In current globalized environment, companies can source capital, goods, information and technology from around the world, often with click of a mouse. In theory, more open global markets and faster transportation and communication should diminish the role of location in competition. After all, anything that can be efficiently sourced from a distance through global markets and corporate networks is available to any company and therefore is essentially nullified as a source of competitive advantage. But if location matters less, why, then, is it true that the odds of finding a world-class mutual-fund company in Boston are much higher than in most any other place? Why could the same be said of high-performance auto companies in southern Germany, or of fashion shoe companies in northern Italy?

Clusters dominate the economic map of the world. Clusters are a striking feature of virtually every national, regional, state, and even metropolitan economy, especially in more economically advanced nations. Silicon Valley and Hollywood may be the world's best-known clusters.

Mapping of a Cluster

Source: PwC Research

Clusters are geographic concentrations of interconnected companies and institutions in a particular field. Clusters encompass an array of linked industries and other entities important to competition. They include, for example, suppliers of specialized inputs such as components, machinery, and services, and providers of specialized infrastructure.

Clusters also often extend downstream to channels and customers and laterally to manufacturers of complementary products and to companies in industries related by skills, technologies, or common inputs. Finally, many clusters include governmental and other institutions such as universities, standards-setting agencies, vocational training providers, and trade associations that provide specialized training, education, information, research, and technical support.

The Cotton Hosiery cluster of Tirupur is one of the most successful and vibrant clusters in India. It contributes to one third of the total apparel exports from India. The dynamics of the relationship among the cluster actors is depicted in the cluster map below.

At the core of the Tirupur cluster are cotton knitwear garment exporters (who may be either manufacturing exporters or merchant exporters) and the manufacturers for the local market. These manufacturing firms are basically garment units. Besides, there are buying agents of importers and selling agent’s for manufacturers for the domestic market. Spinners, knitters, bleachers & dyers, accessory suppliers, embroider; compactors, machinery suppliers and yarn agents support the manufacturers in production. Private export inspection agencies support the export manufacturers in quality inspection. A number of industry associations and technical and financial institutions are present in the cluster.

Tirupur Cluster Map

The Italian leather fashion cluster, which contains well-known shoe companies such as Ferragamo and Gucci as well as a host of specialized suppliers of footwear components, machinery, molds, design services, and tanned leather. It also consists of several chains of related industries, including those producing different types of leather goods (linked by channels and technologies). These industries employ common marketing media and compete with similar images in similar customer segments.

The California wine cluster is another example. It includes 680 commercial wineries as well as several thousand independent wine grape growers. An extensive complement of industries supporting both wine making and grape growing exists, including suppliers of grape stock, irrigation and harvesting equipment, barrels, and labels. Specialized public relations and advertising firms and numerous wine publications aimed at consumer and trade audiences. A host of local institutions is involved with wine, such as world-renowned viticulture and ecology program at the University of California at Davis, the Wine Institute, and special committees of the California senate and assembly.

1.1 Why Cluster:

The sophistication, with which companies compete in a particular location, is strongly influenced by quality of the local business environment. Companies cannot employ advanced logistical techniques, for example, without a high-quality transportation infrastructure. Nor can companies effectively compete on sophisticated service without well-educated employees. Some aspects of the business environment, such as the legal system, for example, or corporate tax rates, affect all industries. In advanced economies, however, the more decisive aspects of the business environment are often cluster specific. Clustering can bring a wide range of benefits to both business and the wider economy. These include:

Clusters & Productivity: Being part of a cluster allows companies to operate more productively in sourcing inputs, accessing information, technology, and needed institutions coordinating with related companies; and measuring and motivating improvement.

Clusters & Productivity: Being part of a cluster allows companies to operate more productively in sourcing inputs, accessing information, technology, and needed institutions coordinating with related companies; and measuring and motivating improvement.

Better Access to Employees and Suppliers. Companies in vibrant clusters can tap into an existing pool of specialized and experienced employees, thereby lowering their search and transaction costs in recruiting. Because a cluster signals opportunity and reduces the risk of relocation for employees, it can also be easier to attract talented people from other locations, a decisive advantage in some industries.

A well-developed cluster also provides an efficient means of obtaining other important inputs. Such a cluster offers a deep and specialized supplier base. Sourcing locally instead from a distant supplier lowers transaction costs. It minimizes the need for inventory, eliminates importing costs and delays, and because local reputation is important, it lowers the risk that suppliers will overprice or renege on commitments.

Access to Specialized Information: Extensive market, technical, and competitive information accumulates within a cluster, and members have preferred access to it. In addition, personal relationships and community ties foster trust and facilitate the flow of information. These conditions make information more transferable.

Complementarities: A host of linkages among cluster members results in a whole greater than the sum of its parts. In a typical tourism cluster, for example, the quality of a visitor's experience depends not only on the appeal of the primary attraction but also on the quality and efficiency of complementary businesses such as hotels, restaurants, shopping outlets, and transportation facilities. Because members of the cluster are mutually dependent, good performance by one can boost the success of the others.

A cluster frequently enhances the reputation of a location in a particular field, making it more likely that buyers will turn to a vendor based there. Italy's strong reputation for fashion and design, for example, benefits companies involved in leather goods, footwear, apparel, and accessories. Beyond reputation, cluster members often profit from a variety of joint marketing mechanisms, such as company referrals, trade fairs, trade magazines, and marketing delegations.

Access to Institutions and Public Goods - Investments made by government or other public institutions such as public spending for specialized infrastructure or educational programs can enhance a company's productivity. The ability to recruit employees trained at local programs, for example, lowers the cost of internal training. Other quasi-public goods, such as the cluster's information and technology pools and its reputation, arise as natural by-products of competition.

Innovation - In addition to enhancing productivity, clusters play a vital role in a company's ongoing ability to innovate. Some of the same characteristics that enhance current productivity have an even more dramatic effect on innovation and productivity growth.

Since sophisticated buyers are often part of a cluster, companies inside clusters usually have a better window on the market than isolated competitors do. Computer companies based in Silicon Valley for example, plug into customer needs and trends with a speed difficult to match by companies located elsewhere. The ongoing relationships with other entities within the cluster also help companies to learn early about evolving technology, component and machinery availability, service and marketing concepts, and so on. Such learning is facilitated by the ease of making site visits and frequent face-to-face contact.

1.2 Factors driving a successful cluster:

All clusters are different but a number of common features stand out as underpinning the development of successful clusters throughout the world. Common factors range from ‘softer’ elements of cluster working such as networks and institutional development, through ‘harder’ aspects, such as physical infrastructure or the presence of large firms, to more intangible elements, such as the presence of leadership or an entrepreneurial culture. A number of other factors that have contributed to the development of successful clusters can also be identified, such as access to markets, to finance or to specialist services.

The Figure below illustrates the relative importance of common success factors across a wide range of different clusters in different locations and over different time periods.

The key factors that are vital for the success of clusters are depicted in the diagram below: