Types and Patterns of Innovation

• Product innovations are embodied by the business outputs goods and services
• Process innovations are innovations in the way business is conducted, such as techniques in marketing or production, to improve efficiency e.g. Reducing defect rate, or increasing output rate
• Product innovations for one organization might be a process innovation for another new distribution service (product innovation) allows its customers to distribute faster (process innovation)

• The difference lies in how far the innovation lies from existing practices
• A radical innovation is like the introduction of the motorized car to replace horse-drawn carriage, whilst the iPhone 4 is an incremental innovation on the iPhone 3
• Radicalness is defined by a combination of newness and the degree of differentness. It is also sometimes defined in terms of risk

Competence Enhancing v Competence Destroying

• Competence enhancing innovation builds on the company’s existing knowledge base
• Competence destroying innovation doesn’t build on the existing knowledge and sometimes renders it obsolete

Architectural Innovation v Component Innovation

• Most products or processes are hierarchal nested systems. This means that at any unit of analysis, the entity is a system of components, and each of these components is a system of smaller components and so on
• Component innovation is the change in the parts that make up the product but don’t have a significant effect on the overall configuration of the system
• Architectural innovation is the change in the overall design of the system or the way that components interact

Technology S-Curves

• The rate of  technology’s performance improvement and the rate at which the technology is adopted in the marketplace (rate of diffusion) repeatedly have been shown to conform to an s-shape curve

Technologies do not always get to reach their limits

• May be displaced by new, discontinuous technology

• A discontinuous technology fulfills a similar market need by means of an entirely new knowledge base
• E.g. Switch from carbon copying to photocopying, or vinyl records to compact discs

S-Curves in Technology Diffusion

• Adoption is initially slow because the tech is unfamiliar
• It accelerates as technology becomes better understood
• Eventually market is saturated and rate of new adoptions declines
• Technology diffusion tends to take far longer than information diffusion

• Technology may require acquiring complex knowledge or experience
• Technology may require complementary resources to make it valuable (e.g. Cameras may not be valuable without film)

S-Curves as a Prescriptive Tool

• Managers can use data on investment and performance of their own technologies OR data on overall industry investment and technology performance to map the s-curve
• While mapping the technology’s S-Curve is useful for gaining a deeper understanding of its rate of improvement or limits, its use as a prescriptive tool is limited

• True limits of technology may be unknown

• Shape of s-curve can be influenced by changes in the market, component technologies or complementary technologies
• Firms that follow the s-curve model too closely could end up switching technologies too soon or too late

S-Curves of diffusion are in part a function of s-curves in technology improvement

• Learning curve leads to price drops, which accelerate diffusion

Types of Adopters

• First 2.5% to adopt the innovation
• Adventurous
• Comfortable with a high degree of complexity/uncertainty
• Access to substantial financial resources

Early Adopters

• Next 13.5%
• Well integrated into social system
• Great potential for opinion leadership
• Other potential adopters look to early adopters for information and advice, so these guys are like missionaries for new products and services

• The next 34%
• Adopt innovations slightly before everyone else
• Not really opinion leaders, but peer interaction is frequent

Late Majority

• The next 34%
• Skeptical
• Scarce resources?

• Last 16%
• Base their decisions primarily on past experience and possess almost no opinion leadership
• Highly skeptical

Theory in Action

Technology Trajectories and “Segment Zero”

• Technologies often improve faster than customer requirements demand
• This enables low-end technologies to eventually meet the needs of the mass market
• Thus, if the low-end market is neglected, it can become a breeding ground for powerful competitors

Technological change tends to be cyclical:

Each new S-Curve ushers in an initial period of turbulence, followed by rapid

• Utterback and Abernathy characterized the technology cycle into two phases:

• The fluid phase (when there is considerable uncertainty about the technology and its market; firms experiment with different product designs in this phase
• After a dominant design emerges, the specific phase begins (when firms focus on incremental improvements to the design and manufacturing efficiency)

Standards Battles and Design Dominance

• Many industries experience strong pressure to select a few single dominant designs
• There are multiple dimensions shaping which technology rises to the position of the dominant design
• Firm strategies can influence several of these dimensions, enhancing the likelihood of their technologies rising to dominance

 W hy Dominant Designs are Selected

• In markets with network externalities, the benefit from using a good increases with the number of other users of the same good
• Network externalities are common in industries that are physically networked

• E.g. Railroads, telecommunications

Government Regulation

• Sometimes the consumer welfare benefits of having a single dominant design prompts government organizations to intervene, imposing a standard

• General standard of mobile communications in EU (GSM)

Result: The Winner Take All Markets

• Natural monopolies

• Firms supporting winning technologies earn huge rewards; others may be locked out

Increasing returns indicate that technology trajectories are categorized by path dependency :

• End results depend greatly on the events that took place leading up to the outcome

A dominant design can have far-reaching influence; it shapes future technological inquiry in the area

Winner take all markets can have very different competitive dynamics than other markets

• Technologically superior products do not always win
• Such markets require different firm strategies for success than markets with less pressure for a single dominant design

In many increasing returns industries, the value of a technology is strongly influenced by both:

• Technology’s standalone value
• Network externality value

Technology’s Standalone Value

• Includes such factors as:

• The functions the technology enables customers to perform
• Its aesthetic qualities
• Its ease of use

Network Externality Value

• Includes the value created by:

• The size of the technology’s installed base
• The availability of complementary goods

• A new technology that has significantly more standalone functionality than the incumbent technology may offer less overall value because it has a smaller installed base or poor availability of complementary goods

• NeXT Computers were extremely advanced technologically, but couldnt compete with the installed base value and complementary good value of Windows

• To successfully overthrow an existing dominant technology, new technology often must either offer:

• Dramatic technological improvement (e.g. Videogame consoles)
• Compatibility with existing installed base and complements
• Subjective information (perceptions and expectations) can matter as much as objective information (actual numbers)
• Value attributed to each dimension may be disproportional

Competing for Design Dominance in Markets with Network Externalities

• We can graph the value a technology offers in both standalone value and network externality value

• We can compare the graphs of two competing technologies, and identify cumulative market share levels (installed base) that determine which technology yields more value

• When customer requirements for network externality value are satiated at lower levels of market share, more than one dominant design may thrive

Are winner-take-all markets good for consumers?

• Economics emphasizes the benefits of competition
• However, network externalities suggest users sometimes get more value when one technology dominates
• Should the government intervene when network externalities create a natural monopoly
• Network externality benefits to customers rise with cumulative market share
• Potential for monopoly costs to customers