Part 1: Innovation Dynamics & Systems
1. Key Concepts
→rising importance of innovation since late 90s → major driver of competition/value creation
Robert Solow (1957)
• Traditional production function: Y = F(L,C)with L=Labor and C=Capital
→ outcome in economy increases with educated people and capital
• Explanatory power (R²) of model jumped from 20% to 80% when including R&D
Why innovation?
→new products create value for companies and shareholders + wealth for economy
1.1 Schumpeter
→2 types of agents
1. Exceptional individuals (heroic entrepreneurs)
- willing to face hazards and difficulties of innovations
- ‘heroic’ as they must pass many though challenges (uncertainty, resistance, complexity) to
bring something new
2. Imitators
- Merely routine managers following heroic pioneers
Schumpeter: Theory 1 (1928)
→ Theory of heroic entrepreneurship and Creative Destruction as the engines behind business cycles
- Science and technology as exogeneous factors
- These factors inspire heroic entrepreneurs to translate technological developments into
economic activity
- Leads to Creative Destruction (when you create, you replace)
Schumpeter: Theory 2 (1942)
→ Changed his mind → Large firms are also engines of innovation and create economic activities
- Science and technology as an internal part of large firms (R&D)
- R&D departments of large firms are increasingly important in innovation process
- Engineers in the R&D department of large firms could be considered as ‘entrepreneurs’
- Example for this model: Apple (iPod, iPhone, iPad,…)
,1.2 Baumol (2004)
Starting point
Distinction between the entrepreneur (partner of the inventor) on the one hand and large established firms
on the other hand.
3 Questions & Answers
Question 1: Who is responsible for innovation and related new economic activities?
- Technological innovation is the driver of wealth creation and profitability
- Heroic entrepreneurs are in the driving seat (e.g. Zuckerberg)
Question 2: If both contribute, is the nature of the contribution similar?
- Large firms and entrepreneurs contribute, but their contribution is differing
- Small, entrepreneurial firms rather create ‘breakthroughs’
- Large firms are more effective in creating aggregated incremental improvements (which can also
have revolutionary consequences
Question 3: If we have acknowledged the contribution of both types of economic actors, can we account for
a complete picture in terms of innovation dynamics?
- No! →universities and governments also play an essential role
- E.g. Universities are good at process/product innovation and basic research
- E.g. governments are good at basic research and funding basic research
1.3 Abernathy & Utterback (1978)
→ Developed a process model, which explains how new technologies/innovations unfold in markets
- Productive unit = a product line + its associated production process
- A productive unit’s capacity for and methods of innovation depend on its stage of evolution
- Concept of product life cycle plays central role
→ new technologies always show a pyramid pattern with 3 stages: entrance → peak → #companies ↓
Abernathy-Utterback Model Industry Dynamics
, 1. Fluid
- A lot of product innovation in this stage
- Demand in market is being addressed → opportunity to make profits → market entrants↑
2. Transitional
- Emergence of one dominant design, which gets standardized
- Price and functionality have major influence on what becomes dominant design
3. Specific/Mature
- Operating at larger scale becomes more important (economies of scale) → #companies ↓
- Product innovation falls and process innovation rises (more efficient processes to produce at larger
scale)
→ customers and the market decide over the dominant design
1.4 Social Construction of Technology (SCOT)
→ Model shows how social dynamics influence technology development
→ In a society, there is always Interpretative and Design Flexibility
Interpretative Flexibility
- Each technological artifact has different meanings and interpretations for various groups
- E.g. air tire bicycle: convenient method for transport vs. traction problems & ugly aesthetics
➔ Relevant social groups = users and producers of technological artifacts
➔ Other relevant groups = journalists or politicians
Design Flexibility – Fluid Stage Abernathy & Utterback
- There are multiple ways of constructing technologies
- A design is only a single point in the large field of technical possibilities, reflecting the interpretations
of certain relevant groups
→ Interpretative and Design Flexibility leads to conflicts within and between social groups
- Conflicts between criteria that are hard to resolve e.g. how can women (skirt) ride bicycle decently
- Conflicts between relevant groups e.g. anti-cyclists lobbied for banning bicycles (security threat)
1. Key Concepts
→rising importance of innovation since late 90s → major driver of competition/value creation
Robert Solow (1957)
• Traditional production function: Y = F(L,C)with L=Labor and C=Capital
→ outcome in economy increases with educated people and capital
• Explanatory power (R²) of model jumped from 20% to 80% when including R&D
Why innovation?
→new products create value for companies and shareholders + wealth for economy
1.1 Schumpeter
→2 types of agents
1. Exceptional individuals (heroic entrepreneurs)
- willing to face hazards and difficulties of innovations
- ‘heroic’ as they must pass many though challenges (uncertainty, resistance, complexity) to
bring something new
2. Imitators
- Merely routine managers following heroic pioneers
Schumpeter: Theory 1 (1928)
→ Theory of heroic entrepreneurship and Creative Destruction as the engines behind business cycles
- Science and technology as exogeneous factors
- These factors inspire heroic entrepreneurs to translate technological developments into
economic activity
- Leads to Creative Destruction (when you create, you replace)
Schumpeter: Theory 2 (1942)
→ Changed his mind → Large firms are also engines of innovation and create economic activities
- Science and technology as an internal part of large firms (R&D)
- R&D departments of large firms are increasingly important in innovation process
- Engineers in the R&D department of large firms could be considered as ‘entrepreneurs’
- Example for this model: Apple (iPod, iPhone, iPad,…)
,1.2 Baumol (2004)
Starting point
Distinction between the entrepreneur (partner of the inventor) on the one hand and large established firms
on the other hand.
3 Questions & Answers
Question 1: Who is responsible for innovation and related new economic activities?
- Technological innovation is the driver of wealth creation and profitability
- Heroic entrepreneurs are in the driving seat (e.g. Zuckerberg)
Question 2: If both contribute, is the nature of the contribution similar?
- Large firms and entrepreneurs contribute, but their contribution is differing
- Small, entrepreneurial firms rather create ‘breakthroughs’
- Large firms are more effective in creating aggregated incremental improvements (which can also
have revolutionary consequences
Question 3: If we have acknowledged the contribution of both types of economic actors, can we account for
a complete picture in terms of innovation dynamics?
- No! →universities and governments also play an essential role
- E.g. Universities are good at process/product innovation and basic research
- E.g. governments are good at basic research and funding basic research
1.3 Abernathy & Utterback (1978)
→ Developed a process model, which explains how new technologies/innovations unfold in markets
- Productive unit = a product line + its associated production process
- A productive unit’s capacity for and methods of innovation depend on its stage of evolution
- Concept of product life cycle plays central role
→ new technologies always show a pyramid pattern with 3 stages: entrance → peak → #companies ↓
Abernathy-Utterback Model Industry Dynamics
, 1. Fluid
- A lot of product innovation in this stage
- Demand in market is being addressed → opportunity to make profits → market entrants↑
2. Transitional
- Emergence of one dominant design, which gets standardized
- Price and functionality have major influence on what becomes dominant design
3. Specific/Mature
- Operating at larger scale becomes more important (economies of scale) → #companies ↓
- Product innovation falls and process innovation rises (more efficient processes to produce at larger
scale)
→ customers and the market decide over the dominant design
1.4 Social Construction of Technology (SCOT)
→ Model shows how social dynamics influence technology development
→ In a society, there is always Interpretative and Design Flexibility
Interpretative Flexibility
- Each technological artifact has different meanings and interpretations for various groups
- E.g. air tire bicycle: convenient method for transport vs. traction problems & ugly aesthetics
➔ Relevant social groups = users and producers of technological artifacts
➔ Other relevant groups = journalists or politicians
Design Flexibility – Fluid Stage Abernathy & Utterback
- There are multiple ways of constructing technologies
- A design is only a single point in the large field of technical possibilities, reflecting the interpretations
of certain relevant groups
→ Interpretative and Design Flexibility leads to conflicts within and between social groups
- Conflicts between criteria that are hard to resolve e.g. how can women (skirt) ride bicycle decently
- Conflicts between relevant groups e.g. anti-cyclists lobbied for banning bicycles (security threat)
