2. Innovation economics: core concepts and issues
What do we mean by innovation. Knowledge and intellectual property. Learning Processes. Technology and product life-cycles.The diffusion of innovations. Highlight: Dominant Design
This short SubStack series gives a weekly key insight from the Masters module I co-teach on 'Innovation and Sustainability in Business'. All those posts are gathered on this page. The Atelier of What's Next WeekNotes continue in parallel.
This week:
Overview of this lecture/chapter.
What do we mean by innovation
Knowledge and intellectual property
Learning Processes
Technology and product life-cycles
The diffusion of innovations
Highlight: Dominant Design
Where we are in the ten lectures.
Overview of this lecture/chapter.
This is the fifth posting but we’re only now in the second lecture. The first post was on the overall purpose of the module. The second and third posts on foundational assumptions (the need for transformation; and, how every approach to ‘sustainable business’ is innovation, at some level). Last week’s post was business responses to sustainability crises.
This is one of the lectures that Will leads. So, a little less depth from me in the highlight.
The lecture/chapter looks at:
What do we mean by innovation
An earlier post used the Schumpeterian take (invention, innovation and diffusion) as the working definition. This section builds, showing that what is meant by innovation is diverse, and is often framed as either radical or incremental. Eco-innovation is specifically about reducing the use of natural resources and the release of harmful substances (plus the degree of ‘greenness’ is often contestable and contested).
Knowledge and intellectual property
This section unpacks knowledge as an economic good, that is, a commodity or service that can be utilized to satisfy human wants and that has exchange value. Unlike physical goods, knowledge is non-rival, and only partially excludable. Others can use it.
So, new knowledge has spillover effects, which are a driving force for technological and economic change. But, because the investing organisation will not get all of the benefit of new knowledge, the overall level of research and development will be below the social optimum.
Knowledge also can be tacit or codified. Some codified knowledge can be property (for instance in patents). This is supposed to incentivise investment but also creates monopoly.
Knowledge depreciates, especially when technological advance is rapid or there is loss of tacit knowledge as people leave.
Learning processes
During innovation (from invention to diffusion) there is a lot of learning. Some of that is about the science and technology base. But also about how to make the product or service, how to market and, for customers, how to use it.
Technology and product life-cycles
The focus of learning activities changes as technologies mature. Typically, the early ‘ferment’ stage is about improving the product, and the later stage is about improving the production, sales and use processes.
Once there is a dominant design, many products show a learning curve, or experience curve. The unit cost goes down over time; typically a doubling of cumulative capacity sees reductions of 10-30% (as seen in computing power, as well as solar and wind renewables) The curve embodies learning-by-doing and economies of scale, but can be confounded, for instance by generalised inflation.
The diffusion of innovations
Technology diffusion usually follows as S-shaped curve, which might be explained by the number of possible clients aware of the new offering. An alternative explanation is on the propensity of customers to adopt (Roger’s stylises these as: innovators, early adopters, early majority, late majority and laggards).
While the stylised views of an S-curve and types of adopters are useful, the reality is that diffusion is more messy, with innovations changing over time.
Highlight: Dominant Design
The Abernathy and Utterback model (‘A-U Model’) is a way of understand the lifecycle of a technology. It is so fundamental that it gets its own Wikipedia page, though the original paper from 1978 is only a pdf here (Google Scholar page here).
The A-U model argues that early in the life of a new technology, there are many designs and options. The focus during this phase is on performance. Eventually a “dominant design” emerges. Following the dominant design, there is a shift to process innovation, with a focus on cost reduction and economies of scale.
The concept of a dominant design will be familiar to anyone who bought a Betamax video cassette player. ‘Dominant’ does not mean ‘best’. It means that the one which comes to be the normal one which is widely adopted.
There are several industry-level implications.
First, the firm that achieves dominant design more likely to capture profits.
Second, an industry ‘shake-out’ is common following dominant design: many firms leave the market.
Third, the nature of competition shifts from product design to incorporating process improvements, marketing.
However, the A-U models was developed, and applies best, to mass-produced consumer goods (e.g. domestic appliances). Many types of product do not see a shift from product-to-process innovation, and are not mass produced. For instance, nuclear power stations.
For these complex products, ones made up of many sub-systems, there can be a dominant architecture. But then each component or sub-system has its own innovation cycle. As a result, there is no a clean move into improving the production process. That’s one reason why these complex products do not have the learning or experience curves, and so do not dramatically come down in price.
Where we are in the ten lectures
Introduction -- here
0. Situating the module’s perspective:
0.1 The only viable story of the future is transformation. -- here
0.2 Every approach to ‘sustainable business’ is innovation, at some level. – here
1.Business Responses to the Sustainability Crisis – here.
The recent history of ‘sustainable business’.
Relating to the academic literature (including stakeholder capitalism).
2.Innovation Economics: Core Concepts and Issues – this note.
What do we mean by innovation.
Knowledge and intellectual property.
Learning Processes.
Technology and product live-cycles
The diffusion of innovations
Still to come:
3.New Product Development and Managing Technology Innovation.
4.(a) Sustainable Entrepreneurship and the route to commercialisation.
4.(b) Sustainable Finance.
5.Innovation (eco)system – beyond the cult of the entrepreneur.
6.Sustainable innovation in a digital age.
7.Sustainability Strategy and Scenario Planning.
8.Transitions and The Bigger Picture.
9.Public Policy for Sustainability-Oriented Innovation.
10.Exploring Innovation and Sustainability through a Case Study.