TCS Daily

The Wealth of (Other) Nations

By Dominic Basulto - October 13, 2003 12:00 AM

After a three-year lull in the technology sector that has made many insiders anxious about any near-term return to prosperity, Silicon Valley is facing a daunting question: How will it continue to remain the global hub of innovation and entrepreneurial activity amidst declining profit margins and shrinking sales? While some IT giants, such as Microsoft, continue to fatten up their coffers, most companies are facing a number of disturbing questions about what comes next. Exotic locales like China and Eastern Europe, once bastions of Communist central planning, now seem to offer more exciting growth prospects for technology investors than Silicon Valley. The strategic response from the U.S. thus far has been uninspiring -- cut costs and boost efficiency until the Next Big Thing rolls around the corner. Companies that can't wait that long (Oracle, Hewlett-Packard) are bulking up, hoping for new economies of scale or for much-anticipated synergies to kick in.


So what ails Silicon Valley? One factor could be a continued blind faith in technology as a way out. Almost any discussion about a recovery in the tech sector seems to involve terms like "Next Big Thing," "killer application," or "fast-growth market niche." Throw enough things against the wall, and something is certain to stick. If it's not Wi-Fi, then it's utility computing or grid computing or nanotechnology or Web services. Once a concept seems to resonate with the public (however fleetingly), companies then attempt to craft a story around these technologies. About a half-dozen different names have been coined for utility computing alone. IBM has "e-business on-demand," HP has the "adaptive enterprise," and Sun Microsystems has something called N1.


Another factor, without a doubt, is the chauvinistic tendency for America's tech leaders to discount the prowess of foreign competitors. In this way of thinking, overseas technology firms are only able to compete because they produce shoddy products, have no respect for intellectual property and pay their workers what amounts to slave labor wage rates. Surely, $49 DVD players from China must be some sort of joke? Low-cost IT outsourcing firms from places like Romania (Romania!) are surely out of their league when they go head-to-head with competitors like IBM and EDS. Grudging respect for the technological know-how of nations such as Russia is almost always followed by reference to rampant software piracy and a lack of sophistication about intellectual property.


Doesn't all this sound familiar? More than one analyst has remarked that the current downturn in Silicon Valley and the public outcry over lost IT jobs to overseas competitors in India and China bears an uncanny resemblance to the loss of U.S. manufacturing competitiveness to Japan during the 1980s. Then, as now, it appeared that a low-cost Asian colossus was ready to topple America from its leadership position by employing a host of "unfair" practices, such as paying below-market wages and tilting the bureaucratic playing field to favor export-oriented upstarts over their U.S. competitors.


What became apparent, though, was that the Japanese economic miracle was due, in large part, to the use of new management principles previously unknown in the West. Japanese companies re-engineered the shop floor to gain a competitive advantage over their Western competitors. They implemented concepts such as Kaizen and Kanban and changed the future of manufacturing forever. They instituted "just-in-time" manufacturing processes, created a culture of "continuous improvement," and emphasized "lean" production.


While these ideas are now a staple of any business textbook, at the time, they were revolutionary. During the 1980s, American companies rushed to implement "just-in-time" manufacturing and adapted the notion of "continuous improvement" as part and parcel of everyday operations. Derivative concepts such as "Six Sigma" and "Total Quality Management" began to permeate the American management landscape. Companies started to boast that "Quality is Job #1" and highlighted their amazingly efficient supply chains.


The point is that maybe, just maybe, companies in Silicon Valley should take a look at new approaches to business that are emerging in places such as India, China and Russia and stop worrying so much about the Next Big Thing. Maybe hot Chinese technology companies like Alibaba, Shanda, 3721 and C Trip are not just shameless, low-cost rip-offs of U.S. companies like eBay, Google or Expedia. Maybe the Russian problem-solving technique known as TRIZ, recently profiled in Wired Magazine, actually makes sense. Maybe the Indian Institute of Technology, described on CBS "60 Minutes" as a mix of Harvard, Princeton and MIT, might be a hotbed of new management theories for all those Indian IT outsourcing giants.


Scratch the surface of any overseas IT success story, and it's almost certain that there's more to the picture than just low costs and a slavish adaptation of U.S. intellectual property. Most likely, these overseas competitors are creating new business processes and sophisticated new management strategies that are suited for emerging economies with weak IT infrastructures, low purchasing power, and incredible population density. By co-opting these management theories, much as U.S. manufacturers did when faced with a threat by the Japanese in the 1980s, Silicon Valley may re-emerge from the current slump bigger, stronger and faster.

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