Global Strategy - blog

The success of technology based firms hinges greatly upon their strategic fitness within two key domains: output markets and technology. First and foremost, the better the firms are able to develop and deliver valuable outputs (i.e. products and services) to customers within a focal target market, the better chances of success they have. Market based success is a function of an optimal market position and coverage and thus the demand potential underlying the targeted market. However, the value-added that that technology based firms ultimately deliver to their customers is based on an extensive and complex platform of technological knowledge and routines. Technology thus represents the inputs to a firm's productive process, whereby routines are required to turn the technological-scientific knowledge into tradable outputs that are perceived valuable by the customers. Despite normal mechanisms of market-based competition, much of competitive racing actually takes place in the technological domain.

A third important dimension in technology firms' business environment is the market for funding and, ultimately, ownership and control. This dimension is special in the sense that it acts as a mediating and coordinating mechanism between the aforementioned domains of output markets and technology. In other words, funding is not a direct determinant of firm viability, but acts as an important enabler and mediator of the two other, more fundamental dimensions. For firms that face long R&D cycles before being able to deliver tradable outputs, the financial markets mediate and time-shift output-market and technology based selection mechanisms to present. This takes place by the process by which investors screen potential ventures (with specific market and technology focus) and determine their future viability. Thus, when direct transactions in the output matkets are not yet materializing, the financial market acts as the key selection environment. However, it is important to note that the financial market is a direct derivative of output markets and the technological domain: only ventures with market and technological potential get funded.

The strategic management of technology based firms is thus largely centered on choices regarding market scope (market position and focus) and technological scope (the technology the company needs to master and control in order for sustained value creation for the customers). For the market dimension, central strategic questions include: Which output markets and related demand should we focus on? How are market demand and preferences distributed and where can we best add value? What is the optimal market position and optimal market coverage? Should we aim at several different areas of application (and thus customer segments) or focus on just one? For the technological dimension, central strategic questions include: What kind of a technological competence base do we need to have now and in the future? Which technology is core and what are the required surrounding technologies or technological platforms? How is the core technology related to the surrounding technology? What should be developed in-house and which knowledge can be acquired from external network structures? Which technology needs to be kept under strategic control through patents and other methods of IPR protection? In general, how broad should a firm's internal technology portfolio be? I.e. what would be the firm's optimal strategic scope from a technological point of view?

Researchers in organizational ecology and strategic management have proposed two broad categories of strategic scope, generalist strategy (broad focus) and specialist strategy (narrow focus). Specialist firms focus on a narrowly defined market segment and/or a slim set of technological competence. Specialists gain competitive advantage through optimizing their processes to produce a specific output as efficiently as possible, with minimum changes and adjustments to the production system. Thus specialists fit best to stable or fairly predictable environments, or situations where the environment changes relatively frequently between a finite number of states (e.g. seasonal demand fluctuation). In contrast, generalists hold a broader market focus and a more central market position. In the technological domain, generalists develop and maintain broad sets of technological knowledge and routines. Due to their broad scope, generalists have considerable "slack" or "buffer" that becomes useful when unpredictable, coarse-grained changes take place in the environment. However, the very same breadth of activities and related excess capacity acts as competitive disadvantage to generalists over specialists in terms of productive efficiency. Researchers have also demonstrated that these two forms may co-exist in very mature industries because the crowding of generalist firms in market centers frees up resources for specialist organizations in peripheral areas. However, this does not appear to be the case in emerging fields.

For emerging, technology based industries it is typical that the underlying market potential (or carrying capacity) has not yet been exhausted and/or is expanding rapidly. Such settings are characterized by strong levels of uncertainty and coarse-grained variation in the technological domain and often more stable and predictable market conditions - at least relative to the technological domain. The emergent nature of such industries means that the existing population of organizations does not consume all available resources from the environment (market demand in particular) and thus the related carrying capacity is not reached. In addition, the resource endowments may even be constantly increasing, as exemplified by the demand for healthcare and wellness related products and services. Such relationships between organizations and environmental resources represent completely different circumstances for competitive interaction and firm strategies compared to crowded mature industries.

Thus, from a strategic management perspective, two intriguing questions arise: How does the choice between generalist vs. specialist strategy affect firm survival in emerging, technology based industries? How does the effect of the choice between generalist vs. specialist strategy differ between the two dimensions of market and technology?

It is proposed that due to unpredictability, "red queen" competitive races, and other characteristics associated to the technological dimension and related environmental change, firms that hold a broad technological scope (i.e. generalists) have better chances of survival in such settings. Because of technological uncertainties, it is beneficial for firms to hold a broad set of technological competence and develop different lines of technology simultaneously. This improves chances of comIng up with a successful technological application before someone else manages to lock it in e.g. through patenting. In addition, yet unknown, potentially interesting market niches may open up, thus favoring those firms that have a broad technological scope. Finally, investors tend to seek ventures with balanced risk profiles and thus balanced portfolios or "pipelines" of simultaneous R&D streams.

At the same time, firms holding a narrow market scope (i.e. specialists) will survive better because of disadvantages from multiple category membership, lack of positional advantages, and relative stability of the environment. We know from earlier research that the more concise external identities firms have, the better chances of success they have. Thus it is beneficial for firms to specialize on a specific market segment rather than to build reputation on several ones. In addition, in rapidly expanding markets occupied by firms of small size compared to market size, positioning in specialist “niche” markets is equally rewarding as positioning in mainstream. Finally, the market dimension, even though changing all the time, is characterized by more predictable and more fine-grained change than the technological domain. Putting these together, it seems plausible that firms in emerging, technology based markets should pursue for narrow strategic scope in the domain of output markets.

We’ve run initial statistical models of the above effects on data from the Finnish biotechnology industry 1978-2006, utilizing patent and biotechnology sector data. The results of the analyses show statistically significant results that support the above logic on both dimensions.

Read more from our recent working paper titled as Specialize? Or diversify? Or do Both? - Niche...