Creating Sustainable Global Advantage for America's Technology Industries
by Ron Mascitelli
This book is a thoughtful and well researched study of the high-technology industry where innovative firms climb like meteors and plummet like comets with mind-boggling rapidity; where the tried and true measures of market value for relatively stable companies no longer appear to hold.
In his introduction Ron Mascitelli finds the rules of engagement are different for these companies and that new rules are necessary to deal with their dynamic and constantly changing environment: “We must seek an entirely new approach to strategy formation that is time-based, adaptable, decision-driven, and focused on the efficient creation of value. Moreover, such an approach must resonate with the forces that drive today’s global technology markets, and be guided by a set of principles and frameworks for extending the firm’s current knowledge and experience into uncharted territory.” His objective is to explore how U.S. firms can achieve and sustain global competitiveness. There is no pretension to having all the answers, but he does describe this as an intellectual odyssey where he has endeavoured to construct one half of the bridge and invites the reader to construct the other half; furthermore, it is his intention to inform the reader in a manner that may not necessarily change opinions but will definitely result in better informed opinions.
The Art of War, by Sun Tzu: “Thus it is said that one who knows the enemy and knows himself will not be endangered in a hundred engagements.”Growth Warriors is comprised of three segments, and a concluding chapter. Part 1 is a broad sweep approach that covers the global environment for technology enterprise. Part 2 deals with creating advantage in technology markets and the various facets of the competitive environment that can directly affect the innovation cycle of firms. Part 3 offers up a variety of strategies for sustained market leadership. Congruent with the global scope of this work, Mascitelli’s concluding chapter deals with the issue of environmental sustainability.
Although the broad sweep of the first three chapters analyze the global environment within which the American technology enterprise seeks to gain and retain a leadership position and therefore covers some familiar economic territory, Mascitelli’s thorough research and probing of the conventional wisdom turns up much that is different, and all of it informative.
On wealth creation and capital growth he notes that the corporate strategies of most U.S. firms are shaped by shareholders’ needs for short-term profits at the expense of maintaining long-run competitiveness in rapidly changing markets. He connects this to the demise over the last four decades of fully three-quarters of the firms that had been counted among the Fortune 500. And: “The unrestrained growth of firms is not necessarily a good thing from the standpoint of long-term competitiveness. Growth that is forced in response to the pressures of entrepreneurial ambition or impatient capital, rather than pulled by market forces, will almost always lead to disaster. Despite overwhelming evidence that short time horizons have constrained the investment strategies of American firms, there has been little improvement in the corporate myopia that continues to limit the global competitiveness of American enterprise.”
The Asian miracle is simply demystified with the observation that, in the absence of technology being applied to the production process, there are limits to growth through continued additions of materials, labour and capital. Put another way, technology is the ingredient required for sustainable productivity growth. In the same vein, there is in addition a skill-premium that is required to produce high-technology products or to utilize new process innovations. The key to advances in technology is the proper funding of research and development, and an educated workforce. Therefore the Asian tigers still have a lot of catching up to do before their seemingly high productivity becomes truly sustainable productivity growth.
The situation is different with the more advanced western nations and Japan where GDP per work hour in these nations shows considerable convergence when viewed over the period of 1870 to 1980; however, the U.S. still leads the group, and Japan trails. Future growth prospects are therefore dependent on increasing total-factor productivity through innovation and invention. Trade patterns among these industrialized nations is increasingly characterized by intra-industry trade as countries increasingly tend to import and export goods within the same industrial categories. Convergence is also showing up with a similarity in wage levels, as well as in the similar preferences of consumers for the goods that these nations produce; however, due to subtle differences in the technological capabilities of each of these nations, specialized niches have developed that can lead to potentially sustainable technological advantage for the firms involved, given the right conditions.
An industry or firm is globally competitive if it can sustain a substantial international market share, while achieving high employee wages and attractive returns to capital.
During the period 1962 to 1985 the U.S. had few export success stories outside of its war industry, although there continue to be high-tech spin-offs from this industry sector, as was the case after WW2. Having seen its leadership erode in other industries the U.S. has to stake out niches, take advantage of its strengths, and hold the productivity high ground. For the most part this means increasing productivity through new technology that either enables higher value to be provided to customers, or that reduces the costs of production. The author cautions that “productivity leadership is not determined by the number of computers on employees’ desks, nor by the complexity of the software system used to manage the shop floor. Only when new technologies result in high-value products, improved customer loyalty, or reduced production costs can they play a role in a firm’s search for competitive advantage.” He asks whether America’s productivity slump in the 1970s and 1980s is not connected to the broad acceptance of information technology that has failed to produce a pay-off. He then speculates about what impact on the nation’s productivity this investment in IT may have had were it to have been directed into R&D instead.
The threat posed by multi-national corporations is minimized in the observation that the share of world production exchanged in global markets in l914 was not surpassed again until the 1970s. The domination of trade by MNCs does not appear to have happened; what appears like intra-industry trade is more often intra-firm trade. As of 1990 between one-fifth and one-third of all U.S. exports and imports have been attributed to intra-firm activity. Rather than threatening local industry MNCs often bring in technology that has spillover effects in the host country.
The threat posed by global competition on the American standard of living appears negligible when it is realized that as of 1995 the total value of foreign trade represented about one-tenth of GDP, with exports at roughly 8 per-cent and imports at about 11 per-cent. An opportunity, by contrast, is presented in that assisting other countries to become wealthier trading partners, and valued customers, is beneficial in the longer term.
The new trade environment is presented as a two-tiered model for technology-intensive products. One being driven by factor costs with production costs being roughly equal between nations. The other being technology-driven with input costs being roughly equal between nations, and this is where the winners and losers in international competition are decided. Evidence points to the environment for innovation in the home nation of MNCs as a primary determinant of their success. “ In the new trading environment, competitive advantage stems from a resonance among national policies, regional environments, and corporate strategies.”
A strong case is made for industrial investment in research and development as a stimulant for both innovation and technological progress. It is also contended that the declining investment in R&D that set in during the late 1960s can be correlated with the two-decade slump in America’s productivity. Investment in R&D declined from 3% of GNP in 1964 to 2.3% in 1975 and may well have been among the first casualties of the corporate downsizings that sought to rebuild profits and shareholder value. Although America’s success in the trade of high-technology products has been a bright spot, its share of the world market for technology-intensive products declined from 29.5% in 1970 to 22.3% in 1987. By contrast, Japan’s share increased from 7.1% to 16% during the same period. A picture often says more than a thousand words and one particularly revealing chart depicts Japan rapidly catching up to the U.S. in the number of scientists and engineers per 10,000 workers employed, and leaving Germany, France and Britain far behind. The author concludes that the erosion of America’s leadership position during this period has been the result of changes in the world economy, and also because of its slow reaction to growing competition. One of the leading reasons for Japanese competitiveness has been that “By adopting a more balanced and outwardly oriented R&D strategy, Japanese firms have secured generally higher returns on investment than those achieved by U.S. firms over the last several decades.” This becomes very clear when viewed in a chart that compares several categories of R&D expenditures by matched pairs of U.S. and Japanese firms.
A firm’s absorptive capacity is examined in some detail. The author finds that in the past there has been “a conspicuous lack of attention paid to the absorption of knowledge from outside sources. In a highly competitive global market, the opportunity costs of squandering precious R&D funds on reinventing existing technology can be devastating.” He continues: “Research on human memory suggests that our ability to absorb new information is strongly dependent on accumulated prior knowledge.” This means “that for a firm to improve its skills at selecting new technologies, it must have internal experience in related research and development. The intensive learning gained by a team of scientists and engineers struggling with similar problems is a powerful source of absorptive capacity.” All sources of high-technology information have to be exploited and absorbed by the organization and in some measure this may be one reason of many why technically active regions come into being.
The author draws a fine distinction in R&D investment between tacit and explicit knowledge. That which can easily be transferred from one individual to another he labels as explicit knowledge, and this is what most firms see and recognize as the product of R&D. Tacit knowledge on the other hand, consists of the intangible abilities gained by individuals through experience, practice and learning. “The tacit knowledge contained in the heads of scientists and engineers may be even more important to sustaining competitive advantage than the transitory benefits of even the most commercially successful innovations." He concludes that, “When tacit knowledge becomes embedded in the cultural and organizational context, it becomes nearly synonymous with core competency.”
There is a section on the sources of competitive advantage that are to be found in industry and market structure; trade and competition policy; a national system of innovation; and, regional advantages. Ways and means of exploiting these sources are examined in detail for their impact on the cycle of innovation.
The author makes some particularly insightful observations about technology enclaves, and networking. As examples: “Gaining access to an informal network requires a conscious effort, particularly for new firms within a technology region. Trusted personal relationships take a lifetime to build, a process that cannot easily be short-circuited. Superficial contacts will tend to be self-serving, with each participant trying to manipulate the interaction to follow his or her own agenda. Only those relationships based on shared history, respect, and mutual interests will result in high-value informal collaborations.” And, “Ultimately, the responsibility for the formation and maintenance of informal networks is shared among individuals, firms, and regional policymakers. While government can serve as a facilitator and catalyst, it is up to the leaders of industry to suppress their mistrust and competitive paranoia, and encourage an increased level of sharing and collaboration with other firms within their region.”
In writing about the strategies for sustained market leadership, the author stresses the constantly changing environment within which the technology industry has to operate. He stresses how critically important it is for the firm to be attuned to the rapidly changing conditions of the marketplace, and being ready to adapt. Even the concept of the learning organization now seems dated as most executives would likely prefer to bet their futures on a knowing organization. In essence, it’s a new scenario that is not subject to the same traditional management theories and practices; one where the quickie solutions and fads often resorted to by management don’t really work. A constant and recurring theme throughout Mascitelli’s book is his stressing the importance of the human element. To quote: “The asset that is most likely to follow a firm’s evolution into new markets is its pool of specialized human capital. These precious resources are the catalyst for value creation, and embody the tacit experience and accumulated technical competencies that are the essence of an enterprise. Agility allows firms to make rapid adaptive changes to organizational structures, products, and market positions. It is a firm’s base of tacit knowledge that translates agility into sustainable market leadership.”
In the lead up to his preferred models for sustained market leadership, Mascitelli reviews the pros and cons of various forecasting methods, the leading technology firms that have used them, and under what circumstances. The tools examined are: expert opinion; trend extrapolation; time-series estimation; regression analysis; delphi method; scenario building, and strategic roadmapping. Most would appear to have some kernel of practicality in them. The author then proceeds to map out three models for sustained market leadership that draws on all of the preceding analysis and learning.
Model 1 seeks to incorporate the adaptability of the small start-up firm with the power and sophistication of a major player to achieve long-term leadership in the technology markets. The analogy used is that of a rosebush that has a continuous stream of products at various stages of their life cycle at any given time. Each product is provided with resources only for as long as the allocation is warranted, then, as older products reach maturity, resources are redirected to more promising innovations.
Model 2 maps out three variants on the loyalty game as the survival of firms today depends on their ability to attract and retain customers. The author notes that in today’s environment of increasing global competition and rapid obsolescence the first sale is just a starting point. Customers have come to expect tangible benefits from their participation in an enduring buyer/supplier relationship and particularly so in high technology industries. Cases show the impact of switching costs on customer thinking; the one-stop shop strategy; bundling as a technology market strategy; and, the drawing of customers into a technology club.
Model 3 deals with technology as art and craft. The author notes the innovative use of existing technologies that he loosely divides into three categories of fad, craft, and art. He examines each and the explosive growth of the high-tech companies involved, concluding with the observation that science and technology provide society with the opportunity for growth, learning, communication, and creative expression.
Mascitelli concludes with a chapter that is a plea for the ethical, responsible use of technology in the interests of raising both the quality of life and the quality of the environment.
This reader did indeed find Growth Warriors an intellectual odyssey well worth the journey.
The Growth Warriors
Creating Sustainable Global Advantage for America's Technology Industries, by Ron Mascitelli, Technology Perspectives, Northridge, CA, 1999