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Significant issues for the future of product innovation
156
J
PROD INNOV
MANAG
1994:11:156-161
0000
Significant Issues for the Future of Product Innovation With Contributions
From:
Americo Albala Professor, University of Chile and Technion: Israel Institute of Technology
Albert H. Rubenstein Walter P. Murphy Professor and Director, Center for Information and Telecommunication Technology at the Robert R. McCormick School of Engineering and Applied Science of Northwestern University
The value of a technology strategy has been increasingly discussed by R&D personnel and those involved in product development and business planning eflorts. In this issue Albert Rubenstein and Americo Albala elevate this discussion by showing the importance of preparing a $rm to compete by stressing the development of important, relevant technologies. Discovery and development must be channeled into areas that will be needed to support business initiatives likely to occur in the future. Albala stresses the importance of this change for the development of economies in nations that have been disappointed by the lack of success of importing technologies ffom more developed nations, while Rubenstein maintains that the pace of marketplace change requires a technology strategy in order to reduce the misapplication of scarce resources within the $rm and the possibility of being blindsided by competitive developments. These essays continue a year-long series of contributions that the editor-in-chief solicited ffom members of the editorial board. Members were asked to reflect upon changes and opportunities that they see influencing our profession during the coming decade. Both of these short essays are designed to introduce new perspectives. It is not essential that you agree with the recommendations, but we hope that you are stimulated as you reflect on the issues they raise.
Address correspondence to Thomas P. Hustad, Editor: Journal of Product innovation Munqement, Graduate School of Business, Indiana University, 801 West Michigan Street, Indianapolis, IN 46202-5151.
0
1994 Elsevier
Science
Americo Albala Rapid technological change is the primary impulse that guides the development strategies of nations enjoying high economic progress. The basic strategy of the modem corporation is innovation based on the close relationship that connects technology, product, and market, resulting in a steady flow of new goods with increased aggregate value. The result is a persistent stimulus toward technological innovation as the basis for corporate survival and growth. The knowledge (information) component has replaced manpower and raw materials as a basic ingredient. What is the situation in the underdeveloped countries? Technological backwardness has been the fundamental cause for the lack of economic progress. Until now, innovation has only slowly permeated the economies of the developing countries and is almost nonexistent in those of lower relative development.’ A combination of socioeconomic factors is both cause and effect of the retardation: low purchasing power, insufficient market size, large foreign debt, balance of payments deficit, pressing social demands, educational deficiencies-all conspire against pro-
and “developing” countries are ‘The terms “underdeveloped” relative. To clarify the issue the Inter-American Development Bank has classified the countries of the area into four categories: (1) higher relative development, (2) medium development, (3) insufficient markets, and (4) lower relative development. In turn, the World Bank, using income level as a yardstick, defnes them as “low, medium low, and medium high.”
0737.6782/94/$7.00
Inc.
655 Avenue of the Americas,
The Coming Revolution in Latin America
New York, NY 10010
THE FUTURE OF PRODUCT INNOVATION
gress. In short, there is a technological gap that separates the advanced from the less developed countries, resulting mostly from the prevailing asymmetry in the availability of qualified human resources for the pursuit of an aggressive innovative action.
The Case of Latin America Technological development has been pursued through the acquisition of technologies purchased from the advanced countries, which, repeatedly, have been absorbed with only minor adjustments or, simply, “as is,” without consideration of the different nature of the available local resources. Original innovation is the exception rather than the rule. The effect is pernicious when the imported technology does not fit the local environment, and certain basic success factors are not properly evaluated, such as capability to absorb the new technology, magnitude of the investment in comparison with the country’s financial capacity, worker quality level, and maintenance tradition. Conversely, R&D is the basis of the technological proficiency of the economically advanced countries, but its application requires the use of selected human resources, complex equipment, and sufficient financial resources. Whereas national R&D expenses total up to 3% of the GNP, in the developing countries the figure is less than OS%, and, in some cases, nonexistent. In particular, developing countries are deficient in human resources possessing research-oriented high scientific/technological qualifications. Whereas technical training has enjoyed high priority in the more advanced countries, the Latin American institutes of higher education did not-until recently-pay enough attention to graduate level programs and research activities. The universities of the area have concentrated their efforts in teaching activities conducive to the formation of professionals. In addition, the private company has not been attracted toward innovative projects. R&D, with its inherent risk factor and resulting project mortality, is an anathema for the typical executive preoccupied by the bottom line and the “here and now” results.
Toward a New Approach A search for a new approach for technological development is now a matter of serious concern of policy makers and educators in most Latin American countries. The existing democratic governments and
J PROD INNOV MANAG 1994;11:15~161
157
free market economic philosophy are solid foundations for a combined industry-government effort to reach that goal. There is acceptance in the area of the application of free market social economic principles and privatization, in opposition to the until now prevailing state-owned enterprise approach. The Western model of leaving the task mostly to the private individual or corporation, as is the norm in the highly developed countries, is insufficient for the poorer countries to achieve the desired development goal. Private industry of Latin America avoids innovative ventures involving risk and uncertainty and so far has been reluctant to conduct R&D that promises unsure benefits and, postpones them to the far future. Compare this trend with the contribution of private enterprise in developed countries that accounts for 60% or more of the total R&D expenditures. A new approach is urgently required for the developing countries to attempt to close the technological gap. To accomplish this, three basic ingredients are essential: 1. Availability of high level human resources capable of carrying out serious research and handling complex physical resources. 2. Entrepreneurs willing to face risk and competition. 3. Availability of financing based on the understanding that, while technological innovation involves the risk of project mortality, it is also the source of higher returns and growth. These characteristics of the innovation process are systemic in nature and require the integrated presence and combined action of various actors under the umbrella of the State. Specifically, achieving that desired goal involves the integrated effort of universities, R&D institutes, industry, and financial institutions. In fact, it is possible to speak of an informal national technological system with defined roles for its various components. The universities assume the responsibility of establishing graduate programs for the preparation of high level human resources qualified for R&D, operation and management of technology, and, in turn, the R&D institutes direct their efforts toward new product and process development. On the other hand, private industry, while maintaining the function of producing and transferring to market the new technological goods, must assume the task of gradually assigning increasing resources for R&D projects, either on the basis of “in-house” activities or contractual arrangements with universities and R&D institutes.
158
J PROD INNOV MANAG 1994;11:156-161
To encourage the accomplishment of such tasks, the state serves as integrator, coordinator, and propeller of the national technological system. In particular, its action is expressed as financial support of research institutes and institutions of higher learning, in particular for the performance of Science and Engineering Masters and Doctoral programs; incentive policies, in the form of grants to industry for approved R&D projects; and tax benefits for export-oriented capital investment projects. Is this a utopia? We do not believe so. In fact, a case in point-among others-is that of Israel [l], which since foundation as a nation has achieved impressive technological accomplishments on the basis of a system committing government, companies, and institutions of higher learning toward the goal of technological development. The result has been a jump in a few decades from the condition of developing to that of a developed country, without even enjoying the benefit of local resources (no oil or other energy sources, insufficient fresh water, lack of practically all local raw materials). The case of Latin America is promising. An impulse for technological development on the basis of local strengths is already visible in some of the leading countries of the area. In particular, it is of interest to note the creation of a number of new institutions devoted to accomplishing this goal. Remarkable examples are the creation of graduate Masters and Doctoral programs in the stronger universities; national R&D councils in various Latin American countries; the Latin American Council for Science and Technology; state funding of R&D projects through various modalities; presence of a variety of R&D and highly qualified technological institutes, and even full Ministries of Science and Technology. In addition, a growing new interest in R&D is apparent in private industry. In Chile, the short-term goal is to double R&D expenditures to 1% of the GNP, on the basis of the combined state/industry efforts. Yes, a revolution is coming to Latin America, but this time it is technological in nature. What-in short-are the requirements for its successes? They are, primarily, availability of human resources possessing high scientific/technological qualifications to conduct R&D, development of high aggregate value technologies, processes and products suited to local capabilities, the existence of aggressive entrepreneurs prepared to face competitive markets and risk, and the entire effort impelled by a national will for technological innovation.
AMERICO ALBALA AND ALBERT H. RUBENSTEIN
Universities, R&D institutes, industry, and government have the joint responsibility for the endeavor.
References I.
Albala, A. Alta Tecnologia cotno Estrategia de Desarrollo: el Caso de Israel. Casa Israel-Chile de Ciencia y Cultura, Santiago, Chile, 1989.
The Urgent Need for Explicit Technology Policies/Strategies in the Firm Albert H. Rubenstein
The Need for Action No matter what the outcomes are of current and future deliberations about technology policy or industrial policy at the national level, the individual large firm is one of the major engines for innovation in US industry. It must respond to its own clearly perceived and dimly perceived threats, needs, and opportunities in the marketplace and in the environment. The firm’s environment includes the actions of domestic and foreign governments, both positive (incentives) and negative (regulations). Although much job creation and innovation come from small- and medium-sized firms, the large firm-Fortune 100 or 500-generally has more of the resources needed for the entire innovation/commercialization process than the typical small- or even medium-sized firm. Such resources are needed for: the entire commercialization process; market development and promotion; capability for negotiations of trade agreements, licenses, and strategic alliances; development or acquisition of core technologies needed for new product, process, and service areas; deep pockets for sustaining the entire innovation/commercialization process; and the resources to withstand the risks and time lags associated with major single innovations or a series of innovations. Current trends in industrial organization and management, both at the corporate level and at the level of individual operating divisions, suggest that there is a high level of uncertainty about the innovation process in the firm and about which directions are needed for sustained growth and profitability. It is not clear whether trends toward downsizing, outsourcing, corporate restructuring, and elimination or drastic reduction of corporate R&D labs and staffs constitute “cause, ” “effect,” or both, in terms of the innovation
‘I-H!?FUTURE OF PRODUCT INNOVATION
process. Some of the firm-specific actions contributing to these trends appear to be taken in response to disappointment with the past rate and impacts of innovation activities in the firm. Certainly, some of them and combinations of them will have a substantial impact on the ability of the firm to mount or continue an effective program of product and process innovation in the longer-term. We are already seeing signs of instability and de-railing of longer-term R&D programs in many large firms that have undergone substantial organizational changes in the past few years. Specific actions and major programs of change do reflect the current perceptions of corporate and operating managers about what is needed to keep operating units (product divisions) “lean and mean” and operating competitively in the short- and intermediate-term. However, in few cases do such actions and perceptions appear to reflect or derive from a systematic effort to develop and operate consistent with a long-term technology strategy either for the firm as a whole or for individual operating units. Our recent research studies and consulting engagements in technology management indicate a general lack of a clear long-term strategy or policy for the effective use of technology in most large firms. This gap in corporate and operating unit policy appears to contribute significantly to the observed instability and lack of sustained longer-term R&D/innovation programs. This situation provides no guidelines for technical, marketing, and production people to help in planning for the long-term and in building the “technology base” necessary for the future well-being of the firm. Potential R&D projects are selected initially and continued or discontinued based on fairly short-term criteria related to current operations and very near-term expectations of the businesspeople running the firm’s operating units. These short-term criteria seldom reflect a longer-term “vision” or mission for the firm or operating unit and typically do not provide for building and maintaining the core competencies that will likely be needed for the longer-term. “Downstream” consequences of a lack of a technology policy or strategy are often manifested by the firm or product division being “blindsided” in the market place or falling into a position where costs and product quality begin to cause problems with customers. Both factory and field problems can arise that are not effectively managed due to lack of the technology base or core competencies that should have been in place to anticipate and prevent or deal with such
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problems. This lack is often the result of poor technology planning and the “downsizing away” of essential core competencies. In addition to “trouble shooting,” there is a need for some “intellectual slack time” for technical people to analyze where the firm or product line stands in terms of: likely future threats, needs, and opportunities; where they would like to be in N years (where N is longer than the usual payout period); and a strategy for getting to that future position in terms of new and improved features, products, processes, and services. Without an elaborate attempt at a definition of technology strategy, policy, or planning (there are many in the literature), here are some recognition criteria: 1. A relatively clear statement and common understanding of where improvements will come from for the firm’s or operating unit’s product line(s)in-house, outsourced, by acquisition, by licensing, etc.-and what the procedures and timetables are for programs of innovation and commercialization. 2. A relatively clear statement and common understanding of how both existing and new technology will be used in the future to enhance the firm’s competitive position and to protect it from surprises in the marketplace. 3. A set of criteria for making technology choices, derived from the first two statements. Examples of such choices are: selection of R&D projects, decisions to commercialize, entry into strategic alliances and other outside arrangements, “complete” outsourcing, focusing on quality vs. costs where trade-off is necessary, and whether to be first in the market with new products. There is even concern being expressed over the perceptions and motivations of the “businessmen” in large Japanese firms with respect to technology and the apparent decline in R&D spending by operating units in some Japanese firms.
The Role of Government
Actions
National industrial or technology policy will not, in itself, bring about changes in technology strategy at the level of the firm, let alone at the operating division level, where most decisions are made about investment in technology and innovation. Particular government actions, such as tax credits or other incentives, that are perceived to be significant and relevant to the
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J PROD INNOV MANAG 1994:11:156-161
decision makers, might have a marginal influence on their decisions. This might happen if the amount of the incentive is perceived as more than minimally incremental and does not involve a lot of effort and aggravation, as some of the previous tax measures did. In our studies of government incentives to innovation in six countries (US, Canada, France, Germany, Great Britain, and Japan), we were not able to detect major impacts of most of these incentives on the decisions made about innovation by operating managers in large firms. As many analysts have noted, a “favorable business climate” can be a major incentive to invest in technology and to look beyond the immediate uses of technology, given that the tirm itself is sharing in the favorable climate and is perceived as being likely to continue benefiting in the longer-term. In specific industries and product areas, of course, subsidies, regulations, and other government actions can have significant effects on the firm’s technology decisions. This is especially true if penalty-avoidance-for product safety, working conditions, pollution control-figures in the firm’s or the individual executive’s cost-benefit calculations. In any event, there is a long and tortuous path within the firm for the impacts of government technology policy and incentives/penalties to take effect. Apparent “quick shifts” in firm behavior that might be imputed to government actions may be quite misleading and may be quite short-lived, once the “cream” is taken off the incentive or the immediate threat of punitive action is removed or is perceived by the businessperson to have diminished or receded into their “decision background.” We have tracked some government incentive programs through a number of firms and find their impact lost, very frequently, in the “signal-tonoise”ratio of many technology-related decisions. That is, if the operating unit manager wants to go ahead with a program of technology application to improve existing products and processes, he or she may take note of possible incentives provided by the government. But the manager is likely to be guided by the size of the investment being considered and the likelihood of its paying off, regardless of the marginal effects of a subsidy or tax break. In other words, the manager is not likely to go for an intrinsically “bad deal” in order to possibly save a little money (a few percent) via a tax break.
AMERJCO ALBALA AND ALBERT H. RUBENSTEIN
Who Are the Action-takers Matters in the Firm?
on Technology
Despite the appearance of well-formulated technology policies/strategy/planning at the corporate level in some large firms, much of this technology-related activity does not penetrate deeply into the decisionmaking of the operating unit managers, in the absence of very direct incentives or penalties applied by top management. If ignoring or operating counter to stated technology policies involves personal losses in income or other rewards to the divisional manager or if compliance helps with such personal and other financial matters, such as the capital budget, then the manager is more likely to comply and make an attempt to formulate his or her own division’s technology policy and strategy consistent with that of the overall firm. We have looked at many divisional marketing and economic plans and found few clear statements linking technology to the division’s marketing and financial plans in any credible way-for example, presenting specific technology programs as the “engine” for driving the marketing and financial outcomes being planned for. In view of the way that corporate decentralization and its associated profit centers have evolved over the past several decades, it is clear that the only way for top management to influence their division managers’ technology-related strategies and behavior is through significant incentives or penalties. Most top managers have declined to do this, viewing their division as their most valuable managers or “businesspeople” human resources. They hesitate to infringe on their division managers’ autonomy to run their operations as they see fit, as long as they do not violate reasonable legal, ethical, or financial boundaries. However, top management can influence their operating managers by clear and consistent incentive/penalty schemes that affect personal and divisional revenues. One such approach has been tried tentatively, but has not spread. bonuses or even part of the It is to “escrow” manager’s salary for a period of years, contingent on the longer-term results of his or her operations, thus giving long-term investments in technology (for example, building and maintaining “core competenties”) a chance to have an impact. Many more large firms should try this approach in an “experimental” mode, to determine if it does, indeed, have the effect of stretching out the operating manager’s “time horizon” and encouraging long-term investment in technology. Such incentive programs,
THE FUTURE OF PRODUCT INNOVATION
however, have to deal with the ubiquitous “double message” prevalent in large decentralized firms: “Invest in technology (and people and facilities and equipment) for the long-term, but be sure to make a profit in the short-term and keep your organization ‘lean and mean.’ ” This longer-term incentive requires change in top management behavior. If they want operating managers to change their behavior toward technology, top management must send a clear signal that “reasoned and reasonable” risk taking and an “investment” approach to technology will not be punished. They must provide assurance that such programs will not be aborted from above in “tight” times, and that they will be encouraged and nurtured by the corporate staffs and top management.
What Kinds of Action Are Required Two kinds of action would help to establish technology policy/strategy/planning in the firm at all levels: involving all levels of 1. A formal mechanism, management, for formulating, enforcing, and updating statements, guidelines, and criteria for use of technology in the firm-both short- and long-term. There should be actual documents, although not the kind that end up in filing cabinets or on the shelf. They should be “living” documents that are referred to frequently, updated as needed, and reflected in other planning and policy documents, such as the financial and marketing plans of the operating divisions. 2. The technology documents and guidelines should not be based on the usual euphemisms that the firm should be “a leader in technology and innovation.” They should be very specific in terms of how that can be achieved, including both positive and negative criteria related to being: low cost producer, highest quality supplier, highly responsive to service needs of customers, first in the market or a follower, a technology-base builder, a pioneer in first use of new technology. Without such specifics, any technology-related document and the policies and strategies it is
J PROD INNOV MANAG 1994;l I:]%-161
161
supposed to govern will be, essentially, ignored by operating management, especially if it is not reinforced by the kinds of incentives/penalties mentioned earlier.
Possible Impacts of Lack of Clear Technology Policies/Strategies For many firms, outsourcing has become a matter of doctrine and implicit, if not explicit, policy for particular areas of technology-information technology, new product development. Although only a few firms have gone to the extreme of ‘complete’ outsourcing of R&D or information technology/systems, even partial outsourcing can have a significant impact on the firm’s ability to seek out technology options and make technology-related decisions. For example, a high level of outsourcing and the elimination or withering away of certain core competencies can leave the firm as a whole and individual operating units without the ability to effectively seek out, try, adopt, adapt, and fully implement new technology routinely in the firm’s businesses. A firm we are doing research for finds itself without the capability of using the results we are producing. Due to downsizing and outsourcing, they do not have the core competency to apply the results routinely, even though the new technology is recognized as essential to their operations. Clear technology policies are needed to delineate and protect core competencies that are relevant not only for the current lines of business and current supporting operations (manufacturing, quality assurance, customer service, software development) but for likely future lines of business and necessary supporting operations. Without clear guidelines provided by statements of technology policy, individual managers-the managers of product division development labs or corporate research labs-may have little backing for their claims for needing to build and retain certain core competencies. Each instance of trying to fill such needs may become a political and/or budget battle in hard times or even in good times, when the “lean and mean”clarion call is sounding throughout the firm.
J
PROD INNOV
MANAG
1994:11:156-161
0000
Significant Issues for the Future of Product Innovation With Contributions
From:
Americo Albala Professor, University of Chile and Technion: Israel Institute of Technology
Albert H. Rubenstein Walter P. Murphy Professor and Director, Center for Information and Telecommunication Technology at the Robert R. McCormick School of Engineering and Applied Science of Northwestern University
The value of a technology strategy has been increasingly discussed by R&D personnel and those involved in product development and business planning eflorts. In this issue Albert Rubenstein and Americo Albala elevate this discussion by showing the importance of preparing a $rm to compete by stressing the development of important, relevant technologies. Discovery and development must be channeled into areas that will be needed to support business initiatives likely to occur in the future. Albala stresses the importance of this change for the development of economies in nations that have been disappointed by the lack of success of importing technologies ffom more developed nations, while Rubenstein maintains that the pace of marketplace change requires a technology strategy in order to reduce the misapplication of scarce resources within the $rm and the possibility of being blindsided by competitive developments. These essays continue a year-long series of contributions that the editor-in-chief solicited ffom members of the editorial board. Members were asked to reflect upon changes and opportunities that they see influencing our profession during the coming decade. Both of these short essays are designed to introduce new perspectives. It is not essential that you agree with the recommendations, but we hope that you are stimulated as you reflect on the issues they raise.
Address correspondence to Thomas P. Hustad, Editor: Journal of Product innovation Munqement, Graduate School of Business, Indiana University, 801 West Michigan Street, Indianapolis, IN 46202-5151.
0
1994 Elsevier
Science
Americo Albala Rapid technological change is the primary impulse that guides the development strategies of nations enjoying high economic progress. The basic strategy of the modem corporation is innovation based on the close relationship that connects technology, product, and market, resulting in a steady flow of new goods with increased aggregate value. The result is a persistent stimulus toward technological innovation as the basis for corporate survival and growth. The knowledge (information) component has replaced manpower and raw materials as a basic ingredient. What is the situation in the underdeveloped countries? Technological backwardness has been the fundamental cause for the lack of economic progress. Until now, innovation has only slowly permeated the economies of the developing countries and is almost nonexistent in those of lower relative development.’ A combination of socioeconomic factors is both cause and effect of the retardation: low purchasing power, insufficient market size, large foreign debt, balance of payments deficit, pressing social demands, educational deficiencies-all conspire against pro-
and “developing” countries are ‘The terms “underdeveloped” relative. To clarify the issue the Inter-American Development Bank has classified the countries of the area into four categories: (1) higher relative development, (2) medium development, (3) insufficient markets, and (4) lower relative development. In turn, the World Bank, using income level as a yardstick, defnes them as “low, medium low, and medium high.”
0737.6782/94/$7.00
Inc.
655 Avenue of the Americas,
The Coming Revolution in Latin America
New York, NY 10010
THE FUTURE OF PRODUCT INNOVATION
gress. In short, there is a technological gap that separates the advanced from the less developed countries, resulting mostly from the prevailing asymmetry in the availability of qualified human resources for the pursuit of an aggressive innovative action.
The Case of Latin America Technological development has been pursued through the acquisition of technologies purchased from the advanced countries, which, repeatedly, have been absorbed with only minor adjustments or, simply, “as is,” without consideration of the different nature of the available local resources. Original innovation is the exception rather than the rule. The effect is pernicious when the imported technology does not fit the local environment, and certain basic success factors are not properly evaluated, such as capability to absorb the new technology, magnitude of the investment in comparison with the country’s financial capacity, worker quality level, and maintenance tradition. Conversely, R&D is the basis of the technological proficiency of the economically advanced countries, but its application requires the use of selected human resources, complex equipment, and sufficient financial resources. Whereas national R&D expenses total up to 3% of the GNP, in the developing countries the figure is less than OS%, and, in some cases, nonexistent. In particular, developing countries are deficient in human resources possessing research-oriented high scientific/technological qualifications. Whereas technical training has enjoyed high priority in the more advanced countries, the Latin American institutes of higher education did not-until recently-pay enough attention to graduate level programs and research activities. The universities of the area have concentrated their efforts in teaching activities conducive to the formation of professionals. In addition, the private company has not been attracted toward innovative projects. R&D, with its inherent risk factor and resulting project mortality, is an anathema for the typical executive preoccupied by the bottom line and the “here and now” results.
Toward a New Approach A search for a new approach for technological development is now a matter of serious concern of policy makers and educators in most Latin American countries. The existing democratic governments and
J PROD INNOV MANAG 1994;11:15~161
157
free market economic philosophy are solid foundations for a combined industry-government effort to reach that goal. There is acceptance in the area of the application of free market social economic principles and privatization, in opposition to the until now prevailing state-owned enterprise approach. The Western model of leaving the task mostly to the private individual or corporation, as is the norm in the highly developed countries, is insufficient for the poorer countries to achieve the desired development goal. Private industry of Latin America avoids innovative ventures involving risk and uncertainty and so far has been reluctant to conduct R&D that promises unsure benefits and, postpones them to the far future. Compare this trend with the contribution of private enterprise in developed countries that accounts for 60% or more of the total R&D expenditures. A new approach is urgently required for the developing countries to attempt to close the technological gap. To accomplish this, three basic ingredients are essential: 1. Availability of high level human resources capable of carrying out serious research and handling complex physical resources. 2. Entrepreneurs willing to face risk and competition. 3. Availability of financing based on the understanding that, while technological innovation involves the risk of project mortality, it is also the source of higher returns and growth. These characteristics of the innovation process are systemic in nature and require the integrated presence and combined action of various actors under the umbrella of the State. Specifically, achieving that desired goal involves the integrated effort of universities, R&D institutes, industry, and financial institutions. In fact, it is possible to speak of an informal national technological system with defined roles for its various components. The universities assume the responsibility of establishing graduate programs for the preparation of high level human resources qualified for R&D, operation and management of technology, and, in turn, the R&D institutes direct their efforts toward new product and process development. On the other hand, private industry, while maintaining the function of producing and transferring to market the new technological goods, must assume the task of gradually assigning increasing resources for R&D projects, either on the basis of “in-house” activities or contractual arrangements with universities and R&D institutes.
158
J PROD INNOV MANAG 1994;11:156-161
To encourage the accomplishment of such tasks, the state serves as integrator, coordinator, and propeller of the national technological system. In particular, its action is expressed as financial support of research institutes and institutions of higher learning, in particular for the performance of Science and Engineering Masters and Doctoral programs; incentive policies, in the form of grants to industry for approved R&D projects; and tax benefits for export-oriented capital investment projects. Is this a utopia? We do not believe so. In fact, a case in point-among others-is that of Israel [l], which since foundation as a nation has achieved impressive technological accomplishments on the basis of a system committing government, companies, and institutions of higher learning toward the goal of technological development. The result has been a jump in a few decades from the condition of developing to that of a developed country, without even enjoying the benefit of local resources (no oil or other energy sources, insufficient fresh water, lack of practically all local raw materials). The case of Latin America is promising. An impulse for technological development on the basis of local strengths is already visible in some of the leading countries of the area. In particular, it is of interest to note the creation of a number of new institutions devoted to accomplishing this goal. Remarkable examples are the creation of graduate Masters and Doctoral programs in the stronger universities; national R&D councils in various Latin American countries; the Latin American Council for Science and Technology; state funding of R&D projects through various modalities; presence of a variety of R&D and highly qualified technological institutes, and even full Ministries of Science and Technology. In addition, a growing new interest in R&D is apparent in private industry. In Chile, the short-term goal is to double R&D expenditures to 1% of the GNP, on the basis of the combined state/industry efforts. Yes, a revolution is coming to Latin America, but this time it is technological in nature. What-in short-are the requirements for its successes? They are, primarily, availability of human resources possessing high scientific/technological qualifications to conduct R&D, development of high aggregate value technologies, processes and products suited to local capabilities, the existence of aggressive entrepreneurs prepared to face competitive markets and risk, and the entire effort impelled by a national will for technological innovation.
AMERICO ALBALA AND ALBERT H. RUBENSTEIN
Universities, R&D institutes, industry, and government have the joint responsibility for the endeavor.
References I.
Albala, A. Alta Tecnologia cotno Estrategia de Desarrollo: el Caso de Israel. Casa Israel-Chile de Ciencia y Cultura, Santiago, Chile, 1989.
The Urgent Need for Explicit Technology Policies/Strategies in the Firm Albert H. Rubenstein
The Need for Action No matter what the outcomes are of current and future deliberations about technology policy or industrial policy at the national level, the individual large firm is one of the major engines for innovation in US industry. It must respond to its own clearly perceived and dimly perceived threats, needs, and opportunities in the marketplace and in the environment. The firm’s environment includes the actions of domestic and foreign governments, both positive (incentives) and negative (regulations). Although much job creation and innovation come from small- and medium-sized firms, the large firm-Fortune 100 or 500-generally has more of the resources needed for the entire innovation/commercialization process than the typical small- or even medium-sized firm. Such resources are needed for: the entire commercialization process; market development and promotion; capability for negotiations of trade agreements, licenses, and strategic alliances; development or acquisition of core technologies needed for new product, process, and service areas; deep pockets for sustaining the entire innovation/commercialization process; and the resources to withstand the risks and time lags associated with major single innovations or a series of innovations. Current trends in industrial organization and management, both at the corporate level and at the level of individual operating divisions, suggest that there is a high level of uncertainty about the innovation process in the firm and about which directions are needed for sustained growth and profitability. It is not clear whether trends toward downsizing, outsourcing, corporate restructuring, and elimination or drastic reduction of corporate R&D labs and staffs constitute “cause, ” “effect,” or both, in terms of the innovation
‘I-H!?FUTURE OF PRODUCT INNOVATION
process. Some of the firm-specific actions contributing to these trends appear to be taken in response to disappointment with the past rate and impacts of innovation activities in the firm. Certainly, some of them and combinations of them will have a substantial impact on the ability of the firm to mount or continue an effective program of product and process innovation in the longer-term. We are already seeing signs of instability and de-railing of longer-term R&D programs in many large firms that have undergone substantial organizational changes in the past few years. Specific actions and major programs of change do reflect the current perceptions of corporate and operating managers about what is needed to keep operating units (product divisions) “lean and mean” and operating competitively in the short- and intermediate-term. However, in few cases do such actions and perceptions appear to reflect or derive from a systematic effort to develop and operate consistent with a long-term technology strategy either for the firm as a whole or for individual operating units. Our recent research studies and consulting engagements in technology management indicate a general lack of a clear long-term strategy or policy for the effective use of technology in most large firms. This gap in corporate and operating unit policy appears to contribute significantly to the observed instability and lack of sustained longer-term R&D/innovation programs. This situation provides no guidelines for technical, marketing, and production people to help in planning for the long-term and in building the “technology base” necessary for the future well-being of the firm. Potential R&D projects are selected initially and continued or discontinued based on fairly short-term criteria related to current operations and very near-term expectations of the businesspeople running the firm’s operating units. These short-term criteria seldom reflect a longer-term “vision” or mission for the firm or operating unit and typically do not provide for building and maintaining the core competencies that will likely be needed for the longer-term. “Downstream” consequences of a lack of a technology policy or strategy are often manifested by the firm or product division being “blindsided” in the market place or falling into a position where costs and product quality begin to cause problems with customers. Both factory and field problems can arise that are not effectively managed due to lack of the technology base or core competencies that should have been in place to anticipate and prevent or deal with such
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problems. This lack is often the result of poor technology planning and the “downsizing away” of essential core competencies. In addition to “trouble shooting,” there is a need for some “intellectual slack time” for technical people to analyze where the firm or product line stands in terms of: likely future threats, needs, and opportunities; where they would like to be in N years (where N is longer than the usual payout period); and a strategy for getting to that future position in terms of new and improved features, products, processes, and services. Without an elaborate attempt at a definition of technology strategy, policy, or planning (there are many in the literature), here are some recognition criteria: 1. A relatively clear statement and common understanding of where improvements will come from for the firm’s or operating unit’s product line(s)in-house, outsourced, by acquisition, by licensing, etc.-and what the procedures and timetables are for programs of innovation and commercialization. 2. A relatively clear statement and common understanding of how both existing and new technology will be used in the future to enhance the firm’s competitive position and to protect it from surprises in the marketplace. 3. A set of criteria for making technology choices, derived from the first two statements. Examples of such choices are: selection of R&D projects, decisions to commercialize, entry into strategic alliances and other outside arrangements, “complete” outsourcing, focusing on quality vs. costs where trade-off is necessary, and whether to be first in the market with new products. There is even concern being expressed over the perceptions and motivations of the “businessmen” in large Japanese firms with respect to technology and the apparent decline in R&D spending by operating units in some Japanese firms.
The Role of Government
Actions
National industrial or technology policy will not, in itself, bring about changes in technology strategy at the level of the firm, let alone at the operating division level, where most decisions are made about investment in technology and innovation. Particular government actions, such as tax credits or other incentives, that are perceived to be significant and relevant to the
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decision makers, might have a marginal influence on their decisions. This might happen if the amount of the incentive is perceived as more than minimally incremental and does not involve a lot of effort and aggravation, as some of the previous tax measures did. In our studies of government incentives to innovation in six countries (US, Canada, France, Germany, Great Britain, and Japan), we were not able to detect major impacts of most of these incentives on the decisions made about innovation by operating managers in large firms. As many analysts have noted, a “favorable business climate” can be a major incentive to invest in technology and to look beyond the immediate uses of technology, given that the tirm itself is sharing in the favorable climate and is perceived as being likely to continue benefiting in the longer-term. In specific industries and product areas, of course, subsidies, regulations, and other government actions can have significant effects on the firm’s technology decisions. This is especially true if penalty-avoidance-for product safety, working conditions, pollution control-figures in the firm’s or the individual executive’s cost-benefit calculations. In any event, there is a long and tortuous path within the firm for the impacts of government technology policy and incentives/penalties to take effect. Apparent “quick shifts” in firm behavior that might be imputed to government actions may be quite misleading and may be quite short-lived, once the “cream” is taken off the incentive or the immediate threat of punitive action is removed or is perceived by the businessperson to have diminished or receded into their “decision background.” We have tracked some government incentive programs through a number of firms and find their impact lost, very frequently, in the “signal-tonoise”ratio of many technology-related decisions. That is, if the operating unit manager wants to go ahead with a program of technology application to improve existing products and processes, he or she may take note of possible incentives provided by the government. But the manager is likely to be guided by the size of the investment being considered and the likelihood of its paying off, regardless of the marginal effects of a subsidy or tax break. In other words, the manager is not likely to go for an intrinsically “bad deal” in order to possibly save a little money (a few percent) via a tax break.
AMERJCO ALBALA AND ALBERT H. RUBENSTEIN
Who Are the Action-takers Matters in the Firm?
on Technology
Despite the appearance of well-formulated technology policies/strategy/planning at the corporate level in some large firms, much of this technology-related activity does not penetrate deeply into the decisionmaking of the operating unit managers, in the absence of very direct incentives or penalties applied by top management. If ignoring or operating counter to stated technology policies involves personal losses in income or other rewards to the divisional manager or if compliance helps with such personal and other financial matters, such as the capital budget, then the manager is more likely to comply and make an attempt to formulate his or her own division’s technology policy and strategy consistent with that of the overall firm. We have looked at many divisional marketing and economic plans and found few clear statements linking technology to the division’s marketing and financial plans in any credible way-for example, presenting specific technology programs as the “engine” for driving the marketing and financial outcomes being planned for. In view of the way that corporate decentralization and its associated profit centers have evolved over the past several decades, it is clear that the only way for top management to influence their division managers’ technology-related strategies and behavior is through significant incentives or penalties. Most top managers have declined to do this, viewing their division as their most valuable managers or “businesspeople” human resources. They hesitate to infringe on their division managers’ autonomy to run their operations as they see fit, as long as they do not violate reasonable legal, ethical, or financial boundaries. However, top management can influence their operating managers by clear and consistent incentive/penalty schemes that affect personal and divisional revenues. One such approach has been tried tentatively, but has not spread. bonuses or even part of the It is to “escrow” manager’s salary for a period of years, contingent on the longer-term results of his or her operations, thus giving long-term investments in technology (for example, building and maintaining “core competenties”) a chance to have an impact. Many more large firms should try this approach in an “experimental” mode, to determine if it does, indeed, have the effect of stretching out the operating manager’s “time horizon” and encouraging long-term investment in technology. Such incentive programs,
THE FUTURE OF PRODUCT INNOVATION
however, have to deal with the ubiquitous “double message” prevalent in large decentralized firms: “Invest in technology (and people and facilities and equipment) for the long-term, but be sure to make a profit in the short-term and keep your organization ‘lean and mean.’ ” This longer-term incentive requires change in top management behavior. If they want operating managers to change their behavior toward technology, top management must send a clear signal that “reasoned and reasonable” risk taking and an “investment” approach to technology will not be punished. They must provide assurance that such programs will not be aborted from above in “tight” times, and that they will be encouraged and nurtured by the corporate staffs and top management.
What Kinds of Action Are Required Two kinds of action would help to establish technology policy/strategy/planning in the firm at all levels: involving all levels of 1. A formal mechanism, management, for formulating, enforcing, and updating statements, guidelines, and criteria for use of technology in the firm-both short- and long-term. There should be actual documents, although not the kind that end up in filing cabinets or on the shelf. They should be “living” documents that are referred to frequently, updated as needed, and reflected in other planning and policy documents, such as the financial and marketing plans of the operating divisions. 2. The technology documents and guidelines should not be based on the usual euphemisms that the firm should be “a leader in technology and innovation.” They should be very specific in terms of how that can be achieved, including both positive and negative criteria related to being: low cost producer, highest quality supplier, highly responsive to service needs of customers, first in the market or a follower, a technology-base builder, a pioneer in first use of new technology. Without such specifics, any technology-related document and the policies and strategies it is
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supposed to govern will be, essentially, ignored by operating management, especially if it is not reinforced by the kinds of incentives/penalties mentioned earlier.
Possible Impacts of Lack of Clear Technology Policies/Strategies For many firms, outsourcing has become a matter of doctrine and implicit, if not explicit, policy for particular areas of technology-information technology, new product development. Although only a few firms have gone to the extreme of ‘complete’ outsourcing of R&D or information technology/systems, even partial outsourcing can have a significant impact on the firm’s ability to seek out technology options and make technology-related decisions. For example, a high level of outsourcing and the elimination or withering away of certain core competencies can leave the firm as a whole and individual operating units without the ability to effectively seek out, try, adopt, adapt, and fully implement new technology routinely in the firm’s businesses. A firm we are doing research for finds itself without the capability of using the results we are producing. Due to downsizing and outsourcing, they do not have the core competency to apply the results routinely, even though the new technology is recognized as essential to their operations. Clear technology policies are needed to delineate and protect core competencies that are relevant not only for the current lines of business and current supporting operations (manufacturing, quality assurance, customer service, software development) but for likely future lines of business and necessary supporting operations. Without clear guidelines provided by statements of technology policy, individual managers-the managers of product division development labs or corporate research labs-may have little backing for their claims for needing to build and retain certain core competencies. Each instance of trying to fill such needs may become a political and/or budget battle in hard times or even in good times, when the “lean and mean”clarion call is sounding throughout the firm.