In this week's City AM article, Peter Alderson, LDF Managing Director discusses how business clusters are as relevant and beneficial as ever to small businesses.
You only have to look at the abundance of tech firms in Silicon Valley, or London’s Silicon Roundabout, to see how similar businesses tend to huddle together in close proximity. For entrepreneurs especially, there’s certainly something to be said for having safety in numbers.
This is the idea behind business clusters, where firms in similar industries gather together in one region to form a network of interconnected companies, including suppliers and larger institutions, for example corporate firms emerging close to banks.
While this is a tradition that goes back hundreds of years as seen in Alfred Marshall’s ‘Principles of Economics’ back in 1890, it was really made fashionable in 1990 when Michael Porter from the Harvard Business School set out to transform the way businesses think about competitive advantage.
Peter Alderson, managing director of business finance provider, LDF comments: “The idea of business clusters is nothing new. However, for businesses based in and around major cities, collaboration can help to drive some key benefits and synergies, namely lower costs, due to reduced transport distances and a more streamlined flow of information.
"A high concentration of skills in one place also creates greater opportunity for investment and recruitment, and crucially for smaller businesses, it can help create an added level security.”
While you’d expect the digital era to prompt the death of these geographical clusters, this is not the case. Porter outlined the benefits of a close-knit pool of specialist businesses, as skills can be brought together into one localised area to create better products through competition.
Clusters have formed around the UK, and high-profile figures have pledged their support for these business networks, particularly bearing in mind how these pools tend to support smaller, younger companies.
Clusters don’t just provide an opportunity for businesses to form partnerships, they can also provide economies of scale, which can in turn support growth.
A report from the Department for Business, Energy & Industrial Strategy (BEIS), published last year, praised clusters for improving a firm’s visibility through critical mass. “This factor can be particularly important for SMEs and firms expanding into international markets where lack of visibility is a challenge,” the report reads.
As Peter explains: “In certain industries, such as manufacturing and technology, clusters are already commonplace. They are often hotbeds of entrepreneurialism, innovation and economic diversification and as the economic landscape evolves, certainly in line with the UK leaving the EU, it is likely that more and more firms will start to explore the benefits of closer collaboration with like-minded businesses”.
The also draws attention to the way this pool of companies can share common resources, have more face-to-face interaction (to create an element of trust), and strengthen the skills within each business.
While the internet has allowed businesses to stretch globally, it’s clear that location is still crucial to a company’s success. So, when deciding where to base your business, sussing out the competition – and placing yourself in the middle of it – could give you the edge.