TM600.88 Spring 1997
Module 4
Instructional Overview
We started Module 1 by relating technology strategy to business strategy, and learning to describe technology strategies in terms of core competencies that, in turn can be examined in the context of a technology forecast of opportunities and competition.
From there we tackled the question, "Given a strategy, how do you execute it?" Specifically, we learned in Module 2 that innovation can be managed as a process to deliberately cultivate the necessary innovations.
In Module 3 the question was, "Given a set of innovations how do you choose which to develop?" The answers included a variety of management practices and evaluation methods, as well as approaches for managing risk and uncertainty.
In this module, the question becomes, "Given a developed technology, how do you make it successful?" We consider a variety of approaches for facilitating the adoption of a technology. These cooperative approaches not only enable an organization to leverage its current capabilities, mitigate investment risks, pool resources, and shorten development cycles -- they can also serve as external sources for needed core competencies. However, such approaches can also result in a loss of competitive advantage and a "brain drain" of internal capabilities. Therefore, we will complete Module 4 with a discussion of options for developing internal sources of technology.
Introduction
You may recall from your earlier readings that one of the ways in which technology strategy is enacted is through technology sourcing. Internal sourcing depends on the firm's R&D capability. However, many important technologies used in a firm's value chain are outside of the firm's technological capabilities and must be externally sourced (BMW, p. 43).
External sourcing may be achieved in any number of ways, from tacit to explicit cooperation, from ongoing alliances to discrete transactions, and from dependence building to skills transferring relationships. Rubenstein (1989, p. 266) identifies ten factors influencing the search for technology outside of the firm:
In practical terms, external sourcing can be accomplished with a variety of organizational forms. Rubenstein (1989, p. 274) lists thirteen modes:
Goldman et.al. (1995, p. 7) describe a new kind of an alliance, a virtual organization:
Outsourcing, licensing, and alliances are examined in more detail in the following material.
External Source: Outsourcing
Hoffman (1994, p. 29) defines outsourcing as "contracting with another company to provide something formerly supplied by an in-house staff". He distinguishes routine subcontracting from outsourcing in that outsourcing is usually done in situations where all or a major part of the functional and administrative activities are transferred to an organization outside of the firm. In manufacturing industries, outsourcing is routinely used for production and assembly operations. In the information technology industries, outsourcing has been employed for data center operations, personal computer and network installation and maintenance, data administration and systems development. Other general management functions that are often outsourced include payroll processing, human resources training and development, warehousing and logistics management.
By far, the driving factor in an outsourcing decision seems to be the money savings, resulting from either cost reductions (e.g., offshore labor savings) or cash incentives (e.g., purchasing the in-house data center and equipment). However, it is easy to underestimate the more hidden costs of outsourcing, such as the expense of negotiating the contract, transitioning the operation, and monitoring the outsourced relationship.
Another reason to outsource is the firm's intent to focus on its core businesses and the desire to reduce attention on functions and activities, which do not directly add value in the value chain. For example, some information technology organizations will outsource the maintenance of their old applications to focus resources on more strategic development.
The last main reason to outsource is to obtain a higher level of performance. An outsourcing vendor may not only provide cost savings from economies of scale and operational efficiencies, it may also provide a greater level of expertise and a higher level of quality than can be achieved in-house. An example of this might be Hewlett Packard's use of Cannon's technology in their LaserJet printers. The higher level of performance could also be a specialized skill. There may be a short-term need for a specific technology; rather than invest in developing that expertise internally, a firm may choose to purchase it externally. A recent article in Computerworld described how COBOL programmers are enjoying a resurgence in demand (after being discarded in favor of more current programming skills), because of the need to address the year 2000 in old programs.
While many organizations find the reasons for outsourcing compelling, there can be a downside to these arrangements. Melymuka (1997) lists 20 "land mines" that can cause outsourcing relationships to "go Kaboom". (To find her Computerworld article for the assigned reading, click here.) The biggest concern should be the potential loss of competitive advantage through the erosion of the firm's intellectual base. Your text addresses this extensively. The next biggest issue is the difficulty of undoing an outsourcing relationship -- a company can find it very difficult to extricate itself from an outsourcing relationship. Hoffman (1994) also cautions that outsourcing is intrinsically disruptive to the organization, and that morale can be hurt. He offers an outsourcing checklist (p. 81):
External Source: Licensing
Another approach to external sourcing is licensing, whereby the firm sells the use of its technology to other organizations, for their use and sale. This may be because the firm does not have the resources or distribution channels needed. Or the technology is really an innovation by-product, not part of the strategic thrust and focus of the firm. Licensing also serves to protect the proprietary nature of a technology, especially when patents are less effective (e.g., biotechnology, software). A company may choose to license its technology to make it more credible as a market standard. Finally, your text suggests that antitrust legislation may prevent a company from fully exploiting its technological advantages (BMW, p. 37).
External Source: Alliances
An alliance is an arrangement formed by a firm with another company performing an activity or function that the firm wishes to couple more closely with its business (Hoffman, 1994). This coupling may be informal or formal.
With informal alliances, the intent is more likely to be compatibility than technology transfer. Compatibility of designs enables parts, systems, etc. to work together. The benefits of compatibility are highlighted in your text (BMW, pp. 296-297):
Make sure you understand each of these in the reading, which also provides examples. Fundamentally compatibility-producing alliances are intended to ensure that "the whole is greater than the sum of the parts".
More formal alliances are typically used for explicitly sourcing necessary technologies and expertise. "Competitive collaboration" can enable the cooperating companies to share investment risks, pool resources, and shorten timelines. The auto industry has many examples of US-Japanese alliances leveraging US design capabilities and market access and Japanese operational capabilities. However, the text offers many caveats about how such arrangements can become more advantageous for one partner than the other. Partners must focus on learning as well as teaching in the inevitable skills transfer -- and protect themselves against transferring the competitive advantage to the other side.
The new type of alliance called a virtual organization really differs from other alliances in its strategic intent. The key is acting like a single-source provider, even if the firms use one or more of the existing organizational mechanisms (such as a joint venture) (Goldman et.al., 1995, p. 209). Many of the reasons for creating a virtual organization apply to other types of alliances. Goldman et.al. argue, however, that the virtual organization is more agile, i.e., better able to compete -- and compete quickly. They identify specific benefits of virtual organizations to the customers (p. 224):
By sharing core competencies, virtual organizations can become world-class competitors.
Internal Sources
While using external sources of technology can be very attractive, Rubenstein (1989, p. 282) identifies some potential issues with the various types of relationships:
So as powerfully productive as outsourcing, licensing, and alliance relationships can be -- they should not be the only approach to sourcing technology. As with most aspects of technology management, a balance should be reached, between the use of external sources and the cultivation of internal sources of technology. In fact, to be able to use external sources of technology effectively, some internal capability must be cultivated.
Your reading in the text about absorptive capacity suggests that the ability to identify, filter, absorb, and use external knowledge is a key element in maintaining a firm's internal innovative capabilities. Prior related knowledge confers an ability to recognize the value of new information, assimilate it, and apply it to commercial ends (BMW, p. 542). This and other readings highlight ways in which to build critical capabilities through ongoing development activities. Please pay particular attention to how aggregate project planning can be used in internal sourcing.