The paradox of standardisation and innovation - Malta Business School
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The paradox of standardisation and innovation

Some argue that standardisation hampers innovation as following a prescribed solution limit new ways of doing things.  This article shows that this is a limited view and that the dynamics of innovation and modern standardization practices promote innovative process to achieve competitive advantage.

The International Standards Organisation (ISO) define Standardization as the activity of establishing, with regard to actual or potential problems, provisions for common and repeated use, aimed at the achievement of the optimum degree of order in a given context (ISO/IEC Guide 2, 2004).

Innovation can be defined as the commercialization of all new products based upon the application of new materials and components, the introduction of new processes, the opening of new markets, and/or the introduction of new organizational forms.  So, innovation is more than an invention; it is a commercialized invention.

When developing a standard solution, the intention is that this solution will be used repeatedly. Therefore, standardization provides a ‘static’ solution because the solution is ‘frozen’ over a certain period of time.  During this period of ’freezing’, the emergence of new solutions that solve the same problem in a better way is hindered by standardization.  From this point of view, standardization definitely hinders innovation (De Vries, 2006).

A classic example for hampering innovation by standardization is the QWERTY keyboard.   The design was based on the frequency of use of letters in the English alphabet.  However, the QWERTY design no longer makes sense because mechanical constructions have been replaced by electrotechnical and electronic machines.  Better keyboards with improved ergonomics have been invented that allow for more speed.  However, QWERTY remains the common solution implemented everywhere since the costs of conversion are too high. The conversion costs include the costs of replacing hardware and the switching costs of training users to learn to work with the new standard.  The latter is more significant.  Moreover, there is a ‘prisoner’s dilemma’; the new standard would be attractive once many others were to use it, both typists and keyboard producers, but this applies for everyone, so everyone waits for everybody else and no-one starts.  So all are ‘locked-in’ in the old-fashioned technology.

However, there is another side to the story.  QWERTY is just the standard for the interface between user and machine.  Since its introduction, the machine itself has been developed a lot, from mechanical to electronic.  The standard was a prerequisite for this innovation: an improved machine without a standard keyboard would not be acceptable to the market.  Moreover, the world-wide standard interface enables manufacturers (of hardware, but also of software and education) to profit from economies of scale, so inventions have more chance to become innovations: innovations that are successful in the market.

European televisions have better colours than American televisions.  The reason for the latter’s harsh colours is that the Americans standardized the specifications for cameras, broadcasting stations, antennas and televisions in an early stage of technological development.  Better systems were developed afterwards that allow for sharper contrast and better colours.  It seems that the advantages of the better technology are more than the cost of conversion but there should be a form of common agreement between the parties concerned to start this conversion, as in the QWERTY example.  The initial failure of high-definition television demonstrates the difficulty of this.

Again, standardization has hampered innovation.   But, again, this is only one side of the coin. Without standards, television systems are impossible; cameras, broadcasting stations, antennae and televisions have to match each other in order for entire system to function.  As long as compatibility standards remain, the cameras, broadcasting stations, antennas and televisions can be innovated; otherwise such innovations would not be possible.  Moreover, the early adoption of colour television standards has strengthened the American lead in developing and producing TV programmes and films.  Today the United States dominates television schedules all over the world.

From the above two classic examples of standardization that have hindered innovation, it can be seen that there is another side as well: without the standard it would not have been possible to develop the invention into a market success.  The standards have therefore hindered innovation of the interfaces but stimulated innovation in the technology itself as far as this is possible without affecting the interface.  In this situation, the innovation and the standard provided solutions for the same problem.  Many standards do not describe a design, but specify performance criteria for a design and in that case innovation is not hindered by the standard. 

Dynamics of innovation

A model developed by Abernathy and Utterback (1975) to explain the dynamics of innovation hypothesizes that the rate of major innovation for both products and processes follows a general pattern over time, and that product and process innovation share an important relationship.

The rate of product innovation in an industry or product class is highest during its formative period.  This period called the ‘fluid phase’, during which a lot of experimentation with product design and operational characteristics takes place among competitors.  The period of fluidity, according to the model, typically gives way to a ‘transitional phase’, in which the rate of major product innovation declines and the rate of major process innovations increases.  At this point, product variety begins to give way to a standard design that has either proven to be the best form for satisfying user needs in the marketplace, or designs that have been dictated by accepted standards, by legal or regulatory constraints.  This standard design is known as the dominant design.  As the form of the product rapidly becomes settled, the pace of innovation in the way it is produced quickens.

This is followed by a specific phase in which the rate of major innovation falls down for both product and process.  Many industries become extremely focused on cost, volume and capacity of product, and process innovation takes place in small, incremental steps.  Naturally, not all industries or products pass through these tidy phases, but, over the years, the model has proven valuable in explaining the innovation pattern (Utterback, 1996).

Paradox

Dominant design, competition and industry structure

A new product innovation by one or a few firms results in a temporary monopoly situation, high unit profit margins and prices, and sales of the innovation in those few market niches where it possesses the greatest performance advantage over competing alternatives.  As demand and production grow, and as more applications are found for the innovation, many new firms enter the market with variations of the product.

The earliest period in the development of a product line or industry in which few firms participate would necessarily be a period of relatively slow technical progress and productivity advance.  As larger number of firms enter the arena, broadening the range of experimentation and the definition of the product technology, greater innovation is expected with a correspondingly greater progress in technology and advance in productivity.

Finally, as a few firms come to dominate the industry with superior product technology and productivity, both experimentation and progress would be expected to slow.  The renewal or broadening of competition would be required for rapid progress to recur.   Once the dominant design is established (i.e. standard of product is developed and contest for product innovation is settled), then competitive engagement shifts to process innovation.  Firms that are unable to make the transition toward greater process innovation are unable to compete effectively and very often fail.  Those that possess special resources may successfully merge with the ultimately dominant firms.  Overall, the inability to change organizational structure and practices in tandem with the evolution of technology in industry is a major source of failure.  Thus, there is a decline in the number of competing firms after the emergence of a dominant design (Utterback, 1996).

References:

Utterback J., Abernathy W., 1975, “A dynamic model of process and product innovation”, Omega, Elsevier.

ISO/IEC Guide 2:2004, Standardization and related activities — General vocabulary, Geneva

De Vries, 2006 Standardisation: A Business Approach to the Role of National Standardisation Organisations, Boston: Kluwer Academic Publishers.

Utterback J., 1996, Mastering the Dynamics of Innovation, Harvard Business School Press, USA