Strategic Dimensions of Technology

When the concept of strategy was first developing, the focus was on economic and competitive variables. R&D, like production, was treated as a functional area to which strategic decisions could be assigned for ‘implementation.’

Since the 1950s, it has become increasingly evident that, in certain industries, technology was becoming a driving force which could shape the strategic future of an enterprise. But recognition of the strategic importance of technology has been slow in planning literature.

This chapter, based on an Ansoffian paper published in 1967 with John Stewart, was one of the early efforts to explore the impact of technology on strategy. The paper was a contribution to the efforts of one major consulting firm to enlarge its field of strategic consultancy to include technology-intensive firms.

The Role of Technology in Business Strategy

Emergence of Technology as a Competitive Tool

During the past 60 years, considerable attention has been directed to management of the R&D process: its organization, its planning and control, its budgeting, and, especially, the stimulation and management of creativity. The impact of technology on business strategies is more critical than it has ever been. Technology-intensive industries, such as chemicals, electronics, pharmaceuticals, automotive or aerospace is frequently a driving force which determines the strategic future of the firm.

On the negative side, failure to recognize in time an impending technology substitution can result in a major loss of market share or, indeed, cause the firm to leave an industry in which it had enjoyed a profitable existence. On the positive side, technology can serve as a major and powerful tool through which a firm can gain and maintain a competitive dominance.

An outstanding example is found with Apple, which in 2007, in its strategic use of technology, introduced the first Apple iPhone during the 79th Academy Awards. The system made obsolete the existing cell phone technology and gave the company a major and lasting advantage over competition.

Recognition of the strategic importance of technology is growing. In many industries, R&D activities have grown to a point where today they rank among the top consumers of company funds. Chief executives, who once accepted R&D on faith, are no longer willing to let the technological tail go on ‘wagging the corporate dog.’ To some managers, R&D has become an ungovernable monster which must be harnessed.

Experience shows that the strategic success of firms is less sensitive to the specifics of a technology than to certain key technological variables which are common across the spectrum of technology-based industries. Firms which recognize and manage these variables will be more likely to succeed than those which let themselves be driven by the inner logic of the technological ‘monster.’

In this chapter, we identify these variables and discuss ways in which they can be integrated with the processes of corporate strategy and capability planning .

Technological Turbulence

In Fig. 9.2, we referred to the importance of technological turbulence in the evolution of the demand life cycle. Figure 12.1 shows three possible levels of technological turbulence. The upper graph demonstrates a stable , long-lived technology which remains basically unchanged for the duration of the demand life cycle. This graph describes many of the first-generation industries which were founded at the end of the nineteenth century and began to reach maturity in the 1950s. During the accelerating growth stage G₁, the products offered by different competitors are similar and remain substantially unchanged. Competition is on product quality and price (as was, e.g., the case in the US automotive industry between 1900 and 1932). When product proliferation occurs during G₂, it is based on product features and design cosmetics rather than on technological advances in product performance.

../images/435756_3_En_12_Chapter/435756_3_En_12_Fig1_HTML.gif — Fig. 12.1
Demand-technology-product life cycles

The middle graph illustrates what we shall call fertile technologies . The basic technology is long-lived, but products proliferate, offering progressively better performance and broadening the field of application.

In fertile technologies (e.g., pharmaceutical industries today), product development becomes a critical factor in economic success. The newest and best-performing product captures the market. But, on the other hand, its leadership is likely to be short-lived due to challenges from similarly effective or superior products offered by competitors. As a result, firms are under constant pressure to innovate.

History shows that in technologically stable industries during period G₁ and G₂, growth of sales correlates with profitability. On the other hand, in technologically fertile industries, ‘profitless prosperity’ may occur: While growth is strong, profitability is either low or even negative, because intensive competition drives down the prices, and short product life cycles prevent firms from recovering their investment in the succeeding products/services. This is what is happening today in the automotive and home entertainment industries, where intensive product proliferation is occurring in efforts to revive stagnating demand. At best, if the performance improvements are revolutionary, the new products may obsolete the current ones and effectively restart the demand life cycle. More typically, though, new products permit the successful firms to maintain or enlarge their market share at the expense of weaker competitors in a field of stagnant growth.

During maturity , product development is also used to diversify the firm into other less-saturated areas of demand.

The third graph on Fig. 12.1 demonstrates a turbulent field of technology in which, in addition to product proliferation, one or more basic technology substitutions take place within the life span of the demand life cycle.

The effects of technology substitution are further reaching than of product fertility, because they threaten obsolescence of the firm’s entire investment in the preceding technology: in R&D know-how, in key scientific and technical personnel, and in processing and manufacturing facilities.

Within a firm, transition to the new technology is difficult, not only financially, but also culturally and politically, because the new technology challenges the historical success model held by both technologists and influential managers, and also threatens their position of power and influence in the firm (for a more detailed discussion of the resulting resistance to change , see Part V).

Experience shows that when the new technology is totally different from the old (such as the vacuum conduction and the solid-state technologies), firms frequently abandon the industry in which they were the original leaders. Thus, people familiar with today’s electronics industry would have difficulty in remembering the names of the major vacuum tube manufacturers of some seventy years ago.

When the substitute technology belongs to the same knowledge stem as its substitute (as, e.g., in today’s emergence of the biogenetic technology in the pharmaceutical industry), a firm will typically stay in the industry, but the problems of timely recognition and reaction remain. If the new technology is ‘fast rising,’ it is usually the historical leaders who fail to react and consequently lose their competitive position. This is illustrated by the recent slippage of the American automotive industry caused by the rapid advent of the new small-car technology.

The problem of transition to a new technology is further aggravated when technology is both fertile and turbulent . When a new technology surfaces, the firm is already deeply involved in the competitive struggle of product proliferation under the old technology. Its R&D program is committed to this struggle and becomes an obstacle to the firm’s transition to the new technology.

Today, any historically stable industry can be changed overnight into a turbulent one by intrusion of an alien technology. This can occur at any stage of the demand life cycle, but is particularly challenging when it occurs during maturity , as is happening today in the automotive industry, where new technologies together with computer-assisted design and manufacturing are revolutionizing both product development and production. The challenge to management is to be realistic in the assessment of the consequences of the new technology. In a climate of concern and frustration with sluggish demand, it is easy to rationalize that the new technology will revolutionize the products and produce a large-scale revival of demand. This is not likely to occur, however, unless the advances are so revolutionary as to make obsolete the products which already saturate the marketplace. In the automotive industry, the ‘automatic factory’ is not likely to have such impact.

Influence and Role of R&D

Historical as well as theoretical analysis (Ansoff 1979-G) shows that during changes in the environmental turbulence, power is a determining factor in a firm’s response. For example, the reason why many firms were slow and frequently late in shifting from the production to the marketing orientation , which occurred in the 1930s and 1940s, is traceable to the resistance to change by the entrenched production-oriented managers. On many occasions, the transition to the new orientation was achieved through political struggles and eventual power transfer to the marketing-minded managers.

Therefore, in technologically turbulent industries, an appropriate balance of influences within the firm is essential if two opposite and equally undesirable situations are to be avoided:

1.
A situation in which the R&D function is dominated by others and unable to make its contribution to the strategic development of the firm; or
2.
A situation in which the firm is driven by the historical technology at a time of technology substitution, or during a shift of critical success factors away from technology to production and/or marketing.

Table 12.1 illustrates the critical functional contributions and hence the power and influence roles appropriate to different technological environments.

Table 12.1

Critical success factors

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In technologically stable industries, corporate general management is the critical driving force on two occasions: first, during emergence and, second, during maturity and decline . In between, experience has shown that the firm runs well if the function which is critical to the success of the firm is allowed to ‘call the strategic shots.’ During G₁, the production function and its mentality acquired a position of dominant power. During G₂ marketing took over.

Having made its original contribution in the establishment of the industry, R&D typically became a secondary supporting function until maturity , when it was frequently called upon by corporate management to play the savior.

The two lower parts of Table 12.1 show that in technologically active industries, R&D has a key role to play throughout the demand cycle. The essential distinction between the fertile and turbulent industries is that in the former the contribution of R&D is primarily through product and process development , while in the latter research becomes equally important. Since the nature of the two processes (as we shall discuss later in this chapter) is different and their values and goals are frequently contradictory, there is typically competition for influence within the R&D function. As in the case of the struggle between production and marketing, power gravitates to ‘R’ or to ‘D’ proportionally according to their historical contributions to the firm’s profitability. Usually, the ‘D’ activity is the winner which results in a built-in commitment to the historical technology. In times of technology substitution, the R&D department continues to proliferate products based on a technology which is in the process of becoming obsolete. This adherence to the historical technology can appropriately be named technological myopia .

Hence, during transitions from one technology to another, it becomes vital that general management exercise a driving influence to make sure that development of products based on the old technology is cut back and that the new technology is acquired by the firm.

Table 12.2 shows the circumstances which dictate different functional influences.

Table 12.2

Dominant power center for success

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1.
In technologically stable (‘standardized’) product environments, when the key success factor is the product price, production becomes the driving force in successful firms.
2.
When response to, and persuasion of, customers is the key success factor (as in G₂ stage of low-technology consumer industries), the marketing function calls the shots.
3.
In technology-intensive industries, when product performance is the key to success, and demand is not sensitive to price, R&D becomes dominant.
4.
In mature and well-ordered competitive environments, when maximization is the key to success, the influence variable shifts to control.
5.
When more than one function makes comparable contributions to success, the key success factor is the firm’s ability to optimize profits through trade-offs of typically conflicting influence and contribution of the functions. In this case, general management is the key to success.
6.
As already mentioned, when technology substitution occurs, it is vital, not only to success but also to survival, that general management take control.
7.
When the firm seeks success across several SBAs by balancing multiple objectives, control by general management is essential.

In the first four cases, as long as success depends on only one of the functions, general management can afford to delegate the deciding power over strategic development to the essential function. However, when the key success factors shift, general management first needs to anticipate the shift and, second, to assure a timely and effective transfer of influence among the functions.

Closing the Gap Between General Managers and Technologies

As the preceding section shows, in technology-intensive firms, general management must become involved in the management of that technology. All too frequently, though, such involvement is made difficult by a mutual lack of understanding between general management and the technologists.

As will be discussed in Chapter 15, during the first half of the century, preparation for the general management role typically included rotation of promising candidates through functional assignments in production, marketing, finance, and, less frequently, in R&D. This lesser frequency was due, in part, to the relatively minor importance assigned to R&D and, in part, to the fact that an expert knowledge of technology is required of R&D managers.

During the second half of the century, as technology progressively became a key to success, technologist-entrepreneurs became the controlling general managers in new companies founded on new technologies. An understanding of the intricacies, prospects, risk, and costs of technology comes naturally to such managers, and, if they had any knowledge gaps, their weaknesses came from a lack of expertise in marketing and manufacturing.

However, in numerous large firms, in which historically stable technologies became fertile and turbulent, and firms which chose to diversify into technology-intensive industries, general managers typically confronted several ‘gaps’ between themselves and the technologists, as listed below:

1.
The information gap which arises from the fact that the vital, frequently vague, and difficult to quantify knowledge about prospects, risks, consequences, and costs of technology typically resides in researchers and development engineers. These knowledge workers are kept from contact with the strategists by several intervening layers of managers, who have neither competence nor interest in technology and who suppress and filter technological information.

One frequent consequence of the information gap is that general management makes R&D investment decisions on the basis of initial R&D project costs, without taking account of the usually massive range of downstream costs which must be incurred before a developed product or a new technique begins to make money in the market. This is akin to assessing the size of a ‘technological iceberg’ by the size of the peak visible above the surface of the water.

2.
The semantic gap which arises from the difference in languages, concepts, and perception of success factors between the general managers and the R&D managers. In advocating new investment, R&D managers typically perceive technological variables as the critical success factors, and unless general management understands the technological claims and places them into overall commercial perspective, the firm may commit corporate resources to ‘solutions in search of problems.’

An example of a general management misunderstanding of the state of the technology is offered by Microsoft and their Zune digital music player. In late 2001, Apple changed digital music forever with the launch of the iPod. Microsoft launched its rival, the Zune, five years later. Despite positive reviews, the Zune flopped due to its delayed entry, weak marketing efforts, and lack of support among major record labels. Sales never picked up, but Microsoft kept the Zune alive for six more generations before killing it off in 2012.

3.
The objectives/ value gap . The objective of the general manager is to produce an optimal return on the corporate resources. Technology is one of the means for doing so and has no intrinsic value of its own. On the contrary, unless the manager is also a trained technologist, intricacies and complexities of technologies are something he prefers to avoid. The thrill of discovery and the elegance of solutions have no value for him.

By contrast, excitement of discovery, elegant solutions, and professional prestige are the objectives of a committed technologist, while concern with the ultimate return on the investment quickly becomes a negative value if it is used to prevent him from working on ‘interesting’ problems.

A consequence of the differences in values/objectives is a difference in perception of what constitutes a desirable product for the firm. For the technologist, a technologically feasible advance is reason enough to go to the market, while the general managers need to be convinced of its potential profitability.

The possible consequence of an objectives/value gap is illustrated in Fig. 12.2 by means of a buyer–seller ‘game matrix.’

../images/435756_3_En_12_Chapter/435756_3_En_12_Fig2_HTML.gif — Fig. 12.2
Buyer–seller ‘game matrix’

The upper right hand is a ‘win-win’ quadrant: The seller profits and the buyer benefits. We call it the strategist’s choice because it forms a basis for a long-term profitable buyer–seller relationship.

In companies which are technology driven, in the sense that products developed by R&D are automatically placed on the market without prior estimates of their potential profitability, the upper left-hand giveaway situation may result. It is likely to occur under one or more of the following conditions:

1.
When new technology is offered prematurely, before manufacturing costs have been brought in line with feasible market prices.
2.
When the product is introduced before the market is ready to pay for the new technological advances.
3.
When the size of the potential demand is not large enough to permit the firm to recover the development costs.
4.
When the number of suppliers, attracted by demand-growth prospects , saturates the market.
5.
Finally, and importantly, strategic giveaway will occur when the firm’s technologists continue to proliferate products, using a technology which is rapidly being overtaken by a substitute technology, in which the firm has no competence.

The lower right-hand buyer-beware quadrant represents a ‘win-lose’ outcome: While the seller profits, the buyer does not get his money’s worth. Historically, this has been a frequent case in low-technology consumer goods industries—a case which has led to the proliferation of consumer protection legislation. But this can equally occur in a technology-intensive industry when well-intentioned technologists, who have little understanding of client needs and cost-benefit relationships, force new products on clients. In such cases, ‘technological fashion’ rather than cost-benefits sells the successful products.

Finally, the lower left-hand fool’s paradise may occur when enthusiastic technologists of the seller company convince the user technologists of the buyer of the technological advantages of their products. In this case, group has neither the competence nor the motivation to evaluate the bottom-line profitability consequences of this ‘lose-lose’ game.

One recent example of this is with the ‘big box’ retail stores (Sears, JC Penney and Macy’s) with their ‘hands-on’ customer service and their symbiotic relationship with the mall owners where many of the big-box stores are located. The ‘Big-box’ retailers sold directly to consumers who enjoyed the experience of shopping-in-person and personal service, and the mall owners benefitted by having the big-box stores as anchors for the malls, drawing the larger customer volume.

However, all of this changed when the Internet became a shopping forum competing directly for the ‘brick-and-mortar’ customers. This new business model of online shopping was a difficult transition for the brick-and-mortar stores as such, it was a ‘fool’ paradise’ to continue building malls for big-box retailers.

In order to survive, malls had to repurpose and create attractions like Mall of the America and ice rinks instead of relying on simply a selection of shopping experiences. This new approach is also in jeopardy as many of the new generation shoppers (Amazon shoppers) are not interested in malls or in-person shopping. Forcing both the mall owners and big-box retailer to once again rethink their competitive position with the consumer.

The preceding discussion reinforces the importance of active general management involvement in technology-based strategic decisions and hence the importance of bridging the information, the semantic and the value gaps. The following complementary steps can be taken to bridge them:

1.
The mere awareness by general management of the dangers posed by the gaps is the first key step.
2.
Assuring that the general management group responsible for strategy formulation includes competent up-to-date technologists.
3.
Educating key R&D managers in strategic management.
4.
Developing in general management expertise in using experts —skills of evaluating claims made by technologists.
5.
Educating general managers in the dynamics and economics of the R&D process and in behavior of creative technologists.
6.
Basing all major R&D investment on profitability estimates which include the entire stream of costs from research to market.
7.
Developing direct communication channels between key knowledge workers and general managers.
8.
Developing a technology surveillance system for general management.
9.
Developing an R&D project management system within the firm which first encourages divergent creativity and then channels it into profitable development projects.
10.
Including technological variables in the business strategy formulation.
11.
Developing an explicit technology (R&D) strategy for the firm.

*2.7.5 Determining the Impact of Technology on Business Strategy

At the left-hand side of Table 12.3 are listed five key technology factors which affect business strategy : investment in R&D, competitive positioning, product dynamics, technology dynamics, and competitive-dynamics. Under each factor, there are several elements which together determine what in Table 12.3 is called the intensity of the factor. The importance of the respective factors to the firm’s future business ·strategy can be assessed as follows:

Table 12.3

Technological strategic factors

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1.
Assess the future intensity and relative importance of the respective technology factors to future success in a particular SBA.
2.
Determine the gaps between the future environment and the firm’s historical strategy.
3.
Estimate the firm’s future technological competitive position if the firm continues using its historical strategy. At this point, the technology factors must be integrated with the economic, competitive, social, and political factors. We shall demonstrate how this can be done in the following section.
4.
Using the procedure discussed in detail in the preceding chapters, determine the desired competitive position.
5.
Identify the changes in the technological strategy factors which should be made.
6.
Check resource feasibility and timing of the changes.
7.
Initiate change projects.

Table 12.3 can be used as a worksheet, first, for determining the future environmental turbulence, secondly, the technological aggressiveness of the firm’s strategy , and thirdly, the gaps and the action priorities. An example of the results of such analysis is presented in summary fashion in Fig. 12.3.

../images/435756_3_En_12_Chapter/435756_3_En_12_Fig3_HTML.gif — Fig. 12.3
Technological factors in strategy

The zigzag profile labeled future environment is the result of step 1 above.
The zigzag firm’s strategy is the diagnosis (step 2) of the historical strategy.
The column next to the profiles is an evaluation of the relative importance of the respective factors to the future success in the environment.
The strategic gap column is derived directly from the differences between the two zigzag profiles.
The action priorities in the last column are determined in part by the gaps and in part by the particular strategy chosen by the firm.

So far, in this and the preceding sections, we have discussed a procedure for including technological factors in the formulation of the firm’s competitive strategy for a given SBA. Similar modification should be made in formulation of the portfolio strategy whenever the firm participates in one or more turbulent technologies .

A technology impact analysis should be made following the procedure described in Chapter 11, and the SBA portfolio balanced to assure that, on the one hand, the firm’s ‘technological eggs’ are not all in one vulnerable basket, and, on the other hand, the firm is not over-diversified to a point where it lacks the critical mass necessary in each of its different technologies.

Integrating Technology Factors into Competitive Strategy Formulation

Figure 12.4 illustrates the process. The first step is to match technological possibilities (state of the art) to needs which exist in society. As already discussed, in technology-driven firm’s new techno-feasible strategies may originate from within R&D as ‘solutions in search of problems’ in the expectation that new developments will always find the market. In a preceding section (Fig. 12.2), we have already described the potential dangers of this approach. Therefore, techno-feasible strategies must be based as much on needs’ analysis as on technological possibilities.

../images/435756_3_En_12_Chapter/435756_3_En_12_Fig4_HTML.gif — Fig. 12.4
Impact of technology on strategy

The next step—econo-feasible strategies —is to determine that, in the absence of competition and other constraints, a firm could make a profit from the innovation, because the potential customers have the purchasing power and are prepared to pay the price.

The next step, competitive success postures , uses the procedure described in Chapter 10. The procedure takes account of the dynamics of demand, expected competitive intensity, expected competitive offerings, and sociopolitical constraints and pressures. As a result of this analysis, a range of potential success postures is identified and their likely profitability is estimated.

The last step is to formulate the firm’s future competitive posture in the manner described in Chapter 10.

The procedure described in Fig. 12.4 should be followed if a firm wishes to avoid a giveaway situation and/or the fool’s paradise . The dotted line shown on the right of the figure describes the practice frequently followed by technology-intensive companies, particularly small ones, which do not have the marketing know-how and lack the resources for a systematic planning of strategy. This ‘laboratory to the market’ approach can be used with assurance only when the following conditions exist:

1.
The firm is in possession of a highly unique technology.
2.
There is an expressed customer desire for the technology.
3.
The customers are prepared to pay any ‘reasonable’ price to obtain it.
4.
The competition is weak.
5.
The supply–demand relationship is highly favorable to the firm.

Unless these conditions are met, the firm will be taking high risks by plunging into the market with technically feasible but commercially unevaluated entries. When the investment in launching the new product is small, this risk may be well worth taking, and the firm may succeed on the average through a succession of successes and failures. When the R&D investment costs become substantial, though, a strong argument can be made in favor of allocating a part of the firm’s resources to market research and strategy formulation, even if this means reducing the energy devoted to product/technology development.

The decision rule for choosing between the two alternatives is a classic one: whether the expected profitability from a succession of ‘blind gambles’ is likely to be greater or smaller than a succession of ‘calculated risks.’ Managers have found that this decision rule is easy to use, if one is willing to be content with qualitative judgments. But the use of this rule frequently becomes prohibitively costly if one insists on ‘hard number’ risk estimates.

If technological turbulence analysis (see Table 12.3) shows that the firm’s technologies are turbulent, that they play an important role in the future success of the firm, and that R&D investment will be significant, it becomes desirable to synthesize the strategic variables into a statement of the firm’s technology strategy . (A detailed discussion of technology strategy is beyond the scope of this book.)

Management Capability for Technology-Intensive Strategies

We next turn attention to the organizational capability needed to support the key technological factors in business strategy . Our concern shall be not with the specific technological knowledge and skills, but rather with the general management capabilities needed for successful development and implementation of the strategy.

2.7.7 R&D Investment Ratio

The size of the R&D investment ratio , as determined in Table 12.3, has important organizational consequences. High ratios are characteristic of technology-intensive industries such as pharmaceuticals, chemicals, and electronics; low ratios arc characteristic of non-intensive industries such as food, lumber, and cement. Most industries, of course, fall between the two extremes, for example, farm equipment and petroleum are near the middle of the range.

A high investment ratio puts four significant requirements on management:

1.
Continuous evaluation of technology ‘make or buy’ decisions :
- Whether to buy technology through licensing or through hiring consultants.
- Whether to buy a company in order to acquire the latest technology in an unfamiliar field.
- Whether to hire top people with the specific technical competence desired.
- Whether to develop additional technical competence by internal training in order to stay competitive.

Where R&D investment ratio is low, it may be possible to develop technology within the company with relatively low risk of being outpaced by competition. High ratios allow less lead time and frequently make acquisition of technology a more attractive alternative. In any case, they call for constant review of the alternatives by a corporate-level group which is aware of the pace of development inside the company and which is also sensitive to significant competitive moves.

2.
An adaptive organization, which can quickly shift to new product and process technologies either from external or internal sources. A major criterion of success in a high ratio organization is its ability to adapt to new technology smoothly without major disruption of its profitable performance.
3.
Effective and flexible management of product innovation. This consists of:
- Strategic control of product-market development which permits management to quickly cut off development projects which fail to come up to initial expectation.
- Explicit R&D strategy . When development projects are many and originate in many places, and when the R&D budget is large, there is a danger of misdirection, waste, and conflict in the development effort. There is further a danger of the historical thrust of technology becoming inconsistent and dysfunctional with the changing business strategy of the firm. Hence, the firm needs a clearly defined R&D strategy which is consistent with the business strategy.
- A well-developed project management system which coordinates and controls the project portfolio consistently with strategy and with annual corporate planning and control.
4.
Close top management supervision of technical efforts. Since the company depends on technology for competitive survival, and commits substantial resources to it, senior managers need to understand cost and profit implications of technological developments. They need assurance that the thrust of technological development is consistent with objectives and the strategy of the firm.

The effect of a low R&D investment ratio is the converse of those described above. Technology can be developed internally within competitive lead times or, in some industries, purchased with the capital equipment into which technology has been incorporated by the manufacturer. Organization structure need not be highly adaptive; since technical developments are evolutionary, only occasional changes in structure will be needed. Resources devoted to technology need not be singled out because historical accounting data on expense and investment adequately reflect the impact of product or process replacements. Finally, marketing does not have to be closely coupled with the technological functions.

As discussed in the last chapter, the choice of the R&D investment ratio is partly determined by the technological turbulence and partly by the level of the firm’s ambition in a given SBA. But in no case should the investment be below the critical mass .

Critical mass is not easy to measure, but a useful estimate can be obtained from arraying the profitability of a series of companies against their R&D budgets. Experienced R&D managers can be relied upon for estimates of the minimum technological effort necessary for the firm to remain technologically competitive (see Chapter 9). Since high-quality research personnel can generate a return out of all proportion to their number, quality as well as quantity affects the critical mass . Another complicating factor is the mix of disciplines found in the technical staff. Managers working with interdisciplinary groups have repeatedly noted that one mix of disciplines will result in higher innovation and output than another.

In technology and/or physical asset industries, the project critical mass must be a particular concern of top management of the firm, when it receives proposals for massive investments. It must not allow ‘foot in the door tactics’ of ambitious scientists and engineers committing the firm to large follow-on investments which the firm cannot afford to make.

2.7.8 R- vs. D-Intensive Organizations

When the firm makes a large investment in the innovation process, the nature of the organizational capability will differ significantly, depending on the relative importance of research vs. development investment. The concepts of ‘research’ and ‘development’ have become so closely linked in management thinking by the expression ‘R&D’ that important differences between them are often ignored in executive decision making. This becomes particularly apparent when companies attempt to apply the lessons of their research experience to problems in development, or vice versa.

We shall use the terms ‘R-intensive ’ and ‘D-intensive ’ to focus on basic and experimental research , on the one hand, and a focus on commercial product design on the other. As already discussed, the mix in most companies falls somewhere between the two extremes.

R-intensive organizations display six characteristics:

1.
They work with indefinite design specifications. Management can identify the important areas of knowledge but cannot specify the results desired in the area. The task of the R-intensive organization is to discover new scientific facts and relationships which have potential commercial applications.
2.
They tend to ‘broadcast’ objectives and market data among technical people rather than channel-specific kinds of information to individuals. Being unable to present specific requirements to research , they use broadcast communication to stimulate creativity and generation of alternatives that will be consistent with top management’s objectives and strategy.
3.
They are nondirective in work assignments. Since design specifications in R-intensive companies are indefinite, and technical insight and potential contribution are individual rather than group attributes, managers must permit freedom for individual initiative and progress, rather than assign individuals to specific parts of a well-defined solution.
4.
They maintain a continuing project evaluation and selection process. Research is constantly turning up alternative ideas and solutions. Moreover, a discovery by a competitor, or results achieved on a related project, may render obsolete a piece of research or change its priority. This calls for a continuing revision of the project portfolio to permit changes in the status and priorities of projects.
5.
They stress the perception of the significance of results. The consequences of research results are frequently not obvious. An essential skill of the strategic manager is his ability to recognize the technical or commercial implications of results. The history of invention is replete with instances, like that of Chemistry graduate student Jamie Link who was working on a silicon chip at the University of California in San Diego in 2003. The chip shattered. But, as it turned out, it was not a disaster. Link and her supervisor discovered that tiny bits of the chip were still sending signals, operating as tiny sensors. They called the self-assembling particles ‘smart dust.’ These microelectromechanical devices include sensors and computational ability. Hailed as one of the top inventions this century, it is used to monitor the purity of water, detect harmful chemicals in the air, and locate and destroy tumors in the body.
6.
They value innovation over efficiency. Economy in performing research is less important than achieving a markedly better solution with clear market or profit advantages. Innovation is therefore encouraged, even at the sacrifice of efficiency, planning, or control.

By contrast, D-intensive organizations can usually be recognized by four characteristics:

1.
Well-defined design specifications. The development objectives are reasonably clear, and performance tests can be specified early during design. The technical task is not to create new knowledge, as in research , but to reduce available knowledge to a commercially profitable solution.
2.
Highly directive supervision. The work to be done is programmed from the beginning of design to successful testing; managers specify objectives, assign tasks, measure, and control performance. The relatively large number of people in the D-intensive projects—designers, test engineers, draftsmen, production engineers—calls for more coordination and ‘people management’ than in an R-intensive organization.
3.
Project management and control. Unlike the R-intensive organization where many people work in parallel on the whole problem or on different aspects of the same problem, the D-intensive organization requires a programming of interlinked tasks, with controls which ensure that technical objectives are achieved with planned time and cost limits. When faced with trade-off decisions between meeting deadlines and last-minute innovations, managers will frequently opt for entering the market on time.
4.
Vulnerability to disruption by change. Given its high costs and relatively high manpower commitment and deadline pressures, a D-intensive project can be severely affected by midstream changes, in managerial or administrative changes, or in performance specifications. Studies by McKinsey and coworkers indicate that management or program changes contribute more heavily to cost, and schedule overruns, than do engineering or technical changes.

Given these differing characteristics, the hazards of managing a D-intensive organization with management concepts and controls suited to the R-intensive company, or vice versa, should be apparent. Consider the following example.

The president of a technically based electronics company was convinced that a strong research department was the key to innovative products and high profits. The department generated plenty of ideas, but few marketable products, a situation to which the president reacted by further increasing the research staff. The company’s marketing, manufacturing, and financial managers began resigning in disgust. Profits dropped, so did the company’s stock. Not long thereafter, the president was replaced by a new man from the outside. President no. 2 began strengthening the development-oriented functions that had atrophied during the research binge and hangover. Then, he began to trim the research staff which, by some estimates, was three times what the company could support. In the seven years since the advent of the new president, the company had successfully marketed a series of technically innovative products against strong competition. Its development, manufacturing, marketing, and financial functions became equal to its most formidable competition. The quality and management of research , despite a substantial staff reduction, have suffered no serious decline , but the management processes to support that research have been drastically altered.

2.7.9 Downstream Coupling

When the firm’s strategy commits it to aggressive product dynamics (see Table 12.3), and when a blending and integration of the functional contributions are a critical success factor (see Table 12.2), the downstream coupling of the functional activities becomes an important factor in the success of the strategy.

In Fig. 12.5, we distinguish three degrees of coupling: high, moderate, and low. High coupling requires close interaction among the technical, manufacturing, and marketing functions of the business. Accurate and detailed market information is essential to adequate product-line planning. The selection of R&D projects is influenced heavily by manufacturing costs, availability of raw materials, abilities of the marketing organization, and countermoves by competition. Minimizing the disruptive effect of new product introductions on manufacturing is critical. Tight control of product quality is essential to successful customer applications and minimum service engineering effort. Finally, time pressure on all functions is usually acute.

../images/435756_3_En_12_Chapter/435756_3_En_12_Fig5_HTML.gif — Fig. 12.5
Degrees of downstream coupling

Many technically based industries require exceptionally high coupling. In specialty plastics, for example, the functions of product and process development , production, and field technical service must be closely linked by a tightly knit communication, decision, and control process. In present-day electronics, integrated circuit producers find that they must work more closely with equipment designers, field service staff, and marketing planners than discrete component suppliers ever did.

In a highly coupled organization, management is usually concerned about the post-development downstream investments in marketing and production. The coupling-conscious management of one chemical company, wary of a proposed $6 million investment in development of a new chemical process, kept pressing for more information. The facts confirmed their misgivings: More than $20 million of additional investment would be required before the parent company’s target rate of return could be achieved. The $6 million ‘down payment’ was not approved.

In highly coupled companies, management must maintain a constant balance of influence among development, production, and technical service to the customer. If development becomes too strong, uneconomic or unreliable products or processes are rammed into manufacturing. If technical service is too powerful, future development is downgraded in the interest of extinguishing the fire-of-the-minute. Occasionally, manufacturing is strong enough to reject desirable product changes in the interest of maintaining high efficiencies, or to schedule output to maximize machine utilization rather than to meet customer commitments.

The correct balance among these three functions is dynamic rather than static. Changes in the company’s competitive situation, technical strengths, and capacity utilization, among others, force management to keep readjusting the balance.

In an earlier section, we have already discussed the fact that when cooperation among the functions is essential, general management must take an active role in managing the development process. Closely coupled development is usually organized into projects, which introduces an additional complexity , since the project manager becomes an additional actor in inter-functional relations. Unless the role, responsibility, and power position of the project manager are clearly defined, the project system may reduce rather than improve the coupling and effectiveness of the development process. In a recent major consumer electronics breakthrough, based on technology substitution, the pioneering firm found that three of its major divisions had significant technological contributions to make to the final design. A project manager was appointed, but he lacked the status, the authority, and the control over the resources necessary to force cooperation in the face of the fierce competition which developed among the divisions. As a result, so much of the firm’s energies were spent on the internal power struggles that schedules slipped severely and little attention was paid to the rate of competitive developments. The firm lost much of its advantage of being an early and imaginative innovator and arrived on the marketplace only to be confronted with vigorous competition from alternative technological approaches.

The lesson to be learned from this experience is that project management is complex and tricky, but it is the essential solution in closely coupled development processes. Fortunately, a large body of literature on project management is available, thanks to early pioneering work in the aerospace industry. In adapting this literature to the needs of a particular firm, attention should be given to assuring that the scope of responsibilities assigned to the project manager is commensurate with his power position and resources under his control.

Product Life Cycle

The concept of the product life cycle is too well known to require exposition here. Life cycles may vary in length from a few months (e.g., the finger fidget) to years or even decades (e.g., the wooden pencil). In technology-intensive businesses, the length of the cycle has important strategic implications , particularly for planning and control.

Speedy management action and response, high concurrency of activities in product introduction, and approximation rather than precision in technical objectives are characteristic of short-cycle companies.

Competitive intelligence is essential for early appraisal of competitive moves and countermoves. To succeed, a company needs to be among the first to bring out a new product or break into a new market, since competition thereafter will quickly force the prices down, depressing profit margins and return on investment . To continue to succeed, the pioneering firm should also be unsentimental and deliberate about ‘killing its own successes’ through timely substitution with the new generations of products.

To observers from slower-moving industries, the short-cycle company appears to be in perpetual chaos. It tends to favor short-circuit devices—such as product managers, project managers, or inter-functional committees—which speed up the inter-functional transfer of information. Faced with the choice of structuring the organization for economy or for rapid response, management will usually pick fast response, even at high cost. Many short-cycle companies, for example, maintain separate engineering and change organizations: These are nonexistent in companies with long product life cycles . Downstream coupling in a short-cycle business is usually very high. Manufacturing may begin to frame its plan, and marketing may set target dates for product introduction, before R&D planning is complete. This, in turn, means that the input to technical plans from marketing and manufacturing is much higher than in the long-cycle company. Engineering approaches must often be changed for manufacturing or marketing reasons, and much prior planning tends to be discarded in the process. Plans are often remade in the short-cycle company; the result is a series of increasingly accurate approximations of introduction dates, product specifications, and detailed plans for market introduction.

In a business with long product life cycles , the converse is generally true. With adequate time to learn about competitive market developments and to plan to counter them, there is less premium for unusual market sensitivity. In the long-cycle company, emphasis is on established procedure and routine. Organization is usually functional. Managerial decisions usually favor economy and efficiency at the expense of rapid response.

Planning is usually sequential—that is, detailed R&D is completed before the manufacturing and marketing planning is begun. Manufacturing and marketing are seldom deeply involved in technical planning. In fact, the technical staff may include market research specialists to help with the long-range R&D planning.

In long-cycle companies, marketing people are often unfamiliar with the specific technical problems or objectives. The marketing group tends to be volume oriented rather than response oriented, since new technical problems are rare and coupling between marketing and technical people is low.

As discussed previously, the life cycle length of successful products frequently changes. For example, in the information processing industry, as electronic computers replaced punched-card data processing equipment, the cycle shortened noticeably. One painful consequence of this shift was that many managers, who had been highly successful in the era of punched cards, were unable to adjust to the planning and control, organizational structure , and strategy implications of the shorter life cycle.

The same adjustment problem may arise when companies diversify. Thus, managers in the oil business often have trouble adjusting to the shorter cycle and the more rapid product obsolescence characteristic of the petrochemical business. The problem is still more acute for petrochemical managers whose companies integrate downstream, such as entering the plastics business—where some product introduction often takes place under near-crash conditions because life cycles are so short. To take a manager trained in the oil business, move him within a few years to a petrochemical subsidiary and then to a plastics operation is to subject his personal adaptability and the flexibility of his management methods and outlook to the severest possible test.

The life cycle conditioning that a manager receives is an asset to him in his present business, but might be a liability to him in a different business. When recruiting a key executive, presidents of non-technology-intensive companies too often go after a manager from the technically glamorous industries. Such a man, even though an outstanding performer in his old environment, may flounder for months or years in a new and different environment.

Distance to the State of Art

The state of the art has different meanings in research as compared to development. In research , it denotes the frontier at which investigators seek to discover new phenomena or to devise a solution to a previously unsolved problem. For development, it implies the less-rarefied zone where the validity of a theory or solution has already been proved, but a successful commercial application remains to be achieved. For development, in other words, the state of the art hinges heavily on economics and sociopolitical environment, as well as on technology.

The proximity of a company’s technology to the state of the art has important implications for the management attitudes, behavior and competence . These implications may be considered under three headings: (1) rate of change , (2) unpredictability , and (3) use of historical precedents .

1.
Rate of change increases as the company moves closer to the state of the art. If it is to remain successful, a company working near the state-of-the-art boundary must keep trying for rapid and frequent advances. At the same time, it must be alert to possible breakthroughs by competitors. Its market position is perpetually in jeopardy from technologically advanced competitors.

Top managers in such firms should be keenly aware of their dependence on a well-developed technological intelligence system . Surveillance of literature, attention to competitive developments, and attendance and participation in scientific societies should all be developed and encouraged. In addition, top managers should make a conscious personal effort to understand and keep abreast of the state of the art.

For companies well back from the boundary, radical breakthroughs are unlikely. Technical progress is evolutionary, with little innovation. Breakthroughs by immediate competitors are no serious threat; the danger is that breakthroughs in other industries and other technologies may obsolete the entire nature of technology.

2.
Unpredictability is high for companies near the state-of-the-art boundary. Since their researchers are working in areas of partial knowledge, the nature and, even more, the timing of results are difficult to foresee. Flexible and adaptive planning of R&D, as well as of the firm’s entire strategic development, is vital under low predictability.

Conversely, far from the boundary of the state of the art, where breakthroughs are unlikely, predictability is high. Specific small improvements in products or processes can be foretold with confidence and timed with a high degree of accuracy; their achievement depends on the resources invested rather than on technical innovation.

3.
Use of historical precedents , which underlies so much management activity, is not useful near the state-of-the-art boundary. Past experience supplies little guidance to help managers judge whether the technologists are doing a sound job, whether capital should be committed to a particular project, whether the project will have a long commercial life or whether, in fact, the entire effort will be profitable.

In view of the uncertainty and lack of precedent, senior executives cannot afford to demand infallibility in the decisions of the middle managers. For to do so is to stifle innovation. Therefore, firms near the state of the art must encourage imaginative risk taking, be prepared to reward venturesome behavior, and be tolerant of periodic failure. In such firms, rewards should be withheld from ‘dependable’ risk avoiders.

The implications of rate of change , predictability , and precedent are substantial in the areas of planning and control. Near the state of the art, a company must settle for more approximation and less precision in goals and standards, and the planning and control systems must be tailored accordingly. In such a company, judgment is critical, and precision is often specious.

Failure to take account of these implications may be exceedingly costly. In one diversified company, an electronics division devoted to the development and marketing of highly sophisticated microwave equipment was expected to plan as far ahead and in as much detail as the industrial products division did. When the division manager continued to protest that the requirement was unrealistic, he was replaced by an accountant. Within fifteen months, half of the technical people had left, and all momentum was gone from the R&D program.

Rapid change in the state of the art means rapid obsolescence of capital investment. Since even the most carefully analyzed investment decisions may turn out badly, rapid payback of investment and flexibility in capital facilities become crucial. In this situation, executives who take their one- and two-year plans very seriously may be justified in treating five-year planning as paper exercises.

Rapid change also means rapid obsolescence of the manager’s knowledge and skills. The engineering director of an electronics company estimated that in twelve years four generations of managers had either relearned their technology or become obsolete. This point must be kept in mind when budgeting for renewal training of managers and technological personnel. Failure to stay abreast of technological development, too often neglected or regarded as ‘superfluous,’ results in erosion of both managerial and technical awareness and competence .

The need for flexible adaptation to technological change extends beyond individuals and the R&D function to marketing, production, and distribution. The entire firm must be a learning adaptive organism. For example, all the sales and application people have to undergo frequent retraining. Marketing must be technologically aware and ready to adapt marketing and promotion strategies to take advantage of technological advances. Production must be both ready and able to adapt to new processes, new tooling, and new equipment.

Summary

This chapter surveyed the impact of technology on a firm’s business strategy . The key points may be stated briefly as follow:

The impact of technology depends on the technological turbulence of the environment.
In fertile and turbulent environments, R&D becomes a vital but, frequently, not the only critical function. Marketing, production, and financial controls may be equally important.
In such cases, general management must play a key role in guiding and integrating the multifunction contributions toward the overall goals of the firm.
In high-technology environments, general management must also avoid being driven by technology, on the one hand, and neglecting the opportunities offered by technology on the other.
When technology substitution and proliferation take place, general management must play the crucial role of anticipating changes in technology and forcing timely technology substitution within the firm.
When the environment is technologically turbulent, the business strategy formulation process must include a number of technological variables.
Introduction of technological variables into the firm’s strategy has far-reaching consequences on the organizational capability and, in particular, on the capabilities of general management .
The success of the firm in a technologically turbulent environment depends, first, on matching the firm’s strategy to the environmental turbulence and, second, on developing a capability which supports the chosen strategy.

A point of great importance to a firm’s timely response to the environment, which has been demonstrated in the preceding discussion, is that the general management capability , which will be needed for a successful response, can be determined directly from an analysis of the future environment, and before the firm’s strategy has been formulated and implemented. Thus, the necessary capability can be built parallel with or even ahead of strategy. We shall be returning to this point in Part III.

Exercises

1.
Develop three lists of key industries which will be technologically stable , fertile, or turbulent during the next five years.
2.
For industries on the turbulent list, identify the nature and the source of the future turbulence.
3.
Map the fertile and turbulent industries into the appropriate quadrants of Fig. 12.2.
4.
Select one industry from the turbulent list and using Table 12.3, construct their future turbulence profile.
5.
For each of the selected turbulent industries, rank the future relative importance to success of: R&D, marketing, production, finance, and general management . Are there any other areas of the firm which will be critical to success? Give reasons for your ratings.

12. Strategic Dimensions of Technology