GU STIA305 06

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Dynamics of Innovation

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  • Companies Build on their Existing Skill Base, Core Competence, Culture, Customer Base
  • An entrenched legacy technology in a complex sector can give rise to a technical/economic/political paradigm , supported by political influence, tax advantages, subsidies, favorable regulations and public expectations, and adept at fending off systems research and innovation. This makes it tough to introduce systems innovations, although innovations do continue in components.
  • Energy: Addiction to Fossil Fuels Continues Despite Innovations in Niche Markets like Solar Energy and Improved Batteries) Health: Health Systems are Inefficient Despite Innovations in Biotech Transport: Improved Vehicles but not Highway Systems Food: Neglect of Research on Organic and Sustainable Agriculture
  • Killer Application’ is Often Required to Build the Market (e.g., Spreadsheet, e-mail) Marketing Must Overcome Barriers Xerox: Sell Copies, not ‘Printing Presses’ Pre-Paid Cell Phone Lowers Up-Front Costs Prius Sells ‘Feel-Good’ Label, not just Fuel Efficiency Customers and Amateurs Discover New Uses Web, Spreadsheet, Post-It, FaceBook, Skype They May Even Organize to Improve Products! Open-Source Software, Surfboards! (Alternative to IP) Distrust Market Forecasts ( “Five 32K Mainframes Will Satisfy World Demand for Computers.”)
  • A Sustained Stream of Incremental Improvements May Multiply Productivity and Sustain Competitiveness for Decades (e.g., in Mining, Railroads) But There is a Danger of Technological Lock-In (QWERTY Effect) Especially if Supported by Subsidy
  • In Classical Product Cycle Theory, Radical Innovations Typically Come from Outside the Industry Customers for Existing Technology Often Demand Relatively Minor Improvements, not Radical Change [but see our later discussion of ‘disruptive’ innovation] Radical New Technology is Often Introduced so as to Resemble its Predecessor Horseless Carriage Word Processor [‘Cut and Paste’]
  • US Companies Undertake Radical Innovations Manufacturing is ‘Reborn’ from its Previous Second Class Status: Process is Important, Too! Globalization Speeds the Product Cycle And the Export of Manufacturing Technology Information Technology Revolutionizes the Service Sector Service Industries Include Insurance, Brokerage, Logistics: They’re Skill- and Capital-Intensive; They’re Not Just ‘Hamburger-Flipping’ They Require Research!
  • Companies have learned from experience and do explore radical innovations now – but usually only if they provide improvements sought by existing customers. Established companies tend to move up-market to more profitable products with more features. ‘ Disruptive’ innovations originate in lower-end or otherwise less profitable markets, and improve until they replace the dominant technology. (examples: low-cost airlines, 3 ½” floppy discs) [NB: The term ’disruptive’ is sometimes mis used to refer to any technology that threatens existing companies.
  • Toyota Ends Quality-Price Trade-Off by Building Quality into the Product Every Worker Can Stop the Production Line! Total Quality Control and the Five Whys Result: Real-Time Redesign as Flaws are Discovered Just-in-Time Inventory, Produce to Order Traffic Jams on Poor Roads as a By-Product Dealers and Suppliers are Long-Term Partners in Design and in Product Improvement The Best Japanese Engineers Begin on the Factory Floor, not in Design
  • Eliminate Time Delays Concurrent Engineering Design Design Simultaneously for Quality, Manufacturability, Life Cycle Contrasts with Earlier Practice of ‘Throwing the Product Over the Wall’ Separating Design and Manufacturing Once Production Starts, Redesign in Real Time as Bugs are Discovered
  • GU STIA305 06

    1. 1. The Dynamic of Technological Innovation Professor Charles Weiss
    2. 2. Why Should I Care? <ul><li>Innovation is a Key to </li></ul><ul><ul><li>Growth, Productivity and Competitiveness </li></ul></ul><ul><ul><li>Better Health, Security and Environment </li></ul></ul><ul><li>So We Need to Understand How </li></ul><ul><ul><li>Technological Innovation Takes Place </li></ul></ul>
    3. 3. Definitions <ul><li>Science : Understanding the Natural World, or the Process by which it Comes to be Understood </li></ul><ul><li>Technology : A System that Organizes and Uses Technical Knowledge for a Practical Purpose </li></ul><ul><ul><li>Includes Hardware, Software and Management </li></ul></ul><ul><li>Both Can be Creative and Fun </li></ul>
    4. 4. More Definitions <ul><li>Research : Increasing Knowledge </li></ul><ul><li>Invention : a New, Useful Idea </li></ul><ul><li>Development : Transforming an Invention or Idea into a Commercial Product </li></ul><ul><li>Innovation : Commercialization or Spread of an Idea in Practice </li></ul>
    5. 5. Science and Technology are Interlinked but Different <ul><li>Basic science gives rise to technology (e.g., MRI, lasers, biotechnology) </li></ul><ul><li>Until ~1880, technology was derived from tinkering, not from science (e.g., cotton gin, barbed wire) </li></ul><ul><li>Technology gives rise to science (e.g., astronomical discoveries from Hubble telescope) </li></ul>
    6. 6. The Dynamic of Technology <ul><li>Motivation of the Engineer: Solve a Practical Problem, Make Things Work </li></ul><ul><li>We Shall Examine Innovation at the Level of </li></ul><ul><ul><li>The Product or Process </li></ul></ul><ul><ul><li>The Economy </li></ul></ul><ul><ul><li>The Firm (next lecture) </li></ul></ul><ul><li>We’ll Start with the Product or Process </li></ul>
    7. 7. <ul><li>Innovations Can Take Place in </li></ul><ul><ul><li>Manufactures or in Services </li></ul></ul><ul><ul><li>Products or Processes </li></ul></ul><ul><ul><ul><li>Beverage Can </li></ul></ul></ul><ul><ul><li>Technical Systems </li></ul></ul><ul><ul><ul><li>McDonald’s </li></ul></ul></ul><ul><ul><ul><li>Electric Grid </li></ul></ul></ul><ul><ul><ul><li>Health Delivery </li></ul></ul></ul><ul><li>Complexity Often Increases as Performance Improves </li></ul><ul><ul><li>Tightly Coupled Complex Systems Require Special Management so as to Avoid Unforeseeable Accidents (Perrow) </li></ul></ul>
    8. 8. Models of Technological Change <ul><li>Technology Push </li></ul><ul><li>Market Pull </li></ul>
    9. 9. “ Technology Push” Model <ul><li>Derived from Atom Bomb Experience </li></ul><ul><ul><li>Nuclear Physics was Arcane Branch of Basic Science Before World War II </li></ul></ul><ul><ul><li>Yet Atom Bomb Won War with Japan, and Revolutionized Geopolitics </li></ul></ul><ul><ul><li>Promise of Nuclear Energy ‘Too Cheap to Meter’ </li></ul></ul><ul><li>The Model: Research --> Invention --> Development --> Commercialization --> Growth </li></ul><ul><ul><li>Examples: Television, Microwave Ovens, Nuclear Power, World-Wide Web </li></ul></ul>
    10. 10. Policy Implication of ‘Technology Push’ Model of Technical Change: Invest in Basic Research, and Economic Growth will Follow Result: Bucolic Corporate Research Labs, Removed from Production
    11. 11. “ Market Pull” Model of Technical Change <ul><li>Pre-Thatcher UK as Counter-Example: Excellent Basic Science, Poor Economic Growth </li></ul><ul><ul><li>Serious Labor-Management Troubles Hurt Growth </li></ul></ul><ul><li>The More Usual Model: “Market Pull” </li></ul><ul><ul><li>Research <-- Invention <-- Development <-- Commercialization <-- Market </li></ul></ul><ul><ul><li>Consequence of Market Pull Model: Whatever Influences the Market, Also Influences Technology </li></ul></ul>
    12. 12. Competition as a Spur to Innovation <ul><li>Most Companies (Like Most People) are Content to Keep Doing What They’re Doing Unless Forced to Change </li></ul><ul><li>Lack of Competition, as from Protection and Over-Regulation, Leads to Stagnation </li></ul><ul><ul><li>This Phenomenon is Notorious in Developing Countries but is Also Found in the US </li></ul></ul>
    13. 13. Classical Product Cycle Theory <ul><li>Define Product </li></ul><ul><li>Develop Market </li></ul><ul><li>Product Becomes Standardized </li></ul><ul><li>One Design Becomes Dominant </li></ul><ul><li>Number of Companies is Reduced </li></ul><ul><li>Production Technology Moves Offshore </li></ul>
    14. 14. At Early Stages in the Product Cycle <ul><li>New Technology Builds on Predecessor </li></ul><ul><ul><li>Auto, Airplane Use Bicycle Technology </li></ul></ul><ul><li>Several Technologies Often Compete </li></ul><ul><ul><li>(Internal Combustion, Stanley Steamer, Diesel Automobile Engines) </li></ul></ul>
    15. 15. <ul><li>As Product Matures, Customers Become Accustomed to the Function and Configuration of the Product </li></ul><ul><ul><li>Process (Manufacturing) Innovation Dominates Product Innovation </li></ul></ul><ul><ul><li>Improve the Components – but Keep the Product the Same (e.g., Digital Camera, Fuel Injection ) </li></ul></ul><ul><li>Product Becomes a Commodity , Sold at Low Margins for its Quality and Price, not its Uniqueness </li></ul><ul><ul><li>Barriers to Entry Increase </li></ul></ul><ul><ul><li>Overseas (‘Offshore”) Manufacture Lowers Costs </li></ul></ul>
    16. 16. <ul><li>Number of Firms Decreases (‘Shake-Out’). Survivors Have </li></ul><ul><ul><li>Large-Scale Production </li></ul></ul><ul><ul><li>Distribution and Marketing </li></ul></ul><ul><ul><li>Management Talent to Grow the Company </li></ul></ul><ul><ul><li>Capacity to Advance the Technology </li></ul></ul><ul><li>Eventually a New Product Replaces the Old </li></ul>
    17. 17. Transition Between Technologies <ul><li>Companies Build on their Existing Base </li></ul><ul><li>As Technology Approaches the Transition Point, a Fight Ensues for Attention in Old-Line Companies </li></ul><ul><li>The New Technology May Threaten a Firm’s Core Competence and Skill Base. Examples: </li></ul><ul><ul><li>Mechanical ---> Electronic Calculators </li></ul></ul><ul><ul><li>Xerox and the Personal Computer: “Fumbling the Future” </li></ul></ul>
    18. 18. The Technology S-Curve
    19. 19. <ul><li>Winner May Depend on Market Requirements </li></ul><ul><ul><li>US vs British Railways (Time Horizon) </li></ul></ul><ul><ul><li>US vs. European Cars (Gas Prices) </li></ul></ul><ul><ul><li>Number-Crunching vs. Graphics Computers (Military Requirement) </li></ul></ul><ul><li>A Marketing Decision </li></ul><ul><ul><li>Betamax vs. VHS </li></ul></ul><ul><li>Political Dynamic </li></ul><ul><ul><li>Nuclear Reactor Design </li></ul></ul><ul><li>Chaos: A Trivial Phenomenon (‘The Flap of a Butterfly’s Wings’) at a Critical Transition Point </li></ul><ul><ul><li>Triumph of DOS: ‘Accidental Empires </li></ul></ul><ul><ul><li>Stanley Steamer and Hoof-and-Mouth Disease </li></ul></ul>
    20. 20. Two Digressions <ul><li>The S-Shaped Curve Can also be Used to Represent the Diffusion of an Innovation rather than its Improved Technical Performance </li></ul><ul><li>Technological Limits are not Fixed – Innovation May be Constantly Improving the ‘Legacy’ Technology </li></ul><ul><li>Information Technology Improves Especially Dramatically </li></ul>
    21. 22. The Idea of a Dominant Design Can be Extended to Entire Industries An entrenched legacy technology in a complex sector can give rise to a technical/economic/political paradigm , This makes it tough to introduce systems innovations, although innovations do continue in components.
    22. 23. Examples of Entrenched Legacy Technologies <ul><li>Energy </li></ul><ul><li>Health </li></ul><ul><li>Transport </li></ul><ul><li>Food </li></ul>
    23. 24. A Digression: Another Way to Classify Innovation <ul><li>1. Radical </li></ul><ul><li>2. Second-Generation </li></ul><ul><li>3. Incremental </li></ul>
    24. 25. 1. Radical Innovation: New Functional Capability <ul><li>‘ Killer Application’ is Often Required </li></ul><ul><li>Marketing Must Overcome Barriers </li></ul><ul><ul><li>Xerox: Sell Copies </li></ul></ul><ul><ul><li>Pre-Paid Cell Phone </li></ul></ul><ul><ul><li>Prius </li></ul></ul><ul><li>Customers and Amateurs Discover New Uses </li></ul><ul><ul><li>Web, Spreadsheet, Post-It, FaceBook, Skype </li></ul></ul><ul><li>They May Even Organize to Improve Products! </li></ul><ul><ul><li>Open-Source Software, Surfboards, Mountain Bikes (Alternative to IP) </li></ul></ul><ul><li>Distrust Market Forecasts ( “Five 32K Mainframes Will Satisfy World Demand for Computers.”) </li></ul>
    25. 26. 2. Second Generation Innovation: New Technology for Existing Functional Capability, e.g., Propeller ---> Jet Engine. Most Alternative Energy Technologies are in this Category, and Must Compete on Price and Performance from the Beginning, [NB: Major secondary innovations are sometimes mis-characterized as radical.]
    26. 27. 3. Smaller Incremental Innovations May Improve <ul><li>Function </li></ul><ul><li>Performance </li></ul><ul><li>Efficiency </li></ul><ul><li>Manufacturability </li></ul><ul><li>Dependability </li></ul><ul><li>Maintainability </li></ul><ul><li>Reparability </li></ul><ul><li>Esthetics </li></ul><ul><li>Incremental Improvements May Multiply Productivity and Sustain Competitiveness </li></ul><ul><li>(e.g., in Mining, Railroads) </li></ul><ul><li>Danger of Technological Lock-In (QWERTY Effect) </li></ul><ul><ul><li>Especially if Supported by Subsidy </li></ul></ul>
    27. 28. Radical Innovation <ul><li>In Classical Product Cycle Theory, Radical Innovations Typically Come from Outside the Industry </li></ul><ul><li>Radical New Technology is Often Introduced so as to Resemble its Predecessor </li></ul><ul><ul><li>Horseless Carriage </li></ul></ul><ul><ul><li>Word Processor [‘Cut and Paste’] </li></ul></ul>
    28. 31. Product Cycle Theory is Overtaken as <ul><li>US Companies Undertake Radical Innovations </li></ul><ul><li>Manufacturing is ‘Reborn’ </li></ul><ul><li>Globalization Speeds the Product Cycle And the Export of Manufacturing Technology </li></ul><ul><li>Information Technology Revolutionizes the Service Sector </li></ul>
    29. 32. ‘ Disruptive’ Innovations: A Refinement of Product Cycle Theory <ul><li>Companies do explore radical innovations – if they provide improvements sought by existing customers. </li></ul><ul><li>‘ Disruptive’ innovations originate in lower-end or other less profitable markets, and improve until they replace the dominant technology. (examples: low-cost airlines, 3 ½” floppy discs) </li></ul><ul><li>[NB: ’Disruptive’ is sometimes mis used to refer to any technology that threatens existing companies.] </li></ul>
    30. 33. The ‘Rebirth’ of Manufacturing (1970s-1980s) Japanese Innovations Re-Establish Manufacturing as a Key to Competitiveness
    31. 34. Re-Examination of The Quality-Price Trade-Off <ul><li>In Mass Production, the More the Inspectors Throw Out, the Higher the Quality </li></ul><ul><ul><li>‘ Move the Metal’: Don’t Stop the Production Line </li></ul></ul><ul><ul><li>If it Ain’t Broke, Don’t Fix It </li></ul></ul><ul><ul><li>(More Precisely, Use Statistical Quality Control: Fix it if it’s on the Way to Going Broke) </li></ul></ul>
    32. 35. AN ASIDE: Quality vs. Quality Control <ul><li>QUALITY: How Good is the Product? </li></ul><ul><li>QUALITY CONTROL: Is Each Unit of the Same Quality? </li></ul>
    33. 36. “ Japan as #1”: The ‘Lean- Manufacturing’ Revolution <ul><li>Toyota Ends Quality-Price Trade-Off by Building Quality into the Product </li></ul><ul><li>Just-in-Time Inventory, Produce to Order </li></ul><ul><li>Dealers and Suppliers are Long-Term Partners in Design, Product Improvement </li></ul><ul><li>The Best Japanese Engineers Begin on the Factory Floor, not in Design </li></ul><ul><li>Recent Accelerator Problem Shows Loss of this Pattern as a Consequence of Expansion </li></ul>
    34. 37. Speeding the Product Cycle: Time as a Competitive Factor <ul><li>Eliminate Time Delays </li></ul><ul><li>Concurrent Engineering Design </li></ul><ul><li>Once Production Starts, Redesign in Real Time as Bugs are Discovered </li></ul>
    35. 38. Globalization Speeds the Product Cycle Still Further <ul><li>Product Cycle Greatly Compressed </li></ul><ul><li>Hasten to Manufacture Offshore </li></ul><ul><li>But Essential Management Controls and Key Technologies Remain in Home Country </li></ul>
    36. 39. Crisis and Response in US Manufacturing Industry (1980s): <ul><li>Crisis: Concern of Permanent Loss of US Competitiveness and then Innovative Capacity </li></ul><ul><li>Response: US Universities and Firms Hasten to Rescue Manufacturing from Stepchild Status </li></ul><ul><li>Major Improvement in US Manufacturing Productivity by 1990 (though the Aircraft Industry is Just Discovering ‘Lean Manufacturing’) </li></ul><ul><li>Japanese Competition Recedes Due to Macro-Economic and Banking Problems </li></ul>
    37. 40. Information Technology Revolutionizes the Service Sector, Unleashes a Flood of Innovation, and Restores US Pre-eminence “ Generative” Technology Encourages User Innovation in a Broad Range of Industries
    38. 41. Challenges to US Dominance <ul><li>Globalization of Research (not Just Manufacturing) Outsources Previous US Specialty </li></ul><ul><li>Offshoring of Information-Intensive Jobs Raises Old Competitiveness Issues </li></ul><ul><li>Multinational Firms Become More Truly Multinational </li></ul><ul><li>Financial Crisis Hurts Venture Capital Model </li></ul>
    39. 42. Innovation at the Level of the Overall Economy: Kondrateev Long Waves
    40. 43. ‘ Enabling’ Technology <ul><li>Pervades Economy, Increasing Productivity Throughout </li></ul><ul><li>Improvements (and Measurable Increases) in Productivity Emerge Slowly as the Economy Adapts to New Possibilities </li></ul><ul><li>Typically Facilitated by Large Government Investments (Especially Military), Made without Strict Cost Controls [Ruttan] </li></ul>
    41. 44. Technology Clusters Built around Enabling Technologies <ul><li>1770-1850: Iron, Steam, Coal, Textiles </li></ul><ul><li>1850-95: Railroads, Steamships, Telegraph, Coal Gas Lights </li></ul><ul><li>1895-1940: Steel, Electric Power and Light, Automobile, Airplane, Radio, Telephone, Petroleum for Energy and as Raw Material </li></ul><ul><li>1940-1990: Chemical Fibers, Pharmaceuticals, Television, Computers, Transistors, Integrated Circuits </li></ul><ul><li>1990-???: Information Technology, Biotechnology, Nanotechnology, ‘Green’ Technology </li></ul><ul><li>2025?-???: Cyborgs? Synthetic Biology? </li></ul>
    42. 45. 30-50 Year Periodicity in Economic Growth Rates: More Than a Generation Needed in Order <ul><li>To Develop Mature Products </li></ul><ul><li>To Build up Supporting Plant, Infrastructure </li></ul><ul><li>To Train Workers, Engineers, Managers </li></ul><ul><li>To Accustom Consumers, Regulators, Legislators, Investors </li></ul>
    43. 46. Contraction Follows Expansion when <ul><li>Competition Creates Excess Capacity </li></ul><ul><li>Resulting Economic Turmoil Leads to Economic Downturn </li></ul><ul><li>But New Science and Technology Leads to New Expansion </li></ul><ul><li>An Aside: Except for Green Technology, this Picture is Driven by Progress in S&T </li></ul>
    44. 47. Have We Seen the Last 50-Year Kondrateev Cycle? <ul><li>Accelerated Innovation May Force Accelerated Technology Absorption, Shorten Cycles or End the Pattern </li></ul><ul><li>Alternatively, Decreases in Military Support to Long-Term Research May Inhibit Development of New Enabling Technology (to be continued) </li></ul>
    45. 48. Perez Fleshes Out Kondrateev Theory with Revised Stages <ul><li>Irruption of Technological Revolution </li></ul><ul><li>Financial Bubble Leads to Collapse </li></ul><ul><li>“ Golden Age” </li></ul><ul><li>Technological Maturity and Social Upheaval </li></ul><ul><li>New Revolution Based on New Technological Paradigm </li></ul>
    46. 49. Irruption of Technological Revolution <ul><li>Change of Technological Paradigm: a </li></ul><ul><li>‘ New Economy’ and a New ‘Common Sense’ </li></ul><ul><li>New Innovation Space: Surge of Technological Innovation, Synergy </li></ul><ul><li>Integrative Skills Become Important, Not Just Science and Technology </li></ul><ul><li>Technology Outruns Regulation: Anything Goes (Spar) </li></ul>
    47. 50. Financial Bubble <ul><li>‘ Financial Capital’ is Detached from ‘Production Capital’, leading to Over-Investment, Excess Capacity, and Eventual Collapse, followed, if all goes well, by . . . </li></ul>
    48. 51. The ‘Golden Age’ <ul><li>Widespread Deployment of the New Technology Exploits the New Possibilities </li></ul><ul><li>Society Adapts, Regularizes, Regulates as Implications of the New Technology Become Clearer </li></ul><ul><li>Perez Feared that Incompatible Innovations would be Excluded </li></ul><ul><li>She Didn’t Foresee the Second Financial Crisis that we’re in now! </li></ul>

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