Design competition in young industries: An integrative perspective

DESIGN COMPETITION IN YOUNG INDUSTRIES: AN INTEGRATIVE PERSPECTIVE

CLAYTON G. SMITH Oklahoma City University

streams of research have considered the competition among alternative versions of a new product and the strategic significance of dominant designs. One highlights the design dimension of compatibility standards. The second focuses on the diversity of product concepts and technological approaches that often exists among competing alternatives. Each research stream stresses a different facet of a dominant design’s potential significance. By integrating these two lines of inquiry, this article provides a more comprehensive view of design competition in young industries. It also suggests new insights on the dynamics that affect the emergence of dominant designs, and the competitive positions of industry participants. Two

INTRODUCTION Research concerning technological innovation and life cycle theory has considered the characteristics of young industries and the nature of competition in this environmental setting. Typically, the early stages of industry development are marked by high levels of technical and market uncertainty, rapid rates of change, entrants with different ideas about how to compete, and competition among alternative product designs. To a substantial degree, rivalry among firms is oriented toward shaping the framework of competition in ways that favor their economic interests and, relatedly, determining which version of the new product will be the ‘dominant design’ (Abernathy & Utterback, 1978; Clark, 1985; Dosi, 1982; Moore & Tushman, 1982; Porter, 1980). The emergence of a dominant design is a watershed event in an industry’s development, in part because of the impact that it can have on the competitive positions of participating firms. A growing body of research has focused on the design dimension of compatibility standards; some of the studies have tended to equate designs that win the

Professor Clayton G. Smith passed away after his paper was accepted for publication. The Journal of High Technology Management Research, Volume 7, Number 2, pages 227-243 Copyright@ 1996 by JAI Press, Inc. All rights of reproduction in any form reserved. ISSN: 1047-8310.

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race for dominance with this issue. A second stream of research has highlighted the diversity of product concepts and technological approaches that often exists among competing alternatives, and defines dominant designs along these latter dimensions. Particularly because they each underscore a different aspect of a dominant design’s potential significance, the purpose of this article is to examine these two lines of inquiry and present an integrative perspective. In so doing, a more comprehensive view is provided about design competition; it is a view that suggests new insights about the dynamics that affect a dominant design’s emergence and the competitive positions of industry participants. Section 2 examines the foundations of design competition, while section 3 considers the basic dimensions along which rival designs may differ. (See Table 1) Section 3.1 considers the dimension of compatibility standards. Alternative designs (e.g., IBMcompatible and Apple PCs) often require complementary products (e.g., applications software) that are tailored to them in order to obtain full-value use. In such cases, network externalities will arise in which the customer’s decision to buy a given version of the product is favorably affected by the relative size of its user base. (This is partly due to the fact that a wider variety of complementary products usually becomes available for the design as the size of its user base increases.) Compatibility standards determine the complementary products that can be used with a given design. The emergence of a standard that is controlled by a specific company as the industry standard can have a sizable impact on the competitive positions of participating firms (Conner, 1991; Garud & Kumaraswamy, 1993; Katz & Shapiro, 1985; Morris & Ferguson, 1993). But section 3.2 indicates that, as with compatibility standards, competing designs often exhibit considerable diversity in product concepts and technological approaches (Abernathy, 1978; Clark, 1985; Dosi, 1982). These design dimensions are distinct from the dimension of compatibility standards. Looking at the high-definition television industry, for example, any design that vies for market acceptance in the United States will have to meet Federal Communications Commission broadcast transmission standards. However, product concepts will probably emerge in some designs that view HDTV as a device for personal computing and receiving interactive information services, in addition to one that

Design Dimensions

TABLE 1 and Their Strategic

Significance

Design Dimension

Strategic Significance

Compatibility

According to research regarding high-tech/network externality environments, competing designs often require complementaryproducts that are tailored to them in order to obtain full-value use.

Standards

In such cases, the emergence of a proprietary industry standard can have significant competitive consequences. Through its ability to control access to the standard, and to unilaterally modify it (as long as compatibility is preserved), the standard-setter can define the rules of competition. Other firms will be at a strategic disadvantage. Product Concepts/ Technological Approaches

According to research concerning innovation in young industries, diversity along these dimensions can mean that competing designs will be grounded in different sets of technical capabilities, and that different sets of marketing capabilities may be required to market each effectively. Such resources and skills are the foundation of a firm’s competitive position. Where rival alternatives are tied to different sets of technical and/or marketing capabilities, the strength of a firm’s competitive position in the long term will depend substantially on which version of the product wins the race for dominance.

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performs the video entertainment function. And alternative designs will probably differ in the display technologies (e.g., advanced cathode ray tubes, vacuum microelectronics, and active matrix liquid-crystal displays) that they employ as well (Benson & Fink, 1991; Nick Li, 1993). Alternative product concepts and technological approaches are often central issues because of their impacts on the functional/price-performance capabilities of given designs. And how the dominant design is defined along these dimensions can significantly affect which firms’ technical/marketing capabilities prove to be most valuable for competition in the young industry (Smith, 1992, 1995). The latter will have corresponding impacts on the competitive positions of industry participants, which is an aspect of the strategic significance of dominant designs that has received inadequate attention. Section 4 presents an integrative perspective of design competition that explores important interlinkages between compatibility standards and product concepts/technological approaches. It will become evident that given standards can affect the viability of alternative concepts and approaches. Conversely, the viability of alternative compatibility standards may be affected, where customers come to value the mix of functional/price-performance capabilities that flows from a given concept and/or approach. These interlinkages are noteworthy because of their potential impacts upon the outcomes of design competition, and the competitive positions of industry participants. The implications of the discussion are considered in the concluding section. Compatibility standards can have considerable impacts on a firm’s ability to develop and maintain a strong competitive position in a new field. This is especially true of a proprietary industry standard that is interlinked with a product concept and technological approach for which a distinct set of technical/market capabilities is required. However, if researchers or practitioners equate dominant designs with compatibility standards, there is a danger of overlooking important dimensions of design competition, and the full strategic significance of the alternative that wins the race for dominance. A greater recognition that dominant designs are not equivalent to compatibility standards should lead to a better understanding of why firms succeed or fail in young industries. Foundations

of Design Competition

The diversity of product designs that characterizes the early stages of industry development is partly due to the high levels of technical and market uncertainty that surround the various alternatives. (In the absence of substantial uncertainty, there would be little genuine diversity in product designs, since the correct design would be reasonably clear.) From a technical perspective, early versions of the product usually have serious shortcomings and technical obstacles that have to be overcome; the possible means for doing so are usually unclear; and the potential for improving their ability to meet perceived customer requirements is largely unknown. From a market standpoint, user needs and preferences are not well-defined. Potential customers are relatively unfamiliar with the new product and its different versions. Even among early adopters, experience in use with given versions is fairly limited. Overall, the initial understanding of user needs and the context of use is usually fragmentary (Clark, 1985; Dosi, 1982; Nelson & Winter, 1982; Smith, 1992). The diversity of product designs is also due to the presence within the young industry of firms with differing backgrounds, each trying to shape the definition of the new product in ways that favor their economic interests. Although many designs may be feasible, those

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that actually surface reflect the experience, interests, and capabilities of the firms that are their sponsors. Over time, such firms participate in a process of experimentation and learning, as they attempt to improve their designs, to harmonize them with emerging customer needs and preferences, and to gain market acceptance for them. The process is guided by a sense of the possibilities and constraints of the various alternatives, and by the interaction between producers and users. Ultimately, this era of design competition is brought to a close by the emergence of a dominant design, which can be defined as the widespread acceptance of a single architecture within the generic product category (Anderson & Tushman, 1990; Clark, 1985; Dosi, 1982; Nelson & Winter, 1982; Smith, 1992). Dimensions

of Design Competition

But what exactly are the dimensions that comprise the architectures of competing designs and the alternative that wins the race for dominance? Research concerning competition in hightech/network externality environments has focused on the design dimension of compatibility standards (Conner, 1991; Garud & Kumaraswamy, 1993; Hariharan & Prahalad, 1994; Hergert, 1987; Katz & Shapiro, 1985; Morris & Ferguson, 1993). Some studies, including the works of Anderson and Tushman (1990) and Lee et al. (1995), have tended to equate dominant designs with industry standards, or have used the terms in an interchangeable fashion. For instance, Anderson and Tushman (1990: 616) discuss computer communications protocols, standards for shared bank-card systems, and television broadcast standards as examples of dominant designs. It should be noted that this research makes the important distinction between innovations that enhance and those that destroy the value of technical competences. But the distinction is made from the perspective of the set of firms whose existing technology may be supplanted by the new. Implicitly, it is assumed that all versions of the new technology revolve around the same basic technical capabilities (p. 617,627). In contrast, research concerning innovation in young industries has highlighted the diversity of product concepts and technological approaches that often exists among rival alternatives, and defines dominant designs along these dimensions (Abernathy, 1978; Clark, 1985; Dosi, 1982). This research also indicates that competing designs can be tied to different sets of competitive capabilities, such that the long-term value of a firm’s capabilities may depend on the design that wins the race for dominance. Together, these two streams of research help to provide a more complete view of design competition, and the strategic significance of dominant designs. Compatibility

Standards

Compatibility standards refer to “the model or specification that determines whether two products can share the same set of complementary products” (Hariharan & Prahalad, 1988: 403). In video cassette recorders, for example, the VHS and Beta formats” competed for preeminence; the rival formats, or standards, were incompatible in that tapes recorded on one format could not be played on a machine designed for the other. As it turned out, Matsushita’s VHS format ultimately became the industry standard. Similarly, the personal computer industry is another arena where vigorous competition occurred between alternative compatibility standards, prior to the emergence of the IBM-compatible industry standard.

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In addition to competition at the systems level, rivalry among alternative compatibility standards often occurs at the subsystems level in adjacent industries. Thus, as the IBM compatible standard emerged, Microsofts DOS achieved dominance as the PC software industry’s standard for operating systems, while Intel’s X86 configuration became the standard in the microprocessor field. In sum, where multiple products must be combined to work together as part of a larger system, the compatibility of a particular product with other complementary products can be one of its most important characteristics (Garud & Kumaraswamy, 1993; Hariharan & Prahalad, 1988). Network Externalities

and The Emergence of Industry Standards

In many cases, compatibility standards will give rise to network externalities, in which the attractiveness to potential customers of one firm’s standard versus others depends on the relative size of its installed base. A larger installed base of compatible products normally gives rise to a greater variety of, and lower prices for, complements for the given standard. (Suppliers of specific complements, such as applications software, will typically focus on the standard with the larger user base, thereby increasing the variety of the complement and driving down its price.) A large installed base may also facilitate communication among users and the ability to constructively exchange complementary products. Finally, a substantial user base may give rise to a larger, more experienced maintenance network, which will improve the availability and quality of after-sales service (Farrell & Saloner, 1986; Hariharan & Prahalad, 1994; Katz & Shapiro, 1985). In order for network externalities to arise, a complement must be essential for obtaining full-value use of the product, and the complement must also be design-specific. (If VCR tapes could be run on machines of any format-if the tapes were not design-specific--or if tapes were not important to the product’s functioning, there would be little benefit in buying what others are using.) It is where these conditions are both met that, the buyer’s purchase decision will be influenced by the relative size of the user base for alternative compatibility standards. And where the product is a durable good, buyer demand will also be influenced by expectations about the size of the user base for various compatibility standards in the future (Conner, 1991; Katz & Shapiro, 1986). As a result of the benefits of using what others are using, and positive feedback effects, market demand will ultimately move toward a particular standard. The decisions of early adopters greatly affect the choices made by subsequent ones. A small, initial lead in the installed base for a standard can result its eventual domination of the market, as the de facto industry standard. And according to this research, the product design that is tied to the winning standard need not be the best in price-performance terms. As long as the differences are not too substantial, customers will often accept a “less advanced” design to obtain the benefits of compatibility with the industry standard (Arthur, 1989; Conner, 1991; David, 1985; Hariharan & Prahalad, 1994; Katz & Shapiro, 1985). Proprietary

Standards and Their Strategic Significance

Where there are rival compatibility standards, the emergence of a proprietary industry standard can have significant competitive consequences. Fundamentally, proprietary control over an industry standard provides the standard-setter with the ability to determine the ground rules by which competitors must play (Garud & Kumaraswamy, 1993; Hariharan & Prahalad, 1988, 1994; Hergert, 1987; Morris & Ferguson, 1993). Such companies

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can frequently regulate other firms’ access to the standard. (For example, Intel broadly licensed early versions of its X86 microprocessors, but greatly limited licensing of the 386 and subsequent generations after its standard had achieved preeminence.) And because they control the industry standard, standard-setters are often in a superior position to develop complementary products that fully exploit its capabilities (It could be argued, for instance, that this is the case of Microsoft’s Excel and Word applications software programs in relation to its DOS/Windows standard). Moreover, by compatibly modifying the standard, such firms can control and discipline competitors. They may, for example, undertake undisclosed interface manipulations that make it difficult to substitute rivals’ complementary products (e.g., computer peripherals) for their own. Finally, rivals often must wait for the leader to introduce each product generation before they can begin the process of imitation. By the time their versions are on the market, the dominant firm may have made significant follow-on advances, and be moving on to the next generation. In general, the ability to exploit proprietary control of a standard-and the competitive impacts that result-stems from the existence of buyer switching costs, which make it difficult to induce migration to an alternative standard. (It should be noted that nonproprietary standards, often established by trade groups or regulatory bodies, are unlikely to have the impacts described here, since they are, in essence, “public goods.” As such, no industry participant can control access to the standard nor can any participant unilaterally modify it.) Product Concepts and Technological

Approaches

Beyond the dimension of compatibility standards, competing designs can also exhibit considerable diversity in product concepts and technological approaches (Abernathy, 1978; Dosi, 1982; Clark, 1985; Smith, 1995)’ (An illustrative example regarding contending designs from the early electronic watch industry is provided below.) These dimensions are often central issues in design competition because of their impacts on the functional/ priceperfotmance capabilities of given versions of the product. Moreover, differences in design characteristics that stem from alternative product concepts and technological approaches can give rise to different marketing requirements. As a result, the dominant design that emerges may affect the competitive value of firms’ marketing capabilities. Such capabilities include brand names, distribution channels, and sales and service networks. They also encompass skills concerning distribution methods, selling methods, and marketing practices (re pricing, promotion, and product policy) (Biggadike, 1979). The characteristics of a design-including its price, the functions performed, the effectiveness in performing given functions, ease of use, and reliability-play a central role in shaping the set of capabilities that is needed to market it effectively. Other capabilities developed to satisfy the marketing requirements of competing versions may be less suitable or necessary for the design in question. (For example, service networks built to meet the needs of other versions may be unnecessary for a design that proves to be much more reliable.) If that alternative proves to be the dominant design, such capabilities may be of limited or little value in the long term. Finally, where alternative technological approaches are utilized, competing versions of the product will often be grounded in different sets of technical resources and skills. While the technical approaches of some designs may be related-there are overlaps in the underlying capabilities-those of other designs may be fundamentally different. As a result, the dominant design can significantly affect the value of firms’ technical capabilities as well.

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An Illustrative

Example

The young electronic watch industry illustrates the diversity of product concepts and technological approaches that often exists, and the impacts on the value of alternative sets of competitive capabilities that dominant designs can have (Landes, 1983; Smith, 1992). During the early stages of industry development, semiconductor firms such as Texas Instruments concentrated on all-electronic LED/LCD product designs, while traditional watch companies such as K. Hattori (Seiko) focused most of their efforts on the quartz analog. LED and LCD designs typically reflected a concept of the electronic watch as a “wrist instrument” that could perform many time-keeping functions. Instead of the traditional hands of analog watches, these designs used a semiconductor (LED or LCD) display, which was well-suited for the broad functionality of the wrist instrument concept. Further, the core technologies of these designs-semiconductor displays, electronic circuits, and quartz crystal oscillators-were largely unrelated to mechanical watch technology. In contrast, the quartz analog design reflected a concept of the electronic watch as a time-keeping device that was also a piece of jewelry. While this design replaced the traditional mainspring and escape mechanism with electronic circuitry and a quartz crystal oscillator, it retained the gear train and hands of the mechanical analog watch. Thus, portions of the technical resources and skills for mechanical watches were relevant for the quartz analog design. The product concept of this design was also more consonant with the brand images and jewelry store distribution channels of mainstream producers of traditional watches, such as Seiko. Ultimately, the quartz analog emerged as the dominant design; Texas Instruments and other semiconductor firms were largely unsuccessful in their efforts to alter the functional capabilities and product characteristics that customers valued. Although this design rendered portions of the technical resources and skills of traditional watch producers obsolete, it clearly was the preferred alternative from their perspective. Strategic Significance Not all young industries are characterized by the diversity in product concepts and technological approaches suggested here. In some cases, rival designs will perform the same basic functions and will be based upon related technical resources and skills. Even where competing versions of the product are grounded in different technical capabilities, they may still give rise to similar marketing requirements (Smith, 1992, 1995). But a firm’s technological knowledge/skills and its marketing assets are the foundation of its competitive position in the given industry (Abernathy & Clark, 1985; Dierickx & Cool, 1989). Where competing designs are tied to different sets of technical and/or marketing capabilities, the strength of a firm’s competitive position in the long term will depend substantially on whether its version of the product wins the race for dominance. This aspect of the strategic significance of dominant designs has not received adequate attention in the literature concerning compatibility standards. Design Competition: In this section, an integrative upon the two lines of inquiry

An Integrative

Perspective

perspective of design competition is presented that builds that have been examined. Following a brief review of

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research concerning general influences on the dominant design’s emergence, two interlinkages between compatibility standards and product concepts/technological approaches are explored (See Figure 1). The first interlinkage concerns how a given standard may affect the viability of alternative product concepts and technological approaches. While non-proprietary standards do not have the competitive impacts described in section 3.1,2 they can indirectly affect the value of firms’ technical/marketing capabilities. The second interlinkage concerns how the viability of alternative compatibility standards may be affected, where customers come to value the mix of functional/price-performance capabilities that flows from a given concept and/or approach. Where a proprietary

-----------I General

influences

Competitive/financial strength of design sponsors Order of entry into industry Coalitions formed around given designs

-----------------a-__------------_-----_____,

interlinkages-compatibility

standards

L___________________________

Design

Competition

&

concepts/approaches

___------------_------_---.

1

Outcomes

Dominant Design industry standard Value of firms’ technical/marketing capabilities ___--_____--_-----~-------------~---~

Design Competition:

FIGURE 1 An integrative

Perspective

Design Competition

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in Young Industries

standard is strengthened through this interlinkage, the odds will be significantly improved that its sponsor will ultimately control the de facto standard, and enjoy the resulting strategic advantages. Overall, it will become apparent that the two interlinkages are important because of their potential impacts on the outcomes of design competition, and the competitive positions of industry participants. General Influences That Shape The Dominant Design’s Emergence Prior research has considered factors that shape the outcomes of design competition, including the competitive/financial strength of design sponsors;3 their order of entry into the industry; and coalitions that are formed around given designs (Clark, 1985; Cowan, 1985; Hariharan & Prahalad, 1988, 1994; Lieberman & Montgomery, 1988; McGrath, et al., 1992; Smith, 1992). As shown in Table 2, these issues are important for several reasons. First, they can affect the mix of functional/price-performance capabilities that customers value most, and market expectations about the future size of the user base for the various designs. Second, they can impact the relative quality, performance, and cost of the different alternatives, and the level of market penetration that they achieve. Finally, they may influence the decisions of suppliers of complementary products, concerning the design alternative they will support, and the decisions of industry associations and regulatory bodies, regarding the establishment of industry standards. These are general influences that shape the dominant design’s emergence. Interlinkages

Between Compatibility

Standards and Concept/ Approaches

Not well-recognized, however, are the interlinkages between compatibility standards and product concepts/technological approaches. One concerns how given standards may affect the viability of alternative concepts/aproaches and, by extension, the value of firms’ competitive capabilities. Through this interlinkage, an industry standard, even one that is not proprietary, can have significant implications from a resource-based perspective. For example, the FCC’s adoption of a HDTV broadcast transmission standard that uses digital (vs. analog) signals will facilitate the convergence of video and computing. (Pictures and sound are sent in the OS and 1 s of computer language rather than via radio waves.) This will greatly enhance the viability of product concepts that view HDTV as a device for personal computing and receiving interactive information services, in addition to the familiar video entertainment function (Nick Li, 1993). The all-digital broadcast transmission standard will increase the likelihood that the dominant design that emerges for high-definition television sets will embody these additional functions. And in so doing, the standard may affect the value of marketing capabilities of existing and potential competitors. Clearly, a dominant design that performs the functions of a personal computer would be more consonant with the brand images of entrants from that industry. In essence, there would be a stronger “perceptual fit” between the product concept of the design and the image of such entrants’ brands (Farquhar, 1989). This could enable their established brand names to engender greater trust for their HDTV offerings, and thereby allow them to develop and maintain a stronger market position. The competitive value of other marketing assets could be affected in a similar fashion. The FCC’s adoption of a digital broadcast standard also enhances the viability of technological approaches with flat-panel displays, relatve to those with advanced cathode ray tubes (CRTs). Fundamentally, the flat-panel (e.g., active matrix liquid-crystal) displays

Value/

Cost/

Decisions

Alliances formed around given design, or liberal licensing policies of design sponsor, can raise level of market penetration achieved.

Where effective, forgoing actions can favorably affect decisions of suppliers of complementary products, industry associations, and regulatory bodies.

R&D partnerships or cross-licensing agreements can foster more rapid improvements of given designs.

Resources combined for collective educational/promotion efforts can help shape mix of attributes that customers value most.

Coalitions Formed Around Given Designs

Alliances formed around given design can favorably affect expectations re future size of user base; purchase decisions may be affected accordingly.

Forgoing advantages can enhance ability to obtain support of suppliers of complementary products, industry associations, and regulatory bodies.

Early entrants benefit from having more time to improve their designs’ priceperformance capabilities.

Designs of early entrants can have a sizable im pact on formation of buyer preferences. Early entry also provides more time to learn about user needs & the context of use. Insights can help shape mix of product attributes that customers value most.

Order of Entry of Design Sponsors

Bodies

Product Suppliers,

and Regulatory

of Complementary

Industry Associations

Performance,

Market Penetration for Given Design

DesignQuality,

Favorably affects ability to win support of suppliers of complementary products, and to influence decisions of industry associations/regulatory bodies regarding establishment of industry standards.

Size of User Base Favorably affects capacity of firm to unlock potential of its design, to engage in aggressive educational/promotion efforts, and to achieve market penetration.

Expectations-Future

Product Attributes Customers

Favorably affects market expectations about which designs are likely to gain wide acceptance; market demand may coalesce around “safer” alternatives

Influences

Competitive/ Financial Strength of Design Sponsors

General

Impacts on Design Competition

TABLE 2 General Influences on The Dominant Design’s Emergence

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that are in contention are digital in nature. While an advanced CRT has several electron beams that sweep back and forth across the dots, or “pixels,” on the screen, the pixels of flat-panel displays are addressed individually.4 For such displays, the digital standard will be easier and less expensive to implement; greater picture clarity can be provided as well. As a result, it is now more likely that an approach with one of the flat-panel technologies-rather than one with advanced CRT technology-will be embodied in the dominant design, and that the associated technical capabilities will have the greatest long-term competitive value (Nick Li, 1993). The early stages of the auto industry’s development provides a further example of how the issue of compatibility can affect the viability of alternative technological approaches (Abernathy, 1978; Clark, 1985). During this period, there was vigorous competition among product designs with different methods of propulsion, including cars that utilized internal combustion gasoline engines and those that used battery-powered electric motors. While many factors played a role in the emergence of a dominant design that incorporated the gasoline engine, one was the need for a convenient and cost-effective means of refueling/recharging the vehicle. At the time, electricity was costly, and the infrastructure for electricity was only beginning to develop. But gasoline was a byproduct of the refinery process that could be readily sold through the existing distribution system for kerosene and other petroleum products. Electric cars were initially more reliable than those with gasoline engines, and they might possibly have won the race for dominance had an essential complementary productelectricity-been more widely and inexpensively available. Nevertheless, while their failure to prevail adversely affected the competitive viability of electric car producers, this was not due to the impacts that are usually attributed to compatibility standards. The issue here was the impact on the viability of alternative technological approaches-and the associated technical capabilities. The core technology of what proved to be the dominant design (the gasoline engine) was fundamentally different from that of the electric car. Demand coalesced around a design for which core technical capabilities of electric car producers were of little value. As a result, a major part of the foundation of their competitive positions was undermined. Pl:

Compatibility standards can affect the viability of alternative product concepts and technological approaches. This interlinkage will affect the long-term competitive positions of industry participants when alternative concepts and/or approaches give rise to different marketing requirements, or when alternative approaches are grounded in different sets of technical capabilities.

The second interlinkage concerns how the viability of alternative compatibility standards may be affected, where customers come to value the mix of functional/price-performance capabilities that flows from a given concept and/or approach. One example is provided by what is now referred to as the VCR Industry (Hariharan, 1990; Olleros, 1986). Early on, there were two basic product concepts, one that viewed the new product as a video player, and the other which saw the product as a video recorder. The technologies for image storage that were in contention included magnetic tape, capacitance technology, and optical/laser technology. (The latter two alternatives used video disks as the storage medium.) Of these technologies, only magnetic tape could be used for performing

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the function of “time-shift,” which allowed the customer to record a television program and then view it subsequently. The other technologies were not feasible for image recording by the consumer and could not, therefore, be used in any design that embodied the video recorder concept. As it turned out, the time-shift function stimulated the development of the market, and demand quickly moved toward the two principal designs-Sony’s Beta system and Matsushita’s VHS system-that offered this capability.5 These versions of the product embodied incompatible standards (as noted earlier) in that video tapes recorded on one machine could not be played on a machine designed for the other. But the viability of both standards was strengthened, versus those of video player designs, as customers came to prefer the functional capabilities that flowed from the video recorder concept and magnetic tape technology. Matsushita prevailed in the follow-on competition between the VHS and Beta standards mainly because it was very aggressive in forging licensing and private label agreements for its version of the product. In so doing, it gained an installed base advantage and increased the attractiveness of its standard to later adopters. Combined with positive feedback effects, market demand ultimately moved to VHS as the de facto industry standard. The pattern is not infrequent. Diversity in product concepts and technological approaches often gives rise to differences in the functional/price-performance capabilities of various designs. Some versions of the product may perform functions that others cannot perform, or offer substantial price-performance advantages on given functional dimensions. At the same time, they may be fundamentally constrained in their ability to perform other functions as well. To a considerable degree, the functional capabilities and priceperformance characteristics of the designs that are available influence the formation of customer preferences (Clark, 1985). Where consumers come to value the mix of functional/price-performance capabilities that flows from the concept/approach that one or more designs embody, the viability of the associated compatibility standard(s) will frequently be strengthened. The viability of other standards will often be reduced correspondingly. These dynamics are most likely to arise when an inuustry standard is determined principally by market forces (versus industry associations or regulatory bodies), and will have important implications when the contending standards are proprietary. When only one design incorporates the concept/approach with the functional/price-performance capabilities that customers come to value, the associated standard will often be propelled to the forefront. Even where more than one design incorporates the favored concept/approach, the sponsoring firms will be in a better position to have their standard emerge as the industry standard subsequently. For such a firm, the odds will be significantly improved that it will ultimately be able to exert proprietary control over the de facto standard, and enjoy the resulting strategic advantages. In summary, the interlinkages described in this section are noteworthy because of their potential impacts upon the outcomes of design competition, and the competitive positions of industry participants. P2:

The viability of alternative compatibility standards can be affected where customers come to value the mix of functional/price-performance capabilities that flows from a given concept and/or approach. This interlinkage will affect the long-term competitive positions of industry participants when the contending standards are proprietary.

Design Competition

in Young Industries

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and Implications

What dimensions comprise the architectures of competing designs, and the alternative that wins the race for dominance? And what is the strategic significance of the dominant design that emerges? Research concerning competition in high-tech/network externality environments has focused on the dimension of compatibility standards, which determine the complementary products that can be used with a particular design. Where alternative designs require complementary products that are tailored to them in order to obtain fullvalue use, the emergence of a proprietary industry standard can allow the standard-setter to define the ground rules by which rivals must play. Other firms will be at a strategic disadvantage. In essence, a proprietary standard provides the standard-setter with the ability to control the high ground in industry competition. This ability is reinforced by the existence of buyer switching costs, which makes it difficult to induce migration to an alternative standard. In contrast, research concerning innovation in young industries has highlighted the diversity of product concepts and technological approaches that often exists among competing alternatives, and how these dimensions affect a design’s functional/priceperformance capabilities. Diversity along these dimensions can also mean that competing designs will be grounded in different sets of technical capabilities, and that different sets of marketing capabilities may be required to market each effectively. Such resources and skills are the foundation of a firm’s competitive position. Where rival alternatives are tied to different sets of technical and/or marketing capabilities, the strength of a firm’s market position in the long term will depend substantially on which alternative wins the race for dominance. Together, these two streams of research help to provide a more complete view of design competition, and the strategic significance of the dominant design that emerges. Moreover, by integrating these lines of inquiry, it is possible to see how interlinkages between compatibility standards and product concepts/technological approaches can affect the emergence of dominant designs. One interlinkage concerns how a compatibility standard can affect the viability of alternative product concepts and technological approaches. In some instances, it may be less difficult to construct an infrastructure that is needed for delivering essential complements for a given design, versus others, or it may be possible to use an existing infrastructure for the complement in question. (As noted above in the case of the early automobile industry, gasoline could be readily sold through the existing distribution system for kerosene and related products, while the infrastructure for electricity was only beginning to develop.) Other times, an industry association or a government regulatory body may appear to favor a given compatibility standard over others (e.g., a digital rather than an analog HDTV broadcast transmission standard). The result may be that product concepts or technological approaches that might have been embodied in the dominant design will be less likely to be so, and vice versa. By extension, this may affect which firms’ technical/marketing capabilities prove to be most valuable for competition in the long term. Research concerning compatibility standards sometimes assumes that non-proprietary industry standards have only limited significance. Because of this interlinkage, however, such standards may have sizable impacts on the market positions of industry participants through their indirect affect on the value of firms’ competitive capabilities. Managers should be cognizant of the potential impacts of this interlinkage, and alternative standards (whether they are proprietary or non-proprietary) should be appraised with this question in mind. This is especially true of standards that have an advantage because of infrastructure issues that surround the delivery of essen-

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tial complements, and standards that seem likely to be approved by industry associations or regulatory bodies. The second interlinkage concerns how the viability of alternative compatibility standards may be affected by the mix of functional/price-performance capabilities that flows from given product concepts and/or technological approaches. Where mainstream customers come to value the functional/price-performance capabilities that stem from the concept/approach that one or more designs embody, the viability of the associated compatibility standard(s) will frequently be strengthened. The viability of other standards will often be reduced correspondingly. These dynamics are most likely to arise when an industry standard is determined principally by market forces (versus industry associations or regulatory bodies), and will have significant implications when the contending standards are proprietary. In this context, competing product concepts and technological approaches will often become part of the battle to establish whose standard will come to the forefront-and who will reap the strategic benefits of proprietary control over the industry standard. Research concerning compatibility standards suggests that the design that is tied to the winning standard need not be the best in price-performance terms. As long as the differences are not too substantial, customers will often accept a less advanced design to obtain the advantages of compatibility with the industry standard. To a considerable degree this is true. However, it must also be remembered that few designs achieve price-performance superiority on all functional dimensions; that customers will often come to place a greater weight on the performance of particular functions; and that they will typically accept sacrifices on other dimensions. Clearly, the managers of firms must identify product concepts and technological approaches that can adequately perform functions that customers seem likely to value (e.g., VCR’s time-shift). They must also engage in aggressive attempts to improve their designs’ price-performance capabilities on dimensions that become more important to competition as experience in use is gained with different versions of the product. Finally, managers of firms must work to shape the mix of functional/price-performance capabilities that mainstream customers value in ways that favor their versions of the product. Market feedback affects the direction of product development activities. But at the same time, the educational/promotional efforts of companies who are seeking to stimulate demand for their designs influence the formation of preferences that guide customer choice (Cowan, 1985). Unless each of these three areas is effectively addressed, broader efforts by a firm to achieve market penetration for its compatibility standard-through strategic alliances or liberal licensing policies for example-are less likely to be successful. In summary, previous research has considered general influences that shape the emergence of dominant designs. However, this article suggests new insights about the dynamics that affect design competition outcomes, and the strategic implications of interlinkages between compatibility standards and product concepts/technological approaches. This perspective should also help to provide a stimulus for future research. To a substantial degree, rivalry among firms in young industries is oriented toward shaping the framework of competition in ways that favor their economic interests (Cowan, 1985; Dosi, 1982; Hariharan & Prahalad, 1994). This article suggests that such rivalry often has two components: one concerning the determination of industry standards; and the second, which has received less attention, concerning whose capabilities will be most valuable for competition in the long term. By examining and further developing the interlinkages described here, follow-on research could provide a better understanding about each

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component of rivalry and the overlaps between them. Insights may also be gained about the circumstances under which firms are most likely to prevail on one or both dimensions, and when it may be advisable to accept “defeat” on one dimension in order to focus on achieving a more favorable outcome on the other.6 Examinations of the interlinkage propositions should be approached as part of a continuing effort to build a theory of design competition in young industries, rather than as a test of elements of an existing theory. It should be recognized that our Level of understanding of design competition and how dominant designs emerge is still relatively limited. Empirical research that is more exploratory in nature, utilizing in-depth longitudinal case studies and small-sample tests of the propositions set forth, is probably the most appropriate way to proceed in this context (Itami & Numagami, 1992). We should not be too preoccupied with the rigor of hypothesis testing techniques when the key task at the moment is to build a cogent and meaningful theory of design competition. Indeed, too much of an emphasis on “hard’ data gathering and analysis could hinder-rather than help-the larger effort to develop such an explanation of the phenomenon. A greater focus on theory building may lead to a reassessment of existing conceptions about design competition in general, and the architectural dimensions of dominant designs in particular. While compatibility standards are often a critical part of the equation, this article has argued that the dominant design construct is broader than this one dimension alone. Moreover, the ways in which dominant designs can affect a firm’s ability to establish a strong competitive position in a new field often go beyond the strategic issues that are associated with compatibility standards. Those who equate dominant designs with compatibility standards may overlook important dimensions of design competition, and the full significance of the alternative that wins the race for dominance. Those who recognize all of the design dimensions, and the interlinkages between them, seem more likely to build a better understanding of why firms succeed or fail in young industries.

ACKNOWLEDGMENTS The author would like to thank Daniel P. Hensley for his outstanding research assistance, and Dr. Henry F. Gray, a research physicist at the U.S. Office of Naval Research, for his helpful comments regarding the discussion of HDTV technology.

NOTES 1. The term product concept refers to the basic conception of a product design (e.g., a “wrist instrument” watch that performs numerous time-keeping functions). Technological approach refers to the core technologies that are utilized for a given version of the product (e.g., LCD display technology) and how the associated components are integrated together within the design. 2. Again, non-proprietary industry standards (e.g., the CCITT fax standard or the current NTSC television broadcast standard) are essentially public goods. No company can control access to such standards or unilaterally modify them (Morris & Ferguson, 1993). 3. Competitive strength refers to the strength of a firm’s technical/marketing capabilities for its design. A company may sponsor an alternative that has superior potential. But if the firm’s capabilities for that design are too weak to overcome its shortcomings, and achieve significant market penetration, other alternatives may come to the forefront instead (Cowan, 1985).

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4. Looking at an active matrix liquid-crystal display, for example, a transistor at each pixel on the screen is told whether to turn on or stay off by a digital command (a -1’ or a -0’). When a transistor is turned on, it causes a liquid crystal to twist, allowing light to pass through. 5. Had the video player concept gained widespread acceptance, the industry might be referred to today as the VDP (Video Disk Player) Industry. 6. Under what conditions, for example, should a firm conclude that demand will coalesce around a rival concept/approach, and embrace that alternative, so that it may still be able to sponsor a winning proprietary standard?

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