Technology strategy and financial performance: Examining the moderating role of the firm's competitive environment

Abstract

Success in today's competitive environment requires a company to pursue a coherent technology strategy to articulate its plans to develop, acquire, and deploy technological resources to achieve superior financial performance. This strategy clarifies the company's choices on: being a technological pioneer or a follower, the breadth of the technology product and process portfolios, amounts of investments in internal R&D and external sources of technology, and levels of technological forecasting to be performed. In turn, these choices require making decisions on the basic and applied R&D to be conduced, the intended offensive or defensive uses of the technology, and emphasis on incremental and radical R&D. To date, however, few studies have attempted to document the collective implications of a company's technological choices for its financial performance. In response, data from 176 manufacturing companies were used to examine the association between a company's technology strategy and its financial performance and to explore the moderating effect of the environment on the technology strategy-performance link. Therefore, the study focused on a company's perceptions of environmental dynamism, hostility, and heterogeneity. Dynamism indicated the perceived continuity of changes in an industry. Hostility referred to the changes in the industry that could adversely impact the firm's operations and performance. Heterogeneity meant that the environment encompassed many segments with different needs. The study developed and empirically tested the following hypotheses: 1. H1a: Pioneering will be highest among firms whose environments are highly dynamic, moderately hostile, and moderately heterogeneous. 2. H1b: Followership will be highest among firms whose environments are highly hostile and moderately dynamic but low in heterogeneity. 3. H2a: Radical product technologies will be pursued most by firms whose environments are highly dynamic, moderately hostile, and moderately heterogeneous. 4. H2b: Radical process technologies will be pursued most by firms whose environments are moderately dynamic, moderately hostile, and moderately heterogeneous. 5. H2c: Incremental product and process technologies will be pursued most by firms whose environments are stable (low dynamism), benign (low hostility), and highly heterogeneous. 6. H3: The broadest technological portfolios will exist among firms whose environments are characterized by moderate dynamism, high heterogeneity, and moderate or low hostility. 7. H4: R&D spending will be highest among firms whose environments are highly dynamic, highly heterogeneous, and highly benign (low in hostility). 8. H5: The use of external technology sources will be highest among firms whose environments are highly dynamic, highly hostile, and highly heterogeneous. 9. H6: Emphasis on technological forecasting will be highest among firms whose environments are highly dynamic, highly hostile, and highly heterogeneous. 10. H7: The environment is a quasi-moderator of the technology strategy-performance relationship. The results supported the study's hypotheses except H2c and H3 and suggested five ideas for managerial action. (1) Executives should develop and use a comprehensive technology strategy to ensure that their company achieves superior financial performance. (2) Executives should be cautious in applying generic prescriptions of how to utilize technological resources to achieve profitability, because the financial payoff from technology strategy variables varies from one environment to the other. Instead, executives should examine their company's goals, capacity to manage diverse product and process initiatives, risk-taking orientation, resources, and the environment. (3) Attention to developing and using process technology innovation is necessary for success. In fact, a broad process innovation portfolio is positively associated with return on assets in the overall sample and in three of the study's five clusters. (4) Managers need to adopt a long-term perspective in making R&D investments, where patient investments over several years are the norm. Increasing R&D spending should not be viewed as a quick fix for the company's poor competitive position. (5) Whereas the external sources of technology can improve the company's performance, managers should identify the conditions under which external sources can be used and educate their employees on the growing importance of these technologies for achieving profitability.