Silicon Valley and Porter's Diamond

Warm welcome to my first blog! Giving a brief introduction about myself, I am doing my bachelor's degree in Information Technology at the University of Moratuwa and also doing CIMA.

Since I come from a dual background of management and IT, I thought of applying a famous management concept to the world's largest IT industry.

Tittle of this post mentions the term "Silicon valley" which is the southern region of the San Francisco Bay Area in Northern California, United States. Silicon valley is the home to many of the world's largest IT companies such as Google, Apple, Microsoft, Hewlett-Packard (HP), Cisco, Oracle, Facebook, Twitter, Yahoo, etc.

Porter's Diamond refers to Micheal Porter's Diamond Theory which explains how certain countries have a distinct advantage over the other countries when it comes to certain industries. For example, Germany for auto industry, Switzerland for chocolates and watches, Holland for super yachts, Italy for Fashion and Scotland for whisky.

In this post, I will be explaining why Silicon valley is world famous for the IT industry using Diamond Theory as a framework.

Diamond Theory can be simply identified using the diagram below.

Factor Conditions
There are two main types of factors. Basic factors such as raw materials, unskilled labor and advanced factors such as highly skilled labor, research and development facilities, etc. Out of these two types of factor conditions, advance factors give a distinct advantage to a particular country over the other countries.

If one looks at the United States and Silicon valley, it posses the most skilled and innovative IT workforce in the world where companies such as Google and Facebook attract some of the world's most outrageously talented IT enthusiasts through their creative, flexible and democratic HR policies. On the other hand, some of the world famous universities for technology research such as MIT, Caltech, Princeton, Stanford, etc. provide excellent research and development facilities to propel the IT industry in the Silicon valley.

Related and Supporting Industries
In a generation where the entire world is connected and dependent on each other, any industry requires the support of other industries to succeed. For example, world class distilleries in Scotland play a major role in the success of Scottish whisky industry.

The story does not take a turn in the Silicon valley either. Social networks such as Facebook and Twitter, network systems specialists such as Cisco and the entire Eco-system of Apple is ably supported by the US telecommunication giants such as AT & T and Verizon.

Demand Conditions
Demand for new software applications and tech gadgets in the US is ridiculous. People are born with a smart phone in hand and 80 years old grand fathers update fb status or tweet every 10 mins. According to the survey conducted by Nielsen in mid 2013, more than 60% of the US population use a smart phone and a vast majority actively interact with others through social media. This strong domestic demand for desktop and mobile applications and smart gadgets such as smart phones and tablets, has given the impetus to IT firms in the silicon valley to constantly innovate, improve quality and move to global markets. Further more, through economies of scale, they are able to sell their products and services at lower prices in global markets and be more competitive.

Strategy, Structure and Rivalry
Another main reason why silicon valley is considered the land of high-tech businesses is the strong strategy of the industry. Corporate giants such Apple, Google, Cisco, Facebook, etc. believe in just one strategy; "Innovation". They all hunt as a pack against IT firms in all other countries using "innovation" as their trump card. This has made IT firms in the silicon valley almost invincible.

Rivalry is another factor that drives national competitive advantage. Rivalry among companies such as Google, Microsoft, Facebook, Twitter, etc. has resulted in several positive outcomes such as improved quality, constant innovation and experience to face battles against other global players from different countries.

Structure mainly refers to ownership structures of businesses. For an industry to achieve sustainable growth, it is important to have strong ownership rules and regulations. Tight legal framework in the US has ensured that people will not simply enjoy the benefits of silicon valley and move their operations to other countries once they are well established.    

There were only four factors in Micheal Porter's original diamond theory, but later two extra factors were added.
  • Role of the chance events - Chance events have played a major role in the success story of silicon valley. World famous entrepreneurs such as Bill Gates, Steve Jobs and Mark Zuckerberg are all school drop-outs. Had they continued their education, Microsoft, Apple or Facebook may never have become a reality. You never know!
  • Role of the government - Although the US government has been heavily criticized in the recent past, they have made telling contributions to the development of silicon valley. For example, it is said that when Sergey Brin conceived Google, he was working on a bibliographic research with a National Science Foundation (NSF). There are several other instances where the federal support has been given for research work.          
All these factors identified in the Porter's Diamond give answers to questions such as "why silicon valley for IT? why only silicon valley? why not any other place?" 

Hope you found my first blog useful. Until next time, be safe, enjoy! 


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