Voices of Digital Communities

The Unexpected Value of the Network

My title suggests I am going to be writing about broadband, but the network and value I want to describe are of a completely different kind.

by / April 10, 2011

My title suggests I am going to be writing about broadband, but the network and value I want to describe are of a completely different kind.

I spent the early part of this week in Eindhoven, Netherlands, one of our Top Seven Intelligent Communities of the year.  It was my second site visit during our 2011 Awards cycle and followed a visit to Issy-les-Moulineaux in March.  The goal was the same: to validate information in Eindhoven's nomination form and to see best practices that no written form can capture.

Well, I found one.  And I think any community will find it worth knowing.

Eindhoven is the high-tech manufacturing center of the Netherlands, one of a small number of such hubs across Europe.  At the center of its economy are two multinationals: ASML and Philips. 

In most cases, having a multinational
in your town is a good-news, bad-news joke.

ASML is the world's dominant supplier (as in +80% market share) of automated systems for producing silicon chips, and it makes all of them right there in Eindhoven.  That is no accident, because ASML is a spin-out of Philips. 

Philips produces billions of dollars worth of lighting, consumer electronics and imaging technologies used principally in healthcare each year.  Founded in Eindhoven, it is now headquartered in Amsterdam and has offices and manufacturing facilities around the planet.  But it keeps a major research and manufacturing facility for advanced medical systems in the city. 

In most cases, having a multinational in your town is a good-news, bad-news joke.  The good news is that they make a huge contribution to the economy, culture and social capital of your community.  The bad news is that they have the means to move elsewhere without breaking a sweat.  And lots of them do. 

While in Eindhoven, I attended a dinner with senior executives of ASML and their primary suppliers, and we discussed exactly that scenario.  Here's what's interesting: all of them were doubtful it would ever happen. 

Why?  Because over the past decade, ASML and its suppliers have built high-value relationships.  ASML does not just hand them a list of specifications and then beat them up on price.  Instead, the company sets out objectives and guidelines for the components and sub-assemblies it needs, and asks the vendors to propose solutions that contribute intellectual capital to the finished machines.  It was a vendor who devised one of the principal innovations of ASML's latest product in order to meet the company's ambitious objectives.  Today, ASML's operations consist largely of assembling and calibrating complex units delivered by its primary suppliers.  These primary suppliers in turn depend on a much larger group of component manufacturers from whom they also demand high added value. 

You are probably aware of the increasing trend for companies to form these kinds of value chains, as they are called, and to drive their suppliers to do much more than meet specs.  But you may not have thought through – as I had not – the unique opportunity this offers to a community.  At my dinner, the ASML executives and supplier CEOs agreed on one key point: ASML only does business with them because they are world-class vendors.  But given that, their proximity in the neighborhood has value.  It makes the complex process of innovation considerably easier.  The same is true of the secondary suppliers in their relation to the top vendors. 

Together, these companies form a network that tends to moor ASML – and Philips, which has the same kind of high-value relationships – in the Eindhoven region.  Say it softly, but it would be reasonably difficult for them to uproot their manufacturing operations from this "sticky" network. That's music to the ears of the people at Brainport, the public-private venture that facilities and coordinates the innovation process in the region. 

Here's the moral of the story for Intelligent Communities.  Increasing the pace of innovation in your community is good.  Building clusters in high-growth industries is better.  But the biggest strategic payoff comes from consciously structuring these clusters so that small companies help to bind bigger firms, and bigger firms lock a giant enterprise or business unit, into a network. Like all networks, its value increases as the number of participants grows.  But the value grows exponentially if each company makes a strategic contribution to the success of the next company up the ladder.

It is not an easy thing to bring about.  It takes vision, lots of persuasion and consistent execution over years.  But in our increasingly competitive global marketplace, such a network work can become a community's greatest

Robert Bell Co-founder of the Intelligent Community Forum

Robert Bell is co-founder of the Intelligent Community Forum, where he heads its research and content development activities. He is the author of ICF's pioneering study, Benchmarking the Intelligent Community, the annual Top Seven Intelligent Communities of the Year white papers and other research reports issued by the Forum, and of Broadband Economies: Creating the Community of the 21st Century. Mr. Bell has also authored articles in The Municipal Journal of Telecommunications Policy, IEDC Journal, Telecommunications, Asia-Pacific Satellite and Asian Communications; and has appeared in segments of ABC World News and The Discovery Channel. A frequent keynote speaker and moderator at municipal and telecom industry events, he has also led economic development missions and study tours to cities in Asia and the US.