What Gives a Region a Large-Scale Competitive Advantage?

The paper titled ‘The Limits of Autarky’, written by AnnaLee Saxenian (1994)^[1], considers the issues surrounding clusters of industries specifically those seen in Silicon Valley and on Route 128. By studying the two areas the author aims to discover why one region can be considerably more successful than another, despite having the same mix of technologies. It has long been recognised that there is competitive advantage to having clusters of companies working together in the same geographic region. However, what is not so clear is exactly why some areas experience considerable competitive advantage while others see little or no notable benefits. By taking a detailed look at Silicon Valley and comparing it directly with Route 128, the author aims to answer this key question, namely, what exactly gives a region such large-scale competitive advantage over other regions?

Underlying this analysis, the author makes the important decision to rebut earlier presumptions made by other scholars in relation to the boundaries between internal and external economies. The author notes that in previous research there has been a tendency for scholars to draw strong distinctions and boundaries in relation to where the internal firm ends and the external economy begins. By suggesting that there is no clear-cut point between internal and external and that the region is, in fact, more akin to a social network with blurred boundaries, the author is able to take a novel and arguably more useful position when it comes to explaining differences in regions (Powell, 1996)^[2].

The first area of research that the author undertakes is looking at the traditional limits of external economies and the analysis that has traditionally been done on the impact of such external economies and localised industrialisation. On a basic level of external economy of scale, analysis explains why firms will tend to cluster together so they can share resources such as transport or even talent; this is not disputed by the author and, in fact, is given greater importance by the author than it has by other modern researchers. The author does not dispute that both Silicon Valley and Route 128 are classic examples of external economies and even reinforces this concept by recognising that they are similar to 19th century industrial districts. However, the author states that there are limits to this analysis which restrict the potential use of external economies as a means of determining why one region would be so much more successful than another. Both Silicon Valley and Route 128 benefited from the self-reinforcing position that they found themselves in, due to these external economies. For example, as new firms joined the area there was greater venture capital available allowing yet more firms to join. This in turn attracted some of the best talent in the country which allowed the areas to expand (Piore & Sabel, 1984)^[3]. However, the real question that the author is focusing on is how Silicon Valley became so much more successful than Route 128, despite seemingly having the same underlying situation. Starting at the same position, between the years 1975 and 1990 Silicon Valley expanded offering 150,000 new jobs in the technology field, whereas on Route 128 only 50,000 jobs were created (Saxenian, 1994)^[4]. By 1990, Silicon Valley produced one third of all electronic products from the USA, with a total value of $11 billion. By which time, Route 128 had seen considerably less growth producing just $4.6 billion. It is this divergence that the author focuses on; how did two areas that were so similar in 1975 become so different?

One of the first concepts that the author explores is that of a network approach. This furthers the concept stated earlier by the author that firms are not individual, autonomous entities and that the boundary between internal factors and external factors is considerably more blurred than previous research might suggest. The author successfully argues that one of the key differences between Silicon Valley and Route 128 is their approach to the way in which individual organisations network with each other within the region. Previous researchers have alluded to this difference, but the author notes that they tend to be disregarded largely as cultural differences, e.g. with California being known for its particularly laid back approach and Massachusetts for being much more risk averse. Whilst the author agrees with this and believes it may have had a bearing on the differences, she feels culture alone is not the main issue. By taking a detailed look at the culture of Silicon Valley, the author identifies that one of the fundamental differences between this region and Route 128 is that Silicon Valley actively encouraged firms to learn jointly and to share experiences. This type of mutual adjustment is something that the author believes is fundamental to the competitive advantage that Silicon Valley has established. Not only has this allowed Silicon Valley to develop some of the most complex technological products, but it has also encouraged very free labour markets ensuring that the right people are commonly found in the right jobs. Contrasting this with Route 128, the author notes that there was considerable more secrecy amongst the firms and much less in the way of sharing. These cultural differences and the way in which the networks operate in these two regions have been noted by the author to be the main reason that Silicon Valley became so much more successful than Route 128. The way in which the individual firms perceive themselves within the Route 128 region and the way in which they keep themselves distinct from other similar companies has been developed as a way of ensuring that each individual firm maintains corporate secrecy. Whilst this protective approach may seem logical, it has inadvertently caused the region to stagnate with little in terms of job movements and little or no sharing of knowledge between firms (Florida & Kenney, 1990)^[5].

Capturing this, the author identifies Silicon Valley as being a regional network-based system rather than being an independent firm-based system. In establishing this analysis, the author questions why Route 128 firms would employ such a strategy for victory when it was clear to see that the diametrically opposed strategy was working so well in Silicon Valley. Having recognised that this is the fundamental difference between Silicon Valley and Route 128, the author explores this competitive advantage further. It is identified that the rigidity seen within Route 128 was entirely suitable when technology was not moving quickly. Where there was no need to adapt rapidly, maintaining individual firms with their own internal knowledge base was key to maintaining a competitive advantage. However, during the 1970s, technological developments were moving rapidly and the need to share resources between firms became critical; this was not something that the firms within Route 128 were able to adapt to, primarily down to the systems that they had established and the high levels of corporate secrecy that were inherent in their business structures (DeBresson & Walker, 1991)^[6].

In order to confirm what the author suspects may be the reason for Silicon Valley’s competitive advantage, the author looked at Japanese industry (Imai, 1989)^[7]. Networking is recognised as critical for all Japanese industries. Moreover, many smaller medium enterprises are linked together, either with agreements or joint ownership structures in order to share a greater variety of resources. This often results in geographical clusters but is not essential. What is clear, however, is that these types of collaborative clusters produce considerable efficiencies. For example, the Japanese car market is one of the best in the world and uses this network-based structure to remain competitively advantaged.

Having seemingly found the reasons for Silicon Valley’s success, the author then moves on to compare and contrast two specific companies in order to see if the theory holds up in practice. The author chose to consider Apollo Computer and Sun Microsystems as the two companies were essentially similar in the 1970s; they were both technology-based start-ups with Apollo computer being established on Route 128 and Sun Microsystems established in Silicon Valley. In keeping with Route 128 culture, Apollo established itself as a very independent company even in so far as actually producing the workstations, not simply designing them. Whilst this initially offered considerable competitive advantage over competitors, it did mean that they developed systems that were entirely incompatible with any other. In contrast, Sun Microsystems, which was established in Silicon Valley, operates a very open policy for sharing information with neighbouring companies and establishing a system that is fully compatible with all other available systems. Sun Microsystems also looks at other companies actually to produce the systems as sticking to the pure design prototype building enables them to concentrate their efforts and expertise. Initially, there was very little difference in the actual performance of the two companies, but over time, Sun became considerably more profitable, as it was able to adapt much more quickly to changes in the industry. By keeping everything internally, Apollo was unable to adapt and this caused considerable decline in sales (Granovetter, 1985)^[8].

These structural differences were clearly important to the relative success of the two organisations. The author then takes this one step further by stating that she actually believes the differences lie in the management style and not in the physical structure of the organisation. Apollo, for example, was very strict about business dress codes and very tight on quality controls; the new manager of Apollo, in 1984, was Thomas Vanderslice and he brought in an exceptionally strict regime which was entirely opposite to the casual and relaxed atmosphere seen in Sun Microsystems (Schein, 1985)^[9]. Although this in itself should not indicate the relative success of the organisation, it was indicative of the willingness to adapt and change that Sun Microsystems had and Apollo did not. This again is typical of Silicon Valley companies in contrast with Route 128 companies. In fact, Sun’s success was so substantial that many Apollo managers left during the 1980s to join the rival company. This caused even further splits between the two regions as expertise began to collect in the Silicon Valley area (Nohria & Eccles, 1992)^[10].

Hewlett Packard was another example that the author cited as being a success for Silicon Valley. Despite being a huge organisation, it did not fall foul of becoming rigid and unable to adapt to this ever-changing industry. It maintained a nexus of almost entirely independent departments all working together but maintaining sufficient independence to enable them to react rapidly to any necessary changes (Sabel, 1988)^[11]. The author draws contrast with DEC a large technological company based on Route 128, which was highly hierarchical in structure and failed to compete at this game due to its unwieldy and rigid internal structures.

Conclusions

By drawing together both the case studies mentioned above as well as previous research, the author has successfully demonstrated that the way in which an organisation views itself and the way in which it views its relationships with other firms in the same geographical region is critical to the ultimate success of the firm and the region in which it exists.

The author concludes, correctly in my opinion, that network-based approaches offer considerable competitive advantage to a firm and the region, in particular, in industries where rapid adaptation is necessary. Collaboration vertically is essential to the success of the industry, as a whole. Corporate secrecy as is seen on Route 128 is a substantial barrier to the development of the technological industries and this has been proven to be the case. Although the author recognises that the physical structure is important to ensure openness and networking between firms, companies should also understand that management style of key firms is more influential than was originally thought. It should be noted that the author does recognise that this network-based approach may not always be suitable and that whilst it is evident that the network-based approach worked very well in the technology industry, in slower moving industries where firms must closely guard their corporate secrets, a much more individual firm-based approach is likely to be more successful. Comparing and contrasting Silicon Valley with Route 128 has allowed the author to explore fully and to explain successfully the potential impact of a network-based approach. The value of this comparison is immensely important for the understanding of the network-based approach and has provided valuable insight for other industries moving forwards.

Bibliography

DeBresson, C. & Walker, R. eds. (1991). Special issue on networks of innovators. Research Policy, 20 (5).

Florida, R. & Kenney M. (1990). Silicon Valley and Route 128 won’t save us. California Management Review, 33 (1), 68-88.

Granovetter, M. (1985). Economic action and social structure: the problem of ’embeddedness.’ American Journal of Sociology, 91 (3), 481-510.

Imai, K. (1989). Evolution of Japan’s corporate and industrial networks. In B. Carlsson, ed. Industrial Dynamics Boston, MA: Kluwer.

Nohria, N. & Eccles, R., eds. (1992). Networks and organizations: Structure, form, and action. Boston, MA: Harvard Business School Press.

Piore, M. & Sabel, C. (1984). The second industrial divide: Possibilities for prosperity. New York: Basic Books.

Powell,W., (1996). ‘Trust-Based Forms of Governance’ in Kramer, R,M. & Tyler,T.R. eds, Trust in Organizations. London: Sage.

Sabel, C. (1988). Flexible specialization and the reemergence of regional economies. In Hirst, P. and Zeitlin, J., eds. Reversing industrial decline?: Industrial structure and policy in Britain and her competitors. Oxford, UK: Berg.

Saxenian, A. (1994). Regional advantage: Culture and competition in Silicon Valley and Route 128. Cambridge, MA: Harvard University Press.

Saxenian, A., (1994). The limits of Autarky: Beyond Networks and Industrial Adaptation in Silicon Valley and Route 128. Available at: http://people.ischool.berkeley.edu/~anno/.

Schein, E. (1985). Organizational culture and leadership. San Francisco, CA: Jossey-Bass.

Footnotes

^[1] Saxenian, A., (1994). The limits of Autarky: Beyond Networks and Industrial Adaptation in Silicon Valley and Route 128.

^[2] Powell,W., (1996). ‘Trust-Based Forms of Governance’ in Kramer, R,M. & Tyler,T.R. eds, Trust in Organizations. London: Sage.

^[3] Piore, M. & Sabel, C. (1984). The second industrial divide: Possibilities for prosperity. New York: Basic Books.

^[4] Saxenian, A. (1994) Regional advantage: Culture and competition in Silicon Valley and Route 128. Cambridge, MA: Harvard University Press.

^[5] Florida, R. & Kenney M. (1990). Silicon Valley and Route 128 won’t save us. California Management Review 33 (1), 68-88.

^[6] DeBresson, C. & Walker, R. eds. (1991). Special issue on networks of innovators. Research Policy. 20 (5).

^[7] Imai, K. (1989). Evolution of Japan’s corporate and industrial networks. In B. Carlsson, ed. Industrial Dynamics Boston, MA: Kluwer.

^[8] Granovetter, M. (1985). Economic action and social structure: the problem of ’embeddedness.’ American Journal of Sociology 91 (3), 481-510.

^[9] Schein, E. (1985). Organizational culture and leadership. San Francisco, CA: Jossey-Bass.

^[10] Nohria, N. & Eccles, R., eds. (1992). Networks and organizations: Structure, form, and action. Boston, MA: Harvard Business School Press.

^[11] Sabel, C. (1988). Flexible specialization and the reemergence of regional economies. In Hirst, P. and Zeitlin, J., eds. Reversing industrial decline?: Industrial structure and policy in Britain and her competitors. Oxford, UK: Berg.