Technological evolution

Since technological change has such a powerful role in competi­ tion, forecasting the path  of technological evolution is extremely impor­ tant to allow a firm to anticipate technological changes and thereby improve   its   position.   Most  research  on   how   technology  evolves in an industry  has grown out of the product  life cycle concept. According to the life cycle model, technological change early in the life cycle is focused on product innovations, while the manufacturing  process re­ mains flexible. As an industry matures, product designs begin to change more slowly and mass production techniques are introduced. Process innovation   takes over  from   product  innovation  as the primary  form of technological activity, with the aim of reducing the cost of an increas­ ingly standardized product. Finally, all innovation slows down in later maturity  and declines   as investments  in   the   various technologies in the industry reach the point of diminishing returns.

The  product  life cycle model  has been refined by the work of Abernathy and Utterback.7 Initially, in their framework, product de­ sign is fluid and substantial product variety is present. Product innova­ tion is the dominant mode of innovation,  and  aims primarily at improving product performance instead of lowering cost. Successive product innovations ultimately yield a “ dominant design” where the optimal product configuration is reached. As product design stabilizes, however, increasingly automated  production  methods  are employed, and process innovation  takes over as the   dom inant  innovative   mode to lower costs. Ultimately, innovation  of both  types begins to slow down. Recently, the concept of “dem aturity” has been added to the Abernathy8 framework to recognize the possibility that m ajor techno­ logical changes can throw an industry back into a fluid state.

While these hypotheses about the evolution of technology in an industry   are an accurate  portrayal  of the process in some industries, the pattern does not apply in every industry. In industries with undiffer­ entiated products (e.g., minerals, many  chemicals), the sequence of product innovations culminating in a dominant design does not take place at all or takes place very quickly. In other industries (e.g., military and commercial aircraft, large turbine generators), automated mass production is never achieved and most innovation is product-oriented. Technology evolves differently  in every industry, just as other industry characteristics do.9 The  pattern  of technological evolution is the result of a number of characteristics of an industry,  and must be understood in the context of overall industry  structural  evolution. Innovation  is both a response to incentives created by the overall industry  structure and a shaper of that structure.

Technological evolution in an industry results from the interaction of a number of forces:

  • Scale change. As firm and industry scale increase, new product and process technologies may become feasible.
  • Learning. Firms learn about product design and how to perform various value activities over time with resulting changes in the technology employed.
  • Uncertainty reduction and imitation. There  are natural  pres­ sures for standardization as firms learn more about what buyers want and imitate each other.
  • Technology diffusion. Technology is diffused through  a variety of mechanisms described earlier.
  • Diminishing returns to technological innovation in value activi­- ties. Technologies may reach limits beyond which further im­ provement is difficult.

The product life cycle pattern of technological  evolution would result if these forces interacted  in the following way. Through succes­ sive product innovation and imitation, the uncertainty about appropri­ ate product characteristics is reduced and a dominant design emerges. Growing scale makes mass production feasible, reinforced by the grow­ ing product standardization.  Technological diffusion eliminates prod­ uct differences and compels process innovation  by firms in order  to remain cost competitive. Ultimately, diminishing returns to process innovation set in, reducing innovative activity altogether.

W hether the life cycle pattern of technological innovation or some other pattern will occur in a particular industry will depend on some particular industry characteristics:

Intrinsic Ability to Physically Differentiate.       A product  that  can be physically differentiated, such as an automobile  or machine  tool, allows many possible designs and  features. A less differentiable product will standardize  quickly and other forms of technological activity will be dominant.

Segmentation of Buyer Needs. Where buyer needs differ substan­ tially, competitors may introduce more  and  more specialized designs over time to serve different segments.

Scale and Learning Sensitivity. The extent to which the industry technologies are scale- or learning-sensitive   relative   to   industry  size will influence the pressure for standardization.  High  scale economies will create pressure over time for standardization  despite segmented buyer needs,   while low   scale economies  will   promote  the   flowering of product varieties.

Technological Linkage Among  Value Activities.       The technologies in the product and in value activities are often linked. Changing one subtechnology in the product often requires changing others, for exam­ ple, while changing the production process alters the needs in inbound and outbound logistics. Technological  linkages among  value activities will imply that changes in one activity will beget or be affected by technology changes in others, affecting the pattern  of technological change.

Substitution   Logic.      The  pressure  from   substitutes   (Chapter  8) is an important determinant of the pattern  of technological  evolution. W hether  substitutes are threatening  based   on cost or differentiation will lead to a corresponding emphasis in technological change. For example, the initial challenge for disposable diapers  was to bring their cost into proximity  with   those of cloth   diapers  and   diaper  services. A great deal of early innovation was in m anufacturing methods.

Technological Limits. Some technologies offer much richer pos­ sibilities for cost or performance improvement than others. In products like commercial aircraft and semiconductors, for example, diminishing returns from efforts at product innovation come relatively slowly. The technological   limits   in   the    various    technologies   and   subtechnologies in the value chain will thus affect the path of technological change.

Sources o f Technology. A final   industry   characteristic  that shapes the pattern of technological change is the source of the technolo­ gies employed in the industry.  The  path  of technological change is usually more predictable when industry-specific technologies are domi­ nant, and the impact of technologies emanating from outside the indus­ try is small.

1. Continuous Versus Discontinuous  Technological Evolution

The pattern of technological evolution differs widely among indus­ tries based on whether  technological change  is incremental  or subject to discontinuity.   Where  there   is   incremental  technological  change, the process is more likely to be determined by actions of industry participants or spinoffs from these participants. External sources of technology are likely to be existing suppliers to an industry.

Where there is technological discontinuity, the sources of technol­ ogy are much more likely to be outside the industry. Entirely new competitors or new suppliers to the industry  are   more  likely to   have an important role. Technological  discontinuity  also tends to decouple the pattern of technological innovation from the state of industry m atu­ rity, because outside sources of technology  are less responsive to indus­ try circumstances than the R& D departments of industry participants. Technological discontinuity  creates the maximum  opportunity  for shifts in relative competitive position. It tends  to nullify many  first- mover advantages and mobility barriers built on the old technology. Discontinuity also may require  wholesale changes  in the value chain rather than changes in one activity. Hence a period of technological discontinuity makes market positions more fluid, and is a time during which market  shares can fluctuate greatly.

2. Forecasting Technological  Evolution

A firm can use this framework to forecast the likely path  of technological evolution in its industry.  In commercial  aircraft, for example, the product is highly differentiable. However, there are large scale economies in product design which limit the number of product varieties that are developed. The  flexibility of production  means  that the production process is no barrier  to continuous  and  long-lasting efforts at product  innovation. Thus the aircraft industry  is one where we would expect continuous product R& D. The flexibility of the pro­ duction process   would   also allow   us   to   expect a continuous  search for new materials and  components  that would be much  less likely in an industry with heavy automation.

With some insight into the likely pattern  of technological  evolu­ tion, a firm may   be able to anticipate  changes  and   move early   to reap competitive advantage. However, there will always be uncertainty wherever technology is involved. Uncertainty over future technological evolution is a m ajor reason why a firm may want to employ industry scenarios in considering  its   choice   of  strategies.   Industry  scenarios are discussed in detail in Chapter 13.

Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.

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