Flexible Re-Cycling and High-Technology Entrepreneurship

This is reflected in the comments of a high-tech executive on changes in the disk drive industry: “Less than a year ago the 20 Megabytes (MB), 2.5” disk drive was the standard product. It has since moved to 40, and 60, and now 80 MB. The most desirable product for the marketplace has basically gone through 3 to 4 product generations in the last 12 months” Leisy Roger , Director of Sales, PrairieTek Corp., Electronic Buyers' News, September 21, 1991, p. 14.

By 1993, some 18 firms had achieved revenues in excess of $1 billion, and overall approximately 1/4 million jobs and 2,150 high-technology companies have been created in Valley Silicon . San Jose Business Journal, November 30, 1992, p. 6.

According to the Center for the Continuing Study of California, California Employment Development Department (1991), Valley's Silicon employment profile comprised 69,900 jobs in business services, 67,400 in electrical components, 57,500 jobs in the computer sector, 31,300 in electronic instruments, 31,300 in information and software, 18,100 in communications, and 5,800 in biotechnology.

Bahrami H. , “The Emerging Flexible Organization: Perspectives from Silicon Valley,” California Management Review, 34/4 (Summer 1992).

In a recent article, Peter Drucker suggests that many of the assumptions on which organizations have historically been built and managed, no longer fit the emerging reality. See Drucker P. F. , “The Theory of the Business,” Harvard Business Review (September/October 1994).

See, for example, Williams J. “How Sustainable is Your Competitive Advantage?” California Management Review, 34/3 (Spring 1992).

See Hannan M. Freeman J. “The Population Ecology of Organizations,” American Journal of Sociology, 62 (1977): 929–964.

There are parallels with Schumpeter's notion of “creative destruction.” See Schumpeter J.A. , “An Analysis of Economic Change,” The Review of Economic Statistics, Volume 17 (May 1935).

Well-known firms which have been discontinued include Visicorp, the spreadsheet software pioneer; Osbourne Computer, which pioneered the portable computer; Xebec, the developer of I/O controllers; and Momenta, the first pen-based computer company.

Owen G. Kehoe L. , London's Financial Times, June 18, 1992 p. 16.

Their “ephemeral” nature does not imply the dissolution of all their know-how and intellectual capital. In the disk drive controller industry, for example, the demise of Xebec had a positive impact on the growth of Cirrus Logic, as did the disengagement of Scientific Microsystems, which led to the resurrection of SuperMac Technologies as an independent firm.

It is interesting to note that, even after a brief period, several of the “excellent” companies described in Peters T. Waterman R. , In Search of Excellence (New York, NY: Harper & Row, 1982), when re-examined were found to have slid from their pre-eminent positions. See “Who's Excellent Now,” Business Week, November 5, 1984, p. 76:.

According to a recent study, smaller organizations are becoming more dominant in the American economy. “[Their] numbers have increased disproportionately in recent years…the typical or average American organization is much smaller than it was in the 1960s.” Carroll G. R. , “Organizations: The Smaller They Get,” California Management Review, 37/1 (Fall 1994).

Well-known industry-focused studies include Freeman J. , “Ecological Analysis of Semiconductor Firm Mortality,” in Singh J.V. , ed., Organizational Evolution: New Directions (Newbury Park, CA: Sage Publications, 1990); and Carroll G. R. Delacroix J. , “Organizational Mortality in the Newspaper Industries of Argentina and Ireland,” Administrative Science Quarterly, 27 (1982): 169–198.

In recent years, there has been a growing interest in Silicon Valley in the context of regional development and the phenomenon of the “technopolis.” See Rogers E.M. Ying-Chung Chen Annie , “Technology Transfer and the Technopolis,” in Von Glinow M.A. Mohrman S.A. , eds., Managing Complexity in High-Technology Organizations (New York, NY: Oxford University Press, 1990); and Saxenian AnnaLee “Regional Networks and the Resurgence of Silicon Valley,” California Management Review, 33/1 (Fall 1990).

Drawing on these field studies, the organizational and strategic features of high-technology firms have been elaborated elsewhere. See Bahrami H. Evans S. , “Stratocracy in High-Technology Firms,” California Management Review, 30/1 (Fall 1987); Bahrami H. Evans S. , “Strategy-Making in High-Technology Firms: The Empiricist Mode,” California Management Review, 31/2 (Winter 1989); Bahrami H. Evans S. , “Emerging Organizational Regimes in High-Technology Firms: The Bi-Modal Form,” Human Resource Management Journal, 28/1 (Spring 1989; Evans S. “Strategic Flexibility for High-Technology Maneuvers: A Conceptual Framework,” Journal of Management Studies, 28/1 (January 1991).

For a detailed discussion of the evolution of industries in different national contexts see Porter M. , The Competitive Advantage of Nations (New York, NY: Free Press, 1990).

See “Hot Spots,” Business Week, October 19, 1992, p. 80.

Hsinchu was initiated in 1980 and has attracted an investment of $2.5 billion to date. A total of 145 firms, over half of which are Taiwanese, generated revenues of around $3.3 billion in 1992. Of these, 40 firms are in semiconductors, 46 in computers and peripherals, 24 in telecommunications, and 15 in electro-optics. San Francisco Examiner, October 17, 1993.

See Garnsey E. Brookes A. Cannon , “The Cambridge Phenomenon Re-Visited,” Research Paper, Judge Institute of Management Studies, Cambridge University, September 1992.

Addressing a meeting of the Churchill Club (October 1992), Bill Hewlett suggested that the origins of Silicon Valley, in his opinion, almost date back to the development of ship-to-shore radio and the early days of television—before RCA moved its R&D labs to the East Coast.

One of the driving forces underscoring these extraordinarily high growth rates is the structure of Venture Capitalist's limited partnerships which typically last for 7 years. In order to show a return to the shareholders, investors need to liquidate their positions within the time frame specified by the limited partnership. Therefore, the exit strategy of a portfolio company, an initial public offering or an acquisition by another firm, needs to be orchestrated within this time frame, so that the proceeds can be shared among the partners and the investors. A general rule of thumb applied by Venture Capitalist's is to evaluate a deal on the basis of achieving 5 times the value of their initial investment in 3 years or 10 times in 5 years. These rates of return may appear to be abnormally high, but when, as a rule of thumb, 1 in 20 firms actually getting off the ground and even fewer going public, they can provide part of the motivation behind rapid growth. Venture Capitalist's often hedge their bets by investing in several firms vying for dominance in any given arena. Even the most seasoned venture capitalists may be unable to spot winners early on—as witnessed by their initially unfavorable reactions to ROLM, Seagate, and Adaptec, among many other successful ventures, or indeed their favorable disposition towards Plexus, Momenta, and EO.

Harker J.M. Brede D.W. Pattison R.E. Santana G. R. Taft L.G. , “A Quarter Century of Disk File Innovation,” IBM Journal of Res. Development, 25/5 (September 1981).

The team comprised, among others, Stevens L.D. Houghton Ken (later the Dean of Engineering at Santa Clara University).

Stevens L.D. “The Evolution of Magnetic Storage” IBM Journal of Res. Development, 25/5 (September 1981): 663–675. For an evolutionary perspective on the production of such devices, see Mulvany R.B. Thompson L.H. , “Innovations in Disk File Manufacturing,” and Haughton K.E. , “An Overview of Disk Storage Systems,” both in Proc. IEEE 63, 1975.

The U.S. disk drive industry is dominant in merchant production, although much of its manufacturing is conducted offshore, particularly in Singapore, Malaysia, and Thailand, or in conjunction with Japanese partners. The industry remains vibrant, as attested by the sustained growth rates and the pace of innovative new product development.

The first tenant was Varian Associates—a spin-off from the University Physics department. Hewlett-Packard followed in 1954. Packard David Hewlett William , Terman's former students, had founded Hewlett-Packard in 1939 to commercialize an electronic device called a “variable frequency oscillator” which Hewlett had developed as part of his graduate work.

See Rogers E. Larsen J. Silicon Valley Fever, (New York, NY: Basic Books, 1984); and Johnston M. “High Tech, High Risk, and High Life in Silicon Valley,” National Geographic, 162/4 (October 1982): 459–476.

See Kotkin J. Grabowicz P. , California, Inc. (New York, NY: Rawson, Wade Publishers, 1982).

For example, Miller Bill , former president of SRI, was also a professor at the Stanford Graduate School of Business.

When the disk drive company, Seagate, was founded by Shugart Alan in 1979, venture capitalists were not initially very interested; private investors—including Dion Norman , the founder of Dyson, and later TI and Compaq's Rod Canion provided the seed money to get the firm off the ground. Later, when Finis Conner wanted to start a new disk drive firm, at a time when that business was out of favor at Sand Hill Circle (where many venture capitalists were based), Canion again stepped in and made an investment whose pay-off was substantial. Boucher Larry and his co-founders took their initial business plan for starting Adaptec, the input/output controller company, to venture capitalists in vain. They mortgaged their houses in order to build a prototype of the product before venture capitalists invested in the company. Similarly, ROLM's founding team initially sought venture capital backing without much success. Each of the four founders invested $15,000 in the business, before Jack Melchor—one of Silicon valley's early venture capitalists—agreed to become a fifth founder by investing $15,000, and guaranteeing a bank line of credit for $ 100,000 in order to get the firm off the ground.

Departing from the traditional mode of venture funding, a recent trend has been the investment by larger firms in high-technology start-ups. EO Corporation, General Magic, and 3DO were initially funded in this manner.

Venture capitalists seldom invest alone in a deal, but with a group of other venture capital firms. For a historical description of the role of venture capital in Silicon Valley see Hambrecht W. R. “Venture Capital and the Growth of Silicon Valley,” California Management Review, 26/2 (Winter 1984).

In recent years, many firms including 3Com, Sun Microsystems, Silicon Graphics. Conner Peripherals, and Syntex have built campus-like settings in order to generate a community spirit and to facilitate inter-group communication and interaction.

Well-known examples include Italians (Frederico Fagin, co-founder of Synaptics and Zilog, Giacomo Marini co-founder of Logitech), French (Jean Louis Gassee, formerly of Apple, and Phillipe Kahn of Borland), British (Will Corrigan of LSI Logic, Dick Moley of Stratacom), Chinese (David Lee of Qume), Hungarian (Andy Grove and Les Vadacz of Intel), Indian (Juggy Tandon of Tandon), German (Michael Spindler of Apple Computer), Iranian (Kamran Elahian of Cirrus Logic and Momenta), Israeli (Arich Feingold, the co-founder of Daisy Systems), and other nationalities.

Schumpeter J.A. “The Creative Response in Economic History,” Journal of Economic History, 7 (November 1947): 149–159.

See San Jose Mercury News , Business Monday Venture Tree Quarterly Survey, November 29, 1993.

See Swanger C.C. “Apple Computer: The First Ten Years,” Case Study #S-BP-245, Graduate School of Business, Stanford University, 1985.

Interestingly, Massaro Don , who replaced Alan Shugart as President of Shugart, became VP of Marketing at Conner Peripherals, after co-founding Metaphor Computers with Dave Liddell, co-inventor of Ethernet at Xerox PARC.

See Kretchmar L. “Auspex Serves Notice,” Upside Magazine (November/December 1989), p. 17–18.

San Jose Business Journal, July 13, 1992, p. 14.

A good case in point is Gordon Campbell, the founder of SEEQ Technology, who after leaving SEEQ went on to found Chips and Technologies. C&T managed to become one of the fastest growing technology companies during the late 1980s. Similarly, Al Shugart—after leaving Shugart Associates—went on to found the successful Seagate Technology, the pioneer of 5.25” Winchester disk drives.

As pointed out by other researchers, the phenomenon of the “Living Dead” illustrates the futility of maintaining a high-technology firm, which has not illustrated demonstrable success, on an expensive life support system. See Bourgeois L.J. Eisenhardt K.M. , “The Anatomy of the Living Dead in the Computer Industry,” California Management Review, 30/1 (Fall 1987).

Maidique M. A. Zirger B.J. , “The New Product Learning Cycle,” Research Policy (December 1985).

See Bahrami Evans (Winter 1989), op. cit.

The notion of “diverse specialization” was discussed in Piore M. Sabel C. , The Second Industrial Divide (New York, NY: Basic Books, 1984).

In this regard, global and overseas companies have shown a great deal of interest in investing and forging alliances in Silicon Valley companies. See Besher A. “Asian Investor Feast,” Upside Magazine (November/December 1989); “Foreign Investment in Bay Area Bioscience,” a survey prepared by Booz-Allen Hamilton for the Bay Area Bioscience Center, 1991; Teece D.J. “Direct Foreign Investment in Silicon Valley,” California Management Review, 35/2(Winter 1992).

See, for example. General Magic and 3DO as recent examples.

McNeally Scott described how Sun Microsystems's organization overcomes this problem by being both “aligned yet loosely couple.” See “Interview with Scott McNeally , Upside Magazine (March 1993).

This phenomenon is clearly observed in the disk drive industry. Over the last decade or so, the firms which have dominated the market for a particular “form factor” (the technical term for the size of the drive—which has evolved in ten years from 8 to 5.25 to 3.5 to 2.5 and recently to 1.8 inches) typically have been late to market with the next generation device. For example, Seagate, the pioneer of 5.25 inch Winchester disk drives (which grew at a tremendous pace during the early 1980s with the rapid take-off of the personal computer market), initially failed to capitalize on the emerging opportunities presented by 3.5 inch disk drives destined for the portable computer market. However, Conner Peripherals—a new start-up founded in 1986 by Conner Finis , a Seagate co-founder and former senior executive—became a major success story in the late 1980s by developing the 3.5 inch disk drive. Earlier, Quantum Corporation had a difficult time making the transition from the 8 inch line, of which it was a pioneer, to the 5.25 inch Winchester drives, which became a standard in the PC era. The firm learned valuable lessons from this experience and quickly became a substantial force in the emerging 3.5 inch form factor in the late 1980s. See Bower J.L. Christensen CM . “Disruptive Technologies: Catching the Wave,” Harvard Business Review, (January/February 1995).

For a discussion of the importance of corporate culture, especially in high-technology companies, see O'Reilly C. , “Corporations, Culture, and Commitment,” California Management Review, 31/4 (Summer 1989).

Well-known examples include Intel, Hewlett Packard, Tandem, AMD, Sun Microsystems, Seagate, Conner Peripherals, Microsoft, and Oracle.

In certain cases, the founders may actually stay beyond their useful tenure, with an adverse impact on the firm's ability to recalibrate its business model as new realities unfold.

Recent studies have argued that new organizations have a high propensity to fail, partly due to problems of initial legitimacy—encapsulated in the term “liability of newness.” See Singh J.V. Tucker D. House R.J. , “Organizational Legitimacy and the Liability of Newness,” Administrative Science Quarterly, 31 (1986): 171–193; Aldrich H.E. Fiol C.M. , “Fools Rush In? The Institutional Context of Industry Creation,” The Academy of Management Review, 19/4 (October 1994): 645–670.

A good case in point is Plexus Corporation, a high profile start-up which received venture capital funding of $35 million. Another case in point is Stardent, formed through the merger of Ardent and Stellar.

A clear example is Trilogy, founded in the early 1980s by Gene Amdahl, who had earlier started Amdahl Corporation in 1970 in order to compete with IBM in the mainframe computer business. Trilogy attracted a lot of interest and venture capital in its formative years, but failed to survive because it could not deliver what was initially promised—an advanced microprocessor. Interview with Amdahl Carlton , Upside (February/March 1992).

For a more extensive review of Shugart and its industry context, see Case Study #S-MM-8, “Shugari Corporation: Planning Manufacturing Capabilities,” and its accompanying Industry Note #S-MM-6N, “Disk Drives for Small and Microcomputer Systems, 1983,” Graduate School of Business, Stanford University 1985.

For a synopsis of this episode, see Evans (1991), op. cit.

SCSI was pioneered by Adaptec, which was founded by three Shugart employees. When an internal business plan was submitted to Shugart's executive team, as part of a new internal venture funding initiative, it was turned down. As a result, the principal developers of this interlace, Boucher Larry and two of his colleagues, left Shugart in 1981 to found Adaptec, an input-output controller company. By 1992, Adaptec had amassed revenues of $311 million and was ranked among the top 200 public high-technology companies.

In 1992, Archive was acquired by Conner Peripherals, whose founder, Conner Finis , was a co-founder of Seagate and Shugart.

San Francisco Chronicle, September 26, 1984. For additional perspectives on the IBM/ROLM merger, see the Economist, September 29, 1984 and the Wall Street Journal, September 27, 1984.

The “Valley” is resplendent with examples of such recalibrations. Recent examples include Apple Computer, Hewlett-Packard, Oracle, Sun Microsystems, and Quantum Corporation. For further details, see “Now Comes the Real Battle at Oracle,” Upside (May 1991), p. 32; “Back to Basics at Hewlett-Packard,” Upside (June 1991), p. 38.

In many situations, the original intent seldom turns out to be the winning business proposition. For example, Shugart began by developing a complete desk-top computer including a printer, before it concentrated on disk drives; ROLM's first business plan included four different business ideas, none of which included the digital PBX, which later fueled its rapid growth.

Previous research has adopted a narrow concept of a spin-off, in part due to the traditional research focus on large corporations and their attempts at improving innovation. A spin-off is, under such circumstances, defined as one which is founded entirely by employees of the parent. In Silicon Valley most start-ups involve the participation of individuals from several different organizations. Unlike conventional analyses of spin-offs where entrepreneurs depart from a single parent, in Silicon Valley many new start-ups are founded by teams of entrepreneurs, oftentimes from different firms. Many of the companies which ROLM and Shugart helped spawn were not all necessarily direct spin-offs, in the limited sense of the term, in that employees joined forces with specialists in other areas to form new companies pioneering the next generation of technologies.

For example, in 1985 Sollman George (Shugart's former Vice President of Sales and Marketing) moved to Centigram—at the time, a struggling voice messaging company—where storage technology is a principal component of their system. In 1992, Centigram orchestrated a successful initial public offering, largely due to Sollman's Mr. ability to reincarnate their business model.

Oshman Ken , its founding Chief Executive, has moved on to lead Echelon, an emerging pioneer in the networking field. A number of former employees of ROLM's Mil-Spec Division have founded Ultra, a firm working on high-speed local area networks. Moley Richard , ROLM's former Vice President of Marketing and its first PBX product manager, is CEO of Stratacom, a manufacturer of multiplexers and network management systems. For additional details, see San Jose Mercury News, March 23, 1987.

The disk drive sector is somewhat self-contained, yet it depends on: Several other specialist entities for its continued ability to innovate; integrated circuits for its electronic and I/O control units; thin film deposition technology for building the read-write recording heads; and the platters of media which can store data at ever increasing densities.

Hart A.G. , “Anticipations, Business Planning, and the Cycle,” Quarterly Journal of Economics (February 1937), pp. 272–293.

As Stigler suggests, “adaptability” implies a singular and permanent adjustment to a newly transformed environment, whereas “flexibility” refers to successive, though temporary, adjustments that are made as conditions evolve. See Stigler G.J. , “Production and Distribution in the Short Run,” Journal of Political Economy, 47 (1939): 305–327. In some cases, this recalibration may involve a migration of existing businesses, such as Shugart's migration from 8 to 5.25 and later to 3.5 inch disk drives; in others, as was the case at ROLM, it may entail the development of new businesses through the cross pollination of several technologies, such as digital computers and telephony.

Popper K.R. , Conjectures and Refutations: The Growth of Scientific Knowledge (London: Routledge & Kagan Paul, 1972).

As Grove Andy Dr. , CEO of Intel, was quoted in London's Financial Times, the agility comes in part from “newcomers sniping at their heels.” Owen G. Kehoe L. , Financial Times, June 18, 1992, p. 16.

There are several examples of large Silicon Valley firms which have successfully recalibrated their business models and have moved on to greater heights, including Intel, Oracle, and Hewlett Packard—just a few of the well known cases in recent years.

Several firms may be brought together in order to gain a critical mass. Macromedia, for example, was recently forged from three software companies all active in the burgeoning multimedia arena. MacroMind, Paracomp, and Authorware were merged together to set industry standards and orchestrate a successful initial public offering. Others examples include. Scientific Microsystems acquisition of OMTI (One More Time Inc.), Borland's acquisition of Ashton Tate, National Semiconductor's absorption of Fairchild, and Silicon Graphics' acquisition of MIPS.

Schumpeter argued that “the earning capacity of any industrial concern peters out after a time,” Schumpeter J.A. , “Economic Theory and Entrepreneurial History,” (1949), in Clemency R. , ed., Essays on Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism (New Brunswick, NJ: Transaction Publishers, 1991), p. 258.

Interview with Bartz Carol , Upside (April 1993), p. 44.