Maximizing the returns from research: to profit from technology, companies need to change their strategy and begin selling the embodiment of that technology at the ever-shifting point of modular decoupling

Research-Technology Management, July-August, 2004 by Clayton M. Christensen, Christopher S. Musso, Scott D. Anthony

Research that creates the right technologies at the right time is critical to competitive success in many industries. Over the long term, research into new materials, components and products provides the fuel that can make products perform better, cost less and generate attractive profits. Yet the promise that research holds is not the reality for many of the companies that invest in it. Development of breakthrough technology often does not lead to breakthrough product sales, even over a very long period, and competitors often appropriate and commercialize new technologies more nimbly than the firms that paid to develop them.

This article proposes a model that can help managers predict whether, when and why technologies that they contemplate developing will create commercial value, and when they will not.

Companies make two types of mistakes, we conclude, that can derail their hopes of reaping commercial benefit from the new technologies they have developed:

1. They can fail to integrate far enough forward to encompass within a single organization all of the unpredictable interdependencies in design and manufacturing that are entailed when building products that use the new technology.

2. They can fail to decouple an integrated value chain and begin selling components into the open marketplace after improved technological understanding resolves the unpredictable interdependencies that earlier had been the mandate for integration.

By helping managers predict when and why the extent of Integration needs to change, we hope this model can help them improve the life-cycle profitability of their investments in developing new technologies.

When, Where and Why Integration?

As depicted above, industries tend to migrate from a state that favors integrated companies with proprietary product architectures to a state that favors modular products and specialist companies (1). This occurs because, in most industries, the pace of performance improvement in products and services outstrips the ability of customers to utilize that progress (2).

In the upper-left domain of the illustration, when there is a performance gap--when product functionality and reliability are not yet good enough to address the needs of customers in a given tier of the market--companies must compete by making the best possible products. When competitive conditions compel engineers to make the highest-performing products possible, they must experiment to fit the pieces of their systems together in evermore-efficient ways to wring the most performance possible out of the technology that is available.

In the race to do this, firms that build their products around proprietary, interdependent architectures enjoy an important competitive advantage over competitors whose product architectures are modular. Interdependence means that the way one component is designed and made depends on the way the other components are being designed and made. In this situation, companies must control the design and manufacture of every critical component of the system in order to make any piece of the system. There is a significant advantage to being integrated with proprietary, interdependent architectures when the functionality and reliability of products are not yet good enough for the applications in which customers need to use the products.

However, our research shows that companies ultimately "overshoot" what customers in a given market application can utilize and they find themselves on the right side of the illustration where there is a performance surplus. Customers in that circumstance tend to be happy to accept improved products, but they are unwilling to pay a premium price to get them. One important reason why some investments in advanced technologies don't pay off is that their effect is to improve the functionality of a system that already is performing more than well enough to address the needs of customers in mainstream applications. High-definition television (HDTV) may prove to be an example of such a technology.

Overshooting does not mean that customers will no longer pay for any improvements. It just means that the type of improvement for which they will pay a premium price will change. Once their requirements for functionality and reliability have been met, customers become willing to pay premium prices for the ability to get exactly what they want, immediately when they need it, and as conveniently as possibly (3).

"Modular" architectures help companies to compete in the manner required in the era of performance surplus on the right side of the illustration--to be fast, flexible and responsive. Modularity helps companies introduce new products faster because they can upgrade individual subsystems without having to redesign everything. Modularity enables product designers and assemblers to mix and match best-of-breed components to give every customer exactly what he or she wants. Assemblers and designers can take advantage of competitive sourcing markets to produce lower-priced end products. Although standard interfaces inherent in modular architectures invariably force compromise in system performance, on the right side firms have the slack to trade away some performance.