Technology strategy: Technological Leadership or Followership

The second broad  issue a firm must address in technology strategy is whether to seek technological leadership. The notion of technological leadership is relatively clear— a firm seeks to be the first to introduce technological changes   that  support   its   generic   strategy.   Sometimes all firms that are not leaders are viewed as technological  followers, including firms that disregard technological change altogether. Techno­ logical followership should be a conscious  and active strategy   in which a firm explicitly   chooses not  to   be first on   innovations,   and  that  is the sense in which it is examined here.

While technological leadership is often thought of in terms of product or process technology, the issue is  much broader.  Leadership can be established in   technologies   employed   in   any   value   activity. The discussion here is directed at the strategic  choice between pioneer­ ing innovation in any value activity and waiting for others to pioneer.

The  decision   to   become a   technological  leader or   follower can be a way of achieving either low   cost   or   differentiation,   as illustrated in Table 5-2:

Firms tend to view technological leadership primarily as a vehicle for achieving differentiation, while acting   as   a   follower   is considered the approach  to achieving low cost. If a technological  leader  is the first to adopt a new lower-cost process, however, the leader can become the low-cost producer. Or if a follower can learn from the leader’s mistakes and alter  product  technology  to meet the needs of buyers better, the follower can achieve differentiation. There can also be more than one technological leader in an industry because of the many technologies involved and the different types of competitive advantage sought.

The  choice of whether  to be a   technological  leader or follower in an important technology is based on three factors:3

  • Sustainability o f the   technological lead. The   degree   to   which a firm can sustain its lead over competitors in a technology.
  • First-mover advantages. The advantages a firm reaps from being the first to adopt a new technology.
  • First-mover disadvantages. The disadvantages a firm faces by moving first rather than waiting for others.

All three factors interact to determine the best choice for a particu­ lar firm. Significant disadvantages of being a first mover may eliminate the desirability of taking the leadership   role even if a firm can   sustain its technological lead. Conversely, first-mover advantages  may  translate an initial technological lead into a sustainable competitive advantage elsewhere though the technological lead itself disappears. First-mover advantages and disadvantages occur most often in the context of tech­ nological choices, but their significance for competitive strategy formu­ lation extends beyond technological strategy. They address the wider question of how timing translates into competitive advantage or disad­ vantage and into entry and mobility barriers.


Technological  leadership is favored if the technological  lead can be sustained because (1) competitors  cannot duplicate  the technology, or (2) the firm innovates as fast or faster than competitors can catch UP. The second condition is im portant because technology often dif­ fuses, requiring a technological leader to remain a moving target. Ko­ dak, for example, has maintained  leadership   in amateur  photography in large part through a succession of camera systems and film chemis­ tries, most recently including the disc camera,  rather  than  possessing a single technology competitors could not match. If a technology lead cannot be sustained,   technological   leadership   can   only   be justified   if the initial lead translates into first-mover advantages,  because of the greater cost of leadership compared to followership.

The sustainability of a technological  lead is a function of four factors:

The Source o f Technological Change. The sustainability of a technological lead depends heavily on whether technology is being developed inside the industry or is coming from outside it. An impor­ tant proportion of technological change  comes  from external  sources such as suppliers, buyers, or completely unrelated industries. In many process industries, for example, the key source of technology is con­ struction engineering firms that design production processes and build plants.

Where im portant sources of technology are external to an indus­ try, sustaining a technological lead is generally more difficult. External technology sources decouple a firm’s access to technology from its technological skills and R& D spending rate, because many companies can get access to external developments. Hence external technological changes act as an equalizer among  competitors.  Technological leaders in industries with   key   external   sources   of technology  must  capture the best of those sources through  coalitions or exclusive arrangements in order to sustain their lead, or have a superior  ability to adapt externally developed technology to the industry.

The Presence or Absence o f a Sustainable Cost or Differentiation Advantage in   Technology Development Activity.       A   technological lead is more likely to be sustainable if a firm has a cost or differentiation advantage in performing technology development. The tools in Chap­ ters 3 and 4 can be used to analyze a firm’s relative cost and differentia­ tion in the development  of technology. For  example,   scale economies or learning effects in technological development give large-share or experienced firms an R& D cost advantage.  Where the costs of develop­ ing a model are largely fixed, a firm with a large share has proportion­ally lower R& D costs than  a smaller-share  firm. It may thus  be able to spend more money on R& D in order to maintain its technological lead without a cost penalty. This  seems to have occurred  in large turbine generators, where General  Electric  has outspent  Westinghouse in absolute terms and maintained a significant technological lead al­ though its R& D as a percentage of sales is still lower than  Westing- house’s. Rising costs of product development in an industry also work in favor of large-share firms. As the cost of bringing out a new herbicide has risen to over $30 million, for example, the advantages of the indus­ try leaders in agricultural chemicals are widening.

A firm’s relative cost or effectiveness in performing technology development  can also be strongly  influenced   by   interrelationships among related business units within the parent company.  Interrelation­ ships can allow the transference of skills or sharing of costs of R&D activity. The  types of interrelationships  involving R& D   are described in Chapter 9. Technological leaders often aggressively pursue techno­ logical interrelationships, entering new businesses with related technol­ ogies. They also create mechanisms for R& D transfer among business units, and tend   to   invest at the corporate  level in core technologies with a potential impact on many business units.

Different parts of the innovation cycle— basic research, applied research, development— tend to offer differing opportunities for sus­ tainable cost advantages  in R& D spending.  Basic product  innovation is often less scale-sensitive than  the subsequent  rapid introduction  of new product  types and  the incorporation  of new features. This  is one of  the reasons Japanese  firms often overtake  innovative   U.S.   firms that fail to m aintain their lead in subsequent product improvements. Many  successful technological  leaders do not  reap all of  the benefits of scale, learning, or interrelationships in R& D in the form of higher profits, but reinvest to maintain their  technological  lead. They also exploit any scale or learning advantages in R& D by rapid new model introduction. Honda, for example, has reinforced its competitive ad­ vantage in motorcycles  through  a continual  stream of new models.

Relative Technological Skills.     A firm with unique technological skills vis-a-vis competitors  is more  likely to sustain its technological lead than a firm with comparable R& D personnel, facilities, and man­ agement to competitors. Technological skills will influence the output from a given rate of spending on technology,  regardless of scale, learn­ ing,   or interrelationship  effects.   Technological  skills are   a   function of many factors— management, company culture, organizational struc­ture and systems, company reputation  with scientific personnel, and others. NEC Corporation, for example, is the company  most  highly ranked by engineering graduates in Japan.  This contributes to its ability to attract  the best graduates,  reinforcing its strong  R& D capability.

Successful technological leaders pay   close attention  to their  stock of R& D skills. They avoid cutting back R& D staff in industry down­ turns or profit squeezes. They  also seek out  relationships  with the leading scientific centers in appropriate fields, and  attem pt to develop an image as the best place to work  for the types of research personnel that support their technology strategy.

Rate o f Technology Diffusion. A final im portant factor in deter­ mining the sustainability of a technological  lead is the rate of diffusion of the leader’s technology. Superior technological skills or cost advan­ tages in performing R& D are nullified if competitors  can easily copy what a firm develops. Diffusion of technology   occurs   continually, though at different rates depending on the industry. Some of the mecha­ nisms for diffusion of a leader’s technology ae as follows:

  • direct observation by competitors of a leader’s products (reverse engineering) and methods of operating
  • technology transfer through equipment suppliers or other ven­ dors
  • technology transfer through industry observers such as consul­ tants and the trade press
  • technology transfer through buyers who desire another qualified source
  • personnel losses to competitors or spinoff firms
  • public statements or papers delivered by a leader’s scientific personnel

The diffusion of technology is often greater for the basic product and process innovations  than  it is for later improvements.  Product and process refinements are more likely to be kept proprietary, particu­ larly when based on process improvements. Since Japanese firms have emphasized constant process innovations, they often develop more sustainable advantages  than  U.S.   or   European  firms that  pioneered the process.

The rate of technological diffusion is partly intrinsic to an industry and partly under a firm’s control. Most of the technology of a mobile home producer, for example, is readily observable by examining the product. Disposable diaper technology diffuses more  slowly because much of it hinges on the way the product is manufactured on custom­ ized machines. Some factors that  slow   down  the rate of  diffusion are as follows:

  • patenting of the firm’s technology and  related technologies
  • secrecy
  • in-house development of prototypes and production equipment
  • vertical integration into key parts that  embody  or give clues to the  technology
  • personnel policies that retain   employees

Successful technological leaders are aggressive in trying to slow down diffusion. They patent extensively where patents can be obtained, and enforce them by always challenging infringers. They  view all con­ tact with outsiders, even buyers, as a threat to proprietary  know-how. Plant tours are a rarity, and even buyers are not told about key innova­ tions. Technological leaders are also often vertically integrated,  build­ ing or modifying equipment in-house to protect  technology, and are discrete in public disclosures. It is striking how many  of the firms known to be secretive are also technological  leaders. These include DuPont, Kodak, Procter & Gamble, and Michelin.


Technological  leadership is strategically desirable   when   first- mover advantages exist. These allow a leader to translate a technology gap into other competitive advantages that persist even if the technol­ ogy gap closes. First-mover advantages rest on the role of timing in improving a firm’s position vis-a-vis sustainable  sources of cost advan­ tage or differentiation. In general terms, a first mover gets the opportu­ nity to define the competitive rules in a variety of areas.

The most im portant types of potential  first-mover advantages in­ clude the following, and can also accrue  to moving first into a geo­ graphic area or to pioneering that does not involve technology per se:

Reputation.       A   firm that  moves first may   establish a reputation as the pioneer or leader, a reputation that emulators will have difficulty overcoming. Leadership places a firm, at least temporarily, in the posi­tion of being unique which can produce long-term image benefits not available to others.   A   first mover  also   may be first to serve buyers and thus to establish relationships where there may be loyalty. The significance of any reputation  advantage  from leadership will depend on the credibility   of a firm   and   its   capacity   to   invest in marketing. A small company may not succeed in enhancing  its reputation  by moving first because it lacks the resources to publicize its lead.

Preempting a Positioning.     A first mover may preempt an attrac­ tive product or market positioning, forcing competitors to adopt less desirable ones. Stouffer’s preempted the gourmet  concept  in frozen entrees, for example. A first mover gets the opportunity  to shape the way a product is defined or marketed in a way that favors it. A first mover can also put capacity in place to preempt the ability of competi­ tors to profitably expand.

Switching Costs.      A first mover can lock in later sales if switching costs are present. In hospital management contracts, for example, the pioneer that signed up hospitals first gained a significant edge in con­ tract renewals because of the substantial costs to the hospital of chang­ ing management  firms.   Switching   would   result in disruption  caused by a new administrator, a new computer system, and other changes.

Channel Selection.       A first mover may gain unique channel access for a new product or product generation. It can pick the best brokers, distributors, or retailers, while followers m ust either accept the second best, establish   new   channels,   or   persuade  the   first   mover’s channels to shift or divide their loyalties.

Proprietary Learning Curve. A first mover gains a cost or differ­ entiation advantage if there is a proprietary learning curve in value activities that are affected by the early move. The  first mover begins down the learning curve first in the affected activities, and may establish a durable cost or differentiation advantage if it can keep its learning proprietary.

Favorable Access to Facilities,   Inputsor Other Scarce Resources. A first mover can often enjoy at least a temporary  advantage in access to purchased inputs or other resources, because it contracts  for them before market forces reflect the full impact of the change it is pioneer­ ing. A firm may get its pick of sites for facilities, for example, or favorable deals   with   raw   material  suppliers  eager   for new   business. A good case in point is the airline industry,  where the early no-frills carriers have acquired cheap surplus aircraft an d /o r low-cost terminal space, and hired out-of-work pilots.   M arket  forces will eventually bid up the prices of these inputs as the no-frills strategy is imitated.

Other  examples come from several extractive  industries.   New mines and processing plants are being constructed  in increasingly re­ mote locations, raising infrastructure costs. They  are also being forced to bear higher environmental  costs. Early movers, then, have lower costs.

Definition o f Standards.       A first mover can define the standards for technology or for other  activities, forcing later movers to   adopt them. These standards, in turn, make the firm’s position more sustain­ able. For example, RCA  defined the standards  in color TV which meant that competitors had to go down the learning curve RCA  had already started down rather than create a new one.

Institutional Barriers.    A first mover may enjoy institutional bar­ riers against imitation.  The first mover  may secure patents, or being first into a country may give it special status with government.  Institu­ tional factors often   facilitate a first m over’s ability   to define standards as well.

Early Profits. In some industries, a first mover  may be in a position   to enjoy   temporarily  high   profits   from   its position.   It may be able to contract  with   buyers   at   high   prices during  early   scarcity of a new item, for example, or sell to buyers who value the new technology very highly.

Successful technological leaders actively pursue  first-mover advan­ tages rather than rely solely on their  technological  edge. They  take every opportunity to use their technological leadership to define the competitive rules in   ways that  benefit them.   They  invest in marketing to reinforce the reputation benefits of being the leader, and price aggres­ sively to make  early   sales to buyers   with   the   highest switching costs. It is striking how many firms that  were first movers  have remained leaders for decades. In consumer  goods, for example, such leading brands as Crisco, Ivory, Life Savers, Coca-Cola, Campbell’s, Wrigley, Kodak, Lipton, and Goodyear were leaders by the 1920s.

First-mover advantages can be dissipated through  aggressive spending by later entrants unless the first mover invests to capitalize on them. As happened to Bowmar in electric calculators, small pioneers are often overwhelmed by later entrants. Their lead is overcome not because first-mover advantages were not present, but  because the re­ sources were not  present to exploit them.  IBM in personal computers is providing a more recent example of a late mover succeeding against early movers based on resources and interrelationships with other busi­ ness units.

Where the first mover does not have adequate resources, the first early mover  with resources can often be the firm   to   gain   the benefits of first-mover advantages. In minicomputers, for example, Digital Equipment did not introduce the first machine but gained many first- mover advantages because it was the first to develop the product aggres­ sively. Digital invested heavily to exploit its advantages  through  ex­ panding its product line, going down the learning curve, and increasing the size of its sales force. A similar situation occurred in video cassette recorders, where Ampex pioneered the product but Japanese  firms invested heavily to improve  the   technology,  produce  units cheaply, and translate their lead into first-mover advantages.


First movers often face disadvantages as well as advantages. First- mover disadvantages stem from two broad  sources, the costs of pioneer­ ing and the risk that conditions will change.

Pioneering Costs.     A first mover often bears substantial pioneer­ ing costs, including the following:

  • gaining regulatory approvals
  • achieving code compliance
  • educating buyers
  • developing infrastructure in areas such as service facilities and training
  • developing needed inputs such as raw   material   sources   and new types of machinery
  • investing in the development of complementary products (see Chapter 12)
  • high costs of early inputs because of scarcity of supply or small scale of needs

Pioneering costs vary widely depending on the type of technologi­ cal innovation and can be reduced by sharing them with good competi­ tors (see Chapter  6). However,  they are   often   unavoidable  for the first mover.

Demand Uncertainty.      A first mover bears the risk of uncertainty over future demand. It must put  capacity  in place first, while later movers can base their decisions on more current information. Though committing before competitors has some advantages, it also has some significant risks. RCA was the first mover into color TV, for example, betting on an early takeoff of the new technology. Later movers learned from RCA ’s experience that demand  for color  sets was some years away and avoided a period of losses.

Changes in Buyer Needs.   A first mover  is vulnerable if buyer needs change and its technology is no longer valued. A first mover’s reputation advantage may also be eliminated  if buyers’ needs change and the first mover is identified with the old generation of technology. Unless buyer needs shift radically, substantially  changing  the technol­ ogy required to serve them, however,   a first mover  can   maintain its lead by modifying technology over time.

Specificity o f Investments to Early Generations or Factor Costs.   A first mover may be at a disadvantage  if early investments  are specific to the current technology and cannot be easily modified for later gener­ ations. In semiconductors, for example, Philco moved early for leader­ ship with a   large automated  plant.   It   enjoyed  a period   of success, but the later development of a different manufacturing process for semiconductor  chips made   its earlier investment  obsolete.   Similarly, the early movers will be disadvantaged if its product or process reflected factor costs or factor quality that have changed.

Technological    Discontinuities.    Technological     discontinuities work against   the   first mover  by   making  obsolete   its investments in the established technology. Technological   discontinuities   are   major shifts in technology that a first mover  may be ill prepared  to respond to given its investment  in   the old   technology.   Discontinuity  favors the fast follower who does not bear the high cost of pioneering. Where technology evolves along a relatively continuous path, however, a first mover’s head start  is an advantage.  It can transfer learning from the old technology to the new and stay ahead on the learning curve.

Low-cost Imitation.     A first mover exposes itself to followers who may be able to imitate the innovation at lower cost than the cost of innovating. Followers often have to bear some costs of imitation and adaptation, however, which work to the benefit of the first mover.

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

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