Work smarter, not harder.  All international entrepreneurs strive to stretch their expenditures in hopes of gaining as much as possible for money spent. This week’s article is about focusing on your industry’s geographic clusters and how to optimize your energies spent building your company in those regions.

What is an Industry Cluster?

An industry cluster is a geographic area where several companies from the same industry have set up operations for strategic reasons. There may be a university research center focused on the industry, as is the case in Upstate New York with the ceramics industry. It may be close to reserves of a specific natural resource, such as high-wind regions for wind energy companies. There may be a large corporation that has spawned spin-off companies, such as Philips in southeast Netherlands.

There are many advantages to setting up operations in an industry cluster area. Industry-specific suppliers have established a local presence. There is likely a local specialized labor pool build around the industry. There are potential collaboration partners. And often the local, regional and national governments take a keen interest in supporting industry clusters with tax incentives and grants. Clustered companies tend to become more successful, creating jobs and tax revenue. Countries that have done a great job cultivating industry cultures include Canada, China and Israel.

Why Second Tier and Not FirstTier Cluster?

There are advantages to growing a presence in a first-tier industry cluster, such as Silicon Valley in the IT industry. In the late 1990’s during the boom, I worked in the IT industry in the San Francisco Bay Area and was able to see Silicon Valley’s growth first-hand. Investors frequently flock to an industry’s first-tier clusters looking for the next big innovation. But there are challenges in first-tier cluster markets too. Competition is usually fierce, which means that the right connections and plenty of financial capital are required. First-tier clusters definitely play favorites so as a new company you will be paddling upstream to make inroads. The other issue with first-tier clusters is that they normally are blind to developments coming from outside their cluster. This is a competitive disadvantage to anyone who believes that all good ideas and innovation comes from the top market. Time and time again entrepreneurs have learned that this is rarely true.

Second-tier clusters have several distinct advantages that should appeal to entrepreneurs. First, costs of operation are often lower. Premium pricing for supplies and services are often attached to the first-tier market. Local industry and government are often more welcoming to new companies than in the first-tier market, reducing the time needed to make connections and creating a core group of government officials, suppliers, partners and clients invested in your success. Competition is often less intense, making it easier to make sales and start to generate revenue in the new market. And second-tier clusters tend to be alert to industry changes and innovations coming from a variety of locations without fixating on only the first-tier cluster. The only exception I have seen is when a second-tier cluster ties itself to a first-tier cluster as a “satellite”. There are several second-tier IT clusters that fixate on Silicon Valley’s every update without a broader perspective. This is particularly dangerous because it gives that particular cluster few of the second-tier advantages and none of the first-tier advantages. Second-tier clusters in the IT industry include but are not limited to: Bangalore, India; Tel-Aviv, Israel; Eindhoven, Netherlands; Boston, USA; Sydney, Australia; and Vancouver, Canada.

I hope this gives perspective to where to set up new sales and production operations for your company. Entrepreneurs always need to seek out competitive advantages as their companies expand. For more articles about optimizing your company’s international marketing and sales, please click here.