The Business Transformation of Incumbents in the Transition to new Basic Technologies

Type de publication:

Conference Paper

Source:

Gerpisa colloquium, Paris (2021)

Résumé:

The transition to new basic technologies often takes a long time to achieve a new stable industry architecture (e.g., Jacobides and MacDuffie 2013) with a new “dominant design” (e.g. Christensen et al. 1998). Therefore, the levels of velocity as well as uncertainty (e.g. O´Reilly III and Tushman 2013), complexity (e.g. Malik 2015) and ambiguity (e.g. Davis et al. 2009) are high (Bennet and Lemoine 2014).

The replacement of the internal combustion engine technology by electromobility is an example of such a long-term industry transition (e.g. Donada and Attias, 2015; Knobbe und Proff 2020). According to current forecasts (e.g. Deloitte 2020; McKinsey & Company 2020), even after decades (in 2030, nearly 20 years after the introduction of the new electric vehicles), sales in the new business with electromobility will only comprise half of the total sales. This projection indicates that until then, more than two-thirds of the sales will still be in the traditional (i.e. internal combustion engines) business.

Especially for established incumbent firms in capital-intensive sectors such as the automotive industry (Macher and Richman 2004; Haleblian et al. 2012), the challenge in such a long-term transition to a new basic technology is that businesses with the new technology are often not profitable for a long period (e.g. de Rubens et al. 2020). New start-ups or competitors from outside the industry (e.g. providers of electronics and software components) without large fixed assets in the traditional technology are much more profitable and valued higher on the stock exchange, which makes them even more challenging (e.g. Thomas and Maine 2019).

In view of this high level of uncertainty and low profitability in business transformation, incumbents often act in the field of tension between industry and firm effects (see Martin and Eisenhardt 2004, Rong et al. 2018, Furr and Kapoor 2018):

On the one hand, on the industry level, experiences from industrial evolution or historical adaptation processes on the way to a new dominant design (e.g. Anderson and Tushman 1990; Christensen et al. 1998 or Klepper 2002) or triggered by (at least radical) “innovative” shocks (Argyres et al. 2015; 2019) – among others in the automotive industry – show that incumbents have to react quickly and flexibly. For this reason, waiting too long reduces the capacity of incumbents to adapt and increases the risk of being selected out in competition with new providers (e.g. Klepper 2002; Argyres et al. 2015; Raffaelli et al. 2019).

On the other hand, on the level of the individual firm, investment decisions frequently lack a minimum level of information. The reason is that incumbents under high uncertainty often cannot broaden the information base in the short term. Therefore, they often tend to postpone their decisions until the information situation improves and uncertainty subsides (e.g. Courtney 1997, Proff and Fojcik 2015). Furthermore, uncertainty about the legal framework often prevents firms from reacting.

This article examines the research question as to whether firms under uncertainty in a long-term transition to new basic technologies (1) react to industry effects with rapid information generation, or (2) follow firm-specific effects and wait for more information.

To take into account these opposing effects, more nuanced perspectives in the actual research on business transformation are required (Eggers and Park 2018; Bigelow et al. 2019), which is particularly important for incumbent firms. A starting point for this case should be independent decisions that firms have to make in such a long-term business transformation (Malik 2015), above all the decision between (1) rapidly generating information and (2) waiting for more information, derived from cross-industry explanations (Csaszar and Eggers 2013).

To make these decision alternatives more concrete, more empirically measurable and therefore easier to manage, they can be broken down into decisions about transition strategies in business transformation as combinations of

(1) Shrinkage strategies in the traditional technology (e.g. market exit, harvest or consolidation strategy, cf. Harrigan and Porter 1983) and

(2) Growth strategies in the new technology (e.g. technological leapfrogging or incremental competence development (cf. Brezis et al. 1991 or Volberda and Baden-Fuller 1998).

However, “a general theory of incumbent adaptation will undercut the rich details of the industries” (e.g. Eggers and Park 2018: 383). Therefore, we more specifically examine the transition of a single industry, that is, the transition of the automotive supplier industry to electromobility. Notably, most firms in this industry are capital-intensive, and ambidexterity (e.g. Duncan 1976; Raisch and Birkinshaw 2008; Simsek 2009) has to be managed in the replacement of basic technologies to a large extent and over a long period (e.g. Raisch and Tushman 2016). Ambidexterity arises because the (efficiency-oriented) traditional business and the (flexibility-oriented) new business follow contradicting management logics yet support each other (e.g. Raisch and Birkinshaw 2008; Simsek 2009; Raisch and Tushman 2016; De Matos 2019; Mokudai 2020). Therefore, ambidexterity influences the choice of strategies in the transition to electromobility between industry- and firm-specific effects.

 

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