Micro-economics of Innovation II

1. Micro-economics of Innovation II Utterback (1996)

2. 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).

3. 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).

4. 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.

5. 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.

6. 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.

7. 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. • Wagner’s 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.

8. 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).

9. 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.

10. 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.

11. 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.

12. Electric Age 4 • Wang, Xerox, Exxon, ITT, AT&T, 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).

13. 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).

14. 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)

15. 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).

16. 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).

17. 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.

18. 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)

19. 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 Dodge’s 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)

20. 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).

21. 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).

22. 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).

23. 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).

24. 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).

25. 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).

26. 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).

27. 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).

28. 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.

29. 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.