Harvard researcher Anna-Lee Saxenian investigated why this happened. She found that Silicon Valley developed a decentralised and experimental way of working characterised by collaboration and collective learning among webs of specialist companies and the engineers themselves. Route 128, by contrast, was dominated by a few self-sufficient firms that kept their expertise in-house, discouraging job-hopping or collaboration between different corporations. Competitive advantage in the Valley rested not with individual firms but with the whole region–there were far more frequent start-ups and exchanges of expertise, a kaleidoscope of ever-shifting alliances and experimentation, a mass of smaller firms rather than a few leviathans. This situation was remarkably similar to that described a century earlier by Alfred Marshall–improvements, new products and ideas did not remain within one firm, and innovation was continually lubricated by discussion assisted by various accomplices, such as head hunters, venture capitalists and universities.87
Route 128 was dominated by strong links and large firms, and the unit that mattered most was the firm; Silicon Valley was a hive of weak links and small firms, where the individual innovator and the network were crucial. The Valley is perhaps the most potent example of the power of weak links on the planet–on average, people stay in their jobs there only two years.
Network effects not only gave global leadership to the Valley, but made large fortunes for (mainly local) investors and many of the engineers themselves. This was a transformation not just of industrial practice, but of rewards and power. It was a new phase of capitalism, or possibly the birth of a totally new system: network society replacing corporatism.
Professor Henry Chesbrough of Harvard University has studied how America innovated in the twentieth century. The United States led the world in research and technology throughout that period, he says, but during the 1980s there was a dramatic change in the way industrial innovation began to operate. The golden age of internal research and development (R&D) was between 1940 and 1985–real spending on research zoomed from $3 billion in 1940 to $102 billion in 1985. During those forty-five years, business applied a ‘closed innovation’ model–ideas were developed in secret, behind company walls, there was low labour mobility, little venture capital, the universities were generally unimportant, and there were few strong start-ups.
But by the 1980s, Chesbrough says, the model had begun to falter. The GI Bill, providing college or technical education for demobilised troops, and the expansion of universities created a huge pool of trained engineers, who were willing and able to surf from firm to firm. New ventures didn’t have to spend a fortune on basic research; they could learn by hiring. Venture capital, which was unimportant until 1980, had grown fifty-one times by 2001, making start-ups possible for people with no money. External research and external suppliers became increasingly available, enabling small firms to create new products and markets. Individuals and small firms filed only 5 per cent of all patents in 1970; by 1992, they accounted for 20 per cent. Big firms–those with more than 25,000 employees–were responsible for 71 per cent of all spending on research in 1981; by 1999, that had dropped to 41 per cent.88
Many new companies, small and large–from garage shop operators to leading firms such as Amgen, Genetech, Genzyme, Intel, Microsoft, Oracle and Sun–do relatively modest basic research, preferring to take and adapt new ideas from wherever they arise, creating wonderful new products without massive R&D budgets. In the past thirty years, we have entered a new era of ever-faster innovation favouring creative individuals, small firms and venture capitalists, able to find and commercialise great ideas. The old corporate behemoths such as Xerox and IBM–once the exemplars of innovation and scientific excellence–have struggled to adapt and survive in the new terrain of open innovation. They may continue to do excellent (and expensive) deep research, but they are likely to miss the significance of the next ‘new big thing’. Xerox invented the PC, Windows-type software, the mouse, laser printers, the paperless office and Ethernet. But it failed to introduce any of them to the market.
Firms outside the mainstream nearly always provide the next important innovation.89 The three US leaders in electrical equipment–GE, RCA and Westinghouse–did not become America’s electronics leaders. They were beaten by upstarts such as Fairchild Semiconductor and Intel, which never made vacuum tubes.
After IBM became the leader in mainframe computers in the late 1950s, it was challenged by some far bigger companies which invested heavily in R&D–GE, Xerox, RCA and Motorola. It saw off all of them, but later failed to repel much smaller firms specialising in a raft of computer innovations–Digital Equipment in minicomputers, Apple in home personal computers, Silicon Graphics in 3-D workstations, Compaq in portable business computers, and Dell in PCs sold directly. Every important innovation in computers from the late 1970s came not from the dominant industry leader, but from smaller firms.
Professor Clayton Christensen has provided a fascinating explanation of why well-run leading firms find it so hard to innovate. He calls it the ‘innovator’s dilemma’: firms doing everything right in their existing market are especially likely to fail whenever a disruptive new technology emerges. His research in a number of innovative industries–including disk drives, automobiles, computers, pharmaceuticals, retailing and steel–shows that breakthrough innovations are initially resisted by the largest and most profitable customers. The disruptive technologies are therefore forced to find new networks of customers and suppliers–and it is nearly always new firms, founded by nimble entrepreneurs, who catch the next wave of industry expansion.90 Time after time, the old, powerful companies, even when the new innovation is laid bare for all to see and copy, just don’t move quickly enough, as if they were hamstrung. This pattern is repeated across all industries, low tech as well as high tech.
Few companies are as well run, well connected and cash rich as the Coca-Cola Corporation. Coca-Cola is still the world’s most valuable brand. Its distribution muscle and reach to consumers around the world are legendary. Yet its only successful new drinks in the twentieth century were Fanta–concocted, incidentally, in Nazi Germany–and Tab/Diet Coke. Meanwhile, new ventures innovated in several areas: Mountain Dew in citrus drinks; Snapple in natural beverages; Red Bull in energy drinks; and Gatorade in sports drinks. In spite of all its resources, Coca-Cola’s attempts to imitate rivals’ innovative brands have either failed utterly (Mellow Yellow, Fruitopia) or become weak followers (KMX, Power-Ade).
McDonald’s is the eighth most valuable brand in the world. Its innovation in fast-delivery hamburger restaurants went a very long way. The company built the world’s first and best fast-food system and network, with unique advantages in real estate, franchising and quality control. Despite all these aces, however, McDonald’s did not innovate in new fast-food categories or create any other fast-food brand. The gaps were filled by new players–Kentucky Fried Chicken, Arby’s, Wienerschnitzel, Baskin-Robbins, Pizza Hut, Mrs Fields, Subway and Starbucks, to name just a few. McDonald’s greatest strength–its devotion to the hamburger–was also its greatest weakness when it came to continued innovation.
What is it about the industry leader that makes it so vulnerable to innovative incursion? Christensen sets out the problem in an intriguing way:
Simply put, when the best firms succeeded, they did so because they listened responsively to their customers and invested aggressively in the technology, products, and manufacturing capabilities that satisfied their customers’ next-generation needs. But, paradoxically, when the best firms subsequently failed, it was for the same reasons–they listened responsively to their customers and invested aggressively in the technology, products, and manufacturing capabilities that satisfied their customers’ next-generation needs.