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Sustainable competitive advantages and market share performances of firms: The case of the Japanese semiconductor industry
International
Journal
of Industrial
Organization
8
( 1990)
73-92.
North-Holland
SUSTAINABLE COMPETITIVE ADVANTAGES AND SHARE PERFORMANCES OF FIRMS: The Case of the Japanese
Semiconductor
MARKET
Industry
Yui KIMURA* lnrernational
Unicersiry
of Japarr, ~Vii.qata-ken
Final version received May
949-7.?. J~rprm
1989
This paper examines empirically the sources of competitive advantage and the mechanisms that determine individual firms’ market shares within the context of the Japanese semiconductor industry. It identifies technological leadership. the scope of product line and vertical linkages with the tirm’s own downstream businesses as major influences on market share. It also finds that the power of these influences differs considerably across different market segments in this industry.
1. Introduction
In industrial organization research market share has long taken a back seat. Systematic empirical research has focused on market concentration, and explored the causes of concentration and its impact on market performance. Only recently have some authors begun to posit market share as a major structural element. Shepherd (1986), for instance, emphasizes the role of individual firms’ market share in explaining market performance. Gale and Branch (1982), Shepherd (1972). Kwoka (1979), Mueller (1986) and Ravenscraft (1983) seem to confirm this empirically. These researchers have focused on the share-performance link. Clearly, investigation into the share-performance link is important, and the link appears complex as these authors suggest. However, they have paid little direct attention to the determination of market share itself. What forces really determine an individual firm’s market share within an industry? What structural and behavioral firm characteristics influence the firm’s market position? We have very little knowledge of the determinants of market share. The major purpose of this paper is to examine the factors that determine an individual firm’s market share within a specific industry context. It *The author wishes to thank Thomas A. Pugel, Lawrence J. White, Ingo Walter. Robert G. Hawkins, Reginald Worthley, Dennis C. Mueller, and two anonymous referees for their useful comments on the earlier drafts of this paper. He also acknowledges the research assistance of Kimiko Nagai. 0167-7187,‘90/53.50
0
1990, Elsevier Science Publishers
B.V. (North-Holland)
74
Y. Kimura, Competitive adcanrage and market share performance offirms
attempts to isolate the structural and behavioral characteristics that influence a firm’s market share. However, studies of intraindustry firm characteristics face a number of limitations, due to problems in firm-level data and statistical analysis. This paper is no exception. Thus its intent is to initiate an avenue of analysis of the determinants of market shares within an industry. In section 2, we develop a theoretical framework for explaining how firm characteristics influence their market shares. Section 3 develops several testable hypotheses for these influences within the context of the Japanese semiconductor industry. It also defines the variables and specifies an empirical model. Section 4 reports the results of our investigation. and section 5 concludes this paper. 2. Determinants
of market share
In the conventional approach, all firms in an industry are regarded as homogeneous in all economically important aspects other than size, and the optimal size of the firm’s output is determined by cost conditions. Hovever, most evidence seems to suggest that cost curves tend to be flat over a wide range of outputs in many industries, and that most firms operate with outputs above minimum efficient scale (MES). If cost curves are rounded Lshaped, these cost conditions leave the optimal scale indeterminate, providing no clues as to why firms attain varying market share above MES. The conventional approach also fails to explain why some firms operate viably below MES. We hypothesize that firms are likely to differ systematically in their structural characteristics, so that an industry contains firms or firm groups with systematically different capabilities to compete [Caves and Porter (1977)]. The firm is viewed as a collection of rent-yielding heterogeneous assets and factors coordinated by its management through long-term contractual relationships. Firms acquire and accumulate heterogeneous assets over time, and the configuration of asset bundles may differ considerably across firms within an industry, depending on their initial and subsequent strategic choices.’ An implication is that the heterogeneous asset bundles may leave firms with differential structural and behavioral characteristics. These differential characteristics often persist due to differential costs and risks involved in changing the configuration of asset bundles, and delineate the firms in their ability to compete - to lower cost below those of competitors and,‘or to differentiate their product from those of competitors. An asymmetry in their ability to compete places some firms in a competitive position superior to others. A high market share may be gained by taking advantage of this ‘Caves (1984) and Porter
(1985).
Y. Kimuru,
Comprririw
adranrage
and marker
share performcrnce
of’jirms
75
asymmetry. Thus, firms that possess superior competitive advantages often claim higher shares than those that do not [Gale (1972) and Shepherd (1986)], and an asymmetry in market share may persist for an extended period. Firms that lack competitive advantages may face differential costs and risks in emulating the asset bundles of the well-positioned firms. These differential costs and risks act as barriers to interscale mobility [Caves and Porter (1977)].
3. Some hypotheses In this paper we test this hypothesis. However, the sources of firm asymmetries are disparate across industries, and a close investigation of their influence must concentrate on sources that are specific to an industry or a well-defined, small set of industries, and develop variables that measure accurately these structural and behavioral characteristics. We focus on firm traits within the Japanese seminconductor industry. We use pooled data for the period 1978-1982 on market share and firm characteristics from the nine largest Japanese semiconductor firms: NEC, Hitachi, Toshiba, Fujitsu, Mitsubishi, Oki, Matsushita, Tokyo Sanyo (now merged with Sanyo) and Sharp. These nine firms account for about 90 percent of total domestic industry output in integrated circuits, and shape the pattern of competition in this industry.2 The sources of data and the definitions of variables are presented in the appendix. Complete data are available only for these nine firms and for this time period, and thus a note of caution is in order. In the data set nine cross-section units are augmented through five continuous time-series observations. Such an augmentation may be problematic, particularly for such a variable as market share that tends to change slowly. To examine the variability of market share over time, coefficients of variation in market share are computed for each firm for each product area, and they are shown in table I. The results of computation indicate that there are sizable variations in individual firms’ share in most product areas, suggesting that this augmentation of our sample does add some useful information to our analysis. Another potential limitation in pooling cross-section data across time is that autocorrelation may be present. However, the data set contains only five time-series observations per firm, and this deters us from statistical examination and correction of potential autocorrelation. Although visual inspection and the Wald-Wolfowitz runs test of the residuals of regressions across time
‘Seno-o
(1983).
28.X5 6.24
105.23
Toshiba
Fujilsu
M;,~soshi~a
69.79
31.38
7.31
Oki
25.29
II.41
Hitachi
of
0 0
0
0
136.93
0
136.96
28.18
14.42
14.42.
73. I I
0
47.29
Codicients
IX
I
I 7.09
14X.81
21.65
21.65
DRAM
NEC 19.91
Table
Firms
Market segments
Time-series
0
0
0
94.68
41.45
7.09
137.15
22.
42.47
34.01
I
IOI.XX
94.97
10.27
18.37
13.08
7.10
x.43
Y. Kimura, Competitive
adcanrage
and marker share perfbrmance
ofjirms
77
suggest that autocorrelation may not be present, our conclusions must nonetheless be qualitied.3 In estimating the model firm characteristics are regressed on market share. The model is specified in the two-limit Tobit form of regression and the maximum likelihood (ML) estimator is used. Market share is bound between 0 and 1, and the dependent variable is truncated at J+=O and 1. The OLS estimator is biased and inefficient when the dependent variable is truncated. The use of Tobit corrects these deficiencies of OLS. It should be noted, however, that in the presence of autocorrelation, the maximum likelihood estimator of the Tobit model may be inefficient but consistent [Maddala (1983)].
Dependent
variables
The hypothesized relationship is tested for the firm’s share in several distinct market segments in the industry. In a differentiated oligopoly where the market is segmented into submarkets, the competitive advantages firms have may differ from segment to segment, reflecting the unique needs and preferences of each customer group [Tremblay (1985)]. The semiconductor market is segmented into several distinct submarkets according to the diverse needs for functional. performance and cost characteristics of semiconductor devices in end-user applications, although some degree of substitutability exists across these semiconductor devices.’ We estimate hypothesized relationships for the MOS memory segments, the microprocessor segment, the bipolar logic segments, and the bipolar linear ICs for industrial applications, and the bipolar linear ICs for consumer electronics applications. The market share variables for these market segments are thus: MOS memory segments:
DRAM SRAM ROM
MOS-based dynamic random access memory ICs. MOS-based static random access memory ICs. MOS-based read-only memory ICs.
‘To test for autocorrelation. the Durban-Watson test requires a sample containing at least 15 time-series observations. For a smaller sample, the Wald-Wolfowitz runs test, though less formal, may be used to detect the non-randomness of the residuals of regression. Using this test. we did not reject the null hypothesis that the residuals are distributed randomly for all the tirms. However, given the small sample size, extreme conditions of the pattern of distribution must be met for rejecting the null hypothesis. For this reason. we suggest caution in interpreting the results of this study. “See Kimura (1986, Chapter 3. pp. 65-75). and Hazewindus (1982. Chapter 5) for product categories and their end-user applications.
78
Y. Kimura,
Competitice
advantage
and market
share performance
offirms
Microprocessor segment:
MICRO
MOS-based microprocessors.
Bipolar logic IC segments:
TTL LSTTL ECL
Bipolar-based TTL logic ICs. Bipolar-based LSTTL logic ICs. Bipolar-based ECL logic ICs.
Bipolar linear IC segmenrs:
BPLID BPLCN
Bipolar linear ICs for industrial applications. Bipolar linear ICs for consumer electronics applications.
Independenr variuhles
A constellation of factors may give rise to persistent, intraindustry competitive asymmetries. Of these factors, we examine technological innovations, the scope of product line, and the vertical linkages with the firm’s own downstream systems product businesses. ’ The literature points to each of these as major influences in the industry. We develop several specific hypotheses on how these factors are likely to affect the firm’s market share, and define variables to measure these influences. The theoretical predictions are shown in table 2. Technologicd innovcrrion:
Technological innovation may give rise to a competitive asymmetry among firms within an industry, opening a gap between the technological leader and the follower firms. This gap may constrain the follower firms’ ability to compete, and confer on a leader firm a transient monopoly of a product and/ or production process. It may constrain the followers’ ability to differentiate products and/or to reduce cost vis-l-vis the leader, increase capital requirements for R&D, and give the leader first-mover advantages. The sustainability of a leader’s monopoly hinges on several technological conditions: abundance of technological opportunities, technological continuity, and the firm-specificity of technology [Pakes and Schankerman (1984), Nelson and Winter (1982) and Porter (1983)]. When these conditions are 5In the preliminary stage of this research, the capital labor ratio was included to test the hypothesis that these firms may differ in production process technology. This variable was dropped because it was totally insignificant in explaining the lirm’s share in all product segments.
Y. Kimura.
Competitive
adcantage
and market
Table Hypothesized
share perfbrmance
79
2
influences of the firm characteristics
MOS memory
of’jirms
on share.
Microproc.
Bipolar logic
Bipolar linear ind.
Bipolar linear consum.
MICRO
TTL LSTTL ECL
BPLID
BPLCN
Firm traits
Explanatory variables
DRAM SRAM ROM
Technological leadership position in MOSmemory
INMME
+
0
0
Microprocessor
INMCR
+
0
0
Bipolar logic
INBDG
0
0
0
Bipolar linear
INBLN
0
+
+
Scope of product line
IDPSC
+
+
+
+
+
Verticul linkages with Computers & telecomm. systems
VLTEC
+
+
+
+
0
Consumer electronics
VLHOM
0
+
0
0
+
present, leaders may be able to sustain their monopoly (hence a large share) and earn a return higher than that of laggard firms. Moreover. first-mover advantages may accrue to leaders due to search and switching cost and intertemporal dependence of demand and cost [Schmalensee (1982), Flaherty (1983) and Porter (1983)J6 When these conditions are not present, fast follower firms will likely prevail in the market. As we have shown elsewhere [Kimura (1986)], these conditions seem to apply very closely to semiconductor technology, and technological innovation may indeed be a powerful source of competitive asymmetry in this industry. There seem, however, some added complexities to semiconductor technology. First, semiconductor technology is not a coherent, single body of knowlege 6These advantages based on technological leadership are also augmented by the productspecilic learning economies and pre-emptive capacity investment in the semiconductor industry. See Kimura (1986, Chapter 4). For theoretical treatment of the strategic signilicance of learning economies and capacity investment, see Spence (1981) and Spence (1977) respectively.
80
Y. Kimura.
Comperirice
adrantage
and market
shore perjbrmance
oj’/irm.s
and know-how. It consists of heterogeneous, distinct product design and process technologies for diverse device applications. and these distinct technologies tend to be device-specific. This heterogeneity arises from the diversity of needs for varied device functions, performance characteristics, and cost in the end-user applications, and from the diversity of cost/ performance profiles attainable through applications of these technologies.’ The technology that best attains the desired profile thus emerges as the dominant technology for specific device applications. Moreover, while most semiconductor technologies are specific to narrow areas of application, certain technologies, particularly MOS VLSI memory technologies, tend to be less specific to device applications. It is generally believed that the knowledge and know-how gained in development and processing of the state-of-the-art MOS VLSI dynamic random access memory (DRAM) devices are general enough to be applied to other types of MOS-based VLSI devices, such as MOS logic devices and microprocessors.’ This suggests a possibility that this technology may carry over to other MOS-based product areas at an incremental cost and risk lower than those faced in independent R&D in those product areas, and that the leadership in MOS VLSI DRAM technology may be readily duplicated in other areas. These features of semiconductor technologies have some important implications for market share determination. First, given the device-specificity of technologies, the firm’s leadership in a technology area may be important in determining its share in the product to which it is specific, but it may be insignificant in other product segments and in the aggregate integrated circuit market. Second, technologies may differ in those conditions that allow technological leaders to sustain a monopoly. Among those heterogeneous semiconductor technologies, some may possess characteristics that require technological leadership to gain a high market share while others lack them. In the latter case, a fast follower strategy may be necessary to gain a large share. Third, the possibility of MOS-based memory technology to carry over to other MOS product areas suggests that the firm’s leadership in this technology may influence its share not only in MOS-based memory segments, but also in other MOS product areas, such as microprocessors, and perhaps in the aggregate IC market as well. To test these hypotheses, we construct measures of a firm’s technological leadership in four distinct semiconductor technologies, drawing on the data in Sakuma (1983). The data allow identification of a specific innovation in a
‘Performance characteristics attainable by different semiconductor technologies are discussed in Parrillo (1983). A discussion of the systems application domains of random access memory devices implemented in diNerent technologies is found in Nikkei Electronics (February 10. 1986). ‘Nikkei
IVficrodeaices
(1983).
Y. Kimura,
Comperrt~re crdranrugr
rtn~l ma&r
shtrrr prrjixmance
ofjirm.s
YI
particular year with the firm that introduced the innovation, and with a specific area of four broadly-defined, distinct technology areas for the period 1975-1982. This list of innovations includes only those innovations that are likely to open a considerable gap, providing a structural defense against follower competitors. To account for the time period during which the firm’s leadership is sustained, and the time lag between the introduction of innovations and market impact, these measures are constructed by cumulating the firm’s annual count of innovations in a specific technology area over the last three years and by lagging this cumulative count one year.’ Thus, for each firm: INMME INMCR INBDG INBLN
is its leadership measure in MOS memory technology, is its leadership measure in MOS-based microprocessor technology, is its leadership measure in bipolar logic technology, is its leadership measure in bipolar linear technology.
The scope of product line: The scope of a firm’s product line may affect its competitive position and market share in individual market segments as well as in an overall market. The influence on the firm’s competitive position and market share derives from cost savings due to economies of scope and product differentiation advantages associated with multiple products. Economies of scope result when a multiproduct firm attains cost savings from simultaneous joint production of several different products within the firm, as contrasted with their production in isolation, each by its own specialized firms. The cost savings arise from inputs that are shared, or utilized jointly among these different products without complete congestion [Baumol, Panzar and Willig (1982) and Teece (1980)]. In semiconductor operations, there seem to be a number of activities whose costs tend to be fixed, yet can be shared across different semiconductor devices within a firm, giving rise to potential economies of scope. As suggested earlier, although most of R&D activities tend to be device-
‘The cumulative lag structure is based on the observation that it took about three years for follower firms to catch up with leaders in the MOS memory technology area during the period covered in the statistical analysis. Since more than 60 percent of the innovations covered in the analysis are related to MOS technology, it was assumed that a similar intertemporal gap existed in other technology areas as well. The one year lag is rather arbitrary. Some new innovations and products seem to have had a more immediate market impact. but some others required a longer lead time. Various structures of time period of sustaining leadership and lags have been attempted in the preliminary research. and this speciiication performed best.
52
Y. Kimurct,
Competitive
adcantqe
and mcvket share performcmcr
offirms
specific, R & D activities in the MOS VLSI memory technology area are less specific to device applications, thus giving rise to economies of scope in R&D. In production, the same process equipment can be shared across products that are based on the same process technology. To the extent that the equipment purchases are lumpy, the production process is subject to economies of scope. Similarly, a firm with a broad product line may be able to attain a lower unit cost in marketing activities if it is able to sell a package of multiple devices rather than a single product, as the cost of closing a deal may be fixed. Moreover, firms with a broader product line may be able to achieve a differentiation advantage associated with multiple products. In the semiconductor industry, this advantage may derive from the end-users’ needs for multiple semiconductor devices in systems integration. The scope of product line may thus influence the competitive position of firms in operating cost and differentiation in specific product areas as well as in the entire market. The scope of product line is a behavioral variable set by firms, but their ability to offer certain devices is substantially constrained by their capability in technologies that are specific to those products. Firms in the industry thus differ in their scope of product line, and in their ability to attain economies of scope and differentiation advantages associated with multiple products. To capture these influences on market share, we introduce: IDPSC
A Hertindahl-type index of the firm’s product line scope in its integrated circuit business, defined as 1 minus the summation of squares of the proportion of the firm’s sales in specific devices to its total semiconductor sales.
Vertical linkages:
Newman (1978) suggests that variations among firms in the vertical linkages between their activities in the focal industry and those in upstream or downstream industries may influence the competitive structure of the focal industry. The semiconductor operations of these Japanese semiconductor firms are partially linked with those in the downstream industries, and we hypothesize that these tapered vertical linkages may affect the competitive positions of firms in the semiconductor industry. The competitive asymmetry associated with a firm’s tapered vertical linkages is likely to arise from the economies attained in R&D in the systems integration technology that links the semiconductor device design and systems applications of the device, product differentiation based on the knowledge of systems integration, and the first-mover advantage provided by
Y. Kimura.
Competitire
adrxnfuge
and market
she
perjtirmance
o/~jirms
53
its own captive demand. The first two sources of asymmetry occurs because IC devices increasingly incorporate subsystems on the chip. and chip manufacturers are thus required to possess knowledge in systems integration in each downstream area. lo Integrated firms may be able to eliminate duplication in R&D at the two stages, and differentiate their IC devices from those unintegrated chip makers. Integrated firms may be able to offer devices that better meet the systems integration needs of final systems manufacturers due to their knowlege of systems integration. The last competitive asymmetry derives from the captive demand that allows integrated firms to accumulate experience and ride down the learning curve faster than unintegrated firms. These hypotheses are tested using the following variables. To account for differences in semiconductor devices required in particular systems applications, we introduce two separate measures: VLTEC
VLHOM
The degree of vertical linkages of the firm’s semiconductor operation with its own businesses in the areas of computers and telecommunications equipment. The degree of vertical linkages of the firm’s semiconductor operation with its own businesses in the areas of consumer electronics.
We expect the firm’s market share to be positively related to VLTEC, and unrelated to VLHOM in the MOS memory and bipolar logic equations as these devices are mainly used in computers and telecommunications equipment. We predict the opposite relationships for bipolar linear devices for consumer electronics applications.
4. The results The model is estimated on the pooled data set described in the preceding section, using Tobit regressions and the maximum likelihood (ML) estimator. Tables 3 and 4 present the results of the Tobit analysis and correlation coefficients among explanatory variables respectively. As seen in table 3, the results are mixed. The results support our hypothesis for the effects of the scope of product line. However, they are mixed and complex for those concerning technological leadership and vertical linkages. We examine these results more closely focusing on each hypothesis.
“Nikkei Electronics (1983).
Y. Kimurcl.
Comperirire
advantage
and marirr
.shre
perfiwmanc~r oJ’Jirm.s
85
Table 4 Correlation
coefficients among explanatory
INMME
INMCR
INBDG
INBLN
INMME INMCR INBDG INBLN IDPSC VLTEC
1.000 0.219 -0.119 0.101 0.506 0.41 I
_ l.Ow - 0.032 0.445 0.064 -0.005
_ l.OtXl -0.145 0.146 0.187
_ _ 1.000 -0.1 16 -0.1 19
VLHOM
- 0.488
-0.014
-0.287
0.163
variables.
IDPSC _ _ _ l.OQO 0.374 -0.628
VLTEC
VLHOM
_ _ _ l.OOil -0.206
_ _ I .OOO
N=45.
Technological
innovcrtion:
The results provide some confirmation of our hypotheses concerning the product specificity of semiconductor technologies and the strategic signilicance of technological leadership. At the same time, they also indicate that the structure of the influences may be more complex than hypothesized. In the MOS memory segments [eqs. (I), (2) and (3)], INMME is correctly leadership signed and significant [eqs. (2) and (3)] while technological measures in bipolar technology areas (INBDG and INBLN) are unrelated to market share. In the microprocessor segment [eq. (4)], the coefficient of INMCR is positive and statistically significant while those of INBDG and INBLN are insignificant. However, INMME and INMCR, the leadership measures that explain share in the MOS memory and microprocessor segments, provide no explanation for share in the bipolar logic segments [eqs. (5) (6) and (7)]. It should also be noted that INBLN is correctly signed and significant in the market segment for bipolar linear devices for consumer electronics applications [eq. (9)]. These results suggest that technological leadership in MOS memory and microprocessor technologies tends to be specific to those product areas, and that it does not extend to bipolar logic ICs. They also indicate that leadership in bipolar logic and linear technologies remain specific to those products and does not carry over to MOS products. The results thus show that the technological leadership hypothesis holds for these technologies in these product segments. However, there are some anomalies in the results, for example the strong influence of INMCR on market share in the DRAM and SRAM segments [eqs. (I) and (2)], and that of INMME in microprocessors [eq. (4)]. Also, these technological leadership measures are both positively and significantly related to share in bipolar linear ICs for industrial and consumer electronics applications [eqs. (8) and (9)], which is inconsistent with our predictions. The strong influence of INMCR on share in the DRAM and SRAM segments is not surprising, however. This result may be seen as a technology carryover. MOS memory technology and microprocessor technology are
86
I;. Kimura.
Competitive
adrantage
and market
shore perjormonce
of’jirms
based on the same MOS process technology, and the knowledge and know-how gained in the development of highly complex microprocessors may carry over to memory devices. Likewise, the strong influence of INMME in the microprocessor equation may be explained as a technology carryover from MOS memory to microprocessor. However, the results of the bipolar linear equations [eqs. (8) and (9)] are somewhat puzzling. Bipolar linear ICs are technologically remote from MOS memories and microprocessors, and we do not expect that the knowlege and know-how would readily carry over directly from MOS memory technology and influence the firm’s competitive position in this product area. We may argue, however, that the knowledge and know-how in those technologies improve the complementarity and compatibility in design of bipolar linear devices with the related MOS products. This may enhance the competitive position of firms in the bipolar linear product areas. Our results thus provide some support for our hypotheses, but they also raise a broad and interesting question concerning the strategic significance of technological leadership. They indicate that the influence of INMME on share differs considerably among the MOS memory segments. The strong influence of INMME and INMCR in MOS memories, microprocessors, and bipolar linear products contrasts sharply with the inability of INBDG to explain share in the bipolar logic segments. What explains these differences? The sparseness of data in INBDG may, in part, account for its inability to explain share. But, more importantly, this question seems to bear on more fundamental conditions of technology, such as the abundance of technological opportunities, technological continuity, the firm specificity of technology and so forth. As discussed earlier, they may give rise to, and sustain competitive asymmetry between technological leaders and followers. These broadly-defined semiconductor technologies may differ in these conditions, and these differences may explain the varying influence of technological leadership on market share. Although we are unable to isolate clearly these technological conditions for each of these broadly-defined semiconductor technologies, let us be a little bold to offer some conjectures. In this industry, it is generally believed that MOS and bipolar technologies greatly differ in the opportunities for further development. MOS technology is still open to a wide range of opportunities for future development while bipolar technology is quickly maturing. With other things being equal, technological leadership is critical to building a strong market position when the technology is continuous, and when it is open to opportunities for further development [Porter (1983), Pakes and Schankerman (1984)]. This may explain the contrast between the strong influence on share of leadership in the MOS memory segments and the inability of leadership to explain share in the bipolar logic segments. The firm-specificity of technology may also provide an explanation for the
Y. K imura,
Competirice
adranrage
and market
share performance
of jirms
57
differences in the influences of leadership on share performance. Among the state-of-the-art MOS memory or digital devices, static random access memory (SRAM) ICs, read-only memory (ROM, particularly EPROM and EEPROM) ICs and microprocessors are far more complex than dynamic random access memory (DRAM) ICs in device design and manufacturing process. The design complexity may require individual leader firms to employ unique, firm-specific approaches in design and processes, and this may allow them to defend the know-how from imitation by fast-second firms. All this implies that those semiconductor technologies may indeed differ in their fundamental conditions, and that these differences may explain some of our results.
The scope of product
line:
The results suggest that the scope of product line is indeed an important source of competitive advantage, and influences the firm’s share in specific product segments. The coefficients of IDPSC are positive and statistically significant in all but the BPLCN equation [eq. (9)]. This finding is consistent with our explanation that the economies of scope in R&D, production and marketing, and product differentiation associated with multiple products, give rise to competitive advantage. We are, however, unable to decompose these effects and trace them to the hypothesized specific sources.” The negative, significant coefficient of IDPSC in eq. (9) is puzzling, and we are not able to explain this result.
Vertical linkages:
The results are disappointing for the vertical linkage measures. They perform as predicted only in the DRAM segment and the segment for bipolar linear ICs for consumer electronics applications [eqs. (I) and (9)]. The positive, significant coefficient of VLTEC and insignificant coefficient of
“Due to the technology carryover of MOS memory technology, a part of the explanatory power of IDPSC seems to be traced to INMME. To examine the determinants of IDPSC, it was regressed on all other explanatory variables, and the results indicate that INMME is the single most important determinant among the technologically-defmed firm traits. Also, to test the hypotheses on the economies of scope in marketmg and product differentiation advantages associated with multiple products, a specification was attempted that replaces IDPSC with the shares in product areas other than the ones for which the regression was estimated. The results suggest that the tirm’s share in the MOS memory segments was closely related to its share in bipolar logic segments. Since the firm’s share in the MOS segments is independent of the influence of bipolar logic technology and vice versa, the results seem to capture the hypothesized influence.
88
1: Kimuru.
Cotnpetitire
adranrqe
and marker
share
performance
offirms
VLHOM in eq. (1) are consistent with our prediction, and so are the negative, significant coefficient of VLTEC and the positive, significant coefficient of VLHOM in eq. (9). However, in most other product areas, the vertical linkage measures are powerless in explaining market share, and these results are somewhat puzzling. We offer a tentative explanation. Of those nine firms in the sample, six firms (NEC, Hitachi, Toshiba, Fujitsu, Mitsubishi, and Oki) actively compete in the MOS memory, microprocessor, and bipolar logic segments. These six firms are similarly vertically integrated with downstream businesses, and. the vertical linkages may not provide them any competitive edge vis-a-vis similarly structured firms. Also, most of these firms are active in merchant sales. and the captive vertical linkages are limited in these firms. In contrast to these six firms, Matsushita, Sanyo, and Sharp compete in the market segment for bipolar linear ICs for consumer electronics applications, and they are more tightly integrated with consumer electronics businesses. Given the structural difference, the vertical linkage with consumer electronics businesses may offer them competitive advantage vis-a-vis the above six firms. Eq. (9) may be capturing this effect. These results provide some evidence to support the hypotheses presented earlier. They confirm that the bases for competitive advantages differ considerably across these market segments, and that the competitive field is not necessarily level for all players in an industry.
5. Conclusions Based on the premise of intraindustry heterogeneity of firms, we developed explanations for differential market shares among firms in an industry, and tested them using data from the Japanese semiconductor industry. Overall, our results offer some confirmation of our hypotheses. Semiconductor technologies appear more or less device-specitic. Technological leadership in MOS memory and microprocessor technologies, at least, seems to influence the firm’s market share in some product areas and also to carry over to related products. The results also indicate that the firm’s activities in adjacent product areas and, to a lesser extent, in vertically-linked industries are likely to affect its competitive position in specific product segments through economies of scope, economies of vertical linkages, and differentiation advantages. However, the results must be viewed as highly tentative due to several serious shortcomings. This study focuses entirely on a single industry. The sample used is a small cross-section time-series sample, too small to investigate statistically potential autocorrelation across time. Augmentation of data through time-series observations may not provide sufftcient addi-
Y. Kimura.
Comperitice
adrantage
and marker
share performance
of‘firms
89
tional information. Measurement of share determinants is often indirect and crude. These are limitations that are often encountered in firm-level studies in oligopolistic industries and in early empirical work of this sort. Despite these limitations, this study does initiate a new avenue of research that may lead to a rich analysis of differences in firms’ competitive positions. To further our knowledge, we need rigorous empirical evidence based on a larger sample with more direct measures of market share determinants from other industries. Further theoretical work and empirical measures of technological conditions are necessary for more concrete understanding of the effect of technological leadership on the firm’s market position.
Appendix Definitions
of variables and sources of data
Explanatory variables 1. The firm’s technological leadership: Following variables are constructed as a sum of the firm’s annual count of innovations and new product introductions in each of the four technology areas, as defined below, in the years t - 1, r - 2, and r - 3, where t = 1978, 1979, 1980, 1981, and 1982. [Sorrvce: Sakuma, A., 1983, Nihon Kigyo no Kenkyu Kaihatsu [Research and Development of Japanese Firms], Business Review 30.1 INMME INMCR INBDG INBLN
Leadership Leadership Leadership Leadership
in in in in
MOS memory technology. MOS-based microprocessor bipolar logic technology. bipolar linear technology.
2. The firm’s scope of product
technology.
line:
IDPSC This is a Herfindahl index, defined as 1 minus summation of squares of the proportion of the tit-m’s sales in a specific devices to its total semiconductor sales for each year from 1978 through 1982. [Source: Yano Economic Research Institute, 1982, Semiconductor/Microelectronics Industry in Japan, and 1983, 1984 nen-ban Handotai Shijo no Chuki Yosoku (Tokyo, Japan: Yano Economic Research Institute).] 3. The measures VLTEC=
of the degree of the firm’s vertical
DVTEC
x RTCAP
linkage:
90
VLHOM
Y. Kimuru, Competirice
= DVHOM
adruntqe
x RTCAP,
and market share performcmce ofjirms
where:
DVTEC
The firm’s annual sales in computer and telecommunications equipment, divided by its annual sales in computers, telecommunications equipment and consumer electronics equipment in the five years from 1978 through 1982. DVHOM The firm’s annual sales in consumer electronics equipment, divided by its annual sales in computers, telecommunications equipment and consumer electronics equipment in the five years from 1978 through 1982. [Source for the abooe two aariables: Yukashoken Hokokusho (Form 10-K equivalent) of NEC Corporation; Hitachi, Ltd.; Toshiba Corporation; Mitsubishi Electric Corporation; Fujitsu Ltd., Oki Electric Industry Co., Ltd.; Matsushita Electric Industrial Co., Ltd.; Tokyo Sanyo Electric Co., Ltd.; Sanyo Electric, Co., Ltd.; and Sharp Corporation for 1978-1982.1 RTCAP The ratio of the values of a firm’s captive consumption of semiconductor devices to the value of its total production, for 1980 and 1982. [Sozrrce: Yano Economic Research Institute, 1982, Semiconductor/ Microelectronics Industry in Japan, and 1983, 1984 nen-ban Handotai Shijo no Chuki Yosoku (Tokyo, Japan: Yano Economic Research Institute).] Dependent
cariables
The following variables are market share of the firm in the decimal form in the market segments, as defined below, in each year from 1978 through 1982. [Source: Yano Economic Research Institute, 1982, Semiconductor/ Microelectronics Industry in Japan, and 1983, 1984 nen-ban Handotai Shijo no Chuki Yosoku (Tokyo, Japan: Yano Economic Research Institute).] MOS memory segments: MOS-based dynamic random access memory ICs. DRAM MOS-based static random access memory ICs SRAM MOS-based read-only memory ICs ROM Microprocessor segment: MICRO MOS-based microprocessors. Bipolar TTL LSTTL ECL
logic ICs: Bipolar-based Bipolar-based Bipolar-based
Bipolar BPLID
linear IC segments: Bipolar linear ICs for industrial
TTL logic ICs. LSTTL logic ICs. ECL logic ICs.
applications.
Y. Kimura.
BPLCN
Competirice
adcanrage
and marker
share performance
qf‘/irms
91
Bipolar linear ICs for consumer electronics applications.
References Baumol. W., J. Panzar and R. Willig. 1982. Contestable markets and the theory of industry structure (Harcourt Brace Javanovich, New York). Caves, R., 1984, Economic analysis and the quest for competitive advantage, American Economic Review 74. May, 127-136. Caves, R. and M. Porter. 1977, From entry barriers to mobility barriers: Conjectural decisions and contrived deterrence to new competition, Quarterly Journal of Economics 91. May. 42 I-434. Flaherty. ‘M.T.. 1983. Market share, technology leadership. and competition in international semiconductor market. in: R.S. Rosenbloom, ed.. Research on technological innovation. management and policy, a research annual. Vol. I (JAI Press, Greenwich. CT). Gale, B., 1972. Market share and rate of return, Review of Economics and Statistics 54, Nov.. 412-423. Gale, B. and B. Branch. 1982. Concentration versus market share: Which determines performance and why does it matter? The Antitrust Bulletin, Spring, 83-105. Hazewindus, N., 1982. The US. microelectronics industry (Pergamon Press. New York). Kimura, Y.. 1986, Competitive stategies and strategic groups in the Japanese semiconductor industry, Ph.D. dissertation (Graduate School of Business Administration. New York University). Kwoka. J.. 1979, The effects of market share distribution on industry performance. Review of Economics and Statistics 61, Feb., 101-109. Maddala. G.S., 1983. Limited-dependent and qualitative variables in econometrics (Cambridge University Press. Cambridge, U.K.). Mueller, D.. 1986. Persistent performance among large corporations, in: L.C. Thomas, III. ed.. The economics of strategic planning (D.C. Heath Company, Lexington. MA). Nelson. R. and S. Winter. 1982. An evolutionary theory of economic change (Harvard University Press. Cambridge, MA). Newman, H., 1978. Strategic groups and the structure-performance relationships. Review of Economics and Statistics 60, Aug.. 417-427. Nikkei Electronics, ed., 1983, Nenritsu 20”,-ijo de Nobiru LSI Sangyo [The LIS industry grows faster than 20”, a year], in Microdevices (Tokyo, Japan: Nikkei-McGraw-Hill, Inc.) 5659. Nikkei Electronics, February IO. 1986. Ryosan Tachiaparu 256-bit Static RAM [Volume prodtrction of 256K-bit SRAM takes off] 185-212. Nikkei Microdevices, February 1986, DRAM wa Mohaya Process wo Hipparanai? [DRAM no longer pulls process] 15. Pakes, A. and M. Shankerman, 1984, An exploration into the determinants of research intensity, in: Z. Griliches, ed., R&D, patents, and productivity (University of Chicago Press, Chicago). Parrillo, L., 1983. VLSI process integration, in: S.M. Sze, ed., VLSI technology (McGraw-Hill. New York). Porter, M., 1983, The technological dimension of competitive strategy, in: R.S. Rosenbloom, ed.. Research on technological innovation, management and policy, A research annual (JAI Press. Greenwich, CT). Porter, M., 1985. Strategic interaction: Some lessons from industry histories for theory and antitrust policy, in: R. Lamb, ed., Competitive strategic management (Prentice-Hall. Englewood Cliffs, NJ). Ravenscraft, D., 1983, Structure-profit relationships at the line of business and industry level. Review of Economics and Statistics 65, Feb., 22-3 1. Sakuma, A., 1983, Nihon Kigyo no Kenyu Kaihatsu [Research and development of Japanese lirms], Business Review 30, 120-146. Schmalensee, R., 1982, Product diLrentiation advantages of pioneering brands, American Economic Review 73, no. 3, June, 349-365. Seno-o, A., ed., 1983, Gendai Nihon no Sangyo Shuchu [Industrial concentration in Japan] (Nihon Keizai Shimbunsha. Tokyo, Japan).
J.I.O.
D
92
Y. Kinturu.
Competitive
adrantage
and market
share performance
offirms
Shepherd, W.. 1972. The elements of market structure, Review of Economics and Statistics 54, Feb.. 25-35. Shepherd, W.. 1986, On the core concepts of industrial economics, in: H.W. de Jong and W. Shepherd. eds.. Mainstream of industrial organization. Book 1, Theory and international aspects (Martinus Nijihoff Publishers, Dordrecht, The Netherlands). Spence, A.M.. 1977, Entry. capacity, investment and oligopolistic pricing. Bell Journal of Economics 8, Autumn. 534-544. Spence, A.M., 1981, The learning curve and competition. Bell Journal of Economics 12. Spring. 49-70. Teece. D.J.. 1980, Economies Behavior and Organization Tremblay, V., 1985, Strategic 34, 2, Dec., 183-198.
of scope and the scope of the enterprise, Journal of Economic I, 223-247. groups and the demand for beer. Journal of Industrial Economics
Journal
of Industrial
Organization
8
( 1990)
73-92.
North-Holland
SUSTAINABLE COMPETITIVE ADVANTAGES AND SHARE PERFORMANCES OF FIRMS: The Case of the Japanese
Semiconductor
MARKET
Industry
Yui KIMURA* lnrernational
Unicersiry
of Japarr, ~Vii.qata-ken
Final version received May
949-7.?. J~rprm
1989
This paper examines empirically the sources of competitive advantage and the mechanisms that determine individual firms’ market shares within the context of the Japanese semiconductor industry. It identifies technological leadership. the scope of product line and vertical linkages with the tirm’s own downstream businesses as major influences on market share. It also finds that the power of these influences differs considerably across different market segments in this industry.
1. Introduction
In industrial organization research market share has long taken a back seat. Systematic empirical research has focused on market concentration, and explored the causes of concentration and its impact on market performance. Only recently have some authors begun to posit market share as a major structural element. Shepherd (1986), for instance, emphasizes the role of individual firms’ market share in explaining market performance. Gale and Branch (1982), Shepherd (1972). Kwoka (1979), Mueller (1986) and Ravenscraft (1983) seem to confirm this empirically. These researchers have focused on the share-performance link. Clearly, investigation into the share-performance link is important, and the link appears complex as these authors suggest. However, they have paid little direct attention to the determination of market share itself. What forces really determine an individual firm’s market share within an industry? What structural and behavioral firm characteristics influence the firm’s market position? We have very little knowledge of the determinants of market share. The major purpose of this paper is to examine the factors that determine an individual firm’s market share within a specific industry context. It *The author wishes to thank Thomas A. Pugel, Lawrence J. White, Ingo Walter. Robert G. Hawkins, Reginald Worthley, Dennis C. Mueller, and two anonymous referees for their useful comments on the earlier drafts of this paper. He also acknowledges the research assistance of Kimiko Nagai. 0167-7187,‘90/53.50
0
1990, Elsevier Science Publishers
B.V. (North-Holland)
74
Y. Kimura, Competitive adcanrage and market share performance offirms
attempts to isolate the structural and behavioral characteristics that influence a firm’s market share. However, studies of intraindustry firm characteristics face a number of limitations, due to problems in firm-level data and statistical analysis. This paper is no exception. Thus its intent is to initiate an avenue of analysis of the determinants of market shares within an industry. In section 2, we develop a theoretical framework for explaining how firm characteristics influence their market shares. Section 3 develops several testable hypotheses for these influences within the context of the Japanese semiconductor industry. It also defines the variables and specifies an empirical model. Section 4 reports the results of our investigation. and section 5 concludes this paper. 2. Determinants
of market share
In the conventional approach, all firms in an industry are regarded as homogeneous in all economically important aspects other than size, and the optimal size of the firm’s output is determined by cost conditions. Hovever, most evidence seems to suggest that cost curves tend to be flat over a wide range of outputs in many industries, and that most firms operate with outputs above minimum efficient scale (MES). If cost curves are rounded Lshaped, these cost conditions leave the optimal scale indeterminate, providing no clues as to why firms attain varying market share above MES. The conventional approach also fails to explain why some firms operate viably below MES. We hypothesize that firms are likely to differ systematically in their structural characteristics, so that an industry contains firms or firm groups with systematically different capabilities to compete [Caves and Porter (1977)]. The firm is viewed as a collection of rent-yielding heterogeneous assets and factors coordinated by its management through long-term contractual relationships. Firms acquire and accumulate heterogeneous assets over time, and the configuration of asset bundles may differ considerably across firms within an industry, depending on their initial and subsequent strategic choices.’ An implication is that the heterogeneous asset bundles may leave firms with differential structural and behavioral characteristics. These differential characteristics often persist due to differential costs and risks involved in changing the configuration of asset bundles, and delineate the firms in their ability to compete - to lower cost below those of competitors and,‘or to differentiate their product from those of competitors. An asymmetry in their ability to compete places some firms in a competitive position superior to others. A high market share may be gained by taking advantage of this ‘Caves (1984) and Porter
(1985).
Y. Kimuru,
Comprririw
adranrage
and marker
share performcrnce
of’jirms
75
asymmetry. Thus, firms that possess superior competitive advantages often claim higher shares than those that do not [Gale (1972) and Shepherd (1986)], and an asymmetry in market share may persist for an extended period. Firms that lack competitive advantages may face differential costs and risks in emulating the asset bundles of the well-positioned firms. These differential costs and risks act as barriers to interscale mobility [Caves and Porter (1977)].
3. Some hypotheses In this paper we test this hypothesis. However, the sources of firm asymmetries are disparate across industries, and a close investigation of their influence must concentrate on sources that are specific to an industry or a well-defined, small set of industries, and develop variables that measure accurately these structural and behavioral characteristics. We focus on firm traits within the Japanese seminconductor industry. We use pooled data for the period 1978-1982 on market share and firm characteristics from the nine largest Japanese semiconductor firms: NEC, Hitachi, Toshiba, Fujitsu, Mitsubishi, Oki, Matsushita, Tokyo Sanyo (now merged with Sanyo) and Sharp. These nine firms account for about 90 percent of total domestic industry output in integrated circuits, and shape the pattern of competition in this industry.2 The sources of data and the definitions of variables are presented in the appendix. Complete data are available only for these nine firms and for this time period, and thus a note of caution is in order. In the data set nine cross-section units are augmented through five continuous time-series observations. Such an augmentation may be problematic, particularly for such a variable as market share that tends to change slowly. To examine the variability of market share over time, coefficients of variation in market share are computed for each firm for each product area, and they are shown in table I. The results of computation indicate that there are sizable variations in individual firms’ share in most product areas, suggesting that this augmentation of our sample does add some useful information to our analysis. Another potential limitation in pooling cross-section data across time is that autocorrelation may be present. However, the data set contains only five time-series observations per firm, and this deters us from statistical examination and correction of potential autocorrelation. Although visual inspection and the Wald-Wolfowitz runs test of the residuals of regressions across time
‘Seno-o
(1983).
28.X5 6.24
105.23
Toshiba
Fujilsu
M;,~soshi~a
69.79
31.38
7.31
Oki
25.29
II.41
Hitachi
of
0 0
0
0
136.93
0
136.96
28.18
14.42
14.42.
73. I I
0
47.29
Codicients
IX
I
I 7.09
14X.81
21.65
21.65
DRAM
NEC 19.91
Table
Firms
Market segments
Time-series
0
0
0
94.68
41.45
7.09
137.15
22.
42.47
34.01
I
IOI.XX
94.97
10.27
18.37
13.08
7.10
x.43
Y. Kimura, Competitive
adcanrage
and marker share perfbrmance
ofjirms
77
suggest that autocorrelation may not be present, our conclusions must nonetheless be qualitied.3 In estimating the model firm characteristics are regressed on market share. The model is specified in the two-limit Tobit form of regression and the maximum likelihood (ML) estimator is used. Market share is bound between 0 and 1, and the dependent variable is truncated at J+=O and 1. The OLS estimator is biased and inefficient when the dependent variable is truncated. The use of Tobit corrects these deficiencies of OLS. It should be noted, however, that in the presence of autocorrelation, the maximum likelihood estimator of the Tobit model may be inefficient but consistent [Maddala (1983)].
Dependent
variables
The hypothesized relationship is tested for the firm’s share in several distinct market segments in the industry. In a differentiated oligopoly where the market is segmented into submarkets, the competitive advantages firms have may differ from segment to segment, reflecting the unique needs and preferences of each customer group [Tremblay (1985)]. The semiconductor market is segmented into several distinct submarkets according to the diverse needs for functional. performance and cost characteristics of semiconductor devices in end-user applications, although some degree of substitutability exists across these semiconductor devices.’ We estimate hypothesized relationships for the MOS memory segments, the microprocessor segment, the bipolar logic segments, and the bipolar linear ICs for industrial applications, and the bipolar linear ICs for consumer electronics applications. The market share variables for these market segments are thus: MOS memory segments:
DRAM SRAM ROM
MOS-based dynamic random access memory ICs. MOS-based static random access memory ICs. MOS-based read-only memory ICs.
‘To test for autocorrelation. the Durban-Watson test requires a sample containing at least 15 time-series observations. For a smaller sample, the Wald-Wolfowitz runs test, though less formal, may be used to detect the non-randomness of the residuals of regression. Using this test. we did not reject the null hypothesis that the residuals are distributed randomly for all the tirms. However, given the small sample size, extreme conditions of the pattern of distribution must be met for rejecting the null hypothesis. For this reason. we suggest caution in interpreting the results of this study. “See Kimura (1986, Chapter 3. pp. 65-75). and Hazewindus (1982. Chapter 5) for product categories and their end-user applications.
78
Y. Kimura,
Competitice
advantage
and market
share performance
offirms
Microprocessor segment:
MICRO
MOS-based microprocessors.
Bipolar logic IC segments:
TTL LSTTL ECL
Bipolar-based TTL logic ICs. Bipolar-based LSTTL logic ICs. Bipolar-based ECL logic ICs.
Bipolar linear IC segmenrs:
BPLID BPLCN
Bipolar linear ICs for industrial applications. Bipolar linear ICs for consumer electronics applications.
Independenr variuhles
A constellation of factors may give rise to persistent, intraindustry competitive asymmetries. Of these factors, we examine technological innovations, the scope of product line, and the vertical linkages with the firm’s own downstream systems product businesses. ’ The literature points to each of these as major influences in the industry. We develop several specific hypotheses on how these factors are likely to affect the firm’s market share, and define variables to measure these influences. The theoretical predictions are shown in table 2. Technologicd innovcrrion:
Technological innovation may give rise to a competitive asymmetry among firms within an industry, opening a gap between the technological leader and the follower firms. This gap may constrain the follower firms’ ability to compete, and confer on a leader firm a transient monopoly of a product and/ or production process. It may constrain the followers’ ability to differentiate products and/or to reduce cost vis-l-vis the leader, increase capital requirements for R&D, and give the leader first-mover advantages. The sustainability of a leader’s monopoly hinges on several technological conditions: abundance of technological opportunities, technological continuity, and the firm-specificity of technology [Pakes and Schankerman (1984), Nelson and Winter (1982) and Porter (1983)]. When these conditions are 5In the preliminary stage of this research, the capital labor ratio was included to test the hypothesis that these firms may differ in production process technology. This variable was dropped because it was totally insignificant in explaining the lirm’s share in all product segments.
Y. Kimura.
Competitive
adcantage
and market
Table Hypothesized
share perfbrmance
79
2
influences of the firm characteristics
MOS memory
of’jirms
on share.
Microproc.
Bipolar logic
Bipolar linear ind.
Bipolar linear consum.
MICRO
TTL LSTTL ECL
BPLID
BPLCN
Firm traits
Explanatory variables
DRAM SRAM ROM
Technological leadership position in MOSmemory
INMME
+
0
0
Microprocessor
INMCR
+
0
0
Bipolar logic
INBDG
0
0
0
Bipolar linear
INBLN
0
+
+
Scope of product line
IDPSC
+
+
+
+
+
Verticul linkages with Computers & telecomm. systems
VLTEC
+
+
+
+
0
Consumer electronics
VLHOM
0
+
0
0
+
present, leaders may be able to sustain their monopoly (hence a large share) and earn a return higher than that of laggard firms. Moreover. first-mover advantages may accrue to leaders due to search and switching cost and intertemporal dependence of demand and cost [Schmalensee (1982), Flaherty (1983) and Porter (1983)J6 When these conditions are not present, fast follower firms will likely prevail in the market. As we have shown elsewhere [Kimura (1986)], these conditions seem to apply very closely to semiconductor technology, and technological innovation may indeed be a powerful source of competitive asymmetry in this industry. There seem, however, some added complexities to semiconductor technology. First, semiconductor technology is not a coherent, single body of knowlege 6These advantages based on technological leadership are also augmented by the productspecilic learning economies and pre-emptive capacity investment in the semiconductor industry. See Kimura (1986, Chapter 4). For theoretical treatment of the strategic signilicance of learning economies and capacity investment, see Spence (1981) and Spence (1977) respectively.
80
Y. Kimura.
Comperirice
adrantage
and market
shore perjbrmance
oj’/irm.s
and know-how. It consists of heterogeneous, distinct product design and process technologies for diverse device applications. and these distinct technologies tend to be device-specific. This heterogeneity arises from the diversity of needs for varied device functions, performance characteristics, and cost in the end-user applications, and from the diversity of cost/ performance profiles attainable through applications of these technologies.’ The technology that best attains the desired profile thus emerges as the dominant technology for specific device applications. Moreover, while most semiconductor technologies are specific to narrow areas of application, certain technologies, particularly MOS VLSI memory technologies, tend to be less specific to device applications. It is generally believed that the knowledge and know-how gained in development and processing of the state-of-the-art MOS VLSI dynamic random access memory (DRAM) devices are general enough to be applied to other types of MOS-based VLSI devices, such as MOS logic devices and microprocessors.’ This suggests a possibility that this technology may carry over to other MOS-based product areas at an incremental cost and risk lower than those faced in independent R&D in those product areas, and that the leadership in MOS VLSI DRAM technology may be readily duplicated in other areas. These features of semiconductor technologies have some important implications for market share determination. First, given the device-specificity of technologies, the firm’s leadership in a technology area may be important in determining its share in the product to which it is specific, but it may be insignificant in other product segments and in the aggregate integrated circuit market. Second, technologies may differ in those conditions that allow technological leaders to sustain a monopoly. Among those heterogeneous semiconductor technologies, some may possess characteristics that require technological leadership to gain a high market share while others lack them. In the latter case, a fast follower strategy may be necessary to gain a large share. Third, the possibility of MOS-based memory technology to carry over to other MOS product areas suggests that the firm’s leadership in this technology may influence its share not only in MOS-based memory segments, but also in other MOS product areas, such as microprocessors, and perhaps in the aggregate IC market as well. To test these hypotheses, we construct measures of a firm’s technological leadership in four distinct semiconductor technologies, drawing on the data in Sakuma (1983). The data allow identification of a specific innovation in a
‘Performance characteristics attainable by different semiconductor technologies are discussed in Parrillo (1983). A discussion of the systems application domains of random access memory devices implemented in diNerent technologies is found in Nikkei Electronics (February 10. 1986). ‘Nikkei
IVficrodeaices
(1983).
Y. Kimura,
Comperrt~re crdranrugr
rtn~l ma&r
shtrrr prrjixmance
ofjirm.s
YI
particular year with the firm that introduced the innovation, and with a specific area of four broadly-defined, distinct technology areas for the period 1975-1982. This list of innovations includes only those innovations that are likely to open a considerable gap, providing a structural defense against follower competitors. To account for the time period during which the firm’s leadership is sustained, and the time lag between the introduction of innovations and market impact, these measures are constructed by cumulating the firm’s annual count of innovations in a specific technology area over the last three years and by lagging this cumulative count one year.’ Thus, for each firm: INMME INMCR INBDG INBLN
is its leadership measure in MOS memory technology, is its leadership measure in MOS-based microprocessor technology, is its leadership measure in bipolar logic technology, is its leadership measure in bipolar linear technology.
The scope of product line: The scope of a firm’s product line may affect its competitive position and market share in individual market segments as well as in an overall market. The influence on the firm’s competitive position and market share derives from cost savings due to economies of scope and product differentiation advantages associated with multiple products. Economies of scope result when a multiproduct firm attains cost savings from simultaneous joint production of several different products within the firm, as contrasted with their production in isolation, each by its own specialized firms. The cost savings arise from inputs that are shared, or utilized jointly among these different products without complete congestion [Baumol, Panzar and Willig (1982) and Teece (1980)]. In semiconductor operations, there seem to be a number of activities whose costs tend to be fixed, yet can be shared across different semiconductor devices within a firm, giving rise to potential economies of scope. As suggested earlier, although most of R&D activities tend to be device-
‘The cumulative lag structure is based on the observation that it took about three years for follower firms to catch up with leaders in the MOS memory technology area during the period covered in the statistical analysis. Since more than 60 percent of the innovations covered in the analysis are related to MOS technology, it was assumed that a similar intertemporal gap existed in other technology areas as well. The one year lag is rather arbitrary. Some new innovations and products seem to have had a more immediate market impact. but some others required a longer lead time. Various structures of time period of sustaining leadership and lags have been attempted in the preliminary research. and this speciiication performed best.
52
Y. Kimurct,
Competitive
adcantqe
and mcvket share performcmcr
offirms
specific, R & D activities in the MOS VLSI memory technology area are less specific to device applications, thus giving rise to economies of scope in R&D. In production, the same process equipment can be shared across products that are based on the same process technology. To the extent that the equipment purchases are lumpy, the production process is subject to economies of scope. Similarly, a firm with a broad product line may be able to attain a lower unit cost in marketing activities if it is able to sell a package of multiple devices rather than a single product, as the cost of closing a deal may be fixed. Moreover, firms with a broader product line may be able to achieve a differentiation advantage associated with multiple products. In the semiconductor industry, this advantage may derive from the end-users’ needs for multiple semiconductor devices in systems integration. The scope of product line may thus influence the competitive position of firms in operating cost and differentiation in specific product areas as well as in the entire market. The scope of product line is a behavioral variable set by firms, but their ability to offer certain devices is substantially constrained by their capability in technologies that are specific to those products. Firms in the industry thus differ in their scope of product line, and in their ability to attain economies of scope and differentiation advantages associated with multiple products. To capture these influences on market share, we introduce: IDPSC
A Hertindahl-type index of the firm’s product line scope in its integrated circuit business, defined as 1 minus the summation of squares of the proportion of the firm’s sales in specific devices to its total semiconductor sales.
Vertical linkages:
Newman (1978) suggests that variations among firms in the vertical linkages between their activities in the focal industry and those in upstream or downstream industries may influence the competitive structure of the focal industry. The semiconductor operations of these Japanese semiconductor firms are partially linked with those in the downstream industries, and we hypothesize that these tapered vertical linkages may affect the competitive positions of firms in the semiconductor industry. The competitive asymmetry associated with a firm’s tapered vertical linkages is likely to arise from the economies attained in R&D in the systems integration technology that links the semiconductor device design and systems applications of the device, product differentiation based on the knowledge of systems integration, and the first-mover advantage provided by
Y. Kimura.
Competitire
adrxnfuge
and market
she
perjtirmance
o/~jirms
53
its own captive demand. The first two sources of asymmetry occurs because IC devices increasingly incorporate subsystems on the chip. and chip manufacturers are thus required to possess knowledge in systems integration in each downstream area. lo Integrated firms may be able to eliminate duplication in R&D at the two stages, and differentiate their IC devices from those unintegrated chip makers. Integrated firms may be able to offer devices that better meet the systems integration needs of final systems manufacturers due to their knowlege of systems integration. The last competitive asymmetry derives from the captive demand that allows integrated firms to accumulate experience and ride down the learning curve faster than unintegrated firms. These hypotheses are tested using the following variables. To account for differences in semiconductor devices required in particular systems applications, we introduce two separate measures: VLTEC
VLHOM
The degree of vertical linkages of the firm’s semiconductor operation with its own businesses in the areas of computers and telecommunications equipment. The degree of vertical linkages of the firm’s semiconductor operation with its own businesses in the areas of consumer electronics.
We expect the firm’s market share to be positively related to VLTEC, and unrelated to VLHOM in the MOS memory and bipolar logic equations as these devices are mainly used in computers and telecommunications equipment. We predict the opposite relationships for bipolar linear devices for consumer electronics applications.
4. The results The model is estimated on the pooled data set described in the preceding section, using Tobit regressions and the maximum likelihood (ML) estimator. Tables 3 and 4 present the results of the Tobit analysis and correlation coefficients among explanatory variables respectively. As seen in table 3, the results are mixed. The results support our hypothesis for the effects of the scope of product line. However, they are mixed and complex for those concerning technological leadership and vertical linkages. We examine these results more closely focusing on each hypothesis.
“Nikkei Electronics (1983).
Y. Kimurcl.
Comperirire
advantage
and marirr
.shre
perfiwmanc~r oJ’Jirm.s
85
Table 4 Correlation
coefficients among explanatory
INMME
INMCR
INBDG
INBLN
INMME INMCR INBDG INBLN IDPSC VLTEC
1.000 0.219 -0.119 0.101 0.506 0.41 I
_ l.Ow - 0.032 0.445 0.064 -0.005
_ l.OtXl -0.145 0.146 0.187
_ _ 1.000 -0.1 16 -0.1 19
VLHOM
- 0.488
-0.014
-0.287
0.163
variables.
IDPSC _ _ _ l.OQO 0.374 -0.628
VLTEC
VLHOM
_ _ _ l.OOil -0.206
_ _ I .OOO
N=45.
Technological
innovcrtion:
The results provide some confirmation of our hypotheses concerning the product specificity of semiconductor technologies and the strategic signilicance of technological leadership. At the same time, they also indicate that the structure of the influences may be more complex than hypothesized. In the MOS memory segments [eqs. (I), (2) and (3)], INMME is correctly leadership signed and significant [eqs. (2) and (3)] while technological measures in bipolar technology areas (INBDG and INBLN) are unrelated to market share. In the microprocessor segment [eq. (4)], the coefficient of INMCR is positive and statistically significant while those of INBDG and INBLN are insignificant. However, INMME and INMCR, the leadership measures that explain share in the MOS memory and microprocessor segments, provide no explanation for share in the bipolar logic segments [eqs. (5) (6) and (7)]. It should also be noted that INBLN is correctly signed and significant in the market segment for bipolar linear devices for consumer electronics applications [eq. (9)]. These results suggest that technological leadership in MOS memory and microprocessor technologies tends to be specific to those product areas, and that it does not extend to bipolar logic ICs. They also indicate that leadership in bipolar logic and linear technologies remain specific to those products and does not carry over to MOS products. The results thus show that the technological leadership hypothesis holds for these technologies in these product segments. However, there are some anomalies in the results, for example the strong influence of INMCR on market share in the DRAM and SRAM segments [eqs. (I) and (2)], and that of INMME in microprocessors [eq. (4)]. Also, these technological leadership measures are both positively and significantly related to share in bipolar linear ICs for industrial and consumer electronics applications [eqs. (8) and (9)], which is inconsistent with our predictions. The strong influence of INMCR on share in the DRAM and SRAM segments is not surprising, however. This result may be seen as a technology carryover. MOS memory technology and microprocessor technology are
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based on the same MOS process technology, and the knowledge and know-how gained in the development of highly complex microprocessors may carry over to memory devices. Likewise, the strong influence of INMME in the microprocessor equation may be explained as a technology carryover from MOS memory to microprocessor. However, the results of the bipolar linear equations [eqs. (8) and (9)] are somewhat puzzling. Bipolar linear ICs are technologically remote from MOS memories and microprocessors, and we do not expect that the knowlege and know-how would readily carry over directly from MOS memory technology and influence the firm’s competitive position in this product area. We may argue, however, that the knowledge and know-how in those technologies improve the complementarity and compatibility in design of bipolar linear devices with the related MOS products. This may enhance the competitive position of firms in the bipolar linear product areas. Our results thus provide some support for our hypotheses, but they also raise a broad and interesting question concerning the strategic significance of technological leadership. They indicate that the influence of INMME on share differs considerably among the MOS memory segments. The strong influence of INMME and INMCR in MOS memories, microprocessors, and bipolar linear products contrasts sharply with the inability of INBDG to explain share in the bipolar logic segments. What explains these differences? The sparseness of data in INBDG may, in part, account for its inability to explain share. But, more importantly, this question seems to bear on more fundamental conditions of technology, such as the abundance of technological opportunities, technological continuity, the firm specificity of technology and so forth. As discussed earlier, they may give rise to, and sustain competitive asymmetry between technological leaders and followers. These broadly-defined semiconductor technologies may differ in these conditions, and these differences may explain the varying influence of technological leadership on market share. Although we are unable to isolate clearly these technological conditions for each of these broadly-defined semiconductor technologies, let us be a little bold to offer some conjectures. In this industry, it is generally believed that MOS and bipolar technologies greatly differ in the opportunities for further development. MOS technology is still open to a wide range of opportunities for future development while bipolar technology is quickly maturing. With other things being equal, technological leadership is critical to building a strong market position when the technology is continuous, and when it is open to opportunities for further development [Porter (1983), Pakes and Schankerman (1984)]. This may explain the contrast between the strong influence on share of leadership in the MOS memory segments and the inability of leadership to explain share in the bipolar logic segments. The firm-specificity of technology may also provide an explanation for the
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differences in the influences of leadership on share performance. Among the state-of-the-art MOS memory or digital devices, static random access memory (SRAM) ICs, read-only memory (ROM, particularly EPROM and EEPROM) ICs and microprocessors are far more complex than dynamic random access memory (DRAM) ICs in device design and manufacturing process. The design complexity may require individual leader firms to employ unique, firm-specific approaches in design and processes, and this may allow them to defend the know-how from imitation by fast-second firms. All this implies that those semiconductor technologies may indeed differ in their fundamental conditions, and that these differences may explain some of our results.
The scope of product
line:
The results suggest that the scope of product line is indeed an important source of competitive advantage, and influences the firm’s share in specific product segments. The coefficients of IDPSC are positive and statistically significant in all but the BPLCN equation [eq. (9)]. This finding is consistent with our explanation that the economies of scope in R&D, production and marketing, and product differentiation associated with multiple products, give rise to competitive advantage. We are, however, unable to decompose these effects and trace them to the hypothesized specific sources.” The negative, significant coefficient of IDPSC in eq. (9) is puzzling, and we are not able to explain this result.
Vertical linkages:
The results are disappointing for the vertical linkage measures. They perform as predicted only in the DRAM segment and the segment for bipolar linear ICs for consumer electronics applications [eqs. (I) and (9)]. The positive, significant coefficient of VLTEC and insignificant coefficient of
“Due to the technology carryover of MOS memory technology, a part of the explanatory power of IDPSC seems to be traced to INMME. To examine the determinants of IDPSC, it was regressed on all other explanatory variables, and the results indicate that INMME is the single most important determinant among the technologically-defmed firm traits. Also, to test the hypotheses on the economies of scope in marketmg and product differentiation advantages associated with multiple products, a specification was attempted that replaces IDPSC with the shares in product areas other than the ones for which the regression was estimated. The results suggest that the tirm’s share in the MOS memory segments was closely related to its share in bipolar logic segments. Since the firm’s share in the MOS segments is independent of the influence of bipolar logic technology and vice versa, the results seem to capture the hypothesized influence.
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VLHOM in eq. (1) are consistent with our prediction, and so are the negative, significant coefficient of VLTEC and the positive, significant coefficient of VLHOM in eq. (9). However, in most other product areas, the vertical linkage measures are powerless in explaining market share, and these results are somewhat puzzling. We offer a tentative explanation. Of those nine firms in the sample, six firms (NEC, Hitachi, Toshiba, Fujitsu, Mitsubishi, and Oki) actively compete in the MOS memory, microprocessor, and bipolar logic segments. These six firms are similarly vertically integrated with downstream businesses, and. the vertical linkages may not provide them any competitive edge vis-a-vis similarly structured firms. Also, most of these firms are active in merchant sales. and the captive vertical linkages are limited in these firms. In contrast to these six firms, Matsushita, Sanyo, and Sharp compete in the market segment for bipolar linear ICs for consumer electronics applications, and they are more tightly integrated with consumer electronics businesses. Given the structural difference, the vertical linkage with consumer electronics businesses may offer them competitive advantage vis-a-vis the above six firms. Eq. (9) may be capturing this effect. These results provide some evidence to support the hypotheses presented earlier. They confirm that the bases for competitive advantages differ considerably across these market segments, and that the competitive field is not necessarily level for all players in an industry.
5. Conclusions Based on the premise of intraindustry heterogeneity of firms, we developed explanations for differential market shares among firms in an industry, and tested them using data from the Japanese semiconductor industry. Overall, our results offer some confirmation of our hypotheses. Semiconductor technologies appear more or less device-specitic. Technological leadership in MOS memory and microprocessor technologies, at least, seems to influence the firm’s market share in some product areas and also to carry over to related products. The results also indicate that the firm’s activities in adjacent product areas and, to a lesser extent, in vertically-linked industries are likely to affect its competitive position in specific product segments through economies of scope, economies of vertical linkages, and differentiation advantages. However, the results must be viewed as highly tentative due to several serious shortcomings. This study focuses entirely on a single industry. The sample used is a small cross-section time-series sample, too small to investigate statistically potential autocorrelation across time. Augmentation of data through time-series observations may not provide sufftcient addi-
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tional information. Measurement of share determinants is often indirect and crude. These are limitations that are often encountered in firm-level studies in oligopolistic industries and in early empirical work of this sort. Despite these limitations, this study does initiate a new avenue of research that may lead to a rich analysis of differences in firms’ competitive positions. To further our knowledge, we need rigorous empirical evidence based on a larger sample with more direct measures of market share determinants from other industries. Further theoretical work and empirical measures of technological conditions are necessary for more concrete understanding of the effect of technological leadership on the firm’s market position.
Appendix Definitions
of variables and sources of data
Explanatory variables 1. The firm’s technological leadership: Following variables are constructed as a sum of the firm’s annual count of innovations and new product introductions in each of the four technology areas, as defined below, in the years t - 1, r - 2, and r - 3, where t = 1978, 1979, 1980, 1981, and 1982. [Sorrvce: Sakuma, A., 1983, Nihon Kigyo no Kenkyu Kaihatsu [Research and Development of Japanese Firms], Business Review 30.1 INMME INMCR INBDG INBLN
Leadership Leadership Leadership Leadership
in in in in
MOS memory technology. MOS-based microprocessor bipolar logic technology. bipolar linear technology.
2. The firm’s scope of product
technology.
line:
IDPSC This is a Herfindahl index, defined as 1 minus summation of squares of the proportion of the tit-m’s sales in a specific devices to its total semiconductor sales for each year from 1978 through 1982. [Source: Yano Economic Research Institute, 1982, Semiconductor/Microelectronics Industry in Japan, and 1983, 1984 nen-ban Handotai Shijo no Chuki Yosoku (Tokyo, Japan: Yano Economic Research Institute).] 3. The measures VLTEC=
of the degree of the firm’s vertical
DVTEC
x RTCAP
linkage:
90
VLHOM
Y. Kimuru, Competirice
= DVHOM
adruntqe
x RTCAP,
and market share performcmce ofjirms
where:
DVTEC
The firm’s annual sales in computer and telecommunications equipment, divided by its annual sales in computers, telecommunications equipment and consumer electronics equipment in the five years from 1978 through 1982. DVHOM The firm’s annual sales in consumer electronics equipment, divided by its annual sales in computers, telecommunications equipment and consumer electronics equipment in the five years from 1978 through 1982. [Source for the abooe two aariables: Yukashoken Hokokusho (Form 10-K equivalent) of NEC Corporation; Hitachi, Ltd.; Toshiba Corporation; Mitsubishi Electric Corporation; Fujitsu Ltd., Oki Electric Industry Co., Ltd.; Matsushita Electric Industrial Co., Ltd.; Tokyo Sanyo Electric Co., Ltd.; Sanyo Electric, Co., Ltd.; and Sharp Corporation for 1978-1982.1 RTCAP The ratio of the values of a firm’s captive consumption of semiconductor devices to the value of its total production, for 1980 and 1982. [Sozrrce: Yano Economic Research Institute, 1982, Semiconductor/ Microelectronics Industry in Japan, and 1983, 1984 nen-ban Handotai Shijo no Chuki Yosoku (Tokyo, Japan: Yano Economic Research Institute).] Dependent
cariables
The following variables are market share of the firm in the decimal form in the market segments, as defined below, in each year from 1978 through 1982. [Source: Yano Economic Research Institute, 1982, Semiconductor/ Microelectronics Industry in Japan, and 1983, 1984 nen-ban Handotai Shijo no Chuki Yosoku (Tokyo, Japan: Yano Economic Research Institute).] MOS memory segments: MOS-based dynamic random access memory ICs. DRAM MOS-based static random access memory ICs SRAM MOS-based read-only memory ICs ROM Microprocessor segment: MICRO MOS-based microprocessors. Bipolar TTL LSTTL ECL
logic ICs: Bipolar-based Bipolar-based Bipolar-based
Bipolar BPLID
linear IC segments: Bipolar linear ICs for industrial
TTL logic ICs. LSTTL logic ICs. ECL logic ICs.
applications.
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Bipolar linear ICs for consumer electronics applications.
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