Capabilities, Innovation and Industry Dynamics: Technological discontinuities and incumbents!

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1 Capabilities, Innovation and Industry Dynamics: Technological discontinuities and incumbents! Fredrik Tell KITE Research Group Department of Management and Engineering Linköping University

2 KITE Research Group! For more information, please visit our website:

3 Three research themes:! 1. Knowledge Integration and Project Organization! 2. Knowledge Integration and Outsourcing! 3. Innovation and the Integration of External Knowledge!!

4 Innovation, industrial dynamics and technological capabilities: Late shakeouts?! Dynamics of complex capital goods industries! Relationship between firm capabilities, innovation and performance! Impact of firm capabilities on responses to (endogeneous) technical change! Specific dynamics of mature phases in oligopolistic competition!!

5 What is an industry?!

6 Product/Industry life cycles!

7 Industry life cycles: Early shakeout patterns! Innovation, entry and exit! Competing explanations! Exogenuous technology shocks (Jovanovic & MacDonald, 1994)! Dominant designs (Abernathy & Utterback, 1975; Tushman & Anderson, 1986)! R&D capabilities (Klepper, 1996; 1997; Klepper & Simons, 2002)! => Favors early entrants (old and large firms)! (Klepper, 1997; Klepper & Simons, 2005)

8 Exogenuous technological innovation! Industries are created by initial inventions and shakeouts are triggered by subsequent refinement inventions (Jovanovic & MacDonald, 1994; Olleros, 1986)! Basic invention => new product => entry => competitive equilibrium => entry ceases (shakeout)! Refinement invention => new entry => incumbent firms at advantage in refining => expand output => fall in prices => non-innovators exit (shakeout)! Favors early entrants (incumbents)! No prediction on process innovations!

9 Dominant designs! A dominant design is a collection of enduring product standards to which the bulk of industry output eventually conforms (e.g. automobiles) (Abernathy & Utterback, 1978)! Product architecture (Henderson & Clark, 1990)! Initial uncertainty concerning designs many designs introduced => experimentation (product innovation)! Network externalities and increasing returns to adoption induce convergence to a dominant design (Utterback & Suàrez, 1993, cf. David, 1985)! Adopters (may) survive, non-adopters exit (shakeout)! Processs innovations on dominant design lead to further concentration (shakeout) through returns to process innovations! Favors early entrants (economies of scale)!

10 Capabilities and increasing returns to R&D! Scale advantages to R&D (Schumpeter, 1950)! Firms conduct both product and process R&D! Increasing returns to process R&D (Klepper, 1996)! Product R&D returns independent upon pre-innovation level of output! Process R&D returns favors firms with high output (proportional reduction of cost)! Early entrants (and large entrants with related capabilities) are at favor and will survive continuous (no new equilibrium) shakeout driven by returns to R&D!

11 Examples! (Klepper & Simons, 2005)

12 Some observed empirical regularities! Early concentration of entrants! Prolonged shakeouts! Early entrants came to dominate industries!!(ford/gm; Goodrich/Goodyear/Firestone; RCA/Zenith/GE; Lilly/Wyeth/ Squibb/Bristol/Pfizer) (Klepper and Simons, 1997; Klepper & Simons, 2005)! Industry leaders dominated product and process innovation! Pre-entry capabilities matter (Klepper & Simons, 2000; Helfat & Lieberman, 2002)!!!!!!!

13 From the making of a oligopoly to the dynamics of oligopolies: Late shakeouts?!

14 Technological capabilities and industrial dynamics in mature industries! Technological capabilities and late shakeouts in the advanced gas turbine industry (Bergek, Tell, Berggren and Watson, 2008; Bergek, Berggren & Tell, 2009)! Mature, but not a declining industry (cf Harrigan, 1980; Lieberman, 1985; Audretsch, 1995) rather growing!

15 The example of Combined Combustion Gas Turbines (CCGT)! Bergek, A., F. Tell, C. Berggren and J. Watson, (2008), Technological capabilities and late shakeouts: Industrial dynamics in the advanced gas turbine industry, , Industrial and Corporate Change, 17 (2): Steam Generator Steam Steam turbine Generator ~ Fuel gas in Exhaust gases Intake Air Compressor Fuel Power Combustor turbine ~ Electricity Generator Advanced Turbine System

16 Global trends in power generation! Capacity (MW) CCGT Orders Total Orders

17 CCGT market growth! Market development MW (yearly) GE 7F MW (cumulative) Market orders (yearly) Cumulative orders

18 Market share development!! ! ! ! ! GE! 28 %! 26%! 22%! 54%! GEC-Alsthom /Alstom a! 9%! 14%! 6%! 15%! ABB! 18%! 12%! 17%! Siemens! 19%! 24%! 21%! 22%! Westinghouse! 5%! 7%! 13%! Mitsubishi b! 13%! 8%! 12%! 8%! Other! 8%! 9%! 9%! 1%! a GE licensee in the first three phases. In the fourth phase, Alstom acquired ABB s Power Generation Business. [i] b Westinghouse licensee in the first phases. [i] In 1989, the energy and transport businesses of Alsthom merged with GEC, forming GEC-Alsthom.

19 Two extremes: ABB and General Electric! Million USD Revenues 25% Operating Profit Margins % % 10% % 0 0% ABB GE ABB GE Bergek, A., C. Berggren and F. Tell (2009), Do technology strategies matter? A comparison of two electrical engineering corporations, , Technology Analysis and Strategic Management, Vol. 21(4):

20 Research questions! What were the characteristics of technological capabilities of the four major firms competing in CCGT?! How did technological capabilities affect rates of innovation and, eventually, chances for survival in this segment of the electrical engineering industry?!

21 How to explain the CCGT case?! Industry life cycles?! No exogeneous technology shock (Jovanovic and MacDonald, 1994)! No product/process innovation pattern, (Abernathy and Utterback, 1978), continuous product development! All firms were old and large (Klepper, 1996)! Not a declining industry!

22 Industry dynamics and product complexity! Complex Products and Systems (CoPS) industries may remain in fluid phase, due to the architectural character of the product (Davies, 1997; Bonaccorsi & Giuri, 2000)! Relatively stable firm structure, few exits and entries! High entry barriers such as installed base, network externalities, and technological interdependencies! Process innovations not as important in CoPS! Specific technological capabilities (including intregration of new knowledge) pertaining to systems integrating (CoPS) firms (partly in line with Klepper)!

23 CCGT as CoPS: Industry and firm characteristics! Products! Markets! Manufacturing! CoPS! Mass production! CoPS! Mass production! CoPS! Mass production! Many components Few components Oligopoly Competition High unit cost Low unit cost Systemic relationships Many alternative architectures Software/ control systems! Analyzable relationships Few alternative architectures No component coordination! Monopsony/ politicized purchasing Government regulation User-producer interaction Sophisticated buyer/ operators Multitude of individual buyers Free markets Arms-length Relationship Non-professional buyers! Customization Intensive technology Project-based organization Systems integration/ Breadth and depth! Standardized Long-linked technology Functional organization Design-modularity/ Specialization! (Magnusson, T., F. Tell & J. Watson (2005), From CoPS to Mass production? Capabilities and innovation in power generation equipment manufacturing, Industrial and Corporate Change, 14(1): 1-26

24 Technological capabilities: A simple conceptualization! Technology Strategies Technology Activities Technological Capabilities Performance

25 Technological capabilities! Technology strategies! Technology leadership! Cost focus! Broad scope! Technology sourcing! Technology activities! Product launching! Patenting! Problem-solving!

26 Methodology! Multiple measures and sources of data! Annual reports! Product launches and Relative market shares! SPRU CCGT database on Power Plant orders! Patents! USPTO database (Linköping): Industry experts! Thomson Derwent databases: Keyword search + manual code search! Interviews and publicly available material (e.g., on sourcing and problem-solving)!

27 Strategy measurements!

28 Example: Broad technology scope!

29 TECHNOLOGY LEADERSHIP GE SIEMENS ABB WESTINGHOUSE 1987 X - Not available 1988 X X X Not available 1989 X x X X 1990 X x X - X X - X X 1993 X X X X X X X 1995 X X X X X X X - X X X X 1999 X X - Not available Not available 2001 X X - X = segment level statements; x = corporate level statements

30 Broad technology scope GE SIEMENS ABB WESTINGHOUSE (4) X (8) Not available (4) X (8) X (7) Not available (4) - (6) X (7) - (6) (4) - (7) X (7) - (6) (3) X (4) X (7) X (6) (3) - (6) X (8) - (5) (3) X (8) - (8) X (4) (4) - (6) X (8) - (4) (4) - (6) X (8) - (3) (5) - (5) X (8) - (4) 1997 X (4) - (5) X (7) - (4) 1998 X (4) X (7) - (9) 1999 X (2) - (6) (5) X (5) Not available Not available (3) X (5) (4) - (3) Note: All statements refer to the power generation segment. Numbers refer to the number of technology categories mentioned of 13 in total (see Appendix C).

31 COST FOCUS GE SIEMENS ABB WESTINGHOUSE 1987 X x Not available X Not available X X X x x X x - X 1995 X - X X x X Not available Not available

32 Technology sourcing! GE: In-house + GE Aircraft Division! The rest: In-house + collaboration!

33 Product launch and sales impact! Phase I Phase II Phase III Phase IV Siemens V94.3 W.house/MHI 701F ABB 13E2 ABB GT24 GE 7G, 9G, 9H (announced) W.house/MHI 501G Siemens V84.3A Orders (MW) GE Frame 7F W.house 501F GE GE licencees Siemens ABB Westinghouse MHI Other

34 Generation F and responses!

35 Next generation!

36 Total patenting! Total number of patents, all searches combined (per application date) ABB GE Siemens Westinghouse

37 Patent search strategy! First we used the search term combined cycle in the Thomson Derwent database, in order to capture the architectural or systemic aspects of CCGT. This search resulted in 92 patent records. A scrutiny of these patents showed that they concerned relevant technological fields.! As a second step we identified the main USPTO patent classes that the patents from the first search were assigned to and searched our own database for patents in these classes. We identified four important subclasses of USPTO class 60 (Power plants) (see Appendix A) and found 118 patents in these classes.! For the third search, we used the Derwent manual code gas turbine engine, which according to industry experts contained CCGT-relevant patents. This search resulted in 151 patent records.! Fourth, we identified the main USPTO patent classes related to the patents identified in step 3 (see Appendix A) and made a search in our database for patents in these classes, resulting in 1,938 patents.! Fifth, we searched our database for patents in a selection of classes that according to industry experts are related to gas turbines (see Appendix A). This search resulted in 1,745 patents.!!

38 Patent classes identified!

39 Technological capabilities: selected patents! GE! Siemens! ABB! Westinghouse! Combined cycle ab! 78 (5.2)! 35 (2.3)! 43 (2.9)! 15 (1.0)! Gas turbine engine (incl. measuring and testing) bc! 865 (3.9)! 685 (3.0)! 220 (1.0)! 227 (1.0)! Gas turbines b! 1031 (5.1)! 293 (1.4)! 204 (1.0)! 217 (1.1)! a Thomson keyword search, granted patents applied for b USPTO patent class search,granted patents applied for c Thomson manual code search, granted patents applied for

40 Technology scope: Distribution of patents! 100% 90% 80% 70% 60% D % % 30% 20% 10% 0% ABB GE Entropy measure (E) = n i= 1 P i ln(1/ P i ) 0 EABB 2.1 and 0 EGE 1.7 (cf. Zander, 1999, 2002)

41 Problems and the ability to solve them! All manufacturers experienced serious problems in their installed plants, but they reacted quite differently:! Public, Shipped home turbines, quick Public, Long problem-solving process Secrecy, continuing sales, slow, failure, Alstom Not much known, Mitsubishi

42 Technological capabilities strategies and activities!

43 Some conclusions and further questions! The importance of having a large and relevant capability base, built up by R&D activities, as a foundation for product development in complex technology fields. The study emphasizes the importance of integrating knowledge from several different technology fields in order to develop new architectural solutions on a sub-system level. How do firms access and integrate diverse technologies?! A focused technology strategy on the segment level seems to be positively related to performance. Companies that focused on a limited number of technologies on the segment level were more successful than companies having a broad technology scope. Where to find the corporate coherence of large multi-technological corporations?! The study shows that the development and launching of new products may not be as important as implicitly assumed in much of the capabilities literature, but rather solving after-launch problems proved more decisive for competitive outcomes. How do firms build problem-solving capabilities for emerging afterrelease problems?!

44 Kowledge sourcing and integration! Bergek, Tell & Palmberg (2010) study 41 alliances in the advanced gas turbine industry and relate modes of knowledge sourcing (organizational interdepence) with product architecture.! Found that collaborative/open sourcing primarily takes place at sub-system level (and materials) (cf. Takeichi, 2001; Novak & Eppinger, 2001)!

45 Conglomerates and coherence?! Appliances Consumer electronics Lighting Media & Entertainment Aviation Power Generation Transportation Health care Materials Services Automation & Control Information & Communications Medical Power Generation Power Transmission Rail Transportation Services Automation Power Transmission Services