Technology and Innovation Strategy Prof.

Markovich

The I ndustry Life Cycle: The Technology S-Curve & Dominant Design
Adapted from Rebecca Henderson, MIT 1

Defining the I ndustry Life Cycle

Many industries appear to go through “ life cycles” or predictable periods of change.

Ferment/
Disruption

“Dominant
Maturity design”
emerges

Takeoff

Source: Adapted from Tushman and Rosenkopf (1992)

Industries grow on a foundation of interesting innovations that customerswant. However, since

very few inventions emerge fully formed, the early days of an industry are usually periods of
ferment. This is not a time when everyone is madly rushing around brewing beer, but is rather a
time when there is enormous uncertainty. No one is quite sure how the new technology can be
packaged or sold, who will value it, how it can be produced/serviced/distributed and, perhaps most
importantly, whether there is any money to be made in supplying it.

During this stage, almost everything about the industry is “ up for grabs.” There is no general
agreement as to exactly what products or services the technology should be used to produce, how
they should be priced, manufactured, serviced or delivered, who they should be sold to or how
their performance should be evaluated. In many cases, there is no general agreement as to what
the “ industry” is and there is often no generally accepted business model: firms entering the
industry are often very uncertain as to exactly how they are going to make money.

Think, for example, of the early days of the personal digital assistant, or PDA. The first pen
based computer was demonstrated by GO in 1991. The Apple Newton followed in 1993. Their
introduction was followed by the introduction of a flurry of different kinds of hand held computer
based devices of very different shapes and sizes. Some had keyboards. Some used a pen as an input

1
The material presented in this memo draws heavily on the research of Bill Abernathy, Jim Utterback, Michael
Tushman and their students. Bill Abernathy’ s book The Productivity Dilemma, Jim Utterback’ s book Mastering the
Dynamics of Innovation, and Michael Tushman’ s paper "Organizational Determinants of Technological Change"
(joint with Lori Rosenkopf, Research in Organizational Behavior, 1992, Vol. 14., pp 311-347) are particularly
warmly recommended to the interested reader.
Technology and Innovation Strategy Prof. Markovich

device. Some mimicked the computer, some were deliberately smaller and lighter. It was not until
the introduction and phenomenal success of the Palm, in 1996, that PDAs began to take on the
shape and functionality that characterizes them today.

The next generation of wireless telecommunications services “ 5G” is currently in ferment, as

is much of internet based financial services. In each case, a wide variety of firms have introduced
a wide variety of products that are in many cases fundamentally different from each other (and
from the established products they seek to replace) in conception and delivery.

In most industries (but not all 2) this period of ferment is brought to an end by the gradual
acceptance of a “ dominant design.” A dominant design provides the blue print, or architecture, for
further technological, market and competitive developments, such that the industry moves from a
focus on radical or discontinuous change to a focus on incremental innovation.

From an academic perspective, the concept of dominant designs is a slippery one, since there
is enormous debate as to whether it can be defined sufficiently precisely, but most people have no
trouble recognizing a dominant design when they see one. Dominant designs have been identified
in many industries, including bicycles, whaling ships, light bulbs and in automobiles.

Dominant designs are important because they set the agenda for subsequent technological
progress: indeed, this is why the dominant design is inherently an “ ex post” concept: the design
that sets the agenda for future progress is, precisely, the industry’ s “ dominant design.” Once a
dominant design has been accepted, technological activity focuses on improving the elements of
the design, rather than on reconfiguring the overall structure. The design improves, but it does not
fundamentally change. Again, consider the case of automobiles. Today’ s cars are much more
reliable, much more comfortable, (in real terms) much cheaper and much more efficient than the
Model T. But they are recognizable descendants of the Model T. Similarly Boeing’ s 777 is a
recognizable descendent of their earliest jet plane, the 707, first introduced in 1957.

Some academics have argued that the advent of a dominant design is best understood as a
technological event. For example, Jim Utterback, in his powerful book “ Mastering the Dynamics
of Innovation” makes the following observation:

The dominant design usually takes the form of a new product (or set of
features) synthesized from individual technological innovations
introduced independently in prior product variants. Looking back over the
early history of the typewriter industry, we can see that the Underwood
Model 5 did this and emerged as the dominant design. It was enormously
well received by the marketplace, and the subsequent introduction of copy-
cat models by its major rivals… With its single QWERTY keyboard, visible
type, table feature, shift-key capitalization, carriage cylinder, and so forth,

2
Some industries seem to stay permanently in ferment. { People have been predicting for many years, for example,
that the multiple, artisanal approaches of the competing management consulting firms are shortly to be replaced by
standardized, procedural zed, sometimes computer based tools. But it has yet to happen. High end consulting remains
a largely individualized, highly tailored business.)
Technology and Innovation Strategy Prof. Markovich

this particular design brought together a number of market-proven

innovations into a single machine and very quickly came to command the
typewriter industry. It remained the dominant design for decades, defining
how the typewriter was supposed to look and operate (author’s emphasis) in
the minds of both typists and other typewriter producers. Any firm that
wanted to offer a keyboard with an innovative arrangement of letters, or
that wanted a circular type wheel… did so at its peril; it might capture some
small niche of the market where those features had demonstrated merit, but
it could abandon any hopes of being a mainstream producer with those
sorts of designs.
Utterback, Mastering the Dynamics of Innovation, 1994, p. 24

Viewed from this perspective, the dominant design is that design that sets the agenda for the
vast majority of subsequent technological developments. For example, Utterback argues that the
adoption of the all steel, closed body by Dodge in 1923 represented the adoption of a dominant
design for the automobile industry. One of the most persuasive pieces of evidence that this is the
case is the fact that the vast majority of subsequent cars were clearly elaborations or refinements
upon this initial, foundational design.

Despite the attractiveness of this idea, however, it may be useful to define “ dominant design”
more broadly, as a general sense of the “ way we do things around here.” This might have a
technological component – PDAs have this kind of functionality – but it might also have a
consumer or market orientated component – PDAs are sold to these kinds of people who use them
for these kinds of tasks – and a competitive, or business system component – and this is how we
structure the delivery system and how we think about making money from them.

This broader definition is useful as the adoption of a dominant design “ sets the agenda” for the
subsequent evolution of the industry, and this agenda is broader than merely technological: it is an
agenda that shapes how firms approach both the market and the problem of competition.

Given their significance to understanding the dynamics of industry evolution, two natural
questions are “ what determines the adoption of a dominant design?” and “ can dominant designs
be identified ex ante, or before the fact?” Unfortunately the answer to the second question is almost
always “ no.” Dominant designs are, by their very nature, defined “ ex post” or after the fact – they
are the ideas or conceptions that “ proved to be the ones the industry adopted.” Moreover, there is
no evidence that the “ best” design is usually (or even often) adopted as the dominant design.
Adoption appears to be driven to some degree by technological excellence, but is also clearly
shaped by powerful social and institutional dynamics.3

3
Note that this definition does not identify any particular “ standard” as a dominant design. Rather, standards
may manifest dominant designs (the Windows operating system is an example of a particularly standard implementing
the dominant design of a graphical user interface), but they are not, in themselves, dominant designs. This is important
to stress because in some circumstances it is possible to be more precise about whether and when a particular standard
will be widely adopted.
Technology and Innovation Strategy Prof. Markovich

The adoption of a dominant design sets the stage for the next stage of the industry’ s evolution:
Takeoff. Industries in takeoff are usually growing very fast. The new product has moved from
being an interesting plaything to a widely accepted necessity, and the firms engaged in producing
it struggle to produce it in volume and quality sufficient to take advantage of the explosion in
demand. Whereas in ferment the question is “ can we make it?” “ does anyone want it?” the question
in takeoff is “ can you make 20 million units by Tuesday” or “ can we respond to 20,000 service
calls a day?” Consider, for example, the case of PDAs. The adoption of Palm’ s design as the
“ dominant design” was accompanied by an explosion in demand, and Palm had to work very hard
to develop both the business model and the organizational skills necessary to meet it.

Eras of ferment are typically accompanied by waves of new entry. As an industry moves to
takeoff rates of entry may initially increase (as new firms become convinced of the opportunity
and jump in) but in general the number of firms in the industry starts to significantly decline as
competition switches from competition between radically different conceptions of the product to
competition between different manifestations of the dominant design. Figure (1) shows this classic
pattern using data from six different industries

Figure 1:
Figure
Source: Fernando Suarez and James Utterback, SMJ 1995

There are a variety of explanations as to why the number of firms in an industry should (in
general) decline so markedly as an industry enters takeoff. One line of argument focuses on the
fact that the adoption of a dominant design and the subsequent takeoff in demand means that firms
in in the stage compete largely based on scale economies. In such an environment, it is difficult
for smaller, more differentiated firms to survive.

Another stream of explanation suggests that in the early days of an industry, entry is sustainable
since the key issue in periods of ferment is not competition between firms but the “ legitimization”
of the entire industry, and as more firms enter they make the industry increasingly “ legitimate.”
Once the industry has been broadly accepted, however, more firms only create more competition,
Technology and Innovation Strategy Prof. Markovich

and classic competitive pressures start to force exit from the industry.

As industries move through the takeoff stage, they gradually begin to exhaust the possibilities
of the dominant design: they can only make the product so much cheaper, faster or smaller – and
the industry moves towards a period of maturity. Industries in maturity are typically “ squeezing
the lemon” – that is, pushing hard for advances under circumstances which don’ t permit much
advance. Consider, for example, the automobile industry. If you were lucky enough to buy a new
car this year, the chances are the only really significant innovation over last year’ s model was what
– heated seats? Back-up camera? This decline in rate of performance improvement is one thing
that allows one to portray the industry life cycle as an S Curve (Figure 2).

Figure 2: The Product process transition.

Industries in maturity differ from those in takeoff. Often competition is around relatively minor
features of the product or service. Competition can be very intense: in some mature industries it is
so difficult to differentiate one’ s offering that profit margins are driven down to the bone (consider
the current state of the PC industry). In some industries, however, maturity can be a relatively
stable and profitable time. The breakfast cereal industry, for example, remains quite profitable, as
is the oxygen extraction industry. In these industries, the established firms have developed assets
through years of competition – often strong brand names, distribution systems or economies of
scale – that allow them to compete very successfully.

Periods of maturity are sometimes brought to an end by the emergence of a “ disruption” that
introduces a new period of ferment. The invention of the steam engine was a classic disruption: so
was the invention of the solid state transistor. The invention of the Internet has threatened to disrupt
a wide range of industries, including, most dramatically, perhaps, the business of music publication
and distribution. E-books threaten to disrupt conventional publishing and genomics threatens to
disrupt conventional pharmaceuticals.

Why the industry life cycle is an important strategic tool

Developing a deep understanding of the industry life cycle and, most importantly, of the
particular “ stage” that your own industry is going through, is critical to the formulation of a good
Technology and Innovation Strategy Prof. Markovich

strategy since a firm’ s answers to the three key questions that form the foundation for a good
strategy almost always change over the life cycle. This is because movement from stage to stage
in the life cycle is accompanied by very significant changes in how value is created, in the structure
of competition and the ways in which firms are organized.

The nature of technological activity changes

As a horrible generalization, the engineers and designers in a company do very different things
at different stages of the S curve. In an era of ferment they invent and experiment. This is the
period that a number of creative engineers find most “ fun” – it is a time for working out whether
things will “ work” and whether anyone will buy them. Communication is often very open and the
environment is often very creative and fast paced.

As the dominant design is established and the industry and the firm move towards the period
of “ take off” the focus of technological activity moves towards a focus on incremental innovation.
Instead of building prototypes, engineers and designers must now build products that can sell in
the tens of thousands. Instead of relying on the customer to fix any “ bugs” that may come up, the
technical staff must now ensure that the product works: every time, or that it is properly supported.
(Geoffrey Moore describes this transition as a problem of “ crossing the chasm” and suggests that
it is one of the most difficult transitions that firms face.)

Once the firm has survived “ takeoff” it must make the transition to maturity. For the
technologists, maturity is about “ fine tuning.” The product must be made even cheaper, or even
more reliable, or available in purple on alternate Thursdays. It is skilled and demanding work, but
it is work of a very different kind.

Abernathy and Utterback captured this transition in the nature of engineering work in their notion
of the “ product/process” transition. (Figure 3). They suggested that in many industries the initial focus
of attention is on product design and development. As the industry matures, and a dominant design is
established attention shifts to a focus on process development. In assembled mechanical products, the
arena in which this theory was first developed, this transition clearly reflects the demands of mass
production: it is very difficult to invest aggressively in process technology until the fundamental
“ architecture” of the product is in place.

Figure 3: The Product process transition.

Technology and Innovation Strategy Prof. Markovich

The nature of competition and the mechanisms of value creation change

In most industries value is created in very different ways as the industry evolves. In the
beginning, in the era of ferment, value is created by the application of novel technologies to novel
markets or new needs. The technology is often not improving very fast: instead, value is being
created by matching the new technology to needs that were not being met before. As the dominant
design is established value is created largely by enormous improvements in performance. The
product (or service or process) becomes much faster, much more reliable or much cheaper.

Making money in eras of ferment is difficult. When a technology is so sophisticated that only
a couple of firms can enter the industry, and when customers are so excited about the new
technology that they are willing to pay heavily for it, ferment can be extremely profitable. (Parts
of the medical equipment business look like this, for example.) In general, however, periods of
ferment are intensely competitive. Firms jostle for position, and customers try to work out if the
new product/service/widget is worth paying for. As the technology or product concept stabilizes
there is often a “ shake out” from the industry. Utterback, for examples, suggests that the adoption
of a dominant design forces widespread exit. Recall that the adoption of a dominant design implies
that the “ terms of competition” have been clarified: customers want this kind of product, for this
kind of price, delivered with this kind of sales and service... Such clarity makes it more difficult
for marginal players to survive. Technically, the extreme differentiation that characterized the
period of ferment – and that permits and encourages a wide variety of firm to compete -- gives
way to competition that is defined by the dominant design.

As the industry matures mechanisms of value capture often change: while in ferment firms
tend to rely on speed, intellectual property protection, as the industry evolves they move towards
a reliance on assets such as scale, production expertise, global presence – towards a reliance on
“ complementary assets” that allow them to compete despite the fact that the opportunity to
differentiate the firm technically may become much more limited.

Periods of “ take off” and high growth are often a kind of Golden Age for the firms that succeed:
steadily increasing demand coupled with constantly increasing performance provides those firms
that manage it well with magnificent returns.

A transition to maturity may bring such a Golden Age to an end. Technical maturity may
trigger saturation in demand, or customer requirements may be such that further improvements in
performance no longer stimulate increased purchasing. 4 In these kinds of industries, stable or
declining sales inevitably increase competitive intensity. Even if sales continue to increase – and
in many mature industries revenues continue to increase significantly – a decline in the rate of
technological progress may significantly increase competitive intensity. Technological maturity
often brings a widespread sharing of technological information as information “ leaks” from firm
to firm and employees move, and this makes it increasingly hard to differentiate products from
each other. In some industries maturity is thus a period of brutal competition as the product
becomes increasingly “ commoditized” . This is not always the case of course, in some industries,
maturity can be highly profitable – Intel, for example, continues to generate respectable returns.

4
Clay Christensen has suggested that this kind of “ overshooting” or increasing mismatch between what the
technology can provide and what customers need makes an industry vulnerable to “ disruption” from smaller, simpler
or cheaper technologies
Technology and Innovation Strategy Prof. Markovich

Key organizational competencies and skills change

In general, the most successful organizations in periods of ferment are those that demonstrate
the ability to be “ organic” or “ flexible.” This is often the stage of an industry at which there is the
most entry from de novo, or freshly founded firms, although there is often entry from firms in
related industries who bring with them needed skills or assets. As the industry matures, firms need
to develop the skills necessary to handle the demands of “ take off.” There is often a shift from a
focus on flexibility and experimentation to a focus on “ being able to get the product out the door.”
Entrepreneurial firms that prided themselves on their informality often find themselves forced to
adopt the very systems and procedures that they so despised in their early days. As firms move
into maturity, and competitive intensity increases, organizations (again as a horrible
generalization) typically become larger and even more procedural zed. They also tend to develop
specialized organizational competencies that enable them to compete extraordinarily effectively.

These organizational shifts are often strategically very significant because they constrain the
firms’ ability to compete. The S curve maps transitions as much as it maps progress. Many firms
fail to make the transition to “ take off” and almost as many fail to manage successfully through
disruptions. (Figure 4)

Figure 4: The S curve maps major transitions

Conclusions
Developing a deep understanding of the dynamics of the industry life cycle can be a critical
strategic tool. It is particular important because the best answer to the three critical questions that
underlie a good strategy – How do we create value? How do we capture value? How do we deliver
value? – are likely to change dramatically as an industry evolves. Understanding and anticipating
these changes is at the heart of a good strategy.