2. Lecture 2 Fundamentals of Technological Change ©2009 Prentice Hall 2-1

3. ©2009 Prentice Hall 2-2

4. ©2009 Prentice Hall 2-3 Learning Objectives 1.Explain why technology tends to develop in an evolutionary manner 2.Graph & describe a technology S-curve 3.Define a shift in the S-curve 4.Spell out the pros and cons of using technology S-curves 5.Describe the Abernathy-Utterback model of technology evolution 6.Define & interpret a dominant design 7.Define & explain radical and incremental technological change 8.Summarize the modifications that researchers have made to the Abernathy-Utterback model 9.Describe & explain architectural innovation 10.Identify the types of innovation that new and established firms are each better suited to develop

5. DEFINITION OF INNOVATION Innovation - the use of new technological or market knowledge to offer a new product or service that customers want Innovation = invention + commercialization Innovation - the adoption of ideas that are new to the adopting organization

6. Innovation Competences and Assets New technological knowledge New Market Knowledge New Product -Low Cost -Improved Attributes -New Attributes

7. THEORIES OF INNOVATION Three general categories 1) theories that predict who might innovate 2) static theories 3) dynamic theories

8. INNOVATION Afuah  Innovation is the use of new technological and market knowledge to offer a new product or service to customers. A product/service can be considered ‘new’ if:  its costs are lowered  it has new attributes  it is, indeed, a new product or service

9. Profits Profits = Revenues – Costs = P( z, q ) x q( z ) – C( q, z ) where P = price C = cost q = quantity z = attributes

10. Value Creation, Costs and Competition

11. 3-10 Overview Several dimensions are used to categorize innovations.  These dimensions help clarify how different innovations offer different opportunities (and pose different demands) on producers, users, and regulators. The path a technology follows through time is termed its technology trajectory.  Many consistent patterns have been observed in technology trajectories, helping us understand how technologies improve and are diffused.

12. 3-11 Types of Innovation Product versus Process Innovation  Product innovations are embodied in the outputs of an organization – its goods or services.  Process innovations are innovations in the way an organization conducts its business, such as in techniques of producing or marketing goods or services.  Product innovations can enable process innovations and vice versa.  What is a product innovation for one organization might be a process innovation for another E.g., UPS creates a new distribution service (product innovation) that enables its customers to distribute their goods more widely or more easily (process innovation)

13. 3-12 Types of Innovation Radical versus Incremental Innovation  The radicalness of an innovation is the degree to which it is new and different from previously existing products and processes.  Incremental innovations may involve only a minor change from (or adjustment to) existing practices.  The radicalness of an innovation is relative; it may change over time or with respect to different observers. E.g., digital photography a more radical innovation for Kodak than for Sony.

14. 3-13 Types of Innovation Competence-Enhancing versus Competence- Destroying Innovation  Competence-enhancing innovations build on the firm’s existing knowledge base E.g., Intel’s Pentium 4 built on the technology for Pentium III.  Competence-destroying innovations renders a firm’s existing competencies obsolete. E.g., electronic calculators rendered Keuffel & Esser’s slide rule expertise obsolete.  Whether an innovation is competence enhancing or competence destroying depends on the perspective of a particular firm.

15. 3-14 Types of Innovation Architectural versus Component Innovation  A component innovation (or modular innovation) entails changes to one or more components of a product system without significantly affecting the overall design. E.g., adding gel-filled material to a bicycle seat  An architectural innovation entails changing the overall design of the system or the way components interact. E.g., transition from high-wheel bicycle to safety bicycle.  Most architectural innovations require changes in the underlying components also.

16. 3-15 Technology S-Curves Both the rate of a technology’s improvement, and its rate of diffusion to the market typically follow an s-shaped curve. S-curves in Technological Improvement Technology improves slowly at first because it is poorly understood. Then accelerates as understanding increases. Then tapers off as approaches limits.

17. 3-16 Technology S-Curves 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 Technological discontinuity may initially have lower performance than incumbent technology. –E.g., first automobiles were much slower than horse-drawn carriages.  Firms may be reluctant to adopt new technology because performance improvement is initially slow and costly, and they may have significant investment in incumbent technology

18. 3-17 Technology S-Curves S-Curves in Technology Diffusion  Adoption is initially slow because the technology 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 not valuable without film).

19. 3-18 Technology S-Curves 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 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 s-curve model too closely could end up switching technologies too soon or too late.

20. 3-19 Technology S-Curves S-curves of diffusion are in part a function of s- curves in technology improvement  Learning curve leads to price drops, which accelerate diffusion

21. 3-20 Diffusion of Innovation and Adopter Categories  Everett M. Rogers created a typology of adopters: Innovators are the first 2.5% of individuals to adopt an innovation. They are adventurous, comfortable with a high degree of complexity and uncertainty, and typically have access to substantial financial resources. Early Adopters are the next 13.5% to adopt the innovation. They are well integrated into their social system, and have great potential for opinion leadership. Other potential adopters look to early adopters for information and advice, thus early adopters make excellent "missionaries" for new products or processes. Early Majority are the next 34%. They adopt innovations slightly before the average member of a social system. They are typically not opinion leaders, but they interact frequently with their peers. Late Majority are the next 34%. They approach innovation with a skeptical air, and may not adopt the innovation until they feel pressure from their peers. They may have scarce resources. Laggards are the last 16%. They base their decisions primarily on past experience and possess almost no opinion leadership. They are highly skeptical of innovations and innovators, and must feel certain that a new innovation will not fail prior to adopting it. Research Brief

22. 3-21 Research Brief Diffusion of Innovation and Adopter Categories

23. 3-22 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.

24. SEGMENT ZERO Market Size of Segment Performance Parameter Segment Zero (NOT SERVED BY INDUSTRY) Segments served by industry

25. 11 - 24 Trajectories of Technology Improvement and Customer Requirements Time High-End Market Low-end Market Mass Market Technology Trajectory Performance Parameter

26. 11 - 25 Low-End Technology Trajectory Intersects Mass-Market Requirements Time High-End Market Low-end Market Mass Market High-End Technology Trajectory Performance Parameter Low-End Technology Trajectory

27. 3-26 Technology Cycles Technological change tends to be cyclical:  Each new s-curve ushers in an initial period of turbulence, followed by rapid improvement, then diminishing returns, and ultimately is displaced by a new technological discontinuity.  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).

28. 3-27 Technology Cycles  Anderson and Tushman also found that technological change proceeded cyclically. Each discontinuity inaugurates a period of turbulence and uncertainty (era of ferment) until a dominant design is selected, ushering in an era of incremental change.

29. 3-28 Technology Cycles  Anderson and Tushman found that: A dominant design always rose to command the majority of market share unless the next discontinuity arrived too early. The dominant design was never in the same form as the original discontinuity, but was also not on the leading edge of technology. It bundled the features that would meet the needs of the majority of the market.  During the era of incremental change, firms often cease to invest in learning about alternative designs and instead focus on developing competencies related to the dominant design.  This explains in part why incumbent firms may have difficulty recognizing and reacting to a discontinuous technology.

30. ©2009 Prentice Hall 2-29 Evolutionary Patterns of Development A process that begins with basic scientific discoveries and ends with commercial products that are adopted by a wide range of customers

31. ©2009 Prentice Hall 2-30 Evolution of technology New technology invented Product introduced to market Technology evolves and performance improves Better products adopted by more people Refine the technology and develop new generations of products

32. ©2009 Prentice Hall 2-31 Drivers of technological evolution Paradigms where researchers seek answers based on prior knowledge Social, economic, and political forces Technology trajectories - paths of improvement of a technology on some performance dimension Paradigm shifts necessary to create new opportunities

33. ©2009 Prentice Hall 2-32 Radical and Incremental Technological Change Most technological innovation is incremental, and involves small improvements to existing technologies Some technological innovation is radical, and involves fundamentally new ways of solving a problem

34. ©2009 Prentice Hall 2-33 Technology S-Curves Graphical representations of the development of a new technology Compare some measure of performance with some measure of effort The relationship between effort and performance is typically S-shaped:  Initially performance improvements per unit of effort are small  Once key drivers of performance are identified rapid improvement follows  Diminishing returns as physical limits reached

35. ©2009 Prentice Hall 2-34 The technology S-curve for Intel’s semiconductors

36. ©2009 Prentice Hall 2-35 Technological improvements along an S-curve Tend to be incremental, building on prior developments, and taking place within an existing paradigm Usually done by established firms:  they have existing technical, market, and organizational capabilities  they have an existing customer base  they have access to internal cash flow to invest

37. ©2009 Prentice Hall 2-36 Shifting S-Curves Happens when an existing technology reaches the point of diminishing returns A new technology is often developed to challenge the existing technology Initially, the new technology is usually inferior to existing technology on key dimensions But the new technology has greater potential for performance improvement

38. ©2009 Prentice Hall 2-37 Shifting S-curve example

39. ©2009 Prentice Hall 2-38 Who Shifts the S-Curve? Usually new entrants because:  Incumbents have no incentive to introduce the new technology  Incumbents have investments in existing technology  Products based on the new technology cannibalize incumbents’ sales  Managers at incumbent firms do not see the new technology as a threat  Incumbent firms can improve the performance of their old technologies  Incumbent firms face organizational obstacles to changing their core technologies

40. ©2009 Prentice Hall 2-39 Using Technology S-Curves as a Management Tool Incumbents can predict when to invest in a radical new technology Limitations:  the inability to identify when to switch technologies  the failure to incorporate all of the factors that matter to the decision to switch  the need for adopters of the new technology to focus on niche markets before tackling the mainstream of the market  the existence of alternative ways respond to the introduction of new technology

41. ©2009 Prentice Hall 2-40 The Abernathy-Utterback Model Technology evolves through periods of incremental innovation, interrupted by periods of radical innovation The development of a radical innovation leads to a fluid phase, during which time many firms enter and compete on the basis of different product designs Eventually, the firms in the industry converge on a dominant design, which results in the specific phase, during which time only incremental innovation occurs After a while, the cycle repeats itself

42. ©2009 Prentice Hall 2-41 The Nature of Innovation and Competition Product innovation: when technological innovation involves the creation of new goods and services sold to customers Process innovation: when technological innovation involves problem solving that improves the method of creating or delivering a product or service Fluid phase dominated by product innovation Specific phase dominated by process innovation

43. ©2009 Prentice Hall 2-42 The Timing of Product and Process Innovation

44. ©2009 Prentice Hall 2-43 Firms in an industry New firms perform best in the fluid phase:  They are better than established firms at product innovation  Less important that they are worse at efficient production based on scale economies During the specific phase, a shakeout typically occurs, with approximately half of the firms exiting the industry; those firms least able to fit their operations to the dominant design tend to exit

45. ©2009 Prentice Hall 2-44 Limitations to the Model Holds best in assembled manufacturing in which consumers have homogenous consumer tastes Holds less well in non-assembled manufacturing, and manufactured products based on non-assembled components Does not hold in services

46. ©2009 Prentice Hall 2-45 Modifications to the Abernathy and Utterback Model Barras’ reverse product cycle theory Tushman’s model of competence destroying and competence enhancing innovation Christensen’s model of value networks and disruptive innovation Henderson and Clark’s model of architectural innovation

47. STATIC MODELS (continues) Model Key features Value added Abernathy-Clark Unbundled technological and market Explains why incumbents may knowledge. Do well at radical technological Highlights the importance of market innovations. capabilities. Henderson-Clark Unbundled technological knowledge Explains why incumbents into component and architectural. Fail at what appears to be Defines innovation as: incremental if incremental innovations. both architectural and component These are actually knowledge are enhanced; architectural if architectural innovations. component knowledge is enhanced but architectural knowledge is destroyed.

48. Abernathy-Clark - Role of Technological and Market Capabilities Preserved Destroyed PreservedDestroyed X Axis: Technical Capabilities Y Axis: Market Capabilities

49. ©2009 Prentice Hall 2-48 Reverse Product Cycle Theory Model for service industries Stage 1: Adopt a technology from a goods industry to make services more efficient Stage 2: Use the technology to make the service more effective Stage 3: Use the technology to create new services (radical change)

50. ©2009 Prentice Hall 2-49 Competence-Enhancing and Competence-Destroying Innovation Radical new technology does not always undermine the capabilities of incumbent firms It is competence-enhancing if it makes use of existing knowledge, skills, abilities structure, design, production processes and plant and equipment It is competence-destroying if it undermines existing skills, structures, etc. Established firms are able to transition to a radical technology when that technology is competence-enhancing but fail to do so when it is competence-destroying

51. ©2009 Prentice Hall 2-50 Architectural Innovation A modular innovation is one that changes the components from which the innovation is created, but not the linkages between those components An architectural innovation is one that changes the linkages between the components, but leaves the components themselves intact

52. ©2009 Prentice Hall 2-51 Henderson and Clark’s Taxonomy of Innovations

53. ©2009 Prentice Hall 2-52 Why incumbent firms fail in the face of Architectural Innovation 1.Often lack the right external linkages to gather information about a new technology architecture emerging in an industry 2.Often lack the capacity to recognize the value of information about architectural innovation that is presented to them 3.Often have difficulty making use of information because adopting an architectural innovation typically requires a company to restructure

54. ©2009 Prentice Hall 2-53 Disruptive Technology and Value Networks For new firms: target a new or underserved segment of the market with a disruptive innovation For incumbent firms: make sure core technology conforms to the features of the dominant design because deviation from the dominant design will make it harder for you to satisfy customers once that design has emerged As an incumbent firm, develop a new company to exploit the disruptive technology, rather than ignoring it, or trying to develop the technology within the confines of your existing organization

55. WHO INNOVATES ? Model Key features Value added Schumpeter I Entrepreneurs are most likely Attempt to predict who is to innovate. most likely to innovate. Schumpeter II Large firms with some degree of Suggests the type of firm monopoly power are the most likely is what matters. to innovate.

56. Static Models Incremental vs radical innovation Abernathy-Clark Henderson-Clark Innovation Value-added Chain Strategic Leadership Familiarity Matrix Quality and Quantity of New Knowledge Appropriability and Complementary Assets Local Environment Strategic Choice

57. Incremental vs. radical innovation Organizational view of classifying innovations Innovation is radical if the technological knowledge required to exploit it is very different than existing knowledge (existing knowledge becomes obsolete) Radical innovations are competence destroying Innovation is incremental if the knowledge required to exploit it builds on existing knowledge (competence enhancing)

58. STATIC MODELS (continues) Model Key features Value added Incremental -- Strategic incentive to invest: defines The type of innovation Radical dichotomy innovation as incremental if it leaves determines the type of firm existing products competitive; radical that innovates. Incumbents if it renders existing products non- are more likely to exploit competitive. incremental innovation, Organizational capabilities: defines the whereas new entrants are innovation as incremental if capabilities more likely to exploit radical required to exploit it build on existing ones; innovations. radical if capabilities required are very different from existing ones. Focus on technological component of innovation; bundles technological and market knowledge; bundles component and architectural knowledge.

59. Strategic Incentive to Invest View In this view the type of innovation (radical vs. incremental) determines what type of firm is likely to invest to be first to exploit the innovation. A short coming is that this model assumes that firms have recognized the potential of the innovation and, in terms of radical innovation, only the fear of cannibalization prevents them from exploiting it.

60. Organizational Capabilities Incumbents have two problems with radical innovations:  since change is competence destroying they may not have the capabilities to exploit it  existing capabilities may not only be useless, they may actually be a handicap, if culture and processes of the old technology are firmly entrenched

61. STATIC MODELS (continues.) Model Key features Value-added Innovation value-added Extends emphasis to the wholeExplains why incumbents may chain innovation value added system of fail at incremental innovations suppliers, customers andand why they may succeed at complementary innovators.radical innovation. The competence of a firm’s ecosystem matters too, Strategic leadership Explores the role of top managementExplains why some and argues that whether or not a firmincumbents are the first to adopts an innovation is a function ofembrace radical innovations. top management’s dominant logic. Familiarity matrix Suggests that success in adopting an It is how a firm adopts an innovation is a function of the adoption innovation that determines mechanism used. its success or failure.

62. Support Activities Primary Activities Technological Development Human Resource Management Firm Infrastructure Procurement InboundLogistics Operations OutboundLogistics Marketing & Sales Service MARGIN MARGIN Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

63. Support Activities Primary Activities Technological Development Human Resource Management Firm Infrastructure Procurement InboundLogistics Operations OutboundLogistics Marketing & Sales Service MARGIN InboundLogistics Operations OutboundLogistics Service Marketing Technological Development Human Resource Management Procurement MARGIN portion more efficiently Firms often purchase a portion of their value-creating activities from specialty external suppliers who can perform these functions more efficientlyOutsourcing Strategic Choice to Purchase Some Activities From Outside Suppliers

64. Supplier Value ChainFirm Value ChainChannel Value Chain Upstream Value Perform valuable activities that complement the firm’s activities Buyer Value Chain Each firm must eventually find a way to become a part of some buyer’s value chain Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain This creates VALUE!! Value chains vary for firms in an industry, reflecting each firm’s unique qualities: History Strategy Success at Implementation Value Chains are part of a Total Value System

65. INNOVATION VALUE-ADDED Radical Incremental Type of innovation SupplierManufacturerCustomersComplimentary innovators Electric car DSK Keyboard Cray 3

66. Familiarity Matrix New and Unfamiliar Existing Market Unfamiliarity requires outside resources New but Familiar New and Unfamiliar New but Familiar Existing Technology

67. STATIC MODELS (continues) Model Key features Value added Quality and quantity It is not just how new the new Explains why superior of new knowledge knowledge is, but also how muchtechnologies do not always of that new knowledge there is andwin. its nature. Appropriateness and It takes more than technologicalExplains why inventors are not complementary assets capabilities to exploit an innovation;always the ones who profit from the appropriateness regime of thean innovation. innovation and complementary assets are also important. Local environment A firm’s innovativeness is a function A firm’s environment matters. of its local environment. Strategic choice A firm’s strategic choices are what Strategy matters. determine whether it exploits an innovation and not so much competence destruction or a lack of incentive to invest in the innovation.

68. TEECE MODEL High Low Available or unimportant Tightly held and important Complimentary Assets Imitability

69. 11 - 68 Time (Effort) Performance parameter Science Push Physical Limit Market Pull