Understanding Your Industry

Identifying your Industry Clusters

An increasingly popular way to look at and work with key industries is through the identification of industry clusters. Industry clusters can be defined using any combination of a wide range of criteria. A cluster may include industries that share similar workforce, input, or infrastructure needs. Or, as is traditionally the case, a cluster may have more to do with the output the industries in it produce. Clusters may also be defined by complementary or interdependent industries: one may produce what another needs.

Economic development agencies identify and focus programs and policies on key industries or clusters in an effort to promote competitiveness, raise awareness of the importance of and relationships among various industries, and promote more efficient and streamlined economic development programs and policies. In a State and Local Policy Program survey of state economic development research directors, one respondent said his state is moving to an industry cluster approach because several cross-cutting issues can be addressed more efficiently and effectively by working with groups of related firms rather than on a firm by firm basis.

Identification of key clusters
Quantitative analysis is a very useful way to identify key industries and clusters. Through an examination of key measures such as employment, earnings, and wages and the use of analytical techniques, such as location quotients, a short list of key industries can be developed. This list of industries might become the clusters on which a region focuses, especially since each two-digit and three-digit NAICS industry is actually an aggregation of other industries. In many cases, several of the industries within the larger aggregated industry will be related (e.g., they may have similar input needs or labor requirements, or they may be complementary).

Consider Printing and Publishing. In the Twin Cities Metropolitan Area, seven three-digit industries within Printing and Publishing have location quotients greater than one, signifying that the region has a higher than national average concentration of each of these industries. Given this strong representation in the regional economy, the Twin Cities decided to make Printing and Publishing one of its four key industry clusters. Review the Twin Cities Industry Cluster Study to learn more about how the key industry clusters were identified.

Although quantitative analysis offers a sound basis for identifying key clusters, it is often not enough. Many states and regions look beyond NAICS classifications to develop more complex clusters that may actually cover several very different industries. For example, one state includes certain plastics and wood industries in its jewelry cluster since they were identified as important suppliers to the jewelry manufacturing industry. Another state groups health care services with pharmaceutical and medical devices manufacturing industries in its health/biomedical cluster. Others group industries by "function, not product."

The way in which economic development analysts often identify clusters that span various NAICS classifications, especially when detailed data are not available, is through qualitative analysis. Focus groups and interviews with representatives of industries identified through quantitative techniques are often good complements to data analysis. These qualitative approaches allow researchers to clarify puzzling aspects of the quantitative research, develop a better picture of the supplier relationships among industries, and identify similar workforce or infrastructure needs. In addition to the development of a better understanding of key industries, the result of the qualitative research may be the confirmation of what the numbers portrayed, a refining or reshuffling of previously identified clusters, or the development of new clusters.

One of the key clusters identified in a Southeastern Minnesota industry cluster study was composites. Based on the observations of local economic development professionals who knew of a dozen composite manufacturers in the area and qualitative observations of company size, product diversity, lending activity, and employment growth, the composites industry became one of the region's four key clusters. Review the Southeastern Minnesota Industrial Cluster Study to learn more about how the key industry clusters were identified.

Analyzing key industry clusters
Once an economic development agency identifies its key industries or clusters, it is important to spend some time getting to know them. Since these are obviously very important industries and engines of growth in the economy, you need to understand how they function, be familiar with their leaders, and appreciate their key needs and concerns. This will help you develop a more sophisticated understanding of your regional or local economy.

In New York, researchers found that carefully constructed focus groups are an extremely useful way to identify necessary programs and policy changes. In Southeastern Minnesota, researchers conducted focus groups and phone and in-person interviews with industry leaders. The researchers found that the focus groups stimulated discussion among industry leaders, and the interviews allowed for more in-depth discussion of key concerns.

One approach some states and regions have used to analyze key industry clusters is based on the work of Michael Porter, a business professor from Harvard University, whose "Diamond of Advantage" highlights four key determinants of competitiveness: 1) factor conditions, 2) home demand, 3) related and supporting industries, and 4) industry strategy, structure, and rivalry. Porter and others have found these four determinants along with chance and government have much to do with the competitive nature of an economy's industries.

As part of its study of industry clusters in the Twin Cities Metropolitan Area and in Southeastern Minnesota, researchers at the Humphrey School's State and Local Policy Program used Michael Porter's "competitive advantage" framework to analyze industry clusters. The research team used a set of questions drawn from this framework to help understand what characteristics contributed to the development of these key industries in the region and what could be done to further support and sustain them. These questions, listed below, are not specific to the regions studied by the State and Local Policy Program and can be used by other counties, regions, or states to help them understand their key industries.

Factor conditions

What workforce skills are crucial to the success of your firm? Which skills do you see as being plentiful in the region? Which are in short supply?
Are local educational and training institutions fulfilling your firm's workforce development needs? What are their strengths? What are their shortcomings?
Which types of infrastructure (shipping, communications, utilities, etc.) do you consider to be especially important to your business? Are your needs being satisfied?

Home demand

In general, who are the local purchasers of this firm's products? Are they especially demanding relative to the firm's other customers?
Is local demand stronger here than in other regions? Is local demand for your products growing more rapidly than in the economy at large?

Firm strategy, structure and rivalry

Do you have a large number of local competitors? Who are your competitors? Where are they (local vs. international)?
What part of your firms is located in the region? (Headquarters? Research and development? Manufacturing?)

Related and supporting industries

Who are the most important suppliers for your firm? Do they tend to be local or non-local? Are local suppliers of generally higher quality than suppliers from other regions?
Is your firm purchasing significant inputs from outside the region? If so, what prevents those inputs from being purchased locally (lack of suppliers, high cost, low quality, well-established relationships with current suppliers, etc.)?

How industry clusters can shape economic development programs and policy
Once an economic development agency identifies and analyzes its key industries, how it uses the information will vary considerably from agency to agency. Some will use the information as simply another way to attract firms within the cluster to the area. Others will use the clusters as a focus of their economic development efforts.

Several states and larger regions assign staff members to specific industry clusters. These representatives keep the clusters informed about state policies, collect industry information the state uses for analysis, and promote state and local policies that help strengthen the clusters. One state economic development research director contacted as part of a State and Local Policy Program's survey said his department's industry cluster representatives serve as "broker agents" who help match manufacturers with suppliers who can meet their needs.

Some states and regions see their role as initial facilitator or organizer. For example, one state economic development researcher said his department believes its job is to "incubate an industry cluster." In doing this, the department organizes firms in the cluster until they reach a "critical mass" at which time the state leaves it to the firms to organize themselves. Meanwhile, the department will work on making regulatory and tax reforms to help the clusters grow.

Many states and regions also report that their industry cluster approach has generated very positive experiences and productive results. One state research director said that after his office identified plastics as an increasingly important sector in the state, the economic development department organized a state plastics association and held a "plastics summit." Plastics firms were surprised by how large the industry was in the state. Since the summit, the firms formed an active organization and held another well-attended summit with state legislators.

In Minnesota, once the state identified key industries, a special office was developed to focus on tourism, and specialists were dedicated to assisting each industry. According to the economic development research director, the state's targeted industry efforts have been successful, especially considering reductions in staff and programs over the last few years. Budget cuts, he added, required the department to focus more strategically and "get the biggest bang for the buck." The key industry approach has allowed the Department of Trade and Economic Development to do just that. The Department is now able to spend a lot of time with "high potential" industries rather than declining industries. Also, by spending more time studying these key industries, the Department has developed a much better understanding of the state economy.

For more information on how other states and regions have identified and analyzed their key industries and cluster, please visit our Industry Cluster Studies page and review the list of state resources.