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The crucial importance of Innovation Ecosystems

Alessandro Petrich, Analyst in P101 | June 29th, 2016

Many are the technological innovations that have changed our lives in the recent past and many others are changing our future: from personal computers, to smartphones, to artificial intelligence. Which are the factor that determine the evolution of a technological innovation to market standard?

The dominant solution is usually a creative synthesis of innovations: it is not always the best technology, but it certainly is the best compromise between various functional characteristics. Just think about the technological battle between the by now vintage VHS and Betamax, two magnetic video recording systems intended for the home. VHS was introduced to the market just a few years later than Betamax, and it was considered by many as technically inferior to its older competitor. However, thanks to a number of factors – among which the influence of the network that JVC (VHS promoter) had very wisely built, as well as longer duration and lower cost of videotapes – VHS was the only one to have a huge success.

Of course, all of us – innovators, investors, consumers – would like to know in advance which will be the most successful idea. But according to traditional models (such as Dosi’s technological paradigm, see chart below), it is impossible to find the emerging technological solution that is closest to the achievement of the technological domain. In fact, the peculiarity of the “dominant design”, is that it can be only recognized ex-post. However, if we consider the greater or lesser efficiency of the innovation ecosystems, we can figure out which technology is potentially dominant, because an efficient innovation ecosystem actively helps a technological solution become dominant.

Let’s take the chart illustrating Dosi’s paradigm: it shows different trajectories, which represent the problem-solving activity performed by firms to create a new technological solution. For example, let’s think of the tablet market launch. The two variables in this case are portability and performance: if portability is by far greater than performance, we’ll have something like a smartphone, on the contrary, in case of a tendency towards performance, the result will be something more like a laptop. The technological solution of the tablet lies somewhere in the middle, but which of the various tablet models will become the standard? Dosi’s paradigm won’t tell.

However, if we try to insert a third variable (“market performance”) that considers the influence of the ecosystem, we’ll obtain a 3D technological paradigm graph, which gives birth to different plans on which technological trajectories move and which are located at different levels. The higher the plan is, the closer it is to technological dominance.

What do we mean by “innovation ecosystem”? On the one hand, it includes key factors such as geographic proximity, cultural adjacency and institutional supports. We can compare an efficient innovation ecosystem to the city of Paris at the beginning of 1900: the French capital was the most active artistic and cultural hub in Europe, thanks to a virtuous, self-fuelling cycle: the presence of many artists generated a highly efficient network which in turn attracted the very best of the “art system” of the time. On the other hand, a firm can build its own ecosystem – a strong and efficient network of strategic and aligned players.

Ecosystems are so important because they directly interact with the new industry life cycle: this, when created, is characterized by a fluid phase in which companies tend to enter the industry with many technological solutions to the same market need. They compete with each other until the dominant technology manifests itself. When an ecosystem is efficient, however, the fluid phase lasts less and a technology can become dominant more quickly.

Timing, we all know, is vital. So what’s the best time to launch an innovation? Certainly not too early, because the earliest innovators do not always get an advantage, but also, not too late, because you are likely to enter a market that has already been conquered. However, several examples have shown that when a viable technology comes from an efficient ecosystem, even if it is late, it can still achieve the status of dominant design. Let’s think, for instance, of Apple iPod: the company revolutionized the MP3 market even though entering the market much later than its competitors. Why? Apple was founded in the right technology ecosystem, the Silicon Valley; what is more, Steve Jobs created a strong ecosystem around the corporation, involving players operating in the music industry at the time, aligning them in solving the problem of piracy and copyright, and creating iTunes. The result? The iPod, as well as having an appealing design, a friendly user interface and a large memory, could count on an innovation ecosystem that pushed this solution strongly towards technological dominance.

Finally, the ecosystem also affects the adoption cycle of a technological innovation, starting from the early adopters and technology enthusiasts, to the mass market. Usually, a company needs to activate this process before its competitors, if it wants to reach the public quickly: but when the underlying ecosystem is more efficient than that of its competitors, the adoption cycle will be shorter and the mass market will be achieved faster.