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Nowak & Grantham _ The virtual incubator managing human capital in the software industry

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In a knowledge-based economy, the creation of wealth becomes synonymous with creating products and services with large software content. However, despite a few major players, the software industry as ...

In a knowledge-based economy, the creation of wealth becomes synonymous with creating products and services with large software content. However, despite a few major players, the software industry as a whole is fragmented and consists mainly of small, niche market entrepreneurial ventures. The authors study the California software industry to characterize the major barriers to success for these ventures. Simultaneously, a fundamental shift of software technology to a component-based development paradigm will reinforce the industry’s fragmented nature by fuelling a third party, independent software component economy. Coupled with the globalization of the IT industry in general, the need for startups and small companies
to form strategic partnerships will become increasingly critical to their ability to create wealth. In recent years, innovative public–private partnerships have attempted to assist startups by addressing their lack of physical resources or capital. This is best illustrated by the dramatic growth of incubators and regional capital networks. In this paper, the authors propose a ‘‘ virtual incubator’’ model to facilitate startup success and business network formation, shifting the focus to the ‘‘ virtual
value chain’’ and to connecting startups with business expertise and strategic partners in the marketplace. The authors provide a theoretical basis for the model and its implementation, important to potential investors in virtual incubators.

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Nowak & Grantham _ The virtual incubator managing human capital in the software industry Nowak & Grantham _ The virtual incubator managing human capital in the software industry Document Transcript

  • Ž .Research Policy 29 2000 125–134www.elsevier.nlrlocatereconbaseThe virtual incubator: managing human capital in the softwareindustryMichael J. Nowak a,), Charles E. Grantham baXerox Venture Lab., Xerox Technology Enterprises, Xerox, Palo Alto Research Center, Palo Alto, CA, USAbInstitute for the Study of Distributed Work and the Fisher Center for Management and Information Technology, Haas School of Business,UniÕersity of California Berkeley, Berkeley, CA, USAAbstractIn a knowledge-based economy, the creation of wealth becomes synonymous with creating products and services withlarge software content. However, despite a few major players, the software industry as a whole is fragmented and consistsmainly of small, niche market entrepreneurial ventures. The authors study the California software industry to characterize themajor barriers to success for these ventures. Simultaneously, a fundamental shift of software technology to a component-baseddevelopment paradigm will reinforce the industry’s fragmented nature by fuelling a third party, independent softwarecomponent economy. Coupled with the globalization of the IT industry in general, the need for startups and small companiesto form strategic partnerships will become increasingly critical to their ability to create wealth. In recent years, innovativepublic–private partnerships have attempted to assist startups by addressing their lack of physical resources or capital. This isbest illustrated by the dramatic growth of incubators and regional capital networks. In this paper, the authors propose a‘‘virtual incubator’’ model to facilitate startup success and business network formation, shifting the focus to the ‘‘virtualvalue chain’’ and to connecting startups with business expertise and strategic partners in the marketplace. The authorsprovide a theoretical basis for the model and its implementation, important to potential investors in virtual incubators.q 2000 Elsevier Science B.V. All rights reserved.Keywords: Virtual incubator; Managing human capital; Software industry1. IntroductionIn a knowledge-based economy, the creation ofwealth becomes synonymous with creating productsŽand services with large software content Hagel and.Armstrong, 1997 . Software is that ubiquitous tech-nology that powers everything in the InformationAge, embedded in everything from automobiles toelectric can openers. The knowledge encapsulated in)Corresponding author. Tel.: q1-650-813-7122; e-mail:nowak@pahv.xerox.comsoftware will increasingly define the economic valueof the intellectual capital it represents. Speaking ofthe importance of this new kind of capital, StewartŽ . w x1997 declares: ‘‘ . . . for a new Information Ageeconomy, whose fundamental sources of wealth areknowledge and communication rather than naturalresources and physical labor.’’At the heart of this new economy lies the softwareindustry, providing the enabling tools and infrastruc-ture to IT professionals in virtually all other indus-tries. A key characteristic of the software industry isthat, despite a few major players, as a whole it is0048-7333r00r$ - see front matter q 2000 Elsevier Science B.V. All rights reserved.Ž .PII: S0048-7333 99 00054-2
  • ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134126fragmented and consists mainly of small, niche mar-ket entrepreneurial ventures. The predominance ofentrepreneurs and small companies in the industrywill only be accelerated by the move towards a newŽ .component-based software development technol-ogy. Together with the globalization of business andthe marketplace, both trends will fuel the need formore strategic alliances and wide-ranging partner-ships. This seems to be especially true in Californiawhere software development often sets internationalstandards, for example JAVA and HTML languagevariants.These competitive drivers will have a profoundeffect on the US economy and in particular themanagement and commercialization of intellectualcapital. It will present a host of human resourcesmanagement challenges to both large and small com-panies, with the roles and responsibilities of employ-ees undergoing profound redefinition. Indeed, theentire role of strategic partners in the value-addedchain of an industry continues to undergo dramaticevolution. In this paper, we review some of thecurrent publicrprivate efforts to assist startups andsmall companies, the critical creative element in thesoftware industry. The authors propose a virtualincubator model to enable small company successand to allow US industry to take advantage of theevolution towards distributed human resources and abusiness landscape dominated by international strate-gic partnerships.2. Software industry evolution2.1. TechnologyThe software industry is poised to undergo adramatic evolution in the next decade, evolving froman object-oriented programming paradigm, where thesoftware expert is still critical to the development ofbusiness applications, to the component-based soft-Ž . 1,2ware development CBSD paradigm. In a com-ponent-based software economy, software experts1Component-based Software White paper, NIST. Can be foundat www.atp.nist.gov.2Russell Dewey, ‘‘Streamlining Software Development’’.will only develop relatively generic componentswhich business or domain experts can purchase andmodify to create domain-specific applications. Thisseparation or specialization of work will allow soft-ware and business experts to focus exclusively ontheir own areas of expertise, much as assembly linespermitted specialization in manufacturing.In this transition, analogous to what the machinetool industry experienced during the 19th centuryIndustrial Revolution, this new approach to softwaredevelopment will lead to a replacement of hand-crafted, artisan-tailored lines of code with software‘‘parts’’ or components and automated processes fortheir assembly. This will lead to dramatic increasesin the quality, maintainability and flexibility of soft-ware while reducing its cost, development time andcomplexity. It will also create a new industry of thirdparty software component foundries that can special-ize around particular competitive advantages in soft-ware functionality or business domain knowledgeand create independent, interoperable, top-qualitycomponents for sale.2.2. GlobalizationGlobalization of the information technology busi-ness will have a critical impact on the ability tocreate wealth among software companies. A host oftechnology and market drivers coupled with govern-ment deregulation are creating a new global market-place, particularly for software.The explosive growth of the Internet and theŽ .Internet Service Providers ISPs as a low-cost, eas-ily accessible marketing, sales and distribution chan-nel for new software products will allow easy accessto mass markets for all producers. On the other hand,large dominant firms will have the ability to createglobal scales of economy and global name brandsand hence take greater advantage of their size anddepth.We believe that there is an interesting parallelhere to other waves of technical innovation. The keycharacteristic that these technologies have is thatthey tend, over time, to increase the density of thesocial networks of innovators. According to theoryŽ .Wellman, 1999 , this increase should increase thepace of innovation; and we feel, spread it out over
  • ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134 127wider spatial areas, i.e., lead to global innovationŽ .Katz et al., 1963; Robertson, 1971 . The current riseof LINUX3is an excellent case study of this type ofinnovation being fuelled internationally through useof the Internet as a communication medium.Taken together, these trends only exacerbate theneed to immediately translate state-of-the-art techno-logical innovation into sustainable competitive ad-vantage in the marketplace. This will increase thepressure on software manufacturers to shorten prod-uct development cycles and lower development costs,Žsince product lifetimes and hence revenue generat-.ing ability are likely to decrease with greater com-petition. As a consequence, the continued globaliza-tion of the world economy will drive the need toform strategic partnerships at all stages of a businessendeavour: technology, product and market develop-Ž .ment Shapiro and Varian, 1998 .2.3. A fragmented industryThe last basic characteristic of the software indus-try to consider is that despite a few major players itis as a whole highly fragmented, consisting mainlyof small, niche market entrepreneurial ventures. Ourstudy of the number of firms vs. annual revenue forsoftware companies in California shows the averageŽannual revenue to be US$2.8 million a gross mea-.sure of size with a standard deviation of US$17.3million, indicating a very wide distribution of firmsize heavily weighted towards the low end. Further-more, all trends suggest that it will remain a frag-mented industry with its members increasingly re-liant on strategic alliances to remain competitive.2.4. The new software industry landscapeThese three evolutionary factors: technology theglobalization of markets and the fragmented andentrepreneurial structure of the industry will lead to anew competitive landscape for the software industry.Advances in technology will lead to the growth of alarge, third party, independent software componentindustry enabled by the CBSD paradigm. Growth of3See www.redhat.com for example.the Internet as a low-cost, easily accessible market-ing, sales and distribution channel for new softwareproducts 4will lead to increased opportunities andcompetition. An industry dominated by entrepreneursand small companies will have an even greater needto form global strategic alliances.These changes will drive competition in the soft-ware industry for the coming decades and cause it tomature in an unlikely direction: back towards itsroots of entrepreneurialism and an industry modelbased on alliance formation and distributed humanresources. Consequently, a better understanding ofthe basic success factors for a software entrepreneurŽ .Bell, 1991 is critical to the understanding of how tostimulate strong economic growth. Key questionsare:Ø What are the strategic variables for a softwareentrepreneur to succeed in the evolving electroniccommerce marketplace?Ž .Ø How does one create, maintain and value sus-Žtainable competitive advantage Hamel and Pra-.halad, 1994 in new ventures with information-based products and services?Ø Where will the management and executive talentfor this explosively expanding industry comefrom?Ø How do we integrate socially diverse teams ofsoftware developers quickly and establish com-puter mediated communication channels?3. The California software industryThe California Trade and Commerce Agency,Office of Strategic Technology sponsored in 1997 astudy to develop a comprehensive strategy to ensurethe long-term viability and economic solvency of thesoftware industry. The study took the form of inten-sive interviews with software industry executives,professional organizations, and regional industrycouncils that took place over the period of 1 year.4As a consequence, Bill Gates and Microsoft have recentlyshifted their business development strategy to software develop-ment, as opposed to providing content, for the Internet. SeeBusiness Week, 9r8r1997, p. 126.
  • ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134128Table 1 illustrates the geographic and marketbreakdown for business resource requirements forstartups in the software industry in California.A major finding of the study is that softwarestartups require external support not usually providedby financial resources. Indeed, these needs are usu-ally pre-cursors to obtaining the capital that the firmsneed to grow. Three critical needs of software star-tups in California are:Ø access to low cost infrastructure resourcesØ access to adequate management skills and knowl-edgeØ access to business networking resources for mar-ketingThere is an apparent lack of these resources inCalifornia and elsewhere around the country. Mostexisting public resources operate only in an ‘‘aware-ness mode,’’ telling new companies what they shoulddo but failing to provide necessary resources forsurvival or access to those resources. As a conse-quence, four out of five startups in California fail,taking with them the potential for new market cre-ation and economic growth. The prime reason forthis failure is under-capitalization, often rooted in thelack of experienced management and of an adequateunderstanding of seed investing by local investors.From this study, it is clear that small businessesand startups need a way to quickly gain the knowl-edge and hire the experience to complete effectivebusiness planning. The following key disciplinesrepresent the knowledge required by a softwareTable 1Order of magnitude estimates for software industry in 1997.Number of annual startupsSegment Northern CA Los Angeles San Diego TotalOffice automation 30 15 5 50Networking 120 60 20 200Internet apps 180 90 30 300Operating systems 12 6 2 20Manufacturing 6 3 1 10Telecom 120 60 20 200Databases 150 75 25 250Scientific 12 6 2 20Games 30 15 5 50Total 660 330 110 1100startup and appeared to be lacking at various levelsby all those interviewed:Ø Business PlanningØ CompetitiÕe Assessment — substitute product as-sessment and barriers to market entry.Ø Marketing — product development, market de-velopment, market penetration, acquisitions andpromotionØ SalesØ Financial Planning and Analysis — sensitivityanalysis for various plan scenariosØ Human Resources — attracting and retaining theright talentA better understanding of early-stage or seed invest-ing has also been recognized as a growing need inthe investment community. 5The lack of a coherent,stable and widely accepted format for structuringearly-stage deals with well-known startup risks hasled to a widespread under-capitalization of new ven-tures around the country. The SBA reports a veryŽ .low percentage approx. 5% of new investmentflowing into startups and small ventures. 6In summary, the critical resources for a successfulstartup to a large extent are not being provided byeither the private or public sector. In the privatesector, until recently a business model that wouldprovide these services and resources in a profitablefashion had not been apparent. On the other hand,the public sector has always struggled with the ques-tion: should it help supply these critical resources toindustry? In the end, both efforts have tended to begeographically focused, unnecessarily restricting thescope of the business opportunity and the potentialfor economic growth.5The Ewing Marion Kauffman Foundation can be found atwww.emkf.org.6‘‘Trends in Venture Capital Funding in the 1990s’’, Nicole R.Onorato, US Small Business Administration, Office of Advocacy,August, 1997.
  • ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134 1294. Managing intellectual or human capital?Clearly, there are radical changes coming to thesoftware industry as a new development paradigmfuels fundamental structural changes and electroniccommerce follows the hyper-growth of the Internet.As their ability to compete on a global level in-creases, however, software entrepreneurs face a morecritical knowledge gap in an even more competitiveclimate. Although often spoken of as intellectualcapital management issue, the real hurdle for anentrepreneur is to acquire and manage the technicaland business knowledge and expertise to compete inthe global market, which increasingly is also ones’Ž .local market Kanter, 1995 . We concentrate in thispaper on the root cause of that knowledge gap.Indeed, the California study illustrates clearly thatthe critical issue for the software industry of theearly 21st century will be human capital. The criticalhuman resources dynamic for the industry has beenand will continue to be one of constant shortage.Here, we believe, is where the need for tripartitecooperation between universities, the public sectorand private commercial interests is the greatest. Un-derstanding and exploiting the nature of the triplehelix may be the key for the US software industry tostay competitive for the foreseeable future.The authors first present a brief review of currentpublic and private sector approaches to assistingentrepreneurs and small companies in their struggleto survive and prosper. At the end, they present anew, hybrid model to facilitate startup success andeconomic growth.4.1. Public sector programsThe traditional approach for the Federal Govern-ment has been to create grants programs to fundtechnology development for mission-oriented agen-cies such as the Departments of Defense or Energy.The Small Business Innovative Research grant pro-gram administers over US$800 M 7a year to smallcompanies in staged grants, but typically addressesonly technical issues which often are not transferable7An interesting commercial web site about SBIRs iswww.win-sbir.com.to the commercial marketplace. 8At the US Depart-ment of Commerce, the Advanced Technology Pro-gram, 9NIST is pioneering an innovative approachto funding R&D in industry in that the technologydevelopment funded must be targeted towards prod-ucts or services for commercial markets. Analysis ofthe economic impact of these funds is currentlyunderway.State governments 10have created grants and otherfinancial assistance programs, often to leverage offof Federal funding, but typically do not focus on theknowledge gap, even when working with small,innovative companies. In California, there are manynascent government-sponsored efforts throughout thestate, but they are unfocused and independent ofeach other and there is no coordination mechanismbetween regions nor a consensus that it is needed. Indue course, there is great skepticism among en-trepreneurs and within the software industry aboutwhat value the public sector can add.4.2. Public–priÕate partnershipsThe US Small Business Administration 11hasbeen a strong advocate of small business around thecountry, making incredible progress in recent yearsin making low-cost loans available to small busi-nesses, in stimulating the creation of Small BusinessInvestment Funds, and other financially oriented as-sistance. One form of public–private partnership hasbeen the creation of ACE-NET, 12which tries totake advantage of the Internet to link potential in-vestors with entrepreneurs and in the process create anew, nationwide equity market for US small busi-ness.8Personal observation. Most SBIR grants lead to the develop-ment of technologies for government consumption with require-ments that make commercial exploitation at best difficult.9More information can be found at www.atp.nist.gov.10States such as California, Michigan and New York have beenquite active in economic development and small business assis-tance.11More information can be found at www.sba.gov.12Information about ACE-NET can be found through the SBAweb site or directly at https:rrace-net.sr.unh.edu.
  • ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134130State-sponsored venture funds, 13and other pub-lic–private partnerships like The Capital Network 14Ž .TCN have been a recent innovation with thepromise of addressing the knowledge and humanresources gap as well as the funding needs of en-trepreneurs. The state-sponsored seed and venturefunds typically take a minor equity stake in theentrepreneurial venture while focusing on its criticalneeds, albeit typically from a local, state perspective.Capital networks like TCN are often non-profit eco-nomic development organizations which train en-trepreneurs in basic business skills as well as provideaccess to investors, but usually from a state orregional perspective.4.3. Incubators 15Often working in conjunction with state and re-gional funds and networks are places especially de-signed to foster the growth of small companies.Studies have documented that legitimate incubatorsincrease their tenant companies’ likelihood of suc-Ž .cess to 80–90% compared with 20% in general byproviding startups with a supportive network, infras-tructure and physical facilities. Critical to a success-ful incubator environment is that it should offerexperienced business and management advice andmentoring as well as access to professional expertise,usually coupled with an explicit requirement thatentrepreneurs complete a thorough business plan.To date, there is no single formula for a success-ful business incubator. According to the National16 Ž .Business Incubator Association NBIA , mostŽ .49% incubators are non-profit, operated by groupsranging from community development organizationsto municipal governments seeking to create new jobsand increase local tax bases. Academic related incu-Ž .bators 13% serve as a link between innovationsdeveloped by universities or colleges and the busi-13The National Association of State Sponsored Seed and Ven-ture Funds is headquartered in Oklahoma City, OK.14The Capital Network of Austin, TX, can be found atwww.thecapitalnetwork.com.15US Small Business Administration, ‘‘Business IncubatorsHatch Young Companies’’, more information at www.sba.gov.16More information can be found at www.nbia.org.nesses that market them to the general public. The‘‘mixed’’ or ‘‘hybrid’’ incubator, which links privatecompanies and public institutions in an effort tocreate new business, comprise 18% of the total.Ž .Finally, a growing number 12% are for-profit incu-bators, which make money by acquiring equity intheir tenant companies or charge for rent or otherservices. According to the founder and first execu-tive director of the NBIA, Carlos Morales, for-profitoperations are expected to grow to at least half thetotal of all incubators in the next few years: ‘‘Thefuture is private, for-profit incubators.’’4.4. The electronic communityA different approach to facilitating small businessand startup success in the private sector is nowoccurring through the growth of a non-profit consor-Ž 17 .tium CommerceNet in Silicon Valley. Com-merceNet was founded in 1994, received initial fund-ing from the Federal Government, and is now a jointventure participant in an ATP award 18to develop anInternet-based infrastructure for electronic com-merce. It has grown to a consortium of nearly 300corporate and organizational members who togetherare struggling to form a global business communityaround the idea of electronic commerce.4.5. A new model proposedOur analysis of software industry trends suggestsa time of increasing competition and opportunity forentrepreneurs and small companies. Our case studyof the software industry in California shows that itsentrepreneurs face the same general issues all en-trepreneurs face: the critical shortage of financial andhuman capital. Current approaches to public–privatepartnership have some merit, especially when fo-cused on training and access to business and man-agement experience. However, it is clear to us thatthere is a great need for a new approach or model tofacilitate startup success and business network for-mation. An open question at this conference is theoptimal location for R&D centers of excellence? We17More information can be found at www.commerce.net.18See 4.
  • ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134 131propose that it is not their location but their connec-tion, with each other and with business centers ofexcellence, that is the key question and focus on howto structure a virtual ‘‘network of innovation’’?Based on the findings of the case study and ourown observations we conclude that the new modelneeds to provide the small business community witha structure and mechanism to easily access:Ø information on ‘‘best practices’’ for business de-velopmentØ industry and management experienceØ resources for international marketing, sales anddistributionAlthough space does not permit an extensive dis-cussion of our methodology, the clear focus has to beon wealth creation. Essential to our approach are theŽ .ideas of Rayport and Sviokla 1995 on the virtualvalue chain. In short, every business today competesin two worlds: a physical world of resources thatmanagers can see and touch and a virtual worldmade of information. The physical world may beaddressed via incubators, but there is also the essen-tial virtual part of the equation. From that perspec-tive, key steps in our methodology are shown inTable 2.These steps above all revolve around the develop-ment of sustainable competitive advantage for a firmand its strategic partners. At first cut, they are blindto geographic and resource constraints and focussolely on pooling resources to optimize the strategicteams’ chances for success. Pooling technical andbusiness talent across all frontiers, providing a clearfocus on wealth creation and a strategy to meet thebusiness opportunity at hand would be the main goalŽ .of the ‘‘virtual incubator’’ see Table 3 .It is clear to us that an entrepreneurial firm hasmany needs that must be addressed in order tobecome a successful venture, but that not all re-Table 2MethodologyØ identify strategic opportunitiesØ identify key core competencies and human resourcerequirementsØ actively manage intellectual capitalØ create strategic alliancesTable 3The virtual incubatorØ Human resources focusqcapitalsa source of integratedresourcesØ Focus on strategic alliance formation: bringing all essentialingredients for success together as early as possibleØ Intellectual capital valuation and management expertiseon-board and active from the startØ Internet-based, distributed resourcesØ For-profitØ Private sector plays lead role, university and public sectorsupporting rolesŽ .Ø Formalized management control systems accounting, etc.for stabilityØ National and international business and market focus andreachØ Work in conjunction with physical incubators when neededsources must be co-located. Indeed, with the global-ization of today’s technical and business resources,that is an unreasonable constraint.We propose to create a ‘‘network of innovation’’which brings together, if only in a virtual sense,centers of technical and business or managementexcellence. This connectivity between practitionersof ‘‘best practices’’ would facilitate powerful al-liances of startups, universities, and large companieswhich would have excellence as a common underly-ing theme and wealth creation as an ultimate com-mon goal. In much the same way as the CBSDparadigm allows application builders to combine‘‘best of’’ components to build competitive softwareproducts, the ‘‘virtual incubator’’ will allow the bestmarketeers, technologists and managers to self-as-semble into strategic alliances to address businessopportunities. 19To summarize our concept of the virtual incuba-tor, we include the table of essential elements below.Clearly our strategy has been to borrow elements ofsuccess from all the previous models of public–private partnership described above, albeit with anew focus on the virtual value chain and strategicalliances. It is also evident that the concept may needfine-tuning for a particular industry, location or mar-19A recent New York Times article, ‘‘Warmth, but No Walls,in This Incubator’’ by William R. Long describes how this worksfor a software company in a virtual incubator in Colorado. See theNew York Times of January 17th, 1999.
  • ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134132ket, we have primarily focused on the softwareindustry because of its trend setting nature and grow-ing role as a key source of value-added for allindustries. However, about 30 of the newest businessincubator programs in the country are ‘‘virtual’’incubators, suggesting the power of the concept andunderlying ideas. 205. A new approach to organizing work in incuba-torsAs we have noted, the advent of the Internet agehas ushered in a period of significant development ofnew models of doing business and managing organi-zations. Various authors have talked about ‘‘thenetworked organization,’’ ‘‘virtual corporations,’’Ž‘‘cellular firms,’’ and ‘‘distributed firms’’ Di Mar-tino and Wirth, 1990; Drucker, 1994; Grantham,.1996a; Miles et al., 1997 . Futurist Alvin Tofflerdescribes a ‘‘third wave’’ economy characterized bycontinual and continuous change, demassified manu-facturing, mass customization, and intensive depen-dence on information and knowledge as sources ofŽ .competitive advantage Toffler, 1980 .Developments in Information Technology are ac-tually enabling, if not driving, enterprises to adoptnew work practices, new organizational structures,and even new management styles in order to extendtheir businesses both domestically and abroad. Asthe pace of business activity increases and marketsemerge and disappear almost overnight, differentapproaches are required to respond to these rapidchanges. The traditional industrial model of hierar-chical, formal, layered organizations may soon beantiquated and replaced by more flexible, dynamicstructures. Mature organizations or industries withcultural barriers to such change risk falling behindand being unable to compete effectively and hence,we believe our case study illustrates a need for a newmodel of business in the software industry.We believe that successful models for workorganization in this ‘‘New Economy’’, which isepitomized by the virtual incubator will includesmall-scale networks of interlocked specialists com-20See 19.ing together on a temporary basis to approach afocused market or software project. This combina-tion of relatively autonomous entities or ‘‘businessatoms’’ will stay together just long enough to meetits members’ specific goals and then disband, withindividuals and teams moving on to other projectsand other ventures. Formal workgroups with memberrelationships that span long periods of time andnumerous work efforts will be replaced with thesefocused, temporary, virtual organizations of organi-Žcally formed business ‘‘molecules’’ Grantham,.1996b; Hagel and Armstrong, 1997 .These ‘‘disposable organizations’’ 21litter SiliconValley and add a critical, dynamic human element tothe rush of new technology and ready capital. Theauthors believe it is this dynamic element whichconstitutes the Valley’s greatest asset. In other words,it is not just the acceptance of an incredibly fluidwork environment, but the eagerness and ability ofthe population to constantly reconfigure to capitalizeon technological and business opportunities and tothrive in such an organizationally uncertain climate.Yet our formal knowledge of how these newforms of organization and management actually op-erate is relatively limited. And while we sense thatthese new management approaches may be moreappropriate for the new economy, little research hasbeen done to show that they actually produce higherquality products and services for customers, a higherquality of life for employees, or higher levels ofprofitability for shareholders and other investors. Theregional success of Silicon Valley in the new econ-omy, we believe, is the best indicator to date.Another compelling present-day example of thisnew organizational model can be found in Holly-wood. For large film ventures today, it is typical forliterally hundreds of small firms and individual enti-ties to coalesce around a project — usually a scriptŽ .Morley and Silver, 1977 . These projects are led byproducers and directors who recruit talent for all keyŽroles including both on-screen and off-screen con-.tributors . Often the members of a film project par-ticipate in a shared equity model, and the final21Jim March, Stanford University, Professor Emeritus in Busi-ness, Sociology, Political Science, and Education, private commu-nication, 1998.
  • ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134 133product is delivered through existing distributionŽ .channels Laumbacher et al., 1997 . Combinations oftalent from a particular film may work together onfuture endeavours; but in general, once a particularproject is completed, the virtual organization thatcreated it comes to an end.The film industry offers a unique and rich exam-ple of how business and organizational structureshave shifted over time from the large, verticallyintegrated production enterprises of the early studioera to the more loosely connected functional net-works of independent actors, production companies,Žand distributors of today Bordwell et al., 1985;.Lewis, 1985 .Similar organizational transformations have oc-curred in other traditional industries during the pasthalf-century as information technology has becomeincreasingly pervasive in business and in our per-sonal lives. Each stage in the evolution of computinghas brought with it changes in how individuals withinorganizations interact with each other, with cus-tomers, and with information itself. No longer isinformation technology merely an automation func-tion. It has become the key business infrastructure ofthe Internet Age, enabling businesses to be con-nected and related to partners, suppliers and cus-Žtomers around the world Daft and Lengel, 1986;Finholt and Sproull, 1990; Prahalad and Hamel,.1993 .6. ConclusionThe authors propose a virtual incubator model tofacilitate small company and startup success and toenable US industry to take advantage of the evolu-tion towards distributed human resources and a busi-ness landscape dominated by strategic partnerships.The development of sustainable competitive advan-tage for a firm and its strategic partners would be itsoperational focus, with ‘‘best practices’’ and excel-lence the underlying theme and wealth creation asthe ultimate common goal. We also need to examinenew and innovative ways of organizing to do this‘‘knowledge work’’. One of these new models hasemerged from this case study that looks at a moretemporary project focus of software teams, than amore traditional ‘‘permanent’’ organizational struc-ture. By supporting a virtual ‘‘network of innova-tion’’ to connect centers of technical and businessexcellence, universities, the public and private sectorcould play a critical role in addressing the knowl-edge gap which will increasingly limit growth in aknowledge-based economy.ReferencesBell, G., 1991. High Tech Ventures: The Guide for En-trepreneurial Success. Addison-Wesley.Bordwell, D., Staiger, J., Thompson, K., 1985. The ClassicalHollywood Cinema: Film Style and Mode of Production to1960. Columbia Univ. Press, New York.Daft, R.L., Lengel, R.H., 1986. Organizational information re-quirements: media richness and structural design. ManagementŽ .Science 32 5 , 554–571.Di Martino, V., Wirth, L., 1990. Telework: a new way of workingŽ .and living. International Labour Review 129 5 , 529–554.Drucker, P., 1994. The age of social transformation. AtlanticMonthly, November, 53–80.Finholt, T., Sproull, L.S., 1990. Electronic groups at work. Orga-Ž .nization Science 1 1 , 41–65.Grantham, C.E., 1996a. Design Principles for the Virtual Work-place. Proceedings of the ACM SIG on Computer PersonnelResearch. Denver, CO, pp. 21–38.Grantham, C.E., 1996b. Working in a Virtual Place: A Case Studyof Distributed Work. Proceedings of the ACM SIG on Com-puter Personnel Research. Denver, CO, pp. 38–52.Hagel, J., Armstrong, A.G., 1997. Net Gain. Harvard BusinessSchool Press.Hamel, G., Prahalad, C.K., 1994. Competing for the Future.Harvard Business School Press.Kanter, R.M., 1995. World Class: Thinking Locally in the GlobalEconomy. Simon and Schuster.Katz, E., Levin, M.L., Hamilton, H., 1963. Traditions of researchon the diffusion of innovation. American Sociological Review28, 237–252.Laumbacher, R., Malone, T., The MIT Scenario Working Group,1997. Two Scenarios for 21st Century Organizations: ShiftingNetworks of Small Firms or All-Encompassing ‘‘VirtualCountries’’? Working Paper, MIT.Lewis, J., 1985. Whom God Wishes to Destroy — FrancisCoppola and the New Hollywood. Duke University Press,Durham.Miles, R.E., Snow, C.S., Mathews, J.A., Miles, G., Coleman, H.J.,1997. Organizing in the knowledge age: anticipating the cellu-Ž .lar form. Academy of Management Executive 11 4 , 7–24.Morley, E., Silver, A., 1977. A film director’s approach tomanaging creativity. Harvard Business Review, March–April,pp. 59–70.Prahalad, C.K., Hamel, G., 1993. Core competence of the corpora-Ž .tion. Harvard Business Review 68 3 , 3–79.Rayport, J.F., Sviokla, J.J., 1995. Exploiting the virtual value
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