Technology Leadership Can Pay Off

Companies defined as technology leaders attained better business results than rivals that de-emphasized technology leadership. OVERVIEW: For the last several years, "technology-driven" companies have been regarded as unfashionable plodders, at least in the eyes of investors and the business media. However, a study of companies that could be called technology leaders reveals that these companies were not only more profitable than their competitors but outgrew them in revenue growth as well. These leaders also excelled in four key areas of technology management: strategy, portfolio management, planning, and development and transfer processes. What are the implications of a reduced willingness to invest in the difficult, risky and uncertain work of technology development? Are some technology-industry companies perhaps too focused on other strategies, ignoring their potential to be technology leaders? Has the pendulum swung too far? We think it has. Technological advances, which take many years of difficult work to achieve, bring substantive and sustainable business advantages that are difficult for competitors to replicate. Innovative, patentable technologies often provide differentiation that is more sustainable than that provided by other strategies such as customer focus or supply-chain excellence. (Microsoft and Intel are notable examples.) To test our belief in the durable business value of technology leadership, we conducted an analysis using data from the Performance Measurement Group, a PRTM subsidiary. PMG's databases contain benchmarking data on the product-development performance of nearly 300 technology-based businesses. These are primarily Fortune 500 companies in the automotive, chemical, computer, electronics, and telecommunications equipment industries. Identifying Technology Leaders To investigate the impact of technology investments on business performance, we searched the database for companies whose characteristics might indicate "technology leadership." We defined technology leaders as companies that spend a relatively high portion of their R&D investment on technology development, and that have been successful in leveraging the resulting technologies into commercially released products. (We are defining "technology development" as R&D projects aimed at evaluating and delivering new technologies for use in future product-development projects, as opposed to current product-development projects.) To find the "technology leaders" in the database, we searched for the companies or business units that were in the top 20 percent in their industry segment in both of two key metrics, averaged over a four-year period: * "Technology development investment," expressed as a percentage of R&D spending. * "Technology utilization," defined as the fraction of technology-development projects that were actually incorporated into commercially released products. The resulting 60 "technology leaders" invested twice as much on technology development as a fraction of their R&D budgets as the average companies in their industries, and managed to utilize their technologies in commercially released products 67 percent more often. Having identified the technology leaders, we then sought to determine whether their technology leadership paid off in improved business performance by comparing the technology leaders to the overall population in the database. The results are illuminating. Across the industry segments we studied, we found that the technology leaders had an average gross-margin advantage over the "average" companies of seven points (41 percent vs 34 percent). In addition, the technology leaders were able to bring their higher gross margins to the bottom line: Their profitability was 78 percent higher than average (16 percent vs. 9 percent). As might be expected, technology leaders are able to charge more for their highly innovative products, or are able to manufacture their products at a lower cost than their competitors, or both. …