THE PRESSURE ON today’s corporate managers to maximize short-term profits often seems at odds with the need for a research and development program that will sustain company value over the long term. The solution to this apparent dilemma starts with the recognition that a business enterprise’s value depends on the level and rate of growth of its cash flow. A firm’s ability to maintain an advantage in market value depends on whether investors perceive that the rate of cash flow growth will be sustained.
The goal of strategic technology management is to contribute to the value of the enterprise by helping assure that the cash flow on which this value depends will be sustained and will continue to grow. Effective management of this kind can help a firm gain and sustain competitive advantages, ranging from incremental improvements in product quality or cost to major breakthroughs that create new market opportunities. Management of technology must, however, be purposeful rather than hopeful or “hands off’ and must always be connected with the firm’s overall business strategy.
Five sets of questions are useful in systematically examining the relationship of a company’s program of managing technology to its business strategy:
- Does the company have a clear product and market strategy? What markets does it want to attack? How? What markets does it intend to defend? What product and service attributes will accomplish these goals?
- What technologies support the product and market strategy? Which ones produce competitive advantage in existing markets by adding value or lowering costs? Which ones promise to support new market initiatives or to define a new plateau of product performance?
- What technological successes can the company support or exploit?
- Does the R&D program focus on developing capability in technologies that will, or may, support its product and market strategy? Are options for technology acquisition (in-house development, licensing, academic support, etc.) being examined in relation to the company’s immediate product and market strategy as well as its future vision?
- Does the company have the means to answer, and keep reviewing the answers to, these questions? Does the R&D staff have access to the firm’s key customers? Do the R&D staff, manufacturing engineers, and marketing people work together to ensure that R&D ideas can be made into high-quality, low-cost products that will meet customers’ needs?
These questions cannot be answered in a facile or casual way. Answering them requires work, understanding, and realism. Corporate leadership that presses for answers can, however, help to assure itself and its stakeholders that the R&D program will sustain growth in company value.
Approaches to Managing Technology
The meaning of technology is straightforward: knowing how to do something well. Here’s a more elaborate definition: the ability to create a reproducible way to generate improved products, processes, and services. In fact, a modern manufacturing business must have a substantial portfolio of individual technologies. The management of technology should ensure that the firm maintains command of the technologies relevant to its purposes and that these technologies support the firm’s business strategy and shareholder value.
Technology management for strategic advantage is difficult and often frustrating. The central issue is the need to reconcile the unpredictability of discovery with the desire to fit technical programs into orderly management of the business. The traditional approach to managing technology has been largely intuitive. Research and development is treated as an overhead item, with budgets set in relation to some business measure (for example, sales) and at a level deemed reasonable by industry practice. Budgets may be projected several years ahead, but are usually set annually. Within this budget framework, decisions about areas of concentration and project continuations may be left largely to R&D management. There is no assurance that the R&D organization, left to its own devices, will pursue programs related to corporate strategy, either in focus or in degree of innovation and risk.
In response to this unsatisfactory situation, many firms have become somewhat more sophisticated. Managers outside the technology area participate in suggesting or reviewing projects, but the connection to company strategy is still casual or haphazard. Some firms subject R&D programs to a rigorous financial justification process based on net present value. Arguing that research and development projects are investments—as in a sense they are—corporate management seeks justification based on rate of return or payout. But it is difficult to project financial returns on an R&D project, especially if the project is focused on achieving a significant innovation. As a result, the program may be pushed toward conservative, incremental projects; the results will be more predictable, but the program will have limited strategic impact.
Clearly, then, there is a need for a measured, genuinely sophisticated approach to R&D management. Interest in a better approach has been stimulated by various developments. First, many corporate leaders have moved beyond the financially driven planning characteristic of the 1970s. Second, the success of entrepreneurial, high-technology companies has excited interest in the potential of technology to build company value. Third, firms have seen that industry leaders give high priority to technology management. Fourth, quality and manufacturing capability are now considered strategic business weapons. Together these developments have helped to create a desire to manage technology in a way that is congruent with business strategy.
Linking Technology Management to Strategy
We believe that a firm’s development and use of technology can be managed so that it effectively supports the firm’s business strategy. Think for a moment about managing financial investments. The effective investment manager must first help the client think through appropriate investment goals, such as a stable income, security, or accumulation of wealth. The investment manager then selects a portfolio of investments with the best chance of accomplishing those goals in the face of future uncertainties. The manager seeks balance among such characteristics as current yield, growth in value or yield, and safety, and tries to manage risk through diversity. Investments are changed to reflect changes in the client’s goals and to take advantage of new investment opportunities that are appropriate. The investment manager can be judged on two bases. First, are the type, balance, and diversity of investments appropriate to the client’s goals? Second, is the program well executed with respect to the particular choices made, including the changes in the portfolio, and the results achieved? This assessment process should be interactive; that is, it should look not just at results, but also at whether changes in the financial markets dictate changes in strategies to achieve the investor’s goals.
The management of technology is analogous to the management of investment. The development and use of technology must be guided explicitly by the business strategy of the firm; at the same time, technological developments should help define the opportunities and threats to which the strategy should then respond. Thus, the strategic management of technology involves a dialogue—a process through which both the strategic targets of the enterprise and the goals of its technology program are regularly reviewed and revised.
In looking more thoroughly at that process, it is important to clarify what “management of technology” really entails. The management of technology encompasses the management of research, product and process development, and manufacturing engineering. Put simply, research expands the firm’s grasp of science and engineering skills. Development makes this knowledge relevant to part of the firm’s business. Engineering translates technology into products that are useful or desirable to customers. It is important, however, to think of these functions as forming a spectrum. In fact, one pitfall in managing technology is to see these as separate functions to be managed in a compartmental fashion. Many Japanese companies have shown the power of integrating all phases of the product creation process. By contrast, some U.S. manufacturers have suffered because they separate product development from manufacturing engineering; this results in poor manufacturability, with cost and quality problems and delays in product introduction. Effective management requires integrating these phases of the product creation process.
Product and Market Strategies
To manage an R&D program effectively, a firm must have a coherent product and market strategy. One way of thinking about such a strategy is suggested by the matrix shown in Table 1. The words in each cell characterize the appropriate technology focus for that product-market mix.
The degree of strategic concentration in one or another product-market area will help to indicate the balance of a firm’s technical programs. At the same time, the findings from the technical programs will suggest which product and market possibilities show promise.
The strategic focus in sector A is to achieve incremental improvements in value—quality and performance—and cost. Allied-Signal, for example, says one element of its strategy is to be the high-value, low-cost producer in its markets. Both objectives help sustain market share and margins, and thus cash flow, in a particular competitive context.
A sector B strategy could be implemented by either a new product whose function is already filled by an existing product, or a new product that complements existing products. The first could substantially improve functionality, lower cost, or both. Examples include the substitution of the electronic typewriter for the electric typewriter, radial tires for bias-ply tires, and slow release antihistamine tablets for conventional pills.
A sector C strategy is one that adapts existing products or the technologies that support them to the needs of new markets. Together with technological development, this focus of strategy requires understanding the idiosyncrasies and needs of new target customers and the distribution channels needed to reach them. 3M is well known for finding ways to adapt its product technology to the needs of new customers.
Sector D must be approached with great caution; it can be a strategic trap baited by technological hubris. A new technology, perhaps in composite materials or genetically engineered drugs, shows exciting promise of yielding new products. For some firms, pursuing such technologies makes sense; these may become their pacing technologies, as explained in the next section. Other firms, however, will respond to the enthusiasm of the moment. Sometimes this push to get on the bandwagon comes from the R&D leadership, but often it comes from top management. The danger is that resources committed to a sector D strategy will disrupt support from other R&D projects that are more relevant to the firm’s overall strategy. Moreover, these programs, once started, are hard to stop; they become “sacred cows.” But perhaps the most embarrassing and frustrating outcome occurs when the technical development program succeeds, but the company lacks the management skills, resources, or market knowledge needed to exploit the success.
The first step in the strategic management of technology is to answer this question: For our firm, what mix of products and markets will best sustain and enhance our cash flow? The next step is to test how well the firm’s technologies support the ideal product and market mix. (The next two sections look at that question.) The third step is to focus technology investments so that they better support the firm’s strategy.
We find it useful to examine a firm’s technologies in light of two questions:
- What is the significance of the technologies in the firm’s portfolio, as measured by their competitive impact and maturity?
- In each product area or business, how strong is the firm’s technological competitive position?
Classification of Technologies by Competitive Impact
We identify three broad classes of technologies in a typical firm’s technological portfolio.
These are technologies that a firm must master to be an effective competitor in its chosen product-market mix. They are necessary, but not sufficient, to achieve competitive advantage. These technologies are widely known and readily available. Electronic ignition technology for automobiles is an example.
The trick for R&D management is to invest enough—but only enough—effort to maintain competence in these technologies. The danger is that inertia will sustain programs in these technologies longer and at greater scale than they deserve, perhaps because these are the traditional areas where the research and development organization feels at home. The U.S. auto industry in the 1960s and 1970s, for example, invested too heavily in familiar areas of product technology rather than in new, less comfortable areas where opportunities to develop new process technology existed.
These technologies provide competitive advantage. They may permit the producer to embed differentiating features or functions in the product or to attain greater efficiencies in the production process. An example is food-packaging technology that enables the purchaser to use microwave cooking.
The primary focus of industrial research and development is on extending and applying the key technologies at the firm’s disposal; they should be given the highest priority among the firm’s investments in technology. Unwilling to invest in key process technologies in the 1950s and 1960s, the U.S. steel industry paid the price in the 1970s; foreign competitors, whose development the U.S. industry had benignly encouraged, far outstripped it in productivity.
These technologies could become tomorrow’s key technologies. Not every participant in an industry can afford to invest in pacing technologies; this is typically what differentiates the leaders (who do) from the followers (who do not). The critical issue in technology management is balancing support of key technologies to sustain current competitive position and support of pacing technologies to create future vitality. Commitments to pacing technologies or potential breakthroughs are hard to justify in conventional, return-on-investment terms. Indeed, these commitments can be thought of more accurately as buying options on opportunity. Relatively modest commitments—and thus, modest downside risk—can give the potential for large upside advantage. Realizing that potential depends on still-unresolved technical and market contingencies. If the option is not pursued, the potential does not exist. Smith, Kline & French supported pursuit of receptor modeling technology in the 1960s, a pacing technology in the pharmaceutical industry at that time. This work led ultimately to the development of TAGAMET and the establishment of the company as a leading pharmaceutical firm (later SmithKline Beckman and, more recently, SmithKline Beecham, p.l.c). Receptor modeling technology is now a recognized key technology in pharmaceuticals.
An effective research and development program must include some investment to build a core of competence in pacing technologies and some effort to gain intelligence from sources such as customers, universities, and scientific literature to help identify and evaluate these technologies. At the same time, disciplined judgments about commitments to pacing technologies are necessary; enthusiastic overspending on advanced technology can undercut essential support of key technologies.
Exploiting Mature Technologies
Technologies mature, just as industries and product lines do. The younger the technology, the greater the potential for further development, but the less certain the benefits. However, a mature technology can often be a key technology. Many Japanese firms use mature technologies as a major competitive weapon. The Sony Walkman, for example, was a wildly successful new product based on comparatively mature technologies. The Walkman fortuitously combined Sony’s work on the miniaturization of its tape recorder line and its work on lightweight headphones. Sony engineers were trying to make a miniature stereo tape player-recorder, but they could not fit the recording mechanism into the target package size. A senior officer realized that combining headphones with a non-recording tape “player” would eliminate the need for speakers, reduce battery requirements, and result in a small stereo tape player with outstanding sound.1
Sometimes a mature technology becomes a key technology when it is applied in a new context. Empire Pencil gained a major cost and quality advantage by using mature plastic extrusion technology as the basis of a new way to manufacture lead pencils. Conventional lead pencil manufacturing requires the use of fine-grained, high-quality wood, such as cedar, and a good deal of hand labor for assembly. Materials are becoming more expensive, and damage to the graphite core during the assembly process causes quality problems. A development team was confronted with this question: How can we improve quality and cut costs? The team realized that wood powder in a plastic binder could simulate the fine-grained wood. From there it was a straightforward step to produce pencil stock in a continuous extrusion process, with wood powder and a core of graphite powder in a plastic binder.
Other mature technologies may be protected (for example, by patents or proprietary treatment) and thus give their owners a key competitive advantage. A Japanese grinding machine manufacturer successfully diversified into the manufacture of integrated circuit wafer equipment. A critical factor in its success was its proprietary mature machine technology. Examples like the latter one may tempt a firm in a mature line of business to diversify into new products and markets where its proprietary but mature technology could have a key competitive impact, but this sector D strategy is risky. The better alternative is to look, as Empire Pencil did, for new technology to invigorate a mature or aging product line.
A business or product line whose key technologies are mature faces a serious threat of being blind-sided by a competitor employing new key technologies. This is what Xerox did to the established copier manufacturers and what word processing did to the typewriter industry.
As an industry or product sector matures, the key technologies often become manufacturing process technologies rather than product feature technologies. This is the case in many mature industries, including chemicals, machine tools, consumer appliances, and food products.
Measuring Technological Strength
The technological strength of a business reflects the degree to which it has competence in, or proprietary control of, key product and process technologies. It also reflects the level of investment to sustain key technologies and to invest in pacing technologies.
Competitive technological strength can be characterized as follows:
Dominant. The business is a technological leader and recognized as such. It has a demonstrable commitment to technology and to creativity.
Strong. The level of technological support and effectiveness in managing technology allows the business to set independent technical directions.
Favorable. The business has the technological capacity to remain competitive. It can manage continued improvement in technology to sustain its position, but it does not have the capability to take technological leadership on a sustained basis.
Tenable. The business is a technological follower. It must frequently catch up with stronger competitors.
Weak. The technical competence of the business is comparatively low, and most technical efforts are short-term, firefighting efforts to improve products or processes.
An objective analysis of the competitive technical strength of each of the firm’s strategic business units helps to answer three questions: Do we have the technological capacity to support our product and market strategy in each business? Are our strategies realistic? What do we need to accomplish to build the technological strength our strategies require?
Classification of R&D Programs
There are three broad types of R&D programs designed to build strength in technologies.
Incremental Research and Development. These programs have well-defined commercial objectives. The likelihood of technical success is relatively high. Thus, the costs and benefits of the program can be defined rather explicitly. Modifying temperature and pressure settings to improve yields of a chemical process is an example. Most technologies used in these programs are key technologies; the remainder are base technologies.
Radical Research. These programs take bold steps forward in applying particular, often pacing, technologies. A new technology may be brought to bear in a product: for example, a grammar-correcting routine in word-processing software. Established technology may be used in a radically different way: plastic extrusion technology used to manufacture “conventional” lead pencils, or electronic sensing and control technologies in a cooking device.
Fundamental Research. These programs are designed to build a new dimension of competence or to investigate the potential usefulness of an area of scientific knowledge. The development of ceramic materials suitable for high-temperature applications might be investigated, for example. Such programs must pass two important screens: First, are the results potentially relevant to the company’s product and market strategy—that is, could a successful result help the firm get where it wants to go? Second, is an internal project the most effective way to acquire the potential technology?
Keeping Technology Relevant
The answers to the questions posed at the beginning of this article need to be reviewed regularly if they are to remain relevant to the business strategy. The frequency of review must fit the business’s rate of technological change, the evolution of product and market strategy, and the time it takes to get results in R&D. Projects should not run on un-challenged for years; nor should a constantly changing R&D staff be allowed to unleash an undisciplined stream of new but unfulfilled ideas. Each firm must find the optimal R&D review cycle to develop the key and pacing technologies critical to its success.
A few simple principles bear review:
- Keep R&D personnel in touch with potential customers and markets. Good R&D requires sensitivity to potential market opportunity, but this will not be achieved by secondary access via the sales organization, or even by conventional market research.
- Foster open communications among R&D staff, manufacturing engineers, and the marketing force. Joint teams help assure that product and process developments can move into implementation smoothly and on schedule.
- Hold to time commitments and schedules. If a development cannot be completed in a timely fashion, it probably is not worth pursuing.
- Avoid fads. These become distractions. Also avoid nurturing “white elephant” programs—often yesterday’s fads.
- Understand the reason for outside linkages. In cooperative programs, understand who your allies are and who may be potential competitors. Use academic links as a window on emerging science that may support pacing technologies of the future. Do not use academic sponsorship to develop key, or even pacing, technologies unless there is very close physical proximity and open communication.
Managing technology effectively means setting and communicating strategic priorities, managing projects to get timely results, and effectively using linkage inside and outside the firm. With the globalization of technology, links with the outside have become imperative. These include links with customers and vendors, as well as with other sources of technology, such as universities. While outside connections can help a firm identify new opportunities and avoid unpleasant competitive surprises, links within the firm must also be carefully managed.