At the core of a technology strategy is the type of competitive advantage a firm is trying to achieve. The technologies that should be developed are those that would most contribute to a firm’s generic strategy, balanced against the probability of success in developing them. Technology strategy is a potentially powerful vehicle with which a firm can pursue each of the three generic strategies. Depending on which generic strategy is being followed, however, the character of technology strategy will vary a great deal, as shown in Table 5-1.
In many firms, R&D programs are driven more by scientific interests than by the competitive advantage sought. It is clear from Table 5-1, however, that the primary focus of a firm’s R&D programs should be consonant with the generic strategy that is being pursued. The R&D program of a cost leader, for example, should include a heavy dose of projects designed to lower cost in all value activities that represent a significant fraction of cost, as well as projects to reduce the cost of product design through value engineering. R&D by a cost leader on product performance must be aimed at maintaining parity with competitors rather than adding costly new features or the goals of R&D will be inconsistent with the firm’s strategy.
Another important observation from Table 5-1 is that both product and process technological change can have a role in supporting each of the generic strategies. Firms often incorrectly assume that process technological change is exclusively cost-oriented and product technological change is intended solely to enhance differentiation. Chapter 3 has shown how product technology can be critical in achieving low cost, while Chapter 4 has shown how changes in process technology may be the key to differentiation (a favorite tactic of Japanese companies).
It is also important that a firm’s technology strategy extend beyond product and process R&D as they are traditionally defined. Technology pervades a firm’s value chain and relative cost and differentiation are a function of the entire chain. Thus a systematic examination of all a firm’s technologies will reveal areas in which to reduce cost or enhance differentiation. The information system department may have more impact on technological change in some firms today than the R&D department, for example. Other important technologies such as transportation, materials handling, communications, and office automation also deserve more than ad hoc or informal attention. Finally, development in all technological areas must be coordinated to ensure consistency and exploit interdependencies among them.
Crown Cork and Seal provides a good example of the link between technology strategy and competitive advantage. Crown focuses on select customer industries and provides cans together with highly responsive service. Crown does little or no basic research and does not pioneer new products. Rather, its R&D department is organized to solve specific customer problems on a timely basis, and to imitate successful product innovations rapidly. Crown’s R&D approach, then, closely supports its focus strategy. Its technological policies are quite different from those of American Can or Continental Group, which supply broad lines of packaging in addition to cans. American and Continental invest heavily on research in basic materials and new products.
The selection of specific technologies in the value chain on which to concentrate development effort is governed by the link between technological change and competitive advantage. A firm should concentrate on those technologies that have the greatest sustainable impact on cost or differentiation, either directly or through meeting the other tests described earlier. These tests allow a ranking of technological changes that would yield the greatest competitive benefit. The cost of improving the technology must be balanced against the benefit, as well as the likelihood that the improvement can be achieved.
Firms often confront a choice between attempting to improve an established technology for performing a value activity or investing in a new one. In aluminum smelting, for example, a firm might concentrate on improving the Hall-Heroult process now in use, or it might attempt to develop carbothermic reduction. Technologies seem to go through a life cycle in which early major improvements give way to later incremental ones. This argues that the benefit/cost tradeoff in improving mature technologies may be less (though perhaps more certain) than that in improving newer technologies.
This can be a dangerous assumption, however, that is self-fulfilling. A technology can be assumed to be mature only with great caution. Major improvements in the efficiency of the Hall-Heroult process are occurring today, for example, despite the fact that it was developed prior to 1900. Similarly, the fuel efficiency of low-speed diesel engines has risen significantly since 1974. Diesel technology is also over 80 years old and was widely viewed as mature compared to gas turbines, yet diesels have actually increased their lead over turbines. In both these examples, the rapid rise in energy prices stimulated active attention to fuel efficiency. Greater attention to improving the technologies was coupled with improvements in materials technology, instrumentation, and electronics that allowed better process control, higher temperatures, and other benefits.
As noted earlier, most products and value activities embody not one technology but several technologies or subtechnologies. It is only a particular combination of subtechnologies that can be assumed to be mature, not individual subtechnologies themselves. Significant changes in any one of the subtechnologies going into a product or process may create new possibilities for combining them that produce dramatic improvements, such as those achieved in smelting and low- speed diesel engines. The advent of microelectronics, a subtechnology that can be applied to many other technologies, is having a profound effect on many industries through unlocking possibilities for new tech- nological combinations.
Thus in choosing among technologies to invest in, a firm must base its decisions on a thorough understanding of each important technology in its value chain and not on simple indicators such as age. Sometimes all that is necessary to produce technological progress is effort and investment, as both examples illustrate. In other cases, advances in subtechnologies may allow improvement in the existing technology. Efforts at improving an older technology can sometimes be futile, however. In such instances the best course of action is to attempt to leapfrog it. The decision by a firm to discard its own technology may be difficult, particularly if it was developed in-house, but such a choice may be essential to maintaining the firm’s competitive position.
The choice of technologies to develop should not be limited to those few where there are opportunities for major breakthroughs. Modest improvements in several of the technologies in the value chain, including those not related to the product or the production process, can add up to a greater benefit for competitive advantage. Moreover, cumulative improvements in many activities can be more sustainable than a breakthrough that is noticeable to competitors and becomes an easy target for imitation. The success of Japanese firms in technology is rarely due to breakthroughs, but to a large number of improvements throughout the value chain.
Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.