i\4icrologic

Micrologic is a small research and development (RED) firm rhar designs hightechnologv products like porlable scanners and autornatic tollr.r,ay systems. lt rvasestablished by Hilaryde Leon, an eleclrical engineer. The firm, esrabliihed in 1984, wasoriginally cailed Cornputer [ngineering Corporation. lt larer became MITECH after it rvasacquired by rhe Ayrla's lnteg,rated Microelectronics lnc. when the Ayalas sold ivllrFCHto focus on their energy and telecommunications businesses, t\vo companies emerged, Amajor portion of MITECH rvas sold to the Borromeos of Cebu rvhile de Leon acquired asmaller portion of N4ITECH and organized it as A4icrologic. The case requires students toevaluate strategic options for the company such as continuing to design its own productsor acqu.i?ing licensing technology from foreign firms.

Author:Discipline:I ndustry:I ssues:

Setting:Level ol Difficulry:Case Number:Teaching Nore:

Rafael A. Rodriguez and Jose MagpantayStrategic ManagementElectron ics

Technology strategyPhilippines, 1997Undergraduate/M BA7.1997 -027 -1997 -A2r

*Prepared by Rafael A. Rodriguez and Jose Magpantay, both professors of University ofthe Phiiippines, as a basis for class discussion. The case is nor designed to illustiateeffective or ineffective handling of managerial situations. Names oi pJrrons and placesincluding financial data havc been disguised.

Introduction

orv is rechnologica.l comperence defined or measuredi &r iirri"g:irt,ga rechnologically comperenr firm from fie rest? k it rhe5ilsin.r, .o.i.ir,,

ird more rechnologicallycompetent than those inro First \Vave or Second \7ave rechnologies? {. it thepresence ofan R&D di'ision rhar eleuates the firm's rechnoloeical .o-o.riFlrr rhe culrure of excellence and rhe comperirive spiric which en"GGiiFlErm tostand its ground even in rhe face of internarional comperirion? Lastly, istechnological iompetence reflected in rhe qualiry of rhe fiim s producr and irsacceprance in the marker?

All rhese are conrributing facrors in deterrnining rhe rechnologicalcompetence of a firm. For example, a firm rhar manufacrures semiconducrors(a.high-rech businbss) under a conrracr agreemenr-rvhere all rhe processes,

211

212 . Cases on StraleBic l\'lana6ement in the Philippine Setting

equipment. and materials are supplied bv a mulrinatior.r2l-63nno1 [sconsidered technologicaill' comoereni. Sinrilarir,, a firm that irroduceshandicrafrs cannot be considered recl-rnologicalll'competent, even though itcieares or fabricates all of rts appropriare technologv equiprnent and processes.

Definitell', technological competence today requires innovativeness in a

relariveii'sophisticated business^(the sizc oithe firm is not inrporrant), i.e.,

ilnorvleeige and science intensive. If the firm is to be technologicallv innotatii,e,

ii needs to have an RSgD division. The firnr should aiso have a healthv attitudelorvards ccmpetition, is not fazed bf it, and thinks it can u'in s'ithoutirotection. And because oithis, it can produce, as u'ell as offer sen'ices that

sass international standards.

Given these crireria for technological competence , \4icrologic. a snrall

research and developmenr (R&D) firr,r that designs high-tecl:n..1ogvi-,roducts like porrabie scanners and automaric tollri'a1's1'srerns, can

iefinirel-v be considered as one oi the nrosr tecltnologicalll' colnpete ntirms in rhe country todar'. Tliis firm is in the high-technologl'businessand is primarily an R&D compan)'. It successfulll'cornpetes in the

internarional marker and is not intimidated bi' foreign comperirors. Allrhese achievemenrs, which u,ere attained under adverse condirion"S'dthe

:ountr),is not noted for activiries in the high-t..hnology areas, governnrentrules and regulations do nor promote R8.D, the country lacks highly skilled

:;rd properly trained sci.entists and engineers), justi$, Micrologic's inclusionin the lisr of technoiogicallv comperent firms that should be e mulated b;'orhers.

Brief History of the Firm

The story of Micrologic, a recentli' established company, follou's the

professional career of Hilary de Leon, its founder and CEO. Hilarl'de Leon,a 1971 elecrrical engineering graduate of the Universiry of the-Philippines,esrablished a small business that was inro designing and manufacturing ofmicroprocessor-based products in the early 1980s.

In 1984, Compurer Engineering Corporarion (CEC), a firm that was

into mainrenance of IBM mainframes, acquired de kont company and made

ir the Designing and Engineering Croup of CEC. That acquisition was

motivated by CECs expansion into rhe microcomputer business (hardrvare

. and sofrware) and they felt thar an R&D division.would srrengthen thecompany. The nexr four years saw the development of products like passbook'

- encoders, automatic rime recording sysrems, and fast process monitoring'I -systems.

Unfortunately, rhe union wirh CEC hampered the growth of rhe' ,:*-". \....

Micrologic . 213

Designing and E'gineering Group because of differences in brrsiness priorities.cECt main businesses were mainframe se^'icing and microcomputer salesrvhile the Designing and Engineering Group's focus rvas into microprocessor-based products.

In 1989, rhe Ayalas' Integrared Jr4icroelecrronics Incorporated (lMI)bougirr tlre Designing and Engineering Group from CEC and gave ir a

ne\\/ name' NJITECH corporation. ]\{i s business then (and up ro now)\\ras ro conrracr rhe assembll'of rnicrochips, and PCBs. The Ayalas,hou'e'er, *,anted ro expand inro higli value added prroducts and the1,sau,rl-re acquisition of de Leon's group as an opporruniry to break i'ro rhisbusiness. The Designing and Engineering Group, on rhe other hand, sau,rhe Ay'ala group as a strategic parrner rvho would supporr the firm's effortsin breaking into the high technologl'business. This meeting of the mindsand merging of business inrerests were reflected in MITECH's mission"to be the leading Philippine compan)'in rhe design and ma'ufacrure ofmicroelecrronic products for rhe local and inrernarional markets" and "rolook at rhe future as one of outsranding opporrunities, grou,ing hand-in-hand wirh our cusromers, our vendors and dealers, our employees andour shareholders, as we forge beyond rhe limirs of high technoiogy rocontinuously develop new ideas inro concrere innovations."

The four shorr years of MITECH's existe nce as parr of the Ayala groupof companies lvas a technological success, not onh'b-v Philippine standards,but e'en bf inrernarional srandards. The firm developed and tried ro marketquire a number of innovative producrs such as:

1) Pyroscan Fire Alarm Panel - a microprocessor-based fire alarm s),srem*'irh event mernory, auromaric printing, and computer connecriviry

2) Addressable Building Auromarion Sysrem - a combinarion of sensors,

detectors, and control devices in automared building managemenrcapable of fire derection, energy management, air conditioningconrrol, and securiqy monitoring.

3) The N{AC 701 2-Vire Addressabie Conrroller Inregrared Circuits -one of the firsr, if not the first applicarion specific inre$rated circuir(ASIC) ever designed by a Filipino firm and it is the hearr ofMITECH's Building Automation System.

4) MITECH designed personal compuiers such as 386 DX and 286NEAT.

, Hyperlink V.32 Modems - a 9600 bps external Flayes CompatibleModem.

211 ' Cases on Stratetic Manasemenl in the Philippine Setting

6) Logbox Conrputerize'J Timekeeping Svstern - a magnrtic card or

barlode-brr.J d"," caprure sl,stem for autcmated time reccrding,

cosc accounring, and securin,apolicaticns for nreciium to large firms.

7\ lr4icrolog Coni',uterized Tin're Recorder - a direct replacement of

the Bundl'clock'B) Port.crclte II - a hand-held computer useful for coiltainer 1'ard

inve nron, corlrroi, good/stock monitoiing in clepartnlent stores, utilirl'

nrerer readinq, and field sales order entr)' svstem'

MITECH's progressive rech|rological sophistication led to the grorvth of

rhe organization. ey. t992, N4ITECII, specifically its I.c. design group, had

,pn'on_.dsnewcomPany-theintegratedSiliconSolutions,Inc.Tlrenelvfirn ', busin.ss was designing applicarion specific integrated circuits (ASICA),

an area nor enrireh,new ro rhe firm because oftheir experience in designing

the \4-AC l0l .

The success of lr4ITECH in product innovatioi-t u';s, unlortunarelJ" not

rei:lected in the sales and financial asPects of rhe business. The sales were not

enougl.r ro cover ihe overhead expenses and rhe payroll. There were et'en

accouniing problerns rhat Ayala finance people and sGV accountants l\'ere

unable ," ,or, out. The mother comPan)" IMI, was in a quandary as to what

to do u,ith N,{ITECH. Filemon Berba. rhe presidenr of IMI, rvas inclined to

fix rhe problem and continue holding on to MITECH. Bur there u'e re others

rvho wanted ro cut llv{l's losses in N'{ITECH.what seated rhe fate of N,{ITECH B'as AYala's investmenrs in energy

and telecommunicarion, rvhich required more focus and resources. The

Al,alas decided to sell a major parr of MITECH to their partners from

Cebu, the Borromeos, u,ho esrablished the Borromeo Technology

Holdings, Inc. Horvever, lvilTECH u'as rerained as a brand name. The

Borromeos gor all the comme rcial products of lr4lTECH including rhe

video-karaoke, u,hich u'as a joinr project rvirh ASTRON. The rwo proje cts

rhat still required R8{D, rhe China tollway projecr and the porrable

scanners, *ere bought by de Leon and used to start the business of the

. new firm thar he had established-MICROLOGIC.' Essentially, MICROLOGIC is the R&D division of the defunct

\'IITECH. k has a sraff of 13, including de Leon,'iryho are mostly scienrisrs

*r,i; . *d engineers. It is primarily into innovative product development, with just

i-i:|',." u.ty small manufacruring force to protoryPe production' The proddct;':.t.Tf,:'lfui.lmarketing is contracred to international disrribution while mass production'r:$';tf'_-

;ffi.lt*ted ro a iocal electronics companl

N4icrologic ' 21 5

\x/irh lv{lcRoLoGIC, ir seems de lron ].ras conrpleted a q'cle. He iras, in

effecr, gone back to the inirial business he ser up in the'80s, a small firm drat is

inro designingmicroprocessor-ba^.ed producu. But r}ere is a qualitadve difference:

,J'r. prodi.r, ofMicrologic require more sophisticated larorvledge of the advanced

t..hnologi.s conrpared io *,. p^rrbook encoders and time recording systems of

dre old doigninj"nd Engineeri.g Group of CEC. T6e past ten years or so had

not been a complete',,1'aste of dme after all. Valuable lessons in marketing innovative

products, pecuiiarities of various inrernational ntarkets, effect of government

policies on th. .on]p.ritiveness of local firms, financing product develoPnlent,

and srreantlining operarions musr have been taken inro account by de Leon in

establishing the lean but mean N4ICROLOGIC'

Evaluating MICROLOGIC s TECHNO Competence

The broad fearures of a technologicalll,comperenr firm was discussed in the

inrroduction. ln fiis secrion, dre derailed fearures of technological competenc:

rvill be discu-rsd and u-sed to eraluate lvlicrologic. These lerrures are:

i) Vision/goals

2) Technology orienration

3) Climate lor technological change

4) Orgaware

5) Humanu'are

6) Hardware

/ ) lnlowareS) External Linkages

9) ir4anagement of TechnologT- Practices

1) \/ision/GoalsA technologically competent firm is forward-looking and is not

afraid to face rhe comperirion, eirher local or international, even in

the era of free trade. Micrologic understands the nature of future

comPetition in its area of niche microprocessor-based. electronic

proiu.r$ that is why it aims to equal or surPass the standards set by

"du"nc.d counrries in four ro seven years and achieve a level of

excellence comparable to the besr rhat the world has had to offer for

the lasr 10 years. The firm sees new business opportunities with the

full.implementation of GATT and AFTA and does not think that

NAIry\- will affect irs operations e'en though it seeks to Penetrate

fie US marker to sell rhe ponable scanners'

216 Cases on Strategic lr/ianagenrenl in the Philippinc Selting

In the next ten )rears, the firm aims to acliieve the lollowingorganization:rl goals:

l) 'Io have an R&D unir thar is sraffed b1'Filipino and foreignscientists and engineers

2) To have a purel)r Filipino top level maniigemenr capable intechnologl' forecasting, assessmenr and orlrer \4OT pracrices

As for technoiogical masrer)/, the firm, being an R&D companl'in a high-technologl'business, is norv ar rhe innovative and crearive

stages. ]n the nexr ten ),ears, the firm aims to mainrain this level oftechnologicaj mastery and produce more rechnologicalll' sophisticared

and high-va.lue products aird services.

Technology OrientationTechnology orientarion refers ro horv a firm looks at rechnology',

rvhether it is a bus iness res ourc e to be manage d o r a cos t to be m i ni mized.

The rechnologT- orienration of the firm can be surmised from thebackground of the top leadership, rhe hiring poliry of rhe firm, thefrequenry and the reasons for changing hardu.are equipmenr, andthe extent of the firm's technology developmenr efforts.

Micrologict .leaders, particuiarly rhe founder and prime moverHilary de Leon, have science and engineering backgrounds. De Leonhas bachelort and mastert degrees in Eiectrical Engineering. Even as

an undergraduate at rhe Universiry of rhe Philippines, he was alreadycommended for his expertise in electronics. And rhis was ar rhe rimewhen the Electrical Engineering Department of U.P. was heavilyslanted towards porver engineering.

Micrologic's rop people, aside from having Engineeringdegrees, already had design and production experience before rheybecame managers. This is importanr in completing the-educarionof a manager. Of course, accounting, finance, and managementare also important in achieving business success and they can easilybe learned (at le4st finance and accounting) by engineers. Bur foran RE<D company that is inrq innovative producr design anddevelopment, a working knowledge of designing and producrionis mandatory for its managers.

Since Micrologic is less tlan rwo years old it has nor yer esablisheda rack record in the acquisirion of capiral goods and equipmenc Dehont response ro the queries on 'how often major capial goods and

?\

Nlicrologic , 217

equipnrenr are acquired and the reasons for acquisirion" musr have

becn b,ased on liis CEC and 14ITECH experiences. Neverrheless, he

gave the follorving response: "Every three to five 1,ears, and ro posirionrhe firm straregicallf in the market." This clearll'shorvs rhar de Leonlooks ar tcchnology as a business resource and not as a cosr ro be

minimized.lr4icrologic alrval's artends indusrry trade fairs. it alu'a1'5 makes ir

a point to decipher (reverse engineer) an1' technology rhar it findsuseful. And, in choosing a foreign parrner, transfer of technologf is

the principal consideration. All these factors reflecr the primacy oftechnologf in the firm's decision-making.

3) Climate forTechnological ChangeIdeally the firm's quesr for technological comperence should come

from wirhin: the culture of excellence, rhe pride in surpassinginrernational srandards, and rhe fulfillment of attaining perfectionby having zero defecr producr runs. In pracrice, rhe externalenvironment-rhe competirion, rhe marker, the suppliers of partsand components, and even the governmenr-has more to do r','irhmany firms' drive for technological change rather than rhe inrernalpush. This does not mean that a firm thar reacrs more ro the exrernalpressure rarher than the inrernai push cannot be considered as

technologically competent, The climate for technological change is

really more of an assessment of the firm's environment from irsparticular point of view.

Micrologic does not find rhe local market and competitionchallenging. These rwo factors only moderately influehce (a rarherpolire or even generous assessmenr) Micrologic's technological efforrs.This is to be expecred because no Filipino firm ar this time is into rhesame business as Micrologic. Besides, rhe auromated tollway sysrem

and the portable scanners are borh headed for foreign markers. .

Micrologic does nor even find the local industry organizationsvery useful in irs quest for technological developmenr. The indusrryorganizations'do not even sponsor seminars or lectures on recenttechnologies. Nor do rhey sponsor researches on common industryneeds. At mosr, rhe local electronics organizarions present petirionsro thi governmenr regarding policies that affect rheir business. Forexample, through the electronics Kapihan sponsored by thePCASTRD, rhe electronics indusrry was able to solicit the DOST

8 . Ceses on Slrategic Managemenl in lhe Fhilippine Selling

Secreraryt help in asking the Deparrmenr ofTi'ade and Industrl'(DTI)and the Deparrment of Finance (DOF) in correcring the inequitableta-xation of electronic componenrs vis-)-vis finished products.

The firm, hou,ever, finds foreign competirors and rhe foreign nrarker

srimuladng for drq'srrongly push $e firm ro do technoioeical innovations

and improve $e qu"1i11'of its producrs and services.

Ir is rvorrhu,hile for policymakers ro nore rhat rhe governmenr'spresent policies do not have significant influence on rhe firms'technolog, upgrading program. This means thar die presenr incentivesfor RErD, ta-r-incenrive for pioneer indusrries, and even the specialDBP windon's for technology projects are nor arrracrive or imporranr

. enough for a fledgling, high-technology company like Micrologic.

4) Orgaware

Among the niche microprocessor-based producr manufacrurersin the country', Micrologic is unique in the sense thar it is more inroproduct development rarher rhan manufacturing. The firm has an

adequately staffed, acrive, and permanenr RSaD unit. k has a smalland adhoc unit rhar carries our rechnology forecasting, assessmenr,

selection, and sourcing. It also has an adequare, specialized technicallibrarl'. And since irs business is nor environmenrally sensirive, itdoes not have an environmenral unit. But the mosr imporranrstrucrure in Micrologic is rhe exisrence of a permanenr venue forR&D, manufacruring, and rop managem€nr people to meer anddiscuss technology-related matrers.

5) Humanware

Micrologic's sraff of rhirreen is distribured as follorvs. Aside fromde Leon who is rhe presidenr, there are: one operarions mahager, onesecretary, one accounranr, one purchasing officer, three assemblers,and five R&D personnel. The R&D people are engineering (J) andph1'sics graduares (2). The assemblers are vocational/rechnical schoolgraduards. AJl rogerher, there are seven individuals wirh rerriary S&Teducation. Three have training beyond the uidergraduate level (deLeon has a masre rt in EE whilelhe rwo Physics gr"d-u"t., arepursuingrleir mastert degree at rhe Universiry of rhe Philippines). However, it is

, 1ot only *re formal schooling of rhe personnel that is noteworrhy. The

R&D people also srudy and work.on ropics iike image processing,microprocessor-based design, digiral signal procerrin!, *ir.less

: communicarions, and heural nerworks on their own. This is a group

6)

r\4icrologic ' 219

that needs no motivation to u'iden their horizon. ]t also helps tl-rat de

L.eon alloivs his staffto u'ork on personal projects or things rhat interest

them within compan)' time.

Hardrvare

The firm's equipment is rypical of an elecrronics laboratoryr They

use logic anallzers, oscilloscopes, PC compatible computers, and other

minor tools. The mosr expensive eeuipment is *re logic anallnr.t

Inforvare

The know-hou,used by the firm is at the level of advanced tertiary

education. An excellent Applied Physics or Engineering background

is a prerequisite, and the rest of the specialized know-how (image

processing, neural nerworks, etc.) are learned from advanced books

and journals.

Exrernal Linkages

Unlike hardware, infoware, humanrvare or orga\\'are, external

linkages-rhe firm's relationships'rvith educational institutions,

supporr industries, industry organizations, and governmgns-dq ne1

have direct effecr on the firms' technological competence. They are

importanr only in so far as establishing how the firm relares ro rhese

institurions on matters relevant to irs business.

,Microiogic is satisfied with our educational institutions' De Leon

fi nds rhe Engineering, Business\, and vocational/technical graduates

of local schools very comperent and easily rrainable. This is ccnrrary

to the opinion of other businessmen and people from the academe'

The possible explanarion for de Leon's sraremenr is rhat he oniy hires

people from the top four engineering schools in the country'

Micrologic encourages its staff to Pursue further studies' Two offieir R&D staffare even uckling purely scientific and academic problems

for rheir advanced degrees. Micrologic also has a joint project with

theAdvanced Science andTechnolory Institute (ASTI) of the DOST'

De Leon participares in industry organizations like the Kapihan

meetings of the elecrronics sector. He thinks thar rhe local industry

organizations are not very active and therefore not really very helpful

to Micrologic's technology development efforts' However, de Leon

lends a helping hand to industry orginization -projects and even

gou.rt-.n, ptol..rt like thc sefiing up of a bulletin board system

(BBS) for rhe electronics industry.

7)

B)

220 . Cases on Strare8ic Managenrent in thc Philippine Setting

A niche electronic firm needs certaitl stlPPort industLies like

oackaging, metal fabricarion' manufactu ri ng suPPlies' electrorri c and

electrical' comPonellts' and even qualiq' screws' For Ir4icrologic s

' requirement, d; Leon finds the local support ind!stries just,sufficient'

u'ith occasional problems in sarisfring standards and. deadlines'

In general, Dt Lo'l seems to be positit'el1'disposed to go\ernmellt

policiei. He finds governrnent policies suPPortive and conducive to

ih. groo'rh of ,h. i-ndu"ry (lie rnusr be reierring to rhe signing of the

GATT and AFTA accords)' He also thinks that the Present

adminisrration is seriousll' and competend,v "leveling rhe playing

field."

9) Management oftchnology Practices r .Although nont of M1c'ologit'' management Pt:Pl: formalll'

studied or arrended a iv{anagement of Technologl' (]\4oT) Program'j

i, ,..rn, that MOT is intuitively practiced in the firm'

De Leon, as CEO of the firm' actively parriciPates in discussing

and resoiving issues related to technology This is expected,because

de Leon i, ",t "tto-plished

eltctronics engineer' De Leon also rakes

anactiveroleinctherMOTPracticeslikeforecasting'assessing'selecting, and sourcing technologies'

.

It is also narurai 6r Mic'ologic' being an RSrD firm' to always

disaggregate technologies, 'o ""**h"'

can be developed within the

firm and whar can bJ ".."rr.d locally' This is the firm's strategic

advantage. This will make the firm competirive in the long run and'

hopefuliy, successful in spite of the odds it has ro face by operating in

the country'

Conclusion

It is stili too early to say if Micrologic will do the Filipino nlion proud'

.h" *;;;^, C"*pt. did for Taiwatt o' S"-'ut'g did for Korea' rvhat can be

certaiq at this time is rhat the firm is rechnologically-competent by borh local

and international standards' lf all the argumenrs in the Pllvious section failed

"io convinci the reader of rhis facr, th. ,..e.tt markedng of the Portable Scanner

ii;'Sb USfi. ifrr. 100 unirs which were made by IONICS, are now being

flii",.ai ";J-i* p.nding US parenr should convince

T: ,1", MicrologicqrflDuteoJ aqo r$ Peilp+ il;-f;;' frJ- "d""'''ed

countries',tnd,:l'i' :'. "T,'n: l^':ir-#".$r_lii iy a. Leon has achieved som11ling like this. The MAc

-iii.Sro..r.or at the core of MITECHs Building automation

Micrologic ' 221

Sl,srems passed interuational standards (UL and TW)' Designing its verv

oi"n p.rronrl computers (336 and 286 levels) is no mean feat either'

io*,..,.r, ,..hnoio*icai ccn:1:'ctence is simpl'i olt of ihe ,necessary

conditions in achievi.giurin.rr ru.."r, i;r the inrer.ationai *aikcr. Tlici-e

are manl' orlt., .o"to'"'rirent iactors thet rjctermine x'6etlier tcci'rrlological

comDerence u,ouid rranslate into business success. l-hese in,,lucie iorg-rerrn

."'""t',,;.", (*ii.i, il:c Ayaia group f eilrd to givc ro \llTECij)' ic'cai suprloit

(rvhich \\,as ,or pro*idJ o1. ,tri to.rt market Ll..rur- of the counrr)"s coionicl

histon'and the .oun,,r, p"disposition tl.,foreign technoloS')' absence of

,_nr";, irl,,ities (such as ,,.rd.rd, and calibration laboratories), a*d, r:rc'st

importantll', the presence of a clear policy on industrialization (industrial

*"l...oL"rj Given th.s. reaiiries and the fact that rve stiii ir6ed to overcome

our lack of reputation in the high technology areas' Micrologic surell' has to

*ork doubly^h"rd if it is to 'uttttd in the international market'