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

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

70 identified. Entry was

70 identified. Entry was concentrated early and became negligible soon after the start of the shakeouts, the number of firms declined for over thirty years after the start of the shakeouts, and the leading firms were nearly all early entrants and generally dominated both product and process innovation. Coupled with other patterns concerning trends in product and process innovation and the diffusion of innovations, these patterns suggested that industry shakeouts were not triggered by particular innovations nor by dominant designs but were part of a broader evolutionary process driven by continual technological change. Shakeouts appear to result from an evolutionary process in which technological innovation contributes to mounting dominance by some early- entering firms. Falling prices and rising quality standards eventually make entry so difficult as to deter further entry, and smaller firms with relatively high cost and low quality steadily exit production as they become unprofitable. The four products studied were selected because of the severity of the shakeouts they experienced. Such a sample is clearly not a random collection of products. It was chosen to facilitate the identification of factors that consistently contribute to shakeouts. It may well be that the four products are not representative of products experiencing less severe shakeouts (including ones experiencing no shakeouts at all). None of the four products experienced the kinds of innovations that in other industries provided opportunities for new firms to displace the industry leaders (Tushman and Anderson [1986], Henderson and Clark [1990], Christensen and Rosenbloom [1995]). Products subject to such innovations may experience periods of new entry that limit the severity of their shakeouts. 57 Consequently, our sampling strategy may be biased toward industries which are characterized by strong first-mover advantages and long-term domination of innovation by the leading firms. Although technological trends and early-mover advantages surely differ between industries with extreme shakeouts and those with periodic technical changes that bring in new firms, a single cause could nonetheless be at the root of both types of evolution. Various theories have been proposed concerning the kinds of innovations that can 57 Rigid disk drives may be an example (Christensen et al. [1996]).

71 undermine industry leaders. One developed by Christensen and Rosenbloom [1995] provides a possible link to the increasing returns hypothesis and thus to a more general theory of industry evolution. Christensen and Rosenbloom argue that innovations that open opportunities for new firms and sometimes lead to the decline of dominant firms often have the characteristic that they create new uses for a product that appeal to new classes of buyers. They stress that incumbent firms’ innovations are shaped by their existing buyers, which often causes incumbent firms to be slow to develop innovations that appeal to new buyers. Consequently, such innovations provide opportunities for new firms to compete with incumbents. The notion of R&D cost spreading that drives the increasing returns theory provides an alternative explanation for this same phenomenon. Since incumbents sell no prior output to new buyers, R&D cost spreading implies that in the absence of R&D or other scope economies incumbents have no greater incentive than new firms to develop innovations that appeal to new buyers. Consequently, industries which systematically experience innovations that attract new users might be expected to experience more entry and hence to undergo less severe shakeouts, ceteris paribus. A sensible next step to explore these ideas would be to analyze samples of products with less severe shakeouts. Indeed, a study of products that experienced no shakeouts at all as well as those experiencing moderate shakeouts might be especially revealing of the factors conditioning whether and how severely industries undergo shakeouts. A unified theory of shakeouts and more generally industry evolution must be able to account for both ends of the spectrum. In this respect, our findings may serve as both guide and goal for theorizing about shakeouts and industry evolution.

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