Technology and the CEO: seeking tomorrow's edge.

Firms that derive a competitive advantage from technology generally have a CEO who sets the scope of exploration, establishes systems to understand customers' needs, and rewards employees for meeting those needs.

In technology--as in M&A, finance, governance, or any other area--chief executives make choices that fundamentally affect the opportunities available to their organizations. Four strategic areas in which many CEOs are deeply involved determine a firm's technological success. These are: setting the scope of technological exploration, orchestrating the methods by which the firm understands customer needs, rewarding new ways of meeting these needs, and using technology to maximize profitability.

At some companies--for example, those involved in computer software or biotechnology--the CEO generates ideas, while at most others, he merely establishes the paradigm within which research and development take place or acts as a conduit for ideas. In any case, examining the CEO's role in devising technology strategy helps to determine which technology strategies work and why--and frequently, to troubleshoot those that don't.

SETTING THE SCOPE

The behavior of the CEO and the senior team of the organization shapes the appetite and aptitude of the firm to take on new projects. Two considerations are important in considering the choice of the firm's technological scope.

The first consideration involves determining how ambitiously the firm is prepared to pursue new technologies. The CEO can push the firm to stay fairly close to what it currently does well, or he can set a more wide-ranging scope.

A firm such as Gillette, for example, focuses technological investment on successive generations of premium-priced shaving gear. In this case, the scope is focused on new technologies to enhance the attractiveness and marketability of well-established products. By contrast, Asahi Glass made an almost complete break with its existing technological platform by moving into the manufacture of liquid-crystal diode products.

Interestingly, research does not show any one focus to be better than another. What we have learned, however, is that if the scope is at odds with incentive and reward systems, the likelihood of being successful is vastly reduced.

SUPPORT SYSTEMS

For years, IBM was able to achieve solid results by setting scope fairly close to the core business. But the company found that the systems which supported this scope were harmful to its efforts to create new products farther from the core (such as its many failed software initiatives). For example, career advancement and financial rewards--which are structured around success at meeting relatively short-term and well-defined goals--are deadly to a firm seeking to move away from its core technologies, but are supportive of a narrower scope.

Most CEOs believe that making a choice about technology will automatically point the firm in the right direction. In reality, conscious, detailed, unrelenting attention may be necessary to ensure that the systems in place support the desired outcome.

Having determined how far afield the firm is willing to go, the CEO must ask a second question: Is the strategy correct? In other words, technologically, is the organization being driven toward "barren ground," or are the areas to be explored rich with new market possibilities?

Frequently missing in technology projects that stretch an organization's core technological competence is a detailed understanding of what provides real value to the customer. When this understanding is absent, the firm may find itself without a market, or payoff, for a costly undertaking.

In one example, a bank invested millions of dollars in technology and systems to reduce average branch waiting times from 12 to six minutes. Unfortunately, customers neither noticed nor cared. Scope, in this case, was misdirected.

Let's think about how such a situation can be avoided.

UNDERSTANDING THE MARKET

If technology strategy aims to provide value to customers, the CEO must aim to provide an environment in which a deep understanding of customers and markets is possible.

Keep in mind: Employees often fail to understand information that has no personal relevance to them. By contrast, when a person working on a technology project has face-to-face contact with customers, he begins to develop "visceral" understanding of them.

The best CEOs establish simple systems to develop this "gut feeling" throughout the organization. For example, Honda requires that its design engineers spend a given portion of their time on the showroom floor, selling Hondas. By the time an engineer returns to work on designing the next generation of automobiles, he has had an opportunity to develop real insight about what customers want and how Honda's offerings compare to those of its competitors.

However, such simple systems need not be confined to technology personnel. For example, Harley-Davidson executives participate in motorcycle clubs, ensuring constant senior-level contact with biking aficionados. Procter & Gamble's CEO, Edwin Artzt, requires his senior lieutenants to periodically spend a day in a supermarket, the "front lines" of competition for the firm's products.

Such simple systems may also help to redefine a company's target customers and markets. Thus, Citibank in the late 1970s was able to redefine the market for its credit card products. From a fairly limited scope, in which the target population was thought largely to comprise branch banking customers, Citibank was able to expand the target population to a national base. This redefinition set the framework for nearly two decades of investment in technology to create what the bank terms "organizational deliverables," which would support this customer redefinition.

INCENTIVE MECHANISMS

Once blessed with an organization that can understand the customer, the best CEOs set up incentive and reward systems to push the organization to use this knowledge. A simple formula to conceptualize this approach: A-B-C. In other words, consequences are a direct result of behaviors, which themselves have antecedents.

Ultimately, CEOs frame the antecedent rewards and disincentives in an organization that push the company to take advantage of its knowledge about the customer. A crucial point: The CEO has no right to expect the organization to deliver what is not being incented.

Rewards and incentives can be formal, informal, or a mixture of the two. In the case of a successful financial services business, fast-track managers reporting to the division director were formally required to have at least 20 percent of total revenue come from products and markets originating in the past five years. Such a formal system is reinforced by the informal messages sent by the way the CEO allocates time and attention.

Assigning disproportionate time and attention a place at the top of the agenda, and disproportionate resources to projects designed to push technology toward meeting new customer needs is a powerful demonstration of commitment. A firm's personnel cannot help but notice such an approach. But it is vital to remember that only one thing at a time can ever be at the top of the agenda.

INCREASING PROFITABILITY

Once the firm is linked to the customer and has in place appropriate incentives and rewards, it can begin to focus on specific ways to use technology to increase profitability. Some examples follow.

Optimize the system, not the offering. The emphasis here is on using technology to eliminate indirect costs that stem from system complexity. For years, a major U.S. turbine business tried to optimize each motor model in its vast array of products. This resulted in increased costs for investments in tools and inventory, delays in delivery, administration and record-keeping, equipment set-up, and spare parts.

Eventually, the business developed a technology that cut its product line from 16 to seven models. The result was a 70 percent reduction in unique parts, a 50 percent reduction in development time, a 30 percent reduction in inventory, and a total cost savings of 30 percent.

Similarly, Honda discovered it was cheaper to build radios into cars as a standard feature than to support the costs associated with offering radios as options.

Simplify products. Like the Gordian knot, some technical problems can be unraveled more efficiently with simple, innovative solutions rather than the sophisticated but uninspired strategies encouraged by many engineering schools.

When Canon set out to create a personal copier, it did not develop complex technology that would allow it to produce a smaller version of its other copiers. Instead, it conceived a cartridge-based system that allowed all service-intensive parts to be replaced--by the customer! Canon was able to develop this cartridge because it strove for simplification, not technological advance.

Reduce cycle time. Shorter production cycles enable savings in manufacturing costs and facilitate a more flexible response to customer demand.

Using such an approach, Japanese auto companies have gained a competitive edge over their American and European competitors. On average, the production cycle of Japanese companies--from initial design to vehicle sale--is two-thirds that of non-Japanese companies.

The Japanese success has prompted additional research into slashing cycle times. In a 1991 paper, John Paul MacDuffie and John F. Krafcik, professors of the Sloan School of Management, MIT, documented a complex interrelationship between the deployment of technology and the deployment of the firm's human resources in the creation of a "lean production system."

Related research has explored the ways in which firms may use information technology to improve internal coordination and enhance responsiveness at the customer interface. An emerging consensus: The best way to reduce cycle times is to focus technology on ways to reduce the number of information transfer points and to increase the richness of information available at each point.

Perfect customer or distributor systems. A technology that allows the customer to reduce costs--or to do something previously impossible--is a technology with substantial appeal.

For example, an engineered plastics firm developed the technology to build an automobile dashboard made of engineered plastic rather than metal. By using the plastic, auto firms were able to build dashboards with six pieces instead of 60. Because the molded plastic part can replace 10 metal pieces, the total cost of building a car is reduced, even though the per-board material costs are higher.

In another example, a major supplier of electrical distribution panels reduced the cycle time for producing circuit boards from four weeks to three days. This gave its customers the advantage of more reliable and faster contract competition, as well as lower costs. In turn, the company gained a competitive advantage.

Distributor systems can also be improved through the judicious use of technology. For example, Kodak used advances in photographic technology to install automatic photo development equipment in its distributors' stores. This reduced overall costs and increased responsiveness to the customer.

Influence buying behavior. By changing the way consumers place orders and interact with the firm, technology can also offer a strategic advantage, even if the offerings themselves are not altered.

A classic case here is that of American Hospital Supply, which installed terminals in the purchasing departments of its customers to help them manage their use of hospital supplies. This system reduced the inventory of the company's clients and limited stock-outs. Eventually, many AHS customers used the system to directly order the least expensive supplies.

Another example is the introduction of automated teller machines by banks. Taking the lead in ATM technology, Citibank garnered increased market share for its New York branches--that is, until competitors caught up.

Give customers a competitive advantage. When used effectively, technology can reduce customer costs, create non-price advantages, improve responsiveness, and increase product differentiation.

Take the evolution of the desktop publishing capabilities of personal computers. By enhancing the graphics capabilities of its PCs, Apple Computer enabled its customers to deliver higher-quality products. The greater the extent to which a firm can provide such benefits to customers--and keep the mechanisms for doing so proprietary--the greater the advantage.

BUILDING CORPORATE VALUES

Flatter corporate hierarchies; close linkages between functional units; and information sharing among R&D, marketing, and support personnel must underpin any technology strategy that provides a true competitive advantage. In an era that depends on consensus building and team-based management, hands-on expertise often comes from the bottom up. But particularly in regard to technology, corporate culture and values often come from the top down--that means from the CEO.

In sum, many firms have proved able to identify promising new technologies. Fewer have been able to use these technologies effectively, bringing successful end products to market. Companies with successful commercialization strategies generally share at least one thing in common: They are led by proactive CEOs who set the technology agenda, establish systems through which the organization explores its markets, and provide incentives for employees to meet customer needs.

Ian C. MacMillan is executive director of the Sol C. Snider Entrepreneurial Center and George W. Taylor professor of Entrepreneurial Studies at The Wharton School of the University of Pennsylvania.

Rita Gunther McGrath is a doctoral candidate at The Wharton School and a senior research associate at its Snider Entrepreneurial Center.