The competitiveness and profitability of a firm depend in part on the design and quality of the products and services that it produces and on the cost of production. Therefore, the relationship of product innovation to process technology and process innovation is of considerable interest. Predicting the nature and impact of innovation can place one firm in a more competitive position than a firm that does not anticipate these events.
The design of the productive system depends in large part on the design of the products and services to be produced. A product or service designed one way may be costly to produce, but it may be somewhat less costly when designed another way.
Recall our discussion of the product life cycle and how the productive system goes through a life cycle of its own, evolving from a process-focused system initially, when volumes are low and flexibility is particularly important, to a product focused system when products have matured. Now we develop these ideas further with a three stage model for process and product innovation.
The first stage begins early in the life of products and processes; initially, innovations are stimulated by needs in the marketplace. Process innovations also are stimulated by the need to increase output rate. In terms of innovation rate, product innovation is high and the initial emphasis is on product performance maximization. There may be the anticipation that new capabilities will, in turn, expand requirements in the market place.
Although we may think largely in terms of physical products, service innovations are quite comparable; for example, the initial introduction of such innovation services as social security, no-fault auto insurance, comprehensive health services (e.g. Kaiser Permanente), fast food services, and so on.
The first phase is called performance maximization for products and services and uncoordinated for processes. High product innovation rates increase the likelihood that product diversity will be extensive. As a result, the productive process is composed largely of un-standardized and manual operations or operations that rely on general purposes technology. The productive system is likely to be of the process focused type, but the characterization uncoordinated is probably justified in most instances because the relationships between the required operations are still not clear.
Price competition becomes more intense in the second stage as the industry or product and service group begins to reach maturity. Productive system design emphasizes cost minimization as competition in the market place begins to emphasize price. The productive process becomes more capital intensive and more tightly integrated through production planning and control.
At this stage, the production process is often segmented in nature. This is true partly because integration is taking place at a broader level through managerial control systems and partly because the dominant system type is the process focused system.
Finally, as the entire system reaches maturity and saturation, innovations tend to be largely cost stimulated, as indicated. Further price competition puts increasing emphasis on cost minimizing strategies, and the production process becomes even more capital intensive ad product focused.
The productive process becomes more highly structured and integrated, as illustrated by automotive assembly lines, continuous chemical processes, and such highly automated, large scale service systems as social security. The productive process becomes so highly integrated that it is difficult to make changes because any change at all creates significant interactions wit other operations in the process.
The model of innovation indicates the close relationship between the design and development of products and services and the productive system design. In fact, during the third, or cost minimizing, stage, the effects of innovation on product cost follow a surprisingly clear pattern. In addition, however, the model demonstrates the close tie-in between the nature of innovation at various times in the product life cycle and the positioning strategy of the enterprise regarding its productive system.