Microeconomics of Innovation II

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Micro-economics of Innovation II

• Utterback (1996)

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Typewriter 1

• 1874 Samuel Clemens (Mark Twain) bought a
  Remington No. 1 typewriter.
• It was large, mounted on its own platform,
  enclosed in a black metal case, with a key board
  and a roll of paper on top.
• It was a synthesis of many existing technologies
  and mechanical elements at the time.
• Clockwork suggested the idea of escapement
  (movement of the carriage one letter at a time.
  The keys and their connecting arms were
  adaptations of the telegraph key. A sewing
  machine pedal returned the carriage and the piano
  was the model for free swinging arms and hammers
  that struck the letter to the paper (Utterback,
  1996).

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Typewriter 2

• Remington No. 1 was based on the invention by a
  former Milwaukee newspaper editor Christopher
  Latham Sholes.
• 1714 an English engineer Henry Miller obtained a
  patent for writing engine.
• In USA, the first patent was awarded to William
  Burt of Michigan for a crude typographer. This
  patent document was written out in longhand.
• The speed of these crude machines was not any
  faster than a good writer (30 words per minute).

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Typewriter 3

• Sholes developed the machine using narrow wooden
  keys that connected to the type hammers by means
  of wires. He made improvements using
  telegraph-like keys that dispensed with the wires
  of the older model.
• Sholes received patents in July 1868.
• In 1869, Sholes took a sales man James Dunsmore
  as his partner to commercialize his innovation.
• They approached Mr. Philo Remington, to whom the
  idea appealed and in 1873 agreed to be exclusive
  manufacturer of the product.

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Typewriter 4

• The keys struck the paper inside the machine. The
  operator could not see his/her work until the
  first four rows were typed.
• Only upper case letters. Why QWERTY Keyboard?
• In 1878 came the Remington No. 2, with double
  typeface and shift keys making it possible to
  write in lower case.
• Widespread use of typewriters. Typists as a
  profession among women became common, opening up
  the office work to women.
• Emergence of a number of competitors.

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Typewriter 5

• A former sales agent of Remington, started
  offering Yost Caligraph.
• Caligraph No. 2 came with upper and lower case
  functions, but instead of the shift key, it had
  two separate keyboards.
• In 1885, the Crandell, the Hammond and the Hall
  machines, each with uniquely different design for
  striking type to paper.
• In 1988, USD 1000, open competition between
  Remington and Caligraph, which the former won.

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Typewriter 6

• Between 1885 and 1890, the number of firms
  doubled to 10 and about 20 suppliers, 1800
  employees and USD 3.6 million in finished goods
  sales.
• Franz X. Wagner, who designed the Caligraph for
  Yost, together with his brother designed a new
  version with an important feature Visible type.
• Wagners new design had the type arms swing out
  and strike the paper front and centre, where the
  operator could observe any mistake and correct it
  immediately.

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Typewriter 7

• John T. Underwood and his father, who were in the
  ribbon and carbon business bought the design from
  Wagner and put the new machine into production in
  1895.
• Underwood No. 1 was an immediate success and by
  Model 5 in 1899, it had a look and feel of the
  modern typewriter.
• Remington rushed out its new model Monarch in
  1901, L. C. Smith Brothers with their No. 8 in
  1908. But, Underwood became the market leader.
• Some 89 small manufacturers by 1909, but
  Underwood, Remington, Royal and L. C. Smith
  Brothers were the key players.
• QWERTY Keyboard (Utterback, 1996).

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Electric Age 1

• In 1933, one of the fringe players in the
  industry - Electrostatic Typewriters - was
  purchased by IBM.
• Both Underwood and Remington passed up the
  opportunity to buy it, because of their
  disappointing experiences with electrics as early
  as 1925.
• Electric typewriters were in the market by 1906,
  but never made a dent in the market.
• IBM not in typewriter business, but in accounting
  and tabulations machines and thought it might
  acquire some useful keypunch technologies from
  the acquisition of Electrostatic.

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Electric Age 2

• During the War period, the government gave
  several orders to IBM, which enabled it to
  perfect design and manufacturing. Other
  typewriter manufacturers had to stop production
  altogether.
• Electric typewriters provided better print
  quality and less physical stress, but the
  business market was not convinced.
• By 1967, IBM had 60 percent of the electric
  market and 74 percent of the high-end market.
  SCM, Royal and Olivetti-Underwood had about 10
  percent each.
• Remington was barely on the map.

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Electric Age 3

• In 1964, IBM Magnetic Tape Selectric, combined
  the electric typewriter technology with digital
  computing technology to make text editing
  possible for the first time.
• By early 1970s, stand-alone word processors with
  CRTs began to replace typewriters.
• New companies, many from unrelated business,
  invested in office of the future, an integrated
  system of dedicated word processors - i.e. Smart
  typewriters with CRTs, microprocessor systems,
  and text processing software.

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Electric Age 4

• Wang, Xerox, Exxon, ITT, ATT, Olivetti, IBM were
  the major players.
• However, these machines did not improve
  productivity in offices, secretaries did not like
  the assembly-line nature of word processing.
• Workers wanted something different, which they
  found later in August 1981, when IBM introduced
  its PC (utterback, 1996).

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Distinctive Developments

• New innovations from old capabilities.
• Dominant design.
• A shifting ecology of firms.
• Waves of technological change.
• Changing leadership at breakpoints in technology.
• The invasion of alien technology (Utterback,
  1996).

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Dominant Design 1

• In the early stages, no firm has a lock on the
  market. No single firm has perfected the product,
  mastered the manufacturing process and control
  over distribution.
• Customers have not yet developed their own sense
  of the ideal product design or what they want in
  terms of features or functions.
• Environment is conducive for entry by many firms
  as long as capital and technical barriers are not
  too high.
• Both customers and producers are experimenting.
• Within this mixture of experimentation and
  competition some centre of gravity eventually
  forms in the shape of a dominant product design
  (Utterback, 1996)

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Dominant Design 2

• A dominant design in a product class is, by
  definition, the one that wins the allegiance of
  the market place, the one that competitors and
  innovators must adhere to if they hope to command
  significant market following.
• The dominant design usually takes the form of a
  new product (or a set of features) synthesized
  from individual technological innovations
  introduced independently in previous product
  variants (Utterback, 1996).

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Dominant Design 3

• A DD embodies the requirements of many classes of
  users of a particular product, event though it
  may not meet the needs of a particular class to
  quite the same extent as would a customized
  design.
• DD is not necessarily the one that embodies the
  most extreme technical performance.
• DD is a satisfier of many in terms of the
  interplay of technical possibilities and market
  choices, instead of an optimizer for a few
  (Utterback, 1996).

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Dominant Design 4

• DD drastically reduces the number of performance
  requirements to be met by a product by making
  many of those requirements implicit in the design
  itself.

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Dominant Design 5

• How does DD occur?
• Collateral assets or co-specialized assets - a
  firm in possession of market channels, brand
  image and customer switching costs will have an
  advantage over its competitors in enforcing its
  product as the DD.
• Industry Regulation and Government Intervention.
• Strategic maneuvering at the firm-level - JVC vs.
  Sony.
• Communication between producers and users
  (Utterback, 1996)

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Can We Recognize a DD?

• Three schools of thought
• First, some believe that DD is the result of
  chance events. For example, steel-bodied cars
  became the norm since Dodges all-steel-innovation
  of the 1920s. Even though aluminum is cost
  effective today, it is difficult to change.
• Second, something inherent in the technology
  determines the outcome with respect to the DD.
  The laws of nature fairly dictate that only a few
  synthetic materials have chemical structures that
  support the spinning of long-fibered material.
  Thus, the technological trajectory accommodates
  only a few possible candidates for the DD.
• Third, social and organizational factors work
  together to determine DD (Utterback, 1996)

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Anticipating Major Technological Challenges

• Most challenges come from outside the traditional
  definition of the industry and its products.
• The formation of new firms is highly visible, and
  this suggests that their commitments to product
  introductions may be one of the most fruitful
  sources of early information about technological
  innovation in progress.
• One of the clear advantages of analyzing new firm
  activities is that there are far fewer of them
  than there are patents, technical papers, or
  variations of existing products (Utterback, 1996).

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Innovation and Industrial Evolution 1

• Product innovation
• Flurry of radical product innovation eventually
  ends with the emergence of a DD.
• Somewhere along the product innovation curve the
  performance criteria that serve as a primary
  basis for competition change from ill defined and
  uncertain to well articulated.
• At the same time, forces that reduce the rate of
  product change and innovation begin to build up.
  It becomes increasingly difficult to better past
  performance users develop loyalties and
  preferences practicalities of marketing,
  distribution, maintenance, etc. demand greater
  standardization.
• Innovations leading to better product performance
  less likely (Utterback, 1996).

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Innovation and Industrial Evolution 2

• Process innovation
• During the formative period of a new product
  technology, the process used to produce it are
  usually crude, inefficient, and based on a
  mixture of skilled labor and general-purpose
  machinery and tools.
• Product innovation and process innovation are
  inter-dependent as the rate of product
  innovation decreases, it is common to observe a
  growing rate of process innovation.
• Skilled labor using common tools give way to
  specialized equipment operated by workers who are
  less skilled (Utterback, 1996).

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Innovation and Industrial Evolution 3

• Organizational Change
• Organization of a firm formed around an
  innovation goes through a transformation as they
  shift focus from innovative products to
  large-scale production and standardized
  offerings.
• 1) Informal control gives way to an emphasis on
  structure, goals and rules.
• 2) Structure becomes hierarchical and rigid, and
  tasks become formal.
• 3) Major innovations - once life-blood of the
  firm - are less and less encouraged continuous
  incremental improvements become the order of the
  day (Utterback, 1996).

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Innovation and Industrial Evolution 4

• Organizational Change
• During periods of high market and technical
  uncertainty, a productive unit must be focused to
  make progress individuals in the organization
  must act together. This type of structure is
  called organic.
• Organic structure - emphasizes, among others
  frequent adjustment and redefinition of tasks,
  limited hierarchy, and high lateral
  communication. It has increased potential for
  gathering and processing information for decision
  making.
• The relative power of individuals in the organic
  form is related to their assumption of
  entrepreneurial roles. The rewards for radical
  product innovations in these firms are
  substantial and are generally valued by an
  entrepreneur to a much greater degree than salary
  rewards.
• Innovation capacity of the organization is high
  (Utterback, 1996).

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Innovation and Industrial Evolution 4

• Organizational Change
• As the firm loses its organic character, the
  relative power of individuals begins to shift
  from those with entrepreneurial ability to those
  with management skills.
• A different set of skills is required for the
  growth and structuring of the organization.
• Often the original entrepreneur or group leaves
  the company at this stage to start other start-up
  companies (e.g. Steve Jobs of Apple to start
  Next, Robert Noyce of Fairchild to start KLH and
  Henry Kloss of Acoustic Research to Advent).
• As a dominant design emerges and production
  operations expand rapidly in response to
  increased demand, the focus of rewards shifts to
  those who are able to expand production
  operations, marketing functions and so forth.
  Rewards may be provided in more traditional terms
  of bonuses, stock options, etc. (Utterback,
  1996).

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Innovation and Industrial Evolution 4

• Organizational Change
• As a product becomes more standardized and is
  produced in a more systematic process,
  interdependence among organizational sub-units
  gradually increases, making it more difficult and
  costly to incorporate radical innovations.
• Organizational control is provided through
  structure, goals, and rules. When the business
  environment is better know and operations become
  routine, it is seen as necessary to provide more
  rigid coordination that establishes consistent
  routines and rules to minimize inefficiency and
  costs in operations. This type of structure is
  known as mechanistic.
• Ideas that threaten to disrupt the stability of
  the existing process will be discouraged, and
  ideas that extend the life of existing products
  and technology will be encouraged and rewarded,
  probably in a highly structured manner
  (Utterback, 1996).

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Innovation and Industrial Evolution 4

• Competitive Environment
• As product capabilities and features are
  crystallized through the emergence of DD,
  competition between rival firms stabilizes. The
  number of competitors drops off quickly. The
  bases of competition shifts to refinements in
  product features, reliability, and cost. From
  this crystallization, a set of efficient
  producers usually emerges.
• The appearance of DD shifts the competitive
  emphasis to favor those firms with greater skill
  in process innovation and process integration and
  with more highly developed technical and
  engineering skills. Many firms are unable to
  compete and effectively fail. Others may possess
  special resources and thus merge with the
  dominant firms (Utterback, 1996).

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Phases in Innovation Dynamics 1

• The Fluid Phase
• A lot of changes occur in this phase in which
  outcomes are highly uncertain in terms of
  product, process, competitive leadership, and the
  structure and management of firms. Technology
  evolution, with crude, expensive and unreliable
  products.
• Product innovation proceeds in the face of both
  target and technical uncertainties.

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Phases in Innovation Dynamics 2

• The Transitional Phase
• DD emerges.
• Product and process innovations start to become
  more tightly linked. Materials become more
  specialized. Managerial controls become
  important.
• The Specific Phase
• Aims at producing a very specific product at a
  high level of efficiency. The value ratio of
  quality to cost becomes the basis of competition.