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Capabilities, Innovation and Industry Dynamics: Technological discontinuities and incumbents

Fredrik TellKITE Research Group

Department of Management and EngineeringLinköping Universityfredrik.tell@liu.se

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.