Innovation ecosystems and the pace of substitution: Re‐examining technology S‐curves

• DOI: http://doi.org/10.1002/smj.2363
• Published date: 01 April 2016
• Author: Ron Adner,Rahul Kapoor
• Date: 01 April 2016

Strategic Management Journal

Strat. Mgmt. J.,37: 625–648 (2016)

Published online EarlyView 16 March 2015 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2363

Received 16 September 2013;Final revision received9 September 2014

INNOVATION ECOSYSTEMS AND THE PACE OF

SUBSTITUTION: RE-EXAMINING TECHNOLOGY

S-CURVES

RON ADNER1and RAHUL KAPOOR2*

1Strategy and Management, Tuck School of Business, Dartmouth College, Hanover,

New Hampshire, U.S.A.

2Management Department, The Wharton School, University of Pennsylvania,

Philadelphia, Pennsylvania, U.S.A.

Why do some new technologies emerge and quicklysupplant incumbent technologies while others

take years or decades to take off? We explore this question by presenting a framework that

considers both the focal competing technologies as well as the ecosystems in which they are

embedded. Within our framework, each episode of technology transition is characterized by the

ecosystem emergence challenge that confronts the new technology and the ecosystem extension

opportunity that is available to the old technology. We identify four qualitatively distinct regimes

with clear predictions for the pace of substitution. Evidence from 10 episodes of technology

transitions in the semiconductor lithography equipment industry from 1972 to 2009 offers strong

support for our framework. Wediscuss the implication of our approach for rm strategy. Copyright

© 2015 John Wiley & Sons, Ltd.

INTRODUCTION

While the waves of creative destruction regularly

crash on the shores of markets, the pace of sub-

stitution varies markedly across different contexts

and episodes (e.g., Anderson and Tushman, 1990).

Why do some new technologies immediately sup-

plant incumbent technologies while others take

decades to take off? Despite the centrality of the

phenomenon in the literature, the pace of technol-

ogy substitution has been under-explored.

At the level of technologies, the strategyliterature

has focused on whether new technologies will rise

to dominate old technologies (e.g., Adner, 2002;

Christensen, 1997; Foster, 1986) butlargely ignored

Keywords: innovation; substitution; ecosystems; technol-

ogy evolution; technology competition

*Correspondence to: Rahul Kapoor, The Wharton School, Uni-

versity of Pennsylvania, Philadelphia, PA 19104, U.S.A. E-mail:

kapoorr@wharton.upenn.edu

Copyright © 2015 John Wiley & Sons, Ltd.

the question of when dominance will be achieved.

Conversely, the diffusion of innovation literature

has focused on the rate of adoption of new technolo-

gies (e.g., Hall, 2004; Rogers, 2003), but has taken

a static view of the diffusing innovations (i.e., over-

looking the continued evolution of both the new and

old technologies). At the level of rms, the strategy

literature has focused on how rms’ capabilities

and experience shape their entry decisions and per-

formance in new technologies (e.g., Franco et al.,

2009; King and Tucci, 2002; Mitchell, 1989, 1991)

but has tended to ignore the pace with which the

new technology substitutes the old. Hence, while

the emphasis has been on rm-level competition in

a new technology, the technology-level competition

between the new and old has been overlooked.

Absent such a technology-level consideration,

the literature is handicapped in offering guidance

regarding how rms should manage the transition

from old to new technologies, and in clarifying

626 R. Adner and R. Kapoor

when persisting with the old technology may

represent a more viable strategy than aggressively

pursuing the new technology.

In this paper we argue that understanding the

pace of substitution requires joint consideration

of the evolution of both the new and the old

technologies. In turn, understanding this evolution

requires an examination of the interdependencies

in the broader ecosystem of components and

complements in which the focal technologies

are embedded (Adner, 2006, 2012; Adner and

Kapoor, 2010; Christensen and Rosenbloom, 1995;

Hughes, 1983; Iansiti and Levien, 2004; Moore,

1993; Rosenberg, 1976, 1982). Developing such

an understanding has important implications for

how rms pursue new and old technology oppor-

tunities (e.g., Christensen, 1997; Foster, 1986), and

how rms manage interdependencies within their

ecosystems as technologies evolve (e.g., Ethiraj,

2007; Kapoor and McGrath, 2014).

We present a structured framework to analyze

the pace of technology substitution that considers

the differential impact of ecosystem on the new

and old technologies. On the one hand, bottlenecks

that arise as other ecosystem elements struggle to

emerge can act to constrain the competitiveness

of the rising new technology (Hughes, 1983;

Rosenberg, 1976, 1982)– they create ecosystem

emergence challenges. On the other hand, advances

in other ecosystem elements that arise after the

old technology has matured can act to enhance

the competitiveness of the old technology (Harley,

1971; Tripsas, 2008; Utterback, 1994)– they create

ecosystem extension opportunities. Our joint con-

sideration of ecosystem emergence challenges for

the new technology and ecosystem extension oppor-

tunities for the old technology allows us to identify

four qualitatively distinct substitution regimes that,

in turn, give rise to a testable prediction regarding

the pace of substitution across these regimes.

We test our theory in the context of the semicon-

ductor lithography equipment industry from 1972

to 2009, a period during which 10 new technology

generations were introduced into the market. These

transitions offer an interesting puzzle: across the

10 generations there was remarkable absence of

variance across the key factors that the literature

has identied as driving substitution. In each case,

the new technology generation was introduced

into the marketplace on a commercial basis (i.e.,

it had overcome its development challenges,

e.g., Henderson and Clark, 1990); at the time of

market introduction, the new generation offered

unambiguously superior performance relative to

the predecessor generation on both an absolute

performance and price-adjusted-performance basis

(e.g., Foster, 1986); customers and the semiconduc-

tor manufacturing rms were well informed about

the availability of the new generation (e.g., Bass,

2004; Rogers, 2003); and customers were eager

to adopt higher performance technologies (e.g.,

Christensen, 1997). Moreover, each of the newgen-

erations preserved the core competences (Tushman

and Anderson, 1986) and complementary assets

(Tripsas, 1997) of the lithography equipment rms.

Yet despite this constancy in conditions, the pace

of substitution varied dramatically across the 10

technology generations, ranging from cases of

rapid substitution (market dominance achieved

after a single year), to slow substitution (domi-

nance achieved after 10 years), to non-substitution

(dominance never achieved).

We draw on a unique array of qualitative and

quantitative data collected during twoyears of eld-

work to explore this puzzle. We nd that our

approach of explicitly considering the interaction

between the old and new technology ecosystems

explains signicant variance in the observed pace

of substitution in semiconductor lithography. Our

theory and our observations are at the level of tech-

nology. However, through our eldwork, we are

also able to shed new light on how heterogeneity

in rms’ choices and investments shaped the path

of technology transitions. We found that at times,

the pace of substitution was slowed due to “last

gasp” efforts by some rms to extend and maxi-

mize the value that they could capture from the old

technology while other rms shifted aggressively to

the new technology. In other instances, the discov-

ery of solutions to the emergence challenges in the

new technology allowed some rms to benet from

spillovers that extended the performance of the old

technology. Finally, we observed a third mechanism

that has not been previously characterized in the

literature: homogeneous actions by heterogeneous

rms as actors across the ecosystem– competitors,

suppliers, complementors, users– engaged in a “last

resort” effort to extend the old technology when

confronted by a collective inability to overcome the

emergence challenges of the new technology in the

expected timeframe.

Our study illustrates the importance of consider-

ing ecosystem dynamics of the new technology’s

emergence and the old technology’s extension to

Copyright © 2015 John Wiley & Sons, Ltd. Strat. Mgmt. J.,37: 625–648 (2016)

DOI: 10.1002/smj