The great social cluster muster

Phil Preston continues his investigation into creating shared value, and asks what role social factors have to play in the success of business clusters such as wine regions, or Silicon Valley.

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. 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 and Kramer’s main methods for creating shared value. The first two were re-conceiving products and markets and redefining value in the productivity chain (see Discovering productivity buried treasure, January 30, and Competitive keys: make your product mean more, January 18) .

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 and 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. 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 and Kramer suggest:

- Identifying where deficiencies or gaps exist (eg. training)

- Focus on those that represent the greatest constraint to your business

- 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.

Phil Preston is a social innovation expert who provides strategic insight into the rapidly changing business and social environment. He can be contacted on phil@philpreston.co