Lecture 2 Innovation Environment
First two articles: get the general idea. No specific details and methods will be asked in the exam.
Firm survival
Less than 0.1% of the US firms live to the age of 40.
What can influence survival rates:
- Size: for example measured by number of employees. It is argued that larger firms are more
resistant to defeats and live longer.
- Financial resources
- Human capital: the expertise or knowledge based that is within the people of a firm. The more
you have an expert knowledge base, which is not available outside and you can use to build new
formulas, you have an advantage.
- Social capital: the relationships a firm maintains with your clients, customers, suppliers etc. Also
includes internal relationships in a firm and for example labor unions, governments.
Only being able to adapt will really contribute to the survival rate.
Types of innovation
- Product innovation: new consumer product, for example a new phone on the market.
o Goods → tangible goods
o Services
- Process innovation: the way you conduct/organize something, for example the way you deliver
something or manufacture something.
o Technological
o Organizational
Innovation matrix:
Incremental change
- Changes a little bit
- Improving efficiency
- Focus is on managing operations
- Dominant role of planning and control
- Important in quality management
Radical change
- Revolutionary jumps
- Comes a lot of times from a time of crisis asking for radical change
- Focus on new opportunities, opportunities that might create a new market, new customers, new
sales etc.
,An evolutionary pattern of innovation
Product life cycle
Initially, you need to invest a lot of time and effort in a new product.
It sort of changes in the middle. The effort you make is leading to a higher
performance. The relative improvements are much better. Much of the
process innovation takes place in this stage.
A new technology can drive the performance of the product (the technology
push). Ultimately, while that life cycle matures, the market also starts
demanding the product (market pull).
You can think about product innovation as a reserve S curve of the product
life cycle.
Most innovations take place at the beginning of the life cycle, as a lot of
things need to be adjusted etc. As the product matures, the innovations are
relatively minor.
Process innovation has a different curve again. Once you have established
what product you are going to make as a company, the process innovation
comes in place to make the process more efficient etc. A lot of the process
innovation needs to come before the dominant design.
Dominant design has to be the design that, price-performance wise, has to
be the best product.
Fluid phase
- First phase, focused on functional performance of the product
- A lot of technological changes
- Companies need to be relatively small, as this is usually
correlated with flexibility.
- Company needs to have an organic structure → highly
adaptable.
Transitional phase
- Trying to optimize the product and make minor changes to the
product
, - Often stimulated by the users
- Both constrained and driven by the technology available
- Less flexible, but more specialized and more efficient.
- More for medium sized companies with good leadership that can deal with these kind of
innovations.
Specific phase
- Optimizing and reducing costs, because there is pressure of competitors who entered the
market.
- Highly efficient is the product now, but not flexible anymore.
- Mostly for large firms with formal organizational control with rules and structure.
- You need a mechanistic structure → organizations have predictability.
Slide 35: summary of what needs to change in the organization along the curve.
Technological discontinuities and organizational environments
How did the writers systematically show what technological discontinuities are?
New technology that provides improvement in price-performance ratio.
How do they build on article 1?
Technologies underpinning products, can change overtime. The technologies evolve, building upon
existing technologies, but improving them (competence enhancing). Sometimes, the discontinuities are
massive and radical, and a new technology was born (competence destroying).
Technological discontinuities: competence enhancing vs competence destroying
Competence enhancing:
- Large improvements in price/performance
- Builds on existing knowledge
- Mostly used by and beneficial for larger established players in the industry. Rich get richer.
Competence destroying:
- Large improvements in price/performance
- Changes the game, radical changes.
- Entirely different knowledge and competencies
- Mostly used by new entrants. “Rich get poor(er)” → the big established firms (the rich) can’t
keep up and get poor.
For an innovation to be a technological discontinuity, it needs to improve the price-performance!
Article: Patterns of Industrial Innovation Summary
Willion Abernathy, Jamer Utterback
To understand the variables that determine successful strategies for innovation, the authors focus on
three stages in the evolution of a successful enterprise:
, 1. Period of flexibility: enterprise seeks to capitalize on its advantages, where they offer greatest
advantages
2. Intermediate years: major products are used more widely
3. Full Maturity: Prosperity is assured by leadership in several principal products and technologies.
Research question: How do kinds of innovations attempted by productive units change as these units
evolve?
Research goal: Designing a model relating patterns of innovation within a unit, to that unit’s competitive
strategy, production capabilities and organizational characteristics.
Conclusion: A productive unit’s capacity for, and methods of innovation, depend critically on its stage of
evolution from a small technology-based enterprise to a major high-volume producer.
Past studies imply that innovations are mostly new products. However, Abernathy and Utterback believe
there is a difference between small entrepreneurial organizations and larger units producing standard
products in high volume, and their characters of innovations of product and process technologies.
With mass production, major system innovations are followed by countless minor product and system
improvements, resulting in lower costs. These innovations also resulted in advanced performances.
Major new products do not seem to be consistent with this pattern of incremental change. →
incremental change. They use process innovation
A more fluid pattern of product innovation is associated with the identification of an emerging need, or
a new way to meet an existing need → an entrepreneurial act. Such new product innovations share
common traits:
- They occur in disproportionate numbers in companies and units located in or near affluent
markets with strong science based universities or research institutions.
- Their competitive advantage over predecessor products is based on superior functional
performance rather than lower initial costs.
- These radical innovations tend to offer higher unit profit margins.
Small, adaptable organizations with flexible technical approached have an advantage in their innovation.
Users of the products play a major role in suggesting the ultimate form of the innovation, as well as the
need. They have a more intimate understanding of performance requirements.
Incremental and fluid change may seem as two extreme types, but in fact not rigid, independent
categories. Research shows that companies currently conducting the incremental changes, were at their
origin small, “fluid” units intent on new product innovation. For example, some years after product
innovation has incurred, costs and productivity may become more important, forcing organizations to
conduct process innovation on these products to gain competitive advantage.
Innovations within an established industry is often limited to incremental improvements of both
products and processes. Product change is introduced from outside an established industry and viewed
as disruptive; usually by new firms. The type of firm and product are of little use in understanding
innovation, as the circumstances are standard. Also, the type of product and its associated production
process should be taken together as unit of analysis: the productive unit (with a highly fragmented
