Technology Discontinuity Summary and Example

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Jump to: Definition of Technological Discontinuity | Motivations for Corporate Alliance | Lifecycle and Alliance Motivations | Discussion | Conclusion

When a major shift in technology occurs, it poses a significant challenge for the companies operating in the affected industry. The technology which forms the foundation of their products and markets may have been affected and the race begins to find a way to adapt to the new technology. In other to maintain competitive standing, the firm must find a way to exploit the new technology’s competencies (Christensen, Suarez, & Utterback, 1998; Tushman & Anderson 1986; Henderson & Clark, 1990). Because of technological discontinuity, matured organizations have three options to explore in order to acquire the new technology: merger or acquisition, develop the technology or an alliance. Utterback (1975) in his technology life cycle model said that there are three phases in technology life cycle and that for each phase there is an appropriate way of aligning with a partner. (He later added a fourth phase). However because of time and market pressures as well as Moore’s law on technology changing every 18 months, alliances seems to be the more attractive option. Rothaermel (2002) contends that alliances between mature firms and new entrants have been suggested as ways that mature firms can use to adapt to radical technological change. In particular, the paper is interested in seeking to explore why technological discontinuity motivates firms to enter into alliance.

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1. Introduction

Technological discontinuities often create tremendous difficulties for incumbent firms. The most recent example of a technological discontinuity can be seen in the video rental industry, the change in content delivery methods has led to the bankruptcy of Blockbuster and ascendancy of companies like Netflix. There are many other examples of such discontinuities: The use of the internet in book retailing is leading to Amazon eclipsing the likes of Barnes and Nobles and Borders, the music industry is also trying to find a way to benefit from new technologies which are obsoleting its older business models. The fact is that discontinuous innovations often initiate a process of creative destruction that frequently leads to the replacement of the technologies of mature firms and sometimes lead to the new entrants’ ascendancy. Nonetheless, some empirical evidence suggests that mature firms may be able to successfully commercialize a discontinuous innovation if such firms have the necessary financial and managerial resources and capabilities to master such an adaptation. Abernathy & Clark (1985) in their study of U.S. auto industry showed that mature firms are able to benefit even from radical technological change that disrupts the firms existing technological competence, provided that the technological change simultaneously entrenches the incumbent’s existing market customer linkages.

Christensen (1997) also found empirical evidence for his claim that organizations will generally succeed in adapting even to discontinuous technological change as long as the new technology is critical to the their existing value network. Further, Rothaermel (2002) went further by saying that organizations that possess complementary assets necessary to benefit from a new technology may be able to leverage their complementary assets via alliances and cooperation with new entrants and accomplish a successful transition to the new technology. Organizational alliances have been suggested as one way for mature organizations to adapt to radical technological change (Rothaermel 2002). In this paper, the question then is: What is the motivation behind the alliance?

Accelerating technological discontinuity as well as decreasing technology cycles inevitably intensifies competition (Quinn, 1992). The degree of uncertainty is contingent on the type of technological discontinuity in which competence-destroying innovation will exercise the highest level of uncertainty (Tushman & Rosenkopi 1992). Additionally, the type of discontinuity firms face also affects the criteria for alliance partner selections. If external technological discontinuity is a competence-destroying one, the value of specialized complementary assets owned by dominant industry players could be destroyed (Tripsas, 1997, Rothaermel, 2002; Shan & Hamilton, 1991), which makes them an unfavorable choice.

2. Technological Discontinuity Definition

Schumpeter (1942) identified discontinuous technological change and related innovations as the sources of the ‘creative destruction’ in industries. A technological discontinuity might be defined as a “breakthrough innovations that advances by an order of magnitude the technological state-of-art, which characterize an industry. Technological discontinuities are based on new technologies whose technical limits are inherently greater than those of the previous dominant technology along economically relevant dimensions of merit (Anderson & Tushman 1997). Anderson & Tushman (1991) said that organizations are now being managed through a period of discontinuity because of revolutionary technological changes causing what they called “creative destruction”: where existing methods are changed in favor of new and better methods. Each technological discontinuity brings about a technological cycle. Some discontinuous innovations are competence destroying, while others are competence enhancing. Competence enhancing is when a breakthrough pushes forward a new state by building on an existing knowledge, while competence destroying totally obsoletes the old technology and knowledge and replaces them with new products and brings about new learning curve.

Usually competency-destroying discontinuities require new skills, abilities, and knowledge in either process or product design. New skills are needed for the new technology and this can cause power and structure shifts in organizations. Competence-enhancing discontinuities are innovations that enhance the current technology and structure of the organization. These discontinuities tend to consolidate industry leadership. Competency-enhancing changes will cause lower entry-to-exit ratio as smaller firms are squeezed out. Competence-destroying changes will increase entry-to-exit ratios as new firms capitalize on changes established firms can’t quickly adapt to.

3. Technological Discontinuity and Motivations for Corporate Alliances

Strategic global alliances in the last 20 years have increased by over 20 percent per year, and are currently estimated to account for as much as 25 percent of the total revenues of participating companies (Anderson et al., 2006). This growing corporate partnering is as a result of the knowledge-based nature of global competition (Narula, 2004). Freeman (1991) said there is a positive correlation between the technological sophistication of an industrial sector and the number of collaborative partnerships undertaken by domain companies.

Since technological discontinuity dramatically changes the industry in which it occurs, its effect on mature firms is profound. Technological discontinuity sometimes deliver better product performance, attract a host of new competitors and also requires technology that is not part of an established firm’s core competence. It then becomes incumbent on older and matured firms to find ways to add this skill to their core competence (Hamel & Prahalad, 1994; Utterback, 1994).

Cellular technology is an example of a technological discontinuity that is posing a threat to the traditional land line. On-line transactions are another example rendering most brick and mortal establishments less important than they were a couple of years ago. Most of these transactions including on-line banking can be done through cell phone. Some mature organizations have embraced this discontinuity by encouraging customers to shop on-line in addition to coming into the stores. They have found that it saves them money because they need less people and less space to operate. This technological development has put the consumer business from brick and mortar perspective “up for grabs.” As a result, most retail organizations are developing on-line competencies to provide on-line software that will help them benefit from this new technology (Lambe & Spekman, 1997).

In a broad sense, such critical technology can be obtained in three ways: merger/acquisition, internal development, or alliance. When a technological discontinuity occurs, alliances are increasingly being chosen to source such technology because of urgency and industry uncertainty (Rothaermel, 2002). Product life-cycles are getting shorter and increasing customer demands are exerting pressure on firms to be as current as possible and this is becoming a more critical determinant of a firm’s success or failure. Firms that can rapidly introduce their products to the market and establish a substantial lead in market share can use this share to gain both relative and enduring cost advantages through economies of scale. More importantly, these firms can use their market share lead to establish their product as the industry dominant product, allowing them to develop a differentiation advantage, capture customers, and severely restrict competition (Hamel & Prahalad, 1994). Although firms differ in their ability to develop and sustain such advantages, and although such advantages can be tenuous early in a technological discontinuity life-cycle, one cannot deny the enormous opportunity presented by a technological discontinuity.

Nokia, the Finnish phone giant and its GSM technology is an example of a firm that took enormous advantage of a technological discontinuity. The GSM was discontinuous to the equipment suppliers compared to previous cellular phone standards, thereby disrupting the industry. Prior to the advent of GSM, Nokia was known and Nokia Information Systems was doing business with the old cellular technology. The first analogous cellular systems were based on national standards such as NMT in Scandinavia, TACS in the UK, AMPS in the US, Netz-C in Germany and RTS in Italy. Pan-European mobility goal motivated the development of the common digital cellular standard, later called as the GSM system. The first initiatives towards developing competencies for the GSM were taken by Mobira in 1982, as the GSM standard specifications became available. Hence, the radiotelephone pioneer Mobira started to probe various possibilities and an alliance which resulted in small scale to collaborative R&D project with Nokia Information System started in 1985. This important role of Mobira related to the strong market position that it had acquired, first in the Nordic radiotelephone market, and subsequently in the market for mobile terminals and base stations for the NMT. In 1988, Nokia Mobile Phones was founded, based on Nokia-Mobira. Similar alliance has taken place between Microsoft and Intel. Early in the evolution of the PC market, both firms were able to gain a dominant market share and establish themselves as the defacto industry standard. Today, both still control about 80% of the market in addition to setting the industry standard. Apple with its Macintosh PC comes in a distant second.

The need for rapid introduction of new product to the market often rules out internal development thereby making attractive external technology acquisition through such methods such as an alliance. Alliances allow firms that lack new product development technology to leverage partners’ existing technological capabilities to speed new product development (Roberts, 1987). Sun and Google entered into an alliance to promote and distribute each other’s technology, under the agreement Sun will make the Google Toolbar–Google’s browser-based search software–available as an option for consumers who download its Java Runtime Environment. This should significantly expand the number of people using Google’s search software. Sun owns Java Runtime Environment which most developers and servers use, Google gets an avenue to distribute its browser and other products and go head to head with Microsoft’s Internet explorer. This is a competence Google does not have and is getting based on the alliance with Sun. Sun on the other hand get to sell its various servers to Google who is expanding its services and will need more servers. Google also committed to explore opportunities to promote and enhance Sun technologies, like the Java Runtime Environment and the productivity suite. The open office productivity suite is intended to go head to head with Microsoft Office.

The need for rapid development of new product is not the only reason why alliances are chosen over internal development or merger/acquisitions. The second technological discontinuity related variable is the uncertainty in the industry which also help explains the choice of alliance against other choices available. Acquiring technology through merger/acquisition may be more expensive than through an alliance because with merger/acquisition the acquiring firm pays for the entire acquired firm, both what is needed and what is not needed irrespective of the fact that the firm has more control over the asset of the acquired firm. An alliance, on the other hand, allows a firm to avoid acquiring what is not needed (Hamel & Prahalad 1994). Minimal alliance cost becomes more advantageous if the firm needs technology or other products from various sources.

Rather than buying or merging with all the different firms have the technologies needed to Firms like Renault and Nissan are using alliances to gain specific critical technologies. In 2003 Renault a French car maker formed an alliance Nissan a Japanese car maker. Carlos Gosen the CEO of both companies said that there is extensive synergies between the Renault and Nissan and believes that he the transfer of knowledge between the engineering teams would only occur within a framework of equality. The advantages of the alliance include many joint projects such as the gasoline tank, the steering-wheel stabilization system. Since Renault and Nissan have successfully become partners in a new equity joint venture by combining their knowledge, they have reinforced their positions as leading automakers.

Segrestin (2003) said that the development of a joint platform is a means of setting up common organizational routines and synchronization mechanisms that make possible the effective transfer of knowledge. Both companies have borne the cost of technology gained through alliance alone. A merger would have come with problems of merging the two companies and which product or technology to retain or discards, and the industry uncertainty may not afford the merger firm enough time to work out all these issues. Though some firms are willing to pay for the additional control provided by a merger/acquisition over an alliance, the state of the industry sometimes makes an alliance more attractive. Industry uncertainty drives firms to use alliances to acquire technology in the face of technological discontinuity, because it can elevate the potential costs of a merger/acquisition to an unacceptable level. For example, the merger of American Online and Time Warner in 2000 was dissolved 2009 with the spinoff of AOL.

4. Technological Discontinuity Life Cycle and Alliance Motivations

Technological discontinuities may initially necessitate an alliance, however various other conditions may change. In particular, fluctuations in the levels of technology acquisition urgency and industry uncertainty throughout the technological discontinuity life-cycle affect the attractiveness of an alliance for sourcing needed technology. Understanding the role of technological discontinuities in alliances starts with understanding cycle’s four stages: the fluid phase, the transitional phase, mature phase and discontinuous phase. Utterback (1970) identified the first three phases, but later added the discontinuous phase.

4.1. Motivations during the Fluid Phase

In this phase, the earliest pioneering products enter the market for that technology amid a high level of market and product uncertainty with the technology in a state of flux, organizations will refuse to place a bet on what they are not sure of (Utterback & Tushman). This phase is characterized by high market demand. Entry barriers are low, firms with proprietary technologies can enter with little ease. Competition between companies is low. To enable products reaching customers quickly firms in this fluid phase may form alliances with each other in areas of sales, marketing etc. Sometimes, alliances are also formed to establish standards. In 1999, some computer companies formed an alliance called Trusted Computing Platform Alliance (TCPA) to establish security solutions standards. Sometimes mature organizations ignore the possibilities presented by a technological discontinuity. Such organizations may see the new technology as an overhyped invention and therefore fail to recognize the potential effect. In addition, there may be very little consumer knowledge of, or demand for, new products.

This not only suggests to organizations that there is little revenue potential, but it also mean that it would be expensive to develop such a market. Consequently, relatively few organizations invest in and experiment with new products based on the new technology brought about through technological discontinuity. For example, When Amazon started selling books online Barnes and Nobles and other brick and mortar booksellers discounted the new technology model and now Barnes and Nobles may be on the brink of bankruptcy. Barnes and Nobles, Borders and other bookseller also believe that not many books will want to buy books online. How can you buy what you have not seen?

The banking industry is also another example. Although on-line technology has existed for some time, until recently on-line product innovation in the banking industry has been slow in coming. One cause has been the difficulty in adapting banking to on-line technology. Banks have to develop user software application, terminal equipment, and sophisticated communications facilities to mesh the technology into a product that consumers could easily use and also be able to have enough security built into the applications to protect users and bank’s asset. Banks probably also believed that consumers would want personal contact with a human banker, due to the relative complexity and risk associated with financial products. This may be true of banking products like mortgage but not for deposits and withdrawals. Lambe & Spekman (1997) quoted a bank official as saying that it will not be in his lifetime that people have a personal relationship with their computer and feel comfortable doing banking on the Internet.

VMware is a technology companies that deals with virtualization software. Virtualization is a catalyst for enabling the transition to secure cloud computing.

VMware teams with industry-leading software companies to jointly develop solution stacks that provide value and cost savings to customers. By working together, customers experience more rapid deployment of their applications, scalability, high availability and security. The partners in alliance include AMD, BMC, CA, Cisco, Dell, EMC, Fujitsu, Hitachi, HP, IBM, Intel, NEC, Novell, redhat, SAP, Stratus, Symantec, Trend Micro, and Unisys. Virtualization is a new technology that is likely going to cause some discontinuity in the industry especially for PC’s and Sever Storage manufacturers.

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Lambe & Spekman (1997) said that more alliances are consummated when urgency and uncertainty are high. Alliances are stable when uncertainty is high and urgency is low the computer/server storage industry, hence the high number of members of the alliance.

4.2. Motivations during the Transition Stage

The transition phase of the life cycle starts with the emergence of a dominant design. As product and market uncertainty lessens efforts is made on improving the dominant technology. During this stage the manifestation of a dominant product design considerably reduces the urgency of technology acquisition and industry uncertainty, also lessens. During this phase industry demand grows rapidly with customers requiring quality product and timely delivery. Entry barrier becomes lower with accessibility of dominant design. Companies realign themselves to the new standard and pursue aggressive growth strategy (R.M Henderson). During this phase companies form alliances to improve the dominant design and develop new technological extension.

Organizations start to reduce the number of product experiments and begin to rationalize the production process as a dominant product design emerges. Process issues such as minimum efficient scale gain importance, and often a shakeout in the industry occurs. This pattern of major process innovation, coupled with incremental product innovation, ends when few major process innovations remain (Abernathy & Utterback, 1978; Moore & Pessemier, 19933).

Once the path of technological discontinuity becomes clearer, organizations appear more likely to consider substantial investments in internal development or outright acquisitions of other firms, including their present alliance partner, to gain technology. Under any of these two options the benefit of vertical integration of technology includes the economy of integration and the cost reductions made possible by improved coordination and control of activities. Owners share their alliances’ outputs until a dominant product design becomes relatively apparent. These firms then began to build their own vertically integrated facilities and/or shut down their alliances (Harrigan 1986). The “Blu-ray Disc group” made up Apple Inc., Dell Inc., Hewlett-Packard, Hitachi, Ltd., Intel Corporation, LG Electronics, Mitsubishi Electric, Panasonic Corporation, Pioneer Corporation, Royal Philips Electronics, Samsung Electronics, Sharp Corporation, Sony Corporation, Sun Microsystems, TDK Corporation, Technicolor SA, 20th Century Fox, Walt Disney Motion Pictures Group, Warner Bros. Entertainment, was started in 2004 and disbanded in 2010 after blu-ray was adopted as the dominant design for DVD.

4.3. Motivations during the Mature Phase

In this phase products built around the dominant design begin to take over the market. The focus of further research shifts from product to process innovation. However because of the high cost of process innovation organizations tends to enter into alliance to share cost and risk. The high cost and risk associated with internal research make technology acquisition more attractive than alliance. Another reason why an acquisition is more attractive than alliance is that all the partners’ maybe competitors and has equal access to the technology. Symantec formed in 1984 has made 69 acquisitions between 1984 and 2010 at the cost of $20 billion. These acquisitions freed Symantec to concentrate its internal efforts at developing its core competence which is internet and computer security.

Incremental product and process innovation continues until another technological discontinuity occurs. Because both urgency of technology acquisition and industry uncertainty are at their lowest points, one would expect that technological discontinuity driven alliances to acquire to be at their lowest. Alliances found during this stage appear to arise for reasons linked to non-technical advantages, such as market access or economies of scale. During this phase of technology’s life cycle the growth of market demand slows but overall volume expands. Competition may lead to price wars and reductions in profit. Because of technological and capital requirements, the entry barrier is high. Organization wide improvements in efficiency and effectiveness are necessary for survival. One way to reduce cost is forming alliances perhaps with a supplier or even a competitor. There are many such alliances in the Airline industry, the three largest passenger alliances are the Star Alliance, SkyTeam and Oneworld. Air cargo industry also has its own alliances such as WOW Alliance, SkyTeam Cargo and ANA/UPS Alliance. These alliances provide a network of connectivity and convenience for international passengers and international packages. The alliances also provide convenient marketing branding to facilitate travelers making inter-airline codeshare connections within countries.

Also during this stage some companies actually divest their non -core business. In 2000, UPS divested the noncore the passenger charter business.

4.4. Motivations during the Discontinuous Phase

The existing and current technology can be rendered obsolete by the new technology. During this phase the market is volatile. This leads to a new market sucking away demand from the old market. The likelihood of new entrants is high. The technology turns gradually back to the fluid phase of a new technology, and the technological process evolution starts all over again. Since technological discontinuities can be competence-destroying, and thus render an organization’s competitive advantage irrelevant, organizations must adjust to this new threat (Tushman & Anderson, 1986). The reaction usually changes organizational strategy and financially sound matured companies will just go out and purchase the new companies with this new technology. Novartis a Swiss company has acquired many smaller and nimble biotech companies in other to grow its business since its formation in 1996.

5. Discussion

Sometimes the decision to enter into an alliance does not wholly belong to the organization, the development in the marketplace; the organizations position relative to the competition play some part in this decision. The structure of the industry and market interplay change as the underlying technology evolves over its life cycle. Companies have the tendency to form alliances as the technology become more stable and as competitive pressure increases. The number of alliances goes down in the discontinuities phase because consolidation decreases the total number of companies within the industry.

During the transition phase merger and acquisition is usually high because mature companies acquire startup to enhance their technology, and as dominant design emerges mature companies step up acquisition so they can stay ahead.

When a technological discontinuity occurs, industry conditions are conducive to the use of alliances to acquire critical technology needed for new product development. As a product evolves toward a dominant product design, motivations for an alliance as a mechanism to gain technology will weaken due to reduced conditions of urgency and uncertainty within the industry. With the emergence of a dominant design, initial alliance motivations will become irrelevant, making alliances less attractive for critical technology acquisition than mergers/acquisitions or in-house development. There are important implications for managers and practitioners who may wish to enhance the efficacy of alliances to source needed technology during period of technological discontinuity: The organization should have a strategy that encompasses an infrastructure that supports the development of an alliance competence, prospective alliance candidate should be properly scanned for the needed technology, technology acquired through alliances should be outside of the current competence of the organization, and managers should anticipate and plan for uncertain effects of the technology.

Organization should have a corporate technology policy that both encourages and supports managers to use alliances to achieve strategic goals. In other to create an effective alliance infrastructure, there has to be commitment from the organization’s top management to develop such infrastructure. The top management’s commitment to alliances will help in the development of a culture that embraces collaboration and alliance core competence. Without such a commitment a corporate-wide alliance infrastructure is not possible. Organizations should also have the inherent skills and resources necessary to absorb the acquired technology. Absorptive capacity appears to be positively related to the size of the firm, its marketing skill, and its production expertise (Atuahene-Gima, 1993). These acquiring firms should possess the competence to leverage the acquired technology successfully.

Perhaps an important building block of the alliance infrastructure is a firm’s experience with technology acquisition alliances. Due to the complexity involved in forming alliances and the high rate of alliance failure, firms should have substantial alliance experience before attempting highly important and complex technology partnerships. Ideally, firms that lack alliance experience should experiment and improve their alliance competencies with less complicated and less important technology acquisition alliances before attempting more complex and critical ones. One can envision a series of escalating alliance experiences in which a firm hones its alliance management skills. Each experience contributes to the skills/competencies required for larger more significant alliances.

6. Conclusions and Areas for Future Research

Rapid technological innovation has often made alliances a prerequisite for business success, but sometimes some of these alliances fail to meet expectations. An enhanced understanding of the effect of the technological discontinuity and technological lifecycle on alliances would be of assistance to managers and other practitioners as they attempt to structure and manage such alliances. The paper has attempted to shed some light on this issue by demonstrating how the progression of the discontinuity and technological lifecycle affects the motivations for alliances.

Future scholars may want to take this topic a bit further by doing some empirical research of the effects of technological discontinuity and technological lifecycle on firm motivations to use alliances for technology acquisition. Also, it would be interesting to see if in the process of forming alliances firms acquire capabilities that exist outside established core competencies. In a world of rapidly changing technology and shortened product life-cycles, sustainable competitive advantage is becoming less of a destination and more of a journey. Gains are often short-lived and imitable. As firms respond to this challenge, alliances are increasingly being used to obtain resources and pursue opportunities that lead to new sources of competitive advantage. Given this, how much does an alliance competence lend to a firm’s ability to develop sustainable competitive advantage? It is hoped that this article has attempted to answer this question and presents ideas that others are invited to improve and extend.

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