Silicon Valley Trip

Clusters and Competition
From Sunday July 28th, 2013 through Sunday August 4th, 2013 nine Undergraduate Students and one Graduate Student, along with Professor Olayele Adelakun from DePaul University’s College of Computing and Digital Media traveled from Chicago to Silicon Valley California, to study the Silicon Valley technology cluster and the effect of the cluster on the companies, and the effect of the companies on the cluster. In addition to scheduled visits at select companies, the group was also able to explore the surrounding area, in order to get a better idea of the external factors, and competition present in this cluster. Throughout the trip, we were able to immerse ourselves in the local culture, and truly get a full experience of Silicon Valley, including local cuisine, museums, and scenery. Upon our return to Chicago, we were also fortunate to be able to visit the headquarters of Groupon, to get a Chicago perspective for our study as well. Overall, it was an experience that could not be replicated in any classroom. Please explore our website to further learn about our trip, and the attendees of the trip.
Clusters & Silicon Valley Michael Porter discusses clusters in the context of a framework, specifically how the development of clusters promotes innovation. Because of factors including government influence, private financing, location, economics, and technological advancements, Silicon Valley has emerged as the leader in IT clusters worldwide. Its proximity to all the essentials of a successful cluster make it a case to study for anyone looking to emulate it. In our analysis, we investigate the various aspects of Porter’s framework (Firm Strategy & Company Rivalry, Factor Input Conditions, Demand Conditions, and Related & Supporting Industries) and provide insight based our personal observations from our summer trip.
IT Cluster Chart

Factor Input Conditions

Factor Input
One of the major factor inputs in Silicon Valley are the universities and R&D firms. Universities are extremely important because one thing in common that every company we visited stated, was the there is a shortage of talent and more available positions than available bodies. Universities, such as Stanford, stand as a double input to the cluster. Stanford has one of the strongest Computer Science programs in the world and produces excellent talents for the tech industry and they also have a very strong research program. A lot of the people we met while visiting companies, were Stanford alums. That alone establishes connections for new grades to the different companies that are looking for new talent. The other strong input, is the research firms. The research firms partner with a lot of the companies, and help work on research theories or solving problems.
Trade Association
In Silicon Valley, there are a lot of different trade associations. They all either consist of or have been started off by respectable figures in the valley. These trade groups work with companies to create communication and dialog between organizations to discuss current and future progress of the tech industry. An example of a major trade association is Silicon Valley Leadership Group. They were founded in 1978 by David Packard of HP and represent over 300 employers on different issues and campaigns that affect the valley. Some topics of interest are education, energy, environment, federal issues, government relations, health, housing/land use, tax policy, transportation, and community ( There are many organizations such as this, some of which also like to set up meetings and events where the different companies in the region can get together and discuss issues such as these. The trade associations in the valley are extremely important and vital to the progress of the industry. By trading technology, data, information, and personnel, the cluster will grow together.
Managerial and Leadership Concerns
Those in leadership and decision making capacities at organizations, including participants of the Silicon Valley technology cluster, are concerned with factor conditions regarding employees, especially those with specialized skills. Michael Porter also discusses this in “Clusters and Competition,” when he writes, “Managers have nightmare visions of losing valued employees to rivals or spinoffs. […] [However,] the presence of the cluster expands their supply. […] Any increase in competition comes with cluster benefits in productivity, flexibility, and innovation” (Porter, 37). Here Porter says that cluster participants have access to an abundant pool of talented personnel, in spite of concerns that these employees may be tempted to leave their organizations. While not apparent during company visits in Silicon Valley, this became much more noticeable during the class’s visit to Groupon, which is located in downtown Chicago. Evidently, a culture difference in risk taking and career pursuing exists between Silicon Valley and Chicago. Those in Silicon Valley have a tendency for risk taking and are unlikely to pursue careers lasting decades, whereas those in Chicago are not as willing to take risks and prefer working at one organization for longer periods of time. Silicon Valley’s pool of employees willing to take risks, and, to a lesser extent, the concentration of venture capitalists, contributes to the presence of startups in the area, as well as innovation of new technology.
University Research Institutions
Stanford research institute is an organization that specializes in client-sponsored research and development. It provides services to government, industry, and private organizations. As a result Stanford Research Institute provides ventures, products, and services that enhance innovation in the Silicon Valley IT-Cluster (About Us). An example of an innovative product that was created by SRI is the voice recognition assistant Siri found in iPhones today. Siri, formally known as PAL, was a form of artificial intelligence created for the United States government to “build a new generation of cognitive assistants that can reason, learn from experience, be told what to do, explain what they are doing, reflect on their experience, and respond robustly to surprise”(SRI International). After SRI created this technology for the government, the institution wanted to bring it to the Marketplace. They did this by creating Siri, which in 2010, was acquired by Apple and integrated into the iPhone 4s in 2011(SRI International).
Concerns for Infrastructure
Participants of the Silicon Valley technology cluster address concerns for factor conditions regarding infrastructure in its various forms, in an attempt to give themselves an advantage over their competition. In the case of physical infrastructure, it was more or less represented by commercial real estate, which in many cases was previously owned by another or former participant of the cluster. For instance, the campus Google currently occupies, which is located in Mountain View, was once owned and operated by Silicon Graphics. The California suburb has seen technology firms settle down and move out, so Google’s decision to plant roots there is nothing new for Mountain View. By purchasing buildings that were already available in Silicon Valley, Google ensures itself an advantage with access to other conditions necessary to actively compete in the cluster. In addition, Facebook inhabits buildings that were formerly utilized by Sun Microsystems, which was acquired by Oracle, another participant of the Silicon Valley cluster. Facebook’s headquarters is located in Menlo Park, centrally located in Silicon Valley and located near other cluster participants such as Google and Yahoo! Walking around Facebook’s campus, some remnants of Sun’s presence were minute but still somewhat noticeable. Accents in the architecture included the former firm’s logo, which Facebook seemed to opt for retention. A senior employee at Facebook who discussed the Silicon Valley cluster with us indicated that it was a sort of reminder that any participant competing in the cluster, such as Sun Microsystems, may someday cease to exist. In his piece for the Harvard Business School Press titled “Clusters and Competition: New Agendas for Companies, Governments, and Institutions”, Michael Porter describes how factor conditions in a cluster contribute to innovation and productivity are usually only found within the cluster. He writes, “Specialized factors, especially those integral to innovation and upgrading […], not only foster high levels of productivity but tend to be less tradable or available from elsewhere” (Porter, 11). Although not explicitly discussing it, what Porter says here is quite applicable to the information and data available to participants within a cluster. This becomes much more apparent shortly after this when Porter says, “An important special case of the informational benefits of clusters is the availability of information about current buyer needs. Sophisticated buyers are often part of clusters, and other cluster participants often gain and share information about buyer needs” (Porter, 15). In these statements, Porter says the infrastructure for data is unique to a cluster, and this is attributed to the firms participating in it. This becomes obvious when studying the technology cluster in Silicon Valley, as companies in the region use the data available to them in varying capacities. A major contributor to the technology cluster in Silicon Valley is the global giant Intel. Silicon Valley’s namesake is in fact attributed to the presence of Intel, as the company employs silicon as a semiconductor in products it manufactures. Since 1968, Intel has provided its customers, specifically other cluster participants, with microprocessors. Firms in the cluster benefit greatly from Intel’s products, which have been refined and improved over the years of Intel’s operation. Conversely, Intel benefits from its consumers buying its products, with research and development of new technology required by specialized firms throughout Silicon Valley’s technology cluster. By providing a specialized factor for cluster participants, Intel has not only encouraged innovation, but also has given itself a competitive advantage. Yahoo! is another cluster participant that comes to mind concerning information of a buyer’s needs. Although competing with companies like Bing and Facebook, both companies also act as suppliers and consumers of Yahoo!’s products and services. Bing conducts research that Yahoo! implements, but is also a competing cluster participant by providing a similar search engine service. Additionally, Facebook is a competitor of Yahoo! as a mail service, as well as a supplier for Yahoo! as Facebook users share stories from Yahoo! News. However, Facebook also relies on Yahoo! when advertisements for the social media site are shown on pages of search results. These are roles that are usually found in clusters, and the relationships among Silicon Valley’s firms are rather commonplace and expected.

Related and Supporting Industries

Presence of Capable, Locally-Based Suppliers
The cluster framework brings together the best pieces of business and compiles those entities into one self-sustaining vehicle to deliver new technology. While some clusters have sprung up by sheer force of competition and business itself, governments around the world have largely influenced the development of clusters in other certain areas on the globe. Though, in every cluster it is important to recognize that every component of the cluster is not just as a competitor, but also as a customer and partner. Clusters encourage companies to work together, and the ever-present goal of innovation helps to drive their efforts.
The word “cluster” implies a localization of separate components all working together in order to run efficiently and effectively. The community is more than half of the ecosystem of a cluster. For example; Intel makes microprocessors for computers. These computers require these processors to engineer newer, better software for other computers. That software company might have bought 100 Intel microprocessors to improve their current systems. Now, these two companies have in effect become partners within the cluster, or are at very least working in cooperation to better the cluster as a whole.

Presence of Competitive Related Industries
In established clusters, the majority of companies are often small start-ups, thus facilitating the need for investors or venture capitalists. Initially these investors can be singular forces, such as local governments. These multitudes of small start-ups can bring in new talent from outside of the cluster, fostering its growth. And furthermore, with the changes some people might bring to the industry, expansion into new realms of innovative technologies is possible. The incentive for a start up is working for yourself creating a product that you had envisioned, before someone else in a related cluster buys you out. As such, entrepreneurs and visionaries will often start-up directly within the clusters, in hopes that they might one day be acquired by larger companies, or even just to partake in the convenience of local talent, services, etc.

Sponsor Forums to Bring Together Cluster Participants
The cluster supports a very healthy and mechanical way of thinking in order to produce “the next big thing.” Within these hack-a-thons, employees are encouraged not just to work on their own idea, but the share with others, and the industry as a whole. This process has brought us some of the applications and programs we use every day, such as Gmail. Merely by allowing one employee to render what he or she found useful and turn it into a tangible product not only for customers to use, but to improve the utility, efficiency and effectiveness of employees. Influencing them to create what they want breaks the norm of daily work, and allows for a new way of thinking toward innovation.
Encourage Cluster-Specific Efforts to Attract Suppliers
The cluster does not only interact with entities inside that same cluster. Companies often reach out to other areas of the world, or country to improve productivity, or reduce cost. Having locations across the world allows IT Companies to truly work around the clock, chiefly in different time zones. Partnering with another IT company or building a campus on another continent can serve to increase product development. For example, when programmers finish a software version for the night, it might be sent across the seas to China, where they can pick up the development right where it was left off in America. The result is theoretical 24 hour manipulation, improving productivity, work flow and, efficiency. Companies use other resources to benefit them in many back end ways. Money, abundance, talent; these are all factors that can drive companies to reach outside of its specific physical location, looking across the seas, or to other parts of the country. This, in turn, links the relationship companies’ share with each other across multiple clusters.

Establish Cluster-Oriented Free Trade Zones, Industrial Parks, or Supplier Parks
The creation of industrial parks and locations enhance the marketability and productivity of a specific industry. Meaning these “supply parks” or “free trade-zones” are the breeding grounds for a cluster. Selling companies land located in close proximity to one another improves the likelihood of the sharing of ideas, thus promoting the cluster and the ecosystem to grow as they desire it to be.

Encourage Local Investments
The self-sustaining ecosystem that is a cluster is totally reliant on its counter parts to remain a productive and successful cluster. The role of government, local economy, and investment incentives are all equally important for a for a cluster, at different points of its lifespan. The fast paced, rapidly advancing model of the clusters in innovative industries can really test companies, emulating a survival of the fittest, to provide us with only the best most desirable products. Altogether, the concept of the Cluster is reshaping the way we conceive the world we live in while maintaining a healthy business relationship and environment to produce and innovate within.

Demand Conditions

Demand Conditions
The demand condition from the National Diamond framework is applied to clusters. If the demand conditions are very high locally, it will help push the surrounding companies to improve upon or generate brand new products. Therefore it creates an ecosystem in which the competition is very high. The pressure in which the firms face from the local demanding market will allow them to predict future needs and innovations, whereas it is much harder to obtain that kind of perception from foreign markets by itself. In the United States, consumers are more demanding of computers, phones, and electronics which can be considered a driver for growth and innovation. Joonyung Kim, Engineering Manager of Intel, said that being in Silicon Valley forces them to be continuously ahead of the game in performance and improvements with their Intel chips. Across all the companies we visited, all of them shared the notion the local demand was high in the Silicon Valley Cluster from sophisticated consumers.

National Advantage and Foreign Markets
The fast pace of innovation of products within the cluster in turn creates a national advantage when considering the exportation of the product to foreign markets. This is due to the fact that the focus of the product or service gets much more attention locally and a company is then able to predict global trends from focusing on local demand at first. Clusters cause an increase in demand for supplies, talent acquisition, and supporting functional services within the cluster. Retaining workers is much harder for a business within an isolated environment when compared to being in a cluster. For example, Groupon opted to set up base in California for 300 programmers for their website and mobile app development because qualifying and experienced engineers were much easier to find and retain than their Chicago branch. California is host to over 931,000 high tech workers employed with high wages, doubling the number of the high tech workers in Texas with 492,000.
Local Demand
Demand at home can identify segments in the market where companies can differentiate their product. Products can be differentiated by quality, price, reliability, or functionality. Our visit to Evernote expanded on the idea of differentiation. They have variations of the Evernote app depending on user preference such as Evernote Hello for an easy way to collect business cards or Evernote food for those that like to take pictures of their food. Intel is introducing them into the tablet market with the Samsung Tablet, the first tablet with an Intel chip. This will differentiate from their competitors and target consumers with preferences in the brand.

B2B Relationships
Companies within the cluster are host to a number of B2B relationships with each other as well as B2C. Nick Ionita, VP of Product Management of Freewheel, said they have a sophisticated B2B demand with the local media companies such as MSNBC, CBS, and Fox. This allows them to be highly productive and innovative. In the end it benefitted them a lot starting up at a location where demand existed in the first place. Ebay Now has a complex B2B relationship with retailers in order to deliver products within the hour. Susan Alban of eBay Now mentions that these merchants are really willing to work with them on making their service more efficient by getting access inventory data to allow their service to work. Demand conditions in the end play a huge role in determining a successful and cultured cluster. It pushes them to innovate and collaborate despite the high competition. It allows them to easily differentiate their product much more effectively versus being with an isolated environment where local demand is not so visible.

Strategy and Rivalry

Context for Firm Strategy & Rivalry
Silicon Valley (SV) is the technology hub of the United States, and perhaps the world. Because of this highly valued status, different levels of economics play an important role in shaping the climate for investment.

Silicon Valley is located within the state of California, which by international standards is a stable government. Because of the sheer size of the local and state economy (12th largest in the world if California were a nation), it plays an important role in the national economy of the US. Despite this stability, financial issues including public pension and education debt are a potential impediment to economic growth. With over 38 million residents, California is the most populous US state.

Unemployment is an interesting area where Silicon Valley displays its unique position among US regions. Despite California’s unemployment rate being among the highest in the US at nearly 9%, Silicon Valley usually sits in the range of 3 to 6%. Anecdotal evidence (interview with Nick Ionita) demonstrates that it is not uncommon for a SV technology worker to lose their job “one day and get hired the next.” Additionally, SV saw an increase in job growth of nearly 4% in late 2012, despite the continue worries of job stagnation throughout the rest of the country.

California has one of the most complicated tax structures in the US with varying income brackets and a complicated investment system. This is important as it plays a large role in the development of the cluster and fostering innovation. Given the need for outside financing (seed investment, angel investors, bank loans), there is an overwhelming need to simplify the tax structure to spur innovation and job creation.

Along these lines is the area of intellectual property (IP). More patents are generated in Silicon Valley than any other part of the country. Major firms that hold patents (and at times, license them) include Google, Intel, and Yahoo among many others. One would tend to believe that because technology firms are so reliant on IP, Silicon Valley would be a haven for IP lawsuits and litigation. While there have been several high profile patent cases, SV operates within a very unique ecosystem where a culture of co-opetition and cooperation exists. Since so many workers move from one company to another or start their own companies, this culture is only natural. A certain aspect of California business law also spurs the culture and atmosphere for innovation – non-compete agreements are not legal. One particularly notable example of this law is the hire of Marisa Mayer as CEO of Yahoo. Given Mayer’s previous employment at Google, a legal non-compete agreement would have prevented this transition and stifled innovation.

Unemployment Rates for States (July 2013)
Location Unemployment Rate
North Dakota 3.0%
Nevada 9.5%
California 8.7%
Illinois 9.5%
National 7.3%

Unemployment Rates for Silicon Valley (July 2013)
Location Unemployment Rate # Employed # Unemployed
Santa Clara 7.4% 856,000 68,300
Cupertino 4.8% 24,500 1,200
Palo Alto 3.9% 32,000 1,300
Mountain View 5.4% 42,000 2,400
San Francisco 6.3% 453,100 30,400
Eliminate barriers to local competition
Partly because of the density of tech related jobs in the area, local competition exists, but in a healthy manor. Many companies do compete, but rather than viewing each other as enemies, they use each other to foster new ideas, share knowledge, and gain a general sense of the direction people and ideas are moving. Several firms including Yahoo and Ebay spoke to this sense of culture. Because of the sheer number of companies based in Silicon Valley, software engineers come to the cluster, and so talent is more accessible. Because competition improves the cluster as a whole, it is another incentive for someone to start up a business here. Accessibility of funding, legal services, and office space attracts entrepreneurs to SV. The more ideas flowing around, the more competition with local companies in Silicon Valley, more innovation will occur naturally. Workers, many of them friends from academia, share ideas all the time especially during social functions. No company is better known for encouraging innovation than Google. Many Google workers have started their own businesses during and after their time at Google

Organize relevant government departments around clusters
Government involvement plays a role within Silicon Valley and IT Clusters in general. Many companies receive revenue from government contracts in exchange for work. Government projects like ARPANET played key roles in the development of the SV cluster. Agencies like NASA still have a presence in the cluster. The US government’s role has diminished in recent times, but the basis of the cluster began because of government research. As the cluster developed (with Intel leading the way), venture capitalist took advantage of the developing ecosystem. With the added influence of public and private educational institutions, the cluster continued to grow and develop. Institutions like Stanford have pushed the idea of entrepreneurship and lead to an increase in tech workers – again, pushing forward the cycle of innovation. SV area alumni have started companies like Google and HP.

Focus efforts to attract foreign investment
Many SV companies have an international presence and launch products all over the world. For example, Evernote went as far as to rebrand itself to fit the foreign market better. Again, because of the nature of a successful cluster, it will naturally attract foreign investment. Foreign investors, governments, and companies within the tech industry are aware of the success and environment in Silicon Valley, or other IT clusters, and wish to be a part of it. Because the world is experiencing globalization, it does not matter that a company, like Samsung, is based in another country. In order to compete on a global scale, they must also be part of the tech community in the United States. This leads to such companies opening up offices within the cluster. Another example besides Samsung is the Brazilian government. Brazil already has a large and growing IT sector/cluster, but the government is still opening offices within San Francisco in order to connect the clusters and promote trade between the two countries. It is interesting to think of the possibility of a “super cluster” where clusters work together sharing resources and creating the same type of community and ecosystem that allows for a local cluster to grow.

Focus export promotion around clusters
The banks of Silicon Valley, such as Silicon Valley Bank and City National, play a key role in investment and export promotion. Investment bankers like JP Morgan play a large role in the ecosystem, by offering low risk loans and investment in order to help companies within Silicon Valley export their products. Low risk lending is just one incentive used to promote exports inside the cluster. Besides funding, attorney choice is very important. Based on FreeWheel’s Nick Ionita advice, “Your attorney is one of the most important decisions you can make at the beginning as a startup.”

While many companies look to globalization and ease of transportation to cut costs, Porter’s cluster theory offers another perspective. A cluster is a group of companies, associated organizations and institutions in a related field with similar commodities and needs in a close proximity. Proximity is key to cluster development and the continued cycle of innovation. This “closeness” to investment (seed money, investors, banks), other technology companies, skilled workers, major research institutions, and legal services increase productivity and increases innovation. These results are maximized when the factors are increased.