Companies often see their competitors within the same geographical area as a threat to their business. This is understandable if the business owners view the economy as a perfect market situation where the market share is being split between the existing players. However, history in the business world has proven that the Industry Cluster Strategy is effective in facilitating economic growth, high-income jobs and business advantages.
Industry Clusters are often described as the geographic concentrations of interconnected companies and institutions in a particular field, encompassing linked industries and other entities important for competition. These clusters are sometimes extended downstream to channels and customers and laterally to manufacturers of complementary products and companies in industries related by technologies, skills, or those with standard inputs. Many clusters include governmental and other institutions too. The clusters’ boundaries can range from a single state or city to a country or even neighbouring countries.
A common trait that the business clusters tend to share is that companies will tend to own plenty of potential employers. They can share infrastructure, from public transport to restaurants and theatres. Firms and workers are likely to learn more from one another when they are close to each other. A phenomenon which is known to be “knowledge spillover”. Having a lot of businesses in one place creates a critical mass with clout when seeking support or investment. It also creates competition, which pushes companies to improve. In addition, skilled people working together tend to form networks. Here, institutions, including universities, play an essential role in forging and shaping these networks, which encourage sharing of knowledge and lead to creations of valuable relationships via social capital generation. Networks can be formal, such as research partnerships between universities and private firms, or informal.
To better illustrate how the Industry Cluster Strategy can bring benefits to economic growth, we have quoted several well-known examples in the following:
Case Study 1: California Wine Cluster
The California Wine Cluster includes 680 commercial wineries and also several thousand independent wine grape flowers. It consists of an extensive complement of industries supporting both grape growing and winemaking. This includes grape stock, irrigation and harvesting equipment, barrels, and labels; specialized advertising firms and public relations; and numerous wine publications targeting consumer and trade audiences. A host of local institutions is involved with wine, such as the world-renowned viticulture and oenology program at the University of California at Davis, the Wine Institute, and special committees of the California senate and assembly. Furthermore, the cluster enjoys stronger linkages to other California clusters in agriculture, food and restaurants, and wine-country tourism.
Figure 1
Due to the cluster strategy, the US wine economy is dominated by the California wine industry, such that 87% of the country’s 383,000 ha of grape bearing area is situated in California, 92% of the national grape harvest is picked in California, nearly 2 out of 3 bottles of wine consumed by Americans are of California origin, and 65% of every dollar Americans spent on wine is spent on wine from California.
Moreover, the cluster strategy made California the most prominent wine exporter globally in 2019. The export performance of the wine industry is also impressive. Since 1986, the volume of wine exports from the United States has grown more than 16-fold, from 7.2 million gallons in 1986 to nearly 120 million gallons, earning more than $790 million in 2004.
Case Study 2: The Carpet Capital of the World – Dalton, Georgia
The city of Dalton, Georgia—located between Atlanta, Georgia, and Chattanooga, Tennessee—is unrivalled in its carpet production. Almost 90% of the functional carpet produced worldwide is made within a 25-mile radius of Dalton. Dalton has evolved in much the same way as California’s Silicon Valley through a rapid expansion of new firms started by entrepreneurs and cooperation among owners, mills, and mills local government. It was only after World War II that the carpet industry came to be identified in this region. Entrepreneurs developed a new tufting technology and captured the carpet industry previously dominated by woven-wool carpet manufacturers in the Northeast.
The six largest carpet companies and 18 of the largest 35 carpet companies are headquartered in Georgia. The carpet cluster includes the carpet tufting mills, yarn mills, finishers, backing manufacturers, machinery suppliers, maintenance services, and sample companies that directly support the carpet industry. 75% to 80% of the yarn used by the carpet industry is produced and processed in Georgia. Over 50,000 employees in Dalton are engaged in carpet manufacturing, and 72 interstate trucking companies are utilised to transport carpet and raw materials, in addition to fleets owned by many carpet companies.
Leveraging on Industry Cluster Strategy to boost Economic Growth
The cluster strategy affects competition in 3 broad ways:
- Increasing the productivity of the companies based in the region
- Driving the pace and direction of innovation, which will underpin the future productivity growth
- Stimulating the formation of new businesses, which then expands and strengthens the cluster
In general, an industry cluster allows every member to benefit as if it had joined with others formally or as if it had a grander scale, without having it to sacrifice its flexibility.
Clusters VS Productivity
Cluster strategy allows companies to have access to technical information. This is because extensive market, technological, and competitive information accumulates within a cluster, and its members have preferred access to it. Also, personal relationships and community ties foster trust and facilitate the flow of information. These conditions mentioned make data more transferable.
Cluster strategy also promotes better access to employees and suppliers, as companies in vibrant clusters can tap into an existing pool of specialised and experienced employees, hence lowering their search and transaction costs spent in recruiting. It is also easier to attract talented and skilful people from other locations as clusters signal opportunities and reduce the risk of relocation for the employees, which is a decisive advantage in specific industries.
Moreover, clusters provide better motivation and measurement. It is easier to measure and compare performances as local rivals share general circumstances. For instance, the labour costs and local market access – and they perform similar activities. Typically, companies within a cluster have intimate knowledge of their suppliers’ prices. Managers are also able to compare the costs and employees’ performance among the other local companies. Additionally, financial institutions can accumulate knowledge about the potential cluster to monitor their performance.
Clusters VS Innovation
Besides enhancing productivity, the cluster strategy plays a vital role in a company’s ongoing ability to innovate. Some of the common characteristics that promote current productivity have a more dramatic effect on innovation and productivity growth.
As sophisticated buyers are usually part of the cluster, companies within a cluster tend to better view the market compared to other isolated companies. For example, the computer companies based in Silicon Valley and Austin, Texas plugged into customer trends and demands with an increasingly problematic speed to match companies situated elsewhere. The ongoing relationships with other cluster entities also help companies learn early about evolving technology, component and machinery availability, service, and marketing concepts, etc. Such learning is facilitated by the ease of making site visits and frequent face-to-face contact.
Besides, clusters can do more than creating opportunities for the innovations to be more visible. They also provide the flexibility and capacity to act rapidly. A company within a cluster often can source what it needs to implement innovations more quickly. Local suppliers and partners can get closely involved in the innovation process, thus ensuring a better match with customers’ requirements.
Clusters VS New Business Formation
It is not surprising that many new companies grow up within an existing cluster rather than at isolated locations. New suppliers, for example, proliferate within a cluster because a concentrated customer base lowers their risks and makes it easier for them to spot market opportunities. Moreover, because developed clusters comprise related industries that usually draw on standard or very similar inputs, suppliers enjoy expanded opportunities.
Clusters are conducive to new business formation for a variety of reasons. Individuals working within a cluster can more easily perceive gaps in products or services to build businesses. Beyond that, barriers to entry are lower than elsewhere. Needed assets, skills, inputs, and staff are often readily available at the cluster location, waiting to be assembled into a new enterprise. Local financial institutions and investors, already familiar with the cluster, may require a lower risk premium on capital. In addition, the cluster often presents a significant local market, and an entrepreneur may benefit from established relationships. All of these factors reduce the perceived risks of entry—and exit, should the enterprise fail.
The formation of new businesses within a cluster is part of a positive feedback loop. An expanded cluster amplifies all the benefits described—it increases the collective pool of competitive resources, which benefits all the cluster’s members. The net result is that companies in the cluster advance relative to rivals at other locations.
Conclusion
It is undeniable that cluster development is one of the dimensions of how economies can convert their knowledge-generating potential into new markets and productivity gains. The government sector, both local and national, should ensure the supply of high-quality inputs and set the competition rules so that productivity and innovation will govern success in the economy. On the other hand, the private companies and developers should work with the government to reinforce and build on existing and emerging clusters rather than create entirely new ones. This is because booming new industries and clusters often grow out of the established ones. Through the successful case studies, we have learnt that clustering helps cities and countries direct their economic development and recruiting efforts. Therefore, all authorities should work hand in hand in forming a more robust cluster by developing and enforcing cluster-based economic development strategies.
At 27Group, we provide services to assist government bodies and corporations in regional economic development, master planning for industry clusters, and business strategy formulation. We bring together seasoned built-asset strategists with on-the-ground experiences in multiple large-scale cluster development around the world, providing unique insights and learning that will assist our clients to plan and develop industry clusters that are commercially viable, competitive and able to generate enormous high-value employment opportunities to surrounding communities. Contact us to know more about our insights in cluster strategy.
