The Function And Concept Of A Cluster Business Essay

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Cluster in economics means geographical, High technology, low cost or historical know how center of co-operation between companies, which have formed a bond inside their branch with other operators in the business which are really important for good competition.

Cluster is like a living organism consisting of many tightly packed companies acting together. The main question is why companies form them? Since there are lots of different operators and competition between them is harsh, the only way to survive is cooperation. With these clusters, the operations and information networks can be made more efficient. There are more benefits to clustering, but the main reason behind them is to gain more market competence and money savings. Today, as the economic recession is still continuing, the local firms need to cooperate in order to survive and develop themselves.


The famous economist Martin Porter made term "Business cluster" famous and well known in the 1990 with his book "The Competitive Advantage of Nations". Paul Krugman also made the concept famous with his book about geographical economics"Geography and Trade (1991)." The oldest references for this kind of business model however date back to 1890 at the work of agglomeration economies by Alfred Marshall.

The best example in history of clusters is Silicon Valley in California when mid- to late 1990s several successful computer technology related companies emerged in Silicon Valley. The high number of established companies in Silicon Valley attracted huge amounts of venture capital to the area.

The cluster effect and huge financial flow had big impact on labor market and the area started to attract highly educated engineer and programmers to the area because the demand for educated workforce was so high.

Function and concept of a cluster

If we look closer to a cluster, we can see that it features many common maritime industries like ship owners, ship managers, charterers and brokers in between all three above mentioned ones. One could say that these four firms run the core functions of a cluster. A cluster can also have more functions to it, depending what kind of companies are involved. As companies get closer to each other, they tend to establish good connections to their neighboring companies. As companies get more information shared their flexibility for short time changes gets better. Other benefit of shared information is that the companies can now research and develop themselves and their functions more easily than before. With R&D project innovations, the new concepts can be developed and shared with all involved parties. This enables more customized and fitting solutions, thus bringing down R&D implementation costs as well.

These hefty projects produce a big amount of data. As many R&D projects are carried out, the people involved in them gain vast knowledge about technologies and how to use them creatively. In a way, these projects also produce specialized workforce, which can be used in consulting services for other companies outside the cluster if needed. If a single company would try to develop the before mentioned functions by themselves, it needs to pay everything from its own pocket. With many companies involved, the risk is shared and costs are split. By doing something by yourself, the results are only fit for you and not to others.

By sharing the economic risk, the firms can be more creative with R&D as the fear of bankruptcy is smaller. This way they might consider of hiring newly graduated students for their projects more often than single firms. Close cooperation with local universities benefits both parties. Companies can advertise themselves through universities and their seminars, on the other hand, universities might get sponsors.

A cluster brings companies together geographically as well. The closer the companies are, the easier it is to contact them physically if needed. Considering the land rent, it's also shared cost between the companies in the cluster who reside in the same property. The cluster functions can differ, depending from dominant situation of the markets. At times of strong economic growth they might be more open for new ideas. At times of recession, they might be more economic survival oriented thus taking less people in.

The primary functions of clusters are to create and train new workforce for the industries, share risks, create new workplaces, develop technology, increase market awareness and competitiveness. With shared risks, come shared costs. This makes research and development of technology easier than before. The companies can share innovations and data via their networks if necessary. Decreased economical risk brings new entrepreneurs to the market. Depending from the world's economic situation, these functions might have different emphasis. In order to survive, the companies form clusters to increase their overall competitiveness, from which all parties are benefitting.

For co-operation you have to take on account there is competition inside clusters and in some cases co-operation can be forbidden to prevent cartel situation. The positive side of competition inside cluster is straight related on innovation and product development.

The most important factors of cluster are improved productivity, innovation and strategically gained advantage. The cluster way of operating has a huge synergy influence which shows strongly in these factors when many different industries develop their co-operation and together gain advantages of economics of scale without the heaviness it generally generates.

Forwarding companies

Forwarding companies and shipping agency's gain huge advantage on geographical location and most of all really centralized competition inside the port of Rotterdam which has over 100 shipping agencies. This creates extremely good competition and good service level they also create good environment to really specialize and focus on the core business. This makes port of Rotterdam so interesting and really completive for shipping companies. So even they have direct or indirect competition inside this cluster they still support each other and ad with other clusters add attractiveness of port of Rotterdam which lures lots of venture capital to the port.

Port of Rotterdam

Port of Rotterdam is a huge business cluster whit many smaller clusters inside it for example port authority. The port has huge competitive advantage in Historical know-how, geographic location, high technology cargo handling and logistics. The most important clusters are petrochemical business, general cargo transshipment handlings and bulk cargo handling. At the moment port of Rotterdam is investing to one cluster inside it via construction work of maasvlakte 2 which supports the container handling ability of the port and adds competitiveness in cargo handling even more.


Cluster development also known as "Economic Clustering" had huge leap forward after Michael Porter published his book "The Competitive Advantage of Nations" 1990. This book made the concept famous and many governments and industry organizations started to develop and use the concept.

This has leaded to the situation governments drive and lob different centrals and areas for certain type of companies to create great different technology clusters


In recent years what we have seen that has been happening in the world is that companies tend to outsource a lots of people to do some of their work. In addition of the help of third party logistic, which targets the companiys function instead of the process, in that function they want to handle containers, shipments and freights only. Not the transport management process at all. While third party logistics handle functions fourth party logistics handles the process of supply chain management. Question of the company is to decide what to outsource from their company, either the function or the process.

With outsourcing companies can hire another company or a person to do their other tasks. Tasks that they could not have been able to complete, because they lack skills or experience inside their company.

Why Outsource?

Here are some example of why to outsource:

Lower costs due to economies of scale

Company can focus more on core functions

Less dependency upon internal resources

Lack of internal expertise

Improve risk management

Acquire innovative ideas

So in short; Outsourcing helps companies to hire other companies or a professional person to do some of their task that they could have not been able to do. If a company lacks expertise on one subject they can hire another company to take care of that problem for them.

What is 4PL?

Definition from:

4PL (Fourth Party Logistics) is a company who manages 3PL's on behalf of the customer.

Our definition:

4PL (Fourth Party Logistics) helps a company to handle their 3PL (Third Party Logistics) for them.

Services from Third party logistics and Fourth party logistics differentiates by their service. Third party logistics focuses more on Forwarding of logistical goods while Fourth Party Logistics handles more of the SCM (Supply Chain Management) functions

With Fourth party logistics they can reduce their costs, add value for their services, have a better efficient information flow.

What will happen in the future?

Looking at the present state of our current economy we are having a financial crisis that already started in 2007. Companies have started to take less consideration of outsourcing, because it seems that the service they provide cost too much for them.

Now days companies have been trying to solve their own problems internally and depend less on outsourcing, Thus saving from their extra expenditure. We cannot really tell what will going to happen in near future it all depends on how well the economy will go on after this financial crisis is over.