Welcome to Week 2!
You have made it through the first week. Congratulations!
This week, we are going to continue to look at TCO A and the industry dynamics of technological innovation. You should begin constructing your Strategic Plan as soon as possible. You should have determined what you are going to do and have begun working on it.
Remember to consult the established guidelines for the plan and stay on schedule for this assignment. Be sure to spend some time working on your plan each week: Failure to stay on track with the plan will put you at a severe disadvantage. This is not an assignment you can complete overnight. The most successful Strategic Plans are those into which the graduate student adds additional ingredients each week. If you wait until a day or two before the Plan is due, you run the risk of failure, just as would a person who tries to plan the future of a real business by throwing things together at the last minute.
This week, we are going to look at various types and patterns of innovation and technology cycles. We will also look at how the timing of when a technology is introduced affects its success and what advantages exist for those that are first to market.
Good luck! I’ll talk to you all in the discussions.
Given a company situation, be able to describe the industry dynamics of technological innovation.
Provide the basic information needed to formulate technology strategies.
Explain the 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).
Identify the differences in individuals who adopt innovation early, and those who adopt innovation later in the technology cycle.
Identify why some firms will adopt a new technology quickly, while others adopt much later or not at all.
Reinforce the effects that increasing returns to adoption has on product diffusion, and specify the effects of increasing returns on entry timing.
Identify the characteristics of firms that enable them to choose when to enter an industry.
Types of Innovation
Types of Innovation | Patterns of Innovation | First Mover Advantages | First Mover Disadvantages | Factors Influencing Optimal Timing of Entry | Schumpeter and Creative Destruction
This week, we are continuing to look at TCO A: Given a company situation, be able to describe the industry dynamics of technology innovation.
The overall goal of this course is to be able to formulate a technology strategy for a given organization. This week, we will look at “typical” patterns of technological innovation in order to provide a foundation for the formulation of a technology strategy.
We will begin by reviewing the different dimensions that are used to distinguish between types of innovation.
We will then move on to describing the general patterns characterizing technology performance improvement and rate of diffusion. As you do your reading this week, while you should pay attention to the predictable phases of technology performance improvement and diffusion (S-curves; eras of ferment, followed by periods of incremental change), you need to be careful of relying on these patterns to make predictions or decisions regarding whether or not and when to adopt a new technology.
We will also examine the timing factors that influence a technology’s likelihood of success. We will discuss first mover advantages (e.g., building brand loyalty and technological leadership, preemption of scarce resources, exploiting switching costs) and disadvantages (e.g., higher spending on R&D, supplier development, distribution channels creation, enabling technology development, complementary goods production, and learning customer requirements), along with the corresponding advantages and disadvantages of entering as an early follower or a late entrant.
Design and Evolution of Technology Strategy
Key Concepts to Know:
The basic questions businesses have to answer to make fundamental business strategy decisions
A capabilities-based organizational learning framework of technology strategy (Burgelman, 2004)
The four dimensions of technology strategy
The evolutionary factors that shape the creation of technology strategy (Burgelman, 2004)
Important aspects of the industry context
Types of Innovation
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There are four dimensions most commonly used to categorize innovations:
Product versus process innovation
Radical versus incremental
Competence-enhancing versus competence-destroying
Architectural versus component
Remember, these dimensions do not stand alone, and neither can they be used to perfectly classify innovations.
Product versus Process
Often, new product and process innovations are developed simultaneously. If not, product innovation can be preceded by process innovation, or vice versa. Of course, a product innovation may be developed by one firm while a process innovation is created at the same time at another. A good example might be a product improvement at UPS that could be a process improvement for one of its customers.
Radical versus Incremental
Several different characteristics have been used to determine the differences between radical and incremental innovation. Most of these characteristics are based on the degree of newness, uniqueness 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?).
Competence-enhancing versus Competence-destroying
An innovation is considered competence-enhancing if it adds to a firm’s current intelligence base (e.g. Intel’s microprocessor series), and it is considered competence-destroying if it takes a completely new path or supersedes existing technology (e.g. the handheld calculators replacement of the slide rule).
Architectural versus Component
An innovation is considered to be a component innovation if it makes changes to a portion of the original design but isn’t a complete redesign of the system (such as changing the engine design of an automobile while leaving the remaining components unchanged). An architectural innovation involves making radical modifications to an existing product (converting a gas powered automobile to a totally electric model, for example). Architectural innovations are often considered more radical and competence-destroying.
Patterns of Innovation
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The most important questions a manager asks are whether and when a firm should adopt an innovation. The answers rest on several interdependent criteria:
Whether or not the new technology offers significant advantages
The amount of effort required to switch (develop new competencies, if necessary)
The technology’s fit with the firm’s current abilities (and thus the amount of effort that would be required to develop new competencies)
Whether or not the firm possesses the complementary resources needed to implement the innovation
The innovations effect on competitive dynamics (e.g. the rate at which competitors will adopt the innovation)
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:
firms try to shift their sales into higher price tiers to maintain their margins;
as the price of the technology rises, the mass market may feel it is overpaying for features it does not value; or
the time needed for customers to learn about and assimilate new features may be greater than the time needed to develop new performance features.
First Mover Advantages
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Everyone wants to be first to market, and rightly so; there are many advantages to being first. Being first is often called first mover. First mover advantages include the ability to build brand loyalty and technological leadership, and the ability to access resources that may become scarce. If the industry is characterized by increasing returns, a firm may benefit from learning about the technology and customer requirements before their competitors do.
If a first mover is first to enter a new technological domain, consumers may consider it to be a technological leader. This reputation for technological leadership can enhance a company’s ability to shape customer expectations (e.g. features, pricing, and so on) and can be sustained if the technology is difficult to imitate or is protected by patent or copyright.
A first mover can prevent later entrants from accessing key locations and important distribution channels, gaining government permits (e.g. broadcast rights), and can make the development of relationships with suppliers more difficult. For example, late entrants that wanted to provide a wireless communication service in 2004 faced the problem that the government had already auctioned off most of the radio frequencies needed to provide the service. A new firm faces the situation of having to buy or lease (if the government permits these transactions) the needed frequencies from its competitors or not entering the market at all.
Exploiting buyer switching costs can enable early movers to keep their customers even if a later entrant offers a superior technology. These switching costs include the cost of the product and the costs associated with learning how to use the product (The qwerty keyboard is the often-used example to demonstrate this point).
First Mover Disadvantages
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It is said that you can always tell the pioneers because they are the ones with the arrows in their backs. What this means is that there are many risks to being first.
Research found that first movers have higher failure rates (47%) and lower market share than the early followers (10% versus 30%). First movers earn greater revenues but also have higher costs, with the result that they earn significantly lower profits over time. The costs incurred by first movers that are nonexistent or greatly reduced for followers include expenditures on R&D, development of supply and distribution channels, development of enabling technologies, development of complementary goods and services, and product trials to determine what features consumers actually prefer. Later entrants can also adopt newer and more efficient production processes.
Research and development expenses for the first mover are higher than those for later entrants because
their exploration costs are higher (they have to pay for research that did not result in a commercially-viable product) and
they bear the cost of developing production processes and complementary goods that later entrants can leverage without the usually very large up-front investment made by the first mover.
Undeveloped supply and distribution channels often characterize the situation faced by a first mover. A new-to-the-world technology often doesn’t have ready-made suppliers or distributors. The first mover then must either develop and produce its own supplies and distribution service or assist in the development of supplier and developer markets (e.g. DEKA’s development of the IBOT wheelchair required the firm to invent new ball bearings and develop a machine to produce the bearings).
Immature enabling technologies and complements also often characterize the situation faced by first movers. For example, PDA developers were reliant on the development of batteries and modems by other firms. This effect has occurred in the development of hydrogen-fuel-cell-powered vehicles. Development of this alternative technology has been slowed because there is no ready way to refuel cars using the new technology (see the Theory in Action section in this chapter for more details).
Uncertainty regarding customer requirements can cause first movers to incur great expense to learn what customers want (market research may have little value when customers do not yet know how they will use the product) and are willing to pay for and refine products accordingly. For example, Kodak was the first to introduce the 8mm video camera in the late eighties but withdrew from the market due to a poor response from customers. As you may know, the story does not end well for Kodak. By the early 1990s, customers became more comfortable with the technology, and Sony successfully entered this market leaving Kodak to play catch-up or not reenter at all. This may have been a case where Kodak would have been better off focusing on customer education efforts.
Why does the belief in first mover advantages persist? First, because there have been successful first movers and second, because the market has, in many cases, misidentified the first mover (e.g. P&G was not the first mover in the disposable diaper market but, because they are the market leader, many think they were. P&G entered 30 years after Chux).
Factors Influencing Optimal Timing of Entry
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How does a firm decide whether to pioneer a technology category or to wait until others do? The answer depends on several factors, including customer certainty, the margin of improvement offered by the new technology, the state of enabling technologies and complementary goods, the threat of competitive entry, the degree to which the industry exhibits increasing returns, and the firm’s resources.
How certain are customer preferences? More certain customer preferences favor early entry. Both companies and consumers learn which features create the most value as they gain experience with the product (there are exceptions, such as drug development targeting certain diseases or symptoms, where the customer requirements are clear from the outset). Features initially thought to be important may not be (e.g. exciting graphics and sounds were initially thought to be needed to establish an e-commerce presence), and features initially thought to be unnecessary or not as important turn out to be important to customers. For example, Sony’s Playstation2 console included the ability to play music CDs and DVDs, which Sony thought was of secondary importance to the functionality supporting game playing. As it turned out, some consumers purchased the console for the CD and DVD functions and purchased only a few games. This was bad news for Sony because consoles are sold at or near cost to increase adoption, and profits are derived from game sales.
Margin of Improvement
How much of a margin of improvement does the innovation provide over previous technologies? The higher the improvement, the more likely it is that a firm is going to be successful entering early because the product will more rapidly gain customer acceptance.
Enabling Technologies and Complementary Goods
Does the innovations requires enabling technologies, and are they sufficiently mature? Readily-available enabling technologies facilitate early entry, and vice versa. Do complementary goods influence the value of the innovation, and are they sufficiently available? If the firm’s innovation requires complementary goods that are not available on the market, and the firm is unable to develop those complements, successful early entry is unlikely.
Schumpeter and Creative Destruction
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The critical nature of innovation in a capitalist system was explored by J. A. Schumpeter in 1942 in his book Capitalism, Socialism, and Democracy.
Schumpeter’s unique view of innovation is called “Creative Destruction” in which old ways of doing things are destroyed and replaced by the new.
The horse-drawn carriage was replaced by the automobile. The typewriter was replaced by the computer. The telegraph was replaced by the telephone. Think of all those telegraph operators who lost their jobs when people started to use the phone, and you see exactly what Schumpeter was talking about.
The problem that organizations have to deal with is the resistance to change exhibited by those in the old systems.
III. Discussion Grading and Follow-up Topics
Remind students about the Discussion Grading Policy for this class as an announcement or in an early discussion posting.
A. Innovation Dimensions
What are some reasons that established firms might resist adopting a new technology?
What are some reasons that both technology improvement and technology diffusion exhibit s-shaped curves?
Why do technologies often improve faster than customer requirements?
B. Why Innovative Companies Fail
What are some advantages of entering a market early?
Are there any advantages to entering the market late?
What factors might make some industries harder to pioneer than others?