TM 201

1. Describe the primary activities in Michael Porter’s value chain model of the firm. (4 points)

In Michael Porter’s value-chain model of a firm, value activities are divided into two broad types
such as primary activities and support activities. Primary activities are composed of five generic
categories: (1) Inbound Logistics; (2) Operations; (3) Outbound Logistics; (4) Marketing and Sales
and (5) Service. Primary activities are activities involved in the physical creation of the product,
its sale and transfer to the buyer, and after-sale assistance. The figure below shows the
illustration for Michael Porter’s value chain model.

Figure 1. Michael Porter's Value-Chain Model of a Firm

Description on other elements of Porter’s value-chain model:
 In competitive terms, value is the amount buyers are willing to pay for what a firm provides
them. It is measured by total revenue, a reflection of the price a firm’s product commands
and the units it can sell.
 The value chain displays total value, and consists of value activities and margin.
 Value activities are the physically and technologically distinct activities a firm performs.
 Margin is the difference between total value and the collective cost of performing the value
activities.
 Every value activity makes use of purchased inputs, human resources (labor and
management), and some form of technology to perform its function.
 Each value activity also uses and creates information such as buyer data, performance
parameters, and product failure statistics.

2. Describe the support activities of value chain. (3 points)

 Support activities support the primary activities and each other by providing purchased
inputs, technology, human resources, and various firm-wide functions.
 The dotted lines reflect the fact that procurement, technology development, and human
resource management can be associated with specific primary activities as well as support
the entire chain.
 Firm infrastructure (which includes general management, planning, finance, accounting,
legal, government affairs, and quality management) is not associated with particular
primary activities but supports the entire chain.
 Figure 2. Representative Technologies in a Firm's Value Chain
3. Next explain what firm-level technology strategy means in terms of this value chain model.
(3 points)

Technology strategy refers to the firm’s approach to the development and use of the technology
to perform value-chain activities efficiently with the aim of achieving the firm’s sustainable
competitive advantage. As explained in Michael Porter’s framework, one approach to
technology strategy is the positioning approach. The approach focuses on how technology
strategy is connected to the external condition like market structure and the positioning of the
firm within an industry.

The position of the business can diagnose the set of activities performed by the business – its
value chain: primary activities (inbound logistics, operations, outbound logistics, marketing &
sales, and services) and secondary activities (firm’s infrastructure, human resource
management, technology development, and procurement). This diagnosis then defines the
foundation for actions meant to create competitive advantage. Michael Porter identified three
strategies for competitive advantage: (1) Cost Leadership Strategy; (2) Differentiation Strategy
and; (3) Focus Strategy.

From these broad understandings of the firm’s strategy, one can then make important decision
on the firms’ technology (or R&D) strategy. Furthermore, the decision as to which technology
will be used to perform a specific value-chain activity is a component of technology strategy.
The following are the three areas of technology strategy:
- Selection of technologies
- Whether to be a Technology Leader or Follower?
- Licensing a technology (Whether to sell or develop technology?)

- Selection of technologies
 Is it in line with the generic strategy?
The technology choice must be coherent with the firm’s basic strategy i.e.
differentiations, focus or cost leadership. At the core of the 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 the generic strategies that have
been identified to fulfill this competitive advantage.
  Is it sustainable according to the changes in the industry structure?
Other than ensuring that the technology is sustainable to the firm, it must also be
favorable to the industry structure. This is because, even though a technological
change can generate advantage for the firm, such change may reduce the
profitability of the whole industry and therefore decrease the profitability of the
firm too in the long term.

- Whether to be a Technology Leader or Follower

 The sustainability of the technological leadership
o The source of technological change
o Advantages related to the activity of technological development
o Relative technological competencies with respect to competitors
o The rate of diffusion of leader technology
 The advantages and disadvantages of being the first mover

- Licensing a technology (Whether to sell or develop the technology?)

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 cost and raising entry barriers
 Have higher profits than those granted by exploitation on the market.

Other Notes:
Five Forces Model
A business area is selected on the basis of the industry attractiveness. Determinants of the
industry attractiveness are the following five forces:
- Rivalry among competitors: Does a strong competition between the existing players
exist? Is one player very dominant or are all equal in strength and size.
- Potential of new entrants: How easy or difficult is it for new entrants to start
competing, which barriers do exist?
- Threat of Substitutes: How easy can a product or service be substituted e.g. made
cheaper.
- Bargaining power of customers: How strong is the position of buyers? Can they work
together in ordering large volumes?
- Bargaining power of supplier: How strong is the position of sellers? Do many potential
suppliers exist or only few potential suppliers, monopoly?
 Figure 3. Diagram of the Five Forces Model

Porter emphasizes that “technology” can effect each of the five forces!
“Technological change” can modify (either increasing or decreasing) the profitability of the
industry; Hence, technology affects a firm’s potential to generate competitive advantages and
can be the basis of the firm’s positioning within the business area.

Generic Strategies (for competitive advantage)

The previous diagnosis can then be the basis of three generic strategies
- Cost Leadership Strategy: This strategy emphasizes efficiency. By producing high
volumes of standardized products, the firm hopes to take advantage of economies of
scale and experience curve effects. e.g. Affordable and good quality PCs (DELL)
- Differentiation Strategy: Differentiation is aimed at the broad market that involves the
creation of a product or services that is perceived throughout its industry as unique. e.g.
Computer using MAC (Apple)
- Focus Strategy: In this strategy the firm concentrates on a select few target markets. It
is also called a segmentation strategy or niche strategy. It is hoped that by focusing your
marketing efforts on one or two narrow market segments and tailoring your marketing
mix to these specialized markets, you can better meet the needs of that target market.
e.g. Green computer (DELL Studio Hybrid)

4. Then explain how the generic competitive strategy of cost leadership can be defined using the
value chain framework. (3 points)

Cost leadership is one of the generic competitive strategies that aim to achieve sustainable
competitive advantage in the industry. This strategy emphasizes efficiency. By producing high
volumes of standardized products, the firm hopes to take advantage of economies of scale and
experience curve effects. e.g. Affordable and good quality PCs (DELL). Cost leadership can also
be attained by firms by placing greater or lesser emphasis (allocation of resources, management
time and attention) on specific value chain activities than competitors, by managing linkages
among activities better than competitors do, and by performing specific value-chain activities
better (better management, more highly trained people, better equipment) or differently (using
an alternative technology) than competitors do. Low-cost leadership also means low overall
costs, not just low manufacturing or production costs! Furthermore, there are two approaches
in securing cost advantage namely: (1) controlling the cost drivers and (2) revamping the value
chain. The following are the ways to attain these approaches:

Approach 1: Controlling the Cost Drivers

- Capture scale economies; avoid scale diseconomies
 - Capture learning and experience curve effects
- Control percentage of capacity utilization
- Pursue efforts to boost sales and spread costs such as R&D and advertising over more units
- Improve supply chain efficiency
- Substitute use of low-cost for high-cost raw materials
- Use online systems and sophisticated software to achieve operating efficiencies
- Adopt labor-saving operating methods
- Use bargaining power to gain concessions from suppliers
- Compare vertical integration vs. outsourcing

Approach 2: Revamping the Value Chain

- Use direct-to-end-user sales/marketing methods
- Make greater use of online technology applications
- Streamline operations by eliminating low-value-added or unnecessary work steps
- Relocate facilities closer to suppliers or customers
- Offer basic, no-frills product/service
- Offer a limited product/service as opposed to a full product/service line

Other notes:
Objective
Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to
- Under-price rivals and reap market share gains
OR
- Earn higher profit margin selling at going price

Keys to Success:
- Make achievement of meaningful lower costs than rivals the theme of firm’s strategy
- Include features and services in product offering that buyers consider essential
- Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match

5. Also explain how generic process innovations (e.g. just-in-time, kaizen, etc.) can be defined in
terms of certain changes in the value chain. (4 points)

A Process Innovation is a change in the value chain that affects the design of work,
organizational structure, and decision processes.

Process innovations are innovations in the way an organization carries out the primary activities
in its value chain such as in techniques of producing or marketing goods or services.
 Improving the effectiveness or efficiency of production – reducing defect rates,
increasing quantity produced in a given time

HOW PROCESS INNOVATIONS HELP FIRMS RECONFIGURE VALUE CHAINS:

- New technologies can change the way in which firms actualize the primary value chain
activities, that is, restructure manufacturing, marketing, or research and development.
- Process innovations, especially in information technologies, can be used to change the
conduct of secondary value chain activities such as finance.
- Process innovations also enable firms to redefine their scope, that is, reconfigure the value
constellation by outsourcing or in-sourcing of value chain activities.
VALUE CONSTELLATION -- the system of supplier value chain, firm value chain, channel value
chain, buyer value chain, etc.

THREE WAYS OF CHANGING VALUE CONSTELLATION THROUGH TECHNOLOGY:

- Shifting the balance of power between firms and their suppliers and distributors
- Outsourcing some activities of the value chain
- Planning and managing supplier and distributor relationships in better ways

LEVELS OF PROCESS INNOVATION

1st LEVEL -- SMALL PROCESS IMPROVEMENT
- Easily found solutions to problems in existing processes as exemplified by the use of kaizen’s
continuous improvement circles.

2nd LEVEL -- IMPROVEMENT OF SUBPROCESSES

- Adoption of best practices from one’s own industry or other industries to improve a sub-
process using the techniques of benchmarking, lean practice, six sigma, 5S, etc.

3rd LEVEL -- REDESIGN OF PROCESSES

- Reengineering of business processes as exemplified by (a) the use of integrated workflow
management and document management systems and (b) the use of real-time and
geographic information systems.

4th LEVEL -- REDESIGN OF BUSINESS MODEL

- Redesigning the business process around customer wishes (e.g., a new king of car insurance
service) or embedding customer choice (flexibility) in the business process (e.g., Dell’s
business model).

5th LEVEL -- REDESIGN OF INDUSTRY VALUE CHAIN

- Reconfiguring the industry value chain as exemplified by the enabling of (a) customer self-
service (e.g., online booking of travel tickets) and (b) customer-to-customer interaction (e.g.,
eBay).

Figure 4. Levels of Process Innovation

Potential Benefits of Process Innovations:

- Enhancement of the speed of operations and customer responsiveness
- Reduction in the cost position of firms relative to competitors
 - Incorporation of product features
- Increase in the Flexibility of the Workplace.

6. Then explain how outsourcing, subcontracting, or OEM can be described in terms of the value
chain. (3 points)

Outsourcing, subcontracting, or OEM is a formal mode of international technology transfer.

These are modes of entry into international markets classified as equity-based entry.
Outsourcing takes place when a firm asks another firm in a foreign country to undertake one or
more of its value-chain activity. Subcontracting, on the other hand, exists “when a firm (the
principal) places an order with another firm (the subcontractor) for the manufacture of parts,
components, assemblies or sub-assemblies to be incorporated into a product which the
principal will sell. Such areas may include the treatment, processing or finishing of materials or
parts by the subcontractor at the principal’s request”. Lastly, unlike a subcontractor, an OEM
produces, according to a foreign firm’s specifications, complete finished goods that are then
sold under that foreign firm’s brand name and through its own distribution channels, enabling
the foreign firm to capture the large post-manufacturing value-added.

7. Explain the four elements of Diffusion. (4 points)

Diffusion is the process of by which innovation is communicated through certain channels over
time along the members of a social system.

Based on its definition, diffusion has four major elements:

- Innovation -- An idea, practice, or object that is perceived as new by an individual or other
unit of adoption. The perceived newness of the idea for the individual determines his/her
reaction to it. If the idea seems new to the individual, it is an innovation.
- Communication -- The means by which messages get from one individual to another,
including mass media channels and interpersonal channels.
- Time -- The parameter that measures the innovation’s rates of propagation and adoption.
- Social System -- A set of interrelated units (individuals, groups, organizations, and/or
subsystems) that are engaged in joint problem-solving to accomplish a common goal.

8. Then explain the difference between the S-curve of diffusion and the traditional bell-shaped of
Technology Adoption Life Cycle (4 points).

Figure 5. S-curve Diffusion

- The rate of adoption is the relative speed with which an innovation is adopted by members
of a social system. When the cumulative fraction of adopters is plotted over time, the
resulting distribution is an S-shaped curve called the S-curve of diffusion.
- At first, only a few individuals (the innovators) adopt the innovation in each time period
(year or month), but soon the diffusion curve begins to climb as more and more individuals
adopt in each succeeding time period.
- Eventually, the curve begins to level off, as fewer and fewer individuals remain who have
not adopted the innovation. Finally, the curve reaches its asymptote.

In the S-curve of diffusion, there are four major eras:

- An emergence phase characterized by a slow advance in the beginning, suggesting that
adoption proceeds slowly at first when there are few adoptions.
- A rapid growth phase when the adoption rate accelerates until half of the individuals in
the system have adopted.
- A slow growth phase, where the rate of growth declines, but adoption continues.
- A maturity phase, where the diffusion almost comes to a halt either due to market
saturation, or the introduction of a new product, process or service into the market.

Figure 6. Eras in the Diffusion History of an Innovation

The S-curves of diffusion enable us to distinguish between innovations along two factors:
1. the rate of diffusion
2. the potential set of adopters.

The slope of the S-curve indicates the rate of diffusion while the height of the curve indicates
the potential set of adopters, i.e., the total no. of individuals or firms who are likely to adopt an
innovation or the market potential for the innovation.

Figure 7. Bell-Shaped Technology Adoption Life Cycle

 When the no. of adopters of a technology is plotted over time, the adopter frequency
distribution follows a bell-shaped curve known as the technology adoption life cycle.

THE TECHNOLOGY ADOPTION LIFE CYCLE IN RELATION TO THE PRODUCT LIFE CYCLE

Individuals or other units of adoption can be classified into one of the following five adopter
categories:
- Innovators - the first 2.5% of the individuals in a system to adopt an innovation
- Early Adopters - the next 13.5% to adopt the innovation
- Early Majority - the next 34% of the adopters of the innovation
- Late Majority - the next 34% after the mean to adopt the innovation
- Laggards - the last 16% to adopt the innovation

Figure 8. Categories of Technology Adopters

9. What are the principal distinguishing characteristics of the adopter categories in the technology
adoption life cycle? (4 points)

See Figure 10

Technology Enthusiasts
- Technology a central interest
- Uninterested in application
- Pursue new tech’s aggressively
- Buy early
- Intrigued by any basic advance
- Buy to explore a device’s properties
 Visionaries
- Interested in applications
- Appreciate benefits of technology
- Buy when they find a strong match
- Don’t rely on established references
- Are a key to penetration

Pragmatists
- Interested in technology but...
- Strong sense of practicality
- Fearful of technology fads
- “Wait & see” attitude
- Want well-established references before buying
- They are the key to success

Conservatives
- Share all the concerns of the early majority
- Not comfortable with technology
- They buy when the technology an established standard
- They want lots of support & buy from well-established companies

Skeptics
- Don’t want anything to do with new technology
- Will buy a technological product only when buried inside another product
- They are generally not considered worth pursuing by technology firms

10. Next explain how this classic model of technology adoption life cycle has been recently modified
by Moore’s Chasm theory (4 points).

MOORE’S CHASM THEORY OF TECHNOLOGY ADOPTION

- In turn, this model becomes the foundation for a high-tech marketing model which says the
way to develop a market is to work the curve from left to right, progressively winning each
group of users, using each "captured" group as a reference for the next.
- In 1991 Geoffrey A. Moore wrote a book – Crossing the Chasm – that got widely read and
quoted in the business community and developed into a theory.
- Moore argued that a large gap or “chasm” exists between the early adopters of any
technology and the mass market. He explained that many technologies initially get
commercially launched by enthusiasts, but later fail to get wider adoption. So to create a
company that is worth hundreds of millions of dollars, entrepreneurs need to come up with
strategies that will help them build a bridge across that gap.
- The reason that business people spend time trying to figure out how to bridge the gap is
because it is the “chasm” that stands between them and a lot of money. Simply put, since
early adopters represent a very small percentage of the population, it follows that you can't
build a business just by selling to them. To build a real viable business you need to cross the
chasm.
- Moore demonstrated that in fact, there are cracks in the curve, between each phase of the
cycle, representing a disassociation between any two groups, that is, "the difficulty any
 group will have in accepting a new product if it is presented the same way as it was to the
group to its immediate left."
- The largest crack, so large it can be considered a chasm, is between the Early Adopters and
the Early Majority. Many (most) high tech ventures fail trying to make it across this chasm.

Figure 9. Gaps in the Technology Adoption Life Cycle

Figure 10. The Technology Adoption "Chasm"

Note: The Technology Adoption Life Cycle is not continuous; it is discontinuous since the
different segments buy for different reasons
Note: The greatest peril in the development of a high-tech market lies in making the transition
from an early market dominated by a few visionaries to a mainstream market dominated by
pragmatists.

- Moore defines a market as:

- a set of actual or potential customers
- for a given set of products or services
- who have a common set of needs or wants, and
- who reference each other when making a buying decision
- Moore says, "the notion that part of what defines a high-tech market is the tendency of its
members to reference each other when making buying decisions -- is absolutely key to
successful high-tech marketing."

Crack 1

Figure 11. Crack 1

The Early Adopters talk to the Innovators/Lead Users; still Crack 1 occurs.
- Hot technology products cannot be readily translated into major new benefits. Business
process problems exist.
- Esperanto – sorry, only for the enthusiasts
- Desktop Video Conferencing did not make it
- Plastic bicycles - same
- To pass Crack 1, there is a strong need to enable a strategic leap forward

Figure 12. The Chasm

The Chasm
The Early Majority does not talk to the Early Adopters, hence the big Chasm.
 The Early Adopters want a technical change agent
- The EAs expect a radical discontinuity between the old and the new
 The Early Majority want a productivity improvement for existing operations
- The EMs want to minimize the discontinuity with the old way
 - The technology is to enhance, not overthrow, the established business
- They want a more or less bug free product, the real 1.0 version
There are several perceived characteristics of the Visionaries (EAs) that alienate the
Pragmatists (EMs):
1. The pragmatists do not feel themselves respected by the visionaries…
2. The visionaries love technology but are bored with the mundane details of their own
industry, the everyday work for the pragmatists…
3. The visionaries want to build systems from the ground up and do not appreciate the
networks and procedures already in place…
4. The visionaries seem to do all the fun things. They take all the funds/attention for their
blue sky projects. If they fail, the pragmatists are there to clean up the mess. If they
succeed, the disruptive change is too much to handle…

Crack 2

Figure 13. Crack 2

The Late Majority talks to the Early Majority, still Crack 2 occurs.
- Whereas the Early Majority is willing and able to become technically competent, the Late
Majority is not
- To pass Crack 1, there is a strong need to ensure user-friendliness, and an ease to adopt.
- Telephone transferring systems did not make it
- Programmable VCRs are unused
- Scanners and Photo Shop Programs are underutilized

Crack 3

Figure 14. Crack 3

The Laggards listen to the Late Majority for economic reasons big enough to make them
change.
 - The laggards are the brakers, the ones that are the last to take on a new technology. They
are important for the coming economical success, but not for the technological
development.
- To pass Crack 3, there must be really no other choice and a clear economic advantage to
compensate for a “very cumbersome technology shift”.
- They start to buy CDs first when no new LPs are made

11. Finally, explain why the ability of high-tech firm to “cross the chasm” is very important in the
marketing of its radical innovation and the recovery of its R&D costs? (4 points)

Crossing the Chasm Requires a Shift in Delivered Values

From Product-Centric Values:
- Fastest/smallest/ lightest etc product
- Most elegant “architecture”
- Product price
- Unique product functionality
 Meeting these values is essential to obtain initial market penetration

To Market-Centric Values:
- Largest installed base
- Most 3rd party supporters
- De facto standard
- Cost of ownership
- Quality of support
 Meeting these values is essential to cross the chasm

The D-Day Analogy

- The perils of the chasm: the life or death of the firm
- You must win entry to the mainstream, despite any possible resistance
- Long-term goal: to enter and take control of a mainstream market that is currently
dominated by an entrenched competitor.
- To enter the market we must conquer, we need an early market base (England)
- We must aim at a strategic target market segment (Normandy beaches)
- Separating us from our goal is the chasm (the English Channel)
- Cross the chasm as fast as we can with an invasion force focused directly on the point of
attack
- SECURE THE BEACHHEAD
o Force The Competitor Out Of Our Targeted Niche Markets Through Focused
Marketing
- Move out to take over additional and adjacent market segments
- Eventually will achieve Overall Market Domination – they will struggle to protect a
shrinking base of sales
- The fledgling enterprise can WIN OVER PRAGMATIST CUSTOMERS in advance of
broader market acceptance – messages travel through word of mouth
- Focuses an overabundance of support into a confined market niche: makes targeting
your firm’s messaging much easier than trying to please everyone
- Simplifies the initial challenge – a restricted set of market variables that makes it easier
to be perfect
 - Develops a solid base of references, collateral, and internal procedures and operational
resources for the firm and therefore wins sales over incumbents
- Tightly bound segments: easier to create messages

12. Explain the categories of the traditional bell-shaped model of the technology adoption cycle.
(4 points)
Same answer to No.9

13. Then explain why the ability to “cross the chasm” is important to (a) a government agency
engaged in technical extension work. (3 points) and (b) a business firm engaged in the
manufacture, marketing, and sale of a high-tech product. (3 points)

- The reason that business people spend time trying to figure out how to bridge the gap is
because it is the “chasm” that stands between them and a lot of money. Simply put, since
early adopters represent a very small percentage of the population, it follows that you can't
build a business just by selling to them. To build a real viable business you need to cross the
chasm.
http://www.cognitivedesignsolutions.com/Information/CrossingTheChasm.htm

14. Explain briefly the objective and a typical concrete about (hardware or document) of each of the
following processes: (a) basic research, (b) invention, (c) early stage technology development,
(d) vertical technology transfer, and (e) technology commercialization. (10 points)

Basic Research Analyzes properties, Results/findings are usually

structures, and relationships published in scientific journals
with a view to formulating or communicated/disseminated
and testing hypothesis, to the scientific community or
theories or laws. colleagues.
Invention Creative process in which new Physical devices, processes,
logical ways are imagined to algorithms, designed biological
manipulate nature for human structures, business methods,
purposes. etc.
Early Stage Development Process of making, improving, Prototype and business plan.
testing, and marketing
prototypes or laboratory
demonstrations of a newly
invented technology for the
purpose of ascertaining its
Commercializability.
Vertical Technology Transfer The transfer of technology Technology transfer agreement
from basic research to applied
research to development and
then to production.
Technology The process of taking an New or improved product or
Commercialization invention and bringing it to process
market. The process takes
time and investment, both of
which may run out before the
 effort is complete.

15. Give a definition of technology management at the firm level using the elements of Michael
Porter’s value chain model of the firm. (4 points)

By simple definition, technology management is the linking of different disciplines to plan,

develop, implement, monitor, and control technological capabilities to shape and accomplish
the strategic objectives of an organization. By looking at Michael Porter’s value chain model of
the firm, technology management refers to the strategic management of the different primary
and support activities of the firm in order to be profitable and create value for the firm, target
customers, and other stakeholders by producing competitive and innovative products or
processes.

16. Explain how certain kinds of process innovations can be generated by making certain changes in
the value chain (3 points).
Process innovations ― changes in the ways in which
products/services are created and delivered

Process innovations ― e-learning systems, flexible

manufacturing systems

Process innovations are innovations in the way an

organization conducts its business, such as in techniques
of producing or marketing goods or services.
– Improving the effectiveness or efficiency of production –
reducing defect rates, increasing quantity produced in a
given time

HOW PROCESS INNOVATIONS HELP FIRMS RECONFIGURE VALUE CHAINS:

1. New technologies can change the way in which firms actualize the primary value chain
activities, that is, restructure manufacturing, marketing, or research and development.
2. Process innovations, especially in information technologies, can be used to change the
conduct of secondary value chain activities such as finance.
3. Process innovations also enable firms to redefine their scope, that is, reconfigure the value
constellation by outsourcing or in-sourcing of value chain activities.

17. Explain how certain modifications of the value chain can give rise to a horizontal technology
transfer. (3 points)

In the event that a firm decided to move or transfer its mature technology to be used by
another firm located at a different place results in a horizontal technology transfer. This is
possible when certain modifications of the firm’s value chain are conducted. One particular
example is when the firm decided to undergo a formal mechanism of technology transfer like
technology licensing or OEM. In technology licensing, the firm or licensor, agrees to make
available to another company, the licensee, use of its patents and trademarks, its manufacturing
processes and know-how, its trade secrets, and its managerial and technical services. With
 licensing, the marketing or commercialization of the licensor’s product, concept, or process is
conducted by the licensee. The licensor does not have to bear the development costs and risks
associated with opening a market. Technology licensing is an easy way of entering a market
without large capital outlays. In terms of OEM contract, the contracted firm or OEM produces
according to the firm’s specifications. The completed goods that are then sold under that firm’s
brand name through its own distribution channels. Through OEM agreement, the firm’s
manufacturing activity is carried out by the OEM, which enables the firm to capture the large
post-manufacturing value-added.

18. Explain the major task of technology management during each of the following stages of the
technology S-curve: (a) New Invention Period, (b) Rapid Growth Period before the selection of
the Dominant Design, (c) Rapid Growth Period after the selection of the Dominant Design, (d)
Maturity period, and (e) Aging Period. (10 points)

The S-curve describes how the performance or cost characteristics of a technology change with
continued R&D efforts and investments over time. At the start of the curve, a significant effort is
needed to get an achievement, but once this basic learning has been done, productivity can
advance significantly with little marginal effort. Hence, performance rises fast and from then on,
once a decline in the slope occurs the productivity is unlikely to increase much by heavy R&D
expenses. After sometime, further advances get more and more fractional.

Foster’s S-curve model suggests that technological progress starts off slowly then increases
rapidly then tapers off as the physical limits of the technology are approached.

The Technology S-curve can be divided into four stages:

Stage 1: New Invention Period — the period immediately following the invention of the
technology which is characterized by a slow initial improvement in the technology performance.
Stage 2: Rapid Growth Period — The period when the performance parameter improves at an
accelerating pace.
Stage 3: Maturity Period — The period marked by a continuing improvement in the performance
parameter, but the rate of improvement is declining.
Stage 4: Aging Period — The period when the performance parameter nears the natural limit
and further improvements become very difficult to achieve.

19. Describe briefly a vertical technology transfer process that is internal to an organization. (3
points)
Vertical technology transfer refers to the transfer of technology from basic research to applied
research to development and then to production. This is observed in the event that the research
and development for the product or technology is already done and the product or technology
is transferred to the responsible department or unit for conducting technology
commercialization. The figure below shows the vertical technology transfer within an
organization carried out by different departments.
20. Explain the objective(s) of each of the following tools of technology management: (a) technology
audit, (b) technology benchmarking, (c) technology forecasting, (d) technology foresight, and (e)
technology roadmapping. (10 points)

Technology Audit is a method of investigation aiming to evaluate an organization’s (a)

technological capacity, (b) position in technology relative to those of its competitors and to the
state-of-the art, (c) strengths and weaknesses in its technological assets and procedures.

Technology Benchmarking – undertaken to analyze the company strengths and weaknesses, a

technology profile is established and it is then compared with leading companies in the sector
and/or an average of companies in the sector. This requires that the experts carrying it out have
the data needed to perform the comparison. It is a process of continuous improvement in the
search for competitive advantage. It measures a company’s products, services and practices
against those of its competitors or other acknowledged leaders in their fields. It is systematic
and continuous measurement process; a process of continuously measuring and comparing an
organization’s business processes against business processes of leaders anywhere in the world
to gain information which will help the organization take action to improve its performance.

Technology Forecasting – aims to anticipate, project, or estimate some future event, series of
events or conditions which is outside of the direct control of organization. It aims to determine
the possible evolution of the technical dimensions of a certain material, product, process or
service. It aims to predict how some characteristic of a technology will evolve within a certain
time frame in the future and with a certain probability of realization.

Technology Foresight – a systematic means of assessing those scientific and technological

developments which could have a strong impact on industrial competitiveness, wealth creation
and quality of life. The process involved in systematically attempting to look into the longer-
term future of science, technology, the economy, the environment and society with the aim of
identifying the emerging generic technologies and the underpinning areas of strategic research
likely to yield the greatest economic and social benefits.

Technology Roadmapping – a planning process that provides a framework for thinking about
the future, for exploring potential development paths, and for ensuring that future goals are
met. It is a comprehensive tool which can help firms identify their future product, service, and
technology needs and select the technology alternatives to meet them. The outcome of
technology roadmapping is called a “technology roadmap”. The essence of technology
 roadmapping is exploring possible future scenarios and at the same time identifying quantifying
and minimizing the risks and uncertainties of that future view.

21. Explain why it is necessary for a firm to have a core competence that can support its chosen
competitive strategy. (3 points)

Core competencies - capabilities that are fundamental to a firm’s strategy and performance.
Core competence is defined as a unique combination of knowledge, capabilities, structures,
technologies and processes in an organization, which makes it possible to provide products or
services which absolutely no other organization can produce in the same way, at the same
moment, and at the same speed.
Core competencies - The resources and capabilities that have been determined to be a source of
competitive advantage for a firm over its rivals.

A firm needs to have core competencies that can support its chosen competitive strategy in
order to achieve the following:
 creation of new products and service that provide potential access to a wide variety of
markets.
 make a significant contribution to the perceived customer benefits of the organization’s
end products or services.
 create sustainable competitive advantage as it is competitively unique and difficult for
competitors to imitate.
 provide potential access to a wide variety of markets.
 gain skill sets that set it apart from its peers.
 create building blocks to future opportunities and earned income ventures.

22. Explain the role of technology strategy in competitive strategy. (3 points)

See No. 3

Technology strategy refers to the firm’s approach to the development and use of the technology
to perform value-chain activities efficiently with the aim of achieving the firm’s sustainable
competitive advantage. The firm’s decision as to which technology will be used to perform
specific value-chain activity is a component of technology strategy. The firm shall consider the
following areas of technology strategy:
 Selection of Technologies
 Whether to be a Technology Leader or Follower?
 Whether to sell or develop the technology (Technology Licensing)

The firm’s decision for the three areas of the technology strategy must be in line with its chosen
competitive strategy. The technology choice must be coherent with the firm’s basic strategy
(differentiation, focus, or cost leadership). The firm must select the appropriate technologies to
support the generic strategies that have been identified to fulfill competitive advantage.

23. Explain the distinction between (a) corporate strategy and (b) business strategy by giving a
concrete example of each kind of strategy from either the Gokongwei Group of Companies or
the Ayala Group of Companies. (4 points)
Corporate Strategy - the direction and scope of an organization over the long term, which
achieves advantage for the organization through its configuration of resources within a changing
environment and to fulfill stakeholders’ expectations.

Corporate Strategy is the way a company creates value through the configuration and
coordination of its multimarket activities.

Corporate strategy defines the markets and the businesses in which a company will operate.
Corporate strategy is typically decided in the context of defining the company’s mission and
vision which are statements of what the company does, why it exists, and what it intends to
become.

Competitive or business strategy defines how the company will compete in a given business.
Competitive strategy hinges on a company’s capabilities, strengths, and weaknesses in relation
to market characteristics and the corresponding capabilities, strengths, and weaknesses of its
competitors.

Business-Level Strategy (competitive strategy)

 How to create competitive advantage in each business in which the company competes:
 low cost leadership
 differentiation
 focus low cost/ focus differentiation
 Business (or Competitive) Strategy is concerned with the use of resources and
capabilities to create competitive advantages in each of businesses or industries in
which a company competes

Corporate-Level Strategy (companywide strategy)

 Corporate (or Company-wide) Strategy is the overall plan for a multi-business unit
company.
 Corporate strategy is what makes the corporate whole add up to more than the sum of
its business unit parts.

Hierarchy of Strategies

Business Strategy (competitive strategy) is concerned with how a firm competes within a
particular market.
 Corporate strategy is concerned with where a firm competes.

24. Explain why it will be very risky for a firm to pursue a first mover strategy if it has no
complementary assets and if it is faced with a weak appropriability regime. (3 points)

It is very risky for a firm to pursue a first mover strategy if it has no complementary assets
because of the following:

Later entrants can capture the market from the pioneer by using their “complementary assets”.

Complementary assets: These refer to all other capabilities -- apart from those that underpin the
technology -- .that the firm must have to exploit the technology. These assets include
manufacturing, marketing, distribution channels, service, reputation, brand name, and
complementary technologies.

Many companies do not succeed with efforts to launch innovations because their competitors
imitate those innovations and offer their versions at a lower price, thus taking customers (and
profits) away from the innovating firms.

So a firm has to figure out when it is better off being an innovator and developing new products
and when it is better off being an imitator and letting competitors develop innovative products.

The success of innovators in this particular industrial situation depends largely on what product
designs are favored by different niche markets, and what design ultimately becomes dominant.

If you come up with a design that appeals to a valuable niche market, or better yet, a design that
ultimately becomes dominant, then your company can capture the returns to innovation thru
lead time and first mover advantages.
E.g., Sun Microsystems succeeded by developing a product that appealed to the niche market
for network servers.

In a weak appropriability regime prior to the emergence of a dominant design, imitators may
enter the market modifying the pioneer’s product in important ways and have a good chance of
having their modified product anointed as the dominant design.

So the innovator must be careful to let the basic design “float” until a certain design appears
likely to become the dominant design.

This means avoiding heavy capital investment on a certain design and entails keeping close to
the market in order that user needs can be integrated into product designs.

If your industry has already converged on a dominant design and innovations are easily imitated,
then to be successful you need to control complementary assets in marketing and
manufacturing quickly.

This requires contracting for these assets because building these assets from scratch usually
takes too long and because contracting minimizes the cost and risk of capital investment.
 After the dominant design is determined, success goes to the firms that control manufacturing
and marketing assets because they can produce and market products at lower costs.

Weak --- the technology is almost impossible to protect

25. Explain the main distinction between a joint venture and a strategic alliance. (2 points)

JV is a “union” of two or more parties who contractually agree to contribute to a specific

venture which is usually limited to a specific task for a specific period of time. Its main
characteristics are:
 Contractual
 Separate legal entity
 Significant matters of operating and financial policy are predetermined and “owned” by
the JV
 Exists for a specific time
 Exists for a specific project or purpose
 Limited with respect to future expectations

In addition, a joint venture is a contractual arrangement whereby a separate entity is created to

carry on trade or business on its own, separate from the core businesses of the participants.

On the other hand, strategic alliance is a cooperative strategy in which firms combine some of
their resources and capabilities to create a competitive advantage. Its main characteristics are:
 May or may not be contractual
 Not a separate legal entity
 Significant matters of operating and financial policy may or may not be predetermined
but are “owned” by the individual participants
 Indefinite life or a specific time
 Fluid and allows for greater amounts of ambiguity

A strategic alliance is generally an arrangement whereby a separate entity IS NOT created.

Participants engage in joint activities but do not create an entity that would carry on trade or
business on its own. A strategic alliance is usually easier to get in/out of due to due lack of
combined legal structure. A strategic alliance is generally viewed as being less risky
26. Explain the general role of the various modes/channels of international technology transfer (e.g.
licensing, OEM, subcontracting, strategic alliance, outsourcing, etc.) in global value chains and
global production networks. (3 points)

International technology transfer modes provide linkages between parts of GVC and GPN.

Note: Please see TM 241 for the same concept/answer.

27. Explain the distinction between actors/players and institutions in a system of innovation.
(3 points)

Actors/players in a system of innovation refer to organizations such as firms, universities,

research, and technology organizations, venture capital organizations and public agencies
responsible for innovation policy, etc. On the other hand, rules of the game refer to institutions
defined as “sets of common habits, norms, routines, established practices, rules or laws that
regulate the relations and interactions between individuals, groups and organizations.”

28. Give two concrete examples each of an actor/player and an institution in the Philippine
innovation system. (3 points)
Example in the Philippines:
Actor/Players – R&D org like DOST, research university like UP
Rules of the Game – R&D policies and related laws like Techno Transfer Act.

29. Explain why our country up to now has failed to catch-up technologically and remained
technologically dependent, while the other countries like Japan, South Korea, Taiwan, and China
were able to catch up technologically and achieve global competitiveness.

Juma and Clark (2002): “...technological catch-up is understood to mean the rapid accumulation
of technological capacity to levels which enable a country to become a technological leader or
competitor with the leading countries.”

UNIDO (IDR 2005) also notes that successful catching-up experiences of the past displayed some
commonalities:
 A rapid increase in the level of education and an emphasis on higher education in
science and engineering.
 The creation of public institutions to conduct industrial research and provide services to
industrial firms.
 Relatively unfettered access to S&T knowledge through participation in international
networks of scientific and engineering competence, and often from weak, if any,
enforcement of IPRs on existing technology.

JAPAN’S INDUSTRIAL CATCH-UP STRATEGY

 Japan during the postwar period pursued a Gerschenkronian substituting strategy of

attempting to compete directly with U.S. forerunners, catch-up with them by focusing
on the most technologically dynamic industries of the time, and by leapfrogging them in
plant size and investment
  The economic role of the state was significantly enhanced with the rise of the
“developmental state”— the state pursued economic growth as its prime objective and
had the power to pursue this objective through the use of macroeconomic stimuli and
“industrial policies.”
 The vehicle used in the finance and organization of Japan’s industrial catch-up was the
keiretsu which facilitated industrial financing.
 Japan’s industries became globally competitive exporters as a result of fierce domestic
competition among the keiretsu.
 FDI and foreign debts played a negligible role in Japan’s industrial financing which was
principally supported by domestic bank financing and subsequent export earnings.

SOUTH KOREA’S INDUSTRIAL CATCH-UP STRATEGY

 South Korea closely followed the Japanese model, with a developmental state
orchestrating the growth of large family-owned vertically integrated conglomerates
called chaebol.
 South Korea depended heavily on foreign debts, foreign equipment, and foreign
materials for its industrialization.
 South Korea pursued a nationalistic substituting strategy which tried to minimize FDI.
 In the early stage of industrialization, the state nationalized commercial banks and
subordinated their loan policies to industrial policy.
 The South Korean developmental state utilized industrial policy by targeting strategic
industries, selecting the chaebols to build up those industries, and guaranteeing their
foreign loans.
 Each strategic industry was pushed to global export markets by the state’s industrial
policy and by the fierce competition among chaebols.

TAIWAN’S INDUSTRIAL CATCH-UP STRATEGY

 Taiwan initially pursued a nationalistic path of development, relying on the three

vehicles of (1) public enterprises, (2) local business groups, and (3) SMEs, undertaking
import-substituting industrialization for a while, and even restricting FDIs.
 Taiwan soon shifted to attracting MNCs to compensate for the lack of big local firms,
and the government even arranged alliances with MNCs when it needed to go into high-
tech areas.
 Taiwan did not have to depend too much on external funding for its industrialization
because of alliances with MNCs and the dominance of SMEs.
 Taiwan thus adopted a “complementing strategy” of industrialization and catch-up
which tried to attract MNCs by providing them with “complementary assets” such as
SME supplier clusters, infrastructure, human capital, fiscal incentives, and so on.
 In entering high-tech industries, Taiwan employed an “orderly spin-off strategy” in
which public research institutes developed major technologies and then commercialized
and diffused these through spin-offs and licensing.

SINGAPORE’S INDUSTRIAL CATCH-UP STRATEGY

 Singapore developed mainly through attracting and upgrading MNCs by providing them
with “complementary assets,” thus adopting a “complementing strategy” like Taiwan.
  Since its industrialization was spearheaded by MNCs which already had their own
technical and financial resources, Singapore did not have a pressing need to raise
industrial funds or to build up local technological capabilities.
 Government-linked companies (GLCs) filled the areas in which MNCs were not
interested but which the government regarded as strategic such as shipbuilding and
steel-making.
 The Singapore government relied on fiscal policies like tax breaks and high depreciation
allowances to stimulate further investment.

CHINA’S INDUSTRIAL CATCH-UP STRATEGY

After the initiation of economic reforms in 1978,China adopted the following policies and
strategies:
 The government withdrew direct intervention in the economy and opened up the
economy to international trade, thereby encouraging reliance on market mediation for
resource allocation and information.
 The government restructured local institutions so as to make R&D institutes more
market-oriented or integrated with manufacturing firms.
 The government initiated the massive search for and acquisition/importation of
missing technologies needed by local enterprises through equipment purchases,
engineering consultancies, OEM arrangements, etc.
 The government adopted policies and programs to encourage high-tech spin-offs from
local universities and R&D institutes.
 Chinese firms pursued global outsourcing of technologies and components to produce
market-oriented incremental product innovations.
 Chinese firms pursued strategic alliances with global technology leaders, established
R&D centers abroad, and acquired core technologies to develop and market global
brands.

Key Elements and Factors of National Technological Catch-up

 What these late industrializing East countries (Japan, South Korea, Taiwan, and
Singapore) have in common is that they have caught up very rapidly, underwent
extensive structural change and – finally – established themselves as among the major
producers (and exporters) internationally in the most technologically progressive
industry of the day, electronics (broadly defined).
 The government in each country appears to have played a very important role in these
processes, with each putting great emphasis on the expansion of education, particularly
the production of engineers.
 In the early phases, governments in Korea and Taiwan intervened heavily with tariff
protection, quantitative restrictions, financial support etc. to benefit the growth of
indigenous industries in targeted sectors.
 Singapore is a special case, since its government has relied heavily on inward FDI in its
industrialization efforts, and thus targeting has had to be achieved through selective FDI
policies.
 In all countries, targeting production for exports and rewarding successful export
performance was very important.
  More recently all countries have put a lot of emphasis on policies supporting R&D and
innovation.
 However, when it comes to the industrial structure, there is diversity. In South Korea
large diversified business groups (chaebols), have been very important, while in
Singapore foreign MNCs dominate the scene and in Taiwan SMEs are dominant.
 In all countries the state played a very important role at an early stage, but this was
done in different ways in different countries. For instance, in both Japan and Korea
credit rationing by the state (so-called “directed credit”) was extensively used to
persuade private firms to go along with the government’s objectives, while this played
virtually no role in Taiwan (which underwent a financial liberalization early on).
 In the Taiwanese case the government had to rely on other instruments such as state-
owned firms and, in particular, heavily supported “intermediate institutions” (R&D
infrastructure etc.) with mixed public/private sector participation.
 Moreover, while industrialization in Japan, and in the USA and Germany before it, was
mainly geared towards the home market, exports played a similar role in the catch-up
strategies of the three “tigers”.
 As to the financing of catch-up, the Japanese catch-up was largely self-financed. The
Japanese financial system was effective in generating large savings from the general
public and funneling these to the large industrial conglomerates, on preferential terms.
 Korean catch-up, on the other hand, depended heavily on foreign lending.

UNIDO’S CRITICAL FACTORS FOR CATCHING-UP

1. Knowledge, by far the most important one, comprising variables highly correlated with the
creation, diffusion and use of knowledge, such as R&D and innovation, scientific
publications, ICT infrastructure, quality management and education.
2. Inward openness, which comprises indicators of import trade and inward FDI.
3. Financial system, concerns overall aspects of market capitalization, country risk and access
to credit.
4. Governance and Political System
5. Geography
6. History

WHAT DETERMINES SUCCESS OR FAILURE IN A CATCH-UP BID

 According to UNIDO (2005), history shows that in the few countries that have managed
to catch up with, even overtake, the leaders at different points in time, the rapid
accumulation of technological capabilities and the development of dynamic domestic
knowledge systems played a pivotal role.

 As stated by UNIDO (2005), “Catch-up is not something that can be expected to occur
only by market forces left to themselves, but something that requires a lot of effort and
institution building.”

30. Explain the basic role of business model in the innovation process and why an innovation project
is bound to fail if it does not have a well-defined and effective business model.
  A business model is the economic value model for the new venture ― a plan for how
the business will make money and create value for its customers and partners.
 Business-Model — redefining the business model or the system by which the company
creates, sells, and delivers value to customers
 A business model describes the value an organization offers to various customers and
portrays the capabilities and partners required for creating, marketing, and delivering
this value and relationship capital with the goal of generating profitable and sustainable
revenue streams.
 BUSINESS-MODEL INNOVATIONS — those involving changes in the business model.

THE ESSENCE OF A BUSINESS MODEL

 Essence of a business model: defining the manner by which (1) the enterprise delivers
value to customers, (2) entices customers to pay for value, and (3) converts those
payments to profit.
 Business model thus reflects management’s hypothesis about what customers want,
how they want it, and how the enterprise can organize to best meet those needs, get
paid for doing so, and make a profit.
 Without a well-developed business model, innovators will fail to either deliver or to
capture value from their innovations.
 A business model
- articulates the logic as to how a business creates and delivers value to customers
and
- outlines the architecture of revenues, costs, and profits associated with the business
enterprise delivering that value.
 The different elements that need to be determined in business model design are listed
in the next slide.

 The issues related to good business model design are all interrelated, and lie at the core
of the fundamental question asked by business strategists: how does one build a
sustainable competitive advantage and turn a super normal profit?
 In short, a business model defines how the enterprise creates and delivers value to
customers, and then converts payments received to profits.

 To profit from innovation, business pioneers need to excel not only at product
innovation but also at business model design.
 Developing a successful business model is insufficient to assure competitive advantage
as imitation is often easy.
 A differentiated (and hard to imitate), yet effective and efficient, business model is more
likely to yield profits.
 Business model innovation can itself lead to competitive advantage if the model is
sufficiently differentiated and hard to replicate for incumbents and new entrants alike.
 In essence, a business model embodies nothing less than the organizational and
financial “architecture” of a business.
 A business model refers in the first instance to a conceptual, rather than a financial,
model of a business.
 It makes implicit assumptions about customers, the behavior of revenues and costs, the
changing nature of user needs, and likely competitor responses.
 A business model outlines the business logic required to earn a profit…and, once
adopted, defines the way the enterprise “goes to market”.
 But a business model is not quite the same as a strategy.
 Actually, business models have only been explicitly catapulted into public consciousness
during the last decade or so as a result of, among others, the emerging knowledge
economy, the growth of the Internet and e-commerce, and the outsourcing and
offshoring of many business activities.
 Note that the way in which companies make money nowadays is different from the
industrial era, where scale was so important and the capturing value thesis was
,relatively simple, i.e., the enterprise simply packed its technology and intellectual
property into a product which it sold, either as a discreet item or as a bundled package.
 The existence today of computers that allow low cost financial statement modeling has
facilitated the exploration of alternative assumptions about revenues and costs.
 The Internet has allowed individuals and businesses easy access to vast amounts of data
and information and has made comparison shipping easier.
 In some industries, such as the recording industry, Internet-enabled digital downloads
compete with established channels (such as physical product sales) and, partly because
of the ubiquity of illegal digital downloading, the music recording industry is being
challenged to completely re-think its business models.
 The Internet is also a new channel of distribution and for piracy which clearly makes
capturing value from Internet transactions and flows difficult for recording companies,
performers and songwriters alike.
 More generally, the Internet is causing many “bricks and mortar” companies to rethink
their distribution strategies ─ if not their whole business models.
 No matter what the sector, there are criteria that enable one to determine whether or
not one has designed a good business model.
 A good business model yields value propositions that are compelling to customers,
achieves advantageous cost and risk structures, and enables significant value capture by
the business that generates and delivers products and services.
 Superior technology and products, excellent people, and good governance and
leadership are unlikely to produce sustainable profitability if business model
configuration is not properly adapted to the competitive environment.
 Business models are often necessitated by technological innovation which creates both
the need to bring discoveries to market and the opportunity to satisfy unrequited
customer needs.
 At the same time, new business models can them- selves represent a form of
innovation.
 There are a plethora of business model possibilities: some will be much better adapted
to customer needs and business environments than others.
Other Notes:

Technology Life Cycles and Foster’s S-Curve

 Technology Trajectory – the path a technology takes through its life time ─ can be depicted by
technology life cycle models which suggest that a technology develops in a relatively predictable
manner.
 One of these models is Foster’s S-curve, which was theorized by Richard Foster in 1986 and
which depicts the development or maturation of a technology in terms of an S shaped graph on
a two-dimensional plane where the vertical axis represents a technology performance
parameter measuring a dimension of merit, while the horizontal axis measures R&D efforts over
time.

The Nature of S-Curve

 The S-curve describes how the performance or cost characteristics of a technology change with
continued R&D efforts and investments over time.
 At the start of the curve, a significant effort is needed to get an achievement, but once this basic
learning has been done, productivity can advance significantly with little marginal effort.
 Hence, performance rises fast and from then on, once a decline in the slope occurs the
productivity is unlikely to increase much by heavy R&D expenses. After sometime, further
advances get more and more fractional.
 The intrinsic limit to technical performance of a physical technology is determined by the
natural physical phenomenon of the technology.
 Every technology S-curve is expressive of only one underlying physical phenomenon.
 The physical technology S-curve is not a model of the process of physical technological change
but an analogous pattern frequently seen in the histories of technical progress.
 The technology S-curve is merely an idealized “descriptive analogy”.
 Foster’s S-curve model suggests that technological progress starts off slowly then increases
rapidly then tapers off as the physical limits of the technology are approached.
THE STAGES OF THE TECHNOLOGY S-CURVE

The Technology S-curve can be divided into four stages:

 Stage 1: New Invention Period — the period immediately following the invention of the
technology which is characterized by a slow initial improvement in the technology performance.
 Stage 2: Rapid Growth Period — The period when the performance parameter improves at an
accelerating pace.
 Stage 3: Maturity Period — The period marked by a continuing improvement in the performance
parameter, but the rate of improvement is declining.
 Stage 4: Aging Period — The period when the performance parameter nears the natural limit
and further improvements become very difficult to achieve.
WHY THE PERFORMANCE PARAMETER EXHIBITS AN S-CURVE

The S-shaped trajectory of the performance parameter can be attributed to two effects:
 LEARNING PROCESSES — In Stage 1, learning generates a more or less reliable design and
production process. In Stage 2, learning curve effects lead to rapid improvements in the
performance characteristic.
 TECHNOLOGY LIMITS — These are the limits imposed by nature, e.g., vacuum tube technology
was limited by the tube’s size and the power consumption of the heated filament. Technology
limits come into play during the later stages of maturation when improvements in performance
parameters become more and more difficult to achieve.
TECHNOLOGY LIFE CYCLE IN TERMS OF MARKET VOLUME

Further Characteristics of Technology S-Curve

 A technology S-curve is a common pattern of progress in a technology’s principal performance

parameter over time, with an initial exponential growth, intermediate linear growth, and an
eventual asymptotic limit.
 A technology S-curve is dependent on an underlying generic physical process.
 The natural limit of progress on a technology S-curve arises from intrinsic factors in the
underlying physical process.
 Technologies do not always get to reach their limits; they may be displaced by new,
discontinuous technology.
 Each S-curve is an expression of only one underlying physical phenomenon. The range of
performance of the technology is determined by the nature of the underlying phenomenon.
 The S shape is not fixed. Unexpected changes in the market, component- and complementary-
technologies can shorten or extend the life cycle.
 Firms can also stretch the S-curves through new development approaches or revamping the
architecture design of the technology.
 The rate of performance improvement is dependent on the effort devoted to its development.

As shown below, a technology may evolve along curve or A’, depending on a number of factors,
including the type of the technology itself and the cost and time devoted to its development. A newer
technology, based on a different underlying physical phenomenon, will have a different S-curve (B) and
a different range of performance for the same performance parameter.
Technological Discontinuities

 Happens when an existing technology reaches the point of diminishing returns

 A new technology is often developed to challenge the existing technology
 Initially, the new technology is usually inferior to existing technology on key dimensions
 But the new technology has greater potential for performance improvement
 Technologies do not always get to reach their limits

 May be displaced by new, discontinuous technology.

o A discontinuous technology fulfills a similar market need by means of an entirely new
knowledge base.
- E.g., switch from carbon copying to photocopying, or from vinyl records to compact
discs
 Technological discontinuity may initially have lower performance than incumbent
technology.
o E.g., first automobiles were much slower that horse-drawn carriages.

 Firms may be reluctant to adopt new technology because performance improvement is initially
slow and costly, and they may have significant investment in incumbent technology
 A discontinuous technology fulfills a similar market need by means of an entirely new
knowledge base. E.g., switch from carbon copying to photocopying, or from vinyl records to
compact discs
 Discontinuities in technical progress for a technology occur when alternate physical processes
can be used in inventions for the technology
 Such discontinuities express themselves as different and disconnected S-curves.
 Technological discontinuities represent next generation, radical, breakthrough innovations
which have performance advances that are eventually several times over that of the current
technology.
 Firms may be reluctant to adopt the new technology because performance improvement may
be initially slow and costly, and they may have significant investment in the incumbent
technology.
 Historically, most technology- based business failures have occurred at such technological
discontinuities; conversely, most successful new high-tech businesses have started at such
technological discontinuities.

Triggers of Technological Discontinuity

 New market emerges
 New technology emerges
 New political rules emerge
 Running out of road
 Change in market sentiment or behavior
 Deregulation or reregulation
 Fractures along ’fault lines’
 Unthinkable events
 Business model innovation
 Shifts in techno-economic paradigm
 Architectural innovation
TECHNOLOGICAL DISCONTINUITIES -- JUMPING THE S-CURVE

When a new technology B begins to substitute for the existing technology A, there appears a
technological discontinuity — a jump to another S-curve. The incremental improvements in an existing
technology A constitute technology maturation, whereas, the radical breakthroughs that produce new
technologies and threaten to obsolete existing technologies constitute technology evolution. In some
cases, drastic improvements in the new technology B are needed before it can make an existing
technology A obsolete; in other cases, a breakthrough technology C may obsolete an existing technology
from the very beginning.
TECHNOLOGICAL EVOLUTION IN TERMS OF SUCCESSIVE GENERATIONS OF TECHNOLOGY

Technological evolution may be depicted in terms of a series of S-curve jumps as one technology is
replaced by a next generation of technology.

TECHNOLOGY S-CURVES FOR A COMPLEX TECHNOLOGY WITH SEVERAL SUBTECHNOLOGIES

The subtechnology S-curves of a complex technology shape the latter’s overall S-curve. For example, the
PC is a complex technology consisting of several subtechnologies.
Managerial Implications of the Technology S-Curve
Usage of the S-Curve: Applications

 Technology life cycle assessment.

 Technology forecasting
 Industry maturity assessment
 Assignment of the necessity of strategic refocusing

S-Curves as a Forecasting Tool

 Managers can use data on investment and performance of their own technologies or data on
overall industry investment and technology performance to map S-curve.
 Managers could then use these curves to assess whether a technology appears to be
approaching its limits or to identify new technologies that might be emerging on S-curves that
will intersect the firm’s technology Scurve.
 Managers could then switch S-curves by acquiring or developing the new technology.
 While mapping the technology’s S-curve is useful for gaining a deeper understanding of its rate
of improvement or limits, its use as a prescriptive tool is limited because
 True limits of technology may be unknown
 Shape of S-curve can be influenced by changes in the market, component technologies,
or complementary technologies.
 Firms that follow S-curve model too closely could end up switching technologies too
soon or too late.

STRENGTHS OF THE S-CURVE APPROACH — BENEFITS

 Allows for an assessment of different stages of a technology.
 Indicates the necessity to watch out for technological discongruities.
 Indicates the necessity for strategic alignment when productivity gains decline.
 Creates clear incentives for first-mover behavior.

LIMITATIONS OF THE S-CURVE : DISADVANTAGES

 The model does not give any clear hints to managers on how to act in the face of technological
discontinuity.
 It cannot be inferred from the model how big the gains will be from new technologies.
 The model does not imply when to invest in new technologies and abandon the current one.
 The model does not imply how a new technology will look like and by whom it will be
introduced.
 The model is a generalization of observed technology paths. In reality, the size and structure of
the S can vary.

S-Curves as a Prescriptive Tool

 Managers can use data on investment and performance of their own technologies or data on
overall industry investment and technology performance to map the S-curve.
 While mapping the technology’s S-curve is useful for gaining a deeper understanding of its rate
of improvement or limits, its use as a prescriptive tool is limited.
 True limits of technology may be unknown
 Shape of s-curve can be influenced by changes in the market, component technologies,
or complementary technologies.
  Firms S-curve model closely could end up switching technologies too soon or too late.

Using Technology S-Curves as a Management Tool

 Incumbents can predict when to invest in a radical new technology
 Limitations:
 the inability to identify when to switch technologies
 the failure to incorporate all of the factors that matter to the decision to switch
 the need for adopters of the new technology to focus on niche markets before tackling
the mainstream of the market
 the existence of alternative ways to respond to the introduction of new technology

Who Shifts the S-Curve?

 Usually new entrants because:
 Incumbents have no incentive to introduce the new technology
 Incumbents have investments in existing technology
 Products based on the new technology cannibalize incumbents’ sales
 Managers at incumbent firms do not see the new technology as a threat
 Incumbent firms can improve the performance of their old technologies
 Incumbent firms face organizational obstacles to changing their core technologies

Established Technology vs. New Rival

The New Rival

 T1: New rival enters the market, somewhere below the status of the existing technology
 Many problems
 Often viewed skeptically, or not as a real threat
 T2: At this point, the new rival matches the performance of the existing technology, but still has
more room to improve
 The older rival may eventually be displaced by the newer technology

How Can a New Technology Compete?

New technology often gains a foothold by identifying and serving niche markets, where it is highly
valued, even if it is imperfect at first
  Military to civilian applications
 Professional/scientific to consumer communities
 Early adopters to late adopters

“Defender” Options

 Being the “defender” is difficult. Some options:

 Abandon the existing business in favor of the new technology
 Work harder to make the existing technology better or more useful
 Hybrid: Hold onto the existing business and begin investing in the new technology
- Hybrid option seems like the best option, but issues such as company culture and
internal skills may prevent this
- “Tyranny of served markets”

What Can the “Defender” Do?

 Options if you are a “defender”:

 Embrace the new technology
 Acquire the new technology company
 Skunkworks
 Leapfrog with new technology with a newer technology of your own
 Find a breakthrough in your existing technology and exploit it
 Expand your existing technology into new and different market segments