Cluster Development Strategy

MSMEs to become Globally Competitive it requires a strategy over and above the normal production function. Michael E. Porter is arguably the best known name in the world for competitive strategy. Is it possible to use his strategy for the competitiveness of MSMEs? Porter in his work on Competitive advantage of Nations in 1998 observed that the 18th century work of Adam Smith and David Ricardo on factor comparative advantage cannot provide explanations for most of the trade that takes place today. The diamond model proposes four interrelated facets, each of which representing a determinant of regional advantage: (1) firm strategy, structure and rivalry; (2) demand conditions; (3) factor conditions; and (4) related and supporting industries. “Chance” and the “government” are two factors that influence these four determinants, but are not determinants themselves. Together these six factors form a system that differs from location to location, thus explaining why some firms (or industries) succeed in a particular location. Not all six factors need to be optimal for firms or industries to be successful.

However it is argued that Porter’s model is more effective in developed countries rather than in developing countries. There are some alternative strategies explaining the competitiveness of MSMEs in current global scenario. These are Collective efficiency by Schmitz (1995) and flexible specialization by Piore and Sabel (1984)

This week The Times of India covered a very interesting interview on M porter’s views on Strategy http://timesofindia.indiatimes.com/Business/Strategy_is_about_competitive_advantage/articleshow/3054691.cms
Also very interesting read for two alternate theories at http://www.ifama.org/tamu/iama/conferences/2001Conference/Papers/Area%20VI/Neven_David.PDF

Cluster Development Programmes and BDS Development Programmes in India

Currently, there are several approach prevalent to address the issue of local economic development especially in Industrial clusters. The most talked internationally are Cluster Development (CD) Approach and creation of Business Development Services (BDS). In one the recent workshops I attended the issues surfaced was whether these two approaches are complementary or mutually exclusive. According to UNIDO (http://www.unido.org/userfiles/RussoF/Hanoi.pdf) CD approach is based on the hypothesis that clusters
1. Give rise to external economies (e.g. specialized suppliers of raw materials, components and machinery; sector specific skills etc.);
2. favour the emergence of specialized technical, administrative and financial services; and
3. create a conducive ground for the development of inter-firm cooperation and specialization as well as of cooperation among public and private local institutions to promote local production, innovation and collective learning.\

On the other hand BDS approach primarily concentrate on the creation of BDS market for BDS services. As a part of classical cluster development approach we primarily concentrate on three macro issues external economies, market for BDS services and different types of cooperation with in the cluster.

The next logical inference is that BDS is sub set of CD approach and there is no need for BDS focused programmes. Any CD approach will automatically take care about BDS services in industrial clusters.

If we get little deeper in to CD approach implementation focus is on BDS interventions as a result of structural adjustment happening in the overall economic scenario. The audience for such services are firms rather than BDS ………..it is important to stress that UNIDO has tried to avoid, to the extent possible, the subsidization of BDS costs out of the conviction that the various cluster actors will not fail to perceive the economic viability of commercial BDS provision if they have been sufficiently sensitized to the value of such services. When subsidies were provided, they were aimed at start-ups providing innovative BDS (e.g. access to new technology cum training, quality management). On the contrary, significantly less support was available for BDS strengthening the commercial capacities of the SSEs or, more generally, to initiatives with an immediate impact upon the profitability of the latter (e.g. participation in fairs, product design). ….

Under CDP the focus remained on firms rather than BDS.

Accordingly, BDS focused programmes are necessary for the creation of a proper BDS market among MSMEs in India. The two methodologies CD approach and BDS are differ on account of timeline, focus, market orientation and to some extent on methodology.

CLUSTER DYNAMICS AND INNOVATION IN SMEs: THE ROLE OF CULTURE

When we talk of clusters in Indian context, it is very difficult to avoid Tirupur cluster reference. In all cluster related conversations Tirupur is assumed as an exception for any kind of success story. Why Tirupur is assumed to be sure success for joint actions for common benefits? There are many reasons which I have experienced in the last 10 years. One of the most important one is the culture of Tirupur. The experience of Tirupur shows that strength of a local economic system, and its capacity to grow and to innovate, are closely related to the pattern of knowledge (thus cultural) stratification, to the territory itself and to learning capacity. When we gave them a presentation on the the growing need of Tirupur SME to integrate better in globally economy, Tirupur Exporters Association instantly agreed to have their common own ICT infrastructure ( E-Readiness centre ) . This shows their cultural capacity to collectively acknowledge that ICT is an important global integration tool, thus TEA play a key role when considering the dynamics of innovation process and growth opportunities for Small and Medium Enterprises (SMEs).

Tirupur hosiery cluster in India is a live example of this. There are several factors visible in the behaviour of TEA , such as the cohesion of stakeholders for the creation of innovation, the development of new institutions in the cluster.

To know more about role of culture in cluster dynamics and innovations there is a very interesting reading CLUSTER DYNAMICS AND INNOVATION IN SMEs: THE ROLE OF CULTURE by Callegati Enrico e Silvia Grandi available on line at
http://www.eblacenter.unito.it/WP/2005/3_WP_Ebla.pdf

Understanding Indian Clusters

Understanding of industrial clusters in Indian context especially by Indian authors can be counted on fingers. A systematic work to my knowledge started by SIDBI and SBI in late 80s. The nineties saw a sudden spurt in cluster related activities and focus on cluster related work mainly by international agencies and authors. In the last five years a lot of consolidation happened in terms of understanding of industrial cluster issues in India.

One the works done is Development of Industrial Cluster ( 2005) by Sudesh Kumar.
The paper gives an interesting insight into some of the work done by UNIDO under Cluster Development programme in India. The complete text of the book may be accessed at http://mpra.ub.uni-muenchen.de/171/1/MPRA_paper_171.pdf

Poverty Alleviation and Cluster Development

Under cluster development programme of UNIDO one of the POC ( Proof of Concept ) initiated was to explore the link between clusters focused interventions and poverty levels. Initially, it was very difficult to establish that clusters and poverty were connected. Dr Khalid from University of Manchester, UK tried to answer some these questions in his recent presentation in USA in Oct, 2007 (http://idbdocs.iadb.org/wsdocs/256,1,Competitiveness of Small Enterprises: Clusters, Business Environment and Local Development ‘Clusters, Territorial Competitiveness, Poverty and Social Sector Integration’ ) Among the three evidences one of the evidence of his presentation was work done by UNIDO in Chanderi, Madhya Pradesh, India. He primarily looked into characteristics, dynamics, poverty nodes in the cluster to explain the relationship. As consequence of UNIDO’s intervention one of the important things happened is corporatisation of artisans specially in Chanderi, an interesting story in todays's Economic Times( http://economictimes.indiatimes.com/News/News_By_Industry/Cons_Products/Weavers_to_become_shareholders_of_Fab_India_subsidiaries/articleshow/3013640.cms )

Strategic Management of Industrial Clusters- Garbage in Garbage out

The last decade has seen mushrooming of cluster development implementing agencies in India. The majority of these agencies are with in government or semi government kind of environment. The massive scaling up of CDP has created a major challenge for CD methodology to produce the desired results as claimed by advocates of CD approach. Surprisingly, there is no strategic management exist to professionally manage implementation work in more than 1000 clusters involving 1000 crores of rupees.

There is need to define key performance indicators, and a right framework to convert strategic direction in to action. Currently, most of CDA/ CDMs and implementing agencies are not trained/ accredited to a critical threshold cluster methodology related actions, resulting into a complete marginalization of CD approach as such.
The major leveraging points of the approach are general not the central point of implementation.

There is visible polarization on soft and hard inputs without understanding that both are complementary to each other. The best utilization of any hard infrastructure happens in best networked and trust based clusters viz Tirupur hosiery cluster in India.

There is need to better exploit the industrial cluster concept and to review all CDPs in the light of Strategic management of these programmes with proper performance indicators and cluster experts.

Power of Knowledge Networking

The Internet has provided a lot of opportunities for knowledge based networking. For cluster practitioners the following five portal are must to visit:



http://www.nextbillion.net/
NextBillion.net brings together the community of business leaders, social entrepreneurs, NGOs, policy makers, and academics who want to explore the connection between development and enterprise.


http://www.iked.org/
IKED is an independent non-profit association, think tank and international network which address the issues of the evolving knowledge-based economy. The organisation focuses on policy analysis and participates in forums devoted to concrete action at local, national and international levels, in collaboration with key stakeholders such as government, industry, academia and civil society.

http://www.isc.hbs.edu/

The Institute for Strategy and Competitiveness, led by Michael E. Porter, Bishop William Lawrence University Professor, studies competition and its implications for company strategy; the competitiveness of nations, regions and cities; and solutions to social problems. Based at Harvard Business School, the Institute is dedicated to extending the research pioneered by Professor Porter and disseminating it to scholars and practitioners on a global basis

http://www.weforum.org/

The World Economic Forum is an independent, international organization incorporated as a Swiss not-for-profit foundation. Works towards a world-class corporate governance system where values are as important a basis as rules. The portal is based on the assumption that economic progress without social development is not sustainable, while social development without economic progress is not feasible

http://www.competitiveness.org/
The Competitiveness Institute offers information on clusters and competitive regions worldwide. We use multiple arenas in real life and on the net for exchange of ideas, knowledge and experiences on methodologies for economic growth. We work on clusters, innovation systems, promotion of entrepreneurship and regional branding

Local Organisations and Clusters

Organisation plays an important role in almost all facets of life and clusters are not untouched by it. My experience of working in the clusters for the last 10 years suggest that any irreversible successful intervention is backed by some kind of institutionalisation of efforts in the form of organisation. Amiya Kumar Bagchi in his book on INDIAN ECONOMIC ORGANISATIONS (1999) , classify evolution of such organisation on three parameters. First, labour intensive firms ( capitalist),second, historical evolution of firms and the last is socio-economic ecosytem. The above three factors have historically impacted differently on the evolution of local organisation in clusters.

The importance of local organisation theoretically based on the assumption that each cluster is unique in its requirements. being in proximity cluster gives an opportunity to evolve new norms to dialogue and network, it gives an opportunity to institutionalise the networking among local stakeholders in the form of trust. This process is embeded in the culture of the cluster and very beautifully captured by Marshall



the mysteries of trade become no mysteries:but are as it were in air , and children learn many of them unconsciously. Good work is rightly appreciated , inventions and improvements in machinery , in process and general organisation of business have their merits promptly discussed ; if one man starts a new idea , it is taken up by others and combined with suggestions of their own ; and thus it becomes source of new ideas.



the local factors in economic thinking has become so important that an article by TT RAM MOHAN ( based on a paper published in HARVARD BUSINESS REVIEW, MARCH 2008 ) in todays Economic Times, suggest that how local firms are giving MNC a run for money. In many market MNCs has been coming face to face with high quality local talent. A very interesting read for today http://economictimes.indiatimes.com/Columnists/T_T_Ram_Mohan_MNCs_at_bay/articleshow/2999915.cms