Regimes

The differing industry dynamics that reign at different stages of the life-cycle take the form of distinctive competitive regimes during which the sources of innovation change. Gort and Klepper (1982) argue that both information external and internal to the industry are important as sources of new technology throughout the life-cycle but their balance changes systematically over time. In the early stages of the industry life-cycle information external to the industry is valuable as new entrants with innovative product designs are competing for market dominance. As the dominant design emerges internal information becomes more valuable. As the focus is on elaborating the dominant design, past learning-by-doing gives an advantage to incumbents over entrants and creates a barrier to entry. Audretsch (1991) conceptualises this kind of development as a change in the competitive regime. In the early stages competition takes place under an entrepreneurial regime that is conducive to experimenting based on external knowledge. Later on during the routinised regime incumbents gain an edge over potential entrants based on their accumulated knowledge stock and this discourages entry to the industry. Furthermore, the incumbents often have advantages in economies of scale and investment intensity as new entrants are seldom able to secure funding to ramp up the production scale to match that of the incumbents.

The different kinds of competitive regimes are characterised by different kinds of innovations.

These have been classified into architectural, revolutionary, regular or niche creation (Abernathy and Clark 1985), competence-enhancing and competence-destroying (Tushman and Anderson 1986), incremental, modular, architectural and radical (Henderson and Clark 1990) as well as deepening and widening (e.g. Breschi et al. 2000). The core idea of each of these classifications is the same. An innovation has a different impact on the industry structure and dynamics depending on whether it builds on existing common knowledge or opens up new unknown avenues. The former kinds of innovations take place in a mature industry, solidify the status quo and tend to be produced by incumbents. This corresponds to the routinised regime. The latter kinds of innovations create new industries, take place during the era of ferment and tend to be produced by new entrants. This corresponds to the entrepreneurial regime. Next we take a closer look at these classifications.

Abernathy and Clark (1985) position innovations in a two-by-two matrix based on the nature of the change in technology and in market linkages (Figure 1). Such change can be either conservative or disruptive. Regular innovations are conservative in both dimensions thus serving existing customers and building on existing technology. Revolutionary innovations, on the other hand, serve existing markets but disrupt the technology and thus destroy existing competence. Niche creation innovations build on existing technological knowledge but serve a new customer base. Finally architectural innovations destroy existing technological knowledge and serve a new market. These innovations either create new industries or fundamentally reformulate existing industries.

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Figure 1. Categorisation of innovations into four types by Abernathy and Clark (1985).

Abernathy and Clark‘s (1985) categorisation is based on the premise that different kinds of innovative activity is required at different stages of the life-cycle. As the life-cycle proceeds, firms transition from one type of innovative phase to another. New industries are created and old ones reformulated through architectural innovations. As the dominant design emerges the innovative activity shifts to the regular type. In addition, revolutionary innovations that change the technological basis of an industry can give rise to a dominant design that offers better performance compared to the previous one. Regular innovations may be invisible but they have a cumulative effect that is significant in terms of product cost, reliability and performance. Niche creation innovations exploit existing technologies to serve new markets. Abernathy and Clark (1985) mention changes in fashion as an example of such niche innovations that offer only temporary advantage and a sequence of products is required to retain consumer interest. The Abernathy and Clark model is cyclical. This means that the position of the dominant design initiated by an architectural or revolutionary innovation is strengthened through regular and niche creating innovations until the pressure from the opportunities created by changes in technological possibilities, customer preferences or government policy builds up and is released though revolutionary or architectural innovations.

In another paper Clark (1985) makes a distinction between movements up and down the design hierarchy. Movements down the hierarchy signify refinement or extension to higher order concepts.

Existing commitments are reinforced and strengthened and thus such innovations are conservative.

Movements up the hierarchy signify departure from existing approaches. Such innovations can shake the core concepts but this may also take place in lower order concepts and still have a significant impact. Furthermore, movements up the hierarchy destroy the value of established competence and investments and they need to be replaced with new skills and resources. This dichotomy is combined with the idea of existing and new customer bases. Movements down the hierarchy can open up new customer segments whereas an innovation that departs from established concepts can serve the existing market. Thus Clark‘s (1985) paper follows the logic of Abernathy and Clark‘s (1985) paper with the two dimensions. However, the idea of design hierarchies and innovations as movements up and down is more elaborately put in Clark (1985).

Market linkages Conservative Disruptive

Conservative Disruptive Technology

Regular

Niche creation Architectural

Revolutionary

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Tushman and Anderson (1986) categorise innovations into either competence-enhancing or competence-destroying. Competence-enhancing innovations are usually originated by incumbents as they build on existing knowledge and create barriers to entry and minimum scale requirements.

Competence-destroying innovations, on the other hand, tend to be originated by new entrants as they alter the set of relevant competencies. Competence-enhancing innovations lead to consolidation whereas competence-destroying innovations create opportunities for new entrants as the incumbents tend to be held back by their traditions, sunk costs and internal politics. This dichotomy follows the logic presented in Abernathy and Clark (1985) and Clark (1985), but the focus is different. Abernathy and Clark (1985) and Clark (1985) concentrate on the changing balance of different kinds of innovations during the industry life-cycle whereas Tushman and Anderson (1986) focus on how these different kinds of innovations distribute among incumbents and entrants.

A similar incumbents versus entrants focus is also present in Henderson and Clark‘s (1990) two-by- two matrix (Figure 2). Technological innovations are classified by two dimensions. Innovation can either reinforce or overturn the core concepts of the product class. The innovation can also either change the linkages between core concepts and components or leave them as they were.

Incremental innovations reinforce the core concepts and do not change the linkages. Modular innovations take place inside system parts as they can overturn core concepts but do not have an effect on the rest of the system. Both architectural and radical innovations change the linkages between system parts but only radical ones overturn core concepts. Thus architectural innovations mainly affect the way system parts are connected whereas radical innovations bring whole new parts as well as their connections.

Figure 2. Categorisation of innovations into four types by Henderson and Clark (1990).

Henderson and Clark (1990) concentrate mainly on architectural innovations and state that they create opportunities for new entrants. This is because they are not held back by the institutionalised communication channels and filters that exist in established organisations. In such organisations the division of labour and communication between different departments is institutionalised around refining a stable architecture effectively. As this architecture changes, even without major changes in component technologies, the firm is unable to respond and develop new ways of working fast enough to survive competition with new entrants without such baggage.

Core concepts Reinforced Overturned

Unchanged

Linkages between core concepts and

components

Changed

Incremental

Radical Architectural

Modular

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In all these classifications innovations are divided into those that reinforce the existing dominant design and those that introduce new candidates for a dominant design. The latter kinds of innovations have also been called ―widening‖ innovations in the sense that they open up new avenues for exploration whereas the former kinds are ―deepening‖ innovations and thus reinforce previous commitments (Breschi et al. 2000). The classifications have been made on the premise that industry evolution consist of eras where most innovations tend to be of either kind and this makes the environment friendly towards either incumbents or entrants. This means that such eras alternate and the transition takes place from time to time. A good example of this is the amateur camera industry where several cycles of radical product and process innovations as well as several shakeouts have taken place (Windrum 2005).

The transition from the era of ferment to the era of incremental innovations is marked by the emergence of the dominant design whereas the transition from the era of incremental innovation to the era of ferment is marked by a radical innovation or a discontinuity. What can be termed a dominant design is more or less a judgement call as is also the case with radical innovations or discontinuities. One empirical definition for a dominant design is that by Anderson and Tushman (1990, p. 620) according to which a dominant design is a single configuration or a narrow range of configurations that accounts for over 50% of new product sales and holds an over 50% market share for at least four years. Criteria for assessing the radical quality of an innovation have been developed by Green et al. (1995) from a firm‘s viewpoint and Dahlin and Behrens (2005) with a more general approach. For the latter, a radical innovation is novel, unique and has an impact on future technology. Coccia (2005), on the other hand, assesses the intensity of innovations according to the number of adopters and the welfare or utility gained through the innovation. For Tushman and Anderson (1986) a discontinuity signifies a sharp price-performance improvement. Even though there is no exact conceptual consensus there is usually a widespread empirical consensus on which innovations are radical and when a dominant design has emerged.

The transition towards the era of ferment and a new technological basis for the industry accompanies the battle between the old technology and the new one. According to Windrum and Birchenhall‘s (2005) findings the replacement will take place as long as there is a positive differential between the direct utility of the new technology and the old one. This is more likely to arise when the entrants have ample time to turn their ―attractive ducklings‖ into ―swans‖. According to Malerba et al. (2007) entrants experimenting with the new technology enhance the changes of replacement when they are able to exploit fringe markets that the old technology does not serve well. Such niches may be too small to attract established firms but they offer the space for entrants to experiment with the technology and a market that keeps them alive until the technology is developed to the stage that it can serve the main market. On the other hand, increasing concentration can increase the founding rates of specialist producers who serve niches without any hegemonic intentions (e.g. Swaminathan 1995).

The battle between the old and the new technology can be prolonged by regulatory regimes that prevent the emergence of a clear winner and the exit of losers as well as by the fuzziness of the performance criteria that makes it difficult to argue and understand the advantages of the new

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technology (Nair and Ahlström 2003). Also, installed base and network effects can slow down or create excess momentum for the adoption of the new technology (Farrell and Saloner 1986).

Furthermore, switching costs that arise from the need for the reconfiguration of customer organisations can slow down the widespread adoption of a new technology (Bresnahan and Greenstein 1996). On the other hand, alliance formation can be used to speed up the transition to new technology by creating new industry standards (Rice and Galvin 2006). Alliances and technology sourcing can also help firms to keep abreast with an emerging technological regime (Nicholls-Nixon and Woo 2003). Geels (2006) argues that technological discontinuities should be seen as transitions in socio-technical systems that take place through the co-evolution of markets, user practices, regulation, culture, infrastructure and science.