When Jack Kilby from Texas Instruments shared last year’s Nobel Prize for Physics for his part in the invention of the integrated circuit, it was long overdue recognition of the vital role that physics has played in the information-technology revolution. Walter Brattain, John Bardeen and William Shockley had already been awarded the Nobel prize for that other great physics invention – the transistor – back in 1956, while Charles Townes had shared the 1964 prize for developing the laser.

It is hard to overestimate the impact that these inventions have had on society. A survey carried out by the Financial Times last year showed that 14 of the world’s top 25 businesses were in the IT, computing or telecoms sectors, which simply would not exist without the laser, transistor or integrated circuit. Together these firms have a combined market capitalization of some $3300bn.

They include a host of familiar names such as Cisco Systems (2nd), Intel (3rd), Lucent Technologies (16th) and IBM (17th), as well as a string of mobile-phone companies like Vodafone Airtouch (6th) and network operators such as Deutsche Telekom (13th). And if one includes companies in the aerospace, defence, automobile, electrical and software sectors, then all but seven of the world’s top 25 firms are “physics based”.

Of course, not all high-tech start-up companies will rise to such heights, but these success stories illustrate the potential that exists for those that have the right products and want to grow. Apple, Intel, Microsoft, Cisco, Compaq and Sun Microsystems are among the many companies that started small and just got bigger and bigger. “History shows again and again that new business and innovation frequently come from the grass roots,” says David Potter, the physicist who founded Psion in 1980.

He should know. After initially focusing on the computer-games market – Psion’s original products included Hungry Horace and Flight Simulator – the company expanded into handheld computers, launching its first hardware product, the Psion Organiser, in 1984. “This was a virgin product in a virgin market – high-risk and high-reward territory,” recalls Potter.

By 1996 the firm’s turnover had grown to £124m and two years later it spun off its software division to create Symbian, a joint venture with Ericsson, Nokia, Motorola and Matsushita to develop a standard operating system to let mobile phones access the Internet. The company now employs more than 1300 staff worldwide and has a turnover of almost £160m.

Although consumers – and the stock market – have yet to be convinced by Psion’s latest Web-compatible handheld computing devices, Potter is in no doubt of the continual need to innovate. “In large companies we are trained to remove business risk,” he says. “[But] removing business risk can remove business opportunity. This is the paradox, which in Europe particularly we must confront. This is why Psion’s business model is based on change.”

Change and adapt

Oxford Lasers is another company that has succeeded in reinventing itself over the years. Set up in 1977 by Andrew Kearsley and Colin Webb from the physics department at Oxford University, the company made its name designing high-average-power copper lasers that were used for isotope separation in the nuclear industry. But with the slow down in the construction of new nuclear plants in the 1980s, the company realized that there was no more need for new methods of producing nuclear-reactor fuel. “Our main line of business was suddenly at an end and we were forced to find new markets in which to operate,” recalls Webb.

The firm therefore turned to high-speed imaging. Copper lasers can deliver very short bursts of high-energy pulses at high repetition rates, which makes them ideal for analysing, for example, the motion of fuel in internal combustion engines or the size of droplets in agricultural sprays. It also began to develop ways of using copper lasers for precision micromachining of hard materials, such as aerospace alloys. “One of the keys to our success has been the ability to innovate,” says Webb. “We have been able to rethink strategy and reinvent ourselves when new opportunities and technologies have been identified. The company has evolved into a much more market-led organization.”

Invest and innovate

Mike Tubbs, who works for the future and innovation unit of the UK’s Department of Trade and Industry, has analysed the factors that make certain physics-based companies succeed. “Generally speaking, those firms that invest heavily in R&D – and where the level of R&D increases with rising sales – do the best,” says Tubbs. “You’ll also find that they expand into international markets very early on in their lives, and many combine acquisition of another companies with organic growth. A good chief executive with the right leadership skills is another key factor.” He also thinks it is important, particularly in a company’s early days, to have one person doing the marketing and another doing the technical work. “That seems to be the ideal combination,” he says.

Renishaw is one firm that invests very heavily in R&D. The company, which was founded in 1973 by David McMurtry and John Deer while working for Rolls-Royce, currently ploughs back almost 9% of its turnover into R&D – far higher than the UK average of 2.9%. It makes automated, high-precision metrology equipment and systems, including Raman microscopes, computer-controlled machine tools and laser interferometer systems that allow the quality of manufactured products to be monitored quickly and repeatedly.

“We have a very simple strategy that we have honed over the years. That is only to develop products that can be protected by patents,” explains McMurtry, who is now chairman and chief executive. “On the open market, all businesses are exposed to fluctuations in exchange rates, so if you can offer customers a unique product that they can’t get elsewhere, then you can charge them what the product’s worth rather than what the market dictates. We only invest in products and processes where we can be the only player in town.”

One of the trickiest challenges facing Renishaw is recruiting technically skilled staff. The company employs over 1400 people including many physicists, particularly in optics. “Good physicists have a very broad approach and a very good aptitude for engineering,” says McMurtry. “But we are growing at 20% a year and have so many vacancies we just can’t fill. Getting good physicists is a real problem for us.”

Right place, right price, right products

Perhaps the archetypal physics-based success story is Oxford Instruments, which was founded as long ago as 1959 by Martin Wood – an engineer by training – who was then based in the physics department at Oxford University. It was the university’s first substantial spin-off, set up to develop high-field superconducting magnets for research in solid-state physics. From those early days in a garden shed in north Oxford, the company has expanded into a business with a turnover of £160m, employing some 2000 staff, selling a range of cryogenic, magnetic, medical, superconducting and analytical equipment.

“Basically we had the right products at the right cost for the right people at the right time,” recalls Peter Williams, who worked for the company from 1982 to 1999, including stints as chief executive and chairman. “There is no magic formula. We simply satisfied our customers’ and shareholders’ needs. However, if I had to put my finger on why Oxford Instruments did so well, I would say that our competitive advantage came from the unique technology that underlay the products. We were selling physics products to physicists so we had to be right at the cutting edge.”

He even believes that in some areas, such as magnetic resonance imaging (MRI), the company has been as close to the research frontier as any university department. “Our products in cryogenics and medical equipment were based on technology that was emerging directly from universities.”

But it hasn’t all been plain sailing. Like any mature business, Oxford Instruments has had its ups and downs. The biggest challenge that it faced in Williams’ time came in 1987 when General Electric – the company’s biggest customer for its magnet systems for MRI scanners – decided to make its own magnets. “Our customers became our competitors,” recalls Williams. Even Siemens, which was another key customer for Oxford Instruments’ magnets and had been manufacturing them under licence from it, was thinking of making all its own magnets.

“It was the joint venture that we established with Siemens in 1989 that saved us,” he explains. “Setting up that joint venture is probably the proudest moment of my career at the company, and the fact that it is still going some 12 years later is a sign of its success.” As Williams puts its: “Making deals is easy. Making them work is the challenge.”

To remain competitive, Oxford Instruments began a major reorganization to focus on magnets, instrumentation and medical instruments shortly after Williams stepped down as chairman in 1999. But he warns that the firm must not “lose sight of the original vision of the company that lives in the hearts and minds of employees”. In the 12 months to the end of March 2000 the firm recorded a loss of £0.8m on a turnover of £160.1m. “While the management are right to restructure on tighter markets,” he says, “they must remember that the reason they are doing so is to remain at the cutting edge of technology. Companies that want to change direction have to be clear about why they’re doing it. If they don’t, they’ll lose their competitive edge.”

But Williams, who chaired a government task force on finding ways of helping small firms to expand, says that the current economic climate makes now an excellent time to go into business. “Although there’s never a bad time to set up your own company,” he says, ” in the UK at least, there is now much more of a fiscal incentive to do so than there ever has been before.”