Many companies lack: an understanding of the dynamics of competition, and in particular, of the relationship between the effort put into improving a product or process and the results achieved over time. When charted, this relationship appears as the familiar S-curve (Exhibit). At first, as funds are put into development, progress is frustratingly slow. Then, as research uncovers the key pieces of information necessary to make advances, the pace surges. Finally, progress slows down again, and each successive innovation requires a greater outlay of resources.  more ....

Ultimately, the S-curve levels off entirely, often as the technology approaches some fundamental limit?for example, the ultimate density of devices that can be squeezed onto a silicon chip. Indeed, it is important to pay attention to such limits, as they are the best clues a manager has for recognizing when a new technology must be developed within the company. It is comparatively easy to see how technological limits will affect the sales of a product that is closely related to the technology, as computers are to silicon chips. It is not so easy, however, when dealing with air travel, say, which combines thousands of technologies. Still, there are usually no more than a handful of technologies that are crucial to a certain product or process, and these are the ones managers should identify and nurture if they hope to anticipate change.

The important thing, therefore, is to spot the technological opportunities. A company should watch its rivals: when one competitor is nearing the top of the S-curve, others are likely to be exploring alternative technologies that could give rise to curves of their own, leading to discontinuities that could take a slower company by surprise. Think about the switch from vacuum tubes to semiconductors, from cloth to paper diapers, and even from conventional tennis rackets to those with enlarged "sweet spots."

Source: Foster et. al, McKinsey Quarterly, revised 2000