Essay| Title: Implications of networking and clustering for the strategy development of cultural organizations | Author: Vera de Jong | Date: November 2011 Introduction Nowadays, almost all cultural organizations rely on a network of other organizations to produce cultural goods (HKU, 2010). In recent decades industry structures have changed dramatically, especially within the ‘new economy’ knowledge industries like the cultural industries, where an increasing number of cultural organizations together form networks and clusters (Cunningham, 2002). An explanation for this change might be found in theories on the modern economy, in which organizations were not able to effectively perform all activities in-­‐house, as the division of labor has promoted organizations to specialize and outsource as many non-­‐core activities as possible (De Wit & Meyer, 2004). Also, there seems to be a growing consensus that inter-­‐organizational cooperation has fundamental impacts on firm level outcomes (Borgatti & Foster, 2003). Usually environmental dynamism affects the strategy development of an organization (Ward et al., 2000). Therefore, organizations are likely to adapt their strategies to the environmental changes (De Wit & Meyer, 2004). Does this mean that cultural organizations should renew their corporate strategies to achieve more cooperative benefits due to emerging networks and clusters? And, is it perhaps possible for cultural organizations to devise cooperative strategies together? Main question and theories The main question that will be used to discuss the implications of networking and clustering on the strategy development of cultural organizations is: what are the implications of networking for the strategy development of cultural organizations? Because the existing literature on cultural organizations is limited on the subject of networking and clustering, general organization theories (Borgatti & Foster, 2003; De Wit & Meyer, 2004), and general industry theories (Porter, 2000; Rosenfeld, 2005) will be used next to literature on the creative industries (Caves, 2000; Cunningham, 2002) to discuss implications of networking and clustering on the strategy development of networking for cultural organizations. Definitions In the last decade, there has been a rapid increase of network research in management (Borgatti, 2003). A network can be defined as a web of inter-­‐organizational relationships that aim to achieve economic goals unattainable alone (De Witt & Meyer, 2004; Rosenfeld, 2005). It might also be the case that these interconnected companies; service providers, specialized suppliers, associated institutions and firms in related industries, are geographically concentrated. In this case, Porter (2000) speaks of the concept of clusters. This essay focuses mainly on networks, but as it has been noted that cultural production and consumption has a tendency to co-­‐locate (Mommaas, 2003), some specific implications of clusters will need attention. Literature review Objectives for cultural organizations to network and cluster Two or more firms generally work together because they expect some value added. They assume more benefits from the interaction than if they proceed on there own (De Witt & Meyer, 2004). Porter (2000) calls these benefits ‘cooperative advantages’. Other authors that conducted research on cooperative networking are Borgatti and Foster (2003), which mention three perspectives on reasons for cooperative networking: resource dependency, benefits of status and learning benefits. The first perspective is based on resource dependency, what means that the resources that one organization needs are often in the hand of other organizations (Borgatti & Foster, 2003). In the creative industry this is often the case, as complex creative projects require the collaboration of several parties, each providing different but complementary inputs and resources. As Caves states: “Subtract one input, and there is no project: each participant “makes” the whole project” (Caves, 2000, pp. 12,13). Additional to Borgatti and Caves, Rosenfeld (2005) argues that cooperative networks enable organizations to acquire costly resources or services or simply reduce costs (Rosenfeld, 2005). The second perspective of Borgatti and Foster links to institutional theory, which assumes that connections with larger, higher status firms can obtain access to resources and legitimacy (Borgatti & Foster, 2003). The third perspective focuses on what can be learned from collaborative organizations. According to Borgatti and Foster collaborative partners function as external knowledge resources, which improve firm performance and innovation (Borgatti & Foster, 2003). Besides these cooperative advantages, there also exist competitive advantages for cultural organizations. These benefits are likely to be obtained by clustering of organizations. In his cluster concept, Porter (2000) includes not only cooperative advantages, but also puts a strong emphasis on competition and competitive advantages. According to Porter (2000) geographical proximity may offer many sources for competitive advantages, like the presence of local rivals, buyers and suppliers and resources. The presence of these sources may lead to innovation, productivity growth and the improvement of new business formation (Porter, 2000). As it has been noted that cultural production and consumption has a tendency to co-­‐locate by forming cultural clusters (Mommaas, 2003), cultural organizations that reside in these cultural clusters are likely to enjoy the above competitive advantages formulated by Porter. Different levels of network relations As said before, nowadays almost all cultural organizations rely on a network of other organizations to produce their cultural goods (HKU, 2010). Within this network, there can be made a distinction of different types of network relations between the organization and their collaborative partners (De Wit and Meyer, 2004). To produce a modern dance performance for example, dance companies often collaborate with other cultural organizations like set designers, fashion designers and theatres. Besides that it is even possible that the dancers themselves are cooperative freelancers. Also collaborations with organizations from outside the cultural industries are needed to produce this cultural good, like a booking-­‐agent or a property owner in order to rent a dance studio. This example shows a confusing mix of different levels of network collaboration. To get an overview of the network structure, there need to be paid attention to the distinction of the different levels of network relations (De Wit and Meyer, 2004). By referring to Porter (1980) and Reve (1990), De Wit and Meyer (2004) give a very clear overview on the different types of network relations. The four main categories of relations between a firm and other industry partners are supplier relations, buyer relations, industry insider relations and industry outsider relations. Within the industry column, supplier relations are upstream, vertical relations. A supplier relation can be either a producer or intermediary of input goods (De Witt & Meyer, 2004). In cultural industries, the creative input of talented artists can only reach consumers with the aid of humdrum inputs, which are supportive inputs with single economic aims (Caves, 2000). Buyer relations are downstream, vertical relations. These can either be actual users of the output or intermediary companies trading the output (De Witt & Meyer, 2004). In the case of the modern dance company, the theatres are the intermediary buyers. The end-­‐consumers that buy tickets at the theatre desk are therefore positioned further downstream in the industry column. Industry insider relations are relations between the firm and other industry incumbents that are producing similar goods or services (De Witt & Meyer, 2004). In the case of the modern dance company this might be another modern dance company, which is involved in a competitive relationship with the fist modern dance company. Industry outsider relations are mostly producers of complementary goods or services (De Wit & Meyer, 2004). Thus, the production of complex creative goods like a modern dance projects requires collaboration of the modern dance company with each of these different relational actors. Each actor provides different but complementary, creative or humdrum, inputs or resources (Caves, 2000). Creation conditions From studied literature on networks, clusters and the creative industries (Florida, 2002; Lampel et al, 2000; Rosenfeld, 2005; De Wit & Meyer, 2004), two main creation conditions for networks can be distilled. These are the presence of a social infrastructure, that is build on pre-­‐existing relationships and the presence of creative human capital. As Rosenfeld states, the most successful networks and clusters are to a large degree self-­‐
selecting, build on a core set of pre-­‐existing relationships (Rosenfeld, 2005). The benefit of this latent social infrastructure is that these specialists have previously worked together and are therefore able to use their high degree of mutual knowledge and trust to efficiently develop the network (Lampel et al., 2000). The presence of creative human capital, which consists of highly educated and skilled creative people, is indispensable for the development of creative networks and clusters as organizations concentrate to gain benefits that stem from common labor pools (Florida, 2002). A third creation condition that needs to be mentioned concerning the development of cultural clusters is geographical proximity. Geographical proximity is a basic creation condition for creative clusters because a creative cluster consists of geographically concentrated creative companies. As argued before, geographical proximity offers many sources for competitive advantages, which are needed for gaining competitive advantages (Porter, 2000). Implications for strategy development As networks and clusters play an increasingly large role in the creative industries (Cunningham, 2002), organizations become increasingly cooperative and competitive at the same time (Porter, 2000). This may provide implications for the strategy development of cultural organizations, since traditional strategy development is mainly dominated by what goes on inside the organization (Porter, 2000). The concepts of networking and clustering however suggest that a good deal of cooperative and competitive advantages lie outside companies and sometimes even outside their industries (Porter, 2000). De Wit and Meyer provide an innovative view on strategies for networks by emphasizing the ‘network level strategy’. Network level strategies transcend traditional level strategies like the functional, business and corporate level strategy by developing strategies for a group of firms (De Wit & Meyer, 2004). The implementation of network level strategies could however be problematic due to the paradox of cooperation and competition. In order to cooperate, organizations must be part of a close network of collaborative relationships. In order to be competitive however, organizations need freedom to bargain and to attack and to secure their own interests (De Wit & Meyer, 2004). However strategists generally agree on the necessity of managing this paradox in order to create network or cluster level strategies, De Wit and Meyer notice a breakdown of two different perspectives. On one side of the spectrum, they identify the discrete organization perspective and on the other side they identify the embedded organization perspective. Strategists that encourage the discrete perspective argue that organizations should remain independent. According to this perspective, organizations should be motivated by aggressive self-­‐
interest and therefore interact competitively under market conditions. In this situation, organizations with the strongest power will be usually able to obtain the biggest economic benefits. The avoidance of resource dependence is however crucial in obtaining organizational power (De Wit & Meyer, 2004). Obtaining organizational power thus might be problematic for cultural organizations, as complex creative projects require the collaboration of several parties, each providing different but complementary inputs and resources (Caves, 2000). Strategists that encourage the embedded organizational perspective argue that organizations should surrender a part of their independence to develop close collaborative arrangements by building up long-­‐term cooperative relationships. By close cooperation, organizations are able to outsource non-­‐core activities in order to specialize, which will help organizations to gain scale and experience advantages. So, successful organizations embed themselves in webs of cooperative relationships to by developing strategies and creating value together with their network partners. This strategic cooperation however only works if the cooperating partnerships are based on mutual dependence and reciprocity. Mutual dependence like resource dependence, will give cooperating organizations an important incentive to focus on making a success of value creation (De Wit & Meyer, 2004). Thus, from this embedded organization perspective, cultural organizations will create more value by cooperation with mutual dependency. Conclusion Cultural organizations increasingly tend to rely on a network of other organizations to produce cultural goods. This development leads to several implications for the strategy development of cultural organizations. Cultural organizations may have various cooperative and competitive objectives to network. In order obtain these objectives, cultural organizations could transcend their cooperate strategies by developing comprehensive network level strategies. During the development of these new strategies, cultural organizations should be aware of the different levels of network relations and also should take in account the creation conditions of networks like the presence of a social infrastructure build on pre-­‐existing relationships and creative human capital. The paradox of cooperation and competition may however be problematic for the development of those new networks. Unfortunately, strategy literature does not reveal a solution to this paradox yet, as current strategist mainly focus on either competitive or cooperative advantages. Further research to the integration of competition and cooperation within network level strategies for cultural organizations is therefore required. References Borgatti, S.P. & Foster, P.C. (2003). The Network Paradigm in Organizational Research: A Review and Typology, Journal of Management, 29 (6), 991–1013. Caves, R. (2000). Creative Industries: Contracts between arts and commerce. Cambridge: Harvard University Press. Cunningham, S. (2002). From Cultural to Creative Industries: Theory, Industry, and Policy Implications, Media Information Australia Incorporating Culture & Policy, 102, 54–65. Florida, R. (2002). The Rise of the Creative Class. New York: Basic Books. HKU (2010). The entrepreneurial dimension of the Cultural and Creative Industries, Utrecht: Hogeschool voor de Kunsten Utrecht. Lampel, J., Lant, T. and Shamsie, J. (2000) Learning from Organizing Practices in Cultural Industries, Organization Science, 11 (3), 263-­‐269. Mommaas, H. (2004). Cultural clusters and the post-­‐industrial city: towards the remapping of urban cultural policy. Urban Studies 41(3), 507-­‐532. Porter, M.E. (1980). Competitive Strategy. New York: Free Press. Porter, M.E. (2000). Locations, Clusters, and Company Strategy. In Clark, G.L. (ed.), The Oxford handbook of economic geography (pp. 253-­‐274). Oxford: Oxford University Press. Reve, T. (1990). The firm as a nexus if internal and external contracts. In M. Aoki, B. Gustafson and O. Williamson (Eds.), The firm as a nexus of treaties (pp. 133-­‐161). Newburry Park: Sage. Rosenfeld, S. (2005). Industry Clusters: Business Choice, Policy Outcome, or Branding Strategy?, Journal of New Business Ideas and Trends, 3 (2), 4-­‐13. De Wit, B., & Meyer, R. (2004). Strategy: process, content, context: an international perspective, 3rd ed., London: Thomson.