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The Dynamic of Technological Innovation

Professor Charles Weiss

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Why Should I Care?

Innovation is a Key toGrowth, Productivity and

CompetitivenessBetter Health, Security and

Environment

So We Need to Understand How Technological Innovation

Takes Place

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Definitions

Science: Understanding the Natural World, or the Process by which it Comes to be Understood

Technology: A System that Organizes and Uses Technical Knowledge for a Practical Purpose Includes Hardware, Software and

Management Both Can be Creative and Fun

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More Definitions

Research: Increasing Knowledge Invention: a New, Useful Idea Development: Transforming an

Invention or Idea into a Commercial Product

Innovation: Commercialization or Spread of an Idea in Practice

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Science and Technology are Interlinked but Different

Basic science gives rise to technology (e.g., MRI, lasers, biotechnology)

Until ~1880, technology was derived from tinkering, not from science (e.g., cotton gin, barbed wire)

Technology gives rise to science (e.g., astronomical discoveries from Hubble telescope)

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The Dynamic of Technology

Motivation of the Engineer: Solve a Practical Problem, Make Things Work

We Shall Examine Innovation at the Level of The Product or Process The Economy The Firm

(next lecture) We’ll Start with the

Product or Process

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Innovations Can Take Place in Manufactures or in Services Products or Processes

Beverage Can Technical Systems

McDonald’s Electric Grid Health Delivery

Complexity Often Increases as Performance Improves Tightly Coupled Complex Systems Require Special

Management so as to Avoid Unforeseeable Accidents (Perrow)

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Models of Technological Change

Technology PushMarket Pull

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“Technology Push” Model Derived from Atom Bomb Experience

Nuclear Physics was Arcane Branch of Basic Science Before World War II

Yet Atom Bomb Won War with Japan, and Revolutionized Geopolitics

Promise of Nuclear Energy ‘Too Cheap to Meter’ The Model: Research --> Invention -->

Development --> Commercialization --> GrowthGrowth Examples: Television, Microwave Ovens, Examples: Television, Microwave Ovens,

Nuclear Power, World-Wide WebNuclear Power, World-Wide Web

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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

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“Market Pull” Model of Technical Change

Pre-Thatcher UK as Counter-Example: Excellent Basic Science, Poor Economic Growth Serious Labor-Management Troubles Hurt

Growth The More Usual Model: “Market Pull”

Research <-- Invention <-- Development <-- Commercialization <-- Market

Consequence of Market Pull Model: Whatever Influences the Market, Also Influences Technology

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Competition as a Spur to Innovation

Most Companies (Like Most People) are Content to Keep Doing What They’re Doing Unless Forced to Change

Lack of Competition, as from Protection and Over-Regulation, Leads to Stagnation This Phenomenon is Notorious in

Developing Countries but is Also Found in the US

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Classical Product Cycle Theory

Define Product Develop Market Product Becomes Standardized One Design Becomes Dominant Number of Companies is

Reduced Production Technology Moves

Offshore

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At Early Stages in the Product Cycle

New Technology Builds on Predecessor Auto, Airplane Use

Bicycle Technology Several

Technologies Often Compete (Internal Combustion,

Stanley Steamer, Diesel Automobile Engines)

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As Product Matures, Customers Become Accustomed to the Function and Configuration of the Product Process (Manufacturing) Innovation

Dominates Product Innovation Improve the Components – but Keep

the Product the Same (e.g., Digital Camera, Fuel Injection )

Product Becomes a Commodity, Sold at Low Margins for its Quality and Price, not its Uniqueness Barriers to Entry Increase Overseas (‘Offshore”) Manufacture Lowers

Costs

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Number of Firms Decreases (‘Shake-Out’). Survivors Have Large-Scale Production Distribution and Marketing Management Talent to Grow the

Company Capacity to Advance the Technology

Eventually a New Product Replaces the Old

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Transition Between Technologies

Companies Build on their Existing Base As Technology Approaches the Transition

Point, a Fight Ensues for Attention in Old-Line Companies

The New Technology May Threaten a Firm’s Core Competence and Skill Base. Examples: Mechanical ---> Electronic Calculators Xerox and the Personal Computer: “Fumbling

the Future”

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The Technology S-Curve

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Winner May Depend on Market Requirements US vs British Railways

(Time Horizon) US vs. European Cars

(Gas Prices) Number-Crunching vs.

Graphics Computers (Military Requirement)

A Marketing Decision Betamax vs. VHS

Political Dynamic Nuclear Reactor Design

Chaos: A Trivial Phenomenon (‘The Flap of a Butterfly’s Wings’) at a Critical Transition Point Triumph of DOS:

‘Accidental Empires Stanley Steamer and

Hoof-and-Mouth Disease

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Two Digressions

The S-Shaped Curve Can also be Used to Represent the Diffusion of an Innovation rather than its Improved Technical Performance

Technological Limits are not Fixed – Innovation May be Constantly Improving the ‘Legacy’ Technology

Information Technology Improves Especially Dramatically

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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.

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Examples of Entrenched Legacy Technologies

Energy Health Transport Food

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A Digression: Another Way to Classify Innovation

1. Radical 2. Second-Generation 3. Incremental

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1. Radical Innovation: New Functional Capability

‘Killer Application’ is Often Required Marketing Must Overcome Barriers

Xerox: Sell Copies Pre-Paid Cell Phone Prius

Customers and Amateurs Discover New Uses Web, Spreadsheet, Post-It, FaceBook, Skype

They May Even Organize to Improve Products! Open-Source Software, Surfboards, Mountain

Bikes (Alternative to IP) Distrust Market Forecasts (“Five 32K

Mainframes Will Satisfy World Demand for Computers.”)

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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.]

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3. Smaller Incremental Innovations May Improve

Function Performance Efficiency Manufacturability Dependability Maintainability Reparability Esthetics

Incremental Improvements May Multiply Productivity and Sustain Competitiveness(e.g., in Mining, Railroads)

Danger of Technological Lock-In (QWERTY Effect) Especially if Supported by

Subsidy

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Radical Innovation In Classical Product Cycle Theory,

Radical Innovations Typically Come from Outside the Industry

Radical New Technology is Often Introduced so as to Resemble its Predecessor Horseless Carriage Word Processor [‘Cut and Paste’]

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Product Cycle Theory is Overtaken as

US Companies Undertake Radical Innovations

Manufacturing is ‘Reborn’ Globalization Speeds the Product Cycle

And the Export of Manufacturing Technology

Information Technology Revolutionizes the Service Sector

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‘Disruptive’ Innovations: A Refinement of Product Cycle Theory

Companies do explore radical innovations – if they provide improvements sought by existing customers.

‘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)

[NB: ’Disruptive’ is sometimes misused to refer to any technology that threatens existing companies.]

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The ‘Rebirth’ of Manufacturing (1970s-1980s)

Japanese Innovations Re-Establish Manufacturing

as a Key to Competitiveness

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Re-Examination of The Quality-Price Trade-Off

In Mass Production, the More the Inspectors Throw Out, the Higher the Quality ‘Move the Metal’: Don’t Stop the Production

Line If it Ain’t Broke, Don’t Fix It (More Precisely, Use Statistical Quality

Control: Fix it if it’s on the Way to Going Broke)

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AN ASIDE: Quality vs. Quality Control

QUALITY: How Good is the Product?

QUALITY CONTROL: Is Each Unit of the Same Quality?

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“Japan as #1”: The ‘Lean- Manufacturing’ Revolution

Toyota Ends Quality-Price Trade-Off by Building Quality into the Product

Just-in-Time Inventory, Produce to Order Dealers and Suppliers are Long-Term

Partners in Design, Product Improvement The Best Japanese Engineers Begin on the

Factory Floor, not in Design Recent Accelerator Problem Shows Loss of

this Pattern as a Consequence of Expansion

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Speeding the Product Cycle: Time as a Competitive Factor Eliminate Time Delays Concurrent Engineering Design Once Production Starts, Redesign

in Real Time as Bugs are Discovered

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Globalization Speeds the Product Cycle Still Further

Product Cycle Greatly Compressed

Hasten to Manufacture Offshore

But Essential Management Controls and Key Technologies Remain in Home Country

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Crisis and Response in US Manufacturing Industry (1980s):

Crisis: Concern of Permanent Loss of US Competitiveness and then Innovative Capacity

Response: US Universities and Firms Hasten to Rescue Manufacturing from Stepchild Status

Major Improvement in US Manufacturing Productivity by 1990 (though the Aircraft Industry is Just Discovering ‘Lean Manufacturing’)

Japanese Competition Recedes Due to Macro-Economic and Banking Problems

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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

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Challenges to US Dominance Globalization of Research (not Just

Manufacturing) Outsources Previous US Specialty

Offshoring of Information-Intensive Jobs Raises Old Competitiveness Issues

Multinational Firms Become More Truly Multinational

Financial Crisis Hurts Venture Capital Model

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Innovation at the Level of the Overall Economy: Kondrateev Long Waves

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‘Enabling’ Technology

Pervades Economy, Increasing Productivity Throughout

Improvements (and Measurable Increases) in Productivity Emerge Slowly as the Economy Adapts to New Possibilities

Typically Facilitated by Large Government Investments (Especially Military), Made without Strict Cost Controls [Ruttan]

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Technology Clusters Built around Enabling Technologies

1770-1850: Iron, Steam, Coal, Textiles 1850-95: Railroads, Steamships,

Telegraph, Coal Gas Lights

1895-1940: Steel, Electric Power and Light, Automobile, Airplane, Radio, Telephone, Petroleum for Energy and as Raw Material

1940-1990: Chemical Fibers, Pharmaceuticals, Television, Computers, Transistors, Integrated Circuits

1990-???: Information Technology, Biotechnology, Nanotechnology, ‘Green’ Technology

2025?-???: Cyborgs? Synthetic Biology?

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30-50 Year Periodicity in Economic Growth Rates:

More Than a Generation Needed in Order To Develop Mature Products To Build up Supporting Plant,

Infrastructure To Train Workers, Engineers,

Managers To Accustom Consumers,

Regulators, Legislators, Investors

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Contraction Follows Expansion when

Competition Creates Excess Capacity

Resulting Economic Turmoil Leads to Economic Downturn

But New Science and Technology Leads to New Expansion

An Aside: Except for Green Technology, this Picture is Driven by Progress in S&T

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Have We Seen the Last 50-Year Kondrateev Cycle?

Accelerated Innovation May Force Accelerated Technology Absorption, Shorten Cycles or End the Pattern

Alternatively, Decreases in Military Support to Long-Term Research May Inhibit Development of New Enabling Technology (to be continued)

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Perez Fleshes Out Kondrateev Theory with Revised Stages

Irruption of Technological Revolution

Financial Bubble Leads to Collapse “Golden Age” Technological Maturity and Social

Upheaval New Revolution Based on New

Technological Paradigm

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Irruption of Technological Revolution

Change of Technological Paradigm: a ‘New Economy’ and a New ‘Common

Sense’ New Innovation Space: Surge of

Technological Innovation, Synergy Integrative Skills Become Important,

Not Just Science and Technology Technology Outruns Regulation:

Anything Goes (Spar)

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Financial Bubble

‘Financial Capital’ is Detached from ‘Production Capital’, leading to Over-Investment, Excess Capacity, and Eventual Collapse, followed, if all goes well, by . . .

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The ‘Golden Age’

Widespread Deployment of the New Technology Exploits the New Possibilities

Society Adapts, Regularizes, Regulates as Implications of the New Technology Become Clearer

Perez Feared that Incompatible Innovations would be Excluded

She Didn’t Foresee the Second Financial Crisis that we’re in now!