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

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

6 changes in innovation

6 changes in innovation coincide with changes in competition. To remain competitive, organizations must keep to incremental product improvements and focus on managing their production processes. New firms, with their lesser experience and lack of an existing customer base, have less chance to break into the market than prior to the emergence of the dominant design. Conversely, innovations that disrupt a dominant design are typically portrayed as opening new opportunities for major product innovation and entry (Anderson and Tushman [1990], Henderson and Clark [1990], Iansiti and Khanna [1995]), . Utterback and Suarez [1993] exploit these ideas to fashion a theory of shakeouts. 3 They focus on a single, lasting, widely-adopted dominant design in the product. The design need not be technologically optimal, as they acknowledge for cases such as the QWERTY typewriter keyboard (David [1985]). The dominant design is at the architectural level of how components are combined into an overall design, representing a "creative synthesis of the available technology and the existing knowledge about customer preferences" (Utterback and Suarez [1993, p. 7]). 4 A design may become a de facto standard because of network externalities (as with the development of gas stations to service gasoline-powered cars) or preferred technological traits, or possibly a de jure standard because of industry-wide standard setting (as with television transmission regulation). Utterback [1994, p. 48] restricts the occurrence of dominant designs to complex assembled products such as automobiles. In Utterback and Suarez’s theory, a shakeout is triggered by convergence on the dominant design. When a new product is introduced, buyer preferences for possible features of the product and the technological means of satisfying these preferences are uncertain. As a result, producers enter offering different varieties of the product and 3 Hopenhayn [1993] presents a related mathematical model. In his model, firms innovate relatively little until a dominant technology is established, since a new dominant technology is assumed to limit the value of previous innovations. In the model, a shakeout occurs solely from decreased entry, but this prediction results from assuming a constant exit rate, which leaves open the question whether exit would increase for the reasons argued by Utterback and Suarez. 4In practice, however, Utterback and Suarez sometimes resort to individual product features to identify a dominant design.

7 compete based on product innovation. Experimentation by buyers and sellers leads to a resolution of uncertainty over time, contributing to the emergence of a dominant design. After the emergence of the dominant design, product innovation slows as producers and users are reluctant to adopt innovations that upset the benefits conferred by the dominant design. This makes entry more difficult. It also reduces producer fears that investments in the production process will be rendered obsolete by major product innovations. Consequently, process innovation rises and a greater amount is invested in capital intensive methods of production. Firms less able to manage the production process exit. Coupled with the decline in entry, the wave of exit contributes to the shakeout. Suarez and Utterback [1995, pp. 420-421] hypothesize that incumbents will have lower rates of exit than post-dominant design entrants due to collateral assets and economies of scale. Christensen et al. [1996, pp. 9-10] elaborate this hypothesis. They conjecture that among pre-dominant design entrants, the later entrants will have lower exit rates because they have sufficient time to duplicate the strength of incumbents regarding collateral assets and scale economies without becoming attached to older technologies that will soon be rendered obsolete by the dominant design. 5 With the onset of the dominant design era, the firms least able to survive exit. Eventually, only the firms that have adapted to the dominant design survive, so that after the emergence of the dominant design presumably firm exit rates should decline and the number of firms stabilize over time. The innovative gamble and dominant design theories have similar implications regarding entry and exit. Both predict that entry will be concentrated early and then decline after the start of the shakeout. In Jovanovic and MacDonald, the number of firms stabilizes before the shakeout, with a possible rise in entry and thus the number of firms just prior to the shakeout. Neither of these patterns is addressed by Utterback and 5 Consistent with their assumptions about effects of entry time on exit rates, Suarez and Utterback [1995] find that pre-dominant design entrants had statistically significant higher rates of survival than post-dominant design entrants in typewriters, automobiles, televisions, picture tubes, and calculators, and Christensen et al. [1996] find evidence that disk drive producers entering within the four years leading up to the time of a dominant design had statistically significant higher survival rates than other firms.

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