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

Abstract

The evolution of technology has been a central issue in the strategy and organizations literature. However, the focus of much of this work has been on what is essentially the “supply side” of technical change—the evolution of firm capabilities. We present a demand-based view of technology evolution that is focused on the interaction between technology development and the demand environment in which the technology is ultimately evaluated. We develop a formal computer simulation model that explicitly considers the influence of heterogeneity in market demand—the presence of consumers with different needs and requirements—on firms' innovation choices. The model is used to examine the dynamics of product and process innovation (Utterback and Abernathy 1975). The analysis reveals that demand heterogeneity offers an alternative to supply-side explanations of the technology life cycle. Further, by considering the implications of decreasing marginal utility from performance improvements, the model highlights the role of “technologically satisfied” consumers in shaping innovation incentives, and suggests a rationale for a new stage in the technology life cycle characterized by increasing performance at a stable price. The stage has not yet been treated formally in the literature, but is widely observed, most prominently in digital and information-based technologies.