There are four phases in the life cycle of a technology, and for each there are appropriate ways of partnering with outsiders. Increasingly, the challenge for managers is to recognize which phase each of their products is in and decide what kinds of external partnerships are most likely to facilitate speedy development. Each product a company is juggling may be in a different phase, and because the partnerships developed for one phase of a given technology could serve a different purpose in another phase of another technology, partnerships must be handled with care. Despite the complexity that comes with the need to manage a variety of alliances, Microsoft Corp. and others are demonstrating that it can be done successfully.

The most dramatic change in global technological innovation — the movement toward externally oriented collaborative strategies that complement internal research-and-development investments — began more than a decade ago.1 Today companies use alliances, joint ventures, licensing, equity investments, mergers and acquisitions to accomplish their technological and market goals over a technology’s life cycle. How can companies decide when to use which form of partnership? In part, by understanding the externally focused technology-life-cycle model.2

The Technology-Life-Cycle Model of Alliances and Acquisitions

Understanding the role of alliances and acquisitions in the technology life cycle starts with understanding the cycle’s four stages: the fluid phase, the transitional phase, the mature phase and the discontinuities phase.3 The first three were identified in the 1970s by James M. Utterback. (See “The Utterback Model of the Technology Life Cycle.”) He later added a fourth, discontinuities, stage. Each stage is shaped by changes in the character and frequency of innovations in technology-based products and processes and by market dynamics. (See “Characteristics of the Four Technology Phases.”)

The Utterback Model of the Technology Life Cycle

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Characteristics of the Four Technology Phases

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The Fluid Phase

In the fluid phase, the earliest pioneering products enter the market for that technology amid a high level of product and market uncertainty.4 For example, CDs that use fluorescent technology are now entering the market for digital data storage, but it is too soon to tell if that technology will win out over DVDs — or other concepts. With the technology in flux, organizations seeking to increase data-storage capacity (say, the military or the movie industry) hesitate to place R&D bets on a single technology. (In an earlier time period, Exxon Enterprises found eight alternative computer-storage technologies equally attractive for investments during a fluid phase of emerging technology.)

The fluid stage also is characterized by a high rate of growth in market demand. Barriers to entry are low; companies with proprietary technologies can enter with ease. There is little brand loyalty; customers seek functionality and quality instead. Direct competition among existing companies is relatively low, so profit margins are high. The bargaining power of suppliers is low because the materials and equipment used to make the products are general in nature.

Today, as product life cycles in high-tech markets shrink, new technology needs quick acceptance. Hence managers of companies in the fluid stage should pursue aggressive outward-licensing strategies to promote their technologies. For example, after Sun Microsystems introduced SPARC (scalable processor architecture) reduced-instruction-set computing (RISC) in 1989, the company licensed it to 21 hardware manufacturers and software developers, including IBM, Novell and Toshiba. And after introducing its Java technology in 1995, Sun made 32 Java licensing agreements in two years.

Startup companies often adopt variations of traditional licensing. For instance, open-source software creators make their source code available to independent programmers who then make compatible changes and share the results — an effective launch strategy for Linux and Apache, among other software products.

To enable a new product to reach customers quickly, high-tech companies in the fluid stage also form marketing alliances with key players in their supply chain. A difference from traditional marketing alliances is the current focus on speeding products to market. Business-to-business Internet companies such as Allaire, Ariba, BroadVision, ChannelWave Software, Veritas Software, Vignette and Webridge allied with key channel players: solutions providers, application-service providers (ASPs), systems integrators, Internet-service providers (ISPs) and consulting companies.

Among the new kinds of alliances, those organized to establish standards are increasingly important. Indeed, in 1999 and 2000, most prominent computer companies participated in one standards alliance or more. (See “Recent Standards Alliances in the Computer Industry.”) Such alliances involve not only the promotion of the technology but also its further development — often among competitors. For example, in the high-profile Trusted Computing Platform Alliance (TCPA) of 1999, five competing computer giants joined forces to create standards for better security solutions.

Recent Standards Alliances in the Computer Industry

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During the fluid stage, well-established technology companies often acquire startups. The acquired companies get access to a wider range of resources, and the acquirer gains critical competitive technologies that would have been costly to develop in-house. Another attractive alternative is to form an R&D alliance with a startup while also making minority equity investments in it. Such strategic alliances allow established companies to keep pace with change while building high-level managerial connections and operational links that can lead to later acquisitions.

The Transitional Phase

The transitional phase of a technology life cycle starts with the emergence of a dominant design. As product and market uncertainty lessens and R&D efforts become focused on improving the dominant technology, design cycles shrink.

During the transitional phase, industry demand grows rapidly, customers require quality products and timely delivery, and barriers to entry become even lower if the dominant design is easily accessible. Companies must realign themselves with the new standards and pursue an aggressive growth strategy.5 To signal their commitment, they also should consider capital investment in production capacity. And to ensure product availability, they need supply and marketing agreements with customers. In the transitional phase, companies often collaborate to improve the dominant design and develop new technological extensions, features and applications through joint R&D. Typically, once they possess sufficient technological capabilities, companies of similar size join forces.

For increased market share and revenue growth, companies need to move quickly to develop or adopt the dominant design. Those with the dominant design pursue their advantage and collect royalties (as Texas Instruments has done most effectively) by aggressively licensing the product to other enterprises. Organizations that have lost the standards battle should adopt the standards quickly by getting a license to use someone else’s discovery or through internal R&D. The growth potential in the transitional phase makes entry particularly attractive for companies in mature technology markets. When the PC industry was in transition, Japanese electronics giants — Hitachi, NEC and Toshiba — invested heavily to enter the business. Mature companies seek to acquire businesses that either possess the dominant design or have the capabilities needed for quick adoption of the new standards.

Growing companies that possess the dominant technology may be able to make acquisitions of their own, thanks to the financial clout of their surging stock prices. Ideally, those acquisitions would have a strong strategic objective, and target companies would possess complementary technologies or an attractive customer base.

The Mature Phase

In the mature phase, products built around the dominant design proliferate. R&D emphasis shifts from product innovation toward process innovation.

Because process innovations are inherently time-consuming and expensive, many companies form R&D alliances to share the cost and risk. Last year’s alliance between Fujitsu and Toshiba to codevelop one-gigabit DRAM (dynamic random-access memory) computer chips is a good example.

The high cost and risk of internal R&D make technology acquisitions attractive, too. In some respects, an acquisition is better than an alliance, in which partners are also competitors and have equal access to the new technology. Acquisitions give the acquirer exclusive rights to the proprietary technology. Between 1993 and 2000, Cisco Systems spent roughly $9 billion buying more than 50 companies.6 Cisco’s technology acquisitions freed up important resources for an internal focus on core competencies.

During the mature stage of a technology’s life cycle, the growth rate of market demand slows, but the total volume of demand expands. The once highly profitable market becomes commoditized, a direct result of cost reduction and excess capacity. There is fierce price competition and pressure on profit margins. The need to bring down cost and grow volume increases. Given the technological and capital requirements, entry is harder for outsiders. The key to surviving the mature stage is strong commitment to organizationwide improvement in efficiency. One way to reduce development cost is through cooperative alliances with suppliers — or even with competitors.

High-tech industries are notoriously cyclical, and companies that pursue manufacturing joint ventures in the mature stage have a better shot at controlling cost and guaranteeing availability and quality despite marketplace fluctuations. Marketing alliances are important, too, as competition intensifies and focusing on customers becomes critical. Marketing alliances help companies target the latent market, pursue competitors’ customers and expand into new geographic markets.

In high-tech industries, horizontal mergers with complementary product lines are another popular method to reduce costs and obtain a stronger market position by offering more products and services. That was the apparent rationale when Compaq bought Digital Equipment Corp. in 1998. Compaq, facing a saturated PC market, saw DEC as its key to expanding into the then more lucrative high-end server and service markets.

In the mature stage, some companies divest noncore properties to alleviate pressures on earnings. In 1998, Texas Instruments, wishing to concentrate on its core digital-signal processing (DSP) business, sold its facilities for manufacturing DRAMs to Micron Technologies. This also is the phase during which technology companies have the highest propensity to make equity investments and acquisitions and to form alliances for R&D, marketing or manufacturing.

The Discontinuities Phase

The existing technology can be rendered obsolete by the introduction of next-generation technology (NGT), a more advanced technology or converging markets. During the discontinuities stage, the marketplace is volatile. A new market develops, taking demand away from the old market. As many previous barriers to entry (incumbents’ specialized production facilities, their investments in R&D and their technology portfolios) lose their force, the likelihood of new entrants is high. The technology in the field gradually turns toward the fluid phase of a new technology life cycle. The process of technological evolution starts again.

Because technological discontinuities can render a company’s competitive ability obsolete, companies must adjust business strategies. When next-generation technology increases system performance, it may either destroy or enhance company competencies.7 If existing producers initiate the NGT (an uncommon scenario in high-tech industries), it is competence-enhancing to them. Even if the market conditions for their mainstream product deteriorate, the new technology may provide first-mover advantage. Companies that are first to increase capacity can capture near-monopoly rents. A one-month time-to-market advantage can dramatically increase the product’s total profit margin. Marketing alliances and agreements to supply end users can accelerate the transition; they guarantee the new product’s availability to high-end customers and alleviate the first mover’s concern about uncertain market demand.

The definition of the technology’s market becomes blurred as markets converge and horizontal mergers appear between attackers and incumbents. Companies with stronger financial bases become acquirers. For example, in an effort to stay ahead of the transition into IP (Internet-protocol) networks, telecommunications giant AT&T purchased cable, telecommunications, high-speed Internet and networking companies. At the same time, to focus on core competencies and avoid redundancy, AT&T made several divestitures. The company’s joint R&D alliances and minority equity investments supported both capital and technology goals — without incurring the costs or risks of acquisitions. Such arrangements are popular between technology giants that have a need to collaborate. In May 1999, AT&T entered a critical alliance in which Microsoft put $5 billion into AT&T and supplied its Windows CE operating system to AT&T’s set-top boxes. Similarly, Intel, having observed that networking and communications were displacing PCs as the opportunity for semiconductors, made 15 acquisitions in those fields during 1999 and 2000 alone.

Companies’ Decisions To Ally or Acquire

A decision to ally or acquire depends not only on company-specific competencies and needs but also on overall market development and the company’s position relative to its competitors. (See “Propensity To Ally or Acquire.”) Industry structure and critical success factors change as the underlying technology evolves over its life cycle and as competitive pressures vary. Companies are more inclined to form alliances as the technology becomes better defined and as competitive pressure increases. Then the number of alliances declines in the discontinuities phase, when consolidation decreases the total number of companies in the industry. The number of M&As is often high during the transition stage because established companies acquire startups to enhance their technology portfolios. As the dominant design becomes clear and technology becomes more mature, companies increase acquisition efforts to stay ahead of the competition.8

Propensity To Ally or Acquire

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Microsoft and the Technology Life Cycle

Microsoft Corp. presents a good example of a company managing its external activities in sync with the underlying technological life cycle. (See “Microsoft and the Four Technology Phases.”)

Microsoft and the Four Technology Phases

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Microsoft’s Fluid Phase (1975 to 1981)

When Microsoft was established in 1975 to provide software for the first personal computer, PC software was relatively new and crude; direct competition was minimal. Throughout the late 1970s, Microsoft focused on developing its PC-software products and technology portfolio. It built strategic relationships with domestic and foreign computer manufacturers, choosing licensing as its principal collaborative mechanism for attracting new customers. During its first six-year period, sales grew at an average annual rate of 165%; revenue reached $16 million by the end of 1981.9

Aggressive licensing of its own versions of generic software products such as Basic, Cobol, Fortran and Pascal helped Microsoft attract the attention of the most powerful mainframe-computer company, IBM. In 1980 Microsoft signed a contract to develop operating systems for IBM’s first personal computer. The strategic partnership between the startup and the established manufacturer was key in making Microsoft’s operating system technology (MS-DOS 1.0) part of the dominant design for PCs. IBM quickly triumphed in the personal computer market, and as other computer manufacturers started to clone the IBM PC, they adopted Microsoft’s operating system, too.

Microsoft’s Transitional Phase (1982 to 1987)

By 1982 Microsoft’s MS-DOS was the dominant operating system for the dominant IBM PC. While Microsoft continued to improve the functionality of its operating systems, it also enhanced its efforts to develop products for specific customer needs. It broadened its technology base by adding application-software programs to its portfolio. Its main objective was to create user-friendly operating systems and software programs for PC users. As the market for PC software grew, Microsoft continued its aggressive licensing strategy. In the first 16 months that MS-DOS was on the market, it was licensed to 50 hardware manufacturers.10 By retaining distribution rights to DOS, Microsoft benefited from the PC boom. And the continuing IBM alliance helped establish Windows as the standard operating system after MS-DOS.

Microsoft’s strong stock performance after its 1986 initial public offering enabled the company to make its first acquisition in 1987 — of Forethought, the developer of PowerPoint.

Microsoft’s Mature Phase (1988 to 1994)

By 1988 Microsoft had developed a complete technology portfolio. It surpassed Lotus Development Corp. as the world’s top software vendor. In the mature stage of its technology life cycle, Microsoft continued to develop and improve its operating systems and application software and to address PC users’ needs for word processing, spreadsheets and multimedia software. Sales grew an average of 45% annually. The growth rate was significantly lower than during the fluid and transitional stages, but overall sales volume was larger.

To strengthen its dominance in the high-growth software market, Microsoft participated in strategic partnerships and made key acquisitions. From 1988 to 1994 Microsoft entered 36 joint ventures and alliances, 61% of which involved joint R&D agreements.11 More important, because it had partnerships with all seven of the leading computer-hardware companies (and because 21 out of 36 joint ventures were exclusive partnerships), Microsoft was able to develop more-functional, user-friendly software.

Microsoft’s Discontinuities Phase (1995 to 1999)

The Internet changed the industry’s competitive landscape. Although it fueled the growth of the PC market, it also lowered the barriers to entry. Alternative devices appeared. From 1995 to 1999 Microsoft continued to improve the product lines that embodied its base technology. Meanwhile it began to develop Internet technologies to establish itself in the new growth market, introducing Internet Explorer 2.0 in 1995 in competition with leading Web browser Netscape Navigator. As it did with application software, Microsoft leveraged its effective operating-system monopoly, bundling Internet Explorer with Windows in the hope that people would use something preinstalled in their PCs.

Microsoft provides a textbook case of a company facing technological discontinuity. As the incumbent, the company possessed deep financial resources and a strong customer base. However, it neither pioneered the Internet nor reacted immediately to it — and consequently fell behind its attackers in the technology and product arenas. Once aware of the seriousness of the threat, Microsoft increased its alliance and acquisition efforts. From 1995 to 1999 alone, it participated in 35 joint ventures. Joint marketing agreements mounted as the market became more volatile and Microsoft strove to maintain a strong relationship with customers.

With the dawn of the Internet and mobile technologies, Microsoft bought 15 companies and, in four years, made 26 minority equity investments focusing on Internet-related technologies and application software.

The Right Partnership Arrangement for the Right Stage

Our life-cycle model indicates that during the fluid stage companies focus on improving product functionality and gaining quick market recognition. Because Microsoft established an important strategic relationship with IBM in that stage, its operating system became the industry standard and Microsoft could proceed to an aggressive licensing strategy.

In the transitional stage, high-tech companies generally form joint R&D ventures, pursue aggressive licensing strategies to realign their technology portfolio, and sign marketing and supply agreements to guarantee consistent quality, price and availability for their customers. Microsoft continued its licensing strategy, and its strategic alliance with IBM remained instrumental to growth.

In the mature stage of the technology life cycle, companies use numerous strategic alliances and acquisitions to share the risks and costs of technology development, ensure availability of essential products and expand into latent markets. Collaborating with leading hardware companies in 36 joint ventures and alliances during its mature phase, Microsoft obtained access to the advanced technologies it needed.

The model anticipates that companies in the discontinuities stage will establish marketing and licensing agreements as well as joint R&D ventures. The phase also features a high level of product and market uncertainty, with technologies invading and markets merging. Thus, when the Internet changed the computer industry’s competitive landscape, Microsoft turned increasingly to alliance efforts. Its 35 joint ventures helped maintain customer relationships and provide comprehensive solutions to clients. As of this writing, Microsoft also has made 26 minority investments and has acquired 15 companies to address the challenge.

Clearly, Microsoft exemplifies our model of the externally focused technology life cycle. Unpublished life-cycle case studies on Cisco and Compaq — plus statistical analyses of industry data — also lend support to our framework.12 Nevertheless, additional empirical validation from many companies and industries is needed.

Ultimately, the model raises concerns for managers. It shows that a company should use, in a timely and appropriate way, every form of business development — alliances, joint ventures, licensing, equity investments, mergers and acquisitions — in order to perform optimally over its underlying technology life cycle. But doing so requires integrated technology and market and financial planning that may be beyond most companies.

Furthermore, few companies seem to excel, with either organizational or managerial processes, in implementing even a portion of what is needed in business development. A subjective search for benchmarks finds Texas Instruments remarkably capable of carrying out profitable outbound licensing. Cisco excels in acquisitions. Intel and 3M do different but comparably effective jobs of corporate venture-capital investing. Millennium Pharmaceuticals in Cambridge, Massachusetts, has rapidly built a multibillion-dollar enterprise from alliances and joint ventures. But no one company seems to be outstanding at more than one mode of business development. The challenge is not beyond companies’ reach, but in order to rise to it, managers must understand the externally focused technology-life-cycle model, think about how it applies to their own situation — and learn to use partnerships that are targeted to a particular technology-life-cycle stage.

References

1. E.B. Roberts, “Benchmarking Global Strategic Management of Technology,” Research-Technology Management 44 (March–April 2001): 25–36.

2. The authors appreciate the financial support of the global industrial sponsors of the MIT International Center for Research on the Management of Technology, as well as funding from the National Science Foundation to the MIT Center for Innovation in Product Development.

3. For a comprehensive literature review on different models of the technology life cycle, see P. Anderson and M.L. Tushman, “Technological Discontinuities and Dominant Designs: A Cyclical Model of Technological Change,” Administrative Science Quarterly 35 (1990): 604–633. Further discussion of the model’s evolution is provided by J.M. Utterback, “Mastering the Dynamics of Innovation” (Boston: Harvard Business School Press, 1994). Utterback’s pioneering life-cycle work, begun in the 1970s, is best summarized by his book. Following Utterback, Tushman and Rosenkopf propose a similar technology-life-cycle model with four stages: eras of ferment, dominant designs, eras of incremental change, and technological discontinuities. See M.L. Tushman and L. Rosenkopf, “Organizational Determinants of Technological Change: Towards a Sociology of Technological Evolution,” Research in Organizational Behavior 14 (1992): 311–347. See also R.R. Nelson and S.G. Winter, “Simulation of Schumpeterian Competition,” American Economic Review 67 (1977): 271–276; R.R. Nelson and S.G. Winter, “The Schumpeterian Tradeoff Revisited,” American Economic Review 72 (1982): 114–132; G. Dosi, “Technological Paradigms and Technological Trajectories: A Suggested Interpretation of the Determinants and Directions of Technical Change,” Research Policy 11 (1982): 147–162; N. Rosenberg, “Inside the Black Box: Technology and Economics” (Cambridge: Cambridge University Press, 1982); D.J. Teece, “Profiting From Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy,” Research Policy 15 (1986): 285–305; D.J. Teece, “Capturing Value From Technological Innovation: Integration, Strategic Partnering and Licensing Decisions,” Interfaces 18 (1988): 46–61; and R.R. Nelson, “Recent Evolutionary Theorizing About Economic Change,” Journal of Economic Literature 33 (1995): 48–90.

4. W.J. Abernathy and J.M. Utterback, “Patterns of Industrial Innovation,” Technology Review 80 (1978): 40–47.

5. R.M. Henderson, “Underinvestment and Incompetence as Responses to Radical Innovation: Evidence From the Photolithographic Alignment Equipment,” Rand Journal of Economics 24 (1993): 248–269.

6. http://www.cisco.com/warp/public/750/acquisition.

7. M.L. Tushman and P. Anderson, “Technological Discontinuities and Organizational Environments,” Administrative Science Quarterly 31 (1986): 439–465.

8. We define “propensity to ally” as the likelihood that a company will participate in joint ventures and alliances. Several ways for post hoc measurement of a company’s propensity to ally seem plausible — for example, by examining its total number of alliances normalized by sales. We define “propensity to acquire” as the likelihood that a company will make an acquisition, perhaps measured similarly by the total number of acquisitions normalized by sales.

9. http://www.microsoft.com.

10. Ibid.

11. Data from the Securities Data Company’s (SDC) joint-venture database. Many joint ventures involve multiple agreements.

12. W. Liu, “Essays in Management of Technology: Collaborative Strategies for American Technology Industries” (Ph.D. diss., MIT Department of Political Science, 2000).