Professional Documents
Culture Documents
DOMINANT
FIRMS
//
FERNANDO F. SUAREZ
<
Business
\-
School of Valparaiso,
Adolfo
Ibanez
University,
JAMES M. UlTERBACK
Sloan School
of Management,
Massachusetts
Institute
of Technology,
Cambridge,
Massachusetts, U.S.A.
\
The economic, population ecology and strategic perspectives on firm survival are here
complementedby viewing the samephenomenonfrom the viewpoint of technologyevolution
as well. The hypothesis tested is that the competitive environment of an industry, and
therefore the survival of firms in it, is substantially affected by the evolution of the
technology on which it is based. Survival analysis is applied to data from six industries.
The resultsshow that by explicitly including technologyas a dynamic and strategic variable
our understanding offirms' survival potential and successcan be enhanced.
INTRODUCTION
The question of why some firms die while others
survive is one of the basic concerns of business
scholars. Survival or long-term viability has long
been recognized as a basic goal for a business
organization (Barnard, 1938; Dertouzos, Lester,
and Solow, 1989). Survival is, at least in the
long term, a prerequisite for success in other
terms, such as market share and profitability.
The survival of firms has traditionally been
studied indirectly through economics research on
industry businesscycles and analysis of declining
industries (see, for instance, Lieberman, 1990;
and Dunne, Roberts, and Samuelson, 1989).
Firm survival has recently been studied more
systematically by researchers in strategy and
population ecology. Advocates of population
ecology have argued that life chancesof organizations are affected by the population density at
time of founding and throughout the life period
of an organization. According to this argument,
organizations founded during periods of high
416
F. F. Suarezand J. M. Utterback
Figure1
Designhierarchiesand dominantdesigns
417
Industry
Dominant Design
Date
Source
Typewriter
Underwood's Model 5;
Hess' innovations
1906
Engler (1969)
Automobile
Television
1952
Abernathy (1978)
John Rydz interview;
1956
(1949-89)
John Rydz interview;
Picturetubes
All-glass,21-inchtube
TelevisionFactbook
TelevisionFactbook
Transistor
Planartransistor
1959
(1949-89)
Tilton (1971), Braun and
MacDonald (1978)
Electroniccalculator
Calculatoron a chip
1971
Majumdar (1977)
418
F. F. Suarezand J. M. Utterback
Given the importance of industry standards to effects or 'network externalities' exist in the
the fate and prosperity of firms in an industry, industry. Positive network externalities arise
government decisions that favor a given design when a good is more valuable to a user the more
often tend to be accompanied by a political users adopt the same good or compatible ones
battle among the firms involved.
(Katz and Shapiro, 1985; Tirole, 1988). Thus, in
At the firm level, and apart from technology the presenceof bandwagon effects, volume sales
itself, there are also factors that can affect the and economies of scale will indeed playa major
emergence of a dominant design. The type of role in the determination of a dominant design.
strategy followed by a firm with respect to Firms which are able to achieve larger scale
its product vif-a-vif that of competitors may more quickly than their competitors may have a
determine which firm's product becomes domi- better chance of winning the race to settle the
nant. This is what Cusumano, Mylonadis, and standard.2 Moreover, the impact of strategic
Rosenbloom (1992)have called 'strategic maneu- maneuvering at the firm level on the determivering'. Indeed, VCRs are a crisp example of nation of the industry's dominant designis greatly
the importance of strategy. One of the reasons enhanced by the existence of bandwagon effects
why the VHS system backed by NC swept the in the industry. In the presence of bandwagon
VCR industry instead of Sony's Betamax is the effects, strategic maneuvering is a powerful force
different strategies followed by these two firms. driving the emergence of a dominant design, as
While NC followed a 'humble' strategy estab- the case of VCRs described above illustrates.
lishing alliances first in Japan and then in Europe
and the U.S.A., Sony stressed reputation and
deliberately avoided alliances or contracts to be HOW DOES A DOMINANT DESIGN
an OEM supplier. According to Cusumano, OCCUR?
Mylonadis, and Rosenbloom, it was primarily
JVC's strategy, and not technological advantages, How does technology evolve so that a given
initial collateral assets,or government regulation design becomes the dominant one? Prior to the
that finally made VHS the dominant design in appearance of a dominant design many of its
the industry. In fact JVC was a late comer, and separatefeatures may be tried in varied products
until the mid-1970s it lagged technologically.
which are either custom designed or designed
Prior to the appearance of a dominant design for a particular and demanding market niche.
economies of scale will have little effect, because The turbulent competitive process through which
a large number of variants of a product will be many firms enter and some leave an industry
produced by the many competing entrants in an may be seen as a process of experimentation,
industry, with each producing at a relatively with each product introduction viewed as a new
small scale. Once a dominant design is created, experiment on user preference (Klein, 1977).
economies of scale can come into play with Performance dimensions will tend to be many
powerful effect, leading to rapid growth of and highly varied and can often be incommensurthose firms which most competently master the ate prior to the occurrence of a dominant design.
development of products based on the dominant As a product evolves certain features will be
design, to the detriment of those firms which are incorporated, subsumingthe related performance
slower to adapt. In general, we think that dimensions into the design. With the appearance
economies of scale are of primary importance of the dominant design the product can be
after a dominant design is in place. In other described by a few related and commensurable
words, traditional microeconomic argumentshold dimensions. A dominant design, then, is synthemore weight following the date of a dominant sized from more fragmented technological innodesign. Our view is that traditional economic vations introduced independently in prior proassumptions about economies of scale are much
more appropriate to the period following a
dominant design than to the period of experimen- 2 Note, though, that a firm can achieve the same result by
tation and creative turbulence which precedesit. giving away most of the production of its product design to
third parties rather than producing it only in-house. This
A notable exceptionto the previous statementis instance of strategic maneuvering was present in the VCR
provided by casesin which significant bandwagon~ industry.
419
-1-
420
F. F. Suarezand J. M. Utterback
50
45
40
...
..
35
..30
0
25
20
3.5
3.0
5
~ TOTAL
0 EXIT
.ENTRY
oL
J.874
J.891
J.SIO8
1925
1942
Years
Figure 2(a). Number of firms participating in the typewriter industry in the U.S.A.
90
III
Ii:
421
422
F. F. Suarezand J. M. Utterback
Censor
Pre/Post
423
424
F. F. Suarezand J. M. Utterback
Table 2. Nonparametric
in six industries
analysis. Wilcoxon
x2
d.t.
26.849
1
1
1
1
Industry
Typewriter
Automobile
Television
Picturetube
Transistor
Calculator
4.295
15.976
0.0161
0.093
4.9334
p-value
COX PROPORTIONALHAZARD
MODELS
+ BJ INDSLENT
+ B4 ISLGWEX + Bs EDENSITY
+ B6 LNENRANK
The variable EDENSITY tests the effect of the
density dependence argument introduced by
population ecologists (Hannan and Freeman,
1988; Carroll and Hannan, 1989). One would
generally expect a higher hazard profile (a 'riskier
life') for firms entering the industry during
periods of high population density (Carroll and
Swaminathan, 1992). Extensions of the original
density dependence argument also allow for a
reduction in the hazard profile as densityincreases
(see, for instance, Barnett, 1990). The latter case
is said to exist when 'mutualism' is present, i.e.
when the existence of more organizations in the
population improves the organizations' survival
profile. As our sample deals with firms that
directly compete for market share, we expect
competition rather than mutualism in our analysis.
The variable INDSLENT captures the effect
of market size at a firm's entry on the hazard
profile of that firm-an idea also related to the
postulates of population ecologists and related
425
426
Industry
Typewriter
83
95
121
105
Automobile
Television
Picture tube
Bl
-0.073***
-0.062***
-0.084***
-0.173***
eBl
0.929
0.939
0.918
0.841
Shift in hazard
Down
Down
Down
Down
7.1%
6.1%
8.1%
15.9%
eB2
Shift in hazard
1.043
0.995
1.004
0.798
Up 4.3%
Down 0.4%
Up 0.4%
Down 20.1%
B2
0.042***
-0.004***
0.004***
-0.225***
RESEARCHAGENDA
The analysispresentedaboveopensa broad agenda
for future research.First, the conceptof a dominant
design clearly needs to be studied and specified
more rigorously. Although work remains to be
done, we think we have moved a significant step
forward here by linking the concept of dominant
design with that of design hierarchies, which in
turn allowed us to consider the emergence of a
dominant designas a combination of technological,
economic, and organizational factors.
There is also further work to do in terms of
finding some sensiblemetrics to narrow down the
searchfor a dominant designdate. This is probably
the most challenging task ahead. Some authors
have used measures which are tautological to
determine a dominant design, such as market
share (Anderson and Tushman, 1990). A better
measure,for instance, might be a notable increase
in licensingactivity during several years by a given
firm or by a group of firms with products based
on the samecore technology. Licensing data, i.e.
whether a particular product or process starts to
capture a large share of the industry's licensing
Q)
'"
:c
~
'C
]co
c
:a
~
...
Q)
~
.3
N
.~
~~
Z""c~
""Q)c
~
zo~
,.,
-~..
Zo
..JC
'"
~~-"">'
fn.o...
~
>,c
"""'U
L1J~
Q 'V;
-0
'-"
",-
u ~.~
",,-><
~~~
~ ~'t;
-00
O~.c
..J=tn~~
-co
-co
E--"'z~~
,.,
.u _flOC
tI)\..",
-.,;
:.::-
~uU
--.
u on
O"'u
c.s~
":
II")
*'-'\0
oriN
~
*
*
or-.
*
t"IO\
orI\o
,- -
00"'"
000"';
r')r')
~~
0"':'
'-'
*
*
-.
'ot"1O
-IX)
00\
* -.*
-IX)
IX)-
Q)
~
E-
O;;;
O>
1'-'
00\
0000
1'-'
*
*
-,,-..
8~
co1'-'
00
*
*
*
~1'--0\
~
0""
**~\O---
.,j-\o
00
1'-'
00
:s
0
e
.?!.
-~
-=
<
"0
~
'"
=
~UE
'0
'-'~
...~.-=
'T'.c
~u =
"'rn~
'0
<~=...~
~ U'"-- >, e
"""-'0
'" =
~~'O~-
"'
..."OtC
C
Z~E
...J>-Q)
~ Q--
'"
"4)
~
0
E
co
.5
~
'9
~
Q)
~
~
0
.~
Q)
~
Q)
...
'"
"E
~
.c
-;
c
0
"::
...
8-
~
~
8
Q)
~
E--
00
N
'r1
**
*--NN
~~
cc
-----
---
d...
'-'
NOr)
--t--
='
U
.0
...
='
1"-'
t--O
0\0\
00
1"-'
~~ ~~
0"'; "-'
*---
*
*
~O\
t--N
00\
0000
1"-'
...
Pi:
Q)
Co
>.
E--
".;
"'"
.c
"C
...
Co
.5
.c'"
~
~
C"
~8
"-"~o
.5 v
~~
"
"
...*
",
-*
e.:.:
~O
~O
Cov
o~
e*
"'*
.c ..
bOO
.E
~ '8.
.9v
.g ~
<*
>.
...
-cn
=
"0
.5
:c
0
e
.(
=
0
.~
'"
~
...
tIO
-E
~
.c
-;;
=
.-2
8So
8
~
~
f-o
:c
~
~
I
.3
N
~~
Z""-
"'CCI/)
"'"
u C
~-~
..JC
",zoc.cu
-CI/)...
Zo
'"
~~
--
t/)->'
Zoub
~>,c u
O'~
~~~
'-"
",u.-;:
...,-1<
~~u
-CO
~ ~~
O~.c
~=~'O~
_=0
~",-
z.~
rTl
-"'C
~
...1>.U
cn~",
0"".
C
C-
Z~e
"O~
---
0"";,:::'0
~
uu
~-
'" =
..~
,.;~=
-U'-
>-bE
.g
,...,
=
Q) rn
O"'Q)
0..9-0
~Q)
,.,..0
~Q)e
~-~~ ~.5
--0
>0;""0
"ij
"0
0
V")
0\
V")
00
V")
f'-\OV")
00
V")
*Ir.N
CX)'ot"
1-
00
'-"
f'")f'")
.-.,
*
N
*
**
00"':'
~ ~~
'8
V")
V")
O\~~OOON""
f'-O
V")
**
CXI
*
**0\ *CXI""
000\
CX)
'='
000
C-
tU
".,;
"'"
~
c
e
.5
~
0
427
etU
~'"
* **
**
**
'-'
1'-"
,s*
~v0-
"0;0
"0
-*
>
..
.*
-s~
.cv
Uo
-0
'" .
.;;: *
.c
,-..
co*
c*
e~
"0;0
"8v
~8
c-
..
~
'C
tU
co
C-
tU
I.tU
'Q)
I.-
~
"
.5
t:"'
~OO\
---
**
OIr\""Ir\""
r'"\0r--r--0\
""0""""""
**
**
**-
I '-'
~"'"
000
I
~8~
""r'"\Ir\""""~-
~-
1'-"
("I
..or..:r..:..o..oNOO
O\OOOOOOO\f'-\O
***
****
00
r'"\N
~~
->
000"'-000"'I
I
***
***
****
NO\MM\O""M\O
\O'ot't-\O\ON'ot'\O
0""0000""00
00000000
-==->~>
428
CONCLUSIONS
ACKNOWLEDGEMENTS
The authors wish to thank several people for
important help: Dr. Ingrid Munck at Statistics
Sweden, Professor Michael Rappa at MIT,
Professor John B. Willett at Harvard and
Professor Lisa Lynch at MIT for their comments
on the statistical methods employed; and Pro-
429
MA.
430
F. F. Suarezand J. M. Utterback
YRAFroD
INDSLENT
ISLGWEX
(years before
(years after
(industry sales (industry sales
dominant des.) dominant des.) at firm's entry) growth at exit)
EDENSITY
(density at
firm's entry)
LNENRANK
(log. of entry
ranking)
In model VIII, the best-fitting model, antilogarithms of parameter estimates (eBi) are shown in parentheses.
YRAFlDD
(years before
(years after
dominant des.) dominant des.)
II
III
IV
-0.073...
0.042***
(0.929)
-0.140.
(1.042)
-0.144...
-0.174..
EDENSITY
(density at
firm's entry)
-2LogL
528.15
0.050*
-0.021 ***
0.0001 **
LNENRANK
(log. of entry
ranking)
-0.643
-0.054
-0.041
-0.456
526.88
526.56
526.05
In model I, the best-fitting model, antilogarithms of parameter estimates (dB,) are shown in
parentheses.
-2LogL