Technology and competition

Any firm involves a large num ber  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 signifi­ cant impact on competition.  A technology is im portant 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 competi­ tive 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 in­ volve such disciplines as industrial engineering, electronics, and materi­ als 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 replac­ ing 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. Procure­ ment  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. Sim­ ilarly, 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 techno­ logical 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 admin­ istrative 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 sepa­ rated it because of the propensity  to overlook it. Change in the way office functions can be performed  is one of the most  im portant 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 m ajor source of linkages within the value chain. Prod­ uct   technology   is linked   to   the   technology  for servicing   a   product, for example, while component technologies are related to overall prod­ uct 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 m ajor recon­ figuration 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 bound­ aries traditionally established for R& D, and inherently  involves suppli­ ers and buyers.1 Some of the technologies embodied  in the value chain are industry-specific, to varying degrees, but many are not. Office auto­ mation 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 charac­ teristics   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 tech­ nology 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-trie 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 em­ ployed 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 compe­ titors thus gains competitive advantage.

In addition to affecting cost or differentiation in its own right, technology affects competitive advantage through  changing or influenc­ ing 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 dram atic 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 cate­ gory, 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-a-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. M un­ dane 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 competi­ tive advantage  if they affect the drivers  of cost or uniqueness in a firm’s value chain.


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 com­ petitive advantage under the following circumstances:

The technological change itself lowers cost or enhances differentia­ tion 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 even­ tually 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 desir­ able 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 tech­ nological accomplishment. Technological change will destroy competi­ tive 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 im portant determ inant of overall industry structure if the technology employed in a value activity becomes wide­ spread. 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 ad­ vantage 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.


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 econo­ mies of scale in the technological development function itself, by quick­ ening 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 re­ quirements in corn wet milling, for example.

Technological change  also   plays   an   im portant  role   in   shaping the pattern of product differentiation in an industry.  In aerosol packag­ ing, for example, technological change has resulted in product stan­ dardization 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 deter­ mine 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 indus­ try dependence on channels (if more product demonstration and after­ sale service is required, for example).


Technological change can shift the bargaining  relationship  be­ tween 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 back­ ward 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 m ajor impact on the ability of firms such as A D P to sell timesharing,  since many buyers can now afford their own machines.


Technological change can shift the bargaining  relationship be­ tween an industry and its suppliers. It can eliminate the need to pur­ chase 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 mem­ branes 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 alumi­ num cans.   Technology  investments  by firms can   also allow   the use of multiple suppliers by creating in-house knowledge of supplier tech­ nologies. This can eliminate dependence on any one supplier.


Perhaps the most commonly recognized effect of technology on industry structure is its impact on substitution.  Substitution is a func­ tion of the relative value to price of competing products and the switch­ ing 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 can alter the nature and  basis of rivalry among  exist­ ing 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 plays an im portant 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 im portant to recognize that regard­ less 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 ship­ ping. Technological change that reduces the cost of responding  to national market differences can help globalize industries.2 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  advance­ ments that improved their performance and widened their usage.


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 na­ ture of its impact on the five forces. If it raises entry barriers, eliminates powerful suppliers, or insulates an industry from substitutes, then tech­ nological 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 eventu­ ally undermine industry structure, if and when the innovation is imi­ tated by other competitors. Firm s must recognize the dual role of technological change in shaping both competitive advantage and indus­ try structure when selecting a technology strategy and in making tech­ nology investments.

Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.

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