The Regional Advantage of the Silicon Valley and Its History (2024)

Introduction

In the 1970's both the Route 128 complex of Boston and the SiliconValley were centers of high technology industry, but by the 1980'sthe Route 128 area was stagnating while the Silicon Valley, afterexperiencing economics shocks, was moving ahead to become the unchallengedglobal leader in high technology. The difference in the two areas was notin resources or location but in their commercial culture. Route 128 firmstended to be insular and proprietary, whereas the Silicon Valley firms wereopen and linked by social and economic networks which enabled them to adjustto the vissitudes of market shifts. Route 128 was more highly dependent uponfederal government contracts than Silicon Valley and, when governmentcontracts declined with the moderation and end of the Cold War, Route128 found it hard to adapt to the civilian market.

The Origin of the High Technology Centers

During World War II the Federal sought the development of high technologyweaponry at top universities such as the Massachusetts Institute of Technology(MIT), Stanford University and the University of California at Berkeley.There was a desire on the part of both the Federal Government and theseuniversities to continue the relationship. In some cases the researchduring the war was carried out in research organizations set up organizationallywithin the universities but physically separated from the campuses forsecurity reasons; e.g., Lincoln Laboratory at MIT. After the War theseresearch laboratories were made more independent of their universitiesand began to function as businesses. They were however businesses thatwere primarily dependent upon government contracts.

The Boston area had a long tradition of technology and the new researchlaboratories had to fit into the business environment of the area.Santa Clara County was still primarily agricultural at the end of thewar and was not constrained by the institutional arrangements of businessthe way the new businesses were in the Boston area.

Some small comments on the history of the two areas are appropriate atthis point. Ms Saxenian mistakenlyasserts that the Silcon Valley area was most famous for "its apricot and walnutorchards," rather than its orchards of French plums which were used to makeprunes.

The topgraphy of Boston with its river channels and baysmake local travel difficult. In additional to the natural difficultiesof the terrain Boston has a terrible, hap-hazard street pattern rather than anythingapproaching a rectangular grid. It is alleged that this street patternarose because the early residents of Boston paved the meandering cowpathsto make roads. Therefore it was a major undertaking to travel from oneside of the metropolitan area to the other. To remedy this situation thetraffic planners decided to build a peripheral roadway, called Route 128, that would allowtravelers to skirt the dense, difficult traffic conditions of Boston.Businesses quickly realized the advantages of locating close to Route 128.New businesses, particularly the the high technology companies, choselocation near Route 128. Branches of major corporations such as Sylvania andRCA were located on Route 128. But startup companies became the mostsignificant factor in the economy of the area. Ratheon rose to prominencein the Route 128 area. By 1970 Route 128 was the majorcenter of electronics development in the U.S., but most of that developmentwas financed by Federal Government contracts.

In the 1970's, as the space race and the Vietnam War wound to a close, military contracts for the Route 128 area droppedsignificantly. This decline in contracts produced a severe recession inthe Route 128 area. The unemployment in high technology industry roseto 20 percent in the early 1970's.

The development of minicomputers saved Route 128. Ken Olsen, who hadbeen working at Lincoln Laboratory left Lincoln with two other engineersin 1957 to found Digital Electrons Corporation (DEC). They worked on waysto reduce the size of computers and the result of their efforts was theminicomputer, a computer the size of desk instead of the size of a room.By 1977 DEC had 41 percent of the world's sales of minicomputers.

Some of the other computer firm operating in the Route 128 area were:

• Digital Equipment Corporation (DEC) founded by Ken Olsen in 1957
• Wang Laboratories, founded by An Wang of Harvard University
• Computer Control Corporation, a subsidiary of Ratheon that waspurchased by the Honeywell Corporation of Minneapolis, Minnesota
• Data General Corporation (DG), a startup founded in 1968 by Edson DeCastro whohad previouly worked at DEC
• Prime Computers, founded in 1972 by William Poduska who had previouslyworked for the minicomputer division of Honeywell
• Computervision, founded by Philippe Villers to manufacture minicomputersas components for Computer-Aided-Design (CAD) and Computer-Aided-Manufacturing(CAM) systems.

Although the first (DEC) and third largest manufacturers of minimcomputersin the world in the 1970's were located in the Route 128 area, the secondlargest, Hewlett-Packard (HP) was located in the Palo Alto area inCalifornia, in the area that later became known as "Silicon Valley."

Competition and Community in the Silicon Valley

Business was conducted according to traditional lines in the Route 128area. Suits were the only proper attire during business hours for theprofessionals. Employees socialized only within the company and socialcontacts with people outside of the company were viewed with suspicion aspotential leaks of trade secrets. In contrast, in the Silicon Valleydress codes were looser and communities of friendships existed acrosscompany lines. People changed jobs frequently in the Silicon Valleywhereas in the Route 128 area professionals seldom changed jobs.

Many of the founders of companies in the Silicon Valley originallycame from the Midwest. Although they may have gone to college and laterworked on the East Coast they did not really accept the East Coastformality and stuffiness. They found the casualness of California moreto their liking. They also felt freer to experiment with new institutionalarrangements in California.

The eight engineers that left William Shockley's firm to create Fairchild Semiconductorwere the crucial catalyst in the development of the Silicon Valley. FairchildSemiconductor became the training center for technological entrepreneurs.There was a high degree of cooperation and sharing of experience amongthe entrepreneurs and professional in the Silicon Valley. Some of thiscomraderie may have been a continuation of relationships that had originatedas students in the top technical universities such as Stanford.

The sense of community that existed among the technical people ofthe Silicon Valley was not just a pleasant social phenomenon. It enableSilicon Valley firms to solve technical problems more easily and rapidlythan technical people who were limited to contacts with other employeesof their company. This flexibility and adaptibility in the long rungave Silicon Valley an adaptibility and flexibility that was more importantto the survival of the industry than any possible loss of trade secrets.Saxenian quotes Wilf Corrigan, the founder of LSI Logic, who expresses it in terms of people thinkingof themselves as working for Silicon Valley rather than a particularcompany.

The frequent changes of jobs in the Silicon Valley necessitated andre-enforced the community of relationships that existed. In contrast,the formality of business relationships in the Route 128 resulted intechnical people being reluctant to change jobs.

The success of technical people who left career jobs to becomeentrepreneurs made it easier for others to take the risk of startingtheir own companies. There was also more of a willingness to investin startup companies. Often those providing the venture capital werethe successful entrepreneurs of the past. The office complexes onSand Hill Road near the Stanford campus became a major center of venturecapital.

The end result of the ease with which companies could be formedresulted in a large number of small companies. By 1980 there wereabout three thousand electronics firms in the Silicon Valley, 85percent of which had less than 100 employees and 70 percent hadless than 10 employees. The community that existed among the employeesand entrepreneurs of Silicon Valley was extended to a community ofinterest among the companies. Cross-licensing arrangements werecommon.

The fact that there was a diverse technical workforce and an abundantsupply of technical services and parts also contributed to the easewith which entrepreneurs could startup companies. This is the powerof the agglomeration of Silicon Valley.

Saxenian notes that, in addition to Stanford and the University ofCalifornia at Berkeley, San Jose State University has been a majorsupplier of trained technical personnel for the Silicon Valley.

It is interesting that a high technology complex developed aroundStanford but not around UC-Berkeley. It may be a result of theanti-business political climate of Berkeley.

The Hewlett-Packard (HP) Business Model

HP pioneered a business structure based upon project teams involvingopen-ness and participation rather than hierarchy. A high degree ofinternal communication was important. HP encouragedmanagers to "wander around" and get acquainted with employees andtheir progress on their projects.

Intel, which was founded by Robert Noyce and others from FairchildSemiconductor, had a organizational arrangement similar to HP. HPemphasized the notion of a corporate family whereas Intel, whilepromoting decentralization, still encouraged competitive strivingfor excellence.

In HP and Intel professional employees were given stock options tocontribute to their sense of the unity of the sucess of their companyand themselves.

The Route 128 System

Massachusetts was the site of centuries of business enterprise and innovation.Family and corporate histories were long and important. The business idealwas the self-sufficient company, insular and hierarchical. This model ofbusiness was regarded as tested and true, the proper form of operation.Yet despite an early lead in transistor technology and production Route128 lost decisively to the Silicon Valley.

Ken Olsen, the founder of DEC, attributes the closedness of businessfirms in New England to puritanism. Stability and frugality were highlyvalued. Risk-taking was looked down upon and failure was an ineradicableblemish on a person reputation. In contrast, in the Silicon Valley risk-takingwas admired and failure was a temporary setback but not a calamity. Andwhen the Silicon Valley entrepreneurs made a fortune they spent on luxuries,sometime ostentatious luxuries. Consequently a fortune was more valuableto the entrepreneurs in the Silicon Valley; it meant a definite improvementin lifestyle. In the Route 128 area getting rich did not mean a changein one's standard of living. It is no wonder there was less risk-takingalong Route 128. Also the spending of the fortune-makers in the SiliconValley contributed to the prosperity of the local economy.

Ms Saxenian quotes the founder of Convergent Technology about hisexperience in the Silicon Valley after having worked for eleven yearsat DEC:

There is no way I could have started Convergent in theBoston area....When I started Convergent, I got commitments for $2.5million in 20 minutes from three people over lunch who saw me writethe business plan on the back of a napkin....In Boston, you can't dothat. It's much more formal. People in New England would ratherinvest in a tennis court than high technology.

The Relation of the Two Areas
to Their Universities

MIT, secure in its reputation as the top engineering university in theworld, gave very little help to the Route 128 bunsinesses. The businesseshad to pay $50,000 to have access to MIT's research findings and educationalfacilities. Gordon Bell of DEC said, "Every time I went to MIT I got sickbecause they wanted our money but we could never get joint projects going."In contrast Stanford charged only $10,000 for access to research findingsand a special recruiting relationship. Employees of companies which paidthe fee were able attend research meetings. Gordon Bell of DEC said hiscompany had closer relationships with Stanford and UC-Berkeley, despitetheir distance, than with MIT. In California there was an extensivecommunity college system and a state university system that supportedhigh tech industry, whereas in Massachusetts there was not.

Business Organizations in the Two Areas
and Their Relation to Local Government

In the Route 128 area the business organizations focused their effortson getting reductions of state and local taxes and emphasized that theircontinued presence in the area was dependent upon the level of taxes.The success of such efforts tended to starve local governments of resourcesfor infrastructure projects that might have enhanced the desirability ofthe location. In contrast, in Silicon Valley firms like HP worked withlocal government to solve community problems.

Digital Electronics Corporation (DEC)

Although DEC was the leader in minicomputer production it was not a typicalRoute 128 firm. DEC located in Maynard, Massachusetts, a small town of10,000 without convenient access to Route 128. DEC executives used ahelicopter for quick access to the outside world. DEC was an island toitself without a relationship even with the town of Maynard.

DEC's operational procedures were a modification of the traditionalNew England business. The founder, Ken Olsen, down played hierarchyand formality. Work was carried out in project teams. In this way DECwas more like the Silicon Valley firms. DEC emphasized very stronglyloyalty. In return, DEC had an unofficial policy of no layoffs. But,as Ms Saxenian points out, such a policy has the effect of making successwithin the company depend more on relationships with managerial staff thansolving technical problems or dealing with the outside world. Ultimatelythe key decisions were made by Ken Olsen and the top elite.

When Edson DeCastro left DEC to found Data General (DG) there was a bitternessbetween the companies that has lasted for decades. DEC threatened to sueDG over the theft of proprietary technology. DG has sued other companiesover such issues. The net result is that each firm in the Route 128 areaaspires to vertical integration and insularity. They value securitymore strongly than opportunity.

The Decline of Route 128 and
the Rise of the Silicon Valley

The Route 128 firms had an early dominance of the electronics industryin the 1950's, both in vacuum tube and transistor technology. In 1959the employment in electronics in the Route 128 area was almost triplethe employment in electronics in the Silicon Valley. But thereafteremployment in electronics in the Silicon Valley was rising exponentiallywhereas employment in the Route 128 area, although fluctuating, wason a steady decline. By 1980 employment in electronics in the SiliconValley was more than three times that of the Route 128 area.

The technology in electronics began to change so rapidly that there wasnot much advantage to being an established business in the industry. Beingan old firm often meant being committed to an obsolete technology. Forexample, the Philco Corporation created an automated line for manufacturingtransistors in 1958 but by 1963 its technology was obsolete and theinvestment was not recoverable. Philco left the industry.

The Route 128 firms sought to produce their semiconductor devices withinthe company so the area lost the economies of scale advantages thataccrued to the Silicon Valley economy of having such devices produced byspecialized firms.

Silicon Valley's Deviance from Its Winning System

Initially the firms in the semiconductor industry in the Silicon Valleyproduced customed-designed integrated circuits under contract with customers.The disadvantage of this arrangement is that the production runs wererelatively small. The advantage was that the firms were not subjected torelentless competition which drives down the price and eliminates profitsnecessary for research and development.

But there was one product whichdid become standardized and Silicon Valley firms thought could be producedas a commodity. That product was computer memory chips. Intel introduced1 K Dynamic Random Access Memory (DRAM) chips in 1970. Many other firmssoon entered the market and price competition became fierce. In 1974 thesize of the chips was increased to 4K and to 16 K in 1975. The innovationsin size were made by Intel but other firms quickly matched these. By 1979there were 16 firms in the 16K DRAM market; five of them were Japanese. Thesize and price competition continued to escalate. By 1984 Japanese firmsintroduced the 256K DRAM chips and when U.S. producers tried to match theJapanese prices they suffered substantial losses and by 1986 had droppedout of the market. There was a loss of 25 thousand jobs in the SiliconValley.

It is easy to get paranoid about unfair competition from Japan. There isfirst of the problem of Japan, Inc., the network of government and privateindustry that turns economic competition into a political equivalent ofwar and tries to find ways to negate the rules of the market place. Politicalmanipulation of interest rates and the exchange rate to produce an undervalued currency can givean insurmountable advantage to a country's producers. Lifetime employmentmakes labor costs a fixed cost and results in a firm being willing tocontinue sales at price levels that would cause other firms to drop outof production. Control of access to domestic markets can enable a firmto sell at a lower cost to foreign buyers than to domestic buyers. All ofthese could have been involved in the lower prices for Japanese memorychips. But the key to the Japanese success in the memory chip competionwas simpler and more innocent.

Integrated circuit devices are produced by creating many copies of theircircuitry on a silicon wafer. Production costs depend upon the number ofwafers processed. Some of the chips in a wafer may be defected so theoutput of the process depends upon the proportion of the chips on a waferthat are good, the yield rate. Cost per unit are thus inversely proportionalto the yield rate. Japanese producers gave greater attention to qualitycontrol and achieved substantially higher yield rates than the Americanproducers and consequently the cost per unit device produced was abouthalf that of the American producers.

But initially the American producers did not understand the nature of theproblem. At the height of the price competion the Silicon Valley abandonedtheir tradition of collaboration with suppliers and customers and triedto push the cost cutting off onto the suppliers. The antagonisms thatdeveloped interfered with the solution of design problems and thus madethings worse rather than better. The American producers tried to relyupon high volume and the economies of scale and this approach did not work.Silicon Valley firm's strength was in their creativity and agility in findingnew products and improving them ahead of the competition rather than inthe brute force economics of the production of commodity items.

Silicon Valley firms left the field of DRAM chips but Intel had createda new product that became the basis for an entirely new industy. That productwas the microprocessor. This was a complex integrated circuit that couldbe programmed. Thus a customer who wanted a specialized device did nothave to have an integrated circuit custom designed and produced in a smallbatch. Instead the microprocessor could be programmed to produce the sameresult and the microprocessors were produced in quantities in which someeconomies of scale could be achieved. However Intel did not stop with onemicroprocessor. They constantly redesigned and improved their microprocessor.The first was the 8080 followed by the 8086, then the 80286 and 80386.

The microprocessor was not invented with the personal computer industryin mind but quickly some realized that the micropressor was, in effect,a computer on a chip. The history of the personal computer is told elsewhere.

DEC's achievements in the minicomputer field were outstanding, but theyhave been forgotten in the wake of the even more spectacular developmentsin personal computers. In 1965 DEC introduced the PDP-8 (Programmed DataProcessor) that sold for only $18,000 when the price tag for computershad recently been in the hundred thousand dollar price range. The PDP-8was four times faster than its rivals. But in 1969 Data General offeredits NOVA with double the speed and memory capacity of the PDP-8. DEC cameback in 1977 with its VAX-11/780 super-minicomouter that had the power ofa mainframe computer at a fraction of its cost. Both DEC and DG strived andto a large degree achieved vertical integration, but this made themvulnerable to technical breakthrough elsewhere in the same way that theirdevelopment of minicomputers weakened IBM.

The VAX line of DEC and the NOVA of DG both had proprietary operatingsystems which limited access to programs developed by the general programmingcommunity. At the time the development of proprietary systems seemed thenatural approach. It was only later with the proliferation of the personalcomputer that people began to understand the power and importance of opensystems; i.e., the development of standards such as operating systems thatenabled users to share their work. Even when customers began to show apreference for open systems the Route 128 companies stuck with theirproprietary system approach.

The expansion of the minicomputer industry in the 1970's created a boomin the economy of Massachusetts. The boom had ended by the mid-1980's andin the late 1980's 50 thousand jobs were lost by the Route 128 firms.The major competition for the Route 128 firms was the Silicon Valley, butthe real enemy of the Route 128 area firms was their organizational structurethat was inappropriate for the dynamic field of computer technology.

Silicon Valley firms, relying upon components and services availablein the market, were able to develop new models and even new product linesfar, far faster than the Route 128 firms which insisted upon developingeverything in-house and effectively had to re-invent the wheel.

The Route 128 firms not only failed to communicate effectively with themarket they often failed to communicate internally. Saxenian cites thecase of DEC cutting its scheduled production run on a personal computerfrom 250,000 to 100,000 but the divisions producing components for thiscomputer continuing to produce 250,000.

In 1985 DEC set up a research laboratory in Palo Alto but largely ignoredthe information and insights this operation gained by being in the SiliconValley.

William Poduska created the Route 128 firm of Prime Computers. AfterPrime was well launched Poduska left Prime to start Apollo Computer. Apollointroduced the workstation computer to the world in 1980. Sun Microsystems of theSilicon Valley entered the workstation field in 1982. Despite this two-yearlag Sun Microsystem, the archtype of the aggressive and agile SiliconValley startup, won the workstation market away from Apollo.

The early 1980's began the era of the personal computers based upon themicroprocessor pioneered by Intel. Route 128 firms remained committed tothe minicomputer architecture with custom-made integrated circuits forcentral processing units. They could not except the grim reality thattechnological innovations can make past technology, no matter howwonderful it once was, obsolete and as dead as yesterday's newspaper.

In contrast the Silicon Valley, although running away with the newtechnology of the microprocessor, did not seem to be wedded to anyparticular technology or product. As times changed Silicon Valley firmsseemed to be able to adapt, experiment and recombine endlessly. It wasa much healthier institutionally than Route 128. Saxenian cites a veryeloquent statement by Tom Hayes, an executive of Applied Materials anda founder of Joint Venture. Hayes said:

Our aim is to build a comparative advantage for the SiliconValley by building a collaborative advantage...to transform SiliconValley from a valley of entrepreneurs into an entrepreneurial valley.

Restricted Opportunity on Route 128

Saxenian states the problem very succinctly:

Although...Route 128's independent-firm-based systemhad provided economic scale and organizational stability that werevaluable in an earlier era, by the 1980's they served primarilyto discourage adaptation. The committment of local companies tovertical integration meant that technical capabilities and know-how...remained locked up within large firms. The paucity of horizontalcommunications stifled opportunities for experimentation and learningwhile traditional corporate structures limited the development ofmanagerial initiative and skill....This may have imposed a minorinconvenience to large firms, it bacame a significant disadvantagefor start-ups and small firms that were unable to learn about oracquire state-of-the art components or services as rapidly as theirWest Coast counterparts.

It did not take the talented people long to realize the land ofopportunity for them was not along Route 128 but instead in SiliconValley.

Although Silicon Valley lost the price war on memory chips to theJapanese producers there were still important markets left. Therereappeared a market for custom-designed chips, or as they were nowcalled Application-Specific Integrated Circuits (ASIC's). The aggregatemarket for these amounted to something comparable to the memory chipmarket in revenue. Instead of seeking profits in terms of economiesof scale the custom chip makers gained profits from the differentiationof their products. The new chip startups produced one to two hundreddifferent types on "mini-fab" production lines with runs of ten toten thousand chips in constrast to commodity product "mega-fab" runs ofmillions of the same chip.

In the 1980's there was a new generation of startups in the computerindustry of the Silicon Valley. Some of these were:

There were also major startups in the Silicon Valley in the 1980's in fieldssuch as computer peripherals and software.

Proprietary Versus Open Systems

Prior to the 1980's most computer firms, as a matter of course, createdproprietary operating systems and software for their computers. Thisresulted in their customers not being able to use software from othersystems. In contrast, the computer manufacturers which used standardizedoperating sytems such as UNIX and DOS enabled their customers to tap into a vast supply ofsoftware created by third parties. This was a tremendous benefit then andnow is considered essential. The use of standardized operating systems iscalled the open system approach. Sun Microsystems was a major proponentof open systems. They made a virtue out of a necessity. During its startupphase Sun Microsystems did not have the resources and credibility todevelop proprietary systems and was not sure that anyone would acceptsuch software written by people who seemed to graduate students.

The Bottom Line

Saxenian presents a very telling comparative statistic for Route 128 versusSilicon Valley. In 1990 HP and DEC, respectively the outstandingcompanies of the Silicon Valley and Route 128, both had revenues of$13 billion. But from its $13 billion HP had net earnings of $771 millionwhile DEC on its $13 billion had a $95 million loss. In 1992 DEChad $2.8 billion quarterly loss and founder Ken Olsen had to resign.

The Virtual Corporation

Michael Dell uses the term "virtual corporation" to denote the phenomenonthat Saxenian describes as a blurring of the boundaries of the firm.This is what occurs when a company works closely with its customers tosatisfy the customers needs. On the other end a corporation can alsomesh its needs with those of its suppliers. The company has a notionof what it wants and the supplier knows what it can supply. Sometimesthe supplier knows of alternate products which will achieve largelythe same results at a low costs. The firm knows the tradeoffs thatare important. By working together the firm and its supplier may beable to achieve optimum results which are not even considered in anarms-length relationship between firm and suppliers.

Silicon Valley firms frequently limit their purchases from any onesupplier to keep themselves from becoming excessively dependent uponone source of a crucial input. Likewise firms also try to avoid becomingexcessive dependent upon any one customer.

Saxenian gives an interesting example of firm-supplier symbiosis in thecase of electronics assembly. Some firms such as Flextronics began to do contract assemblywork, what was called "board stuffing." In the 1970's these board stuffingspecialists were small and low tech. The client provided the componentsand the directions. By the 1980's firms like Flextronics had developedspecial equipment and could provide expert guidance in the selection ofcomponents. When a state of confident trust developed between theelectronics firm and the board stuffers the firm could turnover much ofthe selection and procurement of components to board stuffing specialist.The board stuffing firm might also assume responsibility for testing ofthe finished devices.

This type of operation involving component selection, procurement andtesting is called "turnkey." Flextronics ultimately played a role indesign of printed circuit boards the company "stuffed." Some technologicaladvances were also made in assembly. The traditional assembly operationwas the soldering of wires that passed through holes in the circuitboards. A new method was developed, called "surface mount technology,"(SMT) which involved the fastening of wires to the boards with epoxycement. This method allowed for mounting components on both sides ofa board. This method was pioneered by the Silicon Valley firm ofSolectron. This technology involved a large capital investment and wouldnot likely have been developed in vertically integrated firms.

Another example of firm-supplier synergy is the relationship betweenHP and Weitek. Weitek designed ultra-high-speed chips for fasternumerical computation. HP purchased Weitek chips for its computers.But Weitek achievements were being limited by the state of its chipfabricating operation, its foundry. HP discerned that Weitek usingHP higher quality foundry could produce better chips for HP. HP openedits foundry to Weitek to use to produce chips not only for HP but alsofor other Weitek customers. This was a highly beneficial arrangementfor both Weitek and HP.