Abstract

The central point of this paper is in its title, that is, that there are two distinct renewal patterns (or paradigms): one is appropriate before the advent of the dominant design (of a line of products), whereas the other is appropriate afterwards. These pre- versus post- dominant design paradigms are the Entrepreneurial and the Institutional Paradigms, respectively. These Paradigms prescribe different managerial focuses, styles, and investment practices, as well as different economic renewal policies. Failure to acknowledge this distinction leads to incoherent debate and counterproductive policies. Whereas, acknowledging this distinction advances the debate to engage additional pertinent issues such as near term versus long term goals and mature versus emerging industry stimulation (which are outside the scope of this paper). This paper not only characterizes the two paradigms (which Abernathy and Utterback did in 1978), but also suggests conditions that predict or forecast the imminent occurrence of a dominant design and the form of the concomitant shift in successful management paradigm.

 

Introduction

Executives and policy makers are vitally concerned about industrial renewal, and with good reason. Professor Baumol (1986) writes, " Although no one thing by itself can explain the unprecedented economic growth of the nineteenth and twentieth centuries, primary credit is to be assigned to innovation, including new products, new productive techniques, new business procedures, and use of new types of raw materials."

To further the understanding of innovation, this paper asserts that the advent of the dominant design divides a product cycle into two distinct arenas that must be fostered consistent with two distinct managerial paradigms. Lack of recognition of this basic reality leads to inconclusive debate as in the case of Gilder (1988) and Ferguson's (1988) public clashing of each other's ideas in last year's Harvard Business Review. Application of this basic reality could improve resource allocation, tax policy targeting, and an understanding of industrial renewal.

In those articles, the authors held a public debate on which of two factions, entrepreneurial versus institutional, would be better to promote for the United States economic future, Gilder favored entrepreneurial policies and Ferguson favored institutional policies. To sort out this debate, this paper begins with an attempt at a balanced perspective regarding entrepreneurialism and institutionalism, to use Gilder's and Ferguson's terms. Next it is important not to take the dominant design phenomena for granted, but rather attempt to be somewhat rigorous about its existence and how it can be anticipated and identified. The dominant design changes the rules of the marketplace in some obvious ways that have a whole series of implications which result in two distinct paradigms. These paradigms characterize organizations that would be successful at making the appropriate decisions and actions before and after the advent of the dominant design.

Essentially, having hypothesized this framework and paradigms, Gilder's and Ferguson's papers are revisited. The wealth of observations and opinions they provide are sorted out to demonstrate that diametrically opposed views on the same issue are actually consistent views on diametrically opposed issues --- namely the two paradigms. Finally, application is make to the policy issues Gilder and Ferguson raised. These remarks are concluded by a summary.

 

Perspective

Industrial renewal is closely linked to innovation. Innovation occurs (employing the terminology of Gilder and Ferguson) in entrepreneurial as well as institutional firms. It is easy to assert that industrial innovation occurs far more often and with far greater (immediate and measurable economic) impact in institutional firms, in the aggregate, than in entrepreneurial firms. Especially when one is reminded that innovation does not just manifest in product innovation, but in process innovation, practice innovation (i.e., the method of conducting business), and materials and infrastructional innovations. However, on a per capita basis, innovation is widely believed to be in entrepreneurial firms, especially in the product area. After all, that is what entrepreneurial firms are set up to do, at least in the fields of high technology. More importantly though, entrepreneurial innovation has historically been the essential antecedent of industrial opportunity.

Let's just presume that, in round numbers, large institutional United States' industrial companies sell $2 trillion annually world-wide. Contrast this with, say, the $20 billion that entrepreneurial United States' firms can be said to sell annually mostly within the United States. This 100:1 ratio is what makes the institutional advocates adamant, especially when confronted by the all too common journalistic excesses of certain entrepreneurial enthusiasts.

One last item has a strong bearing on policy. Readers (such as Baumol) of Maddison's (1982) study on a century of capitalism try to rationalize why the relative ranking of industrialized (the 16 in Maddison's study, at least) nations remained unchanged throughout the period of his study, 1870 to 1979, regardless of policies, taxes, savings, or investment patterns. This effect is only explained by rapid diffusion of innovation and its application by countries with adequate industrial (and informational) infrastructures. And, I will add and emphasize, without any direct benefit to the originating innovators.

 

Inception of Dominant Design

During the life cycle of most products there occurs a design that ushers in a new era almost overnight. In general, it is a design characterized by: 1) brilliant balancing and selection of existing technologies, 2) rapid conversion of skeptical bystanders into committed buyers, 3) a conspicuous drop in price/performance, and 4) a displacement of a previous market leader. In effect, it becomes the de facto standard. Examples of such dominant designs are tabulated below:

DISPLACED LEADERS

Table 1

Practitioners should be on the lookout for the appearance of a dominant design when: 1) technological advances manifest in products is markedly slowing, 2) spectacular annual market growth has slowed down to, say, 50%", 3) growth of new entrants exceeds growth of market, 4) several large companies in the field are planning on launching products, and 5) the market is at least 5 years old and the general public is becoming aware through the mass media.

As you might infer, the management paradigms for succeeding in the pre- versus the post- dominant design arenas are also quite distinct. I would go so far as to say that no hurdle has a greater impact on the subsequent fortunes of entrepreneurial firms. Every firm on the right hand column of Table 1, above, became extinct because of, I believe, the inability of the entrepreneurial (i.e., pre-dominant design) companies to shift to the institutional (i.e., post-dominant design) paradigm.

 

Contrasting Managerial Paradigms

The most compelling observation about the advent of the dominant design is that it heralds a new era in the marketplace. This transformation is characterized by:

PARADIGM SHIFT

Table 2

As evidence of the enormity and persuasiveness of the shift in managerial paradigms required in going from the pre-dominant to the post-dominant design arena, I submit the following tables. These tables contrast various pervasive aspects of the conduct of the business. These aspects are tabulated below under the headings: Focus, Style, and Investments (Tables 3, 4, and 5, reespectively).

MANAGERIAL FOCUS