Summary Readings 1ZM40 Topics 5 and 6
Inhoud
Topic 5 – Dominant Design ................................................................................................................. 1
❖ Dominant Designs, Innovation Shocks, and the Follower’s Dilemma – Argyres, Bigelow,
Nickerson ........................................................................................................................................ 1
❖ Perfect Timing? Dominant Category, Dominant Design, and the Window of Opportunity for
Firm Entry – Suarez, Grodal, Gotsopoulos ...................................................................................... 7
❖ Avoiding the Pitfalls of Emerging Technologies – Day & Schoemaker ................................. 11
❖ Dominant Designs and the Survival of Firms – Suarez & Utterback ..................................... 15
Topic 6 – Profiting from Innovation .................................................................................................. 19
• Ideas for Rent: an Overview of Markets for Technology – Arora & Gambardella ................ 19
• Who Profits from Innovation in Global Value Chains? A Study of the iPod and Notebook PCs
– Dedrick, Kramer & Linden .......................................................................................................... 24
• Strategic Management of Intellectual Property – Reitzig ..................................................... 28
• Profiting from Technological Innovation: Implications for Integration, Collaboration,
Licensing and Public Policy – Teece .............................................................................................. 30
Topic 5 – Dominant Design
❖ Dominant Designs, Innovation Shocks, and the Follower’s Dilemma – Argyres, Bigelow,
Nickerson
Numerous studies assume, investigate, or develop the idea that the emergence of a dominant design
leads to an industry shakeout as cost becomes the primary basis of competition.
Theories of dominant design suffer from several shortcomings:
• They lack a clear causal logic explaining the role of dominant design in industry evolution;
• They underemphasize the role of demand in industry evolution in favor of engineering
imperatives on the supply side;
• Limited in their import for strategic management because they can only be identified in
retrospect;
• Contributions to managerial decision making are quite restricted since they imply a very short
menu of strategic responses by firms.
This paper aims to provide a new perspective on dominant designs that addresses these shortcomings.
They first argue that the major shift in industry dynamics and strategic choice often occurs not when
a product design or architecture becomes dominant but much earlier: upon the introduction of a
pioneering new product design by a single firm, the demand for which surges in an unanticipated way:
innovation shock (this shift) (iPod, typewriter, iPhone). While dominant designs do not typically initiate
shakeouts, shakeouts sometimes do emerge as an outcome of the strategic dynamics launched by an
innovation shock. Second, they characterize the industry dynamics that an innovation shock initiates:
Follower’s Dilemma. Dominant design theories only consider imitation and exit as strategic responses,
they suggest that an innovation shock can also lead to strategic repositioning by incumbents, and to
changes in entry patterns. Incumbent’s ability to reposition away from the firm that initiated the
innovation shock is determined by the incumbent’s comparative adjustment costs -> firms are not
entirely at the mercy of technological forces in the environment as suggested by the dominant design
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,theories. Strategic management and managerial decision making play important roles in determining
a firm’s best response to, and therefore its likelihood of survival following, an innovation shock.
Empirical analysis of the early Us auto industry (concept of dominant design is developed in this field).
A period of increased exits in the US auto industry began shortly after Ford’s introduction of the Model
T, not later as had been assumed in earlier studies. The firms most likely to exit the segment defined
by the Model T while remaining active in the industry were smaller, younger firms with a broader base
of technological knowledge.
Industry life cycle:
Initial stage of product design experimentation by firms -> featuring process innovation aimed at cost
reduction (experimentation) -> emergence of dominant design: concepts that define how the
components of the product interact or relate to each other -> basis of competition shifts from
alternate product designs to low-cost production of products that are based on the dominant design
(cost competition) -> industry shakeout: substantial portion of industry participants exit during a brief
window of time.
Anderson and Tushman’s (1990) model of industry evolution:
• Dominant design marks the transition from an era of technological ferment to one of
incremental improvements on the dominant design;
• Radical innovations are distinguished from dominant designs. A discontinuous innovation
ushers in a period of experimentation which ceases with the emergence of the dominant
design.
• Dominant design emerges through a variation-selection-retention dynamic which poses real,
poorly understood challenges for managers.
Dominant architectural solution: describes a period of high rates of experimentation with technical
and organizational architectures, ultimately followed by a period of concentration and lower levels of
variation. Ecology literature: legitimation processes drive the selection of a dominant solution -> such
a solution is not necessarily the most efficient/effective from a technical standpoint. Allows for
different levels of entry and exit in different segments of the industry. Consistent with industry life
cycle research, over time density tends to decrease while concentration increases.
Henderson and Clark: architectural innovation: involving a reconfiguration of both demand-side and
supply-side arrangements for commercializing the industry’s dominant design.
Jovanovic and MacDonald: shakeout involves a drop in entry and rise in exits -> decline in overall
number of firms. This model depends on the explicit assumption that the technological shock
precipitating the shakeout is exogenous to the industry.
Klepper: key dynamic is not the emergence of a dominant design, but the operation of increasing
returns to scale over time. In his model early entrants eventually gain an insuperable cost advantage
over later entrants into the industry because the returns to investment in cost-reducing process R&D
increase with scale. Thus, as firms grow, the gap in costs between early entrants and later entrants
grows larger, leading later entrants to exit. A dominant design does eventually emerge in Klepper’s
model as firms imitate each other’s innovations and customer preferences converge. But key driver
of exit is not the emergence of dominant design, but process R&D investment.
This paper extends this literature in several ways:
• Similar to Klepper we argue that dominant designs as traditionally understood do not spark
shakeouts, as the dominant design literature has largely assumed;
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, • Different from Klepper we argue that an innovation shock produced by a single firm is what
often initiates a period of increased exit rates, rather than the gradual operation of increasing
returns and prior experience mechanisms among several early entrants;
• Similar to population ecology our approach takes into account that many industries can be
segmented in ways that open up strategic opportunities that the traditional dominant design
literature does not typically consider;
• Different from population ecology we assume that shakeouts are not sparked by increasing
density alone, but by the introduction of an innovation shock;
• Different from Henderson and Clark: innovation shock occurs before a dominant design has
emerged, and does not necessarily involve disruption to both demand and supply-side
linkages;
• Similar to Jovanovic and MacDonald: a new technological solution drives increases in exit rates
and can culminate in a shakeout;
• Different from Jovanovic and MacDonald: the solution is generated inside the industry, not
outside.
Innovation shock: introduction by a firm of a new product that stimulates a substantial (unexpected
by market participants) surge and acceleration in demand for that product. The new product 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: new composition of elements and benefits
from large, unanticipated surge in demand. Does not typically launch new industries, comes along well
into the industry’s early development.
The firm introducing the innovation shock is in the position to capture a durable first mover advantage.
The surprising revelation that a new composition of elements is highly desired does not go unnoticed
by competitors -> rivals and potential entrants must reassess their strategic positions in the market.
The arrival of an innovation shock forces rivals to consider three strategic responses:
• Imitating;
• Repositioning;
• Exit.
Potential competitors consider entry and imitation. Innovation shock design (ISD).
Imitating
Supernormal returns attract imitators. Imitation can be viable strategic response for incumbents for
three reasons:
• Can lead to the capture of a share of the newly discovered profit pool;
• Investing in low-cost production, robust SC, developing distribution channels, complementary
assets etc. needed to take full advantage of the new and growing demand (and to create
imitation barriers) 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 ->
diminishes/neutralizes potential advantages that otherwise might accrue to the innovator;
• If rivals don’t respond by imitation, they risk allowing the innovator to gain a longer-term
competitive advantage and resources that can be used against them.
Repositioning
With the innovator having identified substantial demand from the information shock and rapidly
accumulating advantage, rivals could choose to avoid direct competition by repositioning distantly
from the ISD. 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/service.
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, 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. If sufficient heterogeneity in customer preferences
exists and the ISD is unable to serve all demand, niche positions will exist and may be economically
viable.
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
Entry of two kinds: first, firms operating in other industries may choose to enter if they possess
resources and capabilities that are sufficiently redeployable or fungible to compete with the
innovator. Innovation shock reveals new information that reduces the uncertainty of entering by
imitation. De novo entry can be stimulated as well by the arrival of an innovation shock. Composition
of product and service elements that attracts a revenue pool is now known -> potential entrants can
calculate their expected profit upon entry with greater precision -> stimulates additional entry across
all industry positions.
On the other hand if an innovation shock generates a large enough first mover advantage, then it
reduces entry -> capture and retain a large enough share of the demand quickly enough so that entry
is deterred. Pattern of entry following an innovation shock depends heavily on degree of industry
segmentation. Degree of segmentation not too high -> innovation shock may generate a significant
first mover advantage that deters entry into the segment in which the shock was introduced while
also deterring entry into other segments. Segmentation high -> ISD in one segment may not have a
major negative effect on entry into a different segment.
Primary implications
Strategic responses to the arrival of an innovation shock will take time – even a decade or more - to
play out. The greater an organization’s inertia, the longer it will take to undertake core change and
repositioning. Because of heterogeneity in inertia and in prior knowledge among rivals, response times
will vary significantly after an innovation shock is introduced -> many slow responders will be forced
to exit.
Second implication, a dominant design emerges long after the ISD, in part because it is an endogenous
outcome of the innovation shock. Impact of the emergence of a dominant design on exit rates occurs
only after its emergence -> its effects come much later in the industry’s life cycle. Competitive intensity
will continue to increase over time because, after the innovation shock arrives, an increasing number
of firms try to execute their best strategic response -> architectural similarity of products within each
industry segment. The homogenization may spill over to adjacent segments -> giving rise to a
dominant design for the industry as a whole. The eventual dominant design may contain some of, but
not necessarily all, the features of the ISD.
Once the dominant design is established, competition based on economies of scale and incremental,
component-level innovation will lead to further exit. But exits associated with emergence and
establishment of the dominant design come much later in the industry’s development -> cannot
explain the elevation in exit rates that occurs earlier, around the time that the innovation shock was
introduced.
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