Complexity and Codification of the Technology

The increasingly interdisciplinary nature of many of today’s technologies and products means that, in many technical fields, it is not practical for any firm to maintain all necessary skills in-house. This increased complexity is leading many organizations to conclude that, in order to stay at the forefront of their key technologies, they must somehow leverage their in-house competencies with those available externally. For example, their need to acquire external technologies appears to increase as the number of component technologies increases. In extreme cases of complexity, networks of specialist developers may emerge which serve companies which specialize in systems integration and customization for end-users.

One core skills centre on genetic engineering / molecular biology (which allows new characteristics to be inserted into plants), cell biology (which enables the regeneration of plants) and rapid screening and testing techniques for plants and seeds. These key technologies have been developed, and are retained, internally. Such is their complexity, however, that the company seeks to leverage these proprietary skills with complementary technologies accessed from other sources.

In recent years, acquisition has again become a popular means of acquiring technology. Normally, the rationale is to establish a position quickly in a particular technical area. However, feelings about the effectiveness of this route are mixed; many acquisitions have suffered from the loss or demotivation of key staff, or have failed to realize their expected potential for other reasons. Nevertheless, a few companies claim spectacular successes amongst their acquisitions. The common factors here appear to be prior experience of the markets in which the new technology would be used and a compatible culture between the two organizations.

Alliances between large pharmaceutical firms and smaller biotechnology firms have received a great deal of management and academic attention over the past few years. On the one hand, pharmaceutical firms have sought to extend their technological capabilities through alliances with and the acquisition of specialist biotechnology firms. Each of the leading drug firms will at any time have about 200 collaborative projects, around half of which are for drug discovery. On the other hand, small biotechnology firms have sought relationships with pharmaceutical firms to seek funding, development, marketing and distribution. In general, pharmaceutical and biotechnology firms each use alliances to acquire complementary assets, and such alliances are found to contribute significantly to new product development and firm performance. For the pharmaceutical firms, there is a strong positive correlation between the number of alliances and market sales. For the biotechnology firms the benefits of such relationships is less clear.

The biotechnology firm remains dependent upon the complementary  assets of the pharmaceutical firms, whereas the latter type appears to have the capacity to benefit from a broader range of network relationships. A biotechnology firm’s exploration alliances with pharmaceuticals  firms is a significant predictor of products in development (along  with technological diversity) and in turn products in development are a predictor of exploitation alliances with pharmaceutical firms,  and these exploitation alliances predict a firm’s products  in the market. However,   different forms of alliance yield different benefits. Research contracts and licenses wit biotechnology firms are associated with an increase in biotechnology based patents by pharmaceuticals firms, whereas the acquisition of biotechnology firms is associated with an increase in biotechnology   related products from pharmaceutical firms. This increase in biotechnology related products includes only those products developed subsequent to the acquisition, and does not include those products directly acquired with the biotechnology firms. Interestingly, minority equity interests in biotechnology firms and joint ventures  between pharmaceutical and biotechnology firms are associated with a reduction in biotechnology related patents and products. This may be due very high organizational cost of joint ventures or the fact that joint ventures tend to tackle more complex and risky projects than simpler licensing or research contracts.

The more that knowledge about a particular technology can be codified, i.e. described in terms of formulae, blueprints and rules, the easier it is to transfer and the more speedily and extensively such technologies can be diffused. Knowledge that cannot easily be codified is, by contrast much more difficult to acquires since it can only be transferred effectively by experience and face to face interactions. All else being equal, it appears preferable to develop tacit technologies in-house. In the absence of strong intellectual property rights (IPR) or patent protection tacit  technologies provide a more durable source of competitive advantage than those which can easily be codified.

The existence  if difficult to codify tacit knowledge  is one of the factors  that has allowed  it to maintain a competitive advantage in one particular  core technology even though the basic features  of this technology have been in use for over 100 years. Similarly, the design skills of many Italian firms have allowed them to remain internationally competitive despite significant weaknesses in other dimensions.

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