Strategic Management of Technological Innovation Melissa Schilling Chapter

Strategic Management of Technological Innovation Melissa Schilling Chapter 3 TYPES AND PATTERNS OF INNOVATION Types & Patterns of Innovation

Honda and Hybrid Electric Vehicles • Honda had an established record of developing environmentally-friendly cars and manufacturing processes. • Introduced its first hybrid electric vehicle (HEV) in Japan in 1997. – HEVs have increased fuel efficiency and decreased emissions – HEVs do not have to be plugged into an electrical outlet • Honda chose a different hybrid engine design than Toyota. – Honda chose not to collaborate or license its technology to others – wanted to maintain its independence. • Toyota, which engaged in both collaboration and licensing, sold almost three times as many HEVs. • Honda was also developing fuel-cell vehicles at the same time, though they would take much longer to commercialize. Types & Patterns of Innovation 2

Honda and Hybrid Electric Vehicles Discussion Questions: 1. Are hybrid electrical vehicles a radical innovation or an incremental innovation? Are they competence enhancing or competence destroying, and from whose perspective? How would you answer these questions for fuel-cell vehicles? 2. What factors do you think will influence the rate at which hybrid electric vehicles are adopted by consumers? 3. What would be the advantages or disadvantages of Honda and Toyota using the same engine standard? 4. Is Honda’s strategy of producing a different engine standard than Toyota and not collaborating or licensing to other automakers a good one? What would you recommend? 5. Why do you think Honda simultaneously developed both hybrid vehicles and fuel-cell vehicles? Types & Patterns of Innovation 3

Ericsson’s Gamble on 3 G Wireless • Ericsson, founded as a telegraph repair shop in 1876; by end of 2002 was the largest supplier of mobile telecommunications systems in the world. • First generation of cell phones had been analog. Second generation (2 G) was digital. By end of 1990 s, sales of 2 G phones were beginning to decline. • Telecom leaders began to set their sights on 3 G phones that would utilize broadband channels, enabling videoconferencing and high-speed web surfing. • In late 1990 s, Ericsson began focusing on 3 G systems, and put less effort on developing and promoting its 2 G systems. Types & Patterns of Innovation 4

Ericsson’s Gamble on 3 G Wireless • Ericsson experienced a significant erosion in profits – In 2001, lost more than $2 billion; ROA went from 8. 4% to -8. 5% • Transition to 3 G turned out to be more complex than expected – Pace of rollout slowed by lack of affordable 3 G handsets and competing 3 G network standards – Billions of euros spend on upgrading networks and purchasing licenses from government auctions – Companies now very deep in debt which caused loss of investor support – Users did not value 3 G features as much as hoped Types & Patterns of Innovation 5

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. Types & Patterns of Innovation 6

Types of Innovation • Product vs Process Innovation – Product innovations are embodied in the outputs of an organization – its goods or services. • Ericsson’s development of 3 G wireless networks and network services – Process innovations are innovations in the way an organization conducts its business, such as in techniques of producing or marketing goods or services. • Improving the effectiveness or efficiency of production – reducing defect rates, increasing quantity produced in a given time – Product innovations can enable process innovations and vice versa. Types & Patterns of Innovation 7

Product vs. Process Innovation • New processes may enable the production of new products – A new metallurgical technique enabled the development of the bicycle chain which in turn enabled the development of multiple-gear bicycles • New products may enable the development of new processes – The development of advanced workstations enabled the implementation of computer-aided-manufacturing processes that increase the speed and efficiency of production • What is a product innovation for one organization might be a process innovation for another – UPS created a new distribution service (product innovation) that enables its customers to distribute their goods more widely or more easily (process innovation) Types & Patterns of Innovation 8

Types of Innovation • Radical vs Incremental Innovation – The radicalness of an innovation is the degree to which it is new and different from previously existing products and processes. • Radicalness is also defined in terms of risk – 3 G wireless technology required • Investment in new networking equipment and infrastructure • Development of new phones greater display and memeory capabilities as well as a stronger battery and/or better power utilization • Degree of user acceptance of the technology was unknown Types & Patterns of Innovation 9

Types of Innovation • Radical vs Incremental Innovation – 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. • digital photography a more radical innovation for Kodak (chemical photography expertise) than for Sony (electronics expertise). Types & Patterns of Innovation 10

Types of Innovation • Competence-Enhancing vs Competence -Destroying Innovation – Competence-enhancing innovations build on the firm’s existing knowledge base • Intel’s Pentium 4 built on the technology for Pentium III. – Competence-destroying innovations renders a firm’s existing competencies obsolete. • Electronic calculators rendered Keuffel & Esser’s slide rule expertise obsolete. • HP and TI thrived as they had existing competencies in the electronic components needed in electronic calculators. – Whether an innovation is competence enhancing or competence destroying depends on the perspective of a particular firm. Types & Patterns of Innovation 11

Types of Innovation • Architectural vs 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. • adding gel-filled material to a bicycle seat – An architectural innovation entails changing the overall design of the system or the way components interact. • transition from high-wheel bicycle to safety bicycle. – In the 1800 s, the front wheel of a bicycle has a very large circumference in order to provide speed; gears did not exist yet – When gears and chains were invented, the bicycle took on a whole new design – Most architectural innovations require changes in the underlying components also. Types & Patterns of Innovation 12

The High Wheel Bicycle • In 1870 the first all metal machine appeared. The pedals were still attached directly to the front wheel. Solid rubber tires and the long spokes of the large front wheel provided a much smoother ride than its predecessor. – The front wheels became larger and larger as makers realized that the larger the wheel, the farther you could travel with one rotation of the pedals. • Safety issue: because the rider sat so high above the center of gravity, if the front wheel was stopped by a stone or rut in the road, the entire apparatus rotated forward on its front axle, and the rider was dropped unceremoniously on his head. Types & Patterns of Innovation 13

The Hard-Tired Safety • Improvements in the metals used in the bicycle, enabled the manufacturing of small chains and sprockets and were light enough for a human being to power. • The design with two wheels of the same size returned, with speed provided through the use of gears instead of large wheels. • They were safer than the high-wheelers but lacked the long, shock-absorbing spokes of the high-wheelers. – Buyers had to choose between safety and comfort until, a few years later, when Dr. Dunlop developed the pneumatic tire for his child’s bike. Types & Patterns of Innovation 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. • Plot technology’s performance against the amount of effort and money invested in the technology 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. Types & Patterns of Innovation 15

Technology S-Curves • S-curves in technology performance and market diffusion are related – better performance faster adoption – greater adoption further investment in improvements • But they are fundamentally different processes • If the effort invested is not constant over time, the resulting s-curve can obscure the true relationship Types & Patterns of Innovation 16

Technology S-Curves • In 1985, Gordon Moore, cofounder of Intel, noted that the density of transistors on integrated circuits had doubled every year since the IC was invented –The rate has since slowed to doubling every 18 months but the rate of acceleration is still very steep Types & Patterns of Innovation 17

Improvements in Intel's Transistor Density Over Time • In 1985, Gordon Moore, cofounder of Intel, noted that the density of transistors on integrated circuits had doubled every year since the IC was invented – The rate has since slowed to doubling every 18 months but the rate of acceleration is still very steep Types & Patterns of Innovation 18

Transistor Density versus Cumulative R&D Expenses • However, Intel’s R&D dollars per year has also been increasing rapidly – The big gains in transistor density have come at a big cost in terms of effort invested Types & Patterns of Innovation 19

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 Types & Patterns of Innovation 20

Discontinuous Technology • If the returns to effort invested in new technology are much higher than effort invested in the incumbent technology, in the long-run it is more likely to displace the incumbent technology Disruptive technology has a steeper s-curve P e r f o r m a n c e Incumbent technology New technology Effort Types & Patterns of Innovation Disruptive technology has an s-curve that increases to a higher performance limit P e r f o r m a n c e Incumbent technology New technology Effort 21

Technology S-Curves • S-Curves in Technology Diffusion (spread of technology through a population) – 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. , electric lights didn’t become practical until development of bulbs and vacuum pumps, cameras not valuable without film). Types & Patterns of Innovation 22

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 Types & Patterns of Innovation 23

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. Types & Patterns of Innovation 24

S-Curves as a Prescriptive Tool • The benefits a company can achieve by switching to a new technology depends on a number of factors – Advantages of the new technology – New technology’s fit with the company’s current abilities – New technology’s fit with the firm’s position in complementary resources – lacks them or may make compatible products – Expected rate of diffusion of the new technology • Firms that follow s-curve model too closely could end up switching technologies too soon or too late. Types & Patterns of Innovation 25

Diffusion of Innovation & 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. Types & Patterns of Innovation 26

Diffusion of Innovation & Adopter Categories Types & Patterns of Innovation 27

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. Mass market begins to feel they are paying for features they don’t need. • Thus, if the low-end market is neglected, it can become a breeding ground for powerful competitors. - This market was coined “segment zero” by Andy Grove, former CEO of Intel Types & Patterns of Innovation 28

Technology Trajectories and “Segment Zero” • Technologies often improve faster than – customer requirements demand and/or – customers can learn and adapt them to their work • 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. – The “segment zero” that Intel focused on was low-end personal computers – It’s margins were unattractive at the beginning but, as the technology curve advanced, the needs of the mass market were met at a lower price than the high-end technology Types & Patterns of Innovation 29

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 (bringing a stable architecture to the technology), the specific phase begins (when firms focus on incremental improvements to the design and manufacturing efficiency). Types & Patterns of Innovation 30

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. Types & Patterns of Innovation 31

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. Types & Patterns of Innovation 32

Discussion Questions 1. What are some of the reasons that established firms might resist the adoption of a new technology? 2. Are well-established firms or new entrants more likely to a) develop and/or b) adopt new technologies? What are some reasons for your choice? 3. Think of an example of an innovation you have studied at work or school. How would you characterize it on the dimensions described at the beginning of the chapter? 4. What are some of the reasons that both technology improvement and technology diffusion exhibit sshaped curves? Types & Patterns of Innovation 33