Whacky New Networks are Redefining Business

Tom Peters

Ponder the odd relationship between computer maker Hewlett-Packard and semiconductor fabricator Weitek. The growth of specialist “fabs” like Weitek soared in the 1980s, when huge semiconductor firms and computer companies began to focus on designing integrated circuits (ICs), while shipping out a great deal of their capital-intensive manufacturing. But Weitek also developed leading-edge design skills. In an odd twist, it designed some exotic engineering ICs for HP; then Weitek fabbed its special designs in HP’s advanced manufacturing facility, previously closed to outsiders. Topping it off, products designed by Weitek but made on HP premises were not only delivered to HP, but also sold by Weitek to third parties—including HP’s competitors.

The strange and convoluted Weitek-HP relationship is chronicled in “The Origins and Dynamics of Production Networks in Silicon Valley,” a paper by University of California Professor AnnaLee Saxenian. She describes radical new forms of supplier-buyer relationships, concluding that they are fundamentally changing the way America does business.

Companies have always faced “make-buy” decisions, of course, and “outsourcing” has been common. Nonetheless, Saxenian says both the density and the character of the new permutations emerging in Silicon Valley constitute “a radical break with the arm’s-length relations of traditional mass production, in which suppliers manufacture parts according to standard specifications and compete against one another to lower prices.”

As usual, necessity has been the mother of invention. “Rising costs of product development, shortening product (life) cycles and rapid technological change,” Saxenian writes, have led Silicon Valley firms to conduct business in pathbreaking ways. U.S. high-tech companies could have chosen to gobble one another up, forming sluggish mega-firms. (The European electronics industry, to its detriment, has done just that.) Instead, the Valley’s outfits have most often chosen to remain independent; they advance by forming creative, collaborative relationships.

Benefits from the new “network firms” are obvious. A company can focus on what it knows best (advancing in carefully selected areas), spread risks (cost and technology), move fast (by involving all parties from the start), and push multiple sources of innovation onto the market at one time.

Sun Microsystems, founded in 1982 and now a $2.5 billion company, exemplifies the new breed. Sun’s founders, Saxenian observes, “chose to focus on designing hardware and software for workstations and to limit manufacturing to prototypes, final assembly, and testing.” Among other things, Sun purchases advanced ICs, disk drives, standard memory chips, keyboards, mice, and monitors from suppliers; even the printed circuit board at the heart of its workstation is assembled by outsiders. Jim Bean, Sun’s manufacturing VP, told Saxenian that the firm never considered vertical integration—given technological and marketplace volatility and the presence of hundreds of sophisticated concerns in Silicon Valley, each investing heavily in its own speciality.

Sun is an integrator, at the apex of the Valley’s hierarchy. But how do such relationships look from the other end of the food chain? Saxenian also examines some “contract manufacturers,” specializing in printed circuit-board assembly. Ten years ago such outfits were here today, gone tomorrow, “rent-a-body” operations. But that’s changing. Today’s top contract manufacturers are offering state-of-the-art engineering services and computer-integrated manufacturing. San Jose-based Selectron, for example, has developed long-term relationships with IBM, Sun, and Apple, and provides such customers with sophisticated, continuously improved products.

Though the benefits of effective collaboration can be enormous, new management skills must be learned. First, a whole new way of managing relationships: Progressive Silicon Valley companies look at a supplier relationship, says Saxenian, as a “long-term investment.” Managers report that the new relationships with suppliers involve “personal and moral commitments” and a “high degree of trust.”

What Saxenian labels “joint learning” is also important. When suppliers are treated as equals in a mutual process of designing, developing, and manufacturing new products, Saxenian says, “the suppliers themselves become innovative and capital-intensive producers of differentiated products.” Saxenian concludes that Silicon Valley is “far more than an agglomeration of individual technology firms. Its networks of interdependent yet autonomous producers grow and innovate reciprocally.”

Both interdependence and autonomy are essential. By contrast, in a controversial Harvard Business Review article (July-August 1990), MIT Professor Charles Ferguson urges the U.S. to emulate the Japanese “keiretsu” model of doing business, characterized by highly interdependent relations between major corporations, components suppliers, and bankers; mixed boards of directors and overlapping ownership are common.

In the keiretsu model, autonomy takes a back seat to interdependence. And that misses Saxenian’s point entirely: In the end, Silicon Valley’s balance of the two thrusts—with an unmistakable tilt toward autonomy—is essential to mastering turbulent times that call for speedy, perpetual innovation.