4.

THE ACQUISITION AND

EXPLOITATION OF TECHNOLOGY
Methods of Acquiring Technology
Methods of Acquiring Technology
Technology acquisition is an essential strategy for companies to stay competitive and innovate. Several recognized
methods are available for acquiring new technologies, each suitable for different circumstances. These methods include
using internal R&D, participating in joint ventures, contracting out for R&D, licensing in technology, and buying
technology outright. Below is a summary of each method:
1. Using Internal R&D:
 Description: The company develops technology in-house by utilizing its own human and technical resources. This
method requires a strong technical workforce and substantial financial backing to support R&D operations.
 Examples: Companies like General Electric (GE), General Motors (GM), and AT&T rely on their internal R&D
departments to create new technologies.
 Advantages: Complete control over the development process and the ability to tailor technology to specific
needs.
 Disadvantages: High costs, long development times, and the risk of failure without external expertise.
2. Participating in a Joint Venture:
 Description: Two or more companies combine their technological resources and expertise to co-develop a
technology. Joint ventures allow firms to share the risks and rewards of technological development.
 Examples: The joint venture between IBM, Motorola, and Apple to develop the PowerPC chip or between
Motorola and Toshiba to combine microprocessor and memory chip technologies.
 Advantages: Shared costs and expertise, reduced risk, and access to complementary technologies.
 Disadvantages: Potential conflicts in decision-making, sharing of profits, and challenges in managing
collaborative efforts.
3. Contracting Out for R&D:
 Description: Instead of conducting R&D internally, a company outsources its R&D efforts to external
organizations or firms. This method can reduce R&D expenditures and leverage specialized expertise.
 Advantages: Lower costs and access to specialized knowledge without the need for internal resources.
 Disadvantages: Lack of control over the process, potential confidentiality issues, and the risk of receiving subpar
results.
4. Licensing In of Technology:
 Description: A company purchases the right to use existing technology owned by another entity. Licensing allows
companies to access cutting-edge technologies without having to develop them in-house.
 Examples: In the 1950s, Sony licensed the transistor technology from AT&T, which allowed them to integrate
transistors into their products and revolutionize the electronics industry.
 Advantages: Fast access to proven technology and the ability to integrate it into products quickly.
 Disadvantages: Ongoing licensing fees, dependence on the original technology owner, and limited control over
the technology’s development.
5. Buying the Technology:
 Description: This involves an outright purchase of technology from another company. This method offers
immediate access to the technology without having to develop it internally.
 Advantages: Quick acquisition of technology without long-term development commitment. The company can
gain immediate technological advantage.
 Disadvantages: Lack of control over the technology, potential integration challenges, and dependency on the
seller for support and updates.
Factors Affecting the Technology Acquisition Decision
David Ford (1988) developed a matrix that outlines the factors influencing the choice of acquisition method. These
factors help guide decision-making depending on the company's specific situation.
1. Company’s Relative Standing in the Technology:
o If a company has a strong position in a particular technology, it is more likely to develop the technology
in-house (internal R&D). If its position is weak, it may prefer to buy or license technology.
2. Urgency of Acquisition:
o If there is an urgent need for a technology, faster methods such as licensing or purchasing technology are
preferred, as they provide quicker access. Internal R&D, on the other hand, is time-consuming.
3. Level of Commitment (Investment):
o High levels of commitment (financial or human resources) favor internal R&D or joint ventures, while
lower levels may push a company toward licensing or purchasing technology, which involves less long-
term investment.
4. Technology’s Position in the Life Cycle:
o Technologies in the early stages (embryonic or growth phases) may benefit from joint ventures or
contracted-out R&D. Mature technologies (base technologies) are often acquired through licensing or
purchase.
5. Classification of Technology:
o Distinctive: If the technology is critical to the company’s competitive advantage, internal R&D or joint
ventures are more suitable.
o Basic: For technologies that are widely available and necessary but not distinctive, licensing or
purchasing the technology may be more efficient.
o External: Technologies that are external to the company, with limited differentiation, may be best
acquired through purchase or licensing.

Technology Acquisition Decision Matrix (Ford, 1988)

The matrix below shows the applicability of various acquisition methods based on these five factors:
Acquisition Company's Relative Urgency of Level of Technology Life Technology
Method Standing Acquisition Investment Cycle Classification
Internal R&D High Low High Early / Critical Distinctive
Joint Venture Lower Early Moderate Early Distinctive / Basic
Contracting Out Low Early Low Early Distinctive / Basic
R&D
License-In High Low Low Later Distinctive / Basic
Buying Low High Low Any External
Technology

Conclusion
Selecting the appropriate method of technology acquisition depends on the company's standing in the technology, the
urgency of the acquisition, the level of investment it is willing to make, the technology's position on the life cycle, and
whether the technology is distinctive, basic, or external. Each method has its advantages and limitations, and businesses
must carefully evaluate their strategic needs and resources to make the best choice for acquiring technology.

EXPLOITATION OF TECHNOLOGY
Exploitation of Technology
Technology, when viewed as an asset or commodity, can be exploited to generate revenue and competitive advantage.
Companies that own valuable technologies must incorporate technology exploitation into their strategy. This involves
decisions about how best to leverage and diffuse the technology to maximize its market impact. The methods for
exploiting technology often mirror those for acquiring it, but they may present contradictory strategies depending on the
company’s position in the technology's life cycle.
Key Strategies for Exploiting Technology
1. Licensing Technology:
o If a company is strong in a particular technology, licensing it to others becomes a viable option. This
enables the company to capitalize on the value of the technology without the need for additional
investment in support technologies or marketing.
o Technologies with wide applications are especially valuable for licensing, as they can reach a broader
market without the company needing to diversify its own product offerings.
2. Internal Application:
o If a company is not yet confident in the market acceptance of its technology, it might exploit it internally
by applying it in its own products until it proves successful in the broader market. This can help the
company establish a strong position before seeking wider commercialization.
3. Rapid Exploitation:
o Some technologies need to be exploited quickly to gain market acceptance and define the industry
standard. Early diffusion of a technology can discourage competitors from developing similar or
competing technologies. However, rapid exploitation must be balanced with the need to protect
distinctive technologies from premature sharing, which could erode their value.
4. Protection of Distinctive Technologies:
o Companies should delay sharing their most distinctive and critical technologies to protect their
competitive advantage. However, delaying too long can risk losing the opportunity to capitalize on the
technology as it loses its market value.

Technology Exploitation Matrix (Ford, 1988)

David Ford developed a matrix that outlines various factors affecting technology exploitation decisions. This matrix can
guide managers in determining the best approach to exploit technology based on the company's position and several
other factors. Below are the key factors:
1. Company’s Relative Standing in the Technology:
o If the company has a high standing in the technology, it may choose to license it out, as it will be in a
strong position to leverage its value in the market. Conversely, if the company is less established, it may
need to exploit the technology internally until it proves its worth.
2. Urgency of Exploitation:
o If rapid market penetration is crucial, licensing out or joint ventures are preferable. If the company is not
in a rush, exploiting the technology internally may be a more appropriate strategy.
3. Commitment of Resources:
o Some exploitation methods, like internal application or joint ventures, require significant resources and
investment, while others, like licensing out, demand less financial commitment.
4. Technology Life Cycle:
o The stage of the technology’s life cycle impacts its exploitation method. Early-stage technologies are
more likely to be used internally or in joint ventures, while later-stage technologies may be suitable for
licensing or selling.
5. Technology Application:
o Narrow applications call for more direct internal use or specialized manufacturing, while wide
applications may benefit from licensing or joint ventures for broader market penetration.

Factors Affecting Technology Exploitation Decisions

Exploitation Method Company's Urgency of Support Technology Technology
Relative Exploitation Investment Life Cycle Application
Standing
 Employ in Own Products Highest/Most Lowest Lowest Early Narrowest
Critical
Contracted-out Lower High High Early Narrow
Manufacture/Marketing
Joint Venture High Low High Early Wide
License-out High Highest Low Later Distinctive or
Peripheral
Technologies

Conclusion
The exploitation of technology involves decisions about whether to deploy the technology internally, license it to others,
or enter joint ventures to maximize its impact. Companies need to assess several factors such as their technological
standing, the urgency of exploitation, the investment required, and the technology’s position in its life cycle. By making
informed decisions about technology exploitation, companies can ensure they not only benefit from their innovations
but also maintain or enhance their competitive position in the market.

STAGES OF TECHNOLOGY DEVELOPMENT

Stages of Technology Development
Technological development typically progresses through a structured hierarchy of stages. These stages ensure the orderly
progression from basic scientific knowledge to commercially viable technology. The four key stages of technology
development are:
Basic Research:
o Objective: Basic research aims to generate new
scientific knowledge or understanding without any
immediate practical application. It is driven by
curiosity and the desire to advance human
knowledge rather than solve specific problems.
o Focus: The focus is on deepening the
understanding of a particular field, whether pure
(for knowledge's sake) or oriented (directed by an
external entity towards a specific goal).
o Importance: While basic research may not yield immediate commercial results or direct returns on
investment, it is fundamental for new discoveries and the growth of scientific knowledge. It builds the
foundation upon which applied research and technology development can later be based.
2. Applied Research:
o Objective: Applied research is aimed at addressing a specific practical need or challenge. It involves
translating scientific knowledge into a form that can be used in real-world applications.
o Focus: This stage is more focused on creating solutions to specific problems, making it a mix of scientific
knowledge and engineering expertise.
o Importance: Applied research is crucial because it takes the theoretical insights from basic research and
turns them into potential applications. This stage is the bridge between pure science and practical
engineering solutions.
3. Development:
o Objective: The development stage involves systematically applying the knowledge gained from research
to create functional products, systems, or processes.
o Focus: This stage is more engineering-driven than science-driven, as it focuses on turning ideas into
usable technologies or products. It includes design, prototyping, and refinement to make the technology
commercially viable.
 o Importance: Development connects research efforts with practical use and commercialization. This is
where ideas begin to be converted into tangible innovations that can be sold, deployed, or implemented.
4. Technology Enhancement:
o Objective: Technology enhancement involves continuous improvements to existing technologies. It
focuses on optimizing performance, increasing reliability, and extending the technology's lifecycle.
o Focus: This stage includes incremental innovations aimed at improving existing products or processes,
making them more efficient, cost-effective, or adaptable to new challenges.
o Importance: Technology enhancement ensures that technologies remain relevant and competitive over
time. By enhancing and refining technologies, companies can increase their market share, meet evolving
customer needs, and stay ahead of competitors.

Observations on Science and Technology Development (Bhalla, 1987)

 Science Builds on Science: Scientific advancements are cumulative, with each new discovery building on prior
knowledge, except in rare cases of serendipitous breakthroughs.
 Technology Builds on Technology: Similar to science, technology evolves over time by building upon existing
technologies. New technologies are often improvements or variations of previous innovations.
 Technology Development Requires Diverse Skills: The process of technology development involves multiple
stages, each requiring different skill sets, including scientific research, engineering design, and practical
application.
 Long Time Horizon for Key Technologies: Developing key technologies can take between 8 to 15 years. This long
development period means that companies need to plan for technology advancements much further ahead than
their immediate business goals. Technology planning must anticipate future changes and be aligned with long-
term business strategies.

Conclusion
The development of technology follows a structured path, beginning with basic research and moving through applied
research, development, and enhancement. Each stage plays a critical role in ensuring that technological innovations are
scientifically sound, practically applicable, and commercially successful. Understanding the time frames and resource
requirements at each stage is essential for managers to plan effectively for the future and stay competitive in a rapidly
evolving technological landscape.

THE TECHNOLOGY PORTFOLIO AND INDUSTRIAL R&D

The Technology Portfolio and Industrial R&D
In managing a company’s technology development, one of the major concerns for managers is determining the right
types of research and technologies to focus on. The decision-making process depends on various factors including the
company's objectives, industry type, technology base, customer needs, financial and technical resources, and other
relevant considerations. Several approaches to organizing and prioritizing research and development (R&D) activities
have been proposed to help firms create strong technology portfolios.
Schmitt's Classification of R&D Types
Schmitt (1985) classified corporate research into four main categories:
1. Generic Research: Research aimed at generating broad, foundational knowledge without focusing on specific
market applications.
2. Targeted Research: Research directed at specific practical outcomes or products that align with strategic goals.
3. Market-driven Research: Research that focuses on meeting the current and anticipated needs of customers and
the market.
4. Technology-driven Research: Research focused on developing and advancing new technologies, regardless of
immediate market demand.
These categories are useful for companies as they help align research efforts with strategic goals and customer needs.
Merten and Ryu’s Categories of Industrial Research
Merten and Ryu (1982) proposed dividing industrial laboratory research into five categories:
1. Basic Research: Aimed at advancing fundamental scientific knowledge.
2. Exploratory Research: Focused on discovering new possibilities and directions for future development.
3. Development of New Commercial Activities: Efforts dedicated to creating entirely new markets or products.
4. Development of Existing Commercial Activities: Research aimed at improving or expanding existing products or
services.
5. Technical Services: Providing ongoing support, troubleshooting, and improvements to existing technologies.
These categories help organizations prioritize R&D projects based on their strategic needs and technological objectives.
Technology Portfolio Approach
A technology portfolio is analogous to a business portfolio, where investments are diversified across various
technologies, reducing risk and ensuring balanced support for all aspects of the company's technology strategy. By
creating a diverse technology portfolio, companies can manage risks and ensure they are prepared for future
technological shifts.
In developing a technology portfolio, companies typically invest in a range of technologies that cover the entire spectrum
from basic research to applied development and enhancement of existing technologies. This approach is crucial to avoid
putting all resources into a single technology or project, which could expose the company to significant risks if that
particular technology fails or becomes obsolete.
Jain and Triandis' R&D Needs
Jain and Triandis (1990) proposed three types of R&D needs that apply to any company's technology portfolio:
1. Normative Needs: Research driven by the need to fulfill the demands and expectations of users or customers.
2. Comparative Needs: Research focused on maintaining competitive parity with other companies in the same
industry.
3. Forecast Needs: Research aimed at anticipating and preparing for future technological changes, shifts in
consumer behavior, and new regulatory requirements.
R&D for Innovation
R&D plays a critical role in supporting and driving innovation within organizations. Some key areas where R&D efforts are
focused include:
 Product Innovations: Developing new or improved products that meet changing consumer needs or market
demands.
 Material Innovations: Research focused on discovering new materials or improving existing ones for use in
products.
 Process Innovations: Improving manufacturing processes or service delivery methods to enhance efficiency and
reduce costs.
 Market Innovations: Exploring new market opportunities and business models.
 Service Innovations: Innovating in service offerings to provide better customer experiences or new service
solutions.
R&D Investment by Industry Sector
R&D investment varies across different industry sectors. For example, sectors such as electronics, pharmaceuticals, and
chemicals typically invest a larger portion of their revenue into R&D compared to other sectors. Industries like steel,
automobiles, and some electronics sectors have seen a decline in their competitive edge, particularly in the U.S., where
countries like Japan have increased their R&D expenditures, investing significantly more in these areas.
For example, as seen in Exhibit 10-1, in the U.S. in 1995, industries like information technology and electronics, as well as
pharmaceuticals, accounted for 60% of the total R&D expenditure.
Types of R&D Projects
Corporate-level R&D needs to focus on high-leverage opportunities—those that have the potential to create new
business or completely transform existing business operations. To achieve this, R&D investments should be balanced
across different types of projects, including:
 1. Focused and Targeted Short-term Projects: These projects address immediate market or technology needs with
a quick turnaround.
2. Focused and Targeted Long-term Projects: These projects address strategic goals that will have long-term
implications for the company.
3. Speculative and Exploratory Work: Research that explores new, untested ideas with high-risk, high-reward
potential.
4. Supportive Research for Existing Products: Research aimed at maintaining and enhancing current product lines,
ensuring they remain competitive and relevant.
Conclusion
Creating a robust technology portfolio requires balancing short-term and long-term projects, market-driven and
technology-driven research, and investments across various types of innovations. By strategically managing R&D
investments, companies can maintain technological leadership, stay competitive, and support sustainable growth.

JUSTIFICATION OF R&D EXPENDITURES

Justification of R&D Expenditures
R&D is a critical activity for corporations, requiring substantial human and financial resources. However, R&D efforts
compete with traditional business operations, such as production and sales, for these resources. One of the main
challenges faced by R&D directors is justifying R&D expenditures to top management. Since R&D is inherently risky, there
is no guarantee of immediate profitable returns, and R&D may be viewed as a cost without direct revenues. This creates
tension, especially when executives focus on short-term financial performance rather than long-term innovation.
However, it's recognized that R&D expenditures are essential for driving innovation, improving productivity, enhancing
quality, and ultimately maintaining competitiveness.
Methods of Justifying R&D Expenditures
The methods for justifying R&D expenditures generally fall into a few categories, each suited to different stages of the
R&D process:
1. R&D as an Overhead Expense:
o Under this approach, R&D is viewed as a necessary cost of business, akin to other operational expenses
like labor or materials. This method reflects a commitment to continuous technological advancement.
However, it has limitations, especially when it comes to determining the appropriate level of funding
without harming overall financial performance. This method is more appropriate for exploratory or basic
research projects, which contribute to long-term knowledge building but don’t immediately translate
into revenue.
2. R&D as an Investment (Capital Budgeting):
o In this model, R&D is treated like any other capital investment, with funds allocated based on traditional
financial criteria such as Return on Investment (ROI). ROI and similar financial metrics are commonly
used to justify projects with more predictable financial returns, typically for development or engineering
efforts where market and financial implications are clear. However, ROI is less suitable for long-term and
high-risk R&D projects, where the returns are uncertain, and future market conditions are difficult to
predict. This makes ROI less effective for justifying early-stage or revolutionary technological innovations.
3. American Call Option Model:
o For R&D projects that fall between the extremes of being either too uncertain or too costly, Mitchell and
Hamilton (1988) propose using the American call option model, akin to financial market options. This
method allows companies to maintain flexibility by investing only a small upfront cost (the "option
price") to keep the possibility of further development open. The company can later decide whether to
proceed with further investment based on new information, similar to exercising an option. This method
reduces the risk of committing to uncertain ventures and helps firms maintain a strategic position in
emerging technologies.
4. External Funding and Strategic Alliances:
 o For R&D projects that require substantial expenditures beyond the internal budget or risk tolerance,
external funding sources such as government grants, cost-sharing with other organizations, or strategic
partnerships can be explored. By collaborating with other entities, companies can share the risks and
costs of R&D. This approach can make potentially high-reward projects more feasible by distributing the
financial burden and reducing individual risk.
National Technology Policy and Funding
A national technology policy can support the justification of R&D expenditures by encouraging collaborative efforts,
such as consortia or business alliances, and facilitating access to public funding. By offering matching funds and
promoting wider dissemination of federal R&D, such policies can help companies lower the financial barriers to
innovative projects. The goal of such policies is to drive industry investments into acceptable risk levels, ensuring that
R&D projects are financially feasible and aligned with strategic goals.
Summary of R&D Justification Strategies
1. Overhead Expense: Suitable for knowledge-building projects (basic and exploratory research).
2. Investment Approach (ROI): Suitable for later-stage development projects with clearer financial returns.
3. American Call Option Model: Useful for high-risk, uncertain projects, providing strategic positioning with
minimal upfront cost.
4. External Funding and Alliances: Helps mitigate risk and share costs for large or uncertain projects.
5. National Technology Policy: Encourages industry-government collaborations, making more R&D projects
financially feasible.
In conclusion, the justification of R&D expenditures depends on the project’s stage and risk profile, and various funding
models and strategies can be employed to balance financial constraints with the need for innovation.

General Observations on Industrial R&D

General Observations on Industrial R&D
1. Concentration of R&D in Large Firms:
o A large proportion of industrial R&D is conducted by the biggest firms. In the United States, the top 300
largest companies contribute to 92% of research expenditure, with the 40 largest companies accounting
for 70% of industrial R&D spending. This underscores that larger companies tend to have more robust
and resource-rich R&D operations.
2. R&D in Larger Firms:
o The likelihood of having R&D activities increases with the size of the company. Larger organizations
typically have more comprehensive and established research programs, often supported by significant
financial and human resources, making them the primary drivers of innovation.
3. Innovations from Small Firms and Individuals:
o While large firms dominate R&D efforts, small firms and individuals have also been the sources of
significant innovations. Notable examples include xerography (developed by Chester Carlson) and the
Apple II personal computer (developed by Steve Jobs and Steve Wozniak). These breakthroughs
highlight the importance of entrepreneurial spirit and the potential for disruptive innovation from small-
scale players.
4. Low Success Rate of R&D Projects:
o A significant challenge in R&D is that only a small percentage of projects result in successful commercial
products. The success ratio in some industries can be as low as 1 out of 10, and in more challenging
sectors, it may be as low as 1 out of 3,000. This demonstrates the inherent risk in R&D investments and
the uncertainty of turning innovations into profitable products.
5. Small Firms and Employment Growth:
o Small firms are credited with fostering national employment and playing a key role in matching
technology with market needs. However, these firms often lack the financial resources to hire highly
educated scientists and engineers, which can limit their capacity for innovation. Additionally, small firms
 may underestimate the importance of innovation for global competitiveness, which can hinder their
growth and market impact.
6. Research vs. Development:
o R&D activities can be divided into two main stages: research and development. Research typically
involves the exploration of new ideas and basic innovations, while development is focused on
transforming these ideas into commercially viable products. Development is particularly costly, and
raising the necessary resources to bring a product to market can be difficult, especially for small firms
and individuals. Additionally, government, environmental, safety, and legal regulations have further
increased the cost of development efforts.
7. Technology's Role in the Early Product Life Cycle:
o In the early stages of the product life cycle, the emphasis is primarily on technology, which is crucial to
ensure scientific acceptability and prove the value of the innovation. Once the technology has been
validated, the focus shifts toward development, production, and marketing to make the product
commercially viable and profitable.
Key Takeaways:
 Large firms dominate R&D in terms of financial investment, but small firms and individuals can still drive
breakthrough innovations.
 The success rate of R&D projects is low, which means significant risk is involved.
 Small firms play a key role in employment generation and meeting customer needs, but their capacity to invest
in R&D is constrained by financial and resource limitations.
 The development phase of R&D is costly and resource-intensive, particularly as it involves regulatory
compliance.
 Technology is central in the early stages of product development, with development and marketing becoming
more important later in the product life cycle.