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Technology discontinuity as motivation for corporate alliances.

Given the frequently short life cycles of today's technology, organizations face major decisions when a technology they own or need is superceded. To remain competitive, they must deal with such "discontinuities" in a way that is cost-efficient but also compatible with their overall business strategies. Alliances, as opposed to acquisitions or mergers, can be an option with many advantages. Understanding the four phases of the technology cycle (developed by Utterback) can help organizations analyze the problem and find the best solution. The phases are: fluid, transitional, mature, and discontinuities. If resources are available, an organization would do well to train managers for alliance teamwork before the alliance is needed.

Introduction

Increased global competition and advances in technology have altered the environment in which organizations compete. This is leading to a phenomenal increase in corporate alliances between organizations with similar products or services but dissimilar or complementary characteristics in other areas (Sarkar, Echambadi, Cavusgil, and Aulakh, 2001).Technological discontinuities can cause enormous difficulties for mature organizations, for example consider the video rental business. The change in content delivery methods has led to the bankruptcy of Blockbuster and the dominance of companies like Netflix. Amazon.com is another beneficiary of changing technology. Its business model is eclipsing the likes of Barnes & Noble and Borders (now in bankruptcy). The music industry is also trying to find a way to benefit from new technology, which is making its current business models obsolete. Sometimes discontinuous technologies start with creative destruction (Schumpeter, 1942), leading to the replacement of the technologies of mature organizations and the ascendancy of new entrants.

Nonetheless, some evidence points to mature organizations being able to commercialize a discontinuous technology if they have sufficient financial and management resources to adapt to the new technology. In their study of the U.S. auto industry, Abernathy and Clark (1985) showed that mature organizations can benefit from disruptive technology provided that it helped to maintain the mature organization's existing market dominance. Christensen (1997) presented evidence that organizations will successfully adapt the latest technology change if it is essential to their existing system. Further, Rothaermel (2002) said that organizations with assets that can work together with the new technology may also be able to make a smooth transition. Forming alliances is one option a mature organization has in order to adapt to technological innovation (Rothaermel 2002).

Accelerating technological discontinuity as well as shorter technology cycles inevitably intensifies competition (Quinn, 1992). The degree of uncertainty is contingent on technological discontinuity, but competence-destroying innovation produces the highest level of uncertainty (Tushman and Rosenkopi, 1992). Additionally, the discontinuities organizations face also affect the criteria for selecting a partner. A competence-destroying external technological discontinuity usually destroys the value of assets owned by dominant industry players (Tripsas, 1997; Rothaermel, 2002; Shan and Hamilton, 1991). This paper will try to answer this question: Why do technological discontinuities spur corporate alliances?

Technological Discontinuities

Schumpeter (1942) identified discontinuous technological innovation as the origin of creative destruction in organizations. A technological innovation can be said to be a fundamental discovery that moves forward by the sheer magnitude of the innovation. The innovations are based on new technologies whose new boundaries are bigger than the technologies they are replacing (Anderson and Tushman, 1990). Anderson and Tushman (1991) said that organizations are now being managed through a period of disruption because of technological changes causing creative destruction: existing methods are replaced by new and better methods. Each technological discontinuity brings about a technological cycle. Some discontinuous innovations are competence-destroying, while others are competence-enhancing. The latter create a new process or product by building on existing technical knowledge. An example is the ability of airline passengers to print boarding passes or check in from an airline kiosk or from any computer with Internet connection. This technology has benefited the airlines because they need fewer employees to do the same job. Competence-destroying innovation drives out old technology and knowledge and replaces them with new products and skills. Digital photography, for example, totally destroyed film-based technology.

Usually competence-destroying innovations need new skills, knowledge, and the ability for either product or process design to be remodeled. The need for new skills can cause a shift in the structure of the affected organizations. Competence-enhancing innovations buttress the industry's know-how, and this works to the advantage of mature organizations. The innovations usually help consolidate the industry's leadership. Competence-enhancing innovations usually raise barriers to entry, allowing smaller organizations to be pushed out. Competence-destroying innovations decrease entry barriers because any organization with the innovation can enter the market. Nimble organizations can benefit from the new change to the detriment of the mature organizations that usually cannot react quickly. The Swiss watch industry was disrupted by the competence-destroying arrival of quartz technology (Landes, 1983). Coming, Galileo, and SpecTran were able to enter telecommunications markets with a new technology called fiber optics (McConnack and Utterback, 1990).

Technological Discontinuity and Motivations for Corporate Alliances

Strategic global alliances in the last 20 years have increased by over 20% per year, and are currently estimated to account for about a quarter of total revenues of the organizations involved (Anderson, Christ and Sedatole, 2006). Corporate partnerships have been growing because of the knowledge-based nature of global competition (Narula, 2004). Freeman (1991) noted a positive connection between technological progress in an industry and the number of alliances made by the companies. Since technological discontinuities dramatically change the industry in which they occur, their impact on mature organizations is profound. Such discontinuities sometimes deliver better product performance, attract many new competitors, and also require technology that is not part of a typical organization's core competence. Mature organizations must find ways to add new skills to their core competence (Hamel and Prahalad, 1994; Utterback, 1994).

On-line transaction is an example of a technological discontinuity, reducing the influence of most brick and mortar establishments. Most transactions, including on-line banking, can be done through cell phones. Some mature organizations have embraced this discontinuity by encouraging customers to make on-line purchases, but also come into the stores. They have found that it saves them money because they require fewer people and less space to operate. This technological development has put the consumer business from brick-and-mortar establishments up for grabs. As a result, most retail organizations are developing on-line competencies that will help them benefit from this new technology (Lambe and Spekman, 1997).

Mature organizations can obtain needed technology in three ways: merger or acquisition, internal development, or alliance. Alliances are increasingly preferred because of urgency and industry uncertainty (Rothaermel, 2002). Shorter product life-cycles and increasing customer demands are pressuring organizations to be as current as possible, and this becomes a key determinant of an organization's success or failure. Organizations that can quickly introduce their products to the market and build a significant market advantage can use their market share to achieve both relative and lasting cost advantages through economies of scale. More important these organizations can use growing market share to make their product dominant in the industry, creating a differentiation advantage, capturing customers, and severely limiting competition (Hamel and Prahalad, 1994). Although organizations differ in their ability to develop and maintain such advantages, and although such advantages can be tenuous early in a technological discontinuity life-cycle, there is no denying the tremendous opportunity presented by a technological discontinuity. For example, the opportunity presented by quartz technology offered the consumer a more accurate watch. Major advances in computing, networking, and storage technology allows users, especially organizations, to keep copies of documents longer than was possible some years back. Libraries have been able to digitize books and magazines and also store more documents and books without increasing physical space.

Nokia, the Finnish phone giant, with its global system for mobile communication (GSM) technology became an example of an organization that took tremendous advantage of a technological disruption to remake itself. The GSM technology was disruptive to cell phone manufacturers and the whole industry. Prior to GSM, Nokia was known as Nokia Information Systems and did business with early cellular technology. The first analog cellular systems were based on different standards developed by individual countries or groups of countries. Scandinavia used Nordic mobile telephony (NMT), total access communications system (TACS) was in the U.K., United States had advanced mobile phone system (AMPS), funktelefonnetz-C (Netz-C) prevailed in Germany, Italy and radio telephone mobile system (RTMS), while total access communications system (TACS) was used in Hong Kong and also Japan under the name Japan total access communications system (JTACS).

The development of a common digital cellular standard was led by pan-European mobility goals and aspirations. This common standard morphed into the GSM system. In 1985, as GSM specifications became better defined, Mobira entered into a small-scale alliance with Nokia. Mobira was able to do this because of the competencies it had developed in radio phone manufacturing. The combination of Mobira and Nokia Information Systems led to a new company, Nokia Mobile Phones, in 1988, and this eventually lead to the formation of Nokia as we know it today. There was a similar alliance between Microsoft and Intel early in the evolution of the PC market. The alliance was set up to provide joint technical leadership in operating software from Microsoft and CPUs from Intel. Both organizations were able to achieve dominant market share and establish themselves as the industry standard. Today, both still control about 80% of the market in addition to setting the industry standard. Apple with its Macintosh[R] PC comes in a distant second.

The need for rapid introduction of new products to the market often rules out internal development, making technology acquisition through alliance attractive. Alliances allow organizations that lack the technology needed for new product development to leverage partners' existing capabilities to speed new product development (Roberts, 1987). Sun and Google's alliance was formed to promote and distribute each other's products. Sun was to make Google's products such as the Toolbar, browser, and search software available as an option during Java Runtime Environment[R] download to expand the number of people using Google. Sun owned Java Runtime Environment[R], which most developers and servers use, and Google got an avenue to distribute its browser and other products and go head-to-head with Microsoft's Internet Explorer[R]. This is a competence Google did not have before the alliance. Sun sold its main server, the Sun-3x[R] series, to Google, which was expanding its services. Google's part of the agreement was to explore favorable circumstances to promote and enhance Sun's Java Runtime Environment[R] and the OpenOffice.org[R] productivity suite, was intended to compete with Microsoft Office[R].

The need for rapid development of new products is not the only reason why alliances are chosen over internal development or merger and acquisitions. The second reason is the uncertainty in the industry and the organization's position vis-a-vis the competition. A third reason why alliance may be chosen over merger is because the window of opportunity is not wide enough to allow for a full-blown merger, but synergies and resources may also play an important role. Lack of synergy between the two organizations may make it difficult to merge. In addition, acquiring technology through merger or acquisition may be more expensive than through an alliance because an acquiring organization pays for the entire acquired organization, both what is needed and what is not needed. This may offset the advantage of control over the assets of the acquired organization (Hamel and Prahalad, 1994). An alliance, on the other hand, allows an organization to avoid acquiring what is not needed (Hamel and Prahalad, 1994). The comparatively low cost of an alliance becomes an attraction, especially if the organization needs technologies from multiple sources.

Eschewing multiple acquisitions or mergers to satisfy all their technological needs, Renault and Nissan used alliances to obtain key technologies. In 2003, Renault, a French car maker, formed an alliance with Nissan, a Japanese car maker. Carlos Gosen, the CEO of both companies noted extensive synergies between them. He believed that a smart way of transferring knowledge between the engineers of the two companies was by making sure they were equal partners. The advantages of this alliance included joint projects like the gasoline tank and steering-wheel stabilization system. Both companies are equal partners in the new equity joint venture, and, by combining their knowledge, have maintained their positions as leading car makers.

Segrestin (2005) said that by developing a shared platform, Renault and Nissan found a way of setting up a common organizational structure and coordinated methods that transferred knowledge effectively. Both companies bore the cost of technology gained through the alliance. A merger would have presented problems of which product or technology to retain from the two companies, and industry uncertainty may not have afforded them enough time to work out all issues. Though some organizations are willing to pay for the additional control provided by a merger or acquisition, the state of the industry sometimes makes an alliance more attractive to avoid the unpleasant consequences of technological discontinuity, such as astronomical cost, and the potential lack of synergy between the two organizations. For example, the merger of America Online and Time Warner in 2000 was dissolved in 2009 because of lack of synergy and diminishing value of both organizations.

Four phases of technology life cycle

Four phases of the technology life cycle affects corporate alliances.

1. Fluid phase--the earliest stage where the new innovating product enters. This phase is marked with product and market uncertainty. Research and development activities continue at a frenetic state.

2. Transitional phase--the dominant design begins to emerge. Market uncertainty begins to lessen while research and development focuses on improving the dominant design.

3. Mature phase--the dominant design products expand, are more available, and the focus moves from product innovation to process innovation. Also, the market growth rate slows, but the total volume of demand expands.

4. Discontinuities phase--existing technology can be rendered obsolete by the next innovation. During this phase, the marketplace is volatile and new products emerge based on new technology.

[FIGURE 1 OMITTED]

Figure 1 shows that innovation is high during the fluid phase, and during this phase corporate alliances reach their peak. Alliances decline during the transitional phase and outright acquisition and internal development are used to help organizations acquire the technology they need. The mature phase presents opportunities for organizations to focus more on process innovation and also seek alliances that could help maintain market dominance.

Technological Discontinuity Life Cycle and Alliance Motivations

Technological discontinuities may initially lead to an alliance, but other conditions could also lead to corporate alliances. 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 begins with understanding the motivation for alliance during each stage of technological discontinuity life cycle: fluid, transitional, mature (sometimes referred to as the specific phase), and discontinuous phase. Abernathy and Utterback (1978) identified the first three phases but later added the discontinuous phase. These phases and the motivation for each are described next.

Motivations during the fluid phase

This phase is characterized by increasing market demand. Entry barriers are low, and organizations with exclusive technologies can start with little opposition. In this phase, dominant products reach the market with a high level of market and product uncertainty because of the rapid changes in technology. Organizations will refuse to place a bet on the product because they are not sure of its viability (Tushman and Anderson, 1986). Competition is low. To enable products to reach customers quickly, organizations in this fluid phase may form alliances in areas of sales, marketing, etc. Sometimes alliances are formed to establish standards. For example, in 1999, five computer companies (Compaq, HP, IBM, Intel, and Microsoft) formed the Trusted Computing Platform Alliance to create security solutions standards.

Sometimes mature organizations ignore the possibilities presented by a technological discontinuity. They may see the new technology as an overhyped innovation that will fail to turn into products consumers want. This not only suggests to organizations that there is little revenue potential but also that it would also be expensive to develop such a market. Consequently, relatively few organizations invest in and experiment with new products based on the technology brought about through technological discontinuity. For example, when Amazon started selling books on-line, Barnes & Noble and other brick and mortar booksellers like Borders discounted the new business model as unworkable. How can consumers buy what they have not seen? Borders has filed for bankruptcy and Barnes & Noble is fighting to stay alive.

The banking industry provides another example. Although on-line technology has existed for some time, on-line product innovation in the banking industry was slow in coming. One reason has been the difficulty in adapting banking to on-line technology. Banks have to develop user software applications, terminal equipment, and sophisticated communications facilities to create a product with enough guarantees to make consumers trust and use the application. Banks also believed that consumers would require 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 mortgages but not for deposits and withdrawals. Lambe and Spekman (1997) quoted a bank official as saying that in his lifetime people would not have a personal relationship with their computer or feel comfortable doing banking on the Internet.

VMware is a technology company that deals with virtualization software, and virtualization is a catalyst for the transition to safe cloud computing. Cloud computing is a technology that uses the Internet and central remote servers to store data and applications. This allows consumers to use applications and also store their data without any installation on their server or PCs. It also allows access anytime and anywhere for as long as there is a connection. A simple example is Yahoo mail or numerous services offered by Google.

VMware formed an alliance with leading software companies, namely IBM, AMD, BMC, HP, CA, Cisco, SAP, Dell, EMC, NEC, Intel, Novell, Red Hat, Stratus, Symantec, Trend Micro, and Unisys to develop solutions that provide value and cost savings to their customers. The alliance brings their customers a better and more rapid deployment of the applications that is highly portable, scalable, available and secured. Virtualization will likely cause some discontinuity in the industry especially for PCs and storage server manufacturers. VMware and the alliance members are working towards setting the industry standard, which they hope will become the dominant design and give them competitive advantage and market dominance.

Lambe and 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 major motivations for alliance during this stage are technological changes and market uncertainties creating a changing environment that parallels significantly different outcomes. Deeds and

Rothaermel (2003) extend Lambe and Spekman's view when they said that the use of alliances by technology companies has increased substantially and extended to cover areas like research and development (R&D) and new product development. Strategic alliances have become critical to some farms' new product development initiatives.

Motivations during the transition phase

The transition phase of the technology life cycle usually begins with the emanation of a dominant design. Once product and market uncertainty begin to lessen, the dominant design continues to undergo improvement. The iPhone[R], for example, releases improved versions annually. During this stage, the advent of a dominant product design considerably reduces the urgency of acquiring technology, and industry uncertainty declines as customer demand for the product grows rapidly. Entry barriers become lower with accessibility of the dominant design. Companies adopt the new standards and pursue growth vigorously (Henderson, 1993). During this phase, organizations form alliances to improve the dominant design and probably extend the capability of the new technology. They 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 substantial process innovation coupled with incremental product innovation ends when few vital process innovations remain (Abernathy and Utterback, 1978; Moore and Pessemier, 1993).

[FIGURE 2 OMITTED]

Once the path of technological discontinuity becomes clearer, organizations appear more likely to consider substantial investments in internal development or outright acquisitions of other organizations, including a present alliance partner, to gain technology. Owners share their alliances' outputs until a product design becomes dominant. These organizations then begin to build their own vertically integrated facilities and may dissolve their alliances (Harrigan, 1986). The Blu-ray disc alliance, which included Sony, Apple, Sun Microsystems, Sharp, HE Hitachi, Intel, LG, Mitsubishi Electric, Panasonic, Pioneer, Philips Electronics, Samsung, Warner Bros. Entertainment, and Dell, started in 2004 and disbanded in 2010 after Blu-ray became the dominant design for DVD.

Figure 2 is a diagram of Abernathy-Utterback's life cycle model during the transition phase. In this diagram, IBM established the dominant design among many organizations manufacturing PCs, while Dell's innovation was in the realm of process. Dell computers were not different from the dominant design in the market; the innovation was Dell's direct sales processes (Callahan, 2008). During this phase, organizations make improvements to the dominant design and also try to extend its capability. Organizations with a dominant design make more acquisitions because of their financial prowess.

Motivations during the mature phase

In this phase, products developed from the dominant design begin their market ascendancy, and further research focuses on process innovation. Because of the high costs of process innovation, organizations tend to enter into alliances to share costs and risk (Briggs and Watt, 2001). However, the high cost and risk associated with local research sometimes makes acquisition a better option than alliance (Dyer, Kale and Singh, 2004). Acquisition may be more attractive than alliance also because the partners may be competitors and have equal access to the technology. Symantec (formed in 1984) made 69 acquisitions between 1984 and 2010 at the cost of $20 billion ("Symantec Corporation Mergers and Acquisitions," 2008). These acquisitions have enabled the organization to focus all its efforts on developing its core competence, 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 now at their lowest, it's logical that technological discontinuity-driven alliances are also at their lowest (Briggs and Watt, 2001). Alliances formed during this stage appear to seek non-technical advantages, such as market access or economies of scale. During this phase, market demand slows but volume increases and competition may lead to price wars and reduction in profit.

Technology and capital requirements can also raise entry barriers for new organizations. An organization-wide improvement in efficiency and effectiveness is necessary for survival. One way of reducing cost is to form alliances, perhaps with a supplier or a competitor. There are many such alliances in the airline industry, such as Oneworld, Star Alliance, and SkyTeam (Iatrou and Alamdari, 2005). The air cargo sub-industry also has its own alliances, such as WOW and SkyTeam Cargo (Houghtalen and Sokol, 2007). These passenger airline and air cargo alliances make available a string of network connections and convenience for passengers and cargo users. The alliances also become a marketing tool for members. Finally, during this stage some companies divest their non-core business. In 2000, UPS divested its non-core passenger charter business.

Motivations during the discontinuous phase

Current technology can be made obsolete by new technology (Agarwal, Sarkar and Echambadi, 2002). During this phase, the market is usually volatile as innovations and new products suck demand from the old market. The probability of new organizations appearing is high. Technology becomes fluid again, and the process starts all over. Since technological innovation can be competence-destroying, rendering an organization's competitive advantage irrelevant, organizations must adjust to this new threat (Tushman and Anderson, 1986). The reaction usually changes organizational strategy, and financially sound, mature companies will purchase the new companies with this new technology. Novartis, a Swiss company founded in 1996 with the merger of Sandoz and Ciba (King and Schimmelpfennig, 2005), acquired multiple start-ups and other nimble biotech companies to grow its business and acquire new product lines.

Discussion

Sometimes the decision to enter into an alliance does not belong wholly to developments in the marketplace: the organization's position relative to the competition plays some part in this decision. The structure of the industry and market changes intertwine as the underlying technology evolves (Agarwal, Sarkar and Echambadi, 2002). Organizations have the tendency to form alliances as technology becomes more stable and competitive pressure increases. The structure of the industry and markets interplay with changes as the technology life cycle unfolds. Alliance formation slows during the discontinuities phase because the number of companies within the industry shrinks as a result of consolidation. Merger and acquisition rates are usually high during the transition phase because mature organizations acquire startups to secure new technology. The emergence of a dominant design influences mature companies to step up their acquisitions to acquire the needed technology.

When a technological discontinuity occurs, industry conditions are conducive to alliances to advance the critical technology needed for new product development (Lambe and Spekman, 1997). As a product evolves toward dominance, motivations for an alliance will weaken as urgency and uncertainty subside within the industry (Murmann and Tushman, 1997). However, mergers and acquisitions or in-house development become more appealing (Anderson and Tushman, 1991). There are significant implications for managers and practitioners who may wish to enhance the efficacy of alliances to source needed technology during periods of technological discontinuity. An organization's strategy should encompass an infrastructure that supports the development of an alliance. Prospective alliance candidates should be properly scanned for the needed technology, and technology acquired through alliances should be outside of the organization's current competence. Managers should also be trained to anticipate and plan for uncertain effects of technology.

Organizations should have a technology policy that encourages and supports managers to use alliances to achieve strategic goals. To create an effective alliance infrastructure requires commitment from the organization's top management. This commitment 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 develop the competence and resources needed to absorb the acquired technology. Absorptive capacity appears to be positively related to the organization's size, production expertise, product line, and marketing skill (Atuahene-Gima, 1993). These acquiring organizations should have the competence to leverage the acquired technology successfully.

To improve alliance competencies, organizations need to move beyond alliance-building on an ad hoc or temporary basis and establish institutional alliance capabilities. According to a report by Corporate Executive Boards (2000), organizations should establish a dedicated strategic alliance. This group is usually saddled with the task of extending alliance skills throughout the organization. The same report said that in 1977 58% of organizations had established some form of strategic alliance group. Organizations should also have a best-practices manual to help and guide employees through alliance formation. Hewlett-Packard's best-practices manual was developed and maintained through a compilation of in-house programs, trainings, case studies, and input by alliance partners (Harbison and Pekar, 1998). Another tool used to enhance alliance competencies is training. Alliances are different from mergers and acquisitions and, therefore, deserve special training to bring managers and alliance team members up to speed. After the failure of one alliance, Nortel set up special training. The training makes use of case study, incorporating what works and discarding what does not (Harbison and Pekar, 1998). Above all, organizations must develop a disciplined approach to the process by establishing a clear alliance objective and strategy that are linked to the overall corporate goal and vision.

Conclusions and Areas for Future Research

Rapid technological innovation has often made alliances a prerequisite for business success, but sometimes alliances fail to meet expectations. A better understanding of the effect of the technological discontinuity and technological life cycle on alliances would be helpful to managers and other practitioners as they attempt to structure and manage corporate alliances. This paper has attempted to shed some light on this issue by demonstrating how the progression of the discontinuity and technological life cycle affects motivations for alliances. Future scholars may want to take this topic a bit further by doing some empirical research into the role of technological discontinuity in corporate alliances. Also, it would be interesting to see if, by forming alliances, organizations acquire capabilities outside their 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 organizations respond to this challenge, alliances are increasingly being used to obtain resources and pursue opportunities that may lead to competitive advantage (Mitchell and Singh, 1996). How much, in fact, does an alliance contribute to an organization's ability to develop sustainable competitive advantage? This article has attempted to answer this question and presents ideas that others are invited to improve and extend.

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Olutunde O. Babarinsa, University of Maryland University College

A 2011 doctoral candidate in management at the University of Maryland's University College, Oluntunde Barbarinsa's research interests include technology (about which he is passionate) and innovation.
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Author:Babarinsa, Olutunde O.
Publication:SAM Advanced Management Journal
Article Type:Company overview
Date:Jan 1, 2011
Words:5732
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