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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