Technology Evolution and Demand Heterogeneity: Implications for Product and Process Innovation

What is the force turning the technological tides? Traditional answers focus on what is essentially the “supply side” of technical change — the evolution of firm capabilities. Ron Adner, Associate Professor of Strategy and Management at INSEAD and Daniel Levinthal Professor of Management at Wharton, argue that in fields such as electronics and information technology, where constraints on technology development are relatively low, technology evolution is increasingly guided by the demand environment.

In their research, the professors find that as technology performance begins to exceed consumers’ requirements, firms’ abilities to command price premiums for superior performance erodes. In competitive environments, such as the market for personal computers, this imbalance between consumer requirements and product performance leads firms to offer products of increasingly high performance at a stable price. The research sheds light on competition in such regimes and suggests a new approach to evaluating the technology life cycle and firms’ position within it.

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