Why Silicon Valley’s Success Is So Hard to Replicate

SA Forum is an invited essay from experts on topical issues in science and technology.

After decades of bafflement and frustration, the world is still struggling to guess the secret of Silicon Valley’s success. Sure, the towns and cities at the San Francisco Bay’s southern end have plenty of high-tech talent, but that’s scarcely an explanation: those ambitious young engineers and innovators could find work just about anywhere they choose.

You can list the features that brought so many of them to the valley, but the riddle remains. Yes, the surrounding area has its share of universities, government research centers and commercial labs. And a start-up could hardly ask for more encouraging circumstances: a large pool of highly educated workers; access to plentiful venture capital; and a highly entrepreneurial, risk-taking culture.

But Silicon Valley has no monopoly on any of those features. To be sure, pockets of innovation have emerged on a smaller scale elsewhere in the U.S., like North Carolina’s Research Triangle and the Route 128 Corridor outside Boston. All the same, comparable advantages have been of little help to areas such as northern New Jersey, with the legendary Bell Labs and leading universities, along with proximity to Wall Street, the world capital of high-stakes investment.

Countries around the world are doing their best to copy the valley’s magic. Take China, where companies in a variety of industries have boosted their research and development spending by an average of 64 percent every year for the past five years, and the Beijing government is making huge investments in the country’s university system. The hope is that such an infusion of resources will generate a Silicon Valley–style symbiosis between industry and the research sector. The effort has been massive, but so far the results are anything but.

What are the valley’s emulators missing? As authors of The Culture of Innovation: What Makes San Francisco Bay Area Companies Different?, a 2012 joint study by the Bay Area Council Economic Institute and Booz & Co., we attempted to answer that question.* What we found was a special trait that distinguishes Silicon Valley’s firms from ordinary companies: the ability to integrate their innovation strategies with their business strategies.

That one trait can make the difference between success and mediocrity—or worse. Our survey reported that Silicon Valley firms are almost four times as likely as the average U.S. company on Booz & Co.’s annual Global Innovation 1000 study to have a tight alignment of their overall corporate strategy with their innovation strategy.* Not coincidentally, the corporate culture of a Silicon Valley firm is also two and a half times more likely to be attuned to the company’s innovation strategy.

Coordination like that can pay big dividends. According to the Global Innovation 1000 study, companies that successfully mesh their innovation strategies with their corporate aims grow far more vigorously than those that don’t, both in profitability and in net worth. And to underscore the importance of innovation, Silicon Valley companies are four times as likely as others to shake up their own status quo by hiring new product-development talent.

Our ongoing research has identified three basic innovation strategies: Silicon Valley is dominated by what we call the “need seekers,” companies that focus on discerning their users’ actual needs, both spoken and unspoken; figuring out how to meet those needs; and then getting the necessary product or service to market as fast as possible. The other two categories are the “technology drivers” who take their direction from their engineering departments, rather than from their customers, and the “market readers” who rely on an incremental, fast-follower development approach. According to our research, the need-seekers consistently outgrow the other two over a five-year span, both in gross profits and in company value.

Need-seekers, our research also shows, tend to formulate their innovation strategy decisions at the company’s highest levels. Then they make sure to communicate that strategy throughout the organization, and they manage their R&D project portfolios rigorously and ruthlessly. Need-seekers in general—and Silicon Valley companies in particular—foster a culture of strong identification with the customer and sincere passion for the company’s products and services. At the same time, there tends to be less “not invented here” prejudice, consequently making the company more open to good ideas, no matter the source.

Fully 46 percent of Silicon Valley companies follow this model, compared with only 28 percent of U.S. companies in the Global Innovation 1000. Perhaps that’s due to the valley’s venture-capital ethos, which places a premium on tightly focused business plans and on anticipating the customer’s needs.

And that seems to be the long-sought secret. The companies that make their home in the valley rely on a strategy that strives for excellence, puts customer needs at the center of innovation and prizes fresh talent and new ideas above all else. So far that special combination of resources and ideals has proved difficult if not impossible to imitate anywhere else. The quest continues nonetheless. The prize is too great to give up.

*Editor’s Note (4/9/14): Since this column was published, Booz & Company has changed its name to Strategy&.