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Technology and Global Industry: Companies and Nations in the World Economy (1987)

Chapter: Innovation and Industrial Evolution in Manufacturing Industries

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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Innovation and Industrial Evolution in Manufacturing Industries." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 16 Innovation and Industrial Evolution in Manufacturing Industries JAMES M. UTTERBACK Historically, studies of innovation have had a linear viewpoint. That is, they have seen innovation as something that begins with a company possessing a certain technology and then investing in that technology, and the accompanying ideas, and implementing them in the market. This approach, however, assumes that all innovations occur in the same way in all companies and disregards the fact that organizations change throughout their lifetimes. It also fails to distinguish between product and process innovations, each of which may follow a different path. In short, the interaction of technological change and the marketplace is much more complex and dynamic than linear models can describe. The dynamic model discussed below describes how change in product innovation, process innovation, and organizational structure occurs in patterns that are observable across industries and sectors. The dynamic model allows consideration of the different conditions required for rapid innovation and for high levels of output and productivity. The argument describing this model is built on historical studies of innovations in their organizational, technical, and economic settings. Such data are necessarily incomplete, but at the same time, they yield a rich variety of insights. Parts of this chapter draw upon the following previously published sources: Abernathy and Utterback, 1978; Hill and Utterback, 1979; Utterback, 1978; and Utterback and Abernathy, 1975.

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 17 UNIT OF ANALYSIS Product and process innovation are inextricably interdependent; in considering manufacturing innovation, both a product line and an associated production process must be taken together as the unit of analysis. Termed a productive unit in this chapter, this unit of analysis is a slightly different concept than a business or a firm For a simple firm or a single-product firm, the productive unit and the firm would be one and the same. In a diversified firm, however, a productive unit would usually report to a single operating manager and normally be a separate operating division. When the word ''firm'' is used in this chapter, it should be taken narrowly to mean productive unit as defined here. Competition in the marketplace is not only between firms, but often between products or product lines. Even an enterprise classified as a single industry might find itself competing with many disparate groups of firms with different product lines or lines of business. Thus, to group productive units sensibly into industry or market segments, one must ask: In what product lines do units view each other as direct competitors? Within a segment, productive units that view each other as direct competitors face a similar business environment and set of competitive requirements for their technology. The terms "industry" and "market segment" will be used here in this limited sense. A key idea is that productive units may be arranged in a dependent hierarchy from final market to equipment and materials suppliers. Thus, what is viewed as a product innovation by a unit at one level is part of the production process or product of a unit at the next higher level (Abernathy and Townsend, 1975). This means that most innovations affect productivity directly. It also means that the markets to Which innovations respond are often defined by the characteristics of other firms' production processes. Operations management and management of technological innovation and change are inextricably linked. The fact that one firm's product is another's manufacturing equipment or material, and the fact the major product changes are often introduced from outside an established industry and viewed as disruptive by the existing competitors, means that the standard units of analysis of industry— firm and product type—are of little use, for as technology changes, the meaning of these terms also changes. Analysis of change in the textile industry requires that productive units in the chemical, plastics, paper, and equipment industries be included. Analysis of electronics firms requires review of the changing role of component, circuit, and software producers as they become more crucial to change in the final assembled product. Major change at one level works its way up and down the chain because

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 18 of the interdependence of product and process change within and among productive units. Knowledge of the production process as a system of linked productive units is a prerequisite to understanding innovation and competition in an industrial context. Earlier work on the management of technology has focused at a micro level, dealing with similarities among particular successful cases of product or process innovation (Utterback, 1975), whereas work on the economics of technological change has focused at a macro level, dealing with changes in productivity and technology among industries (Rosenbloom, 1974). Neither has aimed at understanding the dependence of product innovation on process innovation and its crucial importance for operations management and strategy. Use of the idea of a productive unit as the unit of analysis requires focusing on their critical interaction, both within a unit and between units linked by physical flows of equipment, material, and parts (Abernathy and Townsend, 1975). PRODUCT INNOVATIONS What is needed is a view of innovation that will aid the decision-making process of company managers, government policymakers, and researchers. Out of this need has arisen a theory holding that the interaction between technology and the marketplace is much more complex and dynamic than the linear view would have us believe. It is our contention here that the conditions required for rapid innovation are extremely different from those required for high levels of output and productivity: Under demands for rapid innovation, organizational structure will be fluid and flexible, whereas under demands for high levels of output and productivity, organizational structure will be standardized and inflexible. Thus, a firm's innovation attempts will vary according to its competitive environment and its corresponding growth strategy. It will also be affected by the state of development of both its production technology and that of its competitors (Abernathy and Utterback, 1978). Therefore, we can expect to see different creative responses from productive units facing different competitive and technological challenges, which, in turn, suggests a change in the way of viewing and analyzing possible policy options for encouraging innovation. A dynamic model of innovation (Figure 1) includes a pattern of sequential and cross-sectoral change in product innovation, process innovation, and organizational structure. Firms that are new to a product area will exhibit a fluid pattern of innovation and structure. As the market develops, a transitional pattern will emerge. Finally, the market stabilizes, fostering a specific pattern of behavior. Therefore, a radical innovation— one that can create new businesses and transform or destroy existing ones—

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 19 is often the result of the addition of entirely new requirements to a previously stable set of dimensions (Normann, 1971). In the fluid phase of a firm's evolution, the rate of product change is expected to be rapid, and operating profit margins are expected to be large. The few existing competitors will be either small new firms or older firms entering a new market based on their existing technological strengths. A firm might be expected to emphasize unique products and product performance in anticipation that the new capability will expand customer requirements. The new product technology will often be crude, expensive, and unreliable but will fill a function in a way that is highly desirable in some market niche. Prices and profit margins per unit will be high, because the product often has great value in a user's application. Several studies have shown that the performance criteria that serve as a primary basis for competition change from ill defined and uncertain to well articulated as a firm travels through the various states of development (Frischmuth and Allen, 1969). In emerging product areas, there is a proliferation of product performance dimensions. These frequently cannot be stated quantitatively, and even the relative importance or ranking of the various dimensions may be unstable. Thus, because most product innovations will be market-stimulated, there will be a high degree of uncertainty about their potential. This can be called target uncertainty. Although the total amount of research and development (R&D) in a sector may be large, its focus will be diffuse. This is called technical uncertainty. The expected value of any R&D investment is reduced by the combined effect of target uncertainty and technical uncertainty. Technology to meet needs will come from many sources, including customers, consultants, and other informal contacts, because fluid units tend to rely heavily on diverse, external sources of information. However, the critical input will not be state-of-the-art technology but new insights about needs (von Hippel, 1977); innovations will originate in units with intimate knowledge of users and user needs. As both producers and users of a product gain experience, target uncertainty lessens and product innovation enters the transitional state. The usefulness of the new product is increasingly better understood, and it may take on a variety of new forms to serve other parts of the market. Additional improvements and innovations incorporating new components and systems concepts may be required to expand its possible uses and sales. A greater degree of competition based on product differentiation usually develops, and dominant product designs may begin to emerge. At the same time, forces that reduce the rate of product change and innovation are beginning to build up. As obvious improvements are introduced, it becomes increasingly difficult to better past performance, users

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INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 21 Fluid Pattern Transitional Specific Pattern Pattern Competitive Functional Product variation Cost reduction emphasis on product performance Innovation Information on Opportunities Pressure to reduce stimulated by users' needs and created by cost and improve users' technical expanding quality inputs internal technical capability Predominant type Frequent major Major process Incremental for of innovation changes in changes product and products required by process, with rising volume cumulative improvement in productivity and quality Product line Diverse, often Includes at least Mostly including custom one product undifferentiated designs design stable standard products enough to have significant production volume Production Flexible and Becoming more Efficient, capital- processes inefficient; major rigid, with intensive, and changes easily changes rigid; cost of accommodated occurring in change is high major steps Equipment General-purpose, Some Special-purpose, requiring highly subprocesses mostly automatic skilled labor automated, with labor tasks creating "islands mainly monitoring of automation" and control Materials Inputs are limited Specialized Specialized to generally materials may materials will be available materials be demanded demanded; if not from some available, vertical suppliers integration will be extensive Plant Small-scale, General-purpose Large-scale, located near user with specialized highly specific to or source of sections particular products technology Organizational Informal and Through liaison Through emphasis control is entrepreneurial relationships, on structure, goals, project and task and rules groups Figure 1 A dynamic model of innovation. Reprinted with permission from Abernathy and Utterback (1978), Technology Review, copyright 1978.

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 22 develop loyalties and preferences, and the practicalities of marketing, distribution, maintenance, advertising, and so forth demand greater standardization. Innovations leading to better product performance become less likely unless the improvement is easy for the customer to evaluate and compare, for firms will attempt to maximize their sales and market share by defining their needs based on those of the customer. The reduction in target uncertainty that comes from greater diffusion of product use allows a correspondingly greater degree of technical uncertainty to be tolerated. Therefore, larger R&D investments will be justified—for advanced technology will become a major source of further product innovation. At some point, before the cost of technological innovation becomes prohibitively high, and before increasing cost competition erodes margins below levels that can support large categories of indirect expense, the benefits of R&D probably reach a maximum. The emergence of a dominant product design that enforces standardization marks the beginning of the specific state. Such product design milestones can be identified in many product lines; sealed refrigeration units for home refrigerators and freezers, effective can-sealing technology in the food canning industry, and the standardized diesel locomotives in the locomotive and railroad industry are but a few examples. George White (1978) contends that dominant designs can be recognized in the early stages of their development. He suggests that dominant designs will usually display several of the following qualifies: • Technologies that lift fundamental technical constraints on the art without imposing stringent new constraints. • Designs that enhance the value of potential innovations in other elements of a product or process. • Products that ensure expansion into new markets. • Products that build on existing operations rather than replacing them. The dominant new product design signals a significant transformation, affecting the type of innovation that follows it, the source of information, and the size, scope, and use of formal research. As the productive unit evolves into this specific state, the set of competitors often becomes an oligopoly and competition begins to shift to product price, which means that product design and process design become more and more closely interdependent as a line of business develops. Margins are reduced, and production efficiency and economies of scale become emphasized. Consequently, the requirements for the market become simpler and more precise. As price competition increases, production processes become more capital-intensive and may be relocated to achieve lower costs. This relocation may even shift capacity overseas (Vernon, 1966; Wells, 1972).

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 23 Because investment in existing process equipment is high, and product and process change axe interdependent, both product and process innovations in the specific state are usually incremental. Under these conditions, however, both product and process features are well articulated and easily analyzed, and the conditions necessary for the application of scientific results and systems techniques are present. Unfortunately, the payoff required to justify the cost of change is large, whereas potential benefits are often marginal; innovations typically will be developed by equipment suppliers for whom the incentives are greater and adopted by the larger user firms (Abernathy, 1976; Abernathy and Wayne, 1974). Thus, as the product market shifts from fluid to transitional to specific, the locus of major product innovation may shift from user to manufacturer to equipment supplier (see Figure 2). PROCESS INNOVATIONS A production process is the system of process equipment, work force, task specifications, material inputs, work and information flows, and so forth employed by a unit to produce a product or service. In the fluid state, the productive unit will typically be small, with limited resources. Order backlogs may rise rapidly, even though the market is small, reflecting the unit's limited capacity. The novelty of the product may mean that the unit will be the sole supplier for a limited period of time. In this situation, the unit will attempt to expand rapidly in the simplest way possible. The emphasis will be on highly skilled and flexible labor, and the process itself will be composed largely of unstandardized and manual operations, or operations that rely on general-purpose equipment. The adaptations made to equipment by the firm will be minor, as in a job shop, and the problems of coordination and control will be similar. Capacity levels will be poorly defined. Such a system necessarily is inefficient. Greater volume will be achieved through paralleling existing processes and improving manual operations. There will be few scale barriers to entry into the business. As a small purchaser, the unit will usually have little influence over its suppliers. Raw materials and parts will be used as available; if new materials or parts are produced for the unit, their quality may vary widely. Variations in input quality and product design are compensated by the considerable flexibility in the types of tasks each individual and piece of equipment can perform. When significant-enough volume is achieved in one or more product lines to encourage standardization, the production process enters the transitional state. Major process change then occurs at a rapid rate. Production

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Fluid Pattern Transitional Pattern Specific Pattern Competitive emphasis on Functional product performance Production variation Cost reduction Innovation stimulated by Information on users' needs and Opportunities created by expanding Pressure to reduce cost and improve users' technical inputs internal technical capability quality Product line Diverse, often including custom Includes at least one product design Mostly undifferentiated standard designs stable enough to have significant products production volume Performance criteria are Ill-defined and uncertain targets Becoming stable with each product Well-defined and monotonic; cost- for innovation; many often occupying a somewhat different and quality-related dimensions qualitative criteria position vis-à-vis criteria predominate Uncertainty concerns The relevance of outcomes that The balance of market and Primarily technical issues as market might be achieved; demands are technical factors as appropriate demands are well known ill defined targets for R & D are clearer Source of technology is Often a user of the product Often a manufacturer of the product Often a supplier of parts, materials, etc. Product use is In a market niche with emphasis Expanding as more market Widespread on its unique advantages segments are entered Product price Is high and demand is insensitive Often failing rapidly with rising Low and demand is sensitive to price; to price; profit margins are high elasticity of demand profit margins are low Exports are Robust based on the product's Strong but facing competition from Declining under strong competition unique performance imitators from abroad Competitors are Few with widely fluctuating Many, but a decline in numbers Few, a classic oligopoly situation in market shares begins after appearance of a which market shares are stable dominant design Unit is vulnerable to others who Can rapidly imitate and improve Can produce more efficiently and Can replace its product with on its innovations consistently functionally superior or far less expensive substitutes Figure 2 INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES Hypotheses concerning the dynamics of product innovation. Reprinted with permission from Abernathy and Utterback (1978), Technology Review, copyright 1978. 25

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 26 systems become increasingly difficult to change, mechanistic, and rigid. Tasks become more specialized and are subjected to more formal operating controls. Some tasks are automated, and emphasis is placed on a systematic flow of work. Levels of automation win vary widely with "islands of automation" linked by manual operations (Bright, 1958). As a result, production processes in this state will have a segmented quality. Steps to expand capacity will most frequently include breaking bottlenecks. A larger initial investment will be required to enter the line of business during the transitional state than in the fluid state. Having become a more significant producer and purchaser, the unit will develop suppliers that depend on its business, which will enable it to influence the consistency of its inputs. Labor tasks will gradually become more structured, with emphasis on particular skills. Maintenance, scheduling, and control will increasingly be handled by specialized labor rather than directly during production. The production process reaches the specific state when it becomes highly developed and integrated around specific product designs, and as investment becomes correspondingly large. In this state, selective improvement of process elements becomes increasingly more difficult. Production volume and scale of plants will be large. The process becomes so well integrated that changes become extremely costly, because even a minor change may require changes in related elements of the process and in the product design. Process redesign typically comes in progressive steps, but it may also be spurred either by the development of new technology or by a sudden or cumulative shift in the requirements of the market. If changes are resisted as process technology and the market continue to evolve, then the stage is set for either economic decay or a revolutionary, as opposed to evolutionary, change. A strong influence will be exerted on suppliers to provide consistent quality and flow of inputs, as these are critical to the unit's productivity and profits in its now high-volume and low-margin operation. Tasks that cannot be automated may be segregated from the mainstream and performed in separate locations or by subcontractors. Consequently, production scheduling and control, quality control, materials requirements planning and materials handling, job design, labor relations, and capital investment decisions will vary with changes in product and process technology. The discussion above implies that various productivity elements—process integration, materials and labor inputs, and scale—can be considered as a set of actively coupled elements. This means that each must change in a balanced way for product and process change to advance uniformly. When one element is changing more rapidly than others, or when one or

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 27 more elements are static while others are changing, we speak of start-up problems or barriers to innovation (Ramstrom and Rhenman, 1969). Unit production costs often decrease in proportion to the cumulative volume of production. This phenomenon has been observed, for example, in the production of items as diverse as light bulbs, integrated circuits, color television sets, automobiles, and aircraft. A similar phenomenon is common in studies of individuals' performance of repetitive tasks. Because reductions in unit costs were first associated with increasing labor skills, the relationship between unit costs and cumulative production is known as a learning curve or an experience curve. Indeed, a stable and skilled labor force is apparently a prerequisite for rapid cost reduction with increases in production. The contention here is that change in each of the elements noted above, including labor skills, underlies the experience phenomenon. Further, management-determined changes in product design and process configuration make possible the required changes in other elements and thus pace the reduction in cost. These hypotheses are summarized in Figure 3. ORGANIZATIONAL STRUCTURE AND INNOVATIVE CAPACITY Not only do changes in products and processes occur in the systematic pattern described above, but organizational requirements may also be expected to vary according to a similar pattern (see Figure 4). During periods of high target and technical uncertainty, a productive unit must be focused to make progress; for a group to be successful in an uncertain environment, individuals in the organization must act together. This type of organizational structure is called organic (Bums and Stalker, 1961). Such an organization emphasizes, among other things, frequent adjustment and redefinition of tasks, less hierarchy, and more lateral communication. An organic organization is more appropriate to uncertain environments because of its increased potential for gathering and processing information for decision making. The relative power of individuals in the organization will be related to their assumption of entrepreneurial roles. The rewards for radical product innovation will often be ownership of a small, new enterprise. The potential wealth resulting from such innovations will be valued by the entrepreneur to a much greater degree than his or her present income. Realization of potential rewards will depend on the survival and growth of the firm, which in turn will depend largely on the ability of the entrepreneur to generate a superior product and to capture a share of an emerging market. The innovative capacity of such an organization will be high. As transition begins, and individuals and units in the organization be

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INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 29 Fluid Pattern Transitional Specific Pattern Pattern Production Flexible and Becoming more Efficient, processes inefficient: major rigid, with capital- changes easily changes intensive, and accommodated occurring in rigid; cost of major steps change is high Equipment General-purpose, Some Special requiring highly subprocesses purpose, mostly skilled labor automated, automatic with creating ''islands labor tasks of automation'' mainly monitoring and control Process Is slight with Is rapidly Is extreme, interdependence subprocesses increasing making it being relatively difficult to independent of incorporate one another changes without disrupting the rest of the process Cost of process Is low Is moderate Is high change Materials Inputs arc limited Specialized Specialized to generally materials may materials will available materials be demanded be demanded; if from some not available, suppliers vertical integration will be extensive Labor Is highly skilled Semiskilled, Is moderately and paid and can performs well- skilled perform a variety defined tasks at performing of tasks low wages largely maintenance and control functions Degree of vertical slow the unit will Is growing as Is extensive, integration purchase most of the unit begins and usually its raw materials to produce many only those units and many parts of its own having a high and components critical parts, degree of components, vertical and materials integration will survive Plant Small-scale, General-purpose Large-scale, located near user with specialized highly specific or source of sections to particular technology products Figure 3 Hypotheses concerning the dynamics of process innovation. Reprinted with permission from Abernathy and Utterback (1978), Technology Review, copyright 1978.

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INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 31 Fluid Pattern Transitional Specific Pattern Pattern Organization Informal and Through liaison Through control is entrepreneurial relationships, emphasis on project and task structure, goals, groups and rules Organizational Organic with Hierarchical and Mechanistic structure is frequent lateral with well- adjustment and relationships are defined tasks redefinition of tasks increasingly and relationships defined Requirements of Are Are increasingly Are those skills management entrepreneurial the managerial needed to skills skills needed to maintain cope with stability and growing moderate growth complexity Innovators are Rewarded for Rewarded for Discouraged radical product expansion of from pursuing innovation, often operations and ideas that via ownership and contributions to threaten the rapid growth of rapid stability of the the unit productivity gains unit Innovative Is high Is moderate Is low due to the capacity of the disruptive organization nature of major innovations Figure 4 Hypotheses concerning the dynamics of organizational form. Reprinted with permission from Abernathy and Utterback (1978), Technology Review, copyright 1978.

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 32 come more sequentially interdependent, coordination and control will occur to a greater extent through planning, liaison relationships, and project and task groups. When the task environment is better defined, an appropriate means of coordination and control will be to define various lateral relationships based on the dependence of one part of the organization on another (Lawrence and Lorsch, 1967). Thus, during transition, organizations are often structured according to products, or regions, each division replicating in some respects the earlier entrepreneurial form. The relative power of individuals will begin to shift from those with entrepreneurial ability to those with management ability, for a different set of skills will be required for the growth and structuring of the organization. Often the original entrepreneur or entrepreneurial group will spin off to start another smaller enterprise. As a dominant design emerges and production operations expand rapidly in response to increased demand, the focus of rewards will shift to those who are able to expand production operations, marketing functions, and so forth. Ownership of the unit by this time may be well established, and rewards may be provided in more traditional terms of bonuses, stock options, and other managerial prerequisites. These changes will cause moderation of the innovative capacity of an organization. As a product becomes more standardized and is produced in a more systematized process, interdependence among organizational subunits gradually increases, making it more difficult and costly to incorporate radical innovations. Once a production process becomes highly developed with respect to a specified and standardized product, organizational control will be provided through emphasis on structure, goals, and rules. When the environment is better known and operations become routinized, it is necessary to provide more rigid coordination that establishes consistent routines and rules to minimize inefficiency and costs in operations. This type of structure is known as mechanistic. The power and influence of individuals who show administrative ability will increase in a mechanistic organization. When the technical and market environment becomes stable—and when growth of a productive unit relies more on stretching existing products and processes—the ability to hold a steady and consistent course will be highly valued. Rewards in a stable situation will be centered on financial results and on predictable, incremental performance in product and process change that build on past investments. Ideas that threaten to disrupt the stability of the existing process will be discouraged, and ideas that extend the life of existing products and technology will be encouraged and rewarded, probably in a highly structured manner.

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 33 The innovative capacity of such a productive unit viewed in isolation will be low. When production processes are highly integrated in a system, and a high degree of interdependence exists among subprocesses, the disruption and cost associated with major changes will be a primary concern. Moreover, influential individuals' perceptions of the gains from improvements that provide immediate and certain rewards amplified by a high production volume will be clear, whereas the consequences of changes that are costly, uncertain, or delayed may be greeted with great skepticism. These hypotheses are summarized in Figure 4. These issues raise difficult problems for organizations. In an organization with a diversity of products in different markets and at different phases in the dynamic product cycle, there is a serious problem of fitting together the organizational styles required for each of the stages. A subdivision that may be the logical functional locus for the introduction of a new product because of similarity of market may have a hierarchical, bureaucratic organization more appropriate to a mature old product and therefore be unable to accommodate itself to the innovation. TRANSITON FROM RADICAL TO EVOLUTIONARY INNOVATION Although we have discussed the three different patterns of innovation as distinct modes of change, they are not completely rigid and independent. That is, each pattern has definable characteristics, but the lines between them tend to blur in real life. Several examples illustrate how movement from one pattern to another proceeds. John Tilton's study (1971) of developments in the semiconductor industry from 1950 through 1968 indicates that the rate of major innovation decreased and that the type of innovation shifted. Eight of 13 major product innovations occurred in the first 7 years of that period, during which time the industry was making less than 5 percent of its total 18-year sales. Two types of enterprise can be identified in this early period—established units that came to semiconductors from vested positions in vacuum tube markets, and new entrants such as Fairchild Semiconductors, IBM Corporation, and Texas Instruments Inc. The established units responded to competition from the newcomers by emphasizing process innovations, whereas the newcomers sought entry and strength through product innovation. The three successful new entrants just listed were responsible for half of the major product innovations and only one of the nine process innovations Triton identified in that 18-year period; however, the three principal established units (divisions of General Electric, Philco, and RCA) made only one-quarter of the product innovations in the same period. Here, process innovation did not prove to be an effective competitive stance; by

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 34 1966, the three established units together held only 18 percent of the market, whereas the three new units held 42 percent. Since 1968, however, the basis of competition in the semiconductor industry has changed; as costs and productivity have become more important, the rate of major product innovation has decreased, and effective process innovation has become an important factor in competitive success. Like the transistor in the electronics industry, the DC-3 stands out as a major change in the aircraft and airlines industries. Almarin Phillips (1971) has shown that the DC-3 was a culmination of previous innovations. It was not the largest, fastest, or longest-range aircraft; it was the most economical, large, fast plane able to fly long distances. It was also essentially the first commercial product of an entering firm (the DC-1 and DC-2 were produced by Douglas in only small numbers). The DC-3 changed the character of innovation in the aircraft industry. No major innovations were introduced into commercial aircraft design from 1936 until jet-powered aircraft appeared in the 1950s. Instead, there were many incremental refinements to the DC-3 concept, which lowered airline operating costs per passenger-mile an additional 50 percent. The history of the electric light bulb also shows a series of evolutionary improvements that started with a few major innovations and ended in a highly standardized commodity-like product (Bright, 1949). By 1909, the first tungsten filament and vacuum bulb innovations were in place; from then until 1955 there came a series of incremental changes that dropped the price of a 60-watt bulb from $1.60 to $0.20 (even with no inflation adjustment), increased the lumens output by 175 percent, and reduced the direct labor content from 3 to 0.18 minutes per bulb. The production process evolved from a flexible job-shop configuration, with more than 11 separate operations and a heavy reliance on the skills of manual labor, to a single machine attended by a few workers. Product and process evolved in a similar way in the automobile industry (Abernathy, 1978). During the 4-year period from 1905 to 1909, the Ford Motor Company developed, produced, and sold five different engines, ranging from two to six cylinders. Each engine tested a new concept. They were made in a factory that was flexibly organized, much as a job shop, relying on trade craftsmen working with general-purpose machine tools that were not the best then available. Out of this experience came a dominant design—the Model T— in 1909, and within 15 years, 2 million engines of this design were produced each year (about 15 million in all) in a facility then recognized as the most efficient and highly integrated in the world. During that 15-year period there were incremental, but not fundamental, innovations in the Ford product. The shift from radical to evolutionary product innovation is a common

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 35 thread in these examples. It is related to the development of a dominant product design, and it is accompanied by heightened price competition and increased emphasis on process innovation. Small-scale units that are flexible and highly reliant on manual labor and craft skills using general-purpose equipment develop into units that rely on automated, equipment-intensive, high-volume processes. Thus, changes in innovative pattern, production process, and scale and kind of production capability all occur together in a consistent, predictable way. DYNAMICS OF A SET OF COMPETING PRODUCTIVE UNITS Creative synthesis of a new product innovation by one or a few firms may result in a temporary monopoly, high unit profit margins and prices, and sales of the innovation in those few market niches where it possesses the greatest performance advantage over competing products. As volume of production and demand grows, and as a wider variety of applications is opened for the innovation, many new firms enter the market with similar products. The appearance of a dominant design shifts the competitive emphasis to favor those firms with a greater skill in process innovation and process integration, and with more highly developed internal technical and engineering skills. Many firms will be unable to compete effectively and will fail. Others may possess special resources and thus merge successfully with the ultimately dominant firms, whereas weaker firms may merge and still fail. Eventually, the market reaches a point of stability, corresponding to the specific state, in which there are only a few firms—four or five is a typical number from the evidence reviewed to date—having standardized or slightly differentiated products and stable sales and market shares. A few small firms may remain in the industry, serving specialized market segments, but, as opposed to the small firms entering special segments early in the industry, they have little growth potential. Thus, it is important to distinguish between small surviving firms and small firms that are new entrants, and to keep in mind that the term "new entrants" includes existing larger firms moving from their established market or technological base into a new product area. Mueller and Tilton (1969) were among the first to present this hypothesis in its entirety. They contend that a new industry is created by the occurrence of a major process or product innovation and develops technologically as less radical innovations are introduced. They further argue that the large corporation seldom provides its people with incentives to introduce a development of radical importance; thus, these changes tend to be de

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 36 veloped by new entrants without an established stake in a product market segment. In their words, neither large absolute size nor market power is a necessary condition for successful competitive development of most major innovations. Mueller and Tilton contend that once a major innovation is established, there will be a rush of firms entering the newly formed industry or adopting a new process innovation. They hold that during the early period of entry and experimentation immediately after a major innovation, the science and technology on which it depends are often only crudely understood, and that this reduces the advantage of large firms. However: As the number of firms entering the industry increases and more and more R&D is undertaken on the innovation, the scientific and technological frontiers of the new technology expand rapidly. Research becomes increasingly specialized and sophisticated and the technology is broken down into its component parts with individual investigations focusing on improvements in small elements of the technology [Mueller and Tilton, 1969, p. 576]. This situation clearly works to the advantage of larger firms in the expanding industry and to the disadvantage of smaller entrants. Staples, Baker, and Sweeny (1977) have summarized several clear parallels between the present theory and Mueller and Tilton's hypotheses: The Utterback and Abernathy model holds implications for organizational structure, just as Mueller and Tilton's does for the composition of an industry. A comparison of the two will show a number of similarities. Both describe a continuum. The stages roughly correspond. Both emphasize the shift of the basis of competition from performance and technological characteristics to price and cost considerations. In both, the evolution is accompanied by an expanding market, increasing importance of production process investment, and a progression from radical to incremental product and process innovation. In general, they describe a progression from a state of flux with rapid technological progress to an ordered situation with cumulative incremental changes. Although they emphasize different aspects of innovation from different perspectives, the models are consistent [Staples et al., 1977, p. 12]. Both this work and that of Mueller and Triton contend that as an industry stabilizes—that is, as technological progress slows down and production techniques become standardized—barriers to entry increase. The most attractive market segments will already be occupied. As process integration progresses, the cost of production equipment rises dramatically. Product prices will fall concurrently, so that firms with the largest market shares will be the ones to benefit from further expansion. Product differentiation will usually be increasingly centered around the technical strengths and R&D organization of the existing firms. Strong patent positions established by earlier entering firms become difficult for later entrants to circumvent.

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 37 Finally, an existing distribution network may also be a powerful barrier to entry, particularly to foreign firms. Another hallmark of stability is the emergence of a set of captive suppliers of equipment and components. Although such suppliers can be an initial source of innovation and growth, they ultimately may become a conservative force, further stabilizing the competition and change within the product market segment, and creating yet another barrier to entry. A final characteristic of the evolution toward stability is a concerted drive among the surviving firms toward vertical integration from materials production to sale. This integration may take various forms. Firms producing the product can reach backward to furnish more of their own components, subassemblies, and raw materials, or the firms producing components can reach forward to do more of the assembly and production of final goods for the market. Such dramatic changes will clearly have ripple effects on firms that buy from or sell to the evolving set of productive units. It is just at the point of stability in which firms get locked into narrow positions that they also ultimately increase their vulnerability. An existing distribution network can suddenly be threatened by a new technology that requires sharply reduced servicing or maintenance, or by the entrance of a large product line. An existing patent may expire. Although Mueller and Tilton contend that industries become stable when patent positions expire, the present argument is that this is more likely to be a period of invasion of the industry by a new wave of product and process change—or, in a few cases, the revitalization of the dominant technology itself. The development of a set of productive units is expected to begin with a wave of entry gradually reaching a peak about when the dominant design of the major product emerges, and then rapidly tapering off. This sequence is followed by a corresponding wave of firms exiting from the industry. The sum of the two waves—entries and exits—will yield the total number of participants in the product market segment at any point. Therefore, the number of participants in an industry can be represented by a curve that starts with a gentle rise representing the first few fluid productive units entering the business followed by a much sharper rise that represents a wave of imitating firms. The point at which a dominant design is introduced in the industry is followed by a sharp decline in the total number of participants until the curve of total participants reaches the stable condition with a few firms sharing the market. We will now turn to a discussion of the auto industry, which exhibits such a wave of change.1 We will then turn to the question of successive waves of entry, and again present specific examples that illustrate the applicability of the model.

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 38 THE AUTOMOBILE More than 100 firms entered and participated in the American automobile industry for a period of 5 years or longer. Figure 5 shows the wave of entry that began in 1894 and continued through 1950, followed by a wave of exits beginning in 1923 and peaking only a few years later, although it has continued until the present day. Figure 5 Entry and exit of firms in the U.S. automobile industry: 1894-1962. Data from Fabris (1966).

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 39 As hypothesized, entry began slowly but then accelerated rapidly after 1900, reaching a peak of 75 participants in 1923. In the next 2 years, 23 firms, nearly a third of the industry, left or merged, and by 1930, 35 firms had exited. During the ensuing depression, 20 more firms left.2 There was a brief flurry of entries and then exits immediately after World War II, but as Figure 5 shows, the number of firms in the industry was relatively stable from 1940 through 1960. The number and scope of major product innovations are reflected in this pattern of entries and exits. In 1923, the year with the largest number of firms, Dodge introduced the all-steel, closed-body automobile. The large number of exits over the next few years corresponds to the fact that by 1925, 50 percent of United States production was closed steel-body cars, and by 1926, 80 percent of all automobiles were of this type. The post-World War II stability in market shares and number of firms reflects the fact that approximately three-quarters of the major product innovations occurred before the start of the war.3 Innovations in product accessories and styling concepts were tested in the low-volume, high-profit luxury automobile. Conversely, incremental innovations were more commonly introduced in lower-price, high-volume product lines. General Motors led in both types of innovations, particularly for major product changes. In certain years, engines show a higher annual magnitude of changes; these changes, however, occur with less frequency than those in chassis characteristics; body productive units are more flexible and continuously changing than engine plants, which tend to change occasionally in an integrated and systematic way.4 COMPARATIVE ANALYSIS As a productive unit develops, its reliance increases on outside sources for production process equipment and components. Firms in the auto industry, for example, developed an early and increasing reliance on suppliers for many types of equipment and innovations (Abernathy, 1978, pp. 60-61). Development of relationships with suppliers, and of a captive set of suppliers, is a hallmark of all the evolving product market segments cited. For example, during the 1890s George Eastman was helped greatly by the availability of high-quality papers and chemicals, some of which had been developed for the earlier dry-plate photographic market; he was also assisted by the rapid increase in the number of firms manufacturing cameras. Several such firms were subcontracted by Kodak to manufacture camera backs and shutters to Eastman's design. Similarly, during the 1970s the large number of companies assembling electronic calculators were

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 40 greatly aided by the availability of high-quality components with declining prices from semiconductor manufacturers. However, in both these examples, these strengths eventually became weaknesses. Established competitors tried to bankrupt Kodak by capturing the two or three sources of high-quality photographic paper, thus drying up his supply. Then, unexplained quality variations in the celluloid that he purchased combined with other circumstances to make several months' production of film useless. Finally, financial weakness and instability among the various firms manufacturing cameras threatened to make it difficult and expensive for Kodak to provide cameras to customers. These events pushed Eastman first in the direction of producing its own photographic paper, then its own chemicals, and finally its own cameras, camera backs, and shutters (Bright, 1949; Jenkins, 1975). Advantages also turned to disadvantages in the calculator industry when rapid reductions in the price of semiconductors caused enormous inventory losses for firms that were purely assemblers. As the production capacity of semiconductor manufacturers increased and production costs dropped further, virtually all the value-added in the calculator occurred in the manufacture of its components; these firms simply integrated forward to provide the entire calculator for the user (Majumdar, 1977). Thus, while suppliers may play a highly creative role as a set of productive units develops, there will also be a drive among producing firms to capture those elements of supply that create the greatest uncertainties for them. However, it should be pointed out that the most innovative producers always seem to provide some of their own production equipment. Abernathy (1978) and Fabris (1966) show that General Motors and, especially, Ford have made continuing process innovations. In the semiconductor industry, Texas Instruments, in particular, has stressed production process innovation and integration, and Tilton's data (1971) show a pronounced shift toward process innovation by new firms as the industry developed and as their market shares expanded. In summary, those firms that survive the introduction of a dominant design appear to be those that integrate vertically or establish the closest supplier relationships. Sometimes, it is the supplier who integrates forward, rather than an early manufacturer who integrates backward, that dominates the market. As Abernathy observed: The degree of vertical integration is not static as long as major product changes are taking place. It is rather the equilibrium condition of a continuous effort to extend integration backward in the face of the constant erosion caused by product change. As the technology of product design advances so that novel changes [are] made less necessary, vertical integration can be maintained without such continuous effort [Abernathy, 1978, pp. 110-111].

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 41 Examining market structure during waves of change indicates that firms that are highly integrated are the most vulnerable to functional technological competition, for they have developed stable production processes and sources of supply and thus have a major commitment to the existing technology (Utterback and Kim, 1986). They may view the new technology or product as either highly specialized with a narrower and small market or as an inferior good, also with narrow market appeal. For example, all the major vacuum tube firms adopted the transistor for traditional applications of tubes. Gene Strull of Westinghouse Electric Corporation has been quoted by Braun and MacDonald (1978) to the effect that probably every major older company began the use of transistors in the divisions that had been making tubes for the same purposes. Stroll claims that this practice handicapped the introduction of semiconductors because it made them look like a replacement for the tube; it was a few years before people started to look and see what the transistor could do in its own right. All major mechanical calculator firms were early entrants in the electronic calculator business. However, they emphasized the complexities of the electronic calculators, and produced them only for the most difficult and limited scientific applications, not in broader and simpler lines for use in business (Majumdar, 1977). The major mechanical typewriter firms were early entrants in the manufacture of electric typewriters but did not continue with their innovations after World War II. The government played a role here in that it directed the typewriter companies to manufacture various types of arms for the war effort and specifically enjoined them from making typewriters. Since IBM Corporation was not in a critical labor supply area, it was allowed to continue manufacturing electric typewriters, nearly all of which were placed in government and military offices. This not only allowed IBM to expand its technical capability and market share, but it also introduced a wide variety of people to use of the new electric typewriter. When IBM's competitors reentered the new business after the war, they all did so with their traditional mechanical designs (Engler, 1965). Finally, companies producing woven carpets of wool were placed at a double disadvantage by the innovation of tufted carpeting using synthetic fibers. Finns producing woven woolen carpets had strong ties with wool suppliers and controlled, through purchases, nearly the entire wool market. Synthetic materials not only enabled the new tufting technology to be highly productive, but they allowed the carpet market to expand dramatically with falling, rather than rising, marginal costs, an experience that was foreign to the manufacturers of woven carpets (Reynolds, 1967). The previous examples have shown how firms enter and leave an industry in parallel with product innovation in that industry. In the fluid state, while

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 42 product requirements are still ambiguous, there will tend to be a rapid entry of firms and few failures. As the industry enters the transitional state, and product requirements become more defined, fewer firms enter and a larger number either may merge or fail. Finally, as the industry enters the specific state, there are only a few large firms, each controlling a consistent share of the market, and possibly a few small firms serving highly specialized segments. INNOVATION, ORGANIZATIONAL STRUCTURE, AND INTERNATIONAL TRADE The literature on technology and international trade has shown that shifts in innovation and industry structure are tied to shifts in the location of production and flows of trade. Louis Wells (1972) finds that trade varies with the product life cycle as follows: Innovation occurs and production begins in the country with the largest and most demanding market for a product—typically the United States. Exports quickly begin to serve mid-scale markets—Europe and Japan. Production then begins in the early export markets with the focus of exports starting to shift to less well developed markets, such as South America. Europe and Japan begin exporting to developing countries in competition with the United States while manufacturing begins in those countries also. Ultimately, producers in developing nations begin exporting back to Europe, Japan, and the United States. An essential point of this argument is that once a product becomes a commodity and the technology stabilizes—that is, when it enters the specific state—maintaining control of production becomes increasingly difficult. This is especially so if other countries have great advantages in factor costs, including materials and energy as well as labor. Conversely, if technology is rapidly changing, innovation and manufacture are much more likely to occur close to users. Freeman (1968) has linked this phenomenon to the export of process equipment. Hekman (1980) has shown that the rapid advance of textile technology led manufacturers to cluster around Boston in the 1830s. He further shows that as production technology stabilized, the industry became widely dispersed in part through the export of now- standardized textile equipment from Boston. Linsu Kim (1980) has pursued a similar hypothesis in reverse in the contemporary and international setting of the Korean electronics industry. He found that the industry became established in Korea through transfers of standardized technology to firms having both the strategy and the organization capable of absorbing it. Later, these firms began to produce variations in product and process. The learning and adjustment engendered by the firms' incremental innovations help to create an organization that

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 43 may become ''innovation viable,'' that is, an organization able to succeed in making product changes in larger steps and to compete on a more equal and independent footing in export markets. Nearly all these examples point to the hypothesis that entering early is the most viable strategy for a firm. If we based our assessment of technological and market dynamics strictly on U.S. business history, it would be hard to disprove this hypothesis. For example, carbon-filament incandescent lamps replaced gas lighting; they themselves were replaced by metal-filament incandescents and later by fluorescent lighting. The Edison Company and the Swan Lamp Company were the innovators in carbon-filament lamps, but only an insurmountable patent position in other aspects of lamp manufacture allowed Edison to overcome new firms that adopted metal filaments earlier than it did. Sylvania in the United States was the first to innovate with fluorescent lighting, and it increased its market share from 5 to 20 percent at General Electric's expense. Harvested, naturally formed ice for refrigeration was replaced by machine-made ice and later by mechanical refrigeration; it was not the ice- harvesting companies that innovated in mechanical means of ice production, nor was it the companies producing ice and ice boxes who innovated in the area of electromechanical refrigeration. Finally, in the 20 years from 1889 to 1909, Eastman Kodak's share of the U.S. photographic market went from 16 percent to 43 percent at the expense of established makers of dry photographic plates, because of its innovation of celluloid roll film. Whereas some investigators of technology and corporate strategy in the United States have emphasized the value of early entry with an innovation, Harvey Brooks writes: The typical pattern of Japanese success has been rapid penetration of a narrow, but carefully selected segment of a broad, expanding world market in which superiority in production efficiency, economies of scale, and exploitation of learning curve effects were particularly important. By expanding more aggressively than its U.S. competitors and anticipating learning curve improvements and economies of scale further into the future in its pricing strategies, Japan has been able to capture an important share of the market for selected products just behind the current technological frontier. They have then broadened out from this point in the middle technology spectrum and moved gradually toward more sophisticated and higher value-added products in the same or a closely allied market segment. Willingness to plunge in and adopt a new technology on the basis of its ultimate promise before it was proven to be cost-effective has been combined with careful and thorough .scanning of related world technological developments for their possible competitive threat or promise [Brooks, 1985, p. 330]. The success of Japanese firms in U.S. markets for automobiles and steel raises a variety of questions about business strategies in technologically dynamic product markets. Clearly, in the past each wave of radical product

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 44 change has brought with it the entry of new firms—either small, technology- based enterprises or larger firms carrying their technical skills into the new product and market areas—and these firms may dominate the restructured industry. The Japanese example, however, shows that productive units can pursue widely different strategies as long as the strategy is matched to the state of evolution of the technology. Clearly, the dynamics of technological change in relation to corporate strategy and international competition are fruitful areas for further work. This is especially so in the light of changing organizational forms and the increasing integration of production across national boundaries, issues discussed by Doz and Teece in subsequent chapters in this volume. SUMMARY In summary, to understand how the development and diffusion of technology affects national productivity and competitiveness, it is essential that we understand the linkages of product technologies with manufacturing process, corporate organization and strategy, and the structure and dynamics of an industry. Lacking balance and integration among all essential factors means that by investing heavily in one area, a firm could allow its competitors to exploit the new product or process technology first. Focusing on manufacturing (or product development, or finance) alone is wholly insufficient. Product design for manufacture, change in organization, and appropriate strategy are also prerequisites for competitive strength. By the same token, potential for product innovation and competitiveness depends increasingly on ability to innovate in manufacturing processes. Finally, there exists a hierarchy of productive units—a product for one is part of the process for another and therefore affects productivity directly. Productivity at the final use stage is strongly affected by the vitality of productive units at earlier stages. Lack of responsive suppliers of equipment and components will seriously constrain advances in ultimate products and systems. Moreover, it is not clear to what degree a nation can import process equipment and assume that its long-run competitive and innovative strengths will not be eroded. With regard to industry structure, appearance of a dominant design shifts emphasis to manufacturing for survival. Those who fail to shift will usually not survive. The dominant design should address world markets and standards to be most competitive (see Lehnerd in this volume). Similarly, it is a mistake in competition to automate too soon or too extensively. Doing so may reduce flexibility in the face of continuing product change and may leave a firm with heavily capitalized plants that are obsolete the day they come on stream. Tailored manufacturing approaches that allow

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 45 needed flexibility in product characteristics are often hallmarks of the most successful and competitive firms. As a product design stabilizes, diffusion of technology is inevitable through movement of skills and people as well as advanced equipment. Architectural rebuilding of industry is constantly required; a vital area for research is the discovery of means through which large and established organizations can constantly and creatively renew their businesses. In an organization with a diversity of products in different markets and at different phases in the dynamic product cycle shown in Figure 1, there is a serious problem of fitting together the organizational styles required for each of the different stages. A subdivision that may be the logical functional locus for the introduction of a new product because of similarity of market may have a hierarchical, bureaucratic organization more appropriate to a mature old product and therefore be unable to accommodate itself to the innovation. This may have been one of the main reasons why vacuum tube divisions that initially seemed to be at the forefront of transistor and semiconductor technology (where they benefited from government support) were unable to become the leaders in the market for this technology when it moved from the fluid sage to the transitional sage. Purely entrepreneurial strategies may no longer be sufficient for successful entry. Rather, creative coalitions blending the strengths of both new and established firms may be required for success in a more international competitive arena. ACKNOWLEDGMENTS I am especially indebted to the late William J. Abernathy. Our collaboration led to many of the ideas and findings expressed here. Many others were originated by him and are explored in the context of the auto industry in his book The Productivity Dilemma (Baltimore: Johns Hopkins University Press, 1978). This report is based on work supported by the National Science Foundation, Division of Policy Research and Analysis under Grant No. PRA 76-82054 to the Center for Policy Alternatives at the Massachusetts Institute of Technology. I also owe a special debt to both Harvey Brooks and Bruce Guile. The original manuscript for this was written in 1982 as part of the above-mentioned project. Harvey Brooks provided an extensive and challenging commentary on the manuscript. Many of his questions are addressed in pan here, much improving the resulting document, but many remain to be addressed. Bruce Guile helped far beyond any reasonable expectation not only in thoroughly editing the manuscript but in providing essential suggestions, advice, and encouragement.

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 46 NOTES 1. Many other examples also could be cited to support these hypotheses. For example, Arthur Bright's work (1949) on invention and innovation in the electric lamp industry cites detailed statistics on firms' entrances and exits, and he gives elaborate histories of the major firms— Westinghouse, the Thompson-Huston Company, and the Edison Company, the latter two of which later merged to become General Electric. Phillips (1971) and Miller and Sawers (1970) provide similar data on air frame and aircraft engine manufacturers; these data have been summarized in another paper by Linsu Kim (1980). Anderson (1953) gives general figures on the number of participants in different phases of the American ice and refrigeration industry, and Jenkins (1975), while concentrating on the Eastman Kodak Company, also discusses the formation, merges, and demise of many other competing firms. 2. The material in this section is based on a dissertation by Richard Fabris entitled "Product Innovation in the Automobile Industry," written in 1966. Supplementary information on the origin and diffusion of different major innovations has been obtained from William Abernathy's book, The Productivity Dilemma, and on market shares and entry from Burton H. Klein's book, Dynamic Economics. 3. These figures are somewhat understated because Fabris does not count a firm that merged but continued in a larger conglomerate as leaving the industry—for example, Cadillac and the Oakland Company (now Pontiac) are counted as surviving independent firms. 4. Fabris studied 32 major product innovations and found that 70 percent occurred before 1935. Abernathy (1978) includes three additional major innovations as occurring during this period— the aluminum alloyed piston, the automatic choke, and disc brakes. Two more of Abernathy's major product innovations—energy absorbing steering assemblies and 12-volt electrical systems —follow the 1962 termination of Fabris' analysis, so there is about a two-thirds overlap between the two studies. REFERENCES Abernathy, W. J. 1976. Production process structure and technological change. Decision Science 7 (October):607-619. Abernathy, W. J. 1978. The Productivity Dilemma. Baltimore, Md.: Johns Hopkins University Press. Abernathy, W. J., and P. L. Townsend. 1975. Technology, productivity and process change. Technological Forecasting and Social Change 7(4):379-396. Abernathy, W. J., and J. M. Utterback. 1978. Patterns of innovation in technology. Technology Review 80:7(June-July):40-47. Abernathy, W. J., and K. Wayne. 1974. Limits of the learning curve. Harvard Business Review 52 (5):109-119. Anderson, O. E., Jr. 1953. Refrigeration in America: A History of a New Technology and Its Impact. Princeton, N.J.: Princeton University Press. Braun, E., and S. MacDonald. 1978. Revolution in Miniature: The History and Impact of Semiconductor Electronics. Cambridge, England: Cambridge University Press. Bright, A. A., Jr. 1949. Electric Lamp Industry: Technological Change and Economic Development from 1800 to 1947. New York: MacMillan. Bright, J. R. 1958. Chapter 1 in Automation and Management. Division of Research, Graduate School of Business Administration. Boston: Harvard University. Brooks, H. 1985. Technology as a factor in competitiveness. Pp. 328-356 in U.S. Com

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 47 petitiveness in the World Economy, B. R. Scott and G. C. Lodge, eds. Boston, Mass.: Harvard Business School Press. Burns, T., and G. M. Stalker. 1961. The Management of Innovation. London: Tavistock. Engler, G. N. 1965. The Typewriter Industry: The Impact of a Significant Technological Innovation. Ph.D. dissertation. University of California, Los Angeles. Fabris, R. 1966. Product Innovation in the Automobile Industry. Ph.D. dissertation. University of Michigan. Freeman, C. 1968. Chemical process plant: Innovation and the world market. National Institute Economic Review 45:29-51. Frischmuth, J. S., and T. J. Allen. 1969. A model for the description of technical problem solving. IEEE Transactions on Engineering Management EM-12 (May):79-86. Hekman, J. S. 1980. The product cycle and New England textiles. Quarterly Journal of Economics 94(4):697-717. Hill, C. T., and J. M. Utterback, eds. 1979. Chapter 2 in Technological Innovation for a Dynamic Economy. Pergamon Press. Jenkins, R. V. 1975. Images and Enterprise: Technology and the American Photographic Industry, 1839 to 1925. Baltimore, Md.: Johns Hopkins University Press. Kim, L. 1980. Stages of development of Industrial Technology in a developing country: A model. Research Policy 9 (July):154-177. Klein, B. H. 1977. Dynamic Economics. Cambridge, Mass.: Harvard University Press. Lawrence, P. R., and J. W. Lorsch. 1967. Organization and Environment. Division of Research, Harvard Business School. Boston: Harvard Business School . Majumdar, B. A. 1977. Innovations, Product Developments, and Technology Transfers: An Empirical Study of Dynamic Competitive Advantage, The Case of Electronic Calculators. Ph.D. dissertation. Case Western Reserve University. Miller, R. E., and D. Sawers. 1970. The Technical Development of Modern Aviation. New York: Praeger Publishers. Mueller, D.C., and J. E. Tilton. 1969. R&D cost as a barrier to entry. Canadian Journal of Economics 2 (November):576. Normann, R. 1971. Organizational innovativeness: Product variation and reorientation. Administrative Science Quarterly 16 (June):203-215. Phillips, A. 1971. Technology and Market Structure: A Study of the Aircraft Industry. Lexington, Mass.: Heath Lexington Books. Ramstrom, D., and E. Rhenman. 1969. A method of describing the development of an engineering project. IEEE Transactions on Engineering Management EM-16 (May):58-64. Reynolds, W. A. 1967. Innovation in the U.S. Carpet Industry, 1947-1963. Ph.D. dissertation. Columbia University. Rosenbloom, R. S. 1974. Technological innovation in firms and industries: An assessment of the state of the art. Harvard Business School Working Paper. HBS 74-8 . Boston: Harvard Business School. Staples, E. P., N. R. Baker, and D. J. Sweeny. 1977. Market Structure and Technological Innovation: A Step Towards a Unifying Theory. Final Technical Report. NSF Grant RDA 75-17332, November. Tilton, J. E. 1971. International Diffusion of Technology: The Case of Semiconductors. Washington, D.C.: The Brookings Institution. Utterback, J. M. 1975. Innovation in industry and the diffusion of technology. Science 183:620-626. Utterback, J. M. 1978. Management of technology. Pp. 137-160 Studies in Operation Management, Arnoldo Hax, ed. Amsterdam: North Holland.

INNOVATION AND INDUSTRIAL EVOLUTION IN MANUFACTURING INDUSTRIES 48 Utterback, J. M., and W. J. Abernathy. 1975. A dynamic model of process and product innovation. Omega 3(6):639-656. Utterback, J. M., and L. Kim. 1986. Invasion of a stable business by radical innovation. Pp. 113-151 in The Management of Productivity and Technology in Manufacturing. New York: Plenum Press. Vernon, R. 1966. International investment and international wade in the product cycle. Quarterly Journal of Economics 80(2):190-207. von Hippel, E. 1977. The dominant role of the user in semi-conductor and electronic subassembly process innovation. IEEE Transactions on Engineering Management EM-24 (May):60-71. Wells, L. T. 1972. The Product Life Cycle and International Trade, Division of Research. Boston, Mass.: Harvard Business School. White, G. R. 1978. Management criteria for effective innovation. Technology Review 80(4):14-22.

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