners, who are interested in these fields, too. The meeting of partners with a common field of interest by the new means of communication constitutes social networks, which are the basis for organisation networks.

In these social networks people exchange information about personal or professional content. Consequently any field of interest is enlarged and intensified by any new participant.

Examples of social networks are the Internet communities of

- Facebook.de, Stayfriends.de for the personal type or
- Xing.de for the professional type.

2. Nevertheless the rapid technological development, which leads to the growth of knowledge and know-how causes a high increase of technological complexity, too, which is the second major effect for the increasing number of organisation networks. Thus the technological complexity in the production processes as well as the economic risk for the single company has to be distributed on additional partners.

3. The third effect for the development of organisation networks is the changing customers demand, especially for non-standardised products. This implies the necessity to change the corporate alignment from the efficiency output of large standardised quantities to more flexible and specialised productions.

Consequently the maintenance of large-scale effects on the one hand in combination with a flexible production which quickly reacts on the market demand on the other hand, is a very high challenge. This challenge could only be met by organisation networks.

4. The understanding of the needs and the advantages to work together promotes the mutual trust of companies, which establish the basis for qualified organisational relationships. This is the fourth effect for the development of organisation networks.

In general the relationship between companies is determined by competition and distrust. But due to the development of this new culture of trust, the number of cooperations and organisation networks is increasing. Especially in Japan this organisational culture of trust has been cultivated for years, which is the reason for Japanese cooperation competency in form of the well-known Keiretsus.

5. The fourth factor leads to the fifth one, which has its origin in Japan, too. Especially in this country the government took influence in the economic activities of the companies. This took place in the seventies, when the Japanese government directly controlled the product line of the companies. Consequently economical goals are subordinate to political goals, which prevented a free market economy.

Economic Effects:

These external effects lead to changes on the economical field. In detail Alter, Hage (Alter, Hage 1993, p. 13 ff), Wildemann (Wildemann 1998, p. 47 ff) and Sydow (Sydow 1995, p. 13 ff) pointed out the following economic changes, which in turn cause an increase of organisation networks:

- the growing internationalisation of the market- and trade relations
- the increasing dynamic of innovation of products
- the fast change of the market’s- and the customer’s demand
- the fast change of technique, values of society etc.
- the market entry of new industrial nations, like China and India
- the shortage of resources
- the growing demand towards producers and suppliers
- the need to concentrate on core competences

All of these aspects require a fast adjustment of the company and advance the development of organisation networks. They offer flexible structures and the possibility to combine different business activities to cope with the changing circumstances.

4.2.2. Internal Reasons

The security and the expansion of the competitive position of the company are dependent on the corporate ability to react flexibly on the changing market situation. That means the changing demand is met by a fast corporate introduction of innovations and optimised costs and quality.

But these strategical competitive advantages could not be achieved by an increasing of the own corporate productivity at least. Thus it is necessary to combine the own corporate strategical strengths with the strategical strengths of other companies to reduce the complexity of the value chain.

After all the reasons for companies to establish organisation networks is the big opportunity for them to complete their corporate weaknesses with the strengths of other companies and offer in return their corporate strengths to complete the others’ weaknesses. According to Thorelli companies try to gain the following strategical strengths (Thorelli 1986, p. 40):

Strategical Strengths:

- financial strength
- technological strength
- expertise / know-how
- legitimacy / trust

In this regard the meaning and importance of the three first strengths are obvious. Trust between companies is often constituted by social networks, personal relationships or friendships. It is the base for long-term contracts inside organisation networks.

Powell evaluates these strategical strengths and transforms them into the following concrete economical goals of single companies (Powell 1987, p. 71):

By joining an organisation network the single company pursues the goal

- to get faster access to new technologies and markets.
- to benefit from the economies of scale by common production or research and development.
- to access company-external know-how.
- to diversify the risk.
- to use common synergetic effects.

4.3. Types of Organisation Networks

These goals could be achieved to different degrees by the different types of organisation networks. In this connection the types could be established according to intra- respectively inter-organisational aspects of the corporate structure and to the strategical or regional corporate orientation.

4.3.1. Intra-Organisation Networks

According to the changing conditions of competition a change in the corporate structure has to be initiated. In order to reduce the complexity of the production reorganizational measures have to be taken first inside the company.

The traditional hierarchical structure has to be renewed by modularisation and decentralisation of corporate divisions. This corporate restructuring provides small but flexible units, with decision-making authorities and profit responsibilities for their own.

The Module Organisation

Osterloh and Frost (Osterloh, Frost 1996, p. 96 ff) define the modular organisation as a segmentation of the company into particular units, which are in technical and economical respect autonomous.

These single modules build one structured, decentralised network, which consists of

- production modules, like
- the cost centre,
- the service centre,
- the profit centre and
- administration modules, like
- the management centre and
- the competence centre.

A precondition for this module organisation is the coordination of the modules, which

- results from their own self-organisation.
- is granted by special measures, like orders, arrangements or transfer prices.

The flexible modules equally interact with each other as an intra-organisational network. By these means the module organisation is well adapted to the new competitive conditions. Nevertheless after covering the local market in the first step, it has to enlarge its strategy internationally and expand to an international organisation.

The International Organisation

The growing internationalisation of the markets pushes companies to compete abroad and to achieve cost advantages internationally. For this purpose the company needs a key for a successful global strategy.

According to Sain a company, which expands internationally has to develop its corporate strategy in the following way (Sain 2009, p. 23):

- Develop the core strategy. Base for sustainable strategic advantage.
- Internationalising the core strategy. Through international expansion of activities and adaptation of the core strategy.
- Globalising the international strategy. Global integration.

By these means the adapted core competences of the parent company is internationally applied. The know-how of the parent company is transferred to the international branches abroad. This is an advanced approach for the company to international success.

The Transnational Company

In contrast to the International Company the branches abroad of the transnational company are interdependent and specialised, which offers additional local advantages. Thus, integrated worldwide activities are possible for optimized coverage of the local markets.

By these means the company enlarges its corporate core strategy to develop multinational flexibility, global compliance and international competitiveness.

This most optimized approach to international markets provides the company the big opportunities

- to establish strong local branches under consideration of the regional demands and markets.
- to achieve cost advantages by the integrated world-wide activities of these branches.
- to acquire and apply world-wide know-how by these branches.

Bartlett and Ghoshal named a company, which combines all of these characteristics

Transnational Organisation

(Bartlett, Ghoshal 1990, p. 32 ff).

The following table gives an overview about the different corporate approaches to the international market.

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Table 1: Organisational characteristics (Source: Bartlett, Ghoshal 1990, p. 92)

Thus the three key elements determine the transnational organisation:

- the allocation of organisational responsibilities develops flexibility
- the local marketability enables understanding of the customer demand and flexible reactions
- organised learning processes improve innovations

The transnational organisation is determined to react on complexity and change. It is adaptive, flexible and becomes highly competitive by its good learning ability. The corporate resources and skills are specialised but widespread and independent, which means any branch abroad gets its particular function and responsibility inside the organisation network.

The Integrated Network

Consequently this complex variety of different branches, functions and responsibilities have to be clearly distinguished and well-coordinated to achieve optimum output.

The integration of all of these functions into an organisation network is characterised by Bartlett and Goshal the

Integrated Network.

(Bartlett, Ghoshal 1990, p. 119).

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Figure 2: The Integrated Network (Source: Bartlett, Ghoshal 1990, p. 119)

The advantage of the integrated network is

- world-wide corporate resources, skills and competences could be strategically allocated and favourable and low priced employees, resources and technologies could be easily integrated into the network. Thus the branches get their strategical function inside the network by the meaning of their skills, resources, know-how and their local markets.

- the shortening of the product life-cycles as well as the rapid change of costs, technologies and customer preferences is met by the flexible corporate productions adapted to the local markets.

- the corporate sales and distribution are aligned to the local culture and market.
- the corporate economical risks could be minimised by distribution inside the product portfolio.

Beside the opportunity to expand from one local market to several markets by building a corporate intra-organisation network the single company has two other opportunities:

- The second opportunity in the field of networks is to participate in an Inter-organisation Network.
- The third opportunity, which stands outside the field of networks and is therefore slightly different from the second one, is to build alliances with other companies abroad. This big opportunity is explained in the last chapter in detail.

For all three opportunities the international alignment is still increasing.

4.3.2. Inter-Organisation Networks

There are two major, well accepted types of inter-organisation networks differentiated by Sydow (Sydow 1992b, p. 252):

- Regional networks
- Strategical networks

The following table points out the differences:

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Table 2: Regional and strategical networks (Source: Sydow 1992b, p. 252)

Regional Networks

In the economics literature the term “regional networks” is simultaneously used with the term “business clusters”, which the following chapter is dedicated to.

Strategical Networks

The major importance of strategical network of companies of different sizes lies in their strategical leadership by a large scale enterprise. In this context strategical leadership means the long-term development and protection of those economical potentials of the organisation network, which are of major competitive importance to strengthen the market position.

Consequently the business area the network is engaged in is predominantly determined by its leading large scale enterprise:

In this way it constitutes the strategical directives, the inter-organisational relationships, the assignment to value adding and supporting companies and finally the common approach to the market (Sydow 1992a, p. 23 ff).

Examples of Strategical Networks

Japanese Keiretsus

They are characterised by an inner circle of Keiretsu companies, which is lead by a large-scale enterprise as central company and an outer circle of subcontractors:

The inner circle of Keiretsu companies

- access different markets.
- has interdependent minority interests to strengthen the inter-organisation relationships.
- provides common capital investment planning
- is debt financed by the banks of the Keiretsu
- performs an interchange of capital between the network companies
- performs a transfer of technology
- performs a transfer of the board of managers

The outer circle of subcontractors are

- small family companies, which execute personnel-intensive tasks.

The strategical network companies are competing, although often cooperations in basic research are made. All members are tight by loose contracts, which drive their readiness for cooperation. Because of their mutual dependences on unique supply relationships, detailed contract are not necessary.

Whereas the inner circle of the Keiretsu is dependent on the expertise of production and innovation of the outer circle of subcontractors, this one is economical dependent from the inner circle.

Consequently the strategy of the strategical network is the flexible specialisation, which is the basis for the development of many strategical networks in the USA and in Europe, too.

Examples of Keiretsus

Mitsui-, Mitsubishi-, Sumitomo-, Fuyo-, Sanwa-, DKB-Group

The following figure reveals the interdependences of the Mitsui Keiretsu.

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Figure 3: The Mitsui Keiretsu (Source: WTEC 2009)

Strategies of Inter-Organisational Networks

Sydow identifies two strategies of inter-organisational networks (Sydow 1992a, p. 27):

- the strategy of differentiation
- the strategy of cost-leadership

The Strategy of Differentiation

An organisation network that pursues the strategy of differentiation builds cooperations with companies to combine research and development, share the modern technological production and the distribution channels, which are aligned to the common consumer target-group.

In the automobile branch the strategy of diversification is promoted by the relationships between producer and subcontractors.

The Strategy of Cost Leadership

By following the strategy of cost leadership any function which is not core competence or any personnel-intensive function is outsourced. By this way the relationships to the subcontractors become more and more important. To manage this network an efficient controlling system has to be implemented.

The following figure gives an overview about both strategies:

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Figure 4: Network strategies (Source: Sydow 1992a, p. 27)

In fact both strategies, the strategy of diversification, as well as the strategy of cost leadership could be applied simultaneously.

Mercedes Benz e.g. leads a strategical network with Chrysler in the USA on the one hand, and on the other hand it systematically cooperates with regional networks in Baden-Württemberg.

Because of this simultaneous application a differentiation between strategical networks and regional networks according to the different strategies is not possible.

However the following chapter about “clusters”, which are used in literature simultaneously to regional networks gives a deep insight and reveals the differentiation...

5 Clusters

5.1. What is a Cluster?

There are different meanings of the term cluster. The actual literature shows various explanations which will be discussed in the following. This provides the basis for the decision which definition will be used for this assignment. The dissociation to the term network is very important to find a clear definition for clusters.

5.1.1. Cluster – The Term

The literal interpretation of the term cluster says in general that it is a mass of single components which are forming a whole. In music they talk about clusters if they mean a sound formation that consists of chordal intervals (Langenscheidt 2009). In mathematics a cluster analysis is used for showing a accumulation of variables in complex data records (Duden 2006, p. 182).

To meet the focus of the module in which this assignment is written it is important to find an economic, scientific interpretation of the term cluster. Already in 1905 Marshall (p. 290) talks about a local concentration of small and mediums sized companies in a specific industry that are connected to each other through the value-added chain (1905, p. 290). Perry (2005, p. 78 f) wrote about Marshall’s Industrial Districts that the members of the districts were more competitive than companies outside the district. Similarities were also found in the company’s strategy and the innovation of the industrial district members.

GREMI a group of social scientist named the idea of creating innovations in networks Innovative Milieus. They hypothesised that innovation cannot be realised alone in companies or their surroundings. The members of an Innovative Milieu are managers, scientists, lecturers and politicians. They all are interacting in their social and business networks. The strength of the Innovative Milieus is the interference of the private and the business networks of their members (Perry 2005, p. 25).

Schramm-Klein (2005, p. 535 f) noted that there is no standardised determination for the term cluster because of the great variety of interpretations. In economics literature that deals with the topic strategic management you will almost exclusively find the interpretation of Michael, E. Porter for the term cluster. This assignment will be also based on the definition of Porter.

Porter (1998, p. 4) defined cluster as “geographically proximate groups of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities”.

The following figure will visualise the development of above described local business conglomerates:

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Figure 5: Development of local business conglomerates (Source: Own interpretation)

Having this definition of Porter in mind, chapter 5.3. goes into detail how a business cluster works today.

5.1.2. Dissociation from the Term Network

Strategic networks and cooperation are more and more topics of business-people discussions. The term network is clearly defined in chapter 4.1.of this assignment. Here we will focus the dissociation to the term cluster.

In the actual topic related literature the terms network and cluster are often used as synonyms. But for this assignment it is important to show the, perhaps small but essential, difference between these two terms.

Networks, even strategic ones and cooperation can be parts of a cluster. There are two functions which you can only find in a cluster. A cooperation or a network does not offer these functions.

The first function of a cluster is the organisational form of it. It is in its collectivity an organisation between market and common structure. A cluster is an organisational form that comprises networks, cooperation, alliances and other market orientated organisations. This is the second functions of clusters which is a fundamental characteristic of them. (Rabenhorst (2009, p. 25 f).

To concretise this description of the different meanings of the terms network and cluster the next chapter is about clusters that exist in business today.

5.2. Strategic Business Clusters

Strategic business clusters are formed with different motivations and in different ways. This chapter shows how clusters work in daily business and why they become a more and more important fact for the choice of location for a company.

5.2.1. Formation and Types of Business Clusters

The motivation for forming a business cluster can be different. There are emergent business cluster like the steel industry in the “Ruhrgebiet” or clusters which organized themselves as a cluster. Business development on economical-political grounds also support the formation of a cluster (Perry 2005, p. 11 ff).

There are vertical and horizontal business clusters. Members of vertical clusters represent the value-added chain of a specific business. An example for such a cluster is given in this assignment in chapter 5.3.2.

Members of vertical business clusters are often dependent on each other.

Horizontal business clusters consist of members in the same level of the value-added chain. Such a cluster is per example a great shopping mall.

5.2.2. More than an Accumulation of Alike Companies

Henry Ford said once (Wirtschaftszitate 2009):

“Coming together is a start,

Staying together is an improvement,

Working together is a success.”

Reflecting this quotation from Henry Ford, who lived from 1863 to 1947, you may imagine how important clusters for a successful business are.

Having a first view at a business cluster than you may associate the following with the members of the cluster (Schiele 2003, p. 27):

Members of business cluster are companies that …

… are more profitable than others in their business

… all belong to the same business

… are all located in the same region

On the one hand this first view approves the definition which is basis of this part of the assignment, the definition of Michael E. Porter. On the other hand there is one new fact that has to be analysed, the association that members of clusters are more profitable or let’s say more successful than others. This analysis will be done in chapter 5.2.3. of this assignment.

Before answering the question if a cluster-membership is a strategic advantage and improves therefore the success of the members, let’s go back to Porters definition of the term.

Porter (1998, p. 72) shows in his determinants of national advantage, four elements that are needed for a business cluster:

- Firm strategy, structure and rivalry
- Factor conditions
- Demand conditions
- Related and supporting industries

All four elements are interacting in a geographically proximal area.

The figure below visualise this interacting model.

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Figure 6: The Determinants of National Advantage (Source: Porter 1998, p. 72)

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