Lecture 2
Fundamentals of Technological
Change
2-1
©2009 Prentice Hall
2-2
©2009 Prentice Hall
Learning Objectives
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Explain why technology tends to develop in an evolutionary
manner
Graph & describe a technology S-curve
Define a shift in the S-curve
Spell out the pros and cons of using technology S-curves
Describe the Abernathy-Utterback model of technology evolution
Define & interpret a dominant design
Define & explain radical and incremental technological change
Summarize the modifications that researchers have made to the
Abernathy-Utterback model
Describe & explain architectural innovation
Identify the types of innovation that new and established firms are
each better suited to develop
2-3
©2009 Prentice Hall
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
Innovation
• New Product
•
•
•
-Low Cost
-Improved Attributes
-New Attributes
Competences
and
Assets
New technological
knowledge
New Market
Knowledge
THEORIES OF INNOVATION
• Three general categories
• 1) theories that predict who might
innovate
• 2) static theories
• 3) dynamic theories
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
Profits
•
•
•
•
•
•
•
Profits = Revenues – Costs
= P( z , q ) x q( z ) – C( q , z )
where
P = price
C = cost
q = quantity
z = attributes
Value Creation, Costs and
Competition
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.
3-10
 Many consistent patterns have been observed
in technology trajectories, helping us
understand how technologies improve and are
diffused.
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)
3-11
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.
3-12
Types of Innovation
• Competence-Enhancing versus CompetenceDestroying 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.
3-13
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.
3-14
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.
3-15
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
3-16
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).
3-17
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.
3-18
Technology S-Curves
• S-curves of diffusion are in part a function of scurves in technology improvement
 Learning curve leads to price drops, which accelerate
diffusion
3-19
Research Brief
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.
3-20
Research Brief
Diffusion of Innovation and Adopter Categories
3-21
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.
3-22
Performance Parameter
SEGMENT ZERO
Market Size of Segment
Segments served by
industry
Segment Zero
(NOT SERVED BY INDUSTRY)
Performance Parameter
Trajectories of Technology Improvement and Customer
Requirements
High-End Market
Technology
Trajectory
Mass Market
Low-end Market
Time
11 -
24
Performance Parameter
Low-End Technology Trajectory Intersects Mass-Market
Requirements
High-End Market
High-End Technology
Trajectory
Mass Market
Low-end Market
Low-End Technology
Trajectory
Time
11 -
25
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:
3-26
• 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).
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.
3-27
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.
3-28
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
2-29
©2009 Prentice Hall
Evolution of technology
New
technology
invented
Product
introduced
to market
Technology
evolves and
performance
improves
Refine the
technology
and develop
new
generations of
products
Better
products
adopted by
more
people
2-30
©2009 Prentice Hall
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
2-31
©2009 Prentice Hall
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
2-32
©2009 Prentice Hall
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
2-33
©2009 Prentice Hall
The technology S-curve for Intel’s
semiconductors
2-34
©2009 Prentice Hall
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
2-35
©2009 Prentice Hall
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
2-36
©2009 Prentice Hall
Shifting S-curve example
2-37
©2009 Prentice Hall
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
2-38
©2009 Prentice Hall
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
2-39
©2009 Prentice Hall
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
2-40
©2009 Prentice Hall
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
2-41
©2009 Prentice Hall
The Timing of Product and Process
Innovation
2-42
©2009 Prentice Hall
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
2-43
©2009 Prentice Hall
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
2-44
©2009 Prentice Hall
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
2-45
©2009 Prentice Hall
STATIC MODELS (continues)
Model
Key features
Value added
Abernathy-Clark
Unbundled technological and market
knowledge.
Highlights the importance of market
capabilities.
Explains why incumbents may
Do well at radical technological
innovations.
Henderson-Clark
Unbundled technological knowledge
into component and architectural.
Defines innovation as: incremental if
both architectural and component
knowledge are enhanced; architectural if
component knowledge is enhanced but
architectural knowledge is destroyed.
Explains why incumbents
Fail at what appears to be
incremental innovations.
These are actually
architectural innovations.
Abernathy-Clark - Role of Technological
and Market Capabilities
Y Axis: Market Capabilities
X Axis: Technical Capabilities
Preserved
Preserved
Regular
Destroyed
Revolutionary
Destroyed
Niche
Architectural
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)
2-48
©2009 Prentice Hall
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
2-49
©2009 Prentice Hall
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
2-50
©2009 Prentice Hall
Henderson and Clark’s Taxonomy of
Innovations
2-51
©2009 Prentice Hall
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
2-52
©2009 Prentice Hall
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
2-53
©2009 Prentice Hall
WHO INNOVATES?
Model
Schumpeter I
Schumpeter II
Key features
Value added
Entrepreneurs are most likely
Attempt to predict who is
to innovate.
most likely to innovate.
Large firms with some degree of
Suggests the type of firm
monopoly power are the most likely is what matters.
to innovate.
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
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)
STATIC MODELS (continues)
Model
Incremental -Radical dichotomy
Key features
Value added
Strategic incentive to invest: defines
The type of innovation
innovation as incremental if it leaves
determines the type of firm
existing products competitive; radical
that innovates. Incumbents
if it renders existing products nonare 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.
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.
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
STATIC MODELS (continues.)
Model
Key features
Value-added
Innovation value-added Extends emphasis to the whole
chain
innovation value added system of
suppliers, customers and
complementary innovators.
The competence of a firm’s
ecosystem matters too,
Explains why incumbents may
fail at incremental innovations
and why they may succeed at
radical innovation.
Strategic leadership
Explores the role of top management
and argues that whether or not a firm
adopts an innovation is a function of
top management’s dominant logic.
Explains why some
incumbents are the first to
embrace radical innovations.
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.
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Firm Infrastructure
Human Resource Management
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers
Firm Infrastructure
Human Resource Management
Human Resource Management
Firms often purchase a portion
Technological Development
Inbound
Logistics
Operations
Outbound
Logistics
Primary Activities
Marketing
& Sales
Service
Operations
Procurement
Marketing
& Sales
Procurement
of their value-creating activities
from specialty external suppliers
Development
who can perform these functions
more efficiently
Outbound
Logistics
Technological
Inbound
Logistics
Support
Activities
Service
Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Upstream Value
Perform valuable activities that
complement the firm’s activities
Channel Value Chain
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
INNOVATION VALUE-ADDED
Radical
Electric car
DSK Keyboard
Type of
innovation
Cray 3
Incremental
Supplier
Manufacturer
Customers
Complimentary
innovators
Familiarity Matrix
Unfamiliarity
requires
outside
resources
Market
New and
Unfamiliar
New but
Familiar
Existing
Existing
New but
Familiar
Technology
New and
Unfamiliar
STATIC MODELS (continues)
Model
Key features
Value added
Quality and quantity
of new knowledge
It is not just how new the new
knowledge is, but also how much
of that new knowledge there is and
its nature.
Explains why superior
technologies do not always
win.
Appropriateness and
complementary assets
It takes more than technological
capabilities to exploit an innovation;
the appropriateness regime of the
innovation and complementary
assets are also important.
Explains why inventors are not
always the ones who profit from
an innovation.
Local environment
A firm’s innovativeness is a function
of its local environment.
A firm’s environment matters.
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.
TEECE MODEL
Complimentary Assets
Available or
unimportant
Imitability
High
Low
Tightly held and
important
Difficult to
make
money
Holder of
complimentary
assets
Inventor
Inventor or party
with bargaining power
Physical Limit
Performance parameter
Market Pull
Science
Push
Time (Effort)
68
11 -