Tuesday, May 3, 2016

Pyramid of Technology and Competitive Strategies: Drivers of Industrial Growth

Technology is the primary driver of industrial development. Generally, technology is viewed in terms of two categories: innovative (or discovery) technologies and generic (or copycat technologies). It is commonly understood that innovative technologies open up new markets with first-to-market products and services, and generic technologies thereafter follow with same or similar products, expanding the markets further. The extent and pace of generic technologies depend on the protection of intellectual property rights (IPR), and the attendant monopoly rights that innovator firms enjoy. The sequence and balance between innovative and generic technologies is well established in certain industries such as pharmaceuticals and electronics while it is somewhat blurred in other industries such as automobiles and Fast Moving Consumer Goods (FMCG).

Technology is hard to develop innovatively for two intertwined reasons; innovation requires intellectual capital which, in turn, requires an ecosystem that nurtures innovation. Generally, innovation is considered technology, and investment intensive and only financially very well endowed firms are considered capable of performing in the innovation space. The real take on that is a bit ambivalent. Fundamental research, no doubt, requires sophisticated equipment and high calibre people, both of them costing a lot. On the other hand, some of the brightest technological innovations be it genomics, epigenetics, stem cells, artificial intelligence, drones and so on have been initiated on a small scale in start-up or academic research formats. The fact of the matter is that it is difficult to categorise technology in a binary format. This blog post proposes that technology is complex and needs to be appreciated from multiple angles.

Technology pyramid

Pyramid is a very graphic template to appreciate multi-layered activities or experiences. Regular pyramid has a square base and an apex point joined to the base by four equal triangles. Viewed from any angle of elevation, the pyramid would look like a triangle. There are three separators in this triangle from a technology point of view. At the very top lies the true innovator space. The middle space belongs to improver-followers. The bottom space belongs to followers. While there is no research body that points to clear statistics, the ratio of innovators to improvers to followers tends to be 1:3:6 in technology oriented industries, and 1:1:8 in commodity oriented industries. The higher the complexity of innovation of the top 10 percent, the greater will be the number of technology components. This provides an opportunity for improver-followers (30 percent) to improve upon the components, making the follower products similar but with some improvements. Most players (60 percent) find even partial improvements daunting, and are satisfied with being generic clones.

The relationship between technology and science has been age old. Science is the foundation of technology. While classification of technologies as above tends to be secular, depending on the edge of the base, there are four types of industries, driven by four different types of sciences. The first is driven by material sciences, the second by biological sciences, the third by mechanical sciences and the fourth by computer sciences. Depending on the base scientific driver, the proportions cited above vary. Semiconductors, medical equipment, wearables, white goods are some examples of predominantly materials sciences driven industries. Vaccines, ayurvedic products, pharmaceuticals, biologics and regenerative medicines are examples of biological sciences driven industries. Robotics, automobiles and machine tools are examples of industries driven by mechanical sciences. Artificial intelligence, IoT and Cloud are examples of computer sciences driven industries. In today’s world, though, there is significant cross-dependence and convergence. Wearables, for example, are driven by advances in computer sciences as well.

Strategy grid

Given that technology driven product strategy is the core of business strategy, the technology pyramid influences the business strategy of a firm, which has two principal components: investment direction and earnings potential. There are two fundamental dimensions of investment; one of technology (including both design and manufacture) and the other of marketing (including both selling and distribution). Innovators need to be extraordinarily high on design and manufacturing investments as well as marketing investments. Improvers need to be balanced in terms of technical and marketing investments. Followers need to be high on marketing investments but can afford to be low on design and manufacturing investments. Only those products which are on phase-out can afford to be low on investments on both technical and marketing dimensions.

There tends to be an earnings grid that corresponds to the investment grid and that has two dimensions: the revenue grid and the (gross) margin grid. Gross margin (or, simply margin) is defined by earnings before depreciation, interest and taxes. The innovator firms would be high on both revenue and margin dimensions. Improvers will be high on revenue grid and medium on margin grid. Followers would be low on both revenue and margin grids. Clearly, there are logically strong incentives to be innovators, followed by improvers and trailed by followers. The reality, however, is otherwise. Most firms tend to prefer an improver strategy or a follower strategy and only the strong hearted tend to pursue the innovator strategy. One financial reason is that the investment intensity adversely affects the net margin potential of a firm, because of depreciation and interest. As a result, even innovator firms tend to follow a strategy of mixed portfolio, with a fair proportion of improvers in their portfolio.

Competitive strategies

There are three competitive strategies of technology that firms can pursue based on the desired positioning in the technology pyramid. These are innovation leadership, improver differentiation and follower productivity. The classification has relevance in terms of organizational leadership characteristics as well.   

Innovation leadership

Innovation leaders are in the forefront of experimentation. Such firms tend to invest enormous resources, including time and effort, not only in their primary scientific drivers (say, materials or mechanicals) but also in exploration of how the other drivers can also be leveraged for greater innovation. Microsoft acquiring DNA sequence to store trillions of data bytes is an example. Another example is driverless cars, combining car and computer technologies.  Innovators are not disheartened by failures and would press on with resource allocations until breakthroughs are achieved. Innovation leaders are often driven by insightful and intuitive leaders who are visionary rather than data oriented analytical leaders.

Improver differentiation

Improver differentiation looks at multiple components of a successful innovator system to develop a new value proposition. Modular smartphone, for example LG G5 model, which enables modular enhancers like DSLR camera which can be attached for performance enhancement, reflects improver differentiation. Such firms tend to take off where others stop. Fitbit, launching a fitness watch, is an example. Despite the launch of Apple watch or Samsung Gear smart watch, Fitbit fitness band continued to be popular. However, the firm recognized that getting a watch bezel on to the band would be a key differentiator and portfolio enhancer. Improver differentiators are driven by leaders who are observant and thoughtful leaders who are creative rather than analytical leaders.  
Follower productivity

Followers need agility, accuracy and efficiency to play the generics game successfully. Wise followers keep their generic follower templates ready even as the innovator products are launched. They understand that the marketing universe is diverse, and the bottom of the economic pyramid so large, that there would always be scope for follower products. Generic pharmaceutical industry is a shining example of how follower productivity enables me-too followers transform the structure of an existing industry, and in the process virtually build a whole new industry segment successfully. Generic followers succeed based on the quality of management and rigour of operations. Leaders who lead follower productivity tend to be operational and efficiency experts.

Crystallisation versus Commoditization

Those who are familiar with solid-liquid physics and chemical engineering understand that crystallization is a complex process. There are many natural crystallization processes that are time scale dependent (examples, mineral crystals or snowflakes). Innovation, likewise, is time dependent; leaders committed to innovation need patience. Laboratory crystallization works on a number of parameters (concentration, temperature, polarity, ionic strength etc.,) to ensure required crystallization. Innovation similarly requires specialization, energy, passion and persistence. More importantly, just as crystal growth happens with the primary crystallization or the first nucleus formation (convergence) and then develops secondary crystallization, innovation also starts with one unique idea and then builds on to make a whole new innovative product eventually.  Examples are electric cars built around high performance electric batteries, smart phones around bright displays, driverless cars on sensors, and so on.

Technology, on the other hand, has a paradoxical aspect. Even highly sophisticated technologies, with high investment intensity, are subject to rapid commoditization so long as they are not protected by patent and monopoly rights. Commoditization stimulates proliferation of competing products. Commoditization occurs when a core or base product is recast into multiple end-user products as in the case of iron and steel. Commoditization is an inevitable outcome of outsourcing of design, development and manufacture. Outsourcing promotes diffused technological entrepreneurship. As more systems developers and component makers get their teeth into their own proprietary technologies, commoditization of technologies tends to occur. This phenomenon, widely commonplace in white goods industry, is now evident in electronics and other industries as well. Commoditization as a phenomenon supports a wide base for followers, and works to the advantage of consumers.

Posted by Dr CB Rao on May 03, 2015     

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