Technology Outsourcing in the U.S. and Japan

Why look to external sources for technology? What are the tactics and strategies employed to take advantage of such technology? Are there opportunities for competitive advantage in the way a company manages the process of acquiring external technology? These are among the questions we sought to answer by undertaking the research reported on in this article. Our sample consisted of 32 leading companies in the United States and Japan (17 U.S., 15 Japanese). The data were collected from personal interviews with 134 senior research staff, including chief technology officers, and two questionnaires--one examining externally-sourced technology from a corporate policy perspective and the other from the viewpoint of the project engineer responsible for the introduction of selected new products. This research project is the source of data for all figures except Figure 1. [FIGURE 1 OMITTED] The average sales of the companies participating in the study was $16.3 billion, with average employment nearly 45,000 (sales of U.S. companies averaged $12.4 billion, Japanese companies averaged $18.3 billion). The entire sample averaged nearly 150 new product introductions per year from 1991-1996. The companies were selected on the basis of their prowess in developing technically sophisticated products. Why Outsource Technology? Why outsource technology? "To make the bottom line look better," one CTO answered. Another said, "Because no one can do everything." A third answered, only partly in jest, "It is the only way to break up an inefficient bureaucracy." One senior manager called technology outsourcing the "great equalizer" enabling the firm to leverage new-product development resources. Another reported an example of this leverage where suppliers provided 50 percent of the funds for an experimental development. The chief engineer of a large capital goods company put it this way: "We want to be the technology leader but not the technology driver." They did not want to develop the technology--their job was to drive the application of technology developed by others. Reduced R&D budgets were cited as another reason to outsource technology. The CEO of one firm directed that the company virtually shut down its internal R&D program and forced external sourcing. It is now well accepted that reliance on internal sources for technology will not ensure success in the next generation of competitive struggle. Some believe that acquiring knowledge from external sources will become even more critical to producing ever more complex products well into the foreseeable future. Edward Roberts tracked changes in technology management practices in Europe, Asia and the U.S. during the 1990s (1). He concludes that the most important change by companies around the globe is the "relentless intensification" of dependence on external sources for technology. His research cites a doubling of dependency on external sources of technology between 1995 and 2001 (Figure 1). But Is It Really Important? Roberts' research provides insight at the aggregate level for reliance on external technology. But are companies going to the outside for the less important aspects of product development? The results of this research suggest they are not. Rather, for U.S. firms, outsourcing the less important technology is only slightly more probable than the more important technology. On the other hand, as can be seen in Figure 2, the Japanese are more likely to outsource the more important technology than they are the less important. [FIGURE 2 OMITTED] A common perception is that the strategic differentiators of a new product (i.e., those product components that will provide the most substantial competitive advantage) will be developed under wraps within the firm, while commodity technologies will be obtained primarily from suppliers. Arguably, the most important strategic differentiator of a new product is the product design. …