Information Technological Change and Innovation - Essay Example

Rise of Technology and Innovation The impact of technological change and innovation is not a recent phenomenon. Technology, from the Greek words techné (useful knowledge) and logos (study), can be understood as the application of useful knowledge to everyday life and has acted as a main driver of change in the world. Consider the simple example of fire: from its early application as a source of heat to fight the cold, it has gone on to be used as a means to cook food, widen the dietary options of humans, lengthen life spans and territorial habitation, conquer nations, generate electricity, and send missions to outer space. Since the industrial revolution, technology has caused accelerated changes in society, first reshaping the face of agriculture and trade-based economies and transforming the world into manufacturing-oriented societies. The 20th century saw the dominance of three so-called engines of change that led to global economic growth and change: management, capital markets, and technology (Micklethwait and Wooldridge, 2002). These three engines are directed by the firm engaged in technology acquisition (Drucker, 1985). Firms and technology acquisition There are two modes of technology acquisition. The first is to acquire the technology from abroad, as firms in Japan, South Korea, and Singapore did after the Second World War through the importation of capital goods, licensing, and foreign direct investments. Japan and South Korea used the technological know-how acquired to learn more about automobiles and computer technologies, for example, and then proceeded to improve on them to come out with world-class products like automobiles (Toyota, Nissan, and Honda), electronics goods (Sony and Panasonic), office equipment (Canon), and even cosmetics (Kao Corporation). The second way for firms to acquire technology is to develop it from within, a process called indigenous development of technology, the route now being taken by America, the U.K., and several European nations. Countries like Japan and South Korea have begun to take this route in recent decades, which accounts for several companies like Sony and Canon owning thousands of technology patents, although they are still far from the number of patents owned by firms and universities in the U.S. and the U.K. Beginning in the 1970s, the connection between firms and centres of learning like universities and colleges became closer, with firms providing financial support in exchange for first-user advantage or a first option to gain access to the best technological minds (Negroponte, 1995). This allowed research and development (R&D) to go forward at an even faster pace, cutting down the time that products are introduced to the markets. Examples are the development of Silicon Valley in California and Route 128 in Boston where the number of high-tech firms, like Intel and Apple in Silicon Valley and Digital Equipment and Data General in Boston, multiplied in the last quarter of the 20th century, fed by the supply of talented scientists in nearby schools (Stanford and the MIT respectively). This close link between the university and firms became one of the defining characteristics of the dot.com boom and bust at the most recent turn of the century. PhD students (like Google’s Larry Page and Sergey Brin) or graduates of these universities (like Sun Microsystems’ Scott McNealy; after all SUN stands for the Stanford University Network) established firms that proved successful. A Harvard dropout established the most successful company (to-date) of the computer age, Microsoft Corporation in Seattle, Washington at the start of the PC era. Firms and public policy of technology change Firms have played a major role in actively lobbying for greater technology advancement, with mixed results. In some cases, like American semiconductor companies lobbying for massive government financial support in the 1980s for R&D collaboration, the effort failed because private firms refused to collaborate in an industry marked by the preservation of competitive advantage through the protection of technological innovations. In other cases, as in the push for the protection of intellectual property rights, firms got what they asked for: protection from patent infringements at least in the developed markets like America and Europe. One of the firms actively supporting this public policy support is Microsoft, which wants to minimise piracy of its software in global markets. Intellectual property rights play an important role in technology innovation as it provides the inventor, usually an engineer or a group of engineers in a firm, an incentive to innovate. The growth of intellectual property rights legislation worldwide, and not only in the U.S., has encouraged more firms to invest in research and development. This has benefited especially the biotech and pharmaceutical firms that require substantial investments to develop products for the market. Firms also play a major role in technology change and innovation by supporting or proposing technology standards to guide the whole industry. Experience has shown that software and hardware standards are necessary as a way of consolidating the market, instead of dividing the markets into several small ones. A case in point is the software industry, which in the 1980s consisted of many companies supplying operating systems to a growing market. After two decades, there are only a handful of these companies left: Microsoft, Apple, Java, Unix, and Linux. Competition played a role in endorsing de facto standards that the market came to accept. Sometimes, firms and their legislative lobbies for technical standards can make or break a technology, no matter how superior. A case in point is the battle of video format technologies between VHS and Betamax. The latter, developed by Sony of Japan, was superior to the latter, which was developed by JVC of Japan and Philips of The Netherlands. Thanks to the latter’s effective lobbying in Europe and in the United States, the VHS format was chosen as the technical standard for video technology, spelling the end of Betamax. Firms also actively seek public policy support in the area of financing arrangements and human resources. When firms decide to invest in developing nations, they request for tax incentives or low-cost financing from the host governments. Large high-tech firms like Intel, Motorola, and American Micro Devices secure generous concessions from national governments where they decide to establish wafer fabrication factories. Companies justify this move as a way to mitigate business and other technological risks. Over the past two decades, western firms have lobbied for an increase in immigration quotas of computer software designers, mostly from India. This is due to the shortage of skilled manpower in this sector. This strategy is useful for U.S. firms to get lower-priced skilled workers from abroad, and also for the native countries of the immigrants, some of whom decide to go back after gaining experience and business connections to establish their own companies or to put up a local subsidiary of foreign firms, to benefit from reverse technology transfer. One successful example is Stan Shih, a former design engineer of Wang Laboratories in the 1980s and who went back to Taiwan and put up Acer, a successful laptop (the company later diversified to designing and producing electronics goods) manufacturer. Acer’s top management team consists of engineers with PhD’s from U.S. and European universities and substantial work experiences in those continents. Why firms are effective agents of change in science and technology Firms possess several qualities that become advantages enabling them to develop and diffuse technological innovation. First, its profit motive encourages innovation. Profits are the result of selling products that the market will buy. Technological innovation can be driven from both ends: on one hand, the market demands more advanced technologies that will make life more comfortable; on the other, firms innovate technologies that the market may not be aware of but that firms can make markets decide to buy. Examples of the first are new car models with an increasing number of gadgets like DVD players, satellite-controlled autopilot systems, or more technology-driven safety features introduced each year by manufacturers. An example of the second is the personal computer innovated by companies like Apple, Radio Shack, and Commodore. At first thought of as a plaything for serious electronics hobbyists, in twenty years it has become a staple household appliance used in myriad ways. Second, firm size allows them to benefit from economies of scale. Their ability to reach into large markets enables firms to bring down production costs in anticipation of higher sales and profits, which feed innovation budgets and a virtuous cycle of profits and greater innovation. The drive of thousands of companies to penetrate the China and India markets is an example of this. Size also helps firms establish business networks in those low-cost nations where they can build manufacturing facilities that will further drive down costs and push up profits. In recent years, semiconductor and computer firms like Intel and Dell and telecommunications firms Nokia and Samsung have established factories in these countries to take advantage of the size of these markets. Third, their reputation as a major employer, a national champion, or a source of national competitive advantage helps firms to gain concessions from governments, their own and those of the countries where they have investments. This provides firms with the ability to secure adequate protection for their business interests through lobbying for regulations, legislation, and world trade policy formulation. The trouble over beef exports to Japan and the patent infringement cases for AIDS drugs in Latin America and India are examples of how this advantage of firms can push or hold technological change and innovation. The interaction between science and technology has been subject to historical change, leading to major issues that need to be confronted now or in the immediate future. As Arthur C. Clarke argued, in general, people exaggerate the short-run impact of technological change and underestimate the long-term impact (cited in Cairncross, 1997). Nowhere is this prediction more true than in the case of the Internet, a communication system designed for the U.S. government, and its enabling technology, the hypertext mark-up language or html, designed by Tim Berners-Lee of the Swiss research centre CERN for use by scientists to share scientific papers and information. Now, the Internet is used for online business, pornography, household research, and foreign exchange trading. Another very important issue that is already in discussion is stem cell research, where a South Korean scientist was recently proven to be doing fraudulent experiments and false scientific declarations. Firms investing on these and other scientific research activities need to confront not only business but also moral, social, and political issues when their scientific innovations prove to be commercially viable. The Internet has many beneficial uses, but it has likewise been used for criminal ends. Last year’s World Summit on the Information Society in Tunisia was organised to address these issues. How firms innovate In his landmark book, Drucker cited seven sources of innovation. Science, he said, is not the most reliable or predictable source of successful innovations (Drucker, 1985). He cites as the reasons for this the high risk and low return dynamic of being first in the market to introduce scientific innovations. Better still to be a follower and let other companies to make mistakes and risk financial losses or bankruptcy. Topping the list is the so-called “unexpected”, the unexpected success, unexpected failure, or the unexpected outside event. This topic is clearly developed in one of the “unexpected” best selling books of the information technology age (Christensen, 1997). DuPont’s accidental discovery of non-stick Teflon surfaces and IBM’s daring bet on using computers for payroll processing are just two of the examples of unexpected success (IBM) or failure (DuPont) turning into successful technological drivers of change and firm profits (Drucker, 1985). The second is incongruity, a discrepancy between what is and what ought to be, a symptom of changes taking place in the market. An example is the containerisation of sea cargo, which increased shipping volumes and decreased costs, in the process enabling world trade to grow by leaps and bounds. Rather than build faster and bigger ships to meet the rising demand of world trade, innovators in firms designed ways to ship more bulk with the same number of ships and improving systems for loading and unloading of cargo (Drucker, 1985). Next comes innovation based on process need, where an innovation perfects a process that already exists, replaces a link that is weak, redesigns an existing old process around newly available knowledge. An example being the use of reflectorised glass beads to serve as highway dividers to make driving safer at night, an invention of Tamon Iwasa, a Japanese, to solve the crisis of rising accident rates on Japanese highways in the 1960s. This was the cheapest, and most practical alternative, to rebuilding or repainting road dividers (Drucker, 1985). The fourth are changes in industry or market structure. When these structures change, innovation either gets accelerated or slows down. Each firm reacts depending on its strengths and weaknesses (Drucker, 1985). Some firms are strong enough to weather the change and succeed in doing so, like Rolls Royce in luxury cars, while others are weak and suffer the consequences, as did British Leyland, once Britain’s largest automobile company and leadership contender in Europe. What happened? Rolls Royce focused on a market niche, while Leyland refused in the late 1970s to change the size of its vehicle engines to cope with higher oil prices. It lost both market position and profitability to competing firms from Scandinavia and Germany and slid downhill from there. These first four sources of innovation lie within the firm or industry sector. The next three involve changes outside the enterprise or industry (Drucker, 1985). The first is demographics, the changes in the population or the characteristics of the population, like the influx of huge numbers of baby boomers into the affluent generation in the 1970s and 1980s, driving up the demand for housing and the technological ability to build them fast. The second are changes in perception, mood, and meaning, like the wave of computer games that American game software maker Atari abandoned prematurely because it mistakenly thought it was just a fad, unlike Electronic Arts that saw PC-based computer gaming as a recreational media business with a bright future. The third, as we have seen previously, is new or scientific knowledge. These seven factors have driven change and innovation and are responsible for much of social, economic, and more recently with the collapse of communism in the east, political developments in the world in the last half century. Innovation in small firms Not all successful firms started out as large with thousands of employees. HP, Microsoft, and Apple were tiny two-man garage outfits driven by the passion of their founders, with personal savings, bank borrowings, or investments from mom and pop as their main source of capital. Aside from exploiting one or a combination of the seven opportunities listed above, these successful firms became successful because of the charisma of their founders and their ability to survive crises. Some, like Apple and HP, succeeded because their products were good and the customers (graphics artists in the case of Apple and engineers and scientists in HP’s case) loved the products to the point of fanaticism. Others, like Microsoft, sold many because it was part of a package over which the consumer had no other choice. Either you buy the software with the computer hardware, or the hardware you buy will not run properly. Very few small firms successfully grow to be large firms, and many die in the market place. Where, for example, is Digital Equipment Corporation or DEC, one of the most well known designers of so-called mid-frame computers in the 1970s? Compaq Computers bought it in the 1980s after it made a slew of mistakes on industry technology standards and market requirements, for example wrongly thinking that the slow personal computers would not pose serious competition in its market. As we know, Intel’s role in PC development and its ability to deliver on the prediction of Moore’s Law – that the number of transistors packed into a microprocessor would double every 18-24 months, resulting in faster PCs and greater computer power – was one of the near-fatal blows DEC received on the way to oblivion. Unfortunately, HP committed the same mistake when it bought Compaq. Some big firms take advantage of their size to take over small innovative firms so that the latter do not lose their entrepreneurial spirit. An example is Johnson and Johnson (J&J), an American company that is actually a multibillion-dollar U.S. conglomerate of over 160 small companies (Christensen, 1997). Technology and Development Never in the history of the world have so many people and nations achieved such a level of progress that the quality of life can be characterised as “comfortable” as happened in our generation of the 20th century. Life spans have increased, there are less poor people, health care is better, and on almost any front there is progress and comfort. Majority of these can be attributed to the way firms have utilised technology to make life in the world better (Easterbrook, 2004). Technology leads to development if firms are allowed to compete in the marketplace, and in those nations where this was not achieved, disruption took place and technology did not lead to development. Take the case of India and South Korea, two Asian countries that started at the same level of per capita income in the middle of the twentieth century. India was under a socialist government until the 1990s where firms were protected and market competition was controlled, while South Korea was a dictatorship where firms were allowed to compete domestically and in world markets. By the end of the century, the two nations were economically miles apart, with their respective levels of technology vastly different. Now, while South Korea continues to make high-tech mobile phones, microprocessors, and world-class automobiles, India is catching up to compete in business process outsourcing, software development, and research and development. The key to enable technology to lead to development was the liberalisation of markets half a century ago in South Korea and just over a decade ago in India. This lesson has been learned, unlearned, then relearned through the years. In America, for example, markets have been freed, highly regulated, and deregulated in line with the economy’s boom-and-bust cycle, brought about by the excesses of free market capitalism alternating with the stifling influence of big government. In Britain, one of the great economic powers of the world in the 18th and 19th centuries, a radical wave of market liberalisation in the 1980s and 1990s swept through its mining, telecommunications, and airline sectors. On the 1st of January 2006, the U.K. liberalised its postal services markets after three hundred years of supporting Royal Mail, a monopoly (Postcomm, 2005). Where is the world going? The last twenty years have seen the rapid advancements in information and communication technologies (ICT), which now play a pivotal role in almost all human activities, the reason being that ICT is perceived as a way of harnessing the potentials of other new technologies. Advances in pharmaceuticals and biotechnology, some going a long way back like genetically modified organisms (GMOs) that have constantly given high-tech agricultural companies like Monsanto and Novartis trouble especially in the west, are not as well known but may well be the next frontier. Whatever happens, we can be sure that technological innovation driven by firms will continue to change the face of the world. References Cairncross, F. (1997). The death of distance: how the communications revolution will change our lives. Boston: Harvard Business School Press. Christensen, C. M. (1997). The innovator’s dilemma: when new technologies cause great firms to fall. Boston: Harvard Business School Press. Drucker, P. F. (1985). Innovation and entrepreneurship: practice and principles. New York: Harper & Row. Easterbrook, G. (2004). The progress paradox. New York: Random House. Micklethwait, J. and Wooldridge, A. (2002). A future perfect: the challenge and hidden promise of globalisation. New York: Crown. Negroponte, N. (1995). Being digital. New York: A. Knopf. Postcomm (2005a). Competition Countdown. In COMMentary, Issue no. 5, p. 1-6. Read More