By: Gunjan Bhardwaj
We know that clusters of co-located firms play an important role in supporting innovation and wealth creation. Spatial proximity can allow firms to take advantage of scale and positive externalities such as access to skilled labour, specialized subcontractors and rapid flows of information. Shared history, trust, and common understanding of phenomena may also enhance cluster members’ ability to interpret, and learn from, each other’s strategies. Yet location in regional clusters in and of itself does not guarantee success.
There is a danger of being seduced by the glamour of the ‘cluster brand’ at the cost of rigorous analysis and examination of whether regional clusters can sustain economic action and entrepreneurial activities. Fascinated by the performance of Silicon Valley, numerous clusters around the globe tried to replicate its formula for success.
There is a danger of being seduced by the glamour of the ‘cluster brand”
This fascination of using the ‘cluster brand’ has created an entire industry of consultants and policy advisors keen to work for regional and national governments to copy the success of Silicon Valley. However, lessons learned from a narrow focus on a small number of well-known success stories in specific sectors, such as information technology, may not be applied to other clusters and sectors around the world.
In depth study of clusters
Over the past six years, we studied more than 17 geographic clusters across different industries in North America, Europe and Asia. We sought to examine a wide range of perspectives and experiences in the course of the data collection process to accommodate the diverse nature of sectors and regional clusters.
Accordingly, we selected research methods that would ensure rich and multifaceted data for exploring key factors driving a cluster’s innovativeness over time. Regarding data reliability, the use of replication logic in multiple-case studies helped us ensure external validity as well as construct and internal validity.
Understanding the phenomena of clusters
In-depth interviews were conducted with over 300 General Managers/Chief Executive Officers to understand phenomena as expressed by individual actors and observers in their own words. The data gathered from in–depth interviews and direct observation also helped the analysis of archival data and industry publications in our study by overcoming the potential abstraction inherent in quantitative analysis and, thus, aiding with conceptual development and instrumentation.
Archival data and industry publications, on the other hand, were particularly useful by helping to avoid “elite bias” (e.g., talking only to high-status respondents such as General Managers) as well as to interpret and validate new lines of thinking regarding positive and potential negative effects of cluster networks.
Benefits of successful clusters
We find that successful clusters manage to create more new jobs, benefit from a greater number of new firms, have a wider range of flourishing service providers, sustaining and driving cluster performance, and experience stronger output growth.
Successful clusters manage to create more new jobs, benefit from a greater number of new firms … and experience stronger output growth
In the past, new product development was mainly determined by individual companies’ capabilities to collect and understand information about their customers and competitors. However, as competition has gradually shifted from among individual integrated firms to among clustered networks of organizations, a firm’s market orientation, as defined by Kohli and Jaworski (1990), not only affects the company’s responsiveness to competition and customer needs but can impact the entire network of companies it is part of.
Increased level of market orientation
This is because individual companies can learn from, and take advantage of, each other’s marketing orientation skills. As Eisingerich and Seifert (2009) suggested, companies that integrate and expand information flow may benefit from more effective co-ordination of actions and consequently higher product innovation performance.
Specifically, the high social and formal connectivity within clusters facilitate the rapid recognition of change, as actors observe each other’s offerings in the marketplace. Because actors continuously observe and adjust to change, they develop an intuition regarding future changes in competitive pressures, technology and customer wants.
Both the speed and the depth of the challenge to established ideas and assumptions may have to increase to exploit changes in technology, competition and customer wants successfully. Because actors are more directly affected by, but may also more easily observe, each other’s portfolio of initiatives in the same cluster, market oriented clusters are characterized by high levels of innovation.
Implications on business
What does this mean for business? We identify three factors that help business sustain its capacity to innovate and successfully commercialize innovations over time:
1. market orientation
2. commitment to exchange partners
3. willingness to compete on a global scale.
As actors can more easily observe, assess and integrate each other’s changing product and service offerings within a cluster, organizations may be forced to create more differentiated value propositions and new sources of demand. Accordingly, high levels of market orientation not only increase competition within a cluster but also enhance the competitiveness of its actors.
Learning from each other
Vertical and horizontal network relations within a cluster enable firms to observe the success or failure of various forms of customization, as they share direct or indirect links with customers and partnering firms.
Moreover, as market orientation levels within a cluster increase, localized business can supply a greater number and variety of products and services. This takes on added significance as the value chains of more and more businesses consist of networks of firms including suppliers of specialized inputs, manufacturers of complementary products and providers of complementary services that can increase innovation by facilitating greater specialization of both inputs and outputs.
Actors outside a cluster, on the other hand, may not be able to benefit from a cluster’s collective market orientation for a number of reasons
Actors outside a cluster, on the other hand, may not be able to benefit from a cluster’s collective market orientation for a number of reasons. First, information spreads faster within industrial clusters through an abundance of weak and strong ties facilitated by geographic proximity. Furthermore, regional proximity may foster trust between actors and take on added significance for inter-organizational co-operation, exchange of information and learning.
Competitive advantages created by clusters
To develop and design competitive products and services, firms need detailed information about changing technologies, competition and customer needs. Because it is costly and time consuming to collect relevant information, actors’ ability to build on each other’s market intelligence can act as a source of competitive advantage.
Essentially, high levels of market orientation within a cluster allow individual firms to gain access to a greater depth and breadth of information than isolated firms. Commitment to exchange partners enables focused, more efficient collaboration which in turn enables firms to benefit more from their innovation efforts. Business willing to compete on a global scale will be best positioned to leverage these mentioned benefits, we find.
Andreas B. Eisingerich and Gunjan Bhardwaj
About the authors
Dr Andreas B. Eisingerich is a research fellow at the Center for Global Innovation, University of Southern California, Los Angeles and works as assistant professor in marketing at Imperial College Business School in London. His research focuses on innovative brand management, services, and customer relationship management strategies. He regularly publishes in leading academic and practitioner journals.
Gunjan Bhardwaj is the leader of the Global Business Performance Think-tank of Ernst&Young. He is also a guest professor for Growth and Innovation management at European Business School (EBS) in Germany and a member of the scientific advisory board of Plexus Institute in the US. Gunjan has published a number of papers and articles in various Journals and magazines and has been a frequent speaker in conferences on marketing and innovation related topics. He is also the chief editor of the quarterly journal of Ernst & Young’s advisory practice called Performance.
Eisingerich, Andreas B. and Matthias Seifert (2009), “Collaboration: The Benefits of Commitment,” MIT Sloan Management Review, 51 (Fall), 15-16.
Kohli, Ajay K. and Bernard A. Jaworski (1990), “Market Orientation: The Construct,
Research Propositions, and Managerial Implications,” Journal of Marketing, 54 (2): 1-18.