Why (should) cluster organizations exist?
Cluster organizations might be more relevant today than ever. Companies in a rapidly changing world face risks that extend far beyond single-firm risks that cannot be addressed single-handedly. Today, the complex nature of many issues refrains from the (antiquated) rational-solution-to-a-problem-schema. Cluster organizations help companies to co-evolve together and to reduce the transaction cost for more interaction, which leads to more learning, which again leads to more innovation. This way, they create the context for thriving and prospering rather than be a tool for competitive survival.
by Wadim Baslow, Senior Project Manager at Quercus Group
This article is the first of a series on cluster development in eight steps. You can find an introduction and an overview here
Trees talk! In line with Darwin, we are often thinking of trees in competition with each other for sunlight, water, or nutrients. The winner’s shade is the loser’s fate of declined growth and chance for survival. However, scientists are just beginning to observe that trees might actually be more cooperative and communal than believed before.
Trees talk and communicate through an intricate network of mycorrhizal fungi used to send chemical, hormonal, and slow-pulsing electrical signals. Trees seem to also share vital resources with each other, for example, carbon as a core element for growth. Interestingly, they seem to do so not only among their own (same species), but extend cooperation towards other species, too. (Richard Grant, 2018, Do trees talk to each other?)
“Maybe birch and fir are in a prisoner’s dilemma where the benefits of group cooperation outweigh the costs of individual prerogatives.” (Suzanne Simard, 2021, The Intelligent Forest)
Studies repeatedly show that also among human groups cooperation is chosen most times over individual rewards. “Ecosystems are similar to human societies — they’re built on relationships. The stronger those are, the more resilient the system” (Suzanne Simard, 2021, The Intelligent Forest).
“Think of trees in a forest. How did the ‘leaders’ get so tall? Were they extra courageous or charismatic? The ecological response would observe that the other organisms mutually contributed to that growth.” [Nora Bateson] (from Simone Cicero, 2018, Why Platform Strategies are all about reducing Transaction Cost)
I think similar to the way trees interact, co-evolve, and thrive together clusters are forests of organizations and companies. They mutually benefit and create shared value through interaction and strong mechanisms for collaboration. The cluster organization in this analogy perhaps is the mycorrhizal fungus. It might not always be visible. However, it is fundamentally part of making interaction possible.
Cluster organizations reduce the cost of interaction and organizing
The context of cluster organizations is often described in the turbulent environment that companies face today. Gerd Meider zu Koecker from the ClusterAgentur Baden Wuerttemberg and his team wrote in their recently published, and more than excellent Cluster Development Guide that
“[…] today’s businesses face complex and turbulent environments. […] Only very few businesses feature sufficient capital, market know how, product knowledge and ability to learn on their own. To combat these limitations, businesses, especially SMEs, must focus on their core competences and establish well structured collaborations with complementary partners.” (Cluster Development Guide.)
Collaboration is an adequate response to complexity and uncertainty. Businesses are commonly seen as experts for efficiency. Efficiency works however only very well against a high degree of certainty and predictability. Efficiency gains can be best reaped when we exactly know cause-effect. It tends to be less helpful when multiple factors make the outcome in an unpredictable way, which seems to be the nature of many currently experienced challenges.
“[…] the world of business is slowly but steadily switching from a perspective of competitive market survival — where organizations compete to reduce their single liabilities and risks by providing solutions to problems — to a perspective of thrivability, where orgs are focused on reducing eco-systemic risks (vs single firm risk) […]” Why Platform Strategies are all about reducing Transaction Cost
This switch in perspectives holds interaction among actors at its core. Interaction enables learning processes. Learning of a diversity of perspectives increases the probability to see the problems from different angles, identify existing strengths, discover more fit approaches and solutions, and increase the likelihood of success through joining forces. In this logic, more interaction creates more learning, which again creates more innovation, which gives rise to shared growth.
Companies in their pursuit of optimization and efficiency will be unlikely willing to bear the high cost of interaction and organizing.
The demand for interaction and the associated transaction cost make up the case for cluster organizations. The cluster organization’s role in clusters is to enable creating shared value by increasing interactions among participants by reducing the transaction costs of doing so.
My hypothesis is these necessary interactions would not occur at scale without cluster organizations. The risk is thereby that organizations and companies will underperform their potential (or die eventually).
Clusters emerge, cluster organizations are built.
Imagine a forest again. Observe! What trees do you see? Which tree is the tallest? How old or young are they? What kind of plants is growing on the forest floor? Perhaps you notice the birds, bugs, and other animals that are part of the intricate dynamics that make up this forest.
Like forests and ecosystems in general, clusters emerge. What type of species you will find in a forest is the result of conditions and factors such as climate, weather, soil, or the relationship between the species. In the same way, clusters come to be, for example, because of present skills, traditions, competencies in a region, government R & D labs, or sometimes chance events.
Cluster organizations instead are created. They are the result of the companies’ demand for collaboration as the “only” viable way to address turbulent times.
Recently, I found great inspiration from Platform Design. Simone Cicero writes in the article Why Platform Strategies are all about reducing Transaction Cost
“ modern organizations shouldn’t create themselves out of the thin air […] but should be somehow brought into existence by the pull of ecosystem’s forces: parties that are striving for help in scaling up interactions will demand (and accept) the existence of a shaper organization, that takes care of aggregating, facilitating, policing.”
Similarly, a cluster organization is “brought to existence”. It is indeed a “shaper organization, that takes care of aggregating, facilitating, policing.”
The decision to take initiative and establish a cluster organization hence depends on the existence of the ecosystem forces and whether they are being identified.
What is a cluster and is it a cluster in the first place?
Wait, wait, wait. ‘Shouldn’t we first agree on what a cluster is?’ — yes- and ‘shouldn’t there be a cluster first before making a decision to build a cluster organization?’ — yes again.
In fact, the first step in our 8-step cluster development framework is cluster analysis. The analysis is a decision-making tool informing the go-/no-go decision of building a cluster organization.
What is a cluster?
The conversation on what constitutes a cluster persists, but there are few fundamentals that both research, policymakers, and cluster practitioners agree on.
Eoin Byrne, Cluster Manager at Cyber Ireland provided a fair summary of the key “ingredients” and their presence before the decision to establish Cyber Ireland. He writes
”[…] the following questions are critical to understand:
- Critical Mass — Does the the sector or group of companies have a critical mass of companies that are connected by a shared end market, customer or technology?
- Geographic Proximity — Is there a geographic centre of the cluster, where the concentration of firms is significantly higher than in neighbouring regions or countries?
- Supporting Institutions — Are there locally based supporting institutions (e.g. a university, government agency, R&D institute, start-up supports, industry association) that cater specifically to the cluster?
- Competitive Advantage — Does the industry cluster have an international competitive advantage?
- International (or National) Growth Market — Do the firms sell their products or services internationally, and is it a growth market? Or is there the potential for a large national market?”
The initial cluster analysis seeks to answer these questions.
Is it a cluster? — data and existing relationships
Our cluster analysis’ design commonly takes shape through two approaches:
- Identifying and describing a larger, more mainstream cluster; or
- Identifying and describing a niche, and more specialized cluster.
It is rarely either one, but something between. The distinction helps however to choose and focus on the appropriate type and level of data and respective research methodology.
Usually, a cluster analysis commences with a collection and analysis of macro-economic indicators and involves gathering publicly available data, for example, firms in a region by employees, turnover, exports, product type, employment statistics, R&D investments, patents, and more. It helps to identify patterns and larger, “mainstream” clusters in a region.
Niche and more specialized clusters tend to be insufficiently captured through this type of data and slip through the analysis. In this case, we supplement and lean more towards interviews, expert insights, workshops discussions, and mapping exercises (e.g. value chain mapping, stakeholder mapping, network analyses, etc.).
The latter is also key to create actionable knowledge. For us, painting an image of the status quo is not enough to inform the decision of whether to initiate a cluster organization or not. What we like to look for are signals and trends of the aforementioned ecosystem forces.
The most interesting insight of the cluster analysis might be illuminating existing interactions between the cluster participants. Without the interaction between the cluster participants, it can merely be called a cluster and would instead resemble a loose collection of similar or related entities. The interaction makes the essence of a cluster. If this essential exists, then the prerequisite ingredients for a cluster organization are all in place.
Strategic Business Alliances, for example, can be signals of existing interactions and therefore be a “precursor to the cluster approach” as Gerd Meider zu Koecker, Director of ClusterAgentur Baden Wuerttemberg, and his team wrote in their Cluster Development Guide.
So, if we can at a level of certainty claim “yes, we have cluster here”, the next prompt is about the need for cluster organization: Is it worth the investment, you might ask, to establish a cluster organization? or more simply “why might the cluster need a cluster organization”.
The loop closes here. If the cluster appears to underperform its potential and could do better by doing it together, it might be worth the leap. The cluster organization builds on the existing and past interactions and creates a platform for more interactions as the basis for mutual learning, innovation, and eventually shared value.
Thank you,
Wadim
If you find this blog post helpful, or if you have any feedback, comment or question, I’d be glad to hear from you.
Write me an e-mail at wadim@quercus-group.com or connect on Linkedin.
