Despite growing milk demand and imports, market-oriented milk production and formal processing in Ethiopia is limited to areas around Addis Ababa, notwithstanding its competing land use demand. This study assessed biophysical and market potential for developing the dairy sector, characterizing Ethiopian dairy clusters. Biophysical data from geographic information system (GIS) sources and information from key informants were combined in mapping and ranking these clusters on milk production potential. Twenty-four indicators in six major categories were applied for this assessment: feed availability, environmental conditions for dairy cattle, current production status, access to inputs and services, output market access, and production expansion potential. Feed availability (fodder, crop residues, and agro-industrial by-products as well as land availability and affordability) were the main drivers for dairy development, followed by the current production status, mainly driven by number of (improved) dairy cattle and (formal) milk volumes. Dairy clusters close to Addis Ababa had the highest overall scores for development potential, mainly determined by local demand and access to inputs. For dairy sustainable dairy development in Ethiopia, companies seeking long-term opportunities may avoid the Addis Ababa area and develop dairy production and processing in other clusters especially in Amhara and Tigray regions, with good milk production potential but less developed market infrastructure. The combination of biophysical data and key informant knowledge offered key strengths in delivering valuable results within a short time span. It however requires a careful selection of knowledgeable key informants whose expertise cover a broad scope of the dairy value chain.