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Towards a theory of innovation in services. Richard Barras Review by Petri Klinge. Introduction. Major new technology in capital goods sector and subsequent development according to product life cycle theory

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slide1

Towards a theory of innovation in services

Richard Barras

Review by Petri Klinge

slide2

Introduction

  • Major new technology in capital goodssector and subsequentdevelopmentaccording to product life cycletheory
  • How thesetechnologiesaretransmitted to userindustries of consumergoods and servicesectors
  • Delays of ”adoption” and ”realisation of potential”
  • Trajectorieswhichemerge in userindustries
  • A ”reverseproductcycle” user and serviceindustries & Normalproductcycle in the capital goodssector.
  • Capital and consumer sector ”out of phase” innovation cycles
slide3

Origins and development of new technology

  • Originsof a major new technology in thecapital goodssector, and itssubsequentdevelopmentaccording to the normalproductcycletheory.
  • Ifan innovationhasgrounds to thrive in othereconomicsettingsthanitsoriginaloneitcanbe a foundation of a major new technology
slide4

Origins and development of new technology

  • ”Three phases” (actuallyfour, butone is transitional):
    • Indroductionphase
      • Major productinnovation
      • Establishment of new industries
      • Rapidtechnicaladvances and diversity of products
      • Labour intesive: relativelyhighcost, butflexible
      • Competitiveadvantage in productperformance
    • Growthphase
      • Competitiveadvantage in majorprocessinnovationdesigned to improvequality
      • Product rangedecreases
      • Standardizedproductionmethods
      • Product marketgrow and marketsexpand
slide5

Origins and development of new technology

  • Maturityphase:
    • Competiveadvantagesearched in incrementalprocessimprovementsdesigned to reduceunitcosts
    • Fewstandard products
    • Market saturating
    • Largerproductionunits and highlevel of automation
    • Cost of furtherinnovationincrese
  • Transitionalphase:
    • Wholecyclebeginsagain with new industries as oldonesdecline
slide6

Transmission of technology

  • A process in which new technologies of capital goods sector are taken up through applications in the consumer goods and services sector.
  • Occurs slowly over a long period of time
slide7

Transmission of technology

  • Twotypes of delays:
      • A) adoption delays: howfast new capital goodsaretakenupby the users
        • Three factors of adoption delays:
          • Trade-offbetweenprice and tech. performance
          • Risk and uncertainty of investment
          • Market structure of adopterindustry
      • B) realizationdelay: howfastfrominstallation of capital goodsuntil the emergence of usefulapplication
        • Three factors of realizationdelays:
          • Opportunity”
          • Usability”
          • Adaptability”
slide8

Transmission of technology

  • Trajectories:
    • S-shapedlogisticdiffusioncurve.
    • Differenttrajectories in differentuserindustriesreflect a combination of common priceperformancecharasteristics of technology and differentmarketstructures and types
    • Theydefine the selection of environment for useradoptation and innovation
  • Adoption of new technologies: Twosets of factors
    • Factorsconcerned with transmission of technology:
    • Technology push:
      • Associated with tje capital goodsembodying the technology
      • Price-performancecharasteristics, uncertaintyaboutperformance, usability
    • Demandpull:
      • Factorsstemfrom the userindustries and theirapplication of technology
      • Market structure of industry, opportunity to applytechnology and adaptability of the userorganisation
    • Factorsconcerninginnovationprocesswithin the userindustries
      • How the technology is applied in the production of consumergoodsandsservices
      • Resultsfrom”technologypush” pressuresoriginationwithintheseindustries
      • and ”demandpull” pressuresoriginationwithin the consumermarket for their products
slide9

”Reverse product cycle”

  • A ”reverseproductcycle” (describes the innovationprocess in user and serviceindustries. At the sametimenormalproductcycle in the capital goodssector is parallel to it.
  • Three phases:
    • 1) Desing of innovation to increase the efficiency the existingservice
      • Quantitative
    • 2) Technology is applied to better the quality of the service
    • 3) Technology to assist in generatingwholly new services
  • After the threephases the cyclebeginsanew!
slide10

Innovation and the growth cycle

  • Kondrative 1.: Steam, textile;
  • K2.: iron, steel, engineering and railways;
  • K3.: electricpower, automobiles and chemicalmanufacture
  • K4.: postwarboom in consumerelectronics, syntheticmaterials and pharmaceuticals
  • K.5: new serviceactivitiesbased on informationtechnologies
slide11

Innovation and the growth cycle

  • Major new technologyhas a centralrole in successivegrowthcycles
  • Disputeabout the mechanismbywhichinnovationcausesregularfluctuation in the securlartrend of economicgrowth
  • Barrasintroduces a mechanismderivedfrom the dynamics of technology transmission process, wherebytechnology is transferredfrom the capital goodssector to the consumergoods and servicessectorcreating a disecquilibrium in technicalprogressdue to the juxtaposition of twoout-of-phaseinnovation life cycles in the twosector.
  • Mechanismhelps to explain the cyclicalfluctations in capital productivity and profitabilitywhichoccursduring the long wave and whichhavethemselvesbeenemployed as explanatoryfactors in some long wavetheory
slide12

Innovation and the growth cycle

  • The modelcanbeexplainedschematically in terms of fourstages of the long wave: prosperity, recession, depression and recovery
slide13

Innovation and the growth cycle

  • Consumer goodsindustriesgrow and quality is beingimprovedthroughprocessinnovations with technologiesorigination in the previousgrowthcycle.
  • Output and labour productivityaregrowingstrogly to meet the growingdemand. Stronggrowth of capital investment. Rate of profitstabilizes. Technical progress is concertrated in consumersector
  • Capital sector is in transitionbetweensuccessive ”technologicalparadigms”. Little improvement as technology is in R&D phase. Generated products aretechnologicallybutnoteconomicallyfeasible.
slide14

Innovation and the growth cycle

  • Whenemergenttechnologiesbecomeeconomicallyfeasible, consumersectorstarts to adoptthesetechnologies.
  • Focus of technicalprogress is in capital goodssectorwhere new products areintroduces.
  • Capital goodsstart to cheapen and consumerexpand to the consumersector
  • New technologiesareused to cheapen the existingconsumersector products
  • Rapidrate in technology is labour saving.
  • Thus, labour productivityincresesbutemployment, capital productivity and profitabilitydrop.
slide15

Innovation and the growth cycle

  • Growth in capital sectorshifts to processinnovationwhichbyimprovingquality of productrangessustaincontinuedmarketgrowthamongconsumerindustriesconsolidating the position of capital goodsindustriesthemselves
  • Consumer sector of usingtechnologyshiftstowardsimproving the quality of services and products
  • These products arenotready in the phase of depression and theireconomicalfeasibility just developsoverthistransitionalphase
  • Notenoughgrowth in new productoffering (despite the new technologyfrom the capital sector) brings the industries to depression as marketsaresaturated
  • Unemployment is high. Capital investment is broadlyneutralthushaltingdecline in profitability and capitaproductivity. Average labour productivitygets a boostfromunderusedcapacity
slide16

Innovation and the growth cycle

  • New products noweconomicallyfeasible. Thisleads to a major new phase of productinnovation. New products and consumerindustriesareestablished and create a base for sustainedeconomicrecovery.
  • New products usenowmature capital sector products extensively. Capital goodsindustryproducesdominanttechnology. Transmission is acceleratedadn new markets open up.
  • Investment is predominantly capital. Relativeprice of technologyincreases. Thus output levelsneed to beexpanded, and soemployment, capital productivity and profitabilityincrese.
  • Nowestablishedtechnology in consumersectordrivesfurtherproduct and processinnovationwithin new industries
  • Growthphasebeginsanew and the cyclecontinues!