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Capabilities, Innovation and Industry Dynamics: Technological discontinuities and incumbents
Fredrik TellKITE Research Group
Department of Management and EngineeringLinköping [email protected]
KITE Research Group
For more information, please visit our website: http://www.liu.se/kite/
Three research themes:
1. Knowledge Integration and Project Organization
2. Knowledge Integration and Outsourcing3. Innovation and the Integration of External
Knowledge
Innovation, industrial dynamics and technological capabilities: Late shakeouts?
• Dynamics of complex capital goods industries• Relationship between firm capabilities,
innovation and performance• Impact of firm capabilities on responses to
(endogeneous) technical change• Specific dynamics of mature phases in
oligopolistic competition
What is an industry?
Product/Industry life cycles
Industry life cycles: Early shakeout patterns
• Innovation, entry and exit• Competing explanations
– Exogenuous technology shocks (Jovanovic & MacDonald, 1994)
– Dominant designs (Abernathy & Utterback, 1975; Tushman & Anderson, 1986)
– R&D capabilities (Klepper, 1996; 1997; Klepper & Simons, 2002)
=> Favors early entrants (old and large firms)
(Klepper, 1997; Klepper & Simons, 2005)
Exogenuous technological innovation
• Industries are created by initial inventions and shakeouts are triggered by subsequent refinementinventions (Jovanovic & MacDonald, 1994; Olleros, 1986)
• Basic invention => new product => entry => competitive equilibrium => entry ceases (shakeout)
• Refinement invention => new entry => incumbentfirms at advantage in refining => expand output => fall in prices => non-innovators exit (shakeout)
• Favors early entrants (incumbents)• No prediction on process innovations
Dominant designs• A dominant design is a collection of enduring product
standards to which the bulk of industry output eventually conforms (e.g. automobiles) (Abernathy & Utterback, 1978)
• Product architecture (Henderson & Clark, 1990)• Initial uncertainty concerning designs – many designs
introduced => experimentation (product innovation)• Network externalities and increasing returns to
adoption induce convergence to a dominant design (Utterback & Suàrez, 1993, cf. David, 1985)
• Adopters (may) survive, non-adopters exit (shakeout)• Processs innovations on dominant design lead to
further concentration (shakeout) through returns to process innovations
• Favors early entrants (economies of scale)
Capabilities and increasing returns to R&D
• Scale advantages to R&D (Schumpeter, 1950)• Firms conduct both product and process R&D• Increasing returns to process R&D (Klepper, 1996)
– Product R&D returns independent upon pre-innovationlevel of output
– Process R&D returns favors firms with high output (proportional reduction of cost)
• Early entrants (and large entrants with relatedcapabilities) are at favor and will survive continuous (no new equilibrium) shakeout driven by returns to R&D
Examples
(Klepper & Simons, 2005)
Some observed empirical regularities
• Early concentration of entrants• Prolonged shakeouts• Early entrants came to dominate industries
(Ford/GM; Goodrich/Goodyear/Firestone; RCA/Zenith/GE; Lilly/Wyeth/Squibb/Bristol/Pfizer) (Klepper and Simons, 1997; Klepper & Simons, 2005)
• Industry leaders dominated product and process innovation
• Pre-entry capabilities matter (Klepper & Simons, 2000; Helfat & Lieberman, 2002)
From the making of a oligopoly to the dynamics of oligopolies: Late shakeouts?
Technological capabilities and industrial dynamics in mature industries
• Technological capabilities and late shakeouts in the advanced gas turbine industry (Bergek, Tell, Berggren and Watson, 2008; Bergek, Berggren & Tell, 2009)
• Mature, but not a declining industry (cfHarrigan, 1980; Lieberman, 1985; Audretsch, 1995) – rather growing
The example of Combined Combustion Gas Turbines (CCGT)
Bergek, A., F. Tell, C. Berggren and J. Watson, (2008), Technological capabilities and late shakeouts: Industrial dynamics in the advanced gas turbine industry, 1986-2002, Industrial and Corporate Change, 17(2): 335-392
Intake AirPowerturbine
Com-pressor
FuelCombustor ~
Generator
Electricity
Steam Generator Steamturbine
Advanced Turbine System
~Generator
Steam
Fuel gas inExhaust gases
Combined Cycle Gas Turbines (CCGT)
Global trends in power generation
0
50000
100000
150000
200000
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Cap
acity
(MW
)
CCGT Orders Total Orders
Market development 1970-2002
0
20 000
40 000
60 000
80 000
100 00019
7019
7219
74
1976
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
MW (y
early
)
050 000100 000150 000200 000250 000300 000350 000400 000450 000
MW (c
umula
tive)
Market orders (yearly) Cumulative orders
CCGT market growth
GE 7F
Market share development
1%9%9%8%Other
8%12%8%13%Mitsubishi b
13%7%5%Westinghouse
22%21%24%19%Siemens
17%12%18%ABB
15%6%14%9%GEC-Alsthom /Alstoma
54%22%26%28 %GE
1999-20021995-19981992-19941987-1991
a GE licensee in the first three phases. In the fourth phase, Alstom acquired ABB’s Power Generation Business.[i]b Westinghouse licensee in the first phases.[i] In 1989, the energy and transport businesses of Alsthom merged with GEC, forming GEC-Alsthom.
Two extremes: ABB and General Electric
Operating Profit Margins
0%
5%
10%
15%
20%
25%
1988
1990
1992
1994
1996
1998
ABB GE
Revenues
0
2 000
4 000
6 000
8 000
10 000
12 00019
88
1990
1992
1994
1996
1998
Million USD
ABB GE
Bergek, A., C. Berggren and F. Tell (2009), Do technology strategies matter? A comparison of two electrical engineering corporations, 1988-1998, Technology Analysis and Strategic Management, Vol. 21(4): 445-470
Research questions
• What were the characteristics of technological capabilities of the four major firms competing in CCGT?
• How did technological capabilities affect ratesof innovation and, eventually, chances for survival in this segment of the electricalengineering industry?
How to explain the CCGT case?• Industry life cycles?
– No exogeneous technology shock (Jovanovic and MacDonald, 1994)
– No product/process innovation pattern, (Abernathy and Utterback, 1978), continuous product development
– All firms were old and large (Klepper, 1996)– Not a declining industry
Industry dynamics and product complexity
• Complex Products and Systems (CoPS) industries may remainin fluid phase, due to the architectural character of the product(Davies, 1997; Bonaccorsi & Giuri, 2000)
• Relatively stable firm structure, few exits and entries• High entry barriers such as installed base, network
externalities, and technological interdependencies• Process innovations not as important in CoPS
• Specific technological capabilities (including intregration of new knowledge) pertaining to systems integrating (CoPS) firms(partly in line with Klepper)
CCGT as CoPS: Industry and firmcharacteristics
Low unit cost
Standardized
Long-linked technology
Functional organization
Design-modularity/ Specialization
High unit cost
Customization
Intensive technology
Project-based organization
Systems integration/ Breadth and depth
Competition
Multitude of individual buyers
Free markets
Arms-lengthRelationship
Non-professional buyers
Oligopoly
Monopsony/politicized purchasing
Government regulation
User-producer interaction
Sophisticated buyer/operators
Few components
Analyzable relationships
Fewalternative architectures
No component coordination
Many components
Systemic relationships
Many alternative architectures
Software/ control systems
Mass productionCoPSMass productionCoPSMass productionCoPS
ManufacturingMarketsProducts
(Magnusson, T., F. Tell & J. Watson (2005), From CoPS to Mass production? Capabilities and innovation in power generation equipment manufacturing, Industrial
and Corporate Change, 14(1): 1-26
Technological capabilities: A simple conceptualization
Technology Strategies
Technology Activities
Technological Capabilities
Performance
Technological capabilities
• Technology strategies• Technology leadership • Cost focus• Broad scope• Technology sourcing
• Technology activities• Product launching• Patenting• Problem-solving
Methodology
• Multiple measures and sources of data– Annual reports– Product launches and Relative market shares
• SPRU CCGT database on Power Plant orders– Patents
• USPTO database (Linköping): Industry experts• Thomson Derwent databases: Keyword search +
manual code search– Interviews and publicly available material (e.g.,
on sourcing and problem-solving)
”Strategy measurements”
TECHNOLOGY LEADERSHIP GE SIEMENS ABB WESTINGHOUSE
1987 X - Not available1988 X X X Not available
1989 X x X X 1990 X x - - 1991 X - X - 1992 X - X X 1993 X X X - 1994 X X X X 1995 X X X - 1996 X X X - 1997 X - X - 1998 X X X 1999 X - 2000 X - 2001 X - 2002 X -
Not available Not available
X = segment level statements; x = corporate level statements
Broad technology scope
GE SIEMENS ABB WESTINGHOUSE 1987 - (4) X (8) Not available1988 - (4) X (8) X (7) Not available
1989 - (4) - (6) X (7) - (6) 1990 - (4) - (7) X (7) - (6) 1991 - (3) X (4) X (7) X (6) 1992 - (3) - (6) X (8) - (5) 1993 - (3) X (8) - (8) X (4) 1994 - (4) - (6) X (8) - (4) 1995 - (4) - (6) X (8) - (3) 1996 - (5) - (5) X (8) - (4) 1997 X (4) - (5) X (7) - (4) 1998 X (4) X (7) - (9) 1999 X (2) - (6) 2000 - (5) X (5) 2001 - (3) X (5) 2002 - (4) - (3)
Not available Not available
Note: All statements refer to the power generation segment. Numbers refer to the number of technology categories mentioned of 13 in total (see Appendix C).
COST FOCUS GE SIEMENS ABB WESTINGHOUSE
1987 X x Not available1988 - - X Not available
1989 - - X - 1990 - - - - 1991 - - X X 1992 - x - - 1993 x X - - 1994 - x - X 1995 X - X - 1996 - - X - 1997 - x X - 1998 - - - 1999 - - 2000 - - 2001 - - 2002 - -
Not available Not available
Technology sourcing
• GE: In-house + GE Aircraft Division• The rest: In-house + collaboration
Product launch and sales impact
0
10000
20000
30000
40000
50000
60000
70000
1986 1990 1994 1998 2002
Ord
ers (
MW
)
GE GE licencees Siemens ABB Westinghouse MHI Other
GE Frame 7F
Siemens V94.3
ABB 13E2
ABBGT24
GE 7G, 9G, 9H(announced)
Siemens V84.3A
Phase IIPhase I Phase III Phase IV
W.house 501F
W.house/MHI 701FW.house/MHI 501G
Generation F and responses
Next generation…
Total number of patents, all searches combined(per application date)
050
100150200250300350
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
ABB GE Siemens Westinghouse
Total patenting
Technological capabilities: selected patents
217(1.1)
204(1.0)
293(1.4)
1031(5.1)
Gas turbinesb
227(1.0)
220(1.0)
685(3.0)
865(3.9)
Gas turbine engine (incl. measuring and testing)bc
15(1.0)
43(2.9)
35(2.3)
78(5.2)
Combined cycleab
Westing-house
ABBSiemensGE
a Thomson keyword search, granted patents applied for 1987–2002.b USPTO patent class search,granted patents applied for 1987–2000.c Thomson manual code search, granted patents applied for 1987–2002.
Distribution of patents
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
ABB GE
D2343141741641537631016513712211060
Entropy measure (E) =
0≤EABB≤2.1 and 0≤EGE≤1.7 (cf. Zander, 1999, 2002)
n
iii PP
1)/1ln(
Problems… and the ability to solve them
• All manufacturers experienced seriousproblems in their installed plants, but theyreacted quite differently:
Public, Shipped home turbines, quick
Public, Long problem-solving process
Secrecy, continuing sales, slow, failure, Alstom
Not much known, Mitsubishi
Technological capabilities – strategies and activities
Some conclusions and further questions
• The importance of having a large and relevant capability base, builtup by R&D activities, as a foundation for product development in complex technology fields. The study emphasizes the importance of integrating knowledge from several different technology fields in order to develop new architectural solutions on a sub-system level. How do firms access and integrate diverse technologies?
• A focused technology strategy on the segment level seems to be positively related to performance. Companies that focused on a limited number of technologies on the segment level were more successful than companies having a broad technology scope. Where to find the corporate coherence of large multi-technological corporations?
• The study shows that the development and launching of new products may not be as important as implicitly assumed in much of the capabilities literature, but rather solving after-launch problems proved more decisive for competitive outcomes. How do firms build problem-solving capabilities for emerging after-release problems?
Kowledge sourcing and integration
• Bergek, Tell & Palmberg (2010) study 41 alliances in the advanced gas turbine industry and relate modes of knowledge sourcing (organizational interdepence) with product architecture.
• Found that ”collaborative/open sourcing” primarilytakes place at sub-system level (and materials) (cf. Takeichi, 2001; Novak & Eppinger, 2001)
Conglomerates and coherence?
•Automation & Control•Information & Communications•Medical•Power Generation•Power Transmission•Rail Transportation•Services
•Appliances•Consumer electronics•Lighting•Media & Entertainment•Aviation•Power Generation•Transportation•Health care•Materials•Services
•Automation•Power Transmission•Services
Explicit studies of coherence - findings
• Teece et al (1994), Journal of Economic Behavior & Organization• Based on a statistical sample from 1987 on 18,620 diversified U.S. corporations
larger than 20 employees, found that coherence defined as relatedness of neighboring activities remained constant as firms in the sample grew more diversified.
• Piscitello (2000), Structural Change and Economic Dynamics• Studied patent data and product/business entry of 248 Fortune 500 firms between
1977-1995. She suggested that the diversification strategies of firms were characterized by product-based coherence in the late 1970s to mid-1980s, and that strategies changed towards technology-based coherence from the late 1980s to the mid-1990s.
• Piscitello (2004), Industrial and Corporate Change• Studied patent data (56 technological fields), product/business entry (42 sectors) and
financial performance (after tax profits) of 248 Fortune 500 firms between 1987-1993. She studied the corporate coherence as interconnectedness betweentechnological and business diversification. She found some evidence that financialperformance was positively influenced by companies abilities to increase corporatecoherence between technologies and products.
• Breschi, Lissoni & Malerba (2003), Research Policy; in: Cantwell et al (2004)• Investigated knowledge relatedness and coherence using a patent database
covering all EPO patents 1978-1993 for all firms from France, Germany, Italy, Japan, UK and the US. They found that relatedness in technologies is a major driver for firms’ technological diversification. They also found that large innovators were more coherent than smaller ones.
Some coherence studies – cont’d
• Nesta & Saviotti (2005), Journal of Industrial Economics; (2006) ICC• Studied scope and coherence of U.S. pharmaceutical firms between 1990
and 1998, performing a citation analysis of 1,440 patents with 5,493 citations. They observe that knowledge base coherence contribute to innovative performance (and market value), and point to the importanceof internal complementarities.
• Leten, Belderbos & Van Looy (2007), Journal of Product Innovation Management• Using patent citation analysis of firm level patent data of 184 European,
U.S. and Japanese firms active in five industries, found an inverted U-form relationship between technological diversification and technological performance. Their analysis also pointed to the moderating effect by technological coherence for the impact on technological diversification on technological performance, in the sense that net benefits of technological diversification are higher in technologically coherent portfolios.
• Bergek, Tell, Berggren, Watson (2008), ICC; Bergek Berggren & Tell(2009) Technology Analysis and Strategic Management
• Compared leading firms in the power generation equipment industry over a period of 15 years, using USPTO patent data, annual reports and financial performance. They found that GE, the most diversified firm on the corporate level was much more coherent (both in strategy and in technology) on the business level than ABB that was the least diversifiedfirm on the corporate level in the sample. Moreover, GE had the best business performance in the industry.