CLUSTER DEVELOPMENT AND KNOWLEDGE EXCHANGE IN THE SUPPLY

CHAIN

OKONJO EMILY ADHIAMBO

D61/62105/2010

LECTURERS: MR. S. NYAMWANGE / MICHAEL CHIRCHIR

A RESEARCH CONCEPT PAPER SUBMITTED IN PARTIAL FULLFILLMENTOF THE REQUIREMENT OF DEGREE OF MASTER OF BUSINESS

ADMINISTRATION (MBA), SCHOOL OF BUSINESS, UNIVERSITY OFNAIROBI

JANUARY 2013

ii

Table of Contents

CHAPTER ONE: INTRODUCTION.................................1

1.1. Introduction.............................................1

1.2. Definition of Clusters...................................1

1.3. Definition of Cluster Development........................1

1.4. Definition of Supply Chain...............................2

1.5. Definition of Knowledge based economy....................2

CHAPTER TWO: LITERATURE REVIEW............................3

2.1. Clusters and Supply Chains...............................3

2.2. knowledge sharing and collaboration within the cluster. .4

2.3. Knowledge exchange in Supply Chain.......................4

2.4. History of Cluster development..........................5

2.5. Research on Cluster Development and Knowledge exchange in SC 6

2.6. Theoretical framework of Clusters and Supply Chain.......8

2.7. Trends in Cluster Development............................8

2.8. Agreements and disagreements for Cluster Development.....9

2.9. Empirical findings on Cluster Development in Supply Chains9

2.10. Critical success factors in Cluster Development in Supply Chains.......................................................10

2.11...............................................Research gap10

2.12........................Research suggestions and objectives11

iii

2.13.................................Possible research question12

2.14.................................................Conclusion12

REFERENCES:..............................................13

iv

CHAPTER ONE: INTRODUCTION

Cluster initiatives are generally networks that are involved

in a broad range of activities such as; supply-chain

development, market intelligence, attraction of foreign

direct investment, management training, joint Research &

Development projects, e.t.c.

Within these clusters, knowledge is exchanged or shared

between firms informally without explicit compensation. The

concept of cluster development and knowledge exchange

embraced together in a given supply chain, establishes a

useful competitive edge for the supply chain.

This concept paper seeks to highlight how other scholars

have illustrated what impact cluster development and

knowledge exchange has on the supply chain. Cluster-based

economic development has since become an increasingly

popular topic for researchers and economic development

professionals. Supply chains are the main beneficiaries.

1.2 Definition of Clusters

Clusters are geographic concentrations of interconnected

companies, specialized suppliers, service providers, and

associated institutions in a particular field that are

present in a nation or region. Clusters arise because they

increase the productivity with which companies can compete.

(Delgado, Porter & Stern, March 2011).

Clusters are groups of companies and institutions co-located

in a specific geographic region and linked by

interdependencies in providing a related group of products

and/or services. (Porter, 1990).

1. 3 Definition of Cluster development

Cluster development is the economic development of business

clusters. The development and upgrading of clusters is an

important agenda for governments, companies, and other

institutions. Cluster development initiatives are an

important new direction in economic policy, building on

earlier efforts in macroeconomic stabilization,

privatization, market opening and reducing the costs of

doing business. (Delgado, Porter & Stern, March 2011).

1.4 Definition of Supply Chain

Mentzer et al (2001) defines supply chain as “a set of three

or more entities (organizations or individuals) directly

involved in the upstream and downstream flows of products,

services, finances, and/or information from a source to a

customer. He further identified three types of supply chain

based on the degree of complexity: a direct supply chain,

extended supply chain, and ultimate supply chain. The

direct supply chain consist of focal firm, its suppliers and

its customers, the extended supply chain involves suppliers’

suppliers and customers’ customer. The ultimate supply

chain includes all organizations that are involved in all

flows of products services, finance, and information from

the ultimate suppliers to the ultimate customers.

1.5 Definition of Knowledge based economy

Peter Drucker in his book, “The Age of Discontinuity”,

defined knowledge economy as the use of knowledge

technologies (such as knowledge engineering and knowledge

management) to produce economic benefits as well as job

creation. He explains that the Knowledge economy is an

extension of an information society. Rules and practices

that determine success in an industrial economy are re-

written in an interconnected globalized economy, developing

knowledge resources that become a critical economic

resource.

The knowledge-based economy is affected by the increasing

use of information technologies. Most industries try to use

available information to gain competitive advantages.

(Malmberg, 2003)

CHAPTER TWO: LITERATURE REVIEW

2.1 Clusters and supply chains

Cluster supply chain is a model of supply chain network

within industrial clusters, also is a new form of combined

organization on industrial cluster and supply chain. (Hong,

2011)

The supply chain is integrated in the core business of the

industry cluster. Both of them focus on improving the

competitive advantage over their competitors. The cluster

support the supply chain by integrating academic institutes,

government agencies, association and supporting industry in

order to create the innovation and enhance the knowledge in

the supply chain.

Cluster and supply chain are in different levels of

management but focus on the common objectives. Industry

cluster is more inclined to the macro-economic level which

focuses on collaboration between partners in the same

industry, while supply chain is more inclined to the micro-

economic level which focuses on the information sharing

between companies who are in the same production chain

Some of the benefits of the cluster in the supply chain

include; improving the capability of companies to select

their supply chain partners, improved knowledge and

information sharing between partners in the supply chain due

to collaboration and Cluster Development Agents (CDA) in the

cluster can be Supply Chain Facilitators (SCF) which will

assists the information sharing in the supply chain context.

Technological innovation also affects the competitive

environment, hindering those who don’t adapt. Information

technology is increasingly becoming the dominant force that

facilitates the communication and the exchange of knowledge

between the different actors of the supply chain within the

cluster. (Ashford, 2011).

2.2 Knowledge sharing and collaboration within

the cluster

The concept of industry cluster has been applied in many

countries since 1998. Companies in the same industry linked

to each other to maintain their competitiveness in the

market and to gain benefits from being a member of the

cluster. This was facilitated by knowledge sharing and

collaboration within the cluster.

This knowledge was collected in form of tacit and explicit

knowledge by experts and organizations within the cluster.

Due to the fact that the other three factors of production

(Land, Labor and Capital) were abundant, accessible and were

considered the reason of economic advantage in the past,

knowledge did not get much attention. As tangible production

factors were no longer enough to sustain a firm’s

competitive advantage, knowledge was called on to play a key

role (Young & Molina, 2003).

In cluster initiatives, knowledge is shared between firms

through the medium of untraded inter-dependencies i.e,

knowledge exchanged informally without explicit

compensation. It specifically addresses the firm and the

cluster level and examines the role of knowledge stocks and

flows in establishing competitive advantage for clusters and

firms (Tallman, Jenkins, Henry & Pinch, 2004)

2.3 Knowledge Exchange in Supply Chain

The collaboration in supply chain management (SCM) aims at

increasing utilization and synchronization of the chain,

resulting in tangible benefits for each participating

company (Anand & Hanna, 2001). Within this context, the

supply chain concept can be seen as a collaborative network

of organizations working together to maximize the value of a

product to the final client.

To be able to reduce conflict within this complex system,

companies need to have common goals, clearly defined domains

and especially a uniform understanding of situations. The

ability to make rapid decisions constitutes a competitive

advantage by decreasing the cycle time and by increasing the

flexibility in order to respond to the change of customer’s

demand (Ramano, 2003).

In this way, enterprises share knowledge to improve the

global value carried out by the supply chain. They share

knowledge as product features, process information, best

practices, allowed adjustments, dictionaries, etc. The

information, which is source of knowledge, circulates across

the supply chain through each relationship between the

partners. Each partner controls and interprets the flow of

information according to their point of view and their

understanding. The information, received from one or several

partners, is manipulated, analyzed and transmitted to the

other partner in a synthetic form. Each firm, treats,

retains information or favorites its exchange in keeping

with the enterprise’s strategy. So, we consider that the

entire supply chain is composed by all the relationships

between each partner of the supply chain (Kleijnen & Smits,

2003).

The relationship is the fundamental part of the knowledge

sharing in the supply chain. All the relationships that

participate to the production process can be aggregated to

handle the diffusion and to measure the impact of knowledge

sharing all along this process.

2.4 History of cluster development

The concept of industry cluster was first popularized by

Porter (1990) in his book named “Competitive Advantages of

Nations”. Since then, it has rapidly attracted attention

from governments, companies, and other institutions.

Industry cluster has since become the current trend in

economic development planning. Many governments and industry

organizations across the globe have turned to this concept

in recent years as a means to stimulate urban and regional

economic growth. As a result, a large number of cluster

initiative organizations were started during the 1990s. The

trend continues still continues today.

2.5 Research on Cluster Development and

knowledge exchange in the Supply Chain

Several researchers have analyzed the cluster development

and knowledge exchange in supply chain. Some researchers

have addressed cluster development, knowledge exchange and

the supply chain, others have concentrated on cluster and

supply chain independently.

The first comprehensive study of cluster initiatives around

the world was reported in the "Cluster Initiative Greenbook"

published by Sölvell, Ketels & Lindqvist, (2003) with a

foreword by Michael Porter in 2003. This book describes and

analyses clusters in detail. It touches on how clusters

evolve and under what settings, it explains the objectives

behind the cluster concept, it illustrates processes and

even highlights what drives good cluster performance. They

again did a follow up study in 2005 covering more than 1400

cluster initiative organizations across the globe.

Captine (2003), in his dissertation, “Development of

clusters and the supply chain management of palm oil

industry in Mozambique”, tried to examine the possibility of

establishing the concept of clusters and supply chain

management in the palm oil industry of Mozambique. He

established that there we good conditions to support the

concept. However, the challenge lay with the creation of

knowledge and awareness amongst the Mozambicans as well as

attracting investments in that area.

Malmberg (2003) researched on how firms within a cluster

create, share and transfer knowledge. He suggested a

framework with which firms in a cluster can create and

transfer knowledge.

Young & Molina (2003) looked at knowledge sharing and

business clusters. They emphasized that the three factors of

production – land, labor and capital, were for a longtime

considered the main drivers of economic success. Knowledge

started getting attention only when it was evident that the

tangible factors of production could no longer sustain the

firm’s competitive advantage. Knowledge sharing and

collaboration has since played a big role using the avenue

of experts.

Sureephong (2008) in his paper “Cluster development and

knowledge exchange in supply chain” tries to illustrate how

the concept of industry cluster coupled with knowledge

exchange can increase supply chain performance. They

selected a supply chain of French stool that is in furniture

cluster, to act as their case study in illustrating that

supply chains can create relationships with new strategic

partners. They also proposed a framework of knowledge

exchange between the different actors, to assist supply

chains construct and classify their knowledge.

Delgado, Porter & Stern (2011), did a publication on,

“Cluster, Convergence and economic performance”. They

evaluate the role of regional cluster composition in the

economic performance of industries, clusters and regions.

They found out that industries participating in strong

clusters have higher employment growth, higher growth of

wages and more number of establishments coming up. They also

pointed out that Industry and cluster level growth also

increase with the strength of related clusters in the region

where they operate.

In Kenya, The Technical committee on cluster development

policy (consisting of Ministry of trade and

industrialization, vision 2030 delivery secretariat, NESC,

KIPR and KEPSA) developed a concept paper that is to

initiate the formulation of a national cluster development

policy in October 2012. This paper is meant to serve as an

input in the draft policy that will be established in the

coming months. It is worth noting that although the concept

of cluster development has been embraced by the rest of the

world since the 90s, Kenya is waking up to the idea of

having a policy on it now. Coupled with the concurrent

growth of supply chain in Kenya, these two concepts embraced

together, would be a good avenue to accomplish major

projects in Kenya such as the Kenya Vision 2030.

2.6 Theoretical framework of Clusters and

Supply Chain

Industry cluster and supply chain are the focus of every

country that relies on a knowledge-based economy. Both focus

on improving the competitiveness of firms in the industry in

different aspects. Industry cluster is more inclined to the

macro-economic level which focuses on collaboration between

partners in the same industry, while supply chain is more

inclined to the micro-economic level which focuses on the

information sharing between companies who are in the same

production chain. The knowledge-based economy is based on

the production, distribution and use of knowledge and

information and is enhanced by the increased use of

information technology. The main objective of industry

cluster development and supply chain management is to

maintain competitiveness of each industry in the market by

using available information/knowledge (Sureephong,

Chakpitak, Buzon & Bouras, 2008).

2.7 Trends in cluster development

The number of United States and Canadian regions applying a

cluster strategy to economic development grows every year.

Cluster-based economic development is not restricted to a

single geography.

Not only states but also large regions such as government

councils and even metropolitan areas have drafted cluster

strategies.

Often, a cluster-based strategy focuses on a few industries

in the regional economy, and high-tech sectors are

privileged.

Sometimes the regional strategy implementation is the result

of a strong industry mobilization (bottom-up) while it can

be a governmental initiative (top-down), or a mix of both.

2.8 Agreements for cluster development

The increasing interest in clusters is only one aspect of a

broader re-orientation of research and economic policy

towards the foundations growth in supply chains. The

economic policy debate had in previous decades been to a

large degree dominated by macroeconomics and the creation of

market institutions in transition economies. But while there

is now fairly broad consensus on the type of macroeconomic

and legal conditions necessary to achieve economic progress,

it is also increasingly becoming clear that these conditions

are not sufficient. As a new approach to help economies reap

the full potential of an improved macroeconomic and legal

context cluster-based efforts have received a lot attention.

(Ketels, 2003)

Disagreements for cluster development

While there is little dispute that the cluster concept is

becoming increasingly popular within the supply chain, not

all researchers agree that this is a positive development.

Some critics argue that the definition of clusters is too

vague and the concept thus a problematic source of policy

advice. Others see cluster-based development as a useful

approach, but are concerned about its actual use in projects

bearing little resemblance to the original framework.

According to Ecotec Research & design (2010), adopting a

cluster approach is not the only way of encouraging regional

economic growth. Informal networking, developing supply

chains and improving workforce skills have a part to play in

improving competitiveness and creating growth.

Practitioners, however, are under pressure to develop a new,

more effective approach to economic development that they

can’t wait for these theoretical disputes to be resolved

2.9 Empirical findings on cluster development

in supply chains

Much of the existing knowledge on clusters and cluster-based

economic development and their interrelationship with the

supply chain, has been developed from case studies and

theory development. The case studies have generated many

useful ideas for theory development, and the conceptual

framework is by now quite well defined. However, much of

future progress will depend on the ability to create more

representative datasets that can be used to test the theory

and suggest further avenues of research.

2.10 Critical success factors in cluster

developmentFrom the study of Ecotec research and consulting in 2005,

they outline the critical success factors in cluster

development. The first two factors they address are

collaboration in networking partnership and knowledge

creation for innovative technology in the cluster.

Another key success factor that supports cluster development

is Cluster Development Agent (CDA). CDA is an expert who

conceptualizes the overall developmental strategy for a

cluster and initiates implementation. He is also the

facilitator between the various cluster players and the

target cluster. According to statistics in the "Cluster

Initiative Greenbook" published by Örjan Sölvell in 2003,

89% of successful clusters have full-time CDA.

Other success factors mentioned include; physical

infrastructure, presence of large firms, access to finance,

specialist services, access to markets, access to business

support services, competition, access to information,

communication, leadership and external economic impacts.

2.11 Research gap

All the different studies carried out above point towards

the usefulness of cluster development in supply chains. They

all seem to point out that supply chains would be more

productive and more effective if they embraced the cluster

concept in their existence. I also tend to agree with them.

A few of these researchers have tried to identify specific

supply chains in their respective countries where cluster

development would end up enriching them while most

researchers talk generally without giving specific

application areas. More research needs to be done with

specific emphasis to given industries so as to confirm

whether indeed this concept is relevant to specific

industries in the supply chain or whether its benefits cut

across.

There is also very little study on the impact of cluster

development and knowledge management in the services supply

chain. More research needs to be carried out to establish

how cluster development and knowledge management could

impact the services supply chain, whether there are any

frameworks that could be implemented different from the

products supply chain and also establish any challenges the

services sector would encounter in embracing the concept.

I have also not come across any definite criticisms refuting

the concept of clusters and supply chain. I attribute this

to the fact that not so much research has been carried out

in the relationship of these two concepts.

2.12 Research suggestions

More research needs to be carried out in supply chain

services as already explained above. The firms in the

service industry also need a framework on how cluster

development and knowledge exchange can enable them develop

and maintain a competitive edge.

It is also worth noting that although the concept of cluster

development has been embraced by the rest of the world since

the 90s, Kenya is waking up to the idea of having a policy

on it now. Coupled with the concurrent growth of supply

chain in Kenya, these two concepts embraced together, would

be a good avenue to accomplish major projects in Kenya such

as the Kenya Vision 2030. There is room for researching on

how Kenya as a country can embrace cluster development and

knowledge management in its supply chain for economic

development purposes.

Possible research Objectives

The research carried out so far on cluster development in

supply chains have so much focused on the products. Very

little information is available when it comes to supply

chain services. The possible research objectives that could

be patronized include the following;

i. To determine that industry cluster could improve supply

chain performance in services.

ii. To proposed a framework of knowledge exchange

between actors within a service supply chain.

iii. To illustrate the role of a Cluster Development

Agent (CDA) in a service industry

2.13 Possible Research question

The research question could be;

Will cluster development and knowledge exchange elevate the

services supply chain to a competitive edge?

2.14 Conclusion

In conclusion, I feel that the research field is still in

need of more testing in order to go a step further beyond

the conceptual/theoretical level that addresses the inter-

relation between supply chains and clusters.

.

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