Technological Evolution at the Producer–Consumer Interface

Electronic Submission Identification Number : xxxxx Technological Evolution at the Producer–Consumer Interface Draft 2 (January 5, 2000) JOHANNES M. PENNINGS The Wharton School University of Pennsylvania 2000 Steinberg Hall – Dietrich Hall Philadelphia, PA 19104 – 6370 phone (215) 898 – 7755 fax (215) 898 – 0401 [email protected] and HANN OHL KIM Australian Graduate School of Management University of New South Wales Sydney 2052 Australia phone +61 – 2 – 9931 – 9552 fax +61 – 2 – 9313 – 7279 [email protected] Electronic Submission Identification Number : 12140 Submitted to Technology and Innovation Management Division, Academy of Management Meetings Toronto 2000 1 Electronic Submission Identification Number : xxxxx ABSTRACT This paper examines the emergence of dominant designs in the tennis racket industry. Unlike other studies, we consider both the competitive dynamics among firms comprising the industry, as well as the choice behavior of consumers. We assume that innovations are usually surrounded by a good deal of causal ambiguity, giving producers opportunities for shaping consumer choice behavior, but on the other hand according a greater weight to visible and legitimate actors on the demand side who can alleviate ambiguity about new products. In short, we very much stress the need to jointly consider both supply and demand conditions and to view producers and consumers in interaction with each other. Furthermore, we hold the selection environment in which new and existing designs come and go, to include both economic (e.g., number of competitors) and institutional (e.g., regulation) factors. We distinguish several dominant designs, based on material head, width and length of racket. Some designs are superior than other ones, based on physical and consumer ratings, but quality is ambiguous, and even so, better designs do not always win. The main thrust of the paper revolves around the degree of professional endorsement of new racket designs which is associated with the likelihood replication by competitors. While controlling for other variables, this relationship is indeed empirical. Obtaining data from trade publications, consumer magazines, and laboratory tests, we examined the effects of environmental, firm and product characteristics. The window of observation was 1975-1999, but some variables were missing for some time intervals. Using a generalized maximum likelihood estimation procedure, the findings suggest that next to endorsement, advertising and product quality are prominent in accounting for the success and failure of new product introductions. The implication is that we should not only focus on firm attributes, its strategy or size of market, but we should also discover what consumers want and how firms can satisfy their needs with a good product. Keywords: dominant design, technological trajectory, consumers, tennis racket. 2 Electronic Submission Identification Number : xxxxx Technological Evolution at the Producer–Consumer Interface I. INTRODUCTION Technological evolutions or “technological trajectories” (Dosi, 1982) are usually attributed to competitive conditions among industry incumbents and new entrants. Schumpeter (1934) was among the first to have spelled out the conditions that undermine the status quo in an industry, the improvement or demise of a dominant design and its replacement by a new one. Dominant designs get exchanged as innovative investments produce new components and/or new architectures. In this paper, we explore the emergence of dominant designs in the tennis racket industry. However, unlike other studies, we consider not only the conduct of competitors, but include also the choice behavior of consumers. While firms can certainly change or solidify consumer preferences regarding new products and services, we should consider those preferences in their own right. We highlight the importance of consumer preferences in accounting for successful product innovations. In the following paragraphs, we develop a framework for innovation that centers on the producer-consumer interface. First, we consider a concern with that interface, rather than with the more conventional, exclusive focus on producers for understanding the dominant design emergence. The views surrounding producers’ role in shaping technological evolutions have been well documented. Next, we explore some aspects that figure prominently in the interface, most notably advertising as input for legitimizing innovations by producers and consumers, and examine that interface as a selection environment that comprises both market and institutional conditions. The results support 3 Electronic Submission Identification Number : xxxxx our hypothesis that consumer preference management is critical in technological evolution. II. A PRODUCER–CONSUMER INTERFACE FRAMEWORK Whether in traditional industrial economics (Sutton, 1991) or economic history (Sahal, 1981), it is widely assumed that the dominant position in the industry is an inevitable consequence of technical efficiency of an ex post successful alternative. However, technological change towards superiority is not self-evident as technical efficiency considerations constitute only one of the factors that shape a technology break- through (e.g., David, 1985; Arthur, 1989; Podolny and Stuart, 1995; Anderson and Tushman, 1990). A new technology might have multiple, but uncorrelated benefits, or a mixture of positive and negative outcomes (e.g., Hoch and Ha, 1986). However, research is typically slanted towards the emergence of new dominant designs, with the benefit (or drawback!) of hindsight, and little knowledge exists about efforts at establishing new designs that faltered. II. 1. Producers The role of firms in shaping technological trajectories is well documented. The definition of the market, and the competitive interdependencies among its firms are the central focus of industrial economics. Markets typically are viewed as firms supplying goods and services that are close substitutes and thus have high cross-elasticities (Robinson, 1933). Market boundaries derive from the gaps in demand such that products within the same market have higher cross elasticities of demand than products belonging to different markets. The market might be segregated cross-sectionally or inter- temporally. When innovations produce new products having diminished cross elasticities 4 Electronic Submission Identification Number : xxxxx with obsolete ones, we observe the emergence of a new market, or convergence from existing ones, e.g., the video game industry and consumer owned communication technologies, or TVs and PCs (Greenstein and Khanna, 1997). It has been suggested that the early and late stages of an industry resemble the ‘entrepreneurial’ and ‘routinized’ regimes, respectively (e.g., Utterback, 1995). This qualitative shift in technological regimes occurs with the emergence of a dominant design. When the industry standard has been firmly established, incumbent firms are in a better position to command a lion’s share of the market because their capabilities in process innovation confer competitive advantages over entrants. The impact of dominant designs has been documented in various industries such as typewriter, automobile, television, and transistor (Utterback and Suarez, 1993). Many innovations are introduced by new entrants. However, when incumbents posseses complementary assets, i.e., the specialized supporting resources necessary for successful commercialization of an innovation, they have competitive advantage over new entrants introducing an innovation (Teece, 1986). Tripsas (1997) indicates that incumbents in the typesetting industry, endowed with certain complementary assets (such as a proprietary font library), might overcome the death of a dominant design to which they were wedded. These firms redeployed those assets during the arrival of a new design by attaching them to new architectures. In the tennis racket industry, firms introducing new designs may be at an advantages as they are already endowed with complementary assets such as marketing and distribution capabilities. This “producer” literature thus dwells on the relationship between the nature of innovation, firm characteristics, and industry dynamics. Not much attention is given to 5 Electronic Submission Identification Number : xxxxx the process by which certain innovations come to be widely adopted by competitors and potential users. The diffusion process plays an important role in technological evolution. It is rare for an innovator to solely satisfy the aggregate market demand. Furthermore, the evolutionary path of technological development significantly changes depending on the extent to which an innovation is imitated by competitors: the decline of Macintosh in personal computing is an oft-cited example. Therefore, the process of imitation or diffusion is the mechanism by which new technologies come to acquire economic significance. According to Nelson and Winter (1982), few studies formally treat the imitation stage as part of a more general theory of technological change. Technological diffusion is a process that spreads successful varieties of products and processes through an economic structure and displaces wholly or partly the existing varieties (Rogers, 1995). Early diffusion studies attempted to find empirical regularities (e.g., Grilliches, 1957; Mansfield, 1961) as illustrated by the well-known S-shaped curve. II. 2. Consumers The role of consumers is generally not considered when tracking and accounting

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