Managing Emerging Technologies:
Paradoxes and Challenges*

By Paul J. H. Schoemaker, Ph.D.
Chairman and CEO, DSI

The failure of established firms in coping with profound technological change is so widely recognized that researchers term it the Curse of Incumbency. The conventional wisdom holds that attackers from the outside have an advantage when a new business model threatens an existing market with a new technological regime.¹ New entrants have used technology in desktop copiers, electronic calculators, mini-mill steel making, videotape recorders and hydraulic earth-moving equipment to take the market away from incumbent firms. The computer industry has evolved from competition among vertically integrated stacks controlled by DEC, IBM, Wang, Amdahl, Nixdorf, NEC or Matsushita to a horizontal industry model where competition occurs between component providers. Few of the leaders in the horizontal model, such as Dell, Cisco, Microsoft or Intel came from the ranks of the old vertical industry.² The same story has unfolded in the hard-disk drive industry where market leadership changed with each successive product generation.³ Similar stories are developing in the world's media, information technology and pharmaceutical industries many of which suffer from dated business models.

Incumbents are especially disadvantaged by their structures, capabilities and mindsets. The established firms have mastered the existing game in their industry. But their finely honed instincts, painstakingly acquired heuristics, deeply embedded skills as well as their implicit values or culture make it tough to deal with the uncertain new realities of a changing market place. They tend to see the market in self-limiting ways while innovations focus on the white spaces between markets (see the article by Roch Parayre in this DSI newsletter).⁴ Nowhere are these challenges more evident than in the arena of new technologies which serves as a microcosm of the conditions businesses may face all around.

Commercial success, when faced with profound uncertainty and complexity, depends on developing a different set of capabilities, tools and perspectives than in the traditional paradigm of business. To illustrate, here are just five of the various challenges (C1-C5) that managers need to navigate based on our Wharton studies about managing emerging technologies in large firms.

The C1: A strong commitment is necessary but you also have to keep your options open.

On the one hand, there are persuasive arguments that investments in innovative ventures should be viewed as creating a portfolio of options where the commitment of additional resources is subject to attaining defined milestones and resolving key uncertainties. These investments are viewed as options, akin to financial call options, that give the investor the right but not the obligation to make further investments.⁵ Additional funds are provided only if the project continues to appear promising. On the other hand, there is compelling evidence that long-run winners are often first movers who commit early and unequivocally to a technology path. Andy Grove⁶ of Intel argues that it takes all the energy of an organization to pursue one clear and simple strategic aim, especially in the face of aggressive and focused competitors, and that hedging by exploring a number of alternative directions is expensive and dilutes commitment.

Managers need to be able to balance commitment with flexibility as discussed in my book Profiting from Uncertainty.⁷ One way to mitigate this problem is to make the organization more flexible so the investments needed to make a strong commitment or to change that commitment are relatively small. Once uncertainty has been reduced to a tolerable level and there is a widespread consensus within the organization on an appropriate innovation path that can utilize the firm’s internal development capabilities, as in the case with Intel’s choice of personal computer over television as the preferred information appliance, then full-scale internal development can begin.

C2: Winners are often pioneers, but most pioneers fail.

A paradox that follows on the first one is that the only way to arrive first in a new territory is to be a pioneer, and yet pioneers more often than not end up at the bottom of a gulch with arrows in their backs. Just consider the expensive land grabs attempted by hundreds of dot.com companies that no longer exist. The big rewards come from being a pioneer, so long as you survive, but patience is needed to increase the odds of success. Pioneering is inherently risky, but there is no need to take foolish risks. As noted above for the dot.com victims, some companies failed because they raced too quickly into an undeveloped market with an undeveloped product.⁸

There is a fine line between gambling and calculated risk taking as Alfred Sloan emphasized when he transformed General Motors from a functional form to a multi-divisional organization. By moving forward in stages, you can build settlements and supply posts along the way. This way you won’t outpace your lines of supply or get trapped out in the wilderness alone. The outposts of small early niches provide a testing ground for strategies, an opportunity to learn how to survive on the frontier and to develop partnerships that are essential to success. Companies exploring emerging technologies have to carefully balance the promise and perils of pioneering.

C3: Strategies should build on existing competencies but organizational separation is often required for success through innovation.

The very characteristics that make large organizations successful create traps for them in managing new opportunities, especially radical innovations. To avoid stifling the new business model, companies often set up incubators, separate spin-offs or divisions where these businesses can grow and develop without the burdens of the mature parent. These separate organizations usually have different cultures, compensation structures, organizational designs and performance measures.

The problem is that the more separate these operations become, the less they can draw upon the strengths of the parent. Xerox PARC engaged in creative leaps that led to innovations such as the graphical user interface, but it was not Xerox that benefited from it but Apple and Microsoft. Saturn created a very different model for its organization but the hoped-for impact on the General Motors organization overall never materialized and in some ways the new initiative was held back by the parent. IBM, in its quest to develop a truly new PC, set up a separate unit in 1980 that failed to tap into any of IBM’s formidable technological competencies. The IBM PC was an assembled product, without any real proprietary technology, and consequently quickly attracted clones. There should not be too much separation between the venture and the parent.

And yet, there needs to be enough separation so the technology’s progress is not stifled. There should be just enough involvement to leverage the competencies of the existing organization. Like parenting a teenager, the new venture has to be given enough freedom to experiment and make mistakes but still be kept within the family. Given the distinctive personalities of these new internal ventures, this balance is always a challenge where it is critical to avoid either stifling the emerging technology business or eroding its synergy with the parent firm. Ideally, companies develop new forms of organizations that are truly ambidextrous.⁹

C4: Competition is intense and brutal, and yet winning requires collaboration.

Competition for emerging technologies can be brutal. With winner-take-all markets and firms that have staked their entire future on success, failure often is not an option. At the same time, no emerging technology company is an island. The success of a new gene therapy may depend on far-flung networks of researchers in specific fields. The success of a new information technology standard depends on upstream and downstream adoption by suppliers and customers. Managing alliances and other partnerships is one of the central activities in successfully developing and commercializing emerging technologies. Furthermore, the structure of these relationships determines the payoffs from the process (as IBM found out in its partnership with Microsoft and Intel). Very often the same companies that are collaborators in one arena are competitors in another. For instance, Sony and Philips who are intense rivals in the consumer market are working together on setting standards in optical media and supplying components to one another. Companies are entering into technology-sharing pacts, in which competitors agree to share future technology developments. For example, IBM might have an agreement with Hitachi to license future innovations in disk drives for a set fee.¹⁰ A major challenge in managing emerging technologies is knowing how to traverse complex webs of relationships with the proper the mix of cooperation and competition.¹¹

C5: Leaders must clearly focus the organization on a few big goals and yet also keep the an eye on the periphery to see new threats and opportunities.

In a two-year period, Mattel lost 20 percent of its share of the fashion doll segment to smaller rivals such as MGA Entertainment Company. This was largely due to Mattel’s failure to keep its Barbie doll in tune with the subtle shifts of thinking inside the minds of pre-teen girls. A subtle market change allowed MGA’s hip new Bratz line to erode the seemingly unassailable strength of Mattel’s Barbie franchise. The edgier Bratz dolls appeals to girls whose tastes are maturing more quickly than in the past. This led to an age compression that narrowed Mattel’s target market from girls ages 3 to 11, to the 3 to 5 age bracket, and a major loss of market share.

The challenge faced by Mattel and many other organizations (see Table 1) is how to interpret weak signals when they are still at the periphery. As with human peripheral vision, the weak signals at the outer edges of an organization are very difficult to see and interpret, and yet could be vital to success or survival. Companies can discover many opportunities by identifying and acting on weak signals ahead of rivals. But the price they pay is that resources are diverted from their focal vision which is focused on the task at hand. How should leaders balance the competing demands of the mainstream business vs. the periphery of their world, especially when these require very different challenges, traps and capabilities?

Table 1 – Weak Signals and Their Consequences

In Sum: Embracing Paradox and Ambiguity

An important part of managing the above challenges, be it in the technology or elsewhere, entails the ability to live with paradox, surprise and their associated ambiguities. Simple, absolute answers are few and far between in a clinical field such as business. If there were simple answers, the rewards of winning in this new game would not be great since many players will master the necessary strategies and tactics. It may be the ability to live with these ambiguities and to continually identify them and think through them that is one of the most important skills managers must develop. It is the very complexity of the emerging technology game, and its associated skewed payoff structure, that makes it worthwhile for established organizations to learn how to play it well. And the new game extends well beyond the challenges we identified for emerging technologies. Since business overall is experiencing a significant rise in uncertainty and complexity, we may need to develop new approaches to management in general. We shall address some of these in our next newsletter.

*This article draws upon Dr. Paul Schoemaker's work with Dr. George Day from Wharton, specifically their books Peripheral Vision (HBS Press, 2006) and Wharton on Emerging Technologies (Wiley, 2000).

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