Cook-Hauptman Associates, Inc. |
( | Abstract | Introduction | Perspective | Dominant Design |
Revitalization | Application | Acknow- ledgments |
Bibliography | ¯ ) |
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. |
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 Perspective Ferguson raised. These remarks are
concluded by a summary. |
Industrial renewal is
closely linked to innovation. Innovation occurs (employing the terminology
of Gilder and Ferguson) in 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. |
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
Table 3 The Managerial Focus (Table 2, above) in
the Entrepreneurial Paradigm (i.e., pre-dominant design) is on maximizing the
delivery of users' performance criteria by leveraging a specific (usually technical)
proprietary advantage. The advent of the dominant design obsoletes that strategy and
manifests as a shift in Managerial Focus to profitably satisfying a market's demand for
the reliable delivery of a high quality, competitively priced, conforming product
(and/or service). The Contrasting Managerial Styles (Table 4, below) of the two
paradigms is the subject of much of John Sculley's (1987) book about Apple's
transformation from being a small company to an enlightened large company. I
borrowed the entries for Style, Strength, and Motivation directly from his
book and share his sentiments in my characterizations in these tables.
Parenthetically, as president of Apple, Sculley resisted the wholesale adoption
of the Institutional Paradigm (which he characterized as "Second Wave"
after a chapter in Alvin Toffler's (1980) book). The inevitability of the
Institutional Paradigm, once the dominant design has manifest (as it did in
1982 with the advent of the IBM Personal Computer) may account for why his
struggle at Apple is so (tragically?) heroic. MANAGERIAL STYLE
Table 4
INVESTMENT CHARACTERISTICS
Table 5
The contrast in Investment Characteristics
(Table 5, above) bears on policy and helps explain why investors and executives trained
in the Institutional Paradigm (which is basically the one Business Schools teach) have
trouble finding policies compatible with the Entrepreneurial Paradigm.
|
In 1988, Messrs. Gilder and
Ferguson published opposing views on the relative merits of entrepreneurialism
versus institutionalism for securing a strong economic future for the United
States' economy. Their debate was provocative, stimulating and informative
and was picked up by the popular press (as part of the Supercollider story).
The debate pitted "free marketeer," George Gilder, as the
entrepreneurial advocate against "government interventionist,"
Charles Ferguson.
Gilder claims that the United States' secret weapon is our
venture (capital financing) system which counteracts (Japan's) low capital
costs and concentrates our efforts, energies and talents into highly focused
and highly responsive entrepreneurial companies. He goes on to cite a host of
recent semiconductor startups (Chips and Technologies, Weitek, Cypress, Xicor,
Micron Technology, et al) which have reversed the United States' loss
of market share. He believes a key United States asset is the startup culture
of entrepreneurialism. Ferguson invokes Reich's (i.e., Robert Reich of Harvard)
specter of "chronic entrepreneurialism" as driving us to economic
catastrophe. The sequence he cites goes like this: 1) "Vulture"
capitalists lure teams from big companies, 2) copy their product in a new
venture, thereby weakening the big companies doubly, 3) this new product
outperforms all and the venture is flooded by orders, 4) this inspires many
more ventures to be started, 5) the original venture, being first, gets
millions in additional financing, 6) expenses soar, the venture teeters, and,
7) finally, concocts a small profit and goes public, 8) consumes $200 million,
9) the investment mood changes, shareholders' sue, options dematerialize and
the new cadre of key people defect, 10) Japan enters the market and an Asian
company acquires the venture at a bargain. To make matters worse, our mature industries have: 1) been
neglected by the United States government which has failed to enforce patents,
gain access to markets, and force reciprocal access to education and technology
overseas, 2) been systematically attacked by a strategy of importing United
States technology, investing enormous resources to master it, and then
outpacing and overtaking us in our own markets, 3) fallen prey to carefully
orchestrated government protected oligopolies that are huge industrial
complexes in strategically coordinated alliances. Gilder says our semiconductor industry is doing fine. Where
the value added really counts (i.e., the design on the semiconductor),
entrepreneurs are setting the market on fire with high speed designs
(Weitek) and specialized chip sets (Chips and Technologies). In market
niches like static RAMs (Cypress) and non-volatile DRAMs (Xicor),
entrepreneurs have made competitive process innovations. Ferguson says our semiconductor market is at a crisis that
requires concerted immediate government action. The root causes of this crisis
is the chronic entrepreneurialism coupled with an integrated strategic attack
orchestrated by Japan's MITI and executed by a half a dozen Japanese cartels. |
The proposition put forth here is
simple enough: If no dominant design has appeared then the entrepreneurial
paradigm will achieve better results. If the dominant design has appeared,
then the institutional paradigm is the reliable way to achieve success. Although Messrs. Gilder and Ferguson treat the semiconductor
market segment monolithically, in reality it is bifurcated. DRAMs dominant
design occurred long ago, so the institutional paradigm applies. Whereas, high
speed processors come in a variety of designs from Clark's graphics engine
(of Silicon Graphics) to Sun's (i.e., Sun Microsystems's) SPARC chip to Weitek's
math co-processor (board designed around their proprietary chips), and,
therefore, the dominant design has not yet occurred. Consequently, high speed
processors are still governed by the entrepreneurial paradigm. Finally,
Chips and Technologies has one foot in each camp. Their chip is the dominant
design of this generation of clones, but the next generation dominant design
hasn't appeared. Therefore, Chips and Technologies' production, distribution
and support must function under the institutional paradigm, while its advanced
designers (who are working on the next generation) must function under the
entrepreneurial paradigm. Having sorted out the semiconductor participants relative to
dominant design, who is right? If memories design and/or CMOS fabrication are
strategic to the United States' economy and/or defense, then Sematech's
(institutional) focus on refining either or both of these activities stands a
good chance of being successful and should be done. On that basis, the
proposition agrees with Ferguson, primarily because the dominant design
occurred years ago when CMOS beat out NMOS and PMOS and even longer ago
for the memory designs. What about the host of issues raised by Gilder and Ferguson
--- intellectual property rights, capital gains tax rates, anti-trust policy,
Department of Defense role, consortia, and capital formation? First of all, there is more technology than product and
process designs. There is the vital issue of basic and applied research as
well as national infrastructures. National infrastructures include the postal
telecommunications, education, and defense systems. These are excellent areas
for proactive government participation, but are outside the scope of this paper. However, a corollary of the basic proposition is: For discontinuous
(i.e., radical and/or significant) innovation use the Entrepreneurial Paradigm, for
incremental innovation use the Institutional Paradigm. What follows is this
practitioner's guidelines for deciding which policies help which stage of
innovation. INNOVATION FOSTERING POLICIES
Table 6 |
I want to thank Drs. (of Management
of Technology from MIT's Sloan School of Management) John Friar, Oscar Hauptman, and
Nitin Nohria for stimulating conversations from which this paper precipitated.
Additionally, I wish to thank Assistant Professor Oscar Hauptman (of the Production
and Operations Management Section at the Harvard Business School) for inviting me
to make this presentation at this conference. The thoughts presented here continue
in debate and represent only my (tentative) conclusions. |
Abernathy, W. M., Utterback, J. M., 1978.
Patterns of Industrial Innovation. Technology Review. pp. 77-83. PRESENTED AT: The 49th Annual Conference of the Academy
of Management on August 15, 1989 in Washington, D.C. |
https://cha4mot.com/works/renewal.html
as of November 23, 1997 Copyright © 1989 by James E. Cook |
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