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Innovation and Industnal Evolution in Manufactunng Industries JAMES M. U l-l ERBACK Histoncally, studies of innovation have had a linear viewpoint. That is, they have seen innovation as something Mat begins with a company possessing a certain technology and den investing in that technology, and the accompanying ideas, and implementing them in the market. Lois approach, however, assumes that all innovations occur in the same way in all companies and disregards the fact that organizations change through- out their lifetimes. It also fails to distinguish between product and process innovations, each of which may follow a different path. In short, He 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 ~nnovabon, process innovation, and organizational structure occurs in patterns Hat are ob- servable across industries and sectors. The dynamic model allows con- sideration 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 Weir organizational, tech- nical, and economic settings. Such data are necessarily incomplete, but at He same time, Hey yield a rich variety of insights. Parts of this chapter draw upon the following previously published sources: Abema~y and Utterback, 1978; Hill and Unerback, 1979; Utterback, 1978; and Utterback and Abemathy, 1975. 16

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INNOVATION AND INDUSTRIAL EVOLUTION UNIT OF ANALYSIS 17 Product and process innovation are inextricably interdependent; in con- s~dering manufacturing innovation, bow 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 s~ngle-product firm, Me productive unit and the firm would be one and the same. h~ a diversified firm, however, a productive unit would usually report to a single operating manager and normally be a separate operating division. When Me 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 matenals 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 Me next higher level (Ab- erna~y and Townsend, 1975~. This means that most innovations affect productivity directly. It also means that Me markets to which innovations respond are often defined by the characteristics of other fiens' production processes. Operations management and management of technological in- novaiion and change are inextricably linked. The fact Mat one firm's product is another's manufacturing equipment or matenal, 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, Me 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 finns 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 Me chain because

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18 JAMES M. U1TERBACK 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 ~ ndusuial context. Earlier work on Me management of technology has focused at a micro level, dealing win similandes among particular successful cases of product or process innovation (Utterback, 1975), whereas work on We 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 We dependence of product ~nnovabon on process Innovation and its crucial importance for operations manage- ment and strategy. Use of the idea of a productive unit as the unit of analysis requires focusing on Weir critical interaction, bow within a unit and between units linked by physical flows of equipment, matenal, and parts (Abernathy and Townsend, 1975~. PRODUCT INNOVATIONS What is needed is a view of innovation that will aid We decision-making process of company managers, government policymakers, and researchers. Out of this need has arisen a theory holding mat the interaction between technology and the marketplace is much more complex and dynamic Wan We 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, organi7~1ional 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 cor- responding growth strategy. It will also be affected by the state of de- velopment of both its production technology and Nat of its competitors (Abernathy and Utterback, 19781. Therefore, we can expect to see different creative responses from productive units facing different competitive and technological challenges, which, ~ 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 se- quenual and cross-sectoral change in product innovation, process inno- vation, and organizational structure. Finns Nat 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 excising ones

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INNOVATION AbJD INDUSTRIAL EVOLlJTION 19 is often the result of Me addition of entirely new requirements to a pre- v~ously stable set of dimensions (Nonnann, 19711. hn We fluid phase of a firm's evolution, the rate of product change is expected to be rapid, and operating profit marks are expected to be large. The few existing competitors will be either small new fimns or older firms entering a new market based on Weir existing technological strengths. A firm might be expected to emphasize unique products and product per- forrnance in anticipation Mat the new capability win expand customer requirements. The new product technology win often be crude, expensive, and unreliable but win fig a function In a way Mat 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 Me performance criteria Mat serve as a primary basis for competition change from ill defined and uncertain to well articulated as a firm travels Trough the venous states of development (Fnschmuth and Allen, 1969~. In emerging product areas, there is a pro- liferation of product performance dimensions. These frequently cannot be stated quantitatively, and even the relative importance or ranking of the venous dimensions may be unstable. Thus, because most product inno- vations will be market-shmulated, there will be a high degree of uncertainty about Bed potential. This can be called target uncertainty. Although He total amount of research and development (R&D) In a sector may be large, its focus will be diffuse. This is cabled 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 over informal contacts, because fluid units tend to rely heavily on diverse, external sources of information. However, He critical input will not be state-of-d~e-=t technology but new insights about needs (von Hippel, 19771; innovations will originate in units with intimate knowledge of users and user needs. As bow producers and users of a product gain experience, target un- cercainty lessens and product Innovation enters He transitional state. The usefulness of the new product is increasingly better understood, and it may take on a variety of new forms to serve over parts of He 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 Hat reduce He rate of product change and innovation are beginning to build up. As obvious improvements are in- troduced, it becomes increasingly difficult to better pest performance, users

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22 JAAlESM. l~lTERBACK develop loyalties and preferences, and the practicalities of marketing, distribution, maintenance, advertising, and so forth demand greater stand- ard~zation. Innovations leading to better product performance become less likely unless He improvement is easy for the customer to evaluate and compare, for firms will attempt to maxir~iize their sales and market share by defining Weir needs based on Lose of the customer. The reduction In target uncertainty that comes from greater diffusion of product use allows a correspondingly greater degree of technical un- cermnty to be toleratM. Therefore, larger R&D investments wall be jus- bfied-for advanced technology will become a major source of furler product innovation. At some point, before the cost of technological in- novation becomes prohibitively high, and before increasing cost compe- tition erodes margins below levels that can support large categories of indirect expense, He benefits of R&D probably reach a magnum. The emergence of a dominant product design Hat enforces standard- ~zation 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-se~ng 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 they development. He suggests that dominant designs will usually display sever of He following qualities: .e Technologies Hat lift fundamental technical constraints on He art without imposing stringent new constraints. Designs that enhance the value of potential innovations in other ele- ments of a product or process. Products Hat ensure expansion into new markets. Products that build on existing operations rather than replacing ~em. The dominant new product design signals a significant transformation, affecting He 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, He set of competitors often becomes an oligopoly and competition begins to shift to product price, which means Hat product design and process design become more and more closely interdependent as a line of business develops. Margins are reduced, and production efficiency and econoniies of scale become emphasized. Con- sequently, the requirements for He 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 re- iocanon may even shift capacity overseas (Vernon, 1966; Wells, 19721.

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INNOVATION AlID INDUSTRIAL EVOLUT10N 23 Because investment in existing process equipment is high, and product and process change are interdependent, both product and process ~nno- vations in the specific state are usually incremental. Under these conditions, however, both product and process features are well articulated and easily analyzed, and He conditions necessary for the application of scientific results and systems techniques are present. Unfortunately, Be payoff re- qu~red to justify the cost of change is large, whereas potential benefits He 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, He 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 form 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 Cough 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 torte. hn this situation, He unit will attempt to expand rapidly in He 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 He fine will be minor, as in a job shop, and the problems of coordination and control will be similar. Ca- pacity 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 biers to entry into the business. As a small purchaser, tile unit will usually have little Influence over its suppliers. Raw materials and parts will be used as available; if new ma- tenals or parts are produced for He unit, their quality may vary widely. Vananons in input quality and product design are compensated by He considerable flexibility in the types of tasks each individual and piece of equipment can perform. When sign~ficant~nough volume is achieved In one or more product lines to encourage standardization, the production process enters He tran- sinonal state. Major process change then occurs at a rapid rate. Production

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26 JAMIESM. U7TERBACK systems become increasingly difficult to change, mechanushc, 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 will vary widely with "islands of automation" linked by manual operations (Bnght, 19581. 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 Animal ~nvesunent will be required to enter Me line of business during the transitional state than in We fluid state. Having become a more significant producer and purchaser, the unit win develop suppliers that depend on its business, which will enable it to influence the consistency of its inputs. Labor tasks win gradually become more structured, win emphasis on particular skills. Maintenance, sched- uling, and control will increasingly be handled by specialized labor rawer clan directly during production. The production process reaches the specific state when it becomes highly developed and integrated around specific product designs, and as invest- ment becomes correspondingly large. In this state, selective improvement of process elements becomes increasingly more difficult. Production vol- ume and scale of plants will be large. The process becomes so weB integrated that changes become extremely costly, because even a minor change may require changes in related elements of Me 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 He market continue to evolve, Hen 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 He unit's productivity and profits in its now high-volume and low-margin operation. Tasks Hat cannot be automated may be segregated from the mainstream and per- formed in separate locations or by subcontractors. Consequently, pro- duction 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 tech- nology. The discussion above implies Hat venous productivity elements pro- cess 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

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38 JAMES M. U~1ERBACK THE AUTOMOBILE More than 100 firms entered and panicipatedindhe I~nencan automobile industry for a period of 5 years or longer. Figure 5 shows the wave of entry Mat began in IS94 and continued Hugh 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. 7s 65 ss U' ~ 45 ILL IL o ~ 35 z 25 all closed steel body introduced by Dodge Number of Operators J . r / /l A A 1 Number of Entries ~ 5090 of U.S. products in closed \ steel body \ 80% of U.S. products in closed \~ steel body 1 - ~_ - ~I ~/ ~I ~ ~ ~ I ~ AA ~ Number of Exits - 4~J W ~ ~~I U~)J~\ ~ ,l,~ ~ 1900 1910 1920 1930 1940 1950 1960 YEAR FIGURE 5 End and exit of films in Me U.S. automobile industry: 189~1962. Data from Fabns (1966).

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INNOVATION AND MUST EVOLUTION 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 Nerd 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 enmes and then exits Immediately after World War lI, 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 enmes and exits. hn 1923, the year win the largest number of fimns, Dodge introduced We all-steel, closed-body automobile. The large number of exits over We 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 IT 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 commondy introduced in lower-pnce, high-volume product lines. General Motors led in both Apes 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 oc- casionally 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. Finns in the auto industry, for example, developed an early and increasing reliance on suppliers for many types of equipment and innovations (Abernathy, 1978, pp. 60-611. 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 cam- eras. Several such firms were subcontracted by Kodak to manufacture camera backs and shuKers to Eastman ' s design. Similarly, during the 1 970s the large number of companies assembling electronic calculators were

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40 JAMES AI. U*1TERBACK greatly aided by the availability of high-qualin', components win declining prices from semiconductor manufacturers. However, in bow these ex- amples, these strengths eventually became weaknesses. Established com- petitors med to bankrupt Kodak by capturing the rive or Free sources of high-quali~cy photographic paper, Bus drying up his supply. Then, unex- plained quality variations in the celluloid that he purchased combined win over circumstances to make several months' production of fihn useless. Finally, financial weakness and instability among the venous firms man- ufacturing cameras Greatened to make it difficult and expensive for Kodak to provide cameras to customers. These events pushed Eastman first in Be direction of producing its own photographic paper, then its own chem- icals, and finally its own cameras, camera backs, and shutters (Bnght, 1949; Jenkins, 1975~. Advantages also turned to disadvantages in the calculator industry when rapid reductions in the puce 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 He manufacture of its components, these firms simply integrated forward to provide the entire calculator for He user (Majumdlar, 19771. Thus, while suppliers may play a highly creative role as a set of productive units develops, there will also be a drive among producung firms to capture close elements of supply Hat create He greatest uncertainties for ~em. However, it should be pointed out that the most innovative producers always seem to provide some of their own production equipment. Aber- nathy (1978) and Fabns (1966) show Hat 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 Heir market shares expanded. In summary, those finns Hat survive Be introduction of a dominant design appear to be those Hat integrate venicaBy or establish the closest supplier relationships. Sometimes, it is He supplier who integrates forward, rather than an early manufacturer who integrates backward, Hat 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 Me technology of product design advances so that novel changes [are] made less necessary, vertical integration can be maintained without such continuous effort [A~ empathy, 1978, pp. 1 1~1 113.

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INNOVATION AND INDUSTRIAL EVOLUTION 41 Examining market structure during waves of change indicates that fimns that are highly integrated are the most vulnerable to functional techno- logical competition, for they have developed stable production processes and sources of supply and thus have a major commitment to the existing technology (Utterback and Kirn, 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 win narrow market appeal. For example, all Me major vacuum tube firms adopted the transistor for traditional appli- cai~ons 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. Strull 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 elec- tronic calculator business. However, Hey 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, 19771. The major mechanical typewriter fimns were early entrants in the man- ufacture of electric typewnters but did not continue with their innovations after World War lI. The government played a role here in that it directed the typewriter companies to manufacture venous types of arms for He 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. Firms 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 dramat- ically with falling, rather than nsing, marginal costs, an experience that was foreign to the manufacturers of woven carpets (Reynolds, 19671. 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

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42 JA1VESM. PAPERBACK product requirements are still ambiguous, Here will tend to be a rapid entry of firms and few failures. As the industry enters the ~ansii~onal state, and product requirements become more defined, fewer firms enter and a larger number either may merge or fail. Finally, as Be industry enters Me specific state, there are only a few large firms, each controlling a consistent share of the market, and possibly a few small finns 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 vanes with the product life cycle as follows: Innovation occurs and production begins in the county with He largest and most demanding market for product typically He United States. Exports quickly begin to serve mid- scale markets Europe and Japan. Production then begins in the early export markets win He focus of exports starting to shift to less well developed markets, such as South America. Europe and Japan begin ex- porting 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 He 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 phe- nomenon to the export of process equipment. Hekman (1980) has shown that He rapid advance of textile technology led manufacturers to cluster around Boston in the 1 830s. He further shows Hat 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 Hat He industry became established in Korea through transfers of standardized technology to firms having bow the strategy and the or- ganizahon 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

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INNOVATION AND INDUSTRIAL EVOLUTION 43 may become "innovation viable," that is, an organization able to succeed In malting product changes In larger steps and to compete on a more equal and independent footing in export markets. Nearly all these examples point to Me hypothesis that entering early is the most viable strategy for a firm. If we based our assessment of tech- nolog~cal and market dynamics strictly on U.S. business history, it would be hard to disprove this hypothesis. For example, carbon-filament incan- descent 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 Finns 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 Elecmc's expense. Harvested, naturally formed ice for refrigeration was replaced by machine-made ice and later by mechanical refrigeration; it was not the ice-harvesi~ng 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 Me expense of established makers of ply 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 wntes: 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 reaming 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~ffeciive has been combined with careful and thorough scanning of related world technological devel- opments for their possible competitive Treat or promise [Brooks, 1985' p. 3301. 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

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44 JAlklESM. ~E~ACK change has brought with it the entry of new finns- either small, technology-based enterprises or larger firms carrying their technical skills into He new product and market areas-and these firms may dominate Be restructured industry. The Japanese example, however, shows Mat productive units can pursue widely different strategies as long as the strategy is matched to the state of evolution of He technology. Clearly, He dynamics of technological change in relation to corporate strategy and international competition are fruitful areas for further work. This is es- pecially so in He 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 summed, to understand how the development and diffusion of tech- nology affects national productivity and competitiveness, it is essential that we understand He linkages of product technologies win manufacturing process, corporate organization and strategy, and He structure and dy- namics 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 orga- nizabon, and appropriate strategy are also prerequisites for competitive strength. By the same token, potential for product innovation and com- peti~aveness 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 He 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 update 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). Sim- ilarly, 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 win heavily capitalized plants that are obsolete He day they come on steam. Tailored manufacturing approaches that allow

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INNOVATION AND INDUSTRIAL EVOLUTION 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 Trough movement of skins and people as well as advanced equipment. Architect rebuilding of industry is constantly required; a vital area for research is He discovery of means Trough which large and established organizations can constantly and creatively renew their businesses. In an organization win a diversity of products in different markets and at dif- ferent phases in Be 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 Mat may be We logical functional locus for He introduction of a new product because of sim~lanty of market may have a hierarchical, bureaucratic organization more appropnate to a mature old product and therefore be unable to accommodate itself to He innovation. This may have been one of He main reasons why vacuum tube divisions that initially seemed to be at He forefront of transistor and semiconductor technology (where Hey benefited from government support) were unable to become the leaders in the market for this technology when it moved from the fluid stage tome transitional stage. Purely entrepreneurial strategies may no longer be sufficient for successful entry. Rather, creative coalitions blending the strengths of both new and established finns may be required for success in a more international compentve arena. ACKNOWLEDGMENTS ~ am especially indebted to He late William J. Abernathy. Our collab- oration 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 (Balt~rnore: Johns Hopkins Un~- versity Press, 19781. This report is based on work supported by the National Science Foundation, Division of Policy Research and Analysis under Grant No. PRA7~82054 to the Center for Policy Alternatives at the Massachu- setts Institute of Technology. ~ also owe a special debt to both Harvey Brooks and Bn~ce 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 He manuscript. Many of his questions are addressed in part 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.

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46 JAMES M. U~ITERBACK NOTES 1. Many over examples also could be cited to support these hypotheses. For example, Arthur Bnght's work (1949) on invention "d innovation in the electric lamp industry cites demled statistics on firs' entrances and exits, and he gives elaborate histories of Me major firms Westinghouse, the Thompson-lIuston Company, and Me Edison Com- pany, 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. Ibe 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. Fabas studied 32 major product innovations and found that 70 percent occurred before 1935. Abernathy (1978) includes three additional major innovations as occurring dunug this period the aluminum alloyed piston, Me automatic choke, and disc brakes. Two more of Abernathy's major product innovations energy absorbing st=g assemblies and 12-volt electrical systems follow the 1962 termination of Fabns' analysis, so Here is about a ~vo-thirds overlap between the nvo studies. ~F;ERENCE~ Abernathy, W. J. 1976. Production process structure and technological change. Decision Science 7 (October):607-619. Abema~y, W. J. 1978. The Productivity Dilemma. Baltimore, Md.: Johns Hopkins Uni- versity 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):4~47. Abernathy, W. J., and K. Wayne. 1974. Limits of the learning curve. Harvard Busmess 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 Serriiconductor Electronics. Cambndge, England: Cambridge University P=ss. Bnght, A. A., Jr. 1949. Electric Lamp Industry: Technological Change and Economic Development from 1800 to 1947. New York: MacMillan. Bright, I. R. 1958. Chapter 1 in Automation and Management. Division of Research, Graduate School of Business Administration. Boston: Harvard IJniversity. Brooks, H. 1985. Technology as a factor in competitiveness. Pp. 328-356 in U.S Com

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INNOVATION AND INDUSTRIAL EVOLUTION 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; Tavistoclc. Engler, G. N. 1965. The Typewnter Industry: The hnpact 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. Uni- versity 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. EKE Transactions on Engineering Management EM-12 (May):79-86. Hekman, I. S. 1980. The product cycle and New England textiles. Quarterly Journal of Economics 94(4):697-717. Hill, C. T., and 1. 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 Indusmal Technology in a developing counny: A model. Research Policy 9 (July): 154-177. Klein, B. H. 1977. Dynamic Economics. Cambndge, 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 Cal- culators. Ph.D. dissertation. Case Western Reserve University. Miller, R. E5., and D. Sawers. 1970. The Technical Development of Modem Aviation. New Yorl`: 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 Boolcs. Rarnstrom, D., and E. Rhenman. 1969. A method of describing the development of an engineering project. IEEE Transactions on Engineenng Management EM-16 (May):58- 64. Reynolds, W. A. 1967. Innovation in the U.S. Carpet Industry, 1947-1963. Ph.D. dis- sertation. Columbia University. Rosenbloom, R. S. 1974. Technological innovation in fines and industries: An assessment of the state of the art. Harvard Business School Working Paper. HBS 7~8. 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 1 83:620-626. Utterback, J. M. 1978. Management of technology. Pp. 137-160 Studies in Operation Management, An~oldo Hax, ed. Amsterdam: North Holland.

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48 JA1VESM. U7TERBACR 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. 1 13-151 in The Management of Productivity and Technology in Manufacn~nug. New York: Plenum Press. Vernon, R. 1966. International investment and international trade in Me product cycle. Quarterly Journal of Economics 80(2):190-207. von Hippel, E. 1977. The dominant role of the user in semiconductor 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.