RESEARCH @ BI: Profitability in Business Clusters
Business clusters is a hot term in the debate on value creation. The thought is for the social networks between the different actors in a cluster to contribute to increased profitability for the businesses in the networks.
Examples of wellknown clusters are the Diamond District between Fifth and Sixth Avenues in midtown Manhattan, the financial district around Wall Street and the theatres around Broadway. We find clusters of biotechnology businesses in San Diego (Biotech Beach) and San Francisco (Biotech Bay). Silicon Valley is synonymous with innovative business activities by colocalized enterprises. Napa Valley is the cluster for the wine industry in the USA. Hollywood in the USA and "Bollywood" in India are business clusters for the film industry. The high tech clusters in Bangalore, India, are one of the world's most innovative clusters of software enterprises.
Shopping centres as labs
A shopping centre represents an excellent laboratory for studying how business clusters affect financial profitability.
Shopping centres are a cluster of shops that have decided to set up at the same location. Commercial enterprises achieve a number of benefits in the form of a good infrastructure and economies of scale.
Customers are flocking to shopping centres. Here they can 'shop' among different competing options, without spending a great deal of time. If you want to purchase a garment, you can compare at least four or five options at most Norwegian shopping centres.
Most research studies of business clusters are about the export industry, goods-producing industry and technology enterprises.
However, in terms of business policy, shopping centres provide many workplaces, workplaces for women, and are very important to regional business development.
The growth of shopping centres during the past 20 years in Norway shows that clusters of shops have dynamics and financial profitability that stimulate the growth of such clusters.
Study of social networks
Market researchers Arne Nygaard, Ragnhild Silkoset and Robert Dahlstrøm at BI Norwegian School of Management, together with Research Manager Harald Nilsen at Steen & Strøm conducted a study of Norway's largest shopping centres, in terms of sales.
The study included responses by a total of 127 store managers at stores that had been at the shopping centre for at least 1 year.
The BI researchers found that the competence of each store manager increased with her (or his) social association with the other store managers at the shopping centre.
This indicates that store operation competence flows through the social networks. "Good store managers are also good at establishing social ties to other stores," observed the researchers.
The study shows that the social ties between store managers stimulated creativity, new ideas, and innovation. According to the research team, creativity also appeared to be a key explanatory variable for the stores' turnover (in terms of sq.m. of store space).
Few friends, less change in the till
The researchers charted the number of friends and acquaintances store managers had among their competitors at the shopping centre, and studied the importance of the size of the social networks for the stores' sales.
The researchers also looked at whether there were financial differences between friendships and acquaintances. A store manager must invest more time and resources to maintain a friendship than an acquaintance.
The study documents that both friends and acquaintances among the centres' competitors helps increase sales. On average, the store managers studied were friends with 5 per cent of the other store managers at the centre, and were acquaintances with 40 per cent.
If a store manager is friends with less than 10 per cent of the other store managers at the centre, this has a negative impact on sales. If the share of friends exceeds 10 per cent, sales also increase per sq.m. of store space.
It is profitable to have 20–70 per cent of the other store managers as acquaintances. If there is a greater share of acquaintances, the study indicates that the relations cost more than what is earned.
Reference:
Dahlstrøm, Robert , Ragnhild Silkoset, Harald Nilsen and Arne Nygaard (2010): Venner og kjente – hvordan hjelper de deg til bedre lønnsomhet i næringsklynger? Magma No. 5, 2010 (articl in Norwegian).
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