1ZM40 - Strategy and Technology Management (1ZM40)
Summary
Summary Topic 5 and 6 - Dominant Designs and Profiting From Innovation
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1ZM40 - Strategy and Technology Management (1ZM40)
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Technische Universiteit Eindhoven (TUE)
Topic 5 (Dominant Designs) and Topic 6 (Profiting From Innovation)
For these topics the following articles are summarized:
Suarez, F. F. & Utterback, J. M. (1995) Dominant Designs and the Survival of Firms. Strategic Management Journal, 16, 415-430.
Argyres, N., Bigelow, L. & Nickerson, J. A. (201...
1ZM40 - Strategy and Technology Management (1ZM40)
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1ZM40 – strategy and technology management
DOMINANT DESIGNS AND THE SURVIVAL OF FIRMS (SUAREZ & UTTERBACK, 1995)
The economic, population ecology, and strategic perspectives on firm survival are here complemented by
viewing the same phenomenon from the viewpoint of technology evolution as well.
INTRODUCTION
Survival = (is at least in the long term), a prerequisite for success in other terms, such as market share and
profitability
Life chances of organizations are affected by the population density at time of founding and throughout the life
period of an organization. Organizations founded during periods of high density have persistently higher age-
specific rates of mortality than those founded during periods of low density. Thus, firms entering a crowded field
has a lower chance of survival than one entering a less competitive field.
The hypothesis that this paper intends to test is that the competitive environment of an industry, and therefore
the survival of its firms, is substantially affected by the evolution of the technology on which an industry is based,
particularly by the emergence of what Utterback and Abernathy termed a ‘dominant design’.
The number of firms in an industry – the industry’s density – will be directly affected by the emergence of a
dominant design in a pattern that is common to all industries we studied.
We explore the feasibility of our claims by applying survival analysis to data from six industries, concentrating on
one specific hypothesis derived from the model of technological evolution advocated here.
WHAT IS A DOMINANT DESIGN?
Dominant design = a specific path, along an industry’s design hierarchy, which establishes dominance among
competing design paths.
Design trajectories and paths are influenced by both technical
and market factors.
A dominant design has the effect of enforcing standardization so
that production economies can be sought. Effective competition
can then take place on the basis of cost as well as product
performance. A dominant design will embody the requirements
of many classes of users of a particular product, even though it
may not meet the needs of a particular class to quite the same
extent as would a customized design. Nor is a dominant design
necessarily the one which embodies the most extreme technical
performance. A dominant design will represent a milestone or
transition point in the life of an industry.
Standards = something which is accepted for current use through authority, custom or general consent.
When dominant design is an industry standard, it opens to factors, other than technology to influence the
adoption of a given design as dominant:
• Possession of collateral assets
o Market channels, brand image, and customer switching costs can help to enforce its product
as the dominant design
o Value of collateral assets will be greater after a dominant design is in place. There are more
incentives for a firm to acquire collateral assets after it knows its design has become dominant
• Industry regulation and government intervention
o Has the power to enforce a standard and define a dominant design
o Government purchases of a product in early stages of an industry may tilt the balance in favor
of the firm producing it, and make this product more likely to become the dominant design.
• Strategic maneuvering at the firm level
o Strategic maneuvering = the type of strategy followed by a firm with respect to its product and
that of competitors may determine which firm’s product becomes dominant
, • Existence of bandwagon effects or network externalities in the industry
o Positive network externalities arise when a product is more valuable to a user, the more users
adopt the same good or compatible ones. Thus, volume sales and economies of scale are an
important determination of a dominant design. Before a dominant design is established,
economies of scale have little effect, because of a large number of variants of a product.
HOW DOES A DOMINANT DESIGN OCCUR?
Process of experimentation = the turbulent competitive process through which firms enter and some leave an
industry. Each product introduction is viewed as new experiment on user preference.
A dominant design is synthesized from more fragmented technological innovations introduced independently
in prior products and tested and often modified by users of those prior products. E.g. typewriter had first no
lower case letters and no shift key, that was all subsumed in the design later.
HYPOTHESES
Hypothesis 1: the probability of survival will tend to be greater for firms entering the industry before the
emergence of a dominant design than for firms entering after it. Thus, the later a firm enters an industry after
the dominant design has emerged, the lower its chances of survival will be
The dominant design is seen as a catalyst for the accumulation of collateral assets and the creation of barriers
to entry by a reduced number of firms.
If this hypothesis is true, then: the survival function of the pre-dominant design entrants subgroup will always
lie above that of the post-dominant design entrants
Hypothesis 2: the earlier a firm enters the industry before the dominant design emerges, the greater the
advantage of that firm will be.
Entering early allows the firm to buy time in order to experiment with the market and thus increase its
probability of coming up with a dominant design.
If this hypothesis is true, then: the hazards function of the post-dominant design entrants subgroups will lie
above that of the predominant design entrants, particularly during the first years of a firm’s existence.
CONCLUSIONS
Hypothesis 1: Not supported
Entry post-dominant design presents more ambiguous results; only one industry clearly supports our prediction
that the risk of failure would be higher for firms entering a greater number of years after the dominant design
Hypothesis 2: supported
Entry pre-dominant design is clearly associated with lower probability of failure, as entering a greater number of
years before the dominant design allows a firm to buy time in order to experiment with new products in a period
when demand changes rapidly.
,DOMINENT DESIGN, INNOVATION SHOCKS, AND THE FOLLOWER’S DILLEMA (ARGYRES,
BIGELOW & NICKERSON, 2015)
“In this paper, we aim to provide a new perspective on dominant designs that addresses the above shortcomings.
We first argue that the major shift in industry dynamics and strategic choice often occurs not when a product
design or architecture becomes dominant (i.e., comes to account for a majority of market share), but much
earlier. The shift instead occurs upon the introduction of a pioneering new product design by a single firm, the
demand for which surges in an unanticipated way. We call this shift an “innovation shock.”
While highly influential, theories of dominant design suffer from several shortcomings.
1. The theories lack a clear causal logic explaining the role of dominant designs in industry evolution
2. Underemphasizing the role of demand in industry evolution in favour of engineering imperatives on the
supply side.
3. Theories are limited in their import for strategic management because dominant designs can only be
identified in retrospect.
LITERATURE REVIEW AND THEORETICAL DEVELOPMENT
industries tend to shift from an initial stage of product design experimentation by firms to a stage featuring
process innovation aimed at cost reduction. At some point, this experimentation leads to the emergence of a
dominant design, defined as “the concepts that define how the components of the product interact or relate to
each other”. The basis of competition then shifts from alternate product designs to low-cost production of
products that are based on the dominant design. This cost competition leads to an industry shakeout, which is
marked by a substantial portion of industry participants exiting during a brief window of time.
Architectural innovation = a reconfiguration of both demand-side and supply-side arrangements for
commercializing the industry’s dominant design.
The shakeout involves a drop in entry and a rise in exits, leading to a decline in the overall number of firms.
We argue that dominant designs as traditionally understood do not spark shakeouts. Besides, we argue that an
innovation shock produced by a single firm is what often initiates a period of increased exit rates.
Our notion implies that an innovation shock occurs before a dominant design has emerged and does not
necessarily involve disruption to both demand side and supply-side linkages. We postulate that a new
technological solution drives increases in exit rates (as well as repositioning) and can culminate in a shakeout. A
critical point of difference is that, in our account, the solution is generated inside the industry, rather than outside
it.
Innovation shock = the introduction by a firm of a new product that stimulates a substantial surge and
acceleration in demand for that product— a surge that was generally unexpected by market participants.
The new product, we suggest, is based on a new configuration of attributes that might include radical or
incremental innovations and might include components developed in-house or by other firms. The critical factors
that identify the innovation shock are that the new product represents a novel composition of elements (even if
many individual elements already existed in rival products) and that it benefits from a large, unanticipated surge
in demand. We suggest that an innovation shock does not typically launch new industries. Rather, it comes along
well into the industry’s early development.
An innovation shock thus reveals information about demand that implies the discovery of a “pool of revenue.”
The firm introducing the innovation shock is therefore in the position to reap a sudden windfall, and to potentially
capture a durable first mover advantage.
The arrival of an innovation shock forces rivals to consider three strategic responses:
1. Imitation,
2. Repositioning
3. Exit,
, Also, it leads potential competitors to consider entry and imitation. For rivals, failing to respond to the newly
revealed demand information, thereby allowing the firm introducing the innovation shock to build competitive
advantage uncontested, greatly increases the likelihood of financial loss and exit. This motivates rivals to
strategically respond.
Imitating
Rival firms, which by definition are not offering the ISD (innovation shock) at the time of its introduction, face
powerful economic pressures to respond and compete for a portion of the profit pool discovered by the
innovator.
Imitation can be an economically viable strategic response for incumbents for three reasons:
1. It can lead to the capture of a share of the newly discovered profit pool
2. Investing in low-cost production, a robust supply chain, developing distribution channels, brand capital,
and any other co-specialized and complementary assets needed to take full advantage of the new and
growing demand takes time, giving imitators a chance to respond. Rivals who quickly imitate may be
able to copy some or all of the investments needed to serve the market, which diminishes or neutralizes
potential advantages that otherwise might accrue to the innovator.
3. If rivals don’t respond by imitating, they risk allowing the innovator to gain a longer-term competitive
advantage and resources that can be used against them.
Repositioning
Rivals could choose to avoid direct competition by repositioning distantly from the ISD (Innovation shock).
The closer the rival’s niche is to the ISD when it was introduced, the less demand the rival will realize once the
innovator launches the new product or service (unless it imitates as described above). If a rival’s demand
decreases and that rival does not imitate, then remaining viable in the industry requires repositioning to a more
distant niche.
Exiting
Competition will drive rivals to pursue sources of competitive advantage, leaving those unable to accumulate
advantage to be selected out. As rivals become stronger, the level of competition will ratchet upward, and exit
rates will rise.
ENTERING
The arrival of the innovation shock generates knowledge about the constellation of product features needed to
access the newly discovered pool of revenue, which may stimulate entry of two kinds.
1. Firms operating in other industries may choose to enter if they possess resources and capabilities that
are sufficiently re-deployable or fungible to compete with the innovator.
2. De novo entry also can be stimulated by the arrival of an innovation shock. Because the composition
of product and service elements that attracts a revenue pool is now known, potential entrants can now
calculate their expected profits upon entry with greater precision.
If an innovation shock generates a large enough first mover advantage, it could actually reduce entry into the
focal industry or industry position of the ISD. We suggest that the pattern of entry following an innovation shock
will depend heavily on the degree of industry segmentation.
PRIMARY IMPLICATIONS
Our perspective implies that strategic responses to the arrival of an innovation shock will take time.
Organizations vary in their degrees of inertia, defined as the inverse of adaptation speed. The greater an
organization’s inertia, the longer it will take to undertake “core” change and repositioning.
The narrower the technological base of the firm prior to the introduction of an innovation shock, the less likely
it will be able to switch segments quickly if doing so requires a different technology base. This lag in adjustment
is due to the cost and time required to acquire, develop, and apply the requisite knowledge.
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