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Innovation Diffusion: How Do Technologies Evolve Over Time?

1) Technologies evolve incrementally over time through small improvements built upon previous ideas and designs. A dominant design often emerges that is adopted by the majority of firms in an industry. 2) Technologies progress through an S-curve, starting slow, then accelerating rapidly as knowledge increases, before reaching limits and slowing again. Firms must decide when to switch from an old to a new technology. 3) The diffusion of new technologies also follows an S-curve pattern as they are adopted by different groups over time based on willingness to pay and risk tolerance, from innovators to the late majority and laggards. Price declines over time, increasing adoption rates.

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Umberto Curti da Porto
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45 views4 pages

Innovation Diffusion: How Do Technologies Evolve Over Time?

1) Technologies evolve incrementally over time through small improvements built upon previous ideas and designs. A dominant design often emerges that is adopted by the majority of firms in an industry. 2) Technologies progress through an S-curve, starting slow, then accelerating rapidly as knowledge increases, before reaching limits and slowing again. Firms must decide when to switch from an old to a new technology. 3) The diffusion of new technologies also follows an S-curve pattern as they are adopted by different groups over time based on willingness to pay and risk tolerance, from innovators to the late majority and laggards. Price declines over time, increasing adoption rates.

Uploaded by

Umberto Curti da Porto
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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INNOVATION DIFFUSION

How do technologies evolve over time?


Evolution or technological evolution is pretty much cumulative. The present is built on generations of older
technology: we are standing on the shoulders of giants. A lot of small idea are built up on big ideas. We
proceed by incremental steps that help us to develop a new technology. It often takes very long time to
technology to diffuse. Improvement of technologies is central to the management of innovation.

Most people incrementally improve existing technologies. We often see a very slow steady increase and
then we see a jump. Many consistent patterns have been observed in technology trajectories helping us
understand how technologies evolve, improve and diffuse. We will discuss: Technology cycle, Technology S-
curve and Diffusion S-curve.
 
Technology cycle (Utterback and Abernathy)
Technology cycle has two phases:
In the fluid phase ...
• there is considerable uncertainty about the technology and its market
• firms experiment with different product designs in this phase (i.e. emphasis on product innovation and
architectural innovation)
After a dominant design emerges, the specific phase begins.
• The dominant design is the design that is used by the majority of the players in the industry
• In this phase, firms either focus on improving the production process or on incremental and component
innovations

Why do dominant designs appear?


Inefficient designs disappear. Standardization is required for mass production, outsourcing and the
availability of complementary goods. Consumers’ tastes become standardized (you are used to see a car
with a given shape – a different look might appear ugly).

Technological discontinuity: a new idea, something new. In the fermentation period (fluid phase) firms
work on this new idea, how to implement the idea. After this period more and more ideas emerge about
how to actually implement a certain idea and at one point in time the so called "dominant design" emerge.
Then everybody is adopting this dominant design and we see only incremental changes.
Fermentation area in the automotive industry: first cars are strongly influenced by a horse carriage.
Different companies came into the market proposing different ideas and the preferred idea that became
the dominant design was the "model T" by Ford. Once the dominant design was established then there
were incremental changes on that solution.
In the fluid phase many different inefficient designs appear. If we remain with too many different ways how
to do something it becomes difficult both for suppliers of components and for producers of complementary
products too. We need to have a dominant design for an economic reason: efficiency. We need some form
of standardization.
Example of e-books: company that produce the e-book reader and the e-book are not the same. We need
the e-book reader to be standardized so that an e-book is available for multiple e-books reader.
  
Then what other firms are doing is just imitating the dominant design. Then, giving this dominant design
what consumers are looking for are lower prices. So, only firms able to produce in an efficient way can
survive and so we observe a high exit rate after a dominant design is established.
 
In fluid phase, product innovation is what most firms are working on. They also do a bit of process
innovation but still product innovation is the main activity in this phase. Then in the specific phase firms do
more process innovation and this is just because they are developing processes in order to make them
more efficient.
 
To sum up: we a new technology arrives we can split it into 2 phases: 1st is called fermentation (or fluid)
phase. Here, new design for a specific product are emerging and then over time since it is inefficient to
have too many versions of a product around, a dominant design emerges. There are 2 main factor that
make the emerging of a dominant design important: if we want to work with other companies we need to
have standardized products (to a certain extent). Second, tastes of costumers are adapting: they want to
have what their neighbors have. Once a dominant design emerges we only see incremental changes in that
dominant design and it is all about efficiency.
In fluid phase: entry > exit, product innovation
In specific phase: exit > entry, process innovation
 
The technology S-curve (Richard Foster)
In the beginning we have very slow progress and then all of a sudden progress is dramatically increasing
and then is getting slower again approaching to the limits.

Time and performance measure in the two axes

In the beginning the new process, the new technology is not very well understood: there are many things
we don't know about, so it improves slowly. Once we reach a certain threshold of knowledge, firms are able
to accelerate and make the big jump. But there are always limit in knowledge in a certain point in time:
once we reach them then progress slow down.

The technology S-curve relates “performance” to “cumulative effort”


But how do we measure performance? How do we measure effort? For example, we can use fuel efficiency
and R&D spending respectively.
 
If you are a firm in the market when do you switch from technology 1 to technology 2? At the beginning the
old technology is still more efficient than the new one. The problem is that if you switch too late you might
miss learning opportunities. Firms switch not just when the new technology becomes more efficient but it
could also be beneficial to switch earlier to exploit learning opportunities.
An example is switch from traditional to digital technology. Doing the switch from old to new is very hard to
do because often the change is radical and we have to re-think the way we do things.
 
The shape of S curve is also influenced by what is happening in the market; it's not only your investment
that shape the s-curve but also other factors as availability of complementary products, improvements in
inputs required for your products, investments of your rivals, etc.

Managers can use data on investment and performance of their own technologies or data on overall
industry investment and technology performance to map s-curves.
While mapping the technology’s s-curve is useful for gaining a deeper understanding of its rate of
improvement or limits, its use as a prescriptive tool is limited since:
- True limits of technology may be unknown.
- Shape of s-curve can be influenced by changes in the market, component technologies, or complementary
technologies.
- Firms that follow s-curve model too closely could end up switching technologies too soon or too late.
 
S-curves are also used to map the diffusion of the technology; they plot the number of adopters against
time
 second use of S-curves

Diffusion s-curve
It is an explanation of s-curve
When you look at the diffusion of new technology, we observe the s-curve again. We have market
penetration and time on axis.
Cases of hybrid corn diffusion: what could explain the s-shape curve in every state and the differences in
different states? In that case diffusion within and across the states was related to the diffusion of
knowledge of a new product  word of mouth: 1st explanation

But what if everybody knows about it? A 2 nd explanation for why we observe such a s-curve is differences in
willingness to pay. Some people can spend a lot of money just to have a new gadget but others not. If we
compare the s-curve with the price of the product we see that at the beginning it is very expensive but then
it is decreasing over time.

People can be classified adopter categories:


- Innovators are the first 2.5% of individuals to adopt an innovation. They are adventurous, comfortable
with a high degree of complexity and uncertainty, and typically have access to substantial financial
resources. They have a high willingness to pay: the do not benefit only from the new technology and what
it can do but they also benefit just from the fact of having a new technology. They want to be seen as
technology-oriented.
 
- Early adopters are the next 13.5% to adopt the innovation. They are integrated into their social system,
and have potential for opinion leadership. Other adopters look to early adopters for information and
advice, thus early adopters make excellent "missionaries" for new products or processes.
Example: businessman with the phone as they need it for job.
 
- Early majority are the next 34%. They adopt innovations slightly before the average member of a social
system. They are typically not opinion leaders, but they interact frequently with their peers. Price is now
decreasing
 
- Late majority are the next 34%. They approach innovation with a skeptical air, and may not adopt the
innovation until they feel pressure from their peers. They may have scarce resources. Price is lower now
 
- Laggards are the last 16%. They base their decisions primarily on past experience and possess almost no
opinion leadership. They are highly skeptical of innovations and innovators, and must feel certain that a
new innovation will not fail prior to adopting it.
 
NB: the story is not about knowledge about the new technology but about differences in willingness to pay.
 
What else can explain the shape of the curve a part from the price?
The risk attitude can also explain differences; you wait until product just becomes better. If you adopt a
product early on it might have several weaknesses, as firms are working on these weaknesses and the
products improve more people are willing to buy them (a new piece of software with bugs)
The better the product becomes the more appealing it becomes to more customers.
 
So, these differences in demand could also be driven by other 4 explanation:
- Tolerance for poor performance - Uncertainty and risk-attitude
- Absorptive capacity - Human skills
 
But what about the diffusion of technology that is free? There is also a 3 rd explanation for why we observe
such a s-curve: network effects.
Direct network effect: the benefit you get from a consumption of a product is increasing with the number
of other people using the same product
Indirect network effect: the utility you get from the consumption of a good depends on the availability of
complementary goods (which in turn depends on the number of other users).
 
Why does it take so long before a new technology spread out?
 High price (a new technology usually has high prices)
 Poor performance at the beginning
 Uncertainty about new technology (if enough people will buy it)
 Human skills: some people have skills to work with the new technology other not
 Need of complementary products
 

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