Any firm involves a large number of technologies. Everything a firm does involves technology of some sort, despite the fact that one or more technologies may appear to dominate the product or the production process. The significance of a technology for competition is not a function of its scientific merit or its prominence in the physical product. Any of the technologies involved in a firm can have a significant impact on competition. A technology is important for competition if it significantly affects a firm’s competitive advantage or industry structure.
1. Technology and the Value Chain
The basic tool for understanding the role of technology in competitive advantage is the value chain. A firm, as a collection of activities, is a collection of technologies. Technology is embodied in every value activity in a firm, and technological change can affect competition through its impact on virtually any activity. Figure 5-1 illustrates the range of technologies typically represented in a firm’s value chain.
Every value activity uses some technology to combine purchased inputs and human resources to produce some output. This technology may be as mundane as a simple set of procedures for personnel, and typically involves several scientific disciplines or subtechnologies. The materials handling technology used in logistics, for example, may involve such disciplines as industrial engineering, electronics, and materials technology. The technology of a value activity represents one combination of these subtechnologies. Technologies are also embodied in the purchased inputs used in each value activity, both in consumable inputs and in capital items. The technology inherent in purchased inputs interacts with the other subtechnologies to yield the level of performance of the activity.
Technology is embodied not only in primary activities but in support activities as well. Computer-aided design is an example of a technology just coming into use in product development that is replacing traditional ways of developing new products. Various types of technologies also underlie the performance of other support activities, including those not typically viewed as technologically based. Procurement embodies procedures as well as technologies for placing orders and interacting with suppliers. Recent developments in information systems technology offer the possibility of revolutionizing procurement by changing ordering procedures and facilitating the achievement of supplier linkages. Human resource management draws on motivation research and technologies for training. Firm infrastructure involves a wide range of technologies ranging from office equipment to legal research and strategic planning.
Figure 5-1. Representative Technologies in a Firm’s Value Chain
Information systems technology is particularly pervasive in the value chain, since every value activity creates and uses information. This is evident from Figure 5-1, which shows information systems technology in every generic category of value activity in the chain. Information systems are used in scheduling, controlling, optimizing, measuring, and otherwise accomplishing activities. Inbound logistics, for example, uses some kind of information system to control material handling, schedule deliveries, and manage raw material inventory. Similarly, an information system is involved in order processing, managing suppliers, and scheduling the service force. Information systems tech- nology also has an important role in linkages among activities of all types, because the coordination and optimization of linkages (Chapter 2) requires information flow among activities. The recent, rapid technological change in information systems is having a profound impact on competition and competitive advantages because of the pervasive role of information in the value chain.
Another pervasive technology in the value chain is office or administrative technology, because clerical and other office functions must be performed as part of many value activities. While office technology can be subsumed under information systems technology, I have separated it because of the propensity to overlook it. Change in the way office functions can be performed is one of the most important types of technological trends occurring today for many firms, though few are devoting substantial resources to it.
The technologies in different value activities can be related, and this underlies a major source of linkages within the value chain. Product technology is linked to the technology for servicing a product, for example, while component technologies are related to overall product technology. Thus a technology choice in one part of the value chain can have implications for other parts of the chain. In extreme cases, changing technology in one activity can require a major reconfiguration of the value chain. Moving to ceramic engine parts, for example, eliminates the need for machining and other manufacturing steps in addition to having other impacts on the value chain. Linkages with suppliers and channels also frequently involve interdependence in the technologies used to perform activities.
A good example of the interdependence of technology in value activities is American Airline’s Sabre reservations system. American leases terminals to travel agents, which allows automated reservations and ticketing. The system has been a source of differentiation for American. At the same time, however, the same system is used inside American in ticketing and issuing boarding passes as well as in route scheduling. American also sells listings on the system to other airlines.
A firm’s technologies are also clearly interdependent with its buyers’ technologies. The points of contact between a firm’s value chain and its buyer’s chain, discussed in the previous chapter, define the areas of potential interdependency of technology. A firm’s product technology influences the product and process technology of the buyer and vice versa, for example, while a firm’s order processing technology influences and is influenced by the buyer’s procurement methods.
Technology, then, is pervasive in a firm and depends in part on both the buyers’ channels and suppliers’ technology. As a result, the development of technology encompasses areas well outside the boundaries traditionally established for R&D, and inherently involves suppliers and buyers.1 Some of the technologies embodied in the value chain are industry-specific, to varying degrees, but many are not. Office automation and transportation are just two areas where vital technologies, in large part, are not industry-specific. Hence technology development relevant to a firm often takes place in other industries. All these characteristics of technology have implications for the role of technology in competitive advantage.
2. Technology and Competitive Advantage
Technology affects competitive advantage if it has a significant role in determining relative cost position or differentiation. Since technology is embodied in every value activity and is involved in achieving linkages among activities, it can have a powerful effect on both cost and differentiation. Technology will affect cost or differentiation if it influences the cost drivers or drivers of uniqueness of value activities described in Chapters 3 and 4. The technology that can be employed in a value activity is often the result of other drivers, such as scale, timing, or interrelationships. For example, scale allows high-speed automatic assembly equipment, while early timing allowed some elec-tric utilities to harness hydropower while sites were available. In these instances technology is not the source of competitive advantage, but rather an outcome of other advantages. However, the technology employed in a value activity is frequently itself a driver when it reflects a policy choice made independently of other drivers. A firm that can discover a better technology for performing an activity than its competitors thus gains competitive advantage.
In addition to affecting cost or differentiation in its own right, technology affects competitive advantage through changing or influencing the other drivers of cost or uniqueness. Technological development can raise or lower scale economies, make interrelationships possible where they were not before, create the opportunity for advantages in timing, and influence nearly any of the other drivers of cost or uniqueness. Thus a firm can use technological development to alter drivers in a way that favor it, or to be the first and perhaps only firm to exploit a particular driver.
Two good examples of the role of technology in altering relative cost position are underway in the aluminum industry and illustrate these points. The dramatic rise in energy costs has made power the largest single cost in aluminum smelting, and transformed a number of firms into high-cost producers because of the cost of their power. The great majority of Japanese aluminum smelters fall into this category, for example. To deal with the problem, Japanese firms have worked actively on carbothermic reduction, a breakthrough technology that dramatically lowers power consumption by converting bauxite and related ores directly into aluminum ingot without the intermediate alumina step. Here a new technology is itself a policy cost driver. Carbothermic reduction by reducing power consumption would also diminish the importance of location and institutional factors as cost drivers because location and government pricing policies for power strongly influence electricity costs.
The other example of the role of technology in cost is occurring in aluminum semifabrications, where a new process technology called continuous casting is emerging as a potential replacement for hot mills. The new process does not appear to result in lower cost at efficient scale, but it is less scale- sensitive. If the process proves successful, it could nullify the scale advantage of large semifabricators and allow plants to be located closer to buyers. This would reduce relatively high transport cost in regions previously served by products shipped from distant facilities. Here the new technology does not appear to be itself a cost driver, but is affecting other drivers (scale and location).
It will influence the cost position of firms asymmetrically depending on their positions vis-à-vis those drivers.
The role of technology in differentiation is illustrated by Federal Express, which reconfigured the value chain in small parcel delivery and achieved faster and more reliable delivery. The new technologies employed in Federal Express’s value chain were policy choices, but also had the effect of increasing scale economies and creating a first mover advantage. Thus as Federal Express has gained a large market share, the cost of matching its differentiation has become very high for competitors. This example also demonstrates the point that a major technological development need not involve scientific breakthroughs or even technologies that were not widely available previously. Mundane changes in the way a firm performs activities or combines available technologies often underlie competitive advantage.
Since a firm’s technology is often interdependent with its buyers’ technology, technological change by the buyer can affect competitive advantage just as can technological change within the firm. This is particularly true in differentiation strategies. For example, a distributor that once differentiated itself by performing pricing and inventory control functions for its retail buyers may lose that differentiation if retailers switch to on-line point-of-sale systems. Similarly, changes in suppliers’ technology can add to or subtract from a firm’s competitive advantage if they affect the drivers of cost or uniqueness in a firm’s value chain.
TESTS OF A DESIRABLE TECHNOLOGICAL CHANGE
The link between technological change and competitive advantage suggests a number of tests for a desirable direction of technological change. Technological change by a firm will lead to sustainable competitive advantage under the following circumstances:
The technological change itself lowers cost or enhances differentiation and the firm’s technological lead is sustainable. A technological change enhances competitive advantage if it leads to lower cost or differentiation and can be protected from imitation. The factors that determine the sustainability of a technological lead are described below.
The technological change shifts cost or uniqueness drivers in favor of a firm. Changing the technology of a value activity, or changing the product in ways that affect a value activity, can influence the drivers of cost or uniqueness in that activity. Even if the technological change is imitated, therefore, it will lead to a competitive advantage for a firm if it skews drivers in the firm’s favor. For example, a new assembly process that is more scale- sensitive than the previous process will benefit a large-share firm that pioneers it even if competitors eventually adopt the technology.
Pioneering the technological change translates into first-mover advantages besides those inherent in the technology itself. Even if an innovator is imitated, pioneering may lead to a variety of potential first-mover advantages in cost or differentiation that remain after its technological lead is gone. First- mover advantages and disadvantages are identified below.
The technological change improves overall industry structure. A technological change that improves overall industry structure is desirable even if it is easily copied.
Technological change that fails these tests will not improve a firm’s competitive position, though it may represent a substantial technological accomplishment. Technological change will destroy competitive advantage if it not only fails the tests but has the opposite effect contemplated in the tests, such as skewing cost or uniqueness drivers in favor of competitors. A firm may also find itself in the situation where a technological change may meet one test but worsen a firm’s position via another.
3. Technology and Industry Structure
Technology is also an important determinant of overall industry structure if the technology employed in a value activity becomes widespread. Technological change that is diffused can potentially affect each of the five competitive forces, and improve or erode industry attractiveness. Thus even if technology does not yield competitive advantage to any one firm, it may affect the profit potential of all firms. Conversely, technological change that improves a firm’s competitive advantage may worsen structure as it is imitated. The potential effect of technological change on industry structure means that a firm cannot set technology strategy without considering the structural impacts.
TECHNOLOGY AND ENTRY BARRIERS
Technological change is a powerful determinant of entry barriers. It can raise or lower economies of scale in nearly any value activity. For example, flexible manufacturing systems often have the effect of reducing scale economies. Technological change can also raise economies of scale in the technological development function itself, by quickening the pace of new production introduction or raising the investment required for a new model. Technological change also is the basis of the learning curve. The learning curve results from improvements in such things as layout, yields, and machine speeds—all of which are types of technological change. Technological change can lead to other absolute cost advantages such as low-cost product designs. It can also alter the amount of capital required for competing in an industry. The shift from batch to continuous process technology for producing cornstarch and corn syrup has significantly increased the capital requirements in corn wet milling, for example.
Technological change also plays an important role in shaping the pattern of product differentiation in an industry. In aerosol packaging, for example, technological change has resulted in product standardization and has made the product a near commodity, all but eliminating the ability of contract packagers to differentiate themselves based on product characteristics. Technological change can also raise or lower switching costs. Technological choices by competitors determine the need for buyers to retrain personnel or to reinvest in ancillary equipment when switching suppliers. Technological change can also influence access to distribution by allowing firms to circumvent existing channels (as telemarketing is doing) or, conversely, by increasing industry dependence on channels (if more product demonstration and aftersale service is required, for example).
TECHNOLOGY AND BUYER POWER
Technological change can shift the bargaining relationship between an industry and its buyers. The role of technological change in differentiation and switching costs is instrumental in determining buyer power. Technological change can also influence the ease of backward integration by the buyer, a key buyer bargaining lever. In the computer service industry, for example, the rapid decline in the cost of computers, driven by technological change, is having a major impact on the ability of firms such as ADP to sell timesharing, since many buyers can now afford their own machines.
TECHNOLOGY AND SUPPLIER POWER
Technological change can shift the bargaining relationship between an industry and its suppliers. It can eliminate the need to purchase from a powerful supplier group or, conversely, can force an industry to purchase from a new, powerful supplier. In commercial roofing, for example, the introduction of rubber-based roofing membranes has introduced powerful new resin suppliers in place of less powerful asphalt suppliers. Technological change can also allow a number of substitute inputs to be used in a firm’s product, creating bargaining leverage against suppliers. For example, the can industry has benefited from fierce competition between the aluminum and steel companies to supply it, brought on by technological change in aluminum cans. Technology investments by firms can also allow the use of multiple suppliers by creating in-house knowledge of supplier technologies. This can eliminate dependence on any one supplier.
TECHNOLOGY AND SUBSTITUTION
Perhaps the most commonly recognized effect of technology on industry structure is its impact on substitution. Substitution is a function of the relative value to price of competing products and the switching costs associated with changing between them, as will be discussed extensively in Chapter 8. Technological change creates entirely new products or product uses that substitute for others, such as fiberglass for plastic or wood, word processors for typewriters, and microwave ovens for conventional ovens. It influences both the relative value/ price and switching costs of substitutes. The technological battle over relative value/price between industries producing close substitutes is at the heart of the substitution process.
TECHNOLOGY AND RIVALRY
Technology can alter the nature and basis of rivalry among existing competitors in several ways. It can dramatically alter the cost structure and hence affect pricing decisions. For example, the shift to continuous process technology in the com wet milling industry mentioned above has also raised fixed cost, and contributed to greater industry rivalry. A similar increase in fixed cost as a percentage of total cost has accompanied the increasing deadweight tonnage of oil tankers, made possible by improvements in shipbuilding technology. The role of technology in product differentiation and switching costs also is important to rivalry.
Another potential impact of technology on rivalry is through its effect on exit barriers. In some distribution industries, for example, automation of materials handling has raised exit barriers because the materials handling equipment is specialized to the particular goods moving through warehouses. Hence what were once general-purpose facilities have become specialized and capital-intensive facilities.
TECHNOLOGICAL CHANGE AND INDUSTRY BOUNDARIES
Technological change plays an important role in altering industry boundaries. The boundary of an industry is often imprecise, because distinctions between an industry’s product and substitutes, incumbents and potential entrants, and incumbents and suppliers or buyers are often arbitrary. Nevertheless, it is important to recognize that regardless of where one chooses to draw industry boundaries, technological change can broaden or shrink them.
Technological change widens industry boundaries in a number of ways. It can reduce transportation or other logistical costs, thereby enlarging the geographic scope of the market. This happened in the 1960s and 1970s with the advent of large bulk cargo carriers in shipping. Technological change that reduces the cost of responding to national market differences can help globalize industries.42 It can also enhance product performance, thereby bringing new customers (and competitors) into a market. Finally, technological changes can increase the interrelationships among industries. In industries such as financial services, computers and telecommunications, technological change is blurring industry boundaries and folding whole industries together. In publishing, automated text processing and printing technologies have made shared printing operations more feasible for several different types of publications. Interrelationships are discussed in greater detail in Chapter 9.
Technology can also narrow industry boundaries. Technological change may allow a firm to tailor the value chain to a particular segment, as will be discussed in Chapter 7. Thus segments can, in effect, become industries. Portable cassette players, for example, have become a full-fledged industry independent of larger cassette players and cassette players used in dictating due to technological advancements that improved their performance and widened their usage.
TECHNOLOGICAL CHANGE AND INDUSTRY ATTRACTIVENESS
While it is sometimes believed that technological change always improves industry structure, the previous discussion should make it clear that it is just as likely to worsen industry structure. The effect of technological change on industry attractiveness depends on the nature of its impact on the five forces. If it raises entry barriers, eliminates powerful suppliers, or insulates an industry from substitutes, then technological change can improve industry profitability. However, if it leads to more buyer power or lowers entry barriers, it may destroy industry attractiveness.
The role of technological change in altering industry structure creates a potential conundrum for a firm contemplating innovation. An innovation that raises a firm’s competitive advantage may eventually undermine industry structure, if and when the innovation is imitated by other competitors. Firms must recognize the dual role of technological change in shaping both competitive advantage and industry structure when selecting a technology strategy and in making technology investments.
Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.