Technological Innovation

Overview

Now we focus on technology, rapid innovations within technology, its effects and different insights on how companies should act and react to the changing environment that is brought about by technological innovation. Porter-type IO, PV (Porter, 1979) and the Resource Based View, RBV (Barney, 1995) -albeit different views on strategy- focus on how to achieve competitive advantage in a more or less static state of the industry. Both the PV and RBV talk about a world where once a market position is acquired (or resources are built), it becomes more a question of operations, control and optimization. They do not discount the idea of industrial evolution, but don’t explain the differences in performance or how to achieve competitive advantage during the tumultuous time of evolution. The Entrepreneurial View realizes the entrepreneur as the source of competitive advantage and someone who breaks the equilibrium that a certain industry achieves (Jacobson, 1992). The EV also acknowledges that equilibrium builds and breaks in cycles. This week’s readings build more on the EV, but approach it from a novel perspective.

Differences in Performance

The commonly known product life-cycle hypothesizes that any industry passes through 4 basic stages; introduction, growth, maturity and decline, and represents these stages by an S-curve. The RBV does not present an objection to this, but Porter (1980) presents a strong criticism of this traditional view by saying that initial industry structure depends on the skills and resources of early entrants and the potential structure depends on innovations in R&D, marketing, manufacturing etc (processes). There is a mesh of deeply interrelated evolutionary processes which affect the five forces and as a result cause every industry to follow a unique life-cycle. The product life-cycle curve is made on the pretense of diminishing returns; it considers eventual demise as inevitable. Porter says that firms can influence industry innovations to benefit the firm’s position and that industry demise (diminishing returns) is not obvious at all.

The strategies based on industrial innovation build on this view by saying that process and knowledge based industries have become significantly distinct and are thus, governed by different rules (Arthur, 1996). Diminishing and increasing returns relate to the traditional industrial based process industries and the novel knowledge based industries respectively.

Anderson and Tushman (1991) bring forth the idea of technology cycles and discontinuities. Technology cycles consist of three eras: substitution, design competition and incremental change (the era of substitution and design combined together make up the era of ferment). Each new cycle is initiated by a major breakthrough which they term as a discontinuity. Discontinuities can be competence-destroying; where old knowledge becomes completely obsolete and ineffectual, or competence-enhancing; where the innovation builds on old knowledge. These can be product or process innovations. Competitive advantage is gained by inciting a discontinuity, and then controlling the evolution during the era of ferment to introduce the dominant design. Anderson concludes with a rudimentary framework in the shape of 4 lessons for managers: expect discontinuities, expect an era of ferment leading up to a dominant design, monitor potential competitors and direct process and product innovation for the profitability and viability of the firm. If we compare this to the RBV, dominant designs brought forth by these discontinuities can also be viewed as heterogeneous resources, and hence are a source of competitive advantage for the firm (Barney, 1995).

The PV and the RBV consider that each industry keeps moving towards equilibrium. The PV and the RBV explain process industries, where process innovations affect only a few links in the value chain (Anderson and Tushman, 1991). Process innovations are usually competence enhancing, and all the players in an industry can keep up- depending on the position they choose to take up within that industry. As a result, no firm can corner the market and a standard price (equilibrium) is maintained. The converse is the increasing-returns world- the knowledge based industries- where products or firms that are ahead get further ahead, and the ones that lag keep lagging further behind(Arthur, 1996).

The PV considers diminishing-returns if firms are not constantly repositioned depending on the variance of the 5-forces. The RBV considers diminishing returns if resources are not strong enough and therefore focuses on building core-competencies to avoid diminishing returns. The PV and the RBV try to explain worlds which favor hierarchy, planning and control; superior optimization is then the difference in performance. In the increasing-returns world, hierarchies flatten because the entrepreneurs need to report directly to the CEO or the board. Time is an important factor here, and delays from ideas to implementation as a result of the red-tape of hierarchies should be avoided. In the process based industries (of the PV and RBV) reinvention just means optimization, but the knowledge-based world is one of adaptation.

Strategy in the processing world is based on core competencies, pricing, costs and quality. In addition to these, Arthur talks about the importance of the economics of positive feedbacks. He talks about the importance of hitting the markets first and to have superb technology. If a market has already been hit first, advantage can be gained by pricing competitively and then exploiting the installed network base (web) for profits. Psychological positioning and exit strategies are also important. Arthur concludes with some thoughts for managers, which reflect ideas from the PV and RBV arbitrarily: understanding feedbacks, ecology recognition, having the resources to compete and identifying the games that are coming.

Stoelhorst (2005) explains that value appropriation is related to increasing-returns and the scarcity and value of resources (RBV). Value creation is driven by ubiquity, and it can be achieved through scale, experience and information economies. He uses the Microsoft example to show that even under increasing-returns, identification of scarce, inimitable resources were the basis of profitability. Christensen, Raynor and Verlinden (2001) present the concept of disruptive technologies; customers cannot keep up with technological progress and that is the purpose, because if a customer is satisfied, the industry will shift towards that of decreasing-returns.

Competitive outcomes in the PC and VCR industries

The four phase model below provides us a unique tool which helps firms anticipate possible sources of the competitive advantage for each phase. By looking to regularities in historical evidence, we could be able to understand and predict the change of the value of resources during the product’s lifecycle (Stoelhorst 2004).

1st phase: Embryonic technology

During the first phase of technological development R&D is important for firms to provide technological innovations. In the development phase of a product, the market is dominated by firms that are able to design and make end-use products. On this stage, the most profit goes to the companies making highly-differentiated products with a strong cost advantage (Christensen, 2001). The early years of the computer industry illustrate how the leading position changes over the time of technological discovery. In 1975, a small company called MITS introduced the first microcomputer, outperforming Intel, the world's largest semiconductor company. Even the fact that Intel introduced the first microprocessor during 1970’s and the third generation 8080 processor (considered as the world's first PC by some experts) in 1977 didn't help Intel keep its leading position in commercializing the personal computer. The other example of firm's performance in dynamic view of competition is the VCR (videocassette recorder) industry. The first VCR was invented by Amptex as the Ampex VTR. Due to its high price and small scale of production it was only available for TV networks. However, three Japanese firms- Sony, JVC and Matsushita- brought the VCR to the consumer market. So we see that it was not the innovator, but the manager of positive feedbacks which reaped the rewards of the technology.

2nd phase: Design competition

This phase of the technology lifecycle is lead by competition between designs. MITS was overtaken by the first imitator IMSAI who played on MITS's inability to meet demand. The IMSAI machine also included CP/M –the only operating system that was then available for microcomputers based on the Intel 8080. The other main competitors for the leading industry position were three companies who introduced incompatible systems with a higher market potential: Commodore PET, Tandy TRS-80 and Apple II (Stoelhorst 2004). The inability of customers to keep up with the technical progress by main player (innovation leader) gives competitors the chance to enter the market to create a better version of a product or a service with a lower cost- a more market friendly version (Christensen et. al. 2001).

3rd phase: Standardization

Emerging consensus of standards becomes crucial for business success during this 3^rd phase. Setting industry standards that meet the needs of the market was an ultimate goal of SONY and JVC. JVC worked on building a web (Arthur, 1996 pp. 106) that was the key factor for VHS format to become the industry standard. To become a market leader, a strategy based on alliances could be crucially important. IBM's PC branch was set as the standard in the market. Setting partnership with Microsoft provided IBM with software developers and producers of add-ons. Strategic maneuvering, build coalitions and establishing dominant designs are the 3^rd phase model components by Stoelhorst (2004).

4th phase: Normal competition

The phase of normal competition is dominated by innovation in component manufacturers, processes and by incremental improvements on the standard. In the late 1970s and early 1980s, the leaders in the VCR for home use production were Matsushita, JVC and Sony. Between 1978 and 1981 Matsushita outperformed Sony by doubling the number of models manufactured. Offering VHS components to other manufacturers was the main reason for market success, together with a broad VHS product line of its own. When the boom in pre-recorded home video tapes came, this market was dominated by VHS and this was the end of Sony’s Betamax line. Sony had to finally opt for an exit and restructured itself to conform to the VHS standard while being on the prowl for the next innovation (which came in the shape of Sony’s Walkman).

With 'clones' appearing in the market, IBM’s monopoly was broken in the PC industry. IBM was losing control and was going through a major restructuring while the start-up Compaq introduced and sold the first fully IBM compatible machine during its first years.

Manufacturers of components and software like Intel and Microsoft profited the most from this development. A new layer of competitive advantages appeared by the early 1990s – low cost producers like Packard-Bell, Gateway and Dell would become the largest PC sellers by introducing low cost manufacturing, excellent logistic capabilities and an innovative internet-based distribution strategy (Stoelhorst 2004, p. 18). These were examples of playing the high tech tables to gain competitive advantage (Arthur 1996, p. 108).

References

Porter, Michael E. (1980), ‘Industry Evolution’, From: Bob de Wit and Ron Meyer (1998), Strategy: Process, Content, Context, 2^nd edition, London: Thomson Learning.

Anderson, Philip and Tushman, M.L. (1991). Managing through cycles of technological change, Research Technology Management; 34 (3): 26-31.

Arthur, W. Brian (1996), Increasing Returns and the New World of Business, Harvard Business Review, (July-August): 100-109.

Stoelhorst, J.W. (2005), Competitive Dynamics and the Paradox of Increasing Returns:

Why Winning Markets May Not Lead to Fat Profits, Working paper, Amsterdam Business School, Universiteit van Amsterdam.

Christensen, Clayton M., Michael Raynor and Matt Verlinden (2001), Skate to Where the Money Will Be, Harvard Business Review, (November): 73-81.

Stoelhorst, J.W. (2004), Balancing Resource-Based Competitive Advantage over a Technology Lifecycle, Paper presented at the Strategic Management Society Annual International Conference, Puerto Rico.

Foster, Richard (1986), Innovation: The Attacker’s Advantage. New York: Summit Books

Barney, Jay B. (1991), Firm Resources and Sustained Competitive Advantage, Journal of

Management, 17, p. 99-120.

Peteraf, Margaret A. (1993), The Cornerstones of Competitive Advantage: A Resource-Based View, Strategic Management Journal, 14, p. 179-191.

Porter, Michael E. (1991), Towards a Dynamic Theory of Strategy, Strategic Management Journal, 12, p. 95-117.

Porter, Michael E. (1979), How Competitive Forces Shape Strategy, Harvard Business Review, (March-April): 137-145.

Jacobson, Robert (1992), The “Austrian” School of Strategy, Academy of Management Review, 17(4): 782-807