Skip to main content

Faculty Insights

Want an Innovative Business? Location Matters

By Wisconsin School of Business

February 5, 2015

How does innovation happen? There’s no recipe for it, but research has found that some conditions can help it emerge.
Regional clusters, like Silicon Valley or Detroit, where firms are interconnected in a common industry, are well known for supporting innovation. In fact, regional clusters have become so prominent in thinking about innovation that clustering itself has been seen as a panacea. But some clusters are more successful than others, and some attempts to encourage new clusters to grow have failed entirely. This suggests that a deeper understanding of clusters is needed.
I worked with Paul Tracey of the University of Cambridge and Simon J. Bell of the University of Melbourne to develop a nuanced model of how regional clusters support innovation throughout the new product development (NPD) cycle. Though NPD is often thought of as an internal process, it involves outside firms like distributors and suppliers as well, and it is by shaping the relationships between these firms that the cluster influences NPD.
We propose that there are two basic cluster configurations:

  • In densely connected clusters, individual firms have many relationships with their peers and competitors in the region. Silicon Valley, with its close-knit community of tech startups, established companies, and investors, is an example of a densely connected cluster.
  • In centralized clusters, a few large companies have a disproportionate number of relationships with suppliers, distributors, and associated firms that depend on their business. This results in a hub-and-spoke network. Detroit, where the big three automakers work with a constellation of much smaller companies, is an example of a centralized cluster.

These two configurations matter because each one fosters a different type of relationship between firms, and the character of these interfirm relationships influences new product development.
Densely connected clusters promote creativity
In densely connected clusters, firms have a great deal of exposure to the practices of their peers. Values and attitudes at firms throughout the cluster tend to converge, establishing informal norms of behavior. Strong, trust-based relationships allow firms to share information and take risks.
As a result, densely connected clusters support the development and commercialization of truly novel products.
Centralized clusters support speed
In centralized clusters, large firms use their dominant position to unilaterally establish formal contracts and agreements with their smaller partners. Relationships are governed by explicit rules and conflict resolution mechanisms, while project requirements are agreed upon in advance.
As a result, goals are aligned and decisions are more easily made, helping firms in centralized clusters bring new products to market quickly.
Location matters
Our model offers marketers new insights and a new portfolio of decision variables beyond the usual considerations of advertising, packaging, pricing, and the like. These decision variables have implications for the success or failure of new products.

  • A firm’s location may support or constrain its new product development decisions.
  • Firms for which novelty is paramount should favor dense clusters, while those for which speed to market is paramount should favor centralized clusters.