I recently completed a paper in which I try to derive some lessons about innovation and strategic advantage from open source. Because "innovation" is so frequently used these days it's important to remember that when we think of product and technology strategy, the notion of innovation needs to map to the business cycle. Here's an excerpt from the paper describing the Innovation Life Cycle:
Technology adoption, but also most product development, typically follows a business cycle called an S-curve. During the early phase a new technology is introduced into the market place but its adoption is limited to a small group of early adopters and small niche markets. As the product gains ascendancy, new capabilities are introduced and refined with the goal of meeting the needs of the broadest possible segment of mainstream users. During this middle phase a dominant design begins to emerge, winning the allegiance of the market place and also effecting standardization of everything from design to manufacturing. The dominant design in turn allows heightened competition as new entrants realize opportunities for further innovation based on cost and scale as well as product performance. This is the period of rapid and greatest growth as a technology matures and reaches the mainstream. During the final phase the product reaches market saturation and hits a plateau. Successful companies begin to consolidate their market share, seek further economies of scale, but also shift focus by targeting other growth opportunities. (Utterback, 1996)
Figure 1: The adoption of technologies follows an S-shaped curve
During the early embryonic phase, before the emergence of a dominant design, the industry is characterized by high levels of experimentation among producers and customers. “No single firm has mastered the processes of manufacturing, or achieved unassailable control of the distribution channels. Customers have not yet developed their own sense of the ideal product design or what they want in terms of features or functions. The market and the industry are in a fluid stage of development. Everyone—producers and customers---is learning as they move along.” (Utterback, 1996)
During this phase innovation means achieving the dominant product design that will eventually gain the allegiance of the market place. A dominant design fulfills the requirements of a large segment of users by optimizing the complex set of trade-offs between cost, functionality, design and performance. As the market settles towards an accepted configuration, a dominant design also drastically reduces the design options and engineering choices that need to be taken into account by a manufacturer. Once a dominant design emerges the basis of competition shifts radically from product design to process innovation. For example, the IBM PC format and design, consisting of a display monitor, standard disk drive, QWERTY keyboard, Intel 8088 chip, open architecture, and MS Dos operating system, became the de facto standard for personal computers and subsequently captured at least 80% of the market by the early 1990s.
Once this dominant design was accepted, the focus of innovation shifted to process innovation where Dell Computer emerged as the process leader in its ability to discipline production, master the supply chain, and create complementary economies. Competition shifts from innovation in product design and features to competition based on cost and scale as well as on product performance. During this phase the locus of business value is found in achieving process innovation, where the emphasis is less on “new” and more on cost, quality and product performance. The concept of a dominant design also incorporates a broader set of factors, including collateral assets, industry regulation, and strategic maneuvering, all with the aim of achieving product leadership in a relatively stable market. (Utterback, 1996)
As the market plateaus incumbent firms are increasingly challenged to realize incremental innovation while maintaining market advantage through a variety of management strategies. The more successful the product the more likelihood that there will be competitors, driving down margins and eventually laying the seeds of its own destruction. A new product is introduced, reaches maturity, and then inevitably faces extinction. In Only the Paranoid Survive, Intel founder Andy Grove writes, “Business success contains the seeds of its own destruction. The more successful you are, the more people want a chunk of your business and then another chunk and then another until there is nothing left.” (Grove, 1999)
Figure 2: The second curve represents the rise of a new technology that will replace the first.
The innovation cycle matches the business cycle of a product as depicted by the S-curve. A firm’s innovation strategy must operate at two levels. First, it needs to take into account the product’s full cycle and the differing requirements for innovation at each stage. Second, as a product reaches maturity and approaches the end of its life cycle transitional strategies must be in place for evolving the next generation product or developing an entirely new product line or set of services. In an increasingly global market, one set of challenges for firms takes the form of increasingly compressed times to bring a new product to market, achieve market leadership, and begin the cycle anew.