Innovation Shocks 231 that the coefficient for DD is much larger than
Innovation Shocks 231 that the coefficient for DD is much larger than
Table 4. Gompertz hazard rate of segment repositioning the coefficient for LOW SEGMENT. The smaller
models
coefficient on LOW SEGMENT suggests that it was the innovation shock that initiated the industry
Model 6 Model 7 1906–1910
1911–1926 shakeout, even if the emergence of the dominant
design later had a large effect. As we argue above,
0.04*** − 0.43*** an innovation shock can set off a set of industry
AGE
(0.02) (0.05) dynamics that can lead to the later emergence of
LOG SIZE
a dominant design, so the two variables do not (0.02) (0.02)
− 0.48*** represent rival theories of shakeouts, but rather are 0.35*** (0.10)
LOG NUMODEL
(0.08) part of the same dynamic. The innovation shock is
− 0.33*** − 0.18** key to understanding the dynamic in full.
DEALIO
(0.10) 0.27 Table 4 provides regression results on data that
.94 3.73*** include the subpopulation of low segment firms
LOG GNP
− 6.14 − 19.8*** only. The regressions examine the likelihood of
CONSTANT
(4.86) (3.54) low segment firms repositioning to other segments,
0.33*** 0.58*** while remaining in the industry until at least 1926.
Gamma
(0.05) (0.18) Model 6 is limited to the pre-innovation shock
2,106 2,042 period of 1906–1910, while Model 7 examines the
No. of observations
Log likelihood
418 444 post-innovation shock period. We omit DENSITY,
No. of subjects
Prob > χ 2 0.000 0.000 DOMINANT DESIGN, and WWI from the regres-
sions for ease of comparison with Models 4 and 5,
Standard errors are in parentheses.
and because we have no reason to suggest that
***p < 0.01; **p < 0.05; *p < 0.1; one-tailed test.
these covariates should influence segment repo- sitioning (as opposed to industry exit). Because
This implies that firms producing a larger number strategic repositioning is not discussed in popula-
of models, reflecting a broader technological base, tion ecology, that literature provides no theoretical
were more likely to reposition away from the low or empirical precedence for including industry or
end segment after the innovation shock arrived. segment density in our regression on reposition-
Thus, while the positive and significant coefficient ing. In unreported regression models that included
estimate on NUMODEL in Model 6 suggests that these three omitted covariates, we found that the
firms with a broader technology base were more signs, magnitudes, and statistical significance of
likely to establish themselves in the low-end seg- our main variables are essentially the same as those
ment prior to the shock, the Model 7 result implies found in Models 6 and 7.
that they were also better able to reposition away The coefficient estimate on AGE in Model 6 is
from that segment after the shock. positive and significant, while it is negative and
significant in Model 7. This implies that older
DISCUSSION AND CONCLUSION
firms were significantly less likely to exit the low segment after the innovation shock occurred there,
The notion of an innovation shock design offers consistent with Hypothesis 2. The positive and
a new approach to understanding the strategic significant coefficient on AGE in Model 6 likely
management of industry evolution prior to the reflects the fact that, early in the industry’s history,
arrival of the so-called dominant design. Like organizational inertia was not a major factor
Klepper (1996, 1997, 2002), we suggest that limiting repositioning, because firms were not yet
important industry dynamics play out long before old enough to have developed significant such
a dominant design emerges or a shakeout occurs. inertia. The coefficient estimate on LOG FIRM
Differently from Klepper, however, our theory is SIZE is negative in Model 7, as predicted, but is
predicated upon the discovery, from an innovation not statistically significant. Thus, no evidence is
shock, of substantial unanticipated demand. The found in support of Hypothesis 3.
arrival of this new information launches a set of Finally, the coefficient for NUMODEL is pos-
industry dynamics, especially a rise in exit rates. itive and significant in Model 7, while negative
We emphasize that often it is one pioneering in Model 6, providing support for Hypothesis 4.
firm’s innovation shock design that triggers the
232 N. Argyres, L. Bigelow, and J. A. Nickerson industry dynamics from which the dominant
typologies often emerge because of a Follower’s design, only later, emerges.
Dilemma. Developing this theoretical antecedent We also argue that an innovation shock cre-
would provide a more integrated and cumulative ates a Follower’s Dilemma that launches a series
theoretical perspective for the positioning school of responses by rivals and potential competitors.
in strategic management. In addition, a broad Empirical analysis provides preliminary support
research in strategy focuses on entry, exit, and for our hypotheses that an innovation shock stim-
repositioning decisions (including mergers and ulates exit from the industry, and especially exit
acquisitions), but a review of this literature from the industry segment in which the shock
suggests to us that rarely are the antecedents occurs. It also suggests that comparative adjust-
of these strategic moves in terms of industry ment costs play an important role in determining
evolution identified and integrated into the theo- which firms reposition in response to an innovation
retical explanation of the decisions. We therefore shock.
posit that building a theory to connect innovation From a strategic management perspective, our
shocks with these other decisions may provide theory offers an advance over the dominant design
the foundation for a more integrative theoretical literature by highlighting a vital role of strategic
framing of a wide variety of strategic decisions. choice. In particular, when faced with an inno-
Finally, we believe there is much value to be vation shock, managers have the responsibility to
added to the strategic management literature— explore and identify alternative strategies for exit,
especially to notions of dynamic capabilities—by entry, or repositioning, and estimate the attendant
developing a more thorough and comprehensive comparative adjustment costs for each alterative
theory of comparative adjustment costs. Doing considered. Although not elaborated in this paper,
so may enable the prediction of best responses managers also are responsible for leading and
whether they involve exit, entry, or repositioning, implementing these strategies, thereby coping with
which not only may be of value for advancing inertia and managing adjustment costs. In contrast,
understanding of competitive dynamics but the dominant design literature offers only a limited
also prove valuable for managers attempting to role for managers or for strategic management.
strategically manage their organizations. Our hypotheses and empirical analyses are
We aimed in this paper to challenge the foun- appropriately characterized as exploratory. Our
dations of the dominant design literature, and to primary focus in this paper is to introduce and
draw new insights about implications for compe- begin to develop a new and potentially impactful
tition and strategic management. In contrast to the concept. The empirical portion of the paper
literature’s focus on the supply side and the exoge- focuses on the industry exemplar with reference
nous emergence of dominant designs leading to to which much of the dominant design literature
industry shakeouts, we introduced the notion of an developed—U.S. automobiles. This industry is
innovation shock, which emphasizes the role of the therefore particularly appropriate for exploring the
arrival of an unanticipated, sudden, and substan- concept of innovation shocks and for evaluating
tial demand for a particular composition of product its contribution over and above that of the concept
and service elements. We argued that an innovation of dominant design.
shock initiates a Follower’s Dilemma that triggers We suggest that future research build on the
a set of industry dynamics involving firm strate- innovation shock design concept. For example,
gies of imitating, repositioning, exiting, and enter- it is important to identify the key characteristics
ing. Critical to predicting which strategy followers of innovation shock designs, and to understand
choose is the magnitude of their adjustment costs the conditions under which they become or do
associated with alternate strategic moves. While not become dominant designs. Anecdotal obser-
the paper does not offer a comprehensive the- vation suggests that there is variance on both of
ory of comparative adjustment costs, it nonetheless these counts across innovation shocks, indicating
offers an initial framework within which to assess opportunities for further theoretical development.
them. Implicit in the concept of an innovation In addition, future conceptual work could seek to
shock is the view that managers—and strategic provide a theoretical foundation for the emergence
management—matter for identifying alternative of Porter’s (1980) typology of strategies: low cost,
strategies and their attendant adjustment costs, as differentiation, and focus. We suspect that the
well as for leading and implementing adaptations.
Innovation Shocks 233
ACKNOWLEDGEMENTS
organizations. American Journal of Sociology 90(6): 1262–1283.
We thank the co-editor, Will Mitchell, and two Carroll G, Bigelow L, Seidel M-D, Tsai L. 1996. The fates of de novo and de alio producers in the
reviewers for helpful comments. For valuable American automobile industry 1885–1981. Strategic feedback we also thank audiences at, and reviewers
Management Journal , (Summer) Special Issue 17: for, the Academy of Management Meetings and
Strategic Management Society Conference, as Carroll G, Hannan M. 1995. Organizations in Industry: well as participants in the strategy seminars at
Strategy, Structure and Selection . Oxford University Press: New York.
the following universities: University of Toronto, Carroll G, Hannan M. 2000. The Organizational Demog- University of Western Ontario, University of
raphy of Corporations and Industries . Princeton Uni- Carlos III Madrid, and INSEAD.
versity Press: Princeton, NJ. Caves R, Crookell H, Killing JP. 1983. The imperfect market for technology licenses. Oxford Bulletin of Economics and Statistics 45 (3): 259–267.
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