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Chapter 3

TYPES AND PATTERNS OF INNOVATION

Strategic Management of

Technological InnovationMelissa Schilling

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Types & Patterns of Innovation 2

Honda had an established record of developing

environmentally-friendly cars and manufacturingprocesses. 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 andlicensing, sold almost three times as many HEVs. Honda was also developing fuel-cell vehicles at the same

time, though they would take much longer tocommercialize.

Honda and Hybrid Electric Vehicles

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Discussion Questions:1. Are hybrid electrical vehicles a radical innovation or anincremental innovation? Are they competence enhancing orcompetence destroying, and from whose perspective? Howwould you answer these questions for fuel-cell vehicles?

2. What factors do you think will influence the rate at whichhybrid electric vehicles are adopted by consumers?

3. What would be the advantages or disadvantages of Hondaand Toyota using the same engine standard?

4. Is Hondas strategy of producing a different engine standardthan Toyota and not collaborating or licensing to otherautomakers a good one? What would you recommend?

5. Why do you think Honda simultaneously developed bothhybrid vehicles and fuel-cell vehicles?

Honda and Hybrid Electric Vehicles

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Ericssons Gamble on 3G Wireless

Ericsson, founded as a telegraph repair shop in1876; by end of 2002 was the largest supplier ofmobile telecommunications systems in the world.

First generation of cell phones had been analog.Second generation (2G) was digital. By end of

1990s, sales of 2G phones were beginning todecline. Telecom leaders began to set their sights on 3G

phones that would utilize broadband channels,enabling videoconferencing and high-speed web

surfing. In late 1990s, Ericsson began focusing on 3Gsystems, and put less effort on developing andpromoting its 2G systems.

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Ericssons Gamble on 3G Wireless

Ericsson experienced a significant erosion inprofits In 2001, lost more than $2 billion; ROA went from

8.4% to -8.5%

Transition to 3G turned out to be more complexthan expectedPace of rollout slowed by lack of affordable 3G

handsets and competing 3G network standardsBillions of euros spend on upgrading networks and

purchasing licenses from government auctionsCompanies now very deep in debt which caused

loss of investor supportUsers did not value 3G features as much as hoped

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Overview

Several dimensions are used to categorizeinnovations.

These dimensions help clarify how differentinnovations offer different opportunities (and posedifferent demands) on producers, users, and

regulators. The path a technology follows through time is

termed its technology trajectory.

Many consistent patterns have been observed intechnology trajectories, helping us understand howtechnologies improve and are diffused.

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Types of Innovation

Product vs Process Innovation Product innovationsare embodied in the outputsof an

organization its goods or services.

Ericssons development of 3G wireless networks andnetwork services

Process innovationsare innovations in the way anorganization conducts its business, such as in techniquesof producing or marketing goods or services.

Improving the effectiveness or efficiency of production

reducing defect rates, increasing quantity produced in agiven time

Product innovationscan enable process innovationsandvice versa.

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Product vs. Process Innovation

New processes may enable the production of new products

A new metallurgical technique enabled the development of thebicycle chain which in turn enabled the development ofmultiple-gear bicycles

New products may enable the development of new

processes The development of advanced workstations enabled theimplementation of computer-aided-manufacturing processesthat increase the speed and efficiency of production

What is a product innovationfor one organization might be

a process innovationfor another UPS created a new distribution service (product innovation)

that enables its customers to distribute their goods morewidely or more easily (process innovation)

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Types of Innovation

Radical vs Incremental InnovationThe radicalnessof an innovation is the degree to

which it is new and differentfrom previously existingproducts and processes.

Radicalness is also defined in terms of risk

3G wireless technology required

Investment in new networking equipment andinfrastructure

Development of new phones greater display and

memeory capabilities as well as a stronger batteryand/or better power utilization

Degree of user acceptance of the technology wasunknown

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Types of Innovation

Radical vs Incremental Innovation Incremental innovationsmay 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 differentobservers.

digital photography a more radical innovation for Kodak(chemical photography expertise) than for Sony

(electronics expertise).

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Types of Innovation

Competence-Enhancing vsCompetence-Destroying Innovation Competence-enhancinginnovations build on the firms

existing knowledge base Intels Pentium 4 built on the technology for Pentium III.

Competence-destroyinginnovations renders a firmsexisting competencies obsolete. Electronic calculators rendered Keuffel & Essers 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 orcompetence destroying depends on the perspective of aparticular firm.

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Types of Innovation

Architectural vs Component InnovationAcomponent innovation (or modular innovation) entails

changes to one or more components of a product systemwithout significantly affecting the overall design.

adding gel-filled material to a bicycle seat

An architectural innovation entails changing the overalldesign of the system or the way components interact.

transition from high-wheel bicycle to safety bicycle.

In the 1800s, 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 theunderlying components also.

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The Hard-Tired Safety

Improvements in the metals used in the bicycle, enabledthe manufacturing of small chains and sprockets and werelight 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 oflarge wheels.

They were safer than the high-wheelers but lacked thelong, shock-absorbing spokes of the high-wheelers.

Buyers had to choose between safety and comfort until,a few years later, when Dr. Dunlop developed thepneumatic tire for his childs bike.

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Technology S-Curves Both the rate of a technologys improvement, and its rate of

diffusion to the market typically follow an s-shaped curve. Plot technologys 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.

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Technology S-Curves

S-curves in technology performance andmarket diffusion are related better performance faster adoption

greater adoption further investment in improvements

But they are fundamentally differentprocesses

If the effort invested is not constant over

time, the resulting s-curve can obscure thetrue relationship

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Technology S-Curves

In 1985, Gordon Moore, cofounder of Intel,noted that the density of transistors onintegrated circuits had doubled every yearsince the IC was invented

The rate has since slowed to doubling every18 months but the rate of acceleration isstill very steep

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Improvements in Intel'sTransistor Density Over Time

In 1985, Gordon Moore, cofounder of Intel, noted that the density oftransistors on integrated circuits had doubled every year since the ICwas invented

The rate has since slowed to doubling every 18 months but therate of acceleration is still very steep

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Transistor Density versusCumulative R&D Expenses

However, Intels 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

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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 lowerperformance 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 andcostly, and they may have significant investment inincumbent technology

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Discontinuous Technology

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Incumbent

technology

New

technology

Effort

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Incumbent

technology

New

technology

Disruptive technology has a steeper s-curveDisruptive technology has an s-curve thatincreases to a higher performance limit

If the returns to effort invested in new technology are

much higher than effort invested in the incumbenttechnology, in the long-run it is more likely to displace theincumbent technology

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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 adoptionsdeclines.

Technology diffusion tends to take far longer thaninformation diffusion. Technology may require acquiring complex knowledge or

experience. Technology may require complementary resources to make it

valuable (e.g., electric lights didnt become practical untildevelopment of bulbs and vacuum pumps, cameras notvaluable without film).

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Technology S-Curves

S-curves of diffusion are in part a function of s-

curves in technology improvement

Learning curve leads to price drops, whichaccelerate diffusion

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S-Curves as a Prescriptive Tool Managers can use data on investment and

performance of their own technologies or data onoverall industry investment and technologyperformance to map s-curve.

While mapping the technologys s-curve is useful for

gaining a deeper understanding of its rate ofimprovement or limits, its use as a prescriptive tool islimited.

True limits of technology may be unknown

Shape of s-curve can be influenced by changes in themarket, component technologies, or complementarytechnologies.

Firms that follow s-curve model too closely could endup switching technologies too soon or too late.

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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 technologys fit with the companys current abilities

New technologys fit with the firms position incomplementary resources lacks them or may makecompatible products

Expected rate of diffusion of the new technology

Firms that follow s-curve model too closely could endup switching technologies too soon or too late.

Diff i f I ti &

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Everett M. Rogers created a typology of adopters: Innovators are the first 2.5% of individuals to adopt an innovation. Theyare adventurous, comfortable with a high degree of complexity anduncertainty, and typically have access to substantial financial resources.

Early Adopters are the next 13.5% to adopt the innovation. They arewell integrated into their social system, and have great potential for

opinion leadership. Other potential adopters look to early adopters forinformation and advice, thus early adopters make excellent "missionaries"for new products or processes.

Early Majority are the next 34%. They adopt innovations slightly beforethe average member of a social system. They are typically not opinionleaders, but they interact frequently with their peers.

Late Majority are the next 34%.They approach innovation with askeptical air, and may not adopt the innovation until they feel pressurefrom their peers. They may have scarce resources.

Laggards are the last 16%.They base their decisions primarily on pastexperience and possess almost no opinion leadership. They are highlyskeptical of innovations and innovators, and must feel certain that a newinnovation will not fail prior to adopting it.

Diffusion of Innovation &Adopter Categories

Diffusion of Innovation &

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Diffusion of Innovation &Adopter Categories

T h l T j t i

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Technology Trajectoriesand Segment Zero

Technologies often improve faster than customer requirements demand

This enables low-end technologies to eventually meet the needs of the massmarket. Mass market begins to feel they are paying for features they dontneed.

Thus, if the low-end market is neglected, it can become a breeding ground

for powerful competitors.- This market was coinedsegmentzeroby Andy Grove, former CEO of Intel

Technology Trajectories

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Technology Trajectoriesand 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 Its margins were unattractive at the beginning but, as the

technology curve advanced, the needs of the mass marketwere met at a lower price than the high-end technology

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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 technologicaldiscontinuity.

Utterback and Abernathy characterized the technologycycle into two phases:

The fluid phase(when there is considerable uncertainty aboutthe 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 phasebegins (when firms focuson incremental improvements to the design and manufacturingefficiency).

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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 eraof incremental change.

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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 originaldiscontinuity, 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 designsand instead focus on developing competencies relatedto the dominant design.

This explains in part why incumbent firms may havedifficulty recognizing and reacting to a discontinuoustechnology.

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Discussion Questions

1. What are some of the reasons that established firmsmight resist the adoption of a new technology?

2. Are well-established firms or new entrants morelikely to a) develop and/or b) adopt newtechnologies? What are some reasons for yourchoice?

3. Think of an example of an innovation you havestudied at work or school. How would youcharacterize 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 s-shaped curves?

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