APPROACHES TO TECHNOLOGY STRATEGY

• This chapter reviews major contributions on the relationship between technology and strategy, the process of technology strategy formulation, and the identification of the major categories of decision related to technology. The chapter is structured as a chronological excursus of the key contributions to our understanding of the problem.

2.1.1 Porter’s Framework

• In the late 70s and early 80s, several works dealt with how to treat technology as a strategic variable. They mostly contributed identify the categories of decision related to technology and the types of innovation strategies firms can follow. A comprehensive work which in the early 80s addressed the point of how to formulate a firm's technology strategy studying both the link with the business strategy and the key dimensions of technological choices is that of Michael Porter (1980) and (1985).

The basic elements of the Porter’s approach

• competition is searching for favorable competitive environments (selecting the appropriate business area), where favorable means that firms in that business area are likely to be profitable in the medium-long term;

• strategy is defining how to achieve a sustainable competitive advantage (positioning within the selected business area). He identifies four generic strategies: cost leadership, product differentiation, cost focus, differentiation focus.

• Therefore, there are two key decisions: selecting the business area and positioning within this.

• He suggests two tools supporting the two key decisions: the five forces model and the value chain, respectively.

• The business area is selected on the basis of the industry attractiveness.

• Determinants of the industry attractiveness are the following five forces: rivalry among established firms, substitute products, new entrants, relations with suppliers, relations with customers.

• Porter recognizes that:

• technology is a determinant of the industry structure and therefore affects the profitability within the industry;

• technology affects a firm’s potential to generate competitive advantages and can be at the basis of the firm’s positioning within the business area.

Table 2.1. Technology influence over the five forces - Examples.

• Rivalry among competitors: modification of the cost structure, substitution costs, exit barriers

• Potential new entrants: economies of scale, learning curve, access to distribution channels

• Substitute products: substitution threats coming from completely different industries, modification of the relative price of products

• Power of customers and suppliers: change of switching costs, opportunity/obstacle to vertical integration, modification of the bargaining power (increasing/reducing the number of customers/suppliers)

• On the other hand, technology affects each activity of the firm's value chain both primary and support (Figure 2.1). It can therefore support or be directly source of advantage in terms of cost or differentiation. Therefore, it can be at the basis of each of the four generic strategies: cost leadership, product differentiation, cost focus, differentiation focus. These strategies can be all the result of or affected by either product or process technological change (Table 2.2).

• Then, Porter in depth studies the elements of a fm’s technology strategy. He suggests that technology strategies consist of three key elements, which correspond

• to three key decisions:

• the selection of the technologies to develop;

• whether to be leader or follower;

• whether to sell the technology or not.

Selection of technologies

• . The selection of the technologies to develop is based on two principles:

• - the coherence of the technological choices with the firm’s basic strategy (cost vs. differentiation, focus vs. broad range, which are the two dimensions of the matrix in Table 2.2). At the core of a technology strategy there is the type of competitive advantage a firm is trying to achieve and the basic question to answer is how technology can support this (the previous table shows examples of technological change consistent with the generic strategies);

• the test of whether the technological change is desirable for the firm. The technological change is desirable when the advantage generated is sustainable for the firm and when the changes in the industry structure is favorable. Porter emphasizes that often firms do not pay attention to the changes

Leadership vs. followership.

• The choice whether to be leader or follower is based on three factors:

• - the sustainability of the technological leadership;

• - the advantages of being first mover;

• - the disadvantages of being first mover. Each is in turn affected by a number of factors.

The sustainability of the technological leadership depends on four factors:

• the source of the technological change. If the source of technology is within the industry, the technological leadership can be easier sustained, whereas, when technological source is external, other firms can access such source and the leadership is not sustainable;

• advantages related to the activity of technology development. A firm which has advantages in the activity of technology development such as scale economies in R&D R&D, higher R&D productivity, higher R&D efficiency, can sustain its leadership over the long term;

• the relative technological competencies. If technological competencies are unique with respect to competitors, the leadership can be easier sustained;

• the rate of diffusion of the leader technology. The diffusion of a firm’s technology and the process of learning by competitors can take place in a variety of ways such as reverse engineering, technology transfer through suppliers and customers, technology transfer through consultants and press, personnel turnover, scientific publications. The leader can protect its technology through a variety of instruments: patenting, internal development of prototypes and production equipment, vertical integration of the production of key components, personnel management policies.

six categories of technological innovation strategy

Licensing a technology (whether to sell or not).

• The decision about technology licensing is related to the introduction of a new technology onto the market rather than its development. The decision to license a technology should be taken when licensing out allows to:

• exploit the technology which otherwise would remain not exploited;

• access markets otherwise not available;• introduce more rapidly a new standard;• create ‘good’ competitors, who may play a role in

stimulating the market demand, share pioneering costs, and raising entry barriers;

• have higher profits than those granted by the exploitation on the market

process of technology strategy formulation

• identification of the specific technologies and sub-technologies of the firm’s value chain;

• identification of the relevant technologies available in other industrial sectors;

• definition of the probable patterns of technological change;• identification of the technologies critical for the firm’s competitive

advantage and favorable for the industry structure;• valuation of the firm’s capabilities and the required investments for

technology development;• selection of a technology strategy able to reinforce the firm’s competitive• position (the technology strategy is composed of the elements given

above, i.e.• selection of the technologies on which to invest, decision whether to be

leader or follower, decisions whether to license out technologies). A further decision concerns whether to acquire technologies from external sources.