Architectural Innovation and the Failure of Established Firms

1. Architectural Innovation: The Reconfiguration of Existing Product Technologies and the Failure of Established Firms Rebecca M. Henderson and Kim B. Clark, 1990. Administrative Science Quarterly, 35(1) Special Issue: Technology, Organizations, and Innovation Presented by Wenting (Christy) ZHU

2. Research Question • Incremental innovation • introduces relatively minor changes to the existing product • exploits the potential of established design • reinforces the dominance of established firms • Radical innovation • based on different set of engineering and scientific principles • opens up whole new markets and potential applications • creates great difficulties for established firms • leads to Successful entry of new firms or redefinition of an industry • However, numerous technical innovations involve apparently modest changes to the existing technology but have quite dramatic competitive consequences, e.g. the case of Xerox and small copiers and the case of RCA and the American radio receiver market. • Why can minor innovations in technological products have disastrous effects on industry incumbents?

3. Conceptual Framework • Component and Architectural Knowledge • unit of analysis: a manufactured product sold to an end user and designed, engineered, and manufactured by a single product-development organization • Successful product development requires component knowledge and architectural knowledge • “architectural innovation” refers to innovation that change the way in which the components of a product are linked together, while leaving the core design concepts untouched. • An electric motor is a design concept one could use to deliver power • A component refers to a physically distinct portion of the product that embodies a core design concept, e.g. a particular motor in the fan • Architectural innovation destroys the usefulness of architectural knowledge but preserves the usefulness of its component knowledge. • The firm’s existing architectural knowledge may actually handicap the firm.

4. Conceptual Framework • Types of Technological Change (continuous) • Horizontal dimension captures an innovation’s impact on components • Vertical dimension captures innovation’s impact on the linkages between components Refines and extends established design Changes only the core design concepts Improvements on blade Design and power of motor Replacement of analog with digital telephones Reconfiguration of an established system A new dominant design From room air fan to portable fan From room air fan to central air conditioning

5. Conceptual Framework • The Evolution of Component and Architectural Knowledge • Technical evolution is usually characterized by periods of great experimentation followed by the acceptance of a dominant design (obtain economies of scale or take advantage of externalities) • Organizations build knowledge and capability around the recurrent tasks that they perform. • Dominant design >> stable architectural knowledge (implicit)>> more attention to new component knowledge>> learn a lot about the dominant design • The role of channels, information filters, and strategies in managing architectural knowledge • Channels implicit in its formal and informal organization (e.g. those working on the motor and the fan blade report to the same supervisor and meet weekly) embody the firm’s architectural knowledge. • Information filters allow the firm to identify immediately what is most crucial in its information stream • Problem-solving strategies summarize what it has been learned about fruitful ways to solve problems in its immediate environment

6. Conceptual Framework • Problems created by architectural innovation • Established organizations require significant time (and resources) to identify a particular innovation as architectural. • The need to build and to apply new architectural knowledge effectively (difficulty in switching from one learning mode to another and build new architectural knowledge in a context in which some of its old architectural knowledge may be relevant) • Easier for new entrants to build the organizational flexibility (abandon old architectural knowledge and build new requires)

7. Innovation in photolithographic alignment equipment • Data • two-year, field-based study of the photolithographic alignment equipment industry (characterized by much smaller firms and a much faster rate of technological innovation; several examples of the impact of architectural innovation on the competitive position of established firms) • Panel data set consisting of research and development costs and sales revenue by product for every product development project conducted between 1962 and 1986, supplanted by a detailed managerial and technical history of each project. • Secondary sources (trade journals, scientific journals, and consulting reports) were used to identify the companies and products and to build up preliminary picture of the industry’s technical history • Data were collected about each product-development project by interviewing at least one of the members (Senior design engineer for each project and a senior marketing executive from each firm, from Mar 1987 to May 1988)

8. Innovation in photolithographic alignment equipment • Technology

9. Innovation in photolithographic alignment equipment • a reliance on architectural knowledge derived from experience with the previous generation blinded the incumbent firms to critical aspects of the new technology. • The case of Kasper Instruments and its response to Canon’s introduction of the proximity printer

10. Discussion and Conclusions • assume that organizations are boundedly rational >> explore the ways in which the formulation of architectural and component knowledge are affected by factors such as firm’s history and culture • Assume that architectural knowledge embedded in routines and channels becomes inert and hard to change. >> explore the extent to which this can be avoided • An architectural innovation’s effect depends in a direct way on the nature of organizational learning. >> what drives effective learning about new architectures and how learning about components may be related to it? • Architectural innovation at the firm level • The effect of technology on competitive strategy