Cloning The Best Of The Valley

Much of what makes it great can be applied to companies of all stripes

The secret to Silicon Valley's success isn't in the silicon. It's not the speedy chips or the whizzy computer games or the intricate data-mining software that can sift complex databases to let us know that beer and diapers are the two items most often purchased together after 6 p.m. It's not even the omnipresent Web addresses that assault us on TV, in magazine ads, and on billboards. Rather, it's a way of doing business. Says venture capitalist L. John Doerr, of Kleiner Perkins Caufield & Byers: "It's a network, as opposed to a hierarchy."

Silicon Valley is setting a new standard for the way all businesses--not just high-tech companies--are run. With their flatter, more democratic organizations, giant talent pools, enormous web of interlocking relationships among companies, super speed, and can-do culture--especially the can-do culture--Valley firms are changing the rules of management.

But not enough. Elements of the Valley have been copied, but the place has not been cloned, gene for gene, anywhere in the world. And despite the corporate rhetoric and modest changes--fewer levels of management, shorter product cycles, even casual dress--the business world at large still doesn't get it. Says Intel Corp. CEO Andrew S. Grove: "People talk the talk. But when I go to the airport and see two dozen Gulfstreams, I don't know if companies have really figured it out."

They haven't. So here's a short list to help.

Failure is O.K.--seriously. Reward those who take risks, and don't penalize those who take a chance and fail. In other parts of the world, business flops and dead-end projects are stigmas. Careers screech to a halt. That makes managers afraid to take a gamble. It's not that way in the Valley, and not just for twentysomething entrepreneurs.

Push all levels of management to try new ideas. "The tolerance of failure is an intensely positive thing that people can learn from and apply," says Larry Keeley, president of Doblin Group, a consulting firm. That's why venture capitalists don't mind backing entrepreneurs who have had a couple of flops. Just ask Nolan K. Bushnell: He's started more than 20 companies, including gamemaker Atari Corp. More than half of his ventures have been disappointments. Says Jean-Louis Gassee, founder of computer startup Be Inc.: "It's hard to learn when you succeed."

Let ideas incubate. Valley companies excel at the early, often muddy stages of a business. This is partly because of the freedom-to-fail culture and a willingness to take greater risks when ideas are still unfolding. The key is to give the ideas breathing room. Don't require a 20-page business plan and detailed market research for every interesting notion. The laptop computer market would never have come about if someone waited for the market research suggesting that consumers want mobile computers. "This is a place that grows out of the rubble of the old innovations," says Paul Saffo, of the Institute for the Future.

Learn to live with creative chaos. Silicon Valley isn't just about speed and shortening product cycles. It's about developing a culture that can adjust quickly to change and chaotic environments. That means teamwork, coordination, minimal bureaucracy, and authority pushed down into the ranks. Indeed, the odd thing about Silicon Valley is that people are fiercely individualistic and yet quick to collaborate, share ideas over E-mail--anything to get the job done faster.

Be your own toughest competitor. Silicon Valley is an environment so accustomed to fierce competition that companies hunt for their own soft underbelly. That means coming up with better products that kill off your existing ones--a practice known as "eating your young." Says Alan F. Shugart, chairman of disk drive giant Seagate Technology Inc.: "Sometimes I think we'll see the day when you introduce a product in the morning and announce its end of life at the end of the day."

Don't stick with your starters too long. This lesson has been learned the hard way. Not every entrepreneur does everything well. The characteristics needed for a startup--zeal, unwavering belief in your mission, and perfectionism--can hurt more mature companies. In the Valley, you can count on one hand the founders still running their billion-dollar babies. So when a company or a business unit grows to a significant size--say around $1 billion--get seasoned help.

Spread the wealth broadly. Put in place compensation systems that reward achievements--for all employees, not just those at the top. The Valley's liberal stock options and vesting programs have become the reason why its employees work at Net speed. So stoke the money machine. Making people rich, fast, is what keeps the food chain filled. This creates a natural pool of managers, or so-called angels, ready to use their bankroll to fund the next great idea. Says James G. Treybig, founder of Tandem Computers Inc.: "This is an awesome machine to create new companies."

Grab market share at all costs. Even if it means giving your product away. And in the process, change the rules of the game. That's what Netscape did. Use the Internet to cut out the middleman and go direct around the world. It's great for building market share and brand recognition. This also tightens relationships with customers and changes the balance of power in the world of distribution. Net media and Web search engine companies such as CNET Inc. and Excite are doing just that--much to the frustration of traditional media companies. By jumping on the Net early and keeping their services free, they've captured market share and established well-known brand names on the Web.

Stay at the cutting edge by investing in startups. The best way to get innovation may be to buy it. Giants like Cisco Systems Inc., which has bought or invested in 34 startups in the past three years, do this to stay plugged into what's brewing in the labs of new companies. Chip king Intel has a $500 million investment fund it uses to seed startups, particularly in the Net and content areas.

So set up a venture capital fund and bring in your own dealmakers to connect with small, fast-moving companies in your industry. Later, you could either make a killing when they go public, get a jump on some new technology, or resell their product, lowering research and development costs.

In the end it comes down to that ill-defined, yet critical ingredient: culture. You can change it but not by picking just one or two items from this list. You have to change the way you do business. And remember the first item: Failure is O.K.

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