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GU STIA305 06

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Dynamics of Innovation

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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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