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Technological Extinctions of Industrial Firms: An Inquiry into their ...

Technological Extinctions of Industrial Firms: An Inquiry into their ...

4 rise and shakeout in

4 rise and shakeout in the number of firms. They posit that a new industry is created by a basic invention and a shakeout is triggered later by a refinement invention. The basic invention leads to a new product, and firms enter to develop it. All firms produce the same (optimal) level of output, which is determined by the shape of the average cost curve. Entry is assumed at all times to be sufficient to drive expected economic profits to zero, and the industry demand curve is assumed to remain fixed over time to focus on supply-side factors. With the demand curve fixed, entry ceases after the basic invention and the number of firms remains constant until the refinement invention. The refinement opens up challenging opportunities for profitable innovation that only some firms will succeed at developing. 1 If the innovative gamble opened up by the refinement is sufficiently attractive, entry occurs. Incumbents are assumed to have a greater probability than entrants of developing the innovations opened up by the refinement by dint of their prerefinement experience. Immediate entry is more profitable than later entry because it gives entrants the maximum chance of innovating before it is no longer profitable to be in the industry. Coupled with entry driving economic profits of entrants to zero, this insures that all entry occurs immediately as the expected profits of later entry are negative. After entry is completed, the gamble plays out. The refinement is assumed to increase the optimal firm level of output, so that firms that innovate expand their output. This causes price to fall, which induces exit among noninnovators, giving rise to the shakeout. Incumbents have a lower probability of exit than entrants since they have a higher probability of innovating. Over time, unsuccessful innovators either innovate or exit, and eventually the number of firms stabilizes once price is driven down sufficiently that no unsuccessful innovators survive. All firms that do survive produce the same level of output. Utterback and Suarez’s theory emphasizes the role of a dominant design. The 1 The notion of innovative opportunities opened up by a refinement is consistent with the idea that technologies follow trajectories initiated by major technological developments (Nelson and Winter [1977], Sahal [1981], and Dosi [1982]).

5 notion that dominant designs directly influence corporate evolution and industrial competition has gained increasing attention over the past two decades (cf. Murmann and Tushman [1996]). The concept of the dominant design was developed by William Abernathy and James Utterback in 1975 to 1978 (Utterback and Abernathy [1975], Abernathy [1978], Abernathy and Utterback [1978]). In their original conception, a dominant design was held to be a collection of enduring product standards to which the bulk of industry output eventually conformed. Abernathy and Utterback used the concept of a dominant design to help interpret the evolution of the U.S. automobile industry. Many industries have since been labeled as having dominant designs, under a proliferating range of definitions. Standardization of one or two individual features of a product or sometimes even a process technology was taken to constitute a dominant design in some cases, such as cement and minicomputers in Anderson and Tushman [1990], automobiles, picture tubes, and calculators in Utterback and Suarez [1993], and facsimile transmission in Baum et al. [1995]. In other cases, a whole product architecture, rather than individual features, was seen as essential to a dominant design (Abernathy and Utterback [1978], Henderson and Clark [1990, p. 14], Anderson and Tushman [1990, p. 613]). 2 Some conceptions of dominant designs allow for the repeated displacement of existing dominant designs with new designs; such periodic replacement is central to Anderson and Tushman’s concept of cyclic technological discontinuities. Others, including Abernathy and Utterback [1978], posit only a single dominant design for a product. In all these views, dominant designs represent watersheds for technological change and organizational survival. Their formation is typically seen as defining new technological eras. After the appearance of a dominant design, product innovation becomes more incremental, focusing on refining the existing design, and greater effort and investment is devoted to improving the production process for the product. These 2 Although Anderson and Tushman conceptualize a dominant design as an overall architecture of interacting characteristics, in practice they often resort to individual features as indicators of dominant designs.

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