Strategic Management Journal, Vol. 13, 119-135 (1992) DYNAMIC INTERACTION BETWEEN STRATEGY AND TECHNOLOGY HIROYUKI ITAMI and TSUYOSHI NUMAGAMI Faculty of Commerce and Institute of Business Research, Hitotsubashi University, Kunitachi, Tokyo, Japan There are at least three perspectives on the interaction between strategy and technology. The first focuses on the effect of current technology on current strategy of the firm, the second on the effect of current strategy on future technology, and the third on the effect of current technology on future strategy. The essence of these effects are respectively: strategy capitalizes on technology, strategy cultivates technology, and technology drives cognition of strategy. As we go from the first to the third, it becomes less conventional, less oriented to economics, more development-oriented and more process and organization-oriented. Fast strategy research has been dominated by the first perspective and thus has been too narrow and static. This paper tries to rectify this imbalance. INTRODUCTION Technology is the most fundamental of the core capabilities of a firm. It is a systematic body of knowledge about how natural and artificial things function and interact. It is a body of knowledge embodied in human brains and muscles, machines, and also in software and standard operating procedures of the organization. As such, it is inevitable that technology will become one of the central factors in deciding the firm's strategy. Diversifi- cation strategy, for example, depends on exten- sible technology which the firm has accumulated (Chandler, 1962; Rumelt, 1974; Teece, 1982). Many strategists warn that technological turning points are often the times when the fortunes of many firms change dramatically (Cooper and Schendei, 1976; Foster, 1986). Strategy, as it is used in this paper, means a Key words: Strategy-technology interaction, tech- nology accumulation, learning by doing, overextension, economies of evolution, technoiogy as a cognitive driver dynamic design of the activities for the entire firm. It is fundamental policy which determines the basic framework of the various activities of the firm and the basic principles of its game plan in the marketplace. We do not use the term strategy as in 'technology strategy', which presum- ably means the basic policy the firm takes in the technology fields (Ouinn, 1961; Quinn and Cavanaugh, 1964; Rosenbloom and Kantrow, 1982). How strategy and technology interact with each other over time is the basic theme of this paper and is what we believe to be one of the fundamental themes in strategy research. We contend that, in the past, the relationship between strategy and technology has been treated in too static a way and in too narrow a sense. In most discussions, technology has been treated as a constraining factor that determines the current opportunity set for the firm. It is usually argued that the strategy that the firm wants to pursue is constrained by the technologically feasible set of actions, or the firm should invest in broadening that feasible set if it wants to take a strategy which requires 0143-2095/92/100119-17$13.50 © 1992 by John Wiley & Sons, Ltd.