Strategy

Cities around the world with emerging tech hubs are asking what’s in Silicon Valley’s so-called “secret sauce,” and how they can emulate the famed region’s success. In order to demystify that secret, Stanford Assistant Professor Chuck Eesley and Daniel Armanios, an assistant professor at Carnegie Mellon University, sometimes visit places far away from Silicon Valley – where entrepreneurial ecosystems are still in their infancy. They research environmental influences that lead to high-tech ventures, and that are therefore critical for aspiring entrepreneurs. For a recently published study, the two spent time in Beijing’s bustling Haidian district – home to some of China’s most prominent universities and technology companies. What the district doesn’t have, however, is a critical mass of startup investors like the venture-capital community in Silicon Valley. Eesley: In my travels in emerging economies, I noticed that there weren’t very many private, early-stage investors. A lot of the resources were still controlled by the government, due to under-developed institutions for antitrust regulations, IP protection and the like. Early-stage entrepreneurs were really struggling to raise funding. In China, the government’s budget and domestic loans account for over half of the total annual domestic investment, and state-owned banks administer three out of four domestic loans. Overall, about 46 percent of domestic financing in China is controlled by the public sector, whereas private-equity funding represents just 5 percent of that total. Armanios: The prevailing view is that to access these public resources you need to know someone in the government. What we find is that even without political connections, you can still make yourself competitive for such financing by working through a locally reputable organization like a science park, incubator or accelerator. China’s science parks were developed to bridge the gap between private-sector entrepreneurs and the public resources they need. As part of their admission process, science parks also assess the potential of the various entrepreneurs who come through the door – in other words, reducing perceived investment risks while at the same time increasing access to startup money. The researchers found that, in particular, entrepreneurs with business experience gained elsewhere, but with no local ties, benefited from a science park’s ability to lend credibility. The other group in the study that gained the most from science parks were highly educated locals who had strong technical skills but needed additional business training and mentoring. China’s first science parks were established in the late 1980s, when the government began to embrace entrepreneurship as a profession and play catch-up with other advanced industrialized nations. They typically provide various services in a shared space and essentially serve as business incubators for technology ventures that spin out of nearby research institutions. This intermediary role is essential for China’s emerging entrepreneurial ecosystem: The state is “ill-equipped” to pick entrepreneurs with the most potential and connect them with the capacity-building training and capital they need. Armanios: How entrepreneurs acquire public financing depends on their prior experiences, capabilities and network connections. Returning entrepreneurs, or those entrepreneurs who spent time abroad and are now coming back to their home country, have tremendous amounts of technical experience and global business know-how. However, they’re trying to get financing from local government officials who don’t have business expertise, so the officials have trouble credibly assessing those kinds of skills. What “returnees” do is apply for admission into science parks because those parks are reputable local institutions that are known for credibly-vetting such skills. “Local elites” on the other hand, who are entrepreneurs educated at prestigious institutions in China – such as Tsinghua University, Peking University, or institutions under the Chinese Academy of Sciences – have tremendous amounts of technical experience but do not have much business experience. They enter science parks to help build up those skills, like business-model development, management training, as well as to learn about marketing and advertising. The experience in China mirrors those of other countries that are striving to incubate entrepreneurial ecosystems of their own. For instance, Start-Up Chile is a key institutional intermediary linking government funds to support about 1,000 Chilean ventures. And more recently, the Malaysian Global Innovation & Creativity Centre has been launched to support and foster strong communities where entrepreneurs are able to easily connect and share their ideas and solutions with each other. Eesley: As a scholar of entrepreneurship, I’d love to see the field do more research on how we can help these entrepreneurs who aren’t well-connected and who may not typically have the resources to enable them to be successful in entrepreneurship. What are the most time- and cost-efficient ways to help train them or to help provide resources or services to enable them to create successful ventures? Armanios: By looking at how science parks in their day-to-day activities actually help support existing government programs – and how that subsequently helps entrepreneurs acquire resources from these programs – really fascinated me. In leveraging intermediaries like science parks, entrepreneurs can improve their access to resources from existing public-policy programs, rather than having to wait or lobby for the creation of new programs. In the end, understanding what mechanisms must be in place to support entrepreneurs in emerging economies will help governments, institutions and entire nations bring more innovation into the world. Armanios: Even in the United States, those early-stage ventures that are trying to commercialize basic science also need government financing. This study, “How entrepreneurs leverage institutional intermediaries in emerging economies to acquire public resources,” was published in the Strategic Management Journal. In addition to Armanios and Eesley, their co-authors include Jizhen Li, an associate professor in Tsinghua University’s Department of Innovation, Entrepreneurship and Strategy, and Kathleen Eisenhardt, a professor of management science and engineering at Stanford and faculty co-director at STVP.

Everyone has blind spots. Diverse teams are better at seeing the full horizon of opportunities and consequences.

For most of us, the reorganization of Google into a network of separate subsidiaries under the holding company Alphabet had zero effect on our lives. In the wake of Larry Page’s announcement in August 2015, we searched the web, mapped our routes, checked our Gmail, and it all felt exactly the same. That’s because those core products remained within the original blockbuster business, now known to investors as Google, Inc. But over the long run, the restructuring could unleash the full ambition and creativity of the Silicon Valley company — influencing our lives dramatically in the way that it has with search, and could with self-driving cars and the rest. That’s Kathleen Eisenhardt’s take on it. She is the S.W. Ascherman M.D. Professor in Management Science and Engineering at Stanford University, and a leading scholar on strategy and organization — especially in technology-based companies and high-velocity industries. Beyond that, Eisenhardt was the Ph.D. advisor for Shona Brown, the former senior vice president of business operations at Google. Together, they wrote the highly acclaimed business book Competing on the Edge: Strategy as Structured Chaos. In advance of next month’s annual stockholders meeting at the Googleplex, the first in the age of Alphabet, and Page’s promise of increased transparency into finances and operations, Eisenhardt explains how tech companies (and even terrorists) have turned to an agile and modular structure — and what needs to happen to fuel outsized innovation beyond just another corporate re-org. Stanford eCorner: Alphabet CEO Larry Page says this will allow for cleaner operations, while industry observers say it will soothe shareholder concerns about Google’s increasingly “wild investments.” What do you find most interesting about the restructuring? Kathleen Eisenhardt: The most interesting aspect of the Google restructuring is that it took so long to do it. Google has an amazing search business — no doubt about it. Many people even call it Google’s “ATM” because it generates so much cash. But at the same time, Google has had a rough time developing successful new businesses. Many (or even all) of Google’s winning innovations and businesses outside of search per se — like YouTube, Google Earth, Nest and so on — came from acquisitions. Even DoubleClick that was pivotal to the search business was an acquisition. So, like other companies with enormously successful core businesses (like Intel and Microsoft), Google’s management has found replicating its search success difficult to do organically — that is, from inside Google itself and without the boost of acquisitions. In my mind, reorganizing was long overdue. eCorner: In Competing on the Edge, you and Shona Brown aimed to help organizations find the balance between too much and too little structure. How did this restructuring size up with the concepts from that book? Eisenhardt: Shona and I wrote about too much and too little organizational structure – and several processes, one of which we called “patching.” Patching simply means frequently reorganizing companies into focused business units that match changing markets. The term patching comes from quilting: the size of the cloth “patches” on a quilt. A major insight of patching is the critical importance of business size — organizing into a few large businesses favors efficiency and fits in stable markets. In contrast, organizing into lots of small businesses favors agility and goes with changing markets. This size tradeoff is another instance of balance between too much and too little structure. In the case of Google, it’s likely that its management stayed too long in an organization that favored efficiency when agility was the better choice. Another point of patching is the importance of having businesses that are about the same size. This reduces politics — a huge benefit. But, it will be challenging for Google to achieve the same size across its business, and so keep the search business from suffocating the others. At the same time, Larry Page is right: The new organization will make for a cleaner organization. The “sunshine” of this new organization should be immensely helpful in the C-suite for clarifying the actual performance of different businesses, and assessing whether the right managers are in place. eCorner: Do you think the separation of Google into subsidiaries — web-based businesses, medicine, investing and assorted technologies (Nest, X, Sidewalk Labs) — will increase the pace of innovation and bring more breakthroughs into the world? Eisenhardt: Yes, I absolutely think that the separation will turbo-charge innovation. Of course, this somewhat depends on the investment level. But generally speaking, if implemented well, the new organization lets Google’s leaders install top-notch management teams for each business and gives those teams the freedom to run their businesses. The key will be to push decision-making (both tactical and strategic) down to the business level — to those managers in the best position, with the most relevant skills and information — to make quick and informed choices. They are the ones, after all, with the pulse of the market. There’s another subtler point, too — that is, one of the toughest challenges is to manage businesses that are operating at different speeds, like simultaneously managing some that are moving at Internet time and others that are running at a slower pace for now (like autonomous vehicles). It is difficult to manage to the beat of different market metronomes. So the new structure should help Google managers to stay in rhythm with their markets. eCorner: You’ve also recently looked at the virtues of simplicity. And if anything, “Google” was the essence of simplicity in corporate identity. Doesn’t the corporation lose something in this restructuring that adds complexity (at least internally)? Eisenhardt: Google’s identity may have been simple, but its structure was not. The new business-unit organization should be a lot simpler for people inside and outside of the corporation. In fact, this restructuring is an old story. A classic book in business history is Strategy and Structure, by Alfred Chandler. He studied several corporations from the beginning of the 20th century, including and notably DuPont. DuPont was primarily an explosives manufacturer that emerged from World War I with huge stockpile of cash. DuPont executives used that cash to diversify into a slew of new businesses, but they stayed in the same monolithic structure that had brought success during the War. By the early 1920s, DuPont was losing money in almost every business except explosives. The flood of red ink finally led DuPont’s senior executives to reorganize the corporation into small business units focused on particular products. DuPont and other corporations that followed this same path went on to become the backbone of U.S. industry. They diversified, stagnated and then reorganized, just as Google has done. Today, companies like Johnson & Johnson, General Electric and 3M have prospered for decades using this same business-unit structure. Even terrorist groups like ISIS successfully use it, unfortunately. In fact, one of Silicon Valley’s most iconic firms, Hewlett-Packard, remained at the top of the tech world for over 30 years. By contrast, Apple and Google are still a long way from this kind of staying power. A major reason for H-P’s success was its very modular business-unit structure. Regrettably, H-P faltered when its corporate executives added complexity and slipped out of this structure. So yes, Google’s switch to their new structure is an old story and an overdue one. The new “simpler” Google will be a better Google.

In the startup world, there may be no such thing as becoming too successful. But for those few ventures that end up growing into a consumer business that reaches massive scale, well, it can get complicated. In the early days of Airbnb, when its founders were happy to just get out-of-towners into their San Francisco loft in order to make rent, they probably didn’t think they would need to worry about how the entire city felt about their business. But because of how wildly successful Airbnb is today, they do now. The company raised over $8 million to defeat a measure on last November’s ballot that would have imposed tighter restrictions on short-term rentals in San Francisco. The debate over the measure reached from city hall to the radio airwaves and overshadowed even the mayor’s race. Opponents included Airbnb and the many hosts who list their properties on the site, while those for the measure were San Francisco residents claiming that the constant stream of Airbnb guests was eroding a sense of community. And that sums up the disruptor’s long-term dilemma: When a startup grows to a point where it is in the public eye, the number of people who feel they have a stake in the venture grows. In short, it becomes their business, too. Chuck Eesley, an assistant professor of management science and engineering at Stanford, has studied how different stakeholders protest corporate behavior — from religious groups that file civil lawsuits, to environmental activists who hold rowdy public protests to attract news vans and bad press for the business. “Innovators and entrepreneurs need to recognize that along with technological disruption, often comes social disruption,” said Eesley, who researches entrepreneurship at the Stanford Technology Ventures Program. “These companies need to be aware of what kinds of regulatory battles might be in their future as a result of their innovation.” “These companies need to be aware of what kinds of regulatory battles might be in their future as a result of their innovation.” - Chuck Eesley Eesley’s study, published online in the Strategic Management Journal, looked at more than 1,300 actions brought against firms by social activists over the span of 30 years to pressure more environmentally responsible corporate behavior. The journal article, “Through the Mud or in the Boardroom: Examining Activist Types and their Strategies in Targeting Firms for Social Change,” was co-authored by Katy DeCelles, an associate professor at the University of Toronto’s Rotman School of Management, and Michael Lenox, a business professor at the University of Virginia and academic director of the Batten Institute for Entrepreneurship and Innovation. Unrest in the valley While their study focused on protests over environmental concerns, some of the findings bear upon some of the most high-profile social challenges currently facing Silicon Valley — tech titans and upstarts alike. Specifically, Eesley and his fellow researchers found that different types of stakeholders tend to employ different protest strategies: “Internal” stakeholders such as activist investors often worked within the system to affect change, like calling for shareholder proxy votes or filing a civil lawsuit. Meanwhile, “external” stakeholders such as social-movement organizations (SMOs) like Greenpeace were more likely to adopt openly confrontational tactics meant to shame firms in the eyes of the press and public. In the tech sector, one such SMO is Silicon Valley Rising, a new labor movement comprising hundreds of janitors, cooks, maintenance workers, receptionists and security guards, all demanding better pay and conditions from the highly successful tech companies that employ them. As for the analog for internal stakeholders identified in Eesley’s study, an excellent example would be Tracy Chou, a female engineer at Pinterest who sparked a national dialog about the glaring lack of women technologists in the valley via her 2013 blog post about gender imbalance. Maybe it’s because she was an “insider,” or the fact that she could speak in a way that relates to her fellow programmers. But one thing’s for sure: Chou’s initial commentary has bent the ear of the entire industry — from the CEO and co-founder of Pinterest vowing to lead the way in diversifying its ranks, to the heads of Apple, Intel and other tech giants now publicly reporting their diversity numbers (or lack thereof). Initially, Chou says public accountability wasn’t part of her plan. But she did want the issue to be discussed industry-wide, and without the blogosphere, she would not have been able to share her thoughts so broadly. “I wasn’t that intentional about it to start, but I think it’s important that these discussions be happening, and the way to provoke them is by being public about the message and the stories,” Chou said. “I think it’s important that these discussions be happening, and the way to provoke them is by being public about the message and the stories.” - Tracy Chou “I think I have a lot more credibility coming from the inside and being someone who has all the ‘right’ credentials,” she added. As it turns out, Chou has ties to both the Stanford Technology Ventures Program and to Eesley in particular. While at Stanford, Chou belonged to STVP’s 2009 cohort of the Mayfield Fellows Program; and as a research assistant for Eesley, Chou helped analyze large databases for his comprehensive study on the economic impact of entrepreneurship and innovation at Stanford. “She had this interest in using data and analyzing data in order to shed light on companies,” Eesley said of Chou. “Now, as an employee in one of these companies, she realized that there was variation across the firms, and that perhaps we should start collecting data and tracking it over time.” Going forward, the measure of a startup’s success may depend not just on how disruptive it is initially, but how responsive it is as the business grows and stirs up the pot of public sentiment.