Markets develop according to the specific paths by which innovations in a given field occur.
How do new industries typically form? Who are usually the initial customers, and how is competition likely to evolve? Such questions have long interested researchers studying technological innovation and its impact on business. Adding to that body of work, Jeffrey L. Funk, professor at Hitotsubashi University’s Institute of Innovation Research in Tokyo, has recently completed an in-depth investigation, presenting results that have implications for any company focused upon searching for the next big thing.
The author studied 19 electronics industries, including digital watches, personal computers, calculators, mobile phones and numerical controls for machine tools. He developed a model for the emergence and evolution of those markets and tested that framework with data from almost 100 published sources as well as interviews with scientists and engineers familiar with the technologies involved. Much of the results confirmed the earlier research of others. For instance, Funk found that in 12 of the 19 industries studied, the types of customers who actually purchased the products were unexpected. In those cases, companies had either focused on the wrong customers or had mistakenly thought that a market did not even exist. “Managers often have excessive confidence in their knowledge of relevant customers and business models,” contends Funk. He suggests that companies must learn to look outside their existing spheres of business to find those unexpected initial customers — advice that is well supported by other past research, such as the work of Harvard Business School professor Clayton M. Christensen on disruptive innovations.
Funk also found that technological change was the major driver for the formulation of new industries. At first blush, that is hardly a surprising result. But Funk has also been able to provide details of how that happens. In his research, he looked specifically at “technology trajectories” — the paths by which innovations in a given field occur. Funk found that technical developments in a new industry did not drive growth nearly as much as advancements in existing industries. A classic example of this is the technology trajectory for vacuum tubes, which was initially developed for the radio industry but then helped spawn televisions and mainframe computers. “It is the combination of existing technologies, whose improvements are driven by existing industries, that drives industry formation,” states Funk. “Although the development of many new concepts helped combine these externally driven trajectories, they merely accelerated, as opposed to drove, industry formation.”
The story becomes a different one, however, as the nascent market matures. Then, argues Funk, the new industry is likely to have a major impact on the technology trajectories. The television industry, for instance, later pushed vacuum tubes into the new application of synchronized scanning. Such industry-specific trajectories will eventually result in the emergence of a dominant design, which then evolves depending on the various trade-offs in that market. With televisions, for instance, vacuum tubes later gave way to transistor technology. Similarly, the LED displays of digital watches were replaced by LCDs. In summary, Funk says, “Externally driven trajectories drive the formation of new industries, and internally driven trajectories can change the dominant design in an existing industry.”
The implications for business are significant. Consider rechargeable batteries: Even though the laptop and mobile-phone industries are currently driving much of the research in this field, the advances could easily have a far greater impact on a different industry, such as electric vehicles. In fact, the development of more efficient and powerful batteries could lead to a different mode of transportation, such as the Segway Human Transporter.
Funk has also investigated the evolving market for mobile phones that access the Internet. In doing so he has identified the key subtrajectories, including processor speed, memory, display size, and color and camera resolution. According to Funk, these subtrajectories will have a huge impact on determining the dominant design for the industry. They could, for example, influence how the computer language Java is used, both for storing sophisticated programs on mobile devices and as the mechanism for delivering content to phones through wireless connections to servers. “Larger memory capacity increases the size and number of programs that can be saved,” states Funk. “Faster processing times reduce the time it takes to activate a program and thus enable the use of larger programs.”
Such improvements will, in turn, lead to a better user interface, which, according to Funk, is currently the biggest limitation to accessing the Internet through mobile phones. For example, faster processing speeds enable the use of more sophisticated voice-recognition systems and three-dimensional graphics. These advances could then open a wide variety of new possibilities in diverse applications such as mobile shopping and navigation services, including those that deploy global positioning satellite (GPS) technology.
Funk’s research also has a number of implications for government. For instance, many policymakers have argued for open standards for the mobile Internet — after all, such standards have been the foundation of the World Wide Web. But Funk is quick to caution that the mobile Internet has a different set of initial customers and business models that could require a rather different kind of approach. “It is possible that fully open standards will conflict with some of the business models that are necessary to ensure industry formation,” he says. “Thus, policy makers would be wise to adopt a proper balance towards openness and promoting industry formation.”
Additional details of the study are contained in the author’s recently published book Mobile Disruption: The Technologies and Applications Driving the Mobile Internet (Hoboken, New Jersey: John Wiley & Sons, 2003). Further background can also be found in his article “Creating and Succeeding in New Industries: Lessons From the Electronics Industries,” which is available on the Web (http://www.iir.hit-u.ac.jp/file/SMR-funk.pdf). Funk can be reached at firstname.lastname@example.org.