TYPES AND 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.
Ericsson’s Gamble on 3G 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 (2G) was digital. By end of
1990s, sales of 2G phones were beginning to
decline.
• 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 3G
systems, and put less effort on developing and
promoting its 2G systems.
Ericsson’s Gamble on 3G 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 3G turned out to be more complex
than expected
– Pace of rollout slowed by lack of affordable 3G
handsets and competing 3G 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 3G features as much as hoped
 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 of Innovation
• Product vs Process Innovation
– Product innovations are embodied in the outputs of an
organization – its goods or services.
• Ericsson’s development of 3G 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.
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 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
– 3G 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 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 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 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 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 the
underlying components also.
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.
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.
 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.
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
 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
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
 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
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
 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 an s-curve that
Disruptive technology has a steeper s-curve increases to a higher performance limit

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Effort Effort
 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).
Technology S-Curves
• S-curves of diffusion are in part a function of s-
curves in technology improvement
– Learning curve leads to price drops, which
accelerate diffusion
 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.
 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.
 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.
Diffusion of Innovation &
Adopter Categories
 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
 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
 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).
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.
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.