1. Strategic Management of Technological
Innovation
Melissa Schilling
Chapter 3
TYPES AND PATTERNS OF INNOVATION

2. Honda andestablishedElectricdeveloping
Hybrid record of Vehicles
• Honda had an
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.
Types & Patterns of Innovation
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3. Honda and Hybrid Electric Vehicles
Discussion Questions:
1
. Are hybrid electrical vehicles a radical innovation or an
incremental innovation? Are they competence enhancing or
competence destroying, and from whose perspective? How
would you answer these questions for fuel-cell vehicles?
2. What factors do you think will influence the rate at which
hybrid electric vehicles are adopted by consumers?
3. What would be the advantages or disadvantages of Honda
and Toyota using the same engine standard?
4. Is Honda’s strategy of producing a different engine standard
than Toyota and not collaborating or licensing to other
automakers a good one? What would you recommend?
5. Why do you think Honda simultaneously developed both
hybrid vehicles and fuel-cell vehicles?
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4. 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.
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5. 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
Types & Patterns of Innovation
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6. 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.
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7. 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.
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8. 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)
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9. 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
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10. 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).
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11. Types of Innovation
• Competence-Enhancing vs CompetenceDestroying 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.
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12. 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.
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13. 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.
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14. 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 highwheelers.
– 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.
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15. 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 improves slowly
technology
at first because it is poorly
understood.
S-curves in Technological Improvement
Then accelerates as
understanding increases.
Then tapers off as approaches
limits.
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16. 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
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17. 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
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18. 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
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19. Transistor Density versus
Cumulative R&D increasing rapidly
• However, Intel’s R&D dollars per year has also beenExpenses
– The big gains in transistor density have come at a big cost in terms of
effort invested
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20. 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
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21. 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 has an s-curve that
the
Disruptive technology
Disruptive technology technology
increases to a higher performance limit
incumbenthas a steeper s-curve
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Types & Patterns of Innovation
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22. 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).
Types & Patterns of Innovation
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23. 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
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24. 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.
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25. 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.
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26. 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
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Types & must feel certain
innovations and innovators, andPatterns of Innovation that a new innovation will not

27. Diffusion of Innovation &
Adopter Categories
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28. 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
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29. 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
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30. 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).
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31. 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.
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32. 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.
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33. Discussion Questions
1. What are some of the reasons that
established firms might resist the
adoption of a new technology?
2. Are well-established firms or new entrants
more likely to a) develop and/or b) adopt
new technologies? What are some
reasons for your choice?
3. Think of an example of an innovation you
have studied at work or school. How
would you characterize it on the
dimensions described at the beginning of
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