978-1259539060 Chapter 3 Lecture Notes

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Instructor’s Manual

CHAPTER 3

Types and Patterns of Innovation

SYNOPSIS OF CHAPTER

The focus of this chapter is helping students to understand the ‘typical’ patterns of technological

innovation in order to provide a foundation for the formulation of a technology strategy.

The chapter begins by reviewing the different dimensions that are used to distinguish between

types of innovation (e.g. product versus process; radical versus incremental; competence

enhancing versus competence destroying; and architectural versus component innovation).

The chapter moves on to describing the general patterns characterizing technology performance

improvement and rate of diffusion. Emphasis is placed on identifying the predictable phases of

technology performance improvement and diffusion (S-curves; eras of ferment, followed by

periods of incremental change) while cautioning students that relying on these patterns to make

predictions or decisions regarding whether or when to adopt a new technology is not advisable.

In this section a typology of innovation adopters (innovators, early adopters, early majority, late

majority and laggards) is also described.

The chapter concludes by reviewing research suggesting that technological change is cyclical

and is comprised of identifiable and reliably occurring phases. Generally, each cycle begins with

a period of rapid improvement, is followed by a period of diminishing returns to improvement

efforts, and finally the technology is displaced by a new technological discontinuity. Utterback &

Abernathy identify three phases: Fluid, Dominant Design and Specific. Tushman & Anderson

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also identify three phases in the technology cycle: Era of Ferment, Dominant Design and Era of

Incremental Change

TEACHING OBJECTIVES

1. Provide students with the basic information needed to formulate technology strategies.

2. Identify differences in the types of innovation and the general patterns that characterize

technology improvement trajectories and technology diffusion rates (including s-curves

and technological discontinuities).

3. Identify the differences in individuals that adopt an innovation early and those that adopt

and innovation later in the technology cycle.

4. Identify why some firms will adopt a new technology quickly while others adopt much

later or not at all.

LECTURE OUTLINE

I. Overview

a. There is no single agreed-upon taxonomy used to describe different kinds of

technological innovations.

b. The performance improvement rate of a technology through time is referred to as its

trajectory and the trajectory usually takes on an S-curve pattern. The diffusion pattern of a

technology also conforms to an s-curve pattern.

II. Types of Innovation

a. Four of the dimensions most commonly used to categorize innovations are: product

versus process innovation, radical versus incremental, competence enhancing versus

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competence destroying, and architectural versus component. It is important to

emphasize that these dimensions are not independent and do not offer a straightforward

system for categorizing innovations in a precise and consistent manner.

i. New product innovations and process innovations often occur in tandem. When

not in tandem product innovation can be preceded by process innovation and vice

versa. Finally, a product innovation for one firm may simultaneously be a process

innovation for another (you may want to reference the UPS example here).

ii. A number of criteria have been posed to distinguish between radical and

incremental innovation. Most of these criteria turn on the degree of newness and

differentness of the innovation and the amount of risk associated with the

innovation. Innovation is often risky because of uncertainty in both technology

(e.g., will the technology perform as expected?) and customer requirements (e.g.,

what features will customers ultimately value?).

iii. An innovation is considered to be competence enhancing if it builds on the firm’s

existing knowledge base (e.g., the 286, 386, 486, Pentium, Pentium II, Pentium III,

Pentium 4 platforms each built on Intel’s existing competencies) and competence

destroying if it does not build on existing competencies or renders them obsolete

(the hand-held calculator’s replacement of the slide rule is a good example of

competence-destroying innovation).

iv. An innovation is considered to be a component innovation (or “modular

innovation”) if it entails changes to one or more components, but does not

significantly affect the overall configuration of the system (such as the

incorporation of gell-filled material for additional cushioning in a bicycle seat that

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does not require any changes in the rest of the bicycle architecture). An

architectural innovation entails changing the overall design of the system or the

way that components interact (in the bicycle example the transition from the

“high-wheel bicycle” to the “safety bicycle” was an architectural innovation).

Architectural innovations are often considered more radical and competence

destroying.

III. Patterns Of Innovation (Technology Performance & Diffusion, S-Curves)

a. S-curves are used to map the performance of a technology and its diffusion rate.

b. S-curves in Technological Improvement: When the performance of a technology is

plotted against the amount of effort and money invested in the technology, it typically

shows slow initial improvement (due to poor understanding of the technology, and a lack

of legitimacy of the technology), then accelerated improvement (due to a deeper

understanding of the technology), then diminishing improvement (as the technology

reaches its inherent limits).

Show Figure 3.1

c. A technology’s s-curve can be misleading if the effort invested is not constant over time.

For example, the curve representing transistor density in the Intel example shows a

sharply increasing performance, as shown in the second figure.

Show Figure 3.2

d. Looking at the Intel example another way, plotting Intel’s cumulative research and

development expense against transistor density, we can see that the big gains in

transistor density have come at high cost. Though the curve does not yet resemble the

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traditional s-curve, its rate of increase is not as sharp as when the curve is plotted against

years.

Show Figure 3.3

e. Discontinuous technologies build on an entirely new knowledge base and can prevent

existing technologies from reaching their limits by fulfilling a similar market need in a

better way.

i. Initially, the technological discontinuity may have lower performance and lower

returns than the incumbent technology. These two factors make incumbent firms

reluctant to switch.

ii. When a disruptive technology has a steeper s-curve and/or a higher performance

limit the returns to effort invested in the new technology may become much higher

than effort invested in the incumbent technology. The new disruptive technology is

likely to displace the incumbent technology under these conditions.

Show Figure 3.4

f. S-curves in technology diffusion are obtained by plotting the cumulative number of

adopters of the technology against time.

g. S-curves in technology diffusion are often explained as a process of different categories of

people adopting the technology at different times (e.g. electronic calculators were first

adopted by scientists and engineers and ultimately became a mass market product).

i. Everett M. Rogers proposed one of the most prominent typologies of innovation

adopters. He divided adopters into the following categories beginning with those

adopting an innovation first: Innovators (2.5%), Early Adopters (13.5%), Early

Majority (34%), Late Majority (34%) and Laggards (16%).

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Show Figure 3.7

ii. Innovators are extremely adventurous in their purchasing behavior, comfortable

with a high degree of complexity and uncertainty and generally have access to

substantial financial resources, and are not always well integrated into a particular

social system but they bring new ideas to the social system.

iii. Early adopters are respected and well integrated members of their social system,

and have the greatest potential for opinion leadership. Early adopters are often

excellent “missionaries” for new products or processes.

iv. Members of the early majority adopt innovations slightly before the average

member of a social system. They are typically not opinion leaders, but they interact

frequently with their peers.

v. The late majority approach innovation with a skeptical air (and often scarce

resources), and may not adopt the innovation until they feel pressure from their

peers.

vi. Laggards may base their decisions primarily upon past experience rather than

influence from the social network, and they possess almost no opinion leadership.

h. Technology diffusion takes far more time than information diffusion and some firms

adopt innovations more quickly than others. Two factors play a role in explaining the

variance in the timing of innovation adoption: 1) The tacit nature of the knowledge

underlying new technologies, and 2) the need for the firm to develop complementary

resources required to make those technologies useful.

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i. S-curves of diffusion are in part due to s-curves in improvement: as technologies are

better developed, they become more useful to customers, and their costs may decrease.

Both of these outcomes can accelerate adoption.

j. S-curves as a Prescriptive Tool: Several authors have argued that managers can use the

s-curve model as a means by which to predict when a technology will reach its limits, and

as a guide for determining whether and when the firm should adopt a new technology.

Though this sounds very desirable (what firm wouldn’t want to know when to shift to a

new technology) the s-curve model has some severe limitations as a prescriptive tool.

i. It is rare that the true limits of a technology can be known and technological limits

are hotly debated.

ii. The lifecycle of a technology can change (shortened or lengthened) if there are

changes in the market, component technologies, or complementary technologies.

iii. Most importantly, firms can take steps to change a technologies trajectory

through their own R&D activities (IBM’s experience with disk drives as described

by Christensen is a good example to use here).

iv. With regard to whether and when a firm should adopt an innovation the answer

rests on several interdependent criteria: 1) the advantages offered by the new

technology; 2) the amount of effort required to switch (develop new competencies

if necessary); 3) the technology’s fit with the firm’s current abilities (and thus the

amount of effort that would be required to develop new competencies); 4) whether

or not the firm possesses the complementary resources needed to implement the

innovation; and 5) the innovations affect on competitive dynamics (e.g. the rate at

which competitors will adopt the innovation).

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j. Often technology improvement trajectories are steeper than the trajectory of

customer demands. Why would firms provide higher performance than that required by

the bulk of their customers? This phenomenon occurs when 1) firms try to shift their sales

into higher price tiers to maintain their margins; 2) as the price of the technology rises,

the mass market may feel it is overpaying features it does not value; and 3) the time

needed for customers to learn about and assimilate new features may be greater than the

time needed to develop new performance features.

Show Figures 3.8 and 3.9

i. For example, Intel identified “segment zero” as the demand for low-end personal

computers (those less than $1000) that had been neglected. Why should firms

like Intel be concerned with segment zero? Because it can become the breeding

ground for companies that provide lower-end versions of the technology. As

Grove notes, ” the overlooked, underserved, and seemingly unprofitable end of

the market can provide fertile ground for massive competitive change.” (This is

a good place to talk about the effect of the iPhone and tablet computers on the PC

industry).

IV. Technology Cycles

a. Technological change is cyclical.

i. Each cycle begins with a period of rapid improvement. This initial phase is

followed by a period of diminishing returns to efforts made to improve the

technology. The third and final phase occurs when the technology is displaced by a

new technology (often referred to as a technological discontinuity).

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ii. A new technological discontinuity or a period of “creative destruction” can result

in significant changes in the competitive structure of an industry, including the

creation of new leaders and new losers.

b. Technology cycles have also been divided into phases based on the degree to

uncertainty experienced in each phase. Utterback & Abernathy proposed the following:

i. Phase I (Fluid Phase), is characterized by considerable uncertainty about both the

technology and its market. Firms are not yet sure which factors or product features

will get the best response from the market so they experiment to get feedback and

make changes accordingly (e.g., the production of solar, wind, and hydrogen).

ii. Phase II (Dominant Design), is characterized by the adoption of a dominant design

based on a consensus about the desired product features.

iii. Phase III (Specific Phase), is characterized by the concentration of firm effort on

process innovations. In this phase firms capitalize on the now stable architecture for

the technology by focusing their innovation efforts on the products, materials, and

manufacturing processes that are specific to the dominant design (e.g. the

production of oil and coal).

c. Anderson and Tushman built on the Utterback & Abernathy model in their study of the

U.S. minicomputer, cement, and glass industries through several cycles of technological

change. They characterized the phases of the technology cycle as follows:

i. Phase I (Era of Ferment), is characterized by turbulence and uncertainty and

begins with the introduction of a new technological discontinuity. In this phase the

new technology displaces the incumbent technology (Anderson and Tushman refer

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to this as substitution) but there is considerable design competition as firms

experiment with different forms of the technology.

ii. Phase II (Dominant Design)―a dominant design will emerge as long as a new

technological discontinuity doesn’t arrive too soon. Anderson and Tushman’s key

insight is that the dominant design was never in the same form as the original

discontinuity and also is never on the leading edge of the technology.

Show Figure 3.10

iii. Phase III (Era of Incremental Change), is characterized by a shift in firm focus to

efficiency and market penetration (e.g. by offering different models and price

points). This period continues until the next technological discontinuity.

d. So why do incumbent firms resist the transition to a new technology? Many firms

focus on refining their current competencies and cease investing in learning about

alternative design architectures. The more a firm focuses on its current capabilities and

processes the less the firm is able to identify and respond to a major architectural

innovation.

e. Not all industries follow these models. When heterogeneity in products and/or

processes is valued the emergence of a dominant design is undesirable (e.g. art and

cuisine).

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