Bringing innovations to market in networked industries

The New Rules for Bringing Innovations to Market, Bhaskar Chakravorti, 2004

Bhaskar Chakravorti, author of 'The Slow Pace of Fast Change,' discusses the pitfalls of innovation in networked industries in this HBR article. (See also this earlier post.)

Chakravorti bases his argument on game theory and network economics.

When a market is in equilibrium (i.e. Nash equilibrium) every player in a market believes that he or she is making the best possible choices and that every other player is doing the same. Equilibrium in a market lends stability to the players' expectations, validates their choices, and reinforces their behaviors. When an innovation enters the market, it upsets the players' expectations and choices and introduces uncertainty in decision making.

So, once a market reaches equilibrium, it resists new ideas and new products and significantly favors incumbents who maintain the status quo.

A market's hostility to innovations becomes stronger when plazers are interconnected. In a networked market, each participant will switch to a new product only when it believes others will do so, too. ... When America's first transcontinental railroads were built in the 1860's, for example, factories and businesses that were close to waterways did not immediately relocate near railways. They did so only when they felt their customers and suppliers were making the switch, too.

Communications technology provides virtual connections between market participants and can affect adoption of new products. Using these technologies, market participants sent signals about their behavior and allow others to form expectations.

For instance, E. Remington and Sons introduced the first typewriter in 1874, a time when penmanship was still a highly respected skill. Most writers (with the exception of Mark Twain) initially shunned the typewriter. The growth of railroads, telephones, and telegraph lines led to the dispersal of companies and the depersonalization of communications. the typewritten document became the standard for written communications in business. Use of the typewriter spread. Thus, the railroads, the telephone, and the telegraph implicitly increased the speed with which consumers accepted the typewriter.

That influence is a two-edged sword.

Networked markets allow for the rapid diffusion of news, ideas, and, in theory, innovations. But they also erect formidable barriers to the adoption of innovations - primarily because of the interdependencies between players.

This reminds me of Barabasi's work on power laws in networks.

Once enough plazers in a networked market decide to switch to a new product, other players' motivation to do so becomes stronger. Beyond that threshold, the network becomes innovation's ally rather than its foe.

This sounds much like a game theoretical explanation of Shumpeter's 'creative destruction.'

Chakravorti also emphasizes the importance of hubs for innovators. Aligning interests with the most connected industry players gives an innovator access to a large network with very little effort.

While he goes on to recommend a strategy for innovators who are trying to move from one equilibrium to another in order to promote their new products, there is little mention of markets that are not yet in equilibrium. I could imagine that the bioinformatics industry is still too young to have reached a Nash equilibrium and that network ties are not yet stable enough to deter innovation. Or, to put it another way, the biomedical industry experienced two 'waves:' Has the industry reached equilibrium in the second wave yet?

And what will happen to an industry so dependent on, even defined by, innovation once it does reach equilibrium?

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