Towards a theory of innovation in services

1. Towards a theory of innovation in services Richard Barras Review by Petri Klinge

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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”

8. 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

9. ”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!

10. 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

11. 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

12. Innovation and the growth cycle • The modelcanbeexplainedschematically in terms of fourstages of the long wave: prosperity, recession, depression and recovery

13. 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.

14. 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.

15. 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

16. 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!