Every location, whether a nation, state, or region, has a set of unique local conditions that underpin the ability of companies based there to compete in the industry. The competitive advantage of a location does not normally arise in isolated companies, but in clusters of companies. Clusters represent critical masses of information, skills, and infrastructure in a particular field. Companies within industry clusters rely on an active set of relationships among themselves for individual efficiency and competitiveness. These relationships fall into three general categories: 

• Buyer-Supplier Relationships. This cluster characteristic is frequently described in economic development literature. It consists of core companies that produce goods and services that are sold to final consumers and of companies at earlier stages in the value-adding chain that supply the inputs – intermediate goods and services and raw materials – that are assembled into or used in the assembly of final goods and services. Distributors of final goods and services, where separate from the producers, may also be a part of these clusters.

• Competitor and Collaborator Relationships. This cluster structure, consisting of companies that produce the same or similar goods and services at a specific level in the value chain, exists because competitors frequently share information (often unintentionally) about product and process innovations and market opportunities and may, in fact, formally collaborate to develop such innovations in strategic alliances.

• Shared-Resource Relationships. These relationships exist when firms rely on the same sources of raw materials, technology, human resources, and information even though they may use these resources to produce goods and services for very different markets.

The ability of companies to compete in the global economy depends on how effectively their region provides them with the resources that they need to excel. Every region has a unique set of local conditions or “input advantages” that provide the economic foundations or competitive platform for attracting and developing clusters of companies. These key “input advantages” include:

• Skilled and adaptable human resources.

• Access to the technologies on which new products and processes are based.

• Availability of financial capital to support new ventures and expansion of existing companies, as well as re-investment i transition industries.

• Support of advanced physical infrastructure for transportation, communication, energy and water, and waste-handling.

• A responsive regulatory and taxation structure that balances business competitiveness with community concerns.

SRI was a pioneer in developing the industry clustering methodology and has applied it consistently for over twenty years to assist regions around the world and throughout the United States in developing the competitiveness of strategic industry sectors. As one of the pioneers of the industry clustering methodology, applying it in practical initiatives at the same time as Michael Porter, SRI uses the concept as both an analytical tool and an organizing mechanism to assist regions in attracting and growing desirable clusters over the long term. We begin by determining which industries or segments are growing, how many people are employed in core industries, etc., and integrate that information with industry expertise to ascertain the true segments and dynamics of clusters within a region. When shifting from diagnosis to prescription, the clustering concept effectively involves existing cluster firms to identify growth opportunities and best-prospects segments, and to craft and implement initiatives to strengthen the foundations for competitive industry clusters.