Cluster analysis

From CEOpedia | Management online

Networks of economic entities, such as industrial enterprises and common production cycles, and organizations that provide support services (banks, consulting and marketing firms, research and educational institutions, insurance companies) form clusters, a complex economic system. Over the past decade, cluster policy has become one of the most important focal points of national policy in developed and developing countries to enhance national and regional competitiveness. This idea is spreading in the form of clearly defined policies and other policy initiatives such as regional strategies and activities supporting local production systems.

Most of today's industrialized economies need the institutional support of firms to become more competitive. In (Afanasiev M.; Korchagina N. and Myasnikova L. (2006)) is argued that enterprise consolidation and clustering are currently one of the most effective supports for increasing production efficiency. The global economy has been impacted by trends in the expansion of the role of the cluster approach. Innovative approaches to the creation of integrated management forms are required for the modern expansion of economic space across the globe, taking into account factors such as:

  • factors both internal and external to regionalization, including enhancement of regional and national competitiveness
  • an increase in regional investments and innovation.
  • development of long-term forms of economic and territorial integration.
  • enhancement of regional and national competitiveness.
  • a rise in globalization processes.

Therefore, the cluster principle, which is based on the proactive promotion of propellant industries, becomes more relevant in terms of creating clusters of "growth poles" in the regional economy and increasing the effectiveness of the public policy.

Analysis of Dutch Flower Clusters using Porter's Five Forces Model

Porter’s five forces model is used to evaluate the competitiveness and strength of businesses. In this paper, this model is used to order to determine the sector's attractiveness and understand its competitiveness in the market regarding the Dutch Flower Cluster:

  • the Threat of New Entrants reflects how new market players impose threats to the existing market players. For the Dutch Flower Cluster, we can identify some factors which reduce the threat of new entrants such as the initial investments and capital needed to start the business, the presence of an economy of scale, the existing strict regulatory framework and a restricted distribution channel.
  • the Threat of Substitute Products, the availability of substitute products makes the competitive environment challenging for the Dutch Flower Cluster since customers can use alternative products in order to satisfy their needs.
  • the Rivalry Among Existing Firms shows us the number of competitors that are present in the Dutch Flower Cluster. This cluster can face strong pressure from rival firms, which can limit each other’s growth.
  • the Bargaining Power of Buyers indicates the pressure that customers put on businesses in order to get high-quality products at affordable prices. Strong bargaining power lowers profitability and makes the industry more competitive for the Dutch Flower Cluster.
  • the Bargaining Power of Buyers indicates the pressure that customers put on businesses in order to get high-quality products at affordable prices. Strong bargaining power lowers profitability and makes the industry more competitive for the Dutch Flower Cluster.

The application of the Five Forces Model of Porter can be used to allow companies to make wise strategic decisions. This model can be used as a starting point to analyse and determine the Dutch Flower Cluster's potential and attractiveness and it can be combined with other frameworks, such as Pestel analisys and Value Chain analysis, for a better understanding of the external environment.

Covid-19 consequences and the internationalisation of the Dutch Flower Cluster

The Covid-19 pandemic struck the Dutch flower cluster during the worst of times, resulting in an 85% loss in 2020’s turnover. The Netherlands is responsible for 44% of the world trade in floriculture products, and 77% of flower bulbs sold worldwide. The virus hit the tulip market in the middle of the tulip sales, the period going from March to May which includes festivities such as Women’s Day, Mother’s Day and Easter, gaining 7 billion euros with an average of $30 million in flowers sold daily. At the beginning of the pandemic, in March 2020, tulip stems were introduced in the largest flower market of Aalsmeer at a stalling price of 0 euros. The growers had to destroy hundreds of millions of tulips and other blossoms. The losses vary from 10% of the turnover to 85% for some producers. Moreover, the transportation of flowers usually works through passenger planes, so in 2020 the early lockdown measures of cancelling all international flights resulted in a stall of the primary means of transportation for the horticulture and floriculture industries. The demand for space on cargo planes rose as well as the freight prices, which went from $1.85 per kilo to $4 per kilo. This discouraged farmers from the export market, and those who continued faced losses as they were not able to transfer the higher costs to consumers, which were not interested in sustaining the rising prices.

The Dutch Tulip cluster has historically been a partner with the Kenyan flower cluster. In 1980 the Kenyan government, the Dutch Ministry of Development Aid, and a group of Dutch growers funded a study on Kenya’s potential for a flower cluster, as the country could provide the Dutch market with high-quality flowers all year round. The Netherlands continued investing in Kenya with flows of FDI. In 2008, 70% of Kenyan cut flower production was owned by Dutch growers. The main Kenyan exports usually are destined for the Netherlands’ market, and in 2009, during the economic crisis, FloraHolland helped the producers in Kenya to develop alternative markets in Russia and Japan. With the pandemic, this strong link between the Dutch and Kenyan flower clusters meant that as soon as Covid-19 hit the Netherlands also the African country was weakened. As the auction at Holland was operating at a lower capacity and demand sank, Kenyan growers were left in a difficult position. The leadership of the Dutch cluster was also established thanks to the connections it made with foreign clusters (in Colombia, Ecuador, Kenya, China, Israel, Ethiopia, Japan, Brazil, and Canada): in fact, the Dutch provided them with supplies, service and knowledge to help them advance and boost their expansion. The strategic direction of the Dutch cluster consisted in moving parts of the production and its development in foreign and growing clusters, integrating the “satellite clusters” with the Dutch one within the framework of the auction system Royal Flora Holland. The factor that helped the most the internationalisation of flower production is the transportation means, as the ability to transport flowers by aeroplane increased the spread of flower production in all locations. The Dutch cluster connects flower clusters in all areas of the world, either with its aid or thanks to its auction system. But, even if all the foreign clusters are connected to the Dutch one, they still are in competition with one another, having their own advantages: e.g. Colombia might have an adequate climate for all-year-round production, without the need to pay gas to heat the greenhouses, but it also has higher costs of transportation, while the Netherlands is greatly connected to the places where flowers are most bought, such as Europe and the US.

Cluster development

Cluster development is increasingly shaping the economic geography of today's cities. It aims to improve the urban spatial structure and contribute to economic growth. As shown in this paper today, one of the most effective mechanisms for improving regional competitiveness is bundling socio-economic spatial domains. In these last years, mainly because of the Covid-19 pandemic, the Dutch flower cluster is facing a high number of challenges, both internal and external. Although everything, the abovementioned cluster managed to remain the main player in this industry; the firms of this cluster are already trying their best to overcome these problems, thanks to the creation of new policies and approaches: the introduction of new products and services to meet the new demand, the improvement of logistical skills, the cooperation with international partners and the development of sub-cluster in places in which the costs of production are lower.

References

Author: Francesca Scattolin

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