Confidential – For Classroom Use Only 1 Driving Technological Change: The Process of Innovation...

Confidential – For Classroom Use Only 1

Driving Technological Change:The Process of Innovation

Types of Innovation


Reprise: Technological Change

Technology is a socio-economic complex including material,

energy source, artifacts/hardware, layout, procedures

(programs, software), knowledge/skills/qualified people, work

organization, management techniques, organizational

structure, cost/capital, industry structure (suppliers, users,

promoters), location, social relations, culture

Technological change can be understood using an

evolutionary model – variation, selection, retention– From the myriad inventions made, some are selected to become part of

the made world and to become the foundation for new inventions

– The mechanisms of selection include knowledge, fantasy, science,

culture, and economics


Invention and Innovation

Schumpeter drew the distinction between invention and

innovation

– Invention is a new combination of pre-existing knowledge

– Innovation includes both a technological change new to both

enterprise and the economy and a change that has diffused

into the economy and is adopted by the firm

• Can refer to the process by which individuals or organizations arrive at

a technical solution

• Can also refer to a product or service, i.e. the output of the process of

innovation

V.K. Narayanan, Managing Technology and Innovation, (Prentice-Hall, 2001)


Invention and Innovation: Another ViewInnovation is the use of new knowledge to offer a new product or service

that customers want. It is invention + commercialization. It is, according to

Porter, “a new way of doing things (termed invention by some authors) that is

commercialized. The process of innovation cannot be separated from a firm’s

strategic and competitive context.”

The new knowledge can be technological or market related:

– Technological knowledge is knowledge of components, linkages between components.

methods, processes, and techniques that go into a product or service.

– Market knowledge is knowledge of distribution channels, product applications, and

customer expectations, preferences, needs, and wants. The product or service is new

in that its cost is lower, its attributes are improved, it now has new attributes it never

had before, or it never existed in that market before.

– Often the new product or service itself is called an innovation, reflecting the fact that it

is the creation of new technological or market knowledge.

Allan Afuah, Innovation Management, (Oxford University Press: 2003).


Two Main Types of Innovation1. Product

– Refers to elements of technology embodied in the goods and services of a firm

– Refers to the output of a firm

2. Process– Pertains to techniques for producing and marketing goods and services

– Refers to the way an organization conducts its business

– Also includes work methods, equipment, distribution, and logistics

– Embedded in a firm’s value chain

– Designed to produce and market goods and services faster, more efficiently, or in

greater volume

The distinction between process and product technology depends on the nature of the

firm (although process technologies are much less visible in the marketplace)– E.g., laser scanning technology is a process for a supermarket but the product for the

manufacturer

As outputs, all technological innovations have three components that form a system:

1. Hardware, consisting of the material or physical aspects of the innovation

2. Software, consisting of the information base that is needed to use the innovation

3. Evaluation of information, consisting of the information that accompanies an

innovation that enables firm or individuals to evaluate its usefulnessV.K. Narayanan, Managing Technology and Innovation, (Prentice-Hall, 2001)


Other Ways of Categorizing InnovationsIncremental

– Minor improvements or changes to the elements of an existing product or organizational technologies and

practices

– Require little new organizational knowledge because they are aligned with existing organizational capabilities

– Exploits the potential of the established design and often reinforces the dominance of established firms

– E.g., the next generation micro-processor

Component (modular)

– Significant changes in elements of products, organizational practices, and technologies without significant

changes to the existing configuration of the elements

– No significant new organizational knowledge is required

Architectural

– Use existing organizational practices and technologies but reconfigure them in new or different ways

– Significant new organizational knowledge is required

– E.g. the effects of miniaturization on key radio components

Radical

– Represent revolutionary changes that require clear departures from existing organizational practices and

technologies

– Typically not aligned with the organization's capabilities and thus require significant new organizational

knowledge

– Usually based on a different set of engineering and scientific principles and often opens up whole new

markets and potential applications

– E.g. wireless communicationsRebecca Henderson and Kim Clark, “Architectural Innovation” in Administrative Science Quarterly 35 (1990).


Architectural and Component Knowledge

Architectural innovations change the way in which the components of a

product are linked together while leaving the core design concepts and

thus the basic knowledge underlying the components untouched

– A component is a physically distinct portion of the product that embodies a

core design concept and performs a well-defined function

The distinction between the product as a system and the product as a

set of components underscores the idea that successful product

development requires two types of knowledge

– Component knowledge, or knowledge about each of the core design

concepts and the way in which they are implemented in a particular component

– Architectural knowledge, or knowledge about the ways in which the

components are integrated and linked together into a coherent wholeRebecca Henderson and Kim Clark, “Architectural Innovation” in Administrative Science Quarterly 35 (1990).


Henderson-Clark Model

Incremental Architectural

Modular Radical

Enhanced

Destroyed

Enhanced Destroyed

Architectural Knowledge

Component Knowledge


From their research, Henderson and Clark suggested that since products are normally made up of components connected together, building them must require two kinds of knowledge: knowledge of the components and knowledge of the linkages between them, which they call architectural knowledge. An innovation, then, can impact either component knowledge or architectural knowledge, or both, with different consequences for the firm adopting it. They went on to define four kinds of innovations. If the innovation enhances both component and architectural knowledge, it is incremental; if it destroys both component and architectural knowledge, it is radical. However, if only the architectural knowledge is destroyed and the component knowledge enhanced, the innovation is architectural. The last case, where component knowledge is destroyed but architectural knowledge enhanced, is called modular innovation.

With these definitions it became clear why firms had problems with what appeared to be incremental innovation. They may have mistaken architectural innovation for incremental innovation. While the component knowledge required to exploit the innovations had not changed (and therefore the semblance of incremental innovation), architectural knowledge had changed. Architectural knowledge is often tacit and embedded in the routines and procedures of an organization, making changes in it difficult to discern and respond to.


More on the Henderson-Clark Model

Incremental Innovations:Product technology:

486 microprocessors

Process technology:Continuous improvement

Modular Innovations:Product technology:

Digital telephones

Process technology:Quality circles

Architectural Innovations:Product technology:

Plain paper copiers

Process technology:Just-in-Time Inventories

Radical Innovations:Product technology:

VCR

Process technology:Robotics in manufacturing

Unchanged

Changed

Reinforced Overturned

Core Concepts

Linkage between core concepts and

components

Radical innovation establishes a new dominant design, and therefore, a new set of core design concepts embodied in components that are linked together in a new architecture

Incremental innovation refines and extends an established design

Rebecca Henderson and Kim Clark, “Architectural Innovation” in Administrative Science Quarterly 35 (1990).


Multi-Level Multi-Player InnovationThe difficulty of defining technological innovation reveals the great diversity of its forms. To expose the nature of

this diversity and understand its implications, I first, paradoxically, need to simplify. Therefore, I divide the

many forms of innovation into two categories, new products and the new know-how upon which they are

based, and further stratify both know-how and products into three levels, as I explain in the following.

For any new product, the underlying know-how ranges from high-level general principles, to mid-level

technologies, to ground-level context-specific heuristics or rules of thumb. In microprocessors, for instance,

high-level know-how includes the laws of solid-state physics; mid-level, the circuit designs and chip layouts; and

ground-level, the tweaking of conditions in a specific semiconductor fabrication plant to maximize the quality and yield

of the microprocessors produced.

Individual forms of technological innovation, especially at the high level, usually have limited economic or

commercial value unless they are complemented by lower-level innovations. A breakthrough in solid-state

physics has value in the semiconductor industry only to the degree that it is accompanied by the development of new

microprocessor designs; and the new designs may be useless without the development of plant-level tweaks for large-

scale production of the microprocessor. Similarly, realizing the value of a new high-level microprocessor may require

the development of new mid-level motherboards and ground-level computers. At the same time, high-level innovations

often provide the building blocks, and a reason for lower-level innovations. A breakthrough in solid-state physics may,

for instance, provide the motive and the means for developing new microprocessor designs, and a new microprocessor

may stimulate the development of new motherboards and computers. In other words, the different forms of

innovation interact in complicated ways, and it is these interconnected, multilevel advances that create

economic value. Amar Bhide, The Venturesome Economy (Princeton University Press: 2008).

Confidential – For Classroom Use Only

Multi-Level Multi-Player Innovation

11

Know-how:

High-level

Mid-level

Ground-level

Microprocessors

Solid state physics

Circuit designs

Management of specific fabrication

plant

Motherboards

Signal processing and power systems

theory

Placement and routing of board

components

Production plans and schedules

Laptop Computers

Concept of clamshell design

Model blueprints and bill of materials

Selection and ongoing

management of suppliers

High-level

Mid-level

Ground-level

Amar Bhide, The Venturesome Economy (Princeton University Press: 2008).

Confidential – For Classroom Use Only

Multi-Level Multi-Player Innovation

12

Know-how:

High-level

Mid-level

Ground-level

Coffee Beans

Plant genetics

Formula for mixing fertilizers

Harvesting schedules for a

plantation

Coffee Roasters

Laws of thermodynamics

Design of roaster drums

Roast operators’ “master taste”

Cup of Espresso

Principle of high-pressure brewing

Knowledge of optimal pressure and fineness of coffee grinds

“Pulling a Shot” on a specific machine

High-level

Mid-level

Ground-level

Amar Bhide, The Venturesome Economy (Princeton University Press: 2008).


Abernathy-Clark Model

Regular Revolutionary

Niche Architectural

Preserved

Destroyed

Preserved Destroyed

Technical Capabilities

Market Capabilities


The Abernathy-Clark model offers one explanation why incumbents may outperform new entrants in the face of some “radical” innovations. The model suggests that there are actually two kinds of knowledge that underpin an innovation: technological and market. Thus a firm’s technological capabilities could become obsolete while its market capabilities remain intact. If such market capabilities are important and difficult to acquire, an incumbent whose technological capabilities have been destroyed can use the market ones to its advantage over a new entrant. Focusing on the perspective of the innovating firm, the model classifies innovations according to their impact on the existing technological and market knowledge of the manufacturer. An innovation is regular if it conserves the manufacturer’s existing technological and market capabilities, niche if it conserves technological capabilities but obsoletes market capabilities, revolutionary if it obsoletes technological capabilities but enhances market capabilities, and architectural if both technological and market capabilities become obsolete.


Technological DiscontinuitiesThe authors …[postulate] that most community change occurs soon after a

discontinuous technological innovation. Furthermore, they hypothesize that these

discontinuities affect the community differently depending on the competence-enhancing or

competence-destroying qualities of the technological innovation.

– Competence-enhancing innovations exploit existing skills and knowledge

within the community. These innovations serve to consolidate industry leadership in

the larger organizations and hinder the development of new organizational forms.

– Competence-destroying innovations spur the creation of new organizational

forms that can quickly acquire and utilize the new technologies. Large, well-

established organizations with too much inertia to adopt the new innovations suffer

and lose their dominance.

Technology evolves through periods of incremental changes punctuated by technological

breakthroughs that either enhance or destroy the competence of firms in an industry.

Competence-destroying discontinuities are initiated by new firms and cause environmental

turbulence, competence-enhancing discontinuities are initiated by existing forms and reduce

turbulence.M. L. Tushman and P. Anderson, "Technological Discontinuities and Organizational

Environments", Administrative Science Quarterly, 31 (1986), 439-65.


S-Curves and Dominant Designs


Technological Discontinuities and Dominant DesignTechnological change can be fruitfully characterized as a sociocultural evolutionary process of variation, selection, and retention.

Variation is driven by stochastic technological breakthroughs. Technological discontinuities initiate substantial

technological rivalry between alternative technological regimes. Social, political, and organizational dynamics select

single industry standards or dominant designs from among technological opportunities. Positively selected variants

then evolve through relatively long retention periods, marked by incremental technical change and increased interdependence

and enhanced competence within and between the communities of practitioners.

Technological advance may, then, be driven by the combination of chance or random events (variation), the direct social, political

action of individuals and organizations in selecting between rival industry standards (selection), and the incremental,

competence-enhancing, puzzle-solving actions of many organizations that are learning by doing (retention).

Tushman and Anderson (1986) highlighted a powerful source of variation by demonstrating that the core technology of

an industry evolves through long periods of incremental change punctuated by technological discontinuities. This

paper extends that work by exploring the other key punctuating event in the evolution of a technology: the emergence

of a dominant design after a technological discontinuity.

We argue that a breakthrough innovation inaugurates an era of ferment in which competition among variations of the original

breakthrough culminates in the selection of a single dominant configuration of the new technology. Successful variations are

preserved by the incremental evolution of this standard architecture until a new discontinuous advance initiates a new cycle of

variation, selection, and retention. The key punctuation points are technological discontinuities and dominant designs; these

delimit eras of ferment and eras of incremental change.

At rare and irregular intervals in every industry, innovations appear that "command a decisive cost or quality advantage and that

strike not at the margins of the profits and the outputs of the existing firms, but at their foundations and their very lives"

(Schumpeter, 1942: 84). Such innovations depart dramatically from the norm of continuous incremental innovation that

characterizes product classes, and they may be termed technological discontinuities. These discontinuities either affect

underlying processes or the products themselves. Philip Anderson and Michael L. Tushman, “Technological discontinuities and dominant designs: a cyclical model of technological change” in Administrative Science Quarterly (Dec, 1990).


Model of Dominant Designs

The Technology Cycle

Era of

Ferment

Era of

Incremental Change

TechnologicalDiscontinuity 1

TechnologicalDiscontinuity 2

DominantDesign 1

Anderson and Tushman’s 1990 model of dominant design:

Johann Murmann and Michael Tushman, From the Technology Cycle to the Entrepreneurship Dynamic.


Technology S-Curves

Both the rate of a technology’s performance

improvement and the rate at which technology is

adopted in the marketplace have repeatedly been

shown to conform to an S-curve

The S-curve model suggests that technological

change is 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

Rate of performance and rate of adoption (i.e.

diffusion) are fundamentally different processes

Rate of diffusion plots number of adopters against

time

Emergence of a new technological discontinuity can

overturn the existing competitive structure of an

industry, creating new leaders and new losers

Schumpeter called this process creative destruction

and argued that it was the key driver of progress in

capitalist societies

“In capitalist reality, as distinguished from its textbook

picture it is not [price] competition which counts but the

competition from the new commodity, the new

technology…which strikes not at the margins to the profits

of the existing firms, but at their…very lives.”

Effort

Per

form

ance

Physical Limit of Technology

Melissa Schilling, Managing Technology (New York: Norton, 1995).


Effort

Rat

e o

f te

chno

logi

cal P

rogr

ess

Speed of light

Communications bottlenecks

Single-processor computer

Multi-processor computer


Technology CyclesPeriods of variation (eras of ferment) are initiated by technological discontinuities and closed by the selection

of a dominant design– After a dominant design emerges (i.e. one design captures of 50% of new sales), subsequent innovation extends

the selected variant’s technological trajectory

Eras of incremental change are, in turn, broken by subsequent technological discontinuities, and the next

cycle of variation, selection, and retention processes begin

Eras of ferment are fundamentally more uncertain than eras of incremental change– Dominant designs are, then, a key transition point between eras of ferment and eras of incremental change

because they signal a reduction in uncertainty about the direction of the technology

As proposed by Abernathy and Utterback:

In the initial more fluid phase, there is considerable uncertainty about both the new technology and its market– Products or services based on the technology might be crude, unreliable, or expensive, but might suit some market

niches

Eventually, producers and customers arrive at some consensus about the desired product attributes and a

dominant design emerges

In the specific stage, the dominant design establishes a stable architecture for the technology and alternate

designs are no longer considered

The dominant design enables– firms to focus their efforts on process innovations that make production of the design more effective and efficient

– firms to focus on incremental innovations to improve components within the architecture

– complementary products and services are developed

Johann Murmann and Michael Tushman, From the Technology Cycle to the Entrepreneurship Dynamic.

Melissa Schilling, Managing Technology (New York: Norton, 1995)


Technologies as Systems:Architecture and Components

In a model of dominant design, technologies are conceptualized as

– systems (e.g. the entire automobile)

– multiple levels of subsystems (e.g. the engine, a first order subsystem, and at a lower

level, the cylinder, a second-order subsystem)

– linking mechanisms (e.g. the auto chassis)

– basic components (e.g. screws)

Some subsystems are core and others are peripheral

– One way in which subsystems become core is if they serve as the link to many other

subsystems

– A second way in which component and subsystem technologies become core is by

constituting a bottleneck in the overall performance of the system

Strictly speaking, a dominant design for the overall system only emerges if all

lower-level subsystems and components are in an era of incremental changeJohann Murmann and Michael Tushman, From the Technology Cycle to the Entrepreneurship Dynamic.


Emergence of Dominant Designs

Dominant designs emerge through a variety of selection mechanisms

– Except for simple, non-assembled products (e.g. cement), uncertainty about

the potential of certain designs cannot be adjudicated by technology alone

– Rather, dominant designs emerge out of a sociopolitical, economic

process of compromise and accommodation played out in the

community

– This means that the best technology does not necessarily win the competition

between alternative designs

Coalitions of different actors, government intervention, and the power of

large users all can have a decisive influence on what design variant will

become the dominant one

– Because the selection of a dominant design in any non-simple technology

involves sociopolitical processes, entrepreneurial activity can shape what

design emerges and which becomes the dominant oneJohann Murmann and Michael Tushman, From the Technology Cycle to the Entrepreneurship Dynamic.


Entrepreneurs and the Emergence of Dominant Designs

In the market process, being first in the market, signing up large customers

early, and forming alliances with other producers are often the decisive factors

– When standards are negotiated, forming coalitions with other entrepreneurs and

organizations is an important strategy for making a particular design the winner

Entrepreneurs and entrepreneurial organizations have many more

opportunities in the eras of ferment than in the eras of incremental change

– In the eras of incremental change, incumbent firms have built-up capabilities to refine

the dominant design in line with the requirements of existing users

– After a technological discontinuity, entrepreneurial ventures can exploit the fact that

existing organizations often find their capabilities rendered obsolete (competence-

destroying innovations), or even when their capabilities retain their value (competence-

enhancing innovations), existing players are frequently more inert and cannot respond

as quickly as entrepreneurs

– Entrepreneurial opportunities are greater after a technological discontinuity

– General proposition: entrepreneurial activities will be significantly higher in eras of

ferment than in eras of incremental changeJohann Murmann and Michael Tushman, From the Technology Cycle to the Entrepreneurship Dynamic.


Summary: Innovation and Dominant Design

Technological change is cyclical with periods of incremental change punctuated by

technological discontinuity and a subsequent period of technological ferment, followed by the

emergence of a dominant design

– Variation is driven by random technological breakthroughs, and technological

discontinuities initiate technological rivalry between alternative technological regimes

– Major technological advances require not just one innovation but a cluster of

innovations

– Technological innovations (outcomes) are the result of product, process, and market

development

Dominant design emerges from market demand which is affected by combination of

technological possibilities and individual, organizational and governmental factors

– Most adopters will await the emergence of a dominant design before investing in the

new technology

– Emergence of a dominant design is a prerequisite to mass adoption, i.e. sales and

volume production of next generation technology will peak after the era of ferment

– Dominant design permits companies to design standardized and interchangeable

parts to optimize organizational processes, volumes and efficiency


Disruptive TechnologyA disruptive technology or disruptive innovation is a technological innovation, product, or

service that eventually overturns the existing dominant technology or status quo product

in the market.

Disruptive innovations can be broadly classified into lower-end and new-market disruptive

innovations. A new-market disruptive innovation is often aimed at non-consumption, whereas a

lower-end disruptive innovation is aimed at mainstream customers who were ignored by

established companies.

Sometimes, a disruptive technology comes to dominate an existing market by either filling a role in

a new market that the older technology could not fill or by successively moving up-market

through performance improvements until finally displacing the market incumbents (as digital

photography has begun to replace film photography).

By contrast, "sustaining technology or innovation" improves product performance of established

products. Sustaining technologies are often incremental; however, they can also be radical or

discontinuous.

The term disruptive technology was coined by Clayton M. Christensen and introduced in his 1995

article Disruptive Technologies: Catching the Wave, which he coauthored with Joseph Bower. He

describes the term further in his 1997 book The Innovator's Dilemma. In his sequel, The Innovator's

Solution, Christensen replaced disruptive technology with the term disruptive innovation because

he recognized that few technologies are intrinsically disruptive or sustaining in character. It is the

strategy or business model that the technology enables that creates the disruptive impact. http://en.wikipedia.org/wiki/Disruptive_technology


Theories of Innovation:Christensen’s Model


Introduction to Christensen Model

According to the disruptive technological change model, advanced by Professor Clayton Christensen, incumbents fail to

exploit disruptive technologies not so much because these firms do not “get it,” as suggested by the architectural innovation

model, or because the technologies are competence destroying to them, as suggested by the incremental-radical model.

Rather, incumbents fail because they spend too much time listening to and meeting the needs of their existing

mainstream customers who, initially, have no use for products from the disruptive technology. Disruptive

technologies have the following four characteristics:

1. They create new markets by introducing a new kind of product or service.

2. The new product or service from the new technology costs less than existing products or services from the old technology.

3. Initially, the products perform worse than existing products when judged by the performance metrics that mainstream

existing customers value. Eventually, however, the performance catches up and addresses the needs of mainstream customers.

4. The technology should be difficult to protect using patents.

To understand the disruptive technological change model, consider a firm that has been successful in exploiting an existing

technology to offer products to its mainstream customers. The firm’s capabilities—what it can or cannot do—are a function

of its resources, processes, and values. Its resources are assets such as product designs, brands, relationships with

suppliers, customers, distribution, people, plants and equipment, technologies, and cash reserves. Its processes are the

systems that the firm has put in place to transform resources into better customer value. These systems are designed to

make task performance more efficient and are difficult to change, especially when they have been embedded into

organizational culture. Allan Afuah, Innovation Management, (Oxford University Press: 2003).


Examples of Disruptive Innovations

Unresolved examples of technologies promoted as 'disruptive innovations'1. Music downloads and file sharing vs. compact discs 2. ebooks vs. paper books 3. VoIP (and VoIP over 802.11) vs. traditional telephone and mobile phone service.

Disruptive Innovation

Displaced or Marginalized Technology

Notes

Agriculture and pastoralism

Hunting and gathering The development of food production technology led to other disruptive technologies such as cities, writing, metal working, wheeled vehicles, and much of the remainder of world civilization.

Container ships and containerization

“Break cargo” ships and stevedores

In addition to efficiency these also provide a great reduction in opportunities for pilferage and integrate well with both rail and truck transport.

Steamships Sailing ships The first steamships were deployed on inland waters where sailing ships were less effective, instead of on the higher profit margin seagoing routes. Hence steamships originally only competed in traditional shipping lines' "worst" markets.

Muskets Longbows and crossbows The development of firearms allowed essentially anyone to become an effective soldier with very little training. Earlier military units like bowmen and knights needed years of practice to master the skills.

Telephones Telegraphy When Western Union infamously declined to purchase Alexander Graham Bell's telephone patents for $100,000, their highest-profit market was long-distance telegraphy. Telephones were only useful for very local calls. Short-distance telegraphy barely existed as a market segment, if at all. So Western Union's decision was quite understandable at the time.

http://en.wikipedia.org/wiki/Disruptive_technology


Wheel of Disruption

Factors that Power the Wheel:Market for talentCapital marketsProduct markets

InfrastructureIndustry dynamics

Research and development

Disruptive foothold established

Internal disruptive ideas get squashed

Growth occurs

Growth stalls

New businesses form

Managers leave and

Entrepreneurs coalesce

The Wheel of Disruption is a core micro-economic engine of macro-economic growth

There are six factors that encourage the wheel of disruption and interact to define an environment that is conducive to disruptive innovation

The best long-term growth prospects come from creating an environment that supports innovation through porous borders and active problem solving

Clayton Christensen, Seeing What’s Next, (Boston: Harvard Business School Press, 2004).


Factors that Power the Wheel

1. Market for talent that is flexible, encourages entrepreneurialism and risk taking, and enable

mobility between firms

2. Capital markets that help new firms start and grow while targeting disruptive opportunities.

Capital market policies that encourage debt financing inhibit the wheel of disruption because

disruptive opportunities start out small and unpredictable.

3. Unconstrained product markets that provide ample motivation and ability (particularly

access to overshot customers or non-consumers) and the capacity to find or create new

distribution channels that support a disruptive business model.

4. Supporting infrastructure that has appropriate tax policies, encourages company formation,

and has intermediaries that provide “lubrication” to the process of disruptions, such as training

and education, market research, and verification and accreditation services.

5. Vibrant industry dynamics with market-based interactions and competition to spur new

business models.

6. R&D environment that protects intellectual property while directing research toward

breaking trade-offs and applying technology into new markets.Clayton Christensen, Seeing What’s Next, (Boston: Harvard Business School Press, 2004).


Introduction: Dilemmas of Innovation

Capabilities of most organizations are far more specialized and context-specific than

most managers are inclined to believe

– This is because capabilities are forged within value networks

– Capabilities are defined and refined by the types of problem tackled in the past

In many instances, the information required to make large and decisive investments in

the face of disruptive technology simply does not exist

– It needs to be created through fast, inexpensive, and flexible forays into the market and the

product

– Managers who don’t bet the farm on their first idea, who leave room to try, fail, learn quickly, and

try again

Disruptive innovations entail significant first-mover advantages – leadership is

important

– Sustaining situations do not entail significant first-mover advantages

Because disruptive technologies rarely make sense during the years when investing in them

is most important, conventional managerial wisdom at established firms constitutes an

entry and mobility barrier that entrepreneurs and investors can bank on



Theories for Understanding Innovation

At the core of The Innovator’s Dilemma and The

Innovator’s Solution are three important theories that

untangle the messy process of innovation, of why

incumbent leaders fail and new firms arise to disrupt their

markets:

1. the disruptive innovation theory;

2. the resources, processes, and values theory; and

3. the value chain evolution theory.



The Disruptive Innovation Theory:Simple, Cheap, Revolutionary

The disruptive innovation theory points to situations in which new organizations can use

relatively simple, convenient, low-cost innovations to create growth and triumph over powerful

incumbents. The theory holds that existing companies have a high probability of beating

entrant attackers when the contest is about sustaining innovations. But established

companies almost always lose to attackers armed with disruptive innovations.

Sustaining innovations

– move companies along established improvement trajectories

– improve existing products on dimensions historically valued by customers

Disruptive innovations

– introduce a new value proposition

– create new markets or reshape existing markets

– two types:

1. low-end – can occur when existing products and services are “too good” and hence overpriced relative to

the value exiting customers can use

2. new market – can occur when characteristics of existing products limit the number of potential consumers

or force consumption to take place in inconvenient, centralized settings



Principles of Disruptive Innovation 1Companies depend on customers and investors for resources

– Managers think they control the flow of resources in their firms, but it is really customers and

investors who dictate how many will be spent because if they are not satisfied, companies do not

survive

– The best companies satisfy customers and investors and kill ideas that they do not want, and

thus do not invest in disruptive ideas

Small markets do not solve the growth needs of large companies

– Disruptive technologies typically enable new markets to emerge

– Many large companies adopt a strategy of waiting until new markets are “large enough to be

interesting”

– Small organizations can most easily respond to the opportunities for growth in a small market

Markets that do not exist cannot be analyzed

– Good management is characterized by sound market research and good planning followed by

execution according to plan – when applied to sustaining innovations, these skills are invaluable and

are the primary reason why established firms are better at introducing sustaining innovations

– In disruptive innovations, where we know least about the market, there are strong first-mover

advantages, but the right markets and the right strategies for exploiting them cannot be known in

advance

Clayton Christensen, The Innovator’s Dilemma, (new York: HarperCollins, 1997).


Principles of Disruptive Innovation 2

An organization’s capabilities define its disabilities

– People are quite flexible in that they can be trained to do lots of different things

– But processes and values are not flexible

Technology supply may not equal technology demand

– Disruptive technologies, though they initially can only be used in small markets remote from the

mainstream, are disruptive because they subsequently can become fully performance-competitive

within the mainstream market against established products

– When the performance of two or more competing products has improved beyond what the market demands,

customers can no longer base their choice upon which is the higher performing product

– The basis of choice evolves from functionality to reliability to convenience to price

– The phenomenon in which product performance overshoots market demands is the primary mechanism

driving shifts in the phases of the product life cycle

– In their efforts to stay ahead by developing competitively superior products, many companies don’t realize the

speed at which they are moving up-market, over-satisfying the needs of their original customers as they race

the competition toward higher performance, higher margin markets

– In doing so, they create a vacuum at lower price points into which competitors employing disruptive

technologies can enterClayton Christensen, The Innovator’s Dilemma, (new York: HarperCollins, 1997).


The Innovator’s Dilemma – Why Excellent Companies Fail

Simply put, when the best firms succeeded, they did so because they listened responsively to their

customers and invested aggressively in the technology, product, and manufacturing capabilities that

satisfied their customers’ next-generation needs.

– But paradoxically, when the best firms subsequently failed, it was for the same reasons – they listened

responsively to their customers and invested aggressively in the technology, products, and

manufacturing capabilities that satisfied their customers’ next-generation needs.

When faced with sustaining technology change that gave existing customers something more and

better in what they wanted, the leading practitioners of the prior technology led the industry in the

development and adoption of the new

– Purpose of advanced technology development in an industry is usually to sustain established

trajectories of performance improvement, to reach the higher-performance, higher-margin domains

– The incumbents were held captive by their customers and the high margins they offered

Disruptive technologies tend to be technologically straightforward

– They are usually developed and adopted by new entrants to the industry, serving current non-

consumers, overshot customers, and undershot customersClayton Christensen, The Innovator’s Dilemma, (new York: HarperCollins, 1997).


The Resources, Processes, and Values Theory:The Building Blocks of Capabilities

Resources Processes Values

Things or assets that organizations can buy or sell, build or destroy.Examples:

Established ways companies turn resources into products or services.Examples:

Criteria by which prioritization decisions are made.Examples:

PeopleTechnologyProductsEquipmentInformationCashBrandDistribution channels

Hiring and trainingProduct developmentManufacturingPlanning and budgetingMarket researchResource allocation

Cost structureIncome statementCustomer demandsSize of opportunityEthics

Incumbent firms fail in the face of disruptive innovations because their values will not prioritize disruptive innovations, and the firm’s existing processes do not help them get done what they need to get done

Resources, processes, and values collectively define an organization’s strengths as well as its weaknesses

RPV Theory argues that organizations successfully tackle opportunities when they have the resources to succeed, when their processed facilitate what needs to get done, and when their values allow them to give adequate priority to that particular opportunity in the face of all other demands that compete for the company's resources this is why incumbent firms miss disruptive opportunities, because their resources, processes, and values compel them to focus on the needs of their current customers and the sustaining innovations their current customers demand

Incumbent firms master sustaining innovations because their values prioritize them, and their processes and resources are designed to tackle precisely those types of innovations



Value Chain Evolution Theory:Integrating to Improve What Is Not Good Enough

The final core theory of innovation – the value chain evolution (VCE) theory – assesses whether a company has made the right

organizational design decisions to compete successfully.

On the surface, the VCE theory is breathtakingly simple. The theory suggests companies ought to control any activity or

combination of activities within the value chain that drive performance along dimensions that matter most to customers.

Directly controlling, or integrating, an activity gives companies the ability to run experiments and push the frontier of what is possible.

Integration gives firms a full platform to run experiments to solve problems caused by unpredictable “interdependencies” between

activities. These same interdependencies can frustrate specialist firms that try to focus on a single piece of a product’s or service’s

value chain. When a specialist’s piece interacts unpredictably with components that other companies design and make, it typically

results in poorly performing, unreliable products.

The performance improvements that integration provides come at a cost, however. Integrated architectures tend to be

relatively inflexible. Integrated companies tend to react relatively slowly. Therefore, the theory suggests that companies

ought to outsource activities that don’t influence the characteristics of a product or service that customers deem (or will

deem) most critical. Specialists can better optimize those pieces of the value chain.

Modular architectures that facilitate (or permit) disintegration sacrifice raw performance in the name of speed to market,

responsiveness, and convenience. This sacrifice allows companies to customize their products by upgrading individual subsystems

without having to redesign an entire product. They can mix and match components from best-of-breed suppliers to respond

conveniently to individual customers’ needs.

EXAMPLE: Dell introduced convenience and customization to the personal computer market. It did this by tightly integrating across the

key interfaces in the supply chain, integrating across the interface with the customer, and outsourcing component design and

production to specialist providers. It followed the VCE theory’s golden rule: Integrate to improve what is “not good enough”

(speed, customization, and convenience) and outsource what is “more than good enough” (the computer’s architectural design).Clayton Christensen, Seeing What’s Next, (Boston: Harvard Business School Press, 2004).


SummaryPer Christensen, there are three important theories that untangle the messy process of

innovation:

1. the disruptive innovation theory;

2. the resources, processes, and values theory; and

3. the value chain evolution theory.

Together they explain why great companies fail:

– Incumbent companies fail by focusing on existing customers and missing the threats posed by

disruptive innovations

– They miss disruptive opportunities, because their resources, processes, and values compel them to

focus on the needs of their current customers and the sustaining innovations their current customers

demand

– Companies are better able to spot disruptive opportunities when they organize to control any activity

or combination of activities within the value chain that drive performance along dimensions that matter

most to customers

• Therefore, the theory suggests that companies ought to outsource activities that don’t influence the

characteristics of a product or service that customers deem (or will deem) most critical


ConclusionWhen can we reasonably expect innovation to lead to the emergence of new

companies or business models that could be harbingers of industry change?

The answer involves evaluating three customer groups:

1. Customers not consuming any product or consuming only in inconvenient settings (non-

consumers): People who lack the ability, wealth, or access to conveniently and easily accomplish an important job for

themselves; they typically hire someone to do the job fro them or cobble together a less than adequate solution

2. Consuming customers who are undershot: Consumers who consume a product, but are frustrated with its limitations; they display willingness to pay more

for enhancements along dimensions most important to them; and create an opportunity for existing firms to

profitably introduce up-market sustaining innovations which make good products better

3. Consuming customers who are overshot: Customers who stop paying for further improvements in performance that historically had merited attractive

price premiums; which introduces commoditization, the process that results in companies being unable to

profitably differentiate their products or services

The most predictable event is that after establishing an initial foothold, new firms experience

a strong incentive to improve, acquire more customers, and migrate into high-profit tiers of

their market. This ultimately sets up a battle between the new firms and an entrenched

incumbent. Clayton Christensen, Seeing What’s Next, (Boston: Harvard Business School Press, 2004).

Confidential – For Classroom Use Only 1 Driving Technological Change: The Process of Innovation...

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