Compare and Contrast Industrial Clusters and Outsourcing Strategies Essay Example

Additionally, without skilled employees, companies cannot compete effectively. Furthermore, various legal factors in the business environment affect a company's operations. For instance, corporate tax rates impact industries in a specific location. Therefore, clusters are crucial for competition as they enhance the productivity of companies located in those areas.

Clusters drive innovation and its pace, thereby influencing future growth and fueling the establishment of new businesses, expanding the cluster as a whole (Porter, 1998). Being part of a cluster allows companies to maintain their flexibility while benefiting on a larger scale. Companies within clusters can freely source inputs, access vital information for growth, and coordinate with related companies. Additionally, clusters provide better access to top employees and specialized suppliers, making them essential for business success.

Simply put, clusters possess certain qualities that make them appealing to businesses. These qualities include attracting opportunities and skilled individuals from other areas, which is advantageous to the companies within the cluster. Additionally, well-developed clusters have a specialized supplier base, making it easier and more convenient for businesses to obtain the necessary inputs. Local availability of suppliers eliminates the need for inventory, importing costs, delays, and reduces the risk of overpricing.

According to S?aric? (2012), companies operating in clusters experience reduced transaction costs and lower recruitment expenses. Clusters facilitate the seamless flow of information and improved communication, making it easier for suppliers to coordinate and provide additional services like installation and debugging. Local outsourcing is found to be more beneficial than distant outsourcing (Porter, 1998), as proximity enhances the overall performance of companies, particularly in advanced and specialized inputs that involve embedded technology in formation and service content.

When there is a large port nearby,

it tends to attract exporting firms in mineral-rich areas, resulting in the formation of mining clusters (Zhu, 2010). The formation of alliances with distant suppliers can be problematic due to limited advantages and numerous disadvantages. However, all formal alliances come with their own complex bargaining and governance issues, which hinder the flexibility of companies (Porter, 1998). Clusters provide a range of informal relationships that are often more advantageous in their arrangements. Ultimately, clusters offer better alternatives compared to vertical integration.

Clusters offer numerous advantages such as extensive markets, technical capabilities, and competitive information for their members. These clusters also provide specialized information based on individual preferences (Kuchiki & Tsuji, 2010). In comparison to in-house units, outside specialists are often more cost-friendly and responsive in terms of component production and other essential services like training. Vertical integration, which was previously the norm, has proved to be ineffective, inefficient, and inflexible in modern business environments (Porter, 1998). Despite the geographical distance, clusters remain advantageous because suppliers attempting to penetrate large and concentrated markets offer aggressive prices to understand the efficiencies of new markets and services. It is not advisable to compete against the benefits of clusters in terms of resource assembly as any competition can make resources scarce and more expensive. However, companies have the option to outsource various inputs from other locations to avoid potential cost penalties.

Clusters play a crucial role in driving demand for specialized inputs and overall supply. Additionally, personal relationships and environmental bonds within clusters foster trust and facilitate the flow of essential information, strengthening the cluster. The interconnectedness among cluster members results in complementary advantages that go beyond the sum of their individual

parts. For example, in a tourism cluster, the visitor experience relies on various complementary businesses such as appealing attractions, high-quality hotels and restaurants, convenient shopping outlets, and efficient transportation facilities. This mutual dependence among cluster members enhances their performance and contributes to the success of others (Zhu, 2010). Various forms of complementarity exist, including coordination activities across companies that can optimize collective productivity. In sectors like wood manufacturing, the efficiency of saw mills depends on a reliable supply of high-quality timber and the timber's ability to be transformed into furniture or construction services.

In the early 1990s, the Millers who were part of the Portuguese community faced significant losses due to low-quality timber caused by the lack of knowledge in timber management among local land owners. A large portion of the timber produced during that time was used for making inferior pallets and boxes, resulting in lower prices for the land owners. To improve productivity, critical aspects of the cluster needed to be changed. This included modifying cutting and sorting methods for logging activities. In addition, saw mills had to enhance their wood processing capabilities and coordinate the development of wood classification measures.

According to Porter (1998), clusters play a crucial role in enhancing reputation and influencing marketing. Buyers tend to favor vendors based in their locations, leading to increased competition in world markets for countries with limited development in clusters. Developing clusters is vital for nations aiming to transition from middle income to advanced economies. In high wage economies, clusters are consistently upgraded (Zhu, 2010). Promoting and forming clusters at the basic level is essential (Porter, 1998). Policy makers should focus on addressing the underlying issues

in cluster foundations, such as improving education and skills, technology capabilities, access to capital markets, and overall institutional functioning.

Furthermore, the government can support the growth of clusters by implementing restrictions on industrial locations and providing subsidies to companies interested in investing in distressed areas. The term "outsourcing" consists of two words: out and sourcing. The concept of sourcing involves transferring work, responsibilities, and decision-making rights to another party or individual (McIvor, 2005). For example, Nike, a globally recognized brand, does not manufacture its own products. Despite being based in the United States, Nike outsources the production of its footwear and apparel. In fact, they have contractual agreements with independent manufacturers operating in over thirty-six countries worldwide.

The act of outsourcing involves the division of joint activities, concepts, cooperation, servicing, and participation in capital (Click ; Duening, 2005). By outsourcing, costs can be saved, access to experience can be increased, and performance and flexibility can be improved. As an example, approximately two-thirds of Nike Footwear is manufactured in China and Vietnam (Morrison, 2009). Nike employs a strategy that differs from clusters, which can be described as outsourcing. Their main focus is on design, development, and marketing.

Under this strategy, there is a limited cost of production to manufacture the products with high reputation being channeled towards high quality at premium rates. Outsourcing can be compared to globalization as the strategy has always proved to be successful in generating giant incomes. Companies are encouraged to source out their work in order to benefit cheaply, faster and better (McIvor, 2005). This method has really benefited the Nike Company in terms of income as their revenues exceeded US $16 billion in

the year 2007.

Moreover, the Nike Company has succeeded by spending a large amount on advertisements. For instance, in 2007, the company spent US$ 2 billion on advertising and endorsing athletes and other sports people (Morrison, 2009). Outsourcing has also played a role in raising Nike's media presence. However, the company has faced controversies and criticisms regarding the working conditions in its factories. To address these issues, the company has implemented the required standards mandated by law in its factories.

The main requirement was to ensure health and safety regulations were followed in factories, workers were paid their dues, and overtime was supervised. However, enforcing these standards became difficult due to outsourcing. Factory owners were under pressure to cut costs and meet deadlines. In response to criticism, Nike improved factory monitoring and shifted this responsibility to third-party monitors. The company also had to defend its corporate responsibility, gaining media attention temporarily. To address CSR policies, Nike appointed a corporate responsibility committee at the board level, prioritizing the needs of consumers, shareholders, business partners, employees, and the community (Morrison, 2009).

Handing over activities to a trusted third party allows companies to focus on their core management activities, increasing their competitive advantages. According to Click & Duening (2005), outsourcing promotes corporate social responsibility by bringing about systematic changes for workers that go beyond traditional risks and reputation, leading to global social responsibility. Additionally, outsourcing also includes education programs and allows workers to have freedom of association, such as joining unions. However, Nike faces challenges in implementing outsourcing strategies due to limitations on freedom of association in certain countries where they operate. For example, China and Vietnam have restricted independent trade

unions (Morrison, 2009). Both clusters and outsourcing strategies have resulted in political and legal tensions.

The American job creation act of 2004 was implemented due to concerns about outsourced jobs. In response, the Nike Company had to repatriate $500 million of foreign earnings in 2006 (Morrison, 2009). However, government directives are hindering the formation of clusters and offering subsidies in certain geographical locations. Furthermore, companies in clusters are facing heavy taxes from the government due to population and environmental concerns (Porter, 1998). Both outsourcing and clusters need to address health and safety issues, as well as employment terms such as wages and working hours for their employees.

Clusters and outsourcing have both brought benefits to their respective communities. For instance, the Nike Foundation, established in 2005, has focused on reducing poverty and gender inequality in developing countries through philanthropic initiatives (Morrison, 2009). Similarly, the California wine clusters have fostered the growth of various institutions involved in winemaking. These include highly regarded programs like the viticulture and enology program at the University of California at Davis, as well as organizations such as the wine institute and the special committee of California senate and assembly (Porter, 1998).

Clusters are crucial for competition as they impact productivity. The productivity of companies relies on their competitive strategies rather than the industries they belong to. Developing clusters is essential for poorer countries to compete in global markets with affordable labor and natural resources. Creating clusters is a key factor for nations aiming to transition from a middle-income to an advanced and well-developed economy.

Outsourcing involves the division of joint activities, concepts, cooperation, servicing, and participation in capital. It offers cost savings, increased access to

experience, and improvements in performance and flexibility.

References

1. Click, R. L., & Duening, T. N. (2005). Business process outsourcing: The competitive advantage. Hoboken, NJ: John Wiley & Sons.
2. Kuchiki, A., & Tsuji, M. (2010). From agglomeration to innovation: Upgrading industrial clusters in emerging economies. Basingstoke, UK: Palgrave Macmillan.
3. McIvor, R. (2005).

The text includes information about two books on the topic of outsourcing process and competitive advantages through clusters. The first book is titled "The outsourcing process: Strategies for evaluation and management" by Cambridge University Press. The second book is titled "Competitive advantages through clusters: An empirical study with evidence from China" by Springer Gabler, and it was written by Saric in 2012. Additionally, there is a mention of a person named Zhu.

(2010). Analysis of industrial clusters in China. Boca Raton: Science Press/CRC Press.

Corporate Social Responsibility. Global Issues and 18, 548-550.

Porter, M. E. (1998). Clusters and the New Economics Of Competition.

Harvard Business Review, 77-90.