Technological Discontinuity and Corporate Alliances

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. 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.

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, 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. 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.

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, 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.

Accelerating technological discontinuity as well as decreasing technology cycles inevitably intensifies competition. The degree of uncertainty is contingent on the type of technological discontinuity in which competence-destroying innovation will exercise the highest level of uncertainty. 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, which makes them an unfavorable choice.

Technological Discontinuity and Corporate Alliances

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.

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.

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. 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. 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. 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. 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 Ghosn 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.

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 spin-off of AOL.

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