Capabilities, Innovation and Industry Dynamics

Fredrik TellKITE Research Group

Department of Management and EngineeringLinköping Universityfredrik.tell@liu.se

Research problem

• Dynamics in complex capital goods industries• Relationship between firm capabilities,

innovation and performance• Impact of firm capabilities on responses to

technical change

Technological capabilities and industrial dynamics in mature industries

• Technological capabilities and late shakeouts in the advanced gas turbine industry (Bergek, Tell, Berggren and Watson, 2008)

• Integrating knowledge – why established firms may shying away from entering distributed generation (Magnusson, Tell and Watson, 2005)

Technological capabilities and discontinuous innovation

• The example of CCGTs(Bergek, A., F. Tell, C. Berggren and J. Watson, (2008), Technological capabilities

and late shakeouts: Industrial dynamics in the advanced gas turbine industry, 1986-2002, Industrial and Corporate Change, 17(2): 335-392 )

Intake AirPowerturbine

Com-pressor

FuelCombustor ~

Generator

Electricity

Steam Generator Steamturbine

Advanced Turbine System

~Generator

Steam

Fuel gas inExhaust gases

Combined Cycle Gas Turbines (CCGT)

Global trends in power generation

0

50000

100000

150000

200000

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Cap

acity

(MW

)

CCGT Orders Total Orders

Market development 1970-2002

0

20 000

40 000

60 000

80 000

100 000

1970

1972

1974

1976

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

MW (y

early

)

050 000100 000150 000200 000250 000300 000350 000400 000450 000

MW (c

umula

tive)

Market orders (yearly) Cumulative orders

CCGT market growth

GE 7F

Pre GE ”Frame F” market shares

0

5000

10000

15000

20000

25000

30000

1970 1971 1972 1973 1974 1975 1976 1977 1979 1980 1981 1982 1983 1984 1985 1986

Cum

ulat

ive o

rder

s (MW

)

GE ABB Siemens Westinghouse Other

Market share development

1987-19911992-1994 1995-1998 1999-2002

GE 28 % 26% 22% 54%

GEC-Alsthom /Alstoma 9% 14% 6%

ABB 18% 12% 17%

Siemens 19% 24% 21%

Westinghouse 5% 7% 13%

Mitsubishi b 13% 8% 12% 8%

Other 8% 9% 9% 1%

22%

15%

a GE licensee in the first three phases. In the fourth phase, Alstom acquired ABB’s Power Generation Business.[i]b Westinghouse licensee in the first phases.[i] In 1989, the energy and transport businesses of Alsthom merged with GEC, forming GEC-Alsthom.

Research questions

• What were the characteristics of technological capabilities of the four major firms competing in CCGT?

• How did technological capabilities affect ratesof innovation and, eventually, chances for survival in this segment of the electricalengineering industry?

Product life cycles

Industry life cycles

(Klepper, 2002)

How to explain?

• Industry life cycles?– No exogeneous shock (Jovanovic and MacDonald, 1994)– No product/process innovation pattern, (Abernathy and

Utterback, 1978)– All firms were old and large (Klepper, 1996)

• Complex Products and Systems (CoPS) industriesmay remain in fluid phase, due to the architecturalcharacter of the product (Davies, 1997)

• Specific technological capabilities (includingintregration of new knowledge) pertaining to systems integrating (CoPS) firms (partly in line with Klepper)

Methodology

• Multiple measures and sources of data– Annual reports– Product launches and Relative market shares

• SPRU CCGT database on Power Plant orders– Patents

• USPTO database (Linköping): Industry experts• Thomson Derwent databases: Keyword search +

manual code search– Interviews and publicly available material (e.g.,

on sourcing and problem-solving)

Technological capabilities

• Technology strategies• Technology leadership • Cost focus• Broad scope• Technology sourcing

• Technology activities• Patenting• Problem-solving• Product launching

TECHNOLOGY LEADERSHIP GE SIEMENS ABB WESTINGHOUSE

1987 X - Not available1988 X X X Not available

1989 X x X X 1990 X x - - 1991 X - X - 1992 X - X X 1993 X X X - 1994 X X X X 1995 X X X - 1996 X X X - 1997 X - X - 1998 X X X 1999 X - 2000 X - 2001 X - 2002 X -

Not available Not available

X = segment level statements; x = corporate level statements

BROAD TECHNOLOGY SCOPE GE SIEMENS ABB WESTINGHOUSE

1987 - (4) X (8) Not available1988 - (4) X (8) X (7) Not available

1989 - (4) - (6) X (7) - (6) 1990 - (4) - (7) X (7) - (6) 1991 - (3) X (4) X (7) X (6) 1992 - (3) - (6) X (8) - (5) 1993 - (3) X (8) - (8) X (4) 1994 - (4) - (6) X (8) - (4) 1995 - (4) - (6) X (8) - (3) 1996 - (5) - (5) X (8) - (4) 1997 X (4) - (5) X (7) - (4) 1998 X (4) X (7) - (9) 1999 X (2) - (6) 2000 - (5) X (5) 2001 - (3) X (5) 2002 - (4) - (3)

Not available Not available

Note: All statements refer to the power generation segment. Numbers refer to the number of technology categories mentioned of 13 in total (see Appendix C).

COST FOCUS GE SIEMENS ABB WESTINGHOUSE

1987 X x Not available1988 - - X Not available

1989 - - X - 1990 - - - - 1991 - - X X 1992 - x - - 1993 x X - - 1994 - x - X 1995 X - X - 1996 - - X - 1997 - x X - 1998 - - - 1999 - - 2000 - - 2001 - - 2002 - -

Not available Not available

Product launch and sales impact

0

10000

20000

30000

40000

50000

60000

70000

1986 1990 1994 1998 2002

Ord

ers (

MW

)

GE GE licencees Siemens ABB Westinghouse MHI Other

GE Frame 7F

Siemens V94.3

ABB 13E2

ABBGT24

GE 7G, 9G, 9H(announced)

Siemens V84.3A

Phase IIPhase I Phase III Phase IV

W.house 501F

W.house/MHI 701FW.house/MHI 501G

Generation F and responses

CAPACITIES EFFICIENCIES KEY DATES COMPANY TURBINE MODEL GT CCGT GT CCGT Announced First order

GE Frame 7F 150 MW 230 MW. 34.2% 53% 1987 1987 Westinghouse 501F 150MW 230 MW 35.4% 54% 1989 1989 Siemens V94.3 200 MW 300 MW 35.7% 54% 1990 1992 ABB GT13E2 164 MW 250 MW 35.7% 54.7% 1992 1992 GT24 165 MW 250 MW 37.5% 57.5% 1993 1993

Next generation…

CAPACITIES EFFICIENCIES KEY DATES COMPANY TURBINE MODEL GT CCGT GT CCGT Announced First order

ABB GT24 165 MW 250 MW 37.5% 57.5% 1993 1993 Westinghouse 501G 230MW 345MW 38.5% 58% 1994 1997 Siemens V84.3A 170 MW 245 MW 38% 58% 1995 1995 GE Frame 7G 240 MW 350 MW 39.5% 58% 1995 none

Frame 7H n/a 400 MW n.a. 60% 1995 2004 Frame 9H n/a 480 MW n.a. 60% 1995 1998

Total number of patents, all searches combined(per application date)

050

100150200250300350

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

ABB GE Siemens Westinghouse

Total patenting

Technological capabilities: selected patents

GE Siemens ABB Westing-house

Combined cycleab 78(5.2)

35(2.3)

43(2.9)

15(1.0)

Gas turbine engine (incl. measuring and testing)bc

865(3.9)

685(3.0)

220(1.0)

227(1.0)

Gas turbinesb 1031(5.1)

293(1.4)

204(1.0)

217(1.1)

Numbers in brackets show the ratio of the number of patents of a particular firm in a certain category and the lowest number of patents of all firms in that category. For example, in the first category ABB’s ratio (2.9) equals 43 (the number of patents of ABB) over 15 (the number of patents of Westinghouse, which has the lowest number of patents in that category of all the firms).

Problems… and the ability to solve them

• All manufacturers experienced seriousproblems in their installed plants, but theyreacted quite differently.

Technological capabilities and knowledgeintegration – strategies and activities

GE SIEMENS ABB WESTINGHOUSE Technology leadership

Segment & technology level

Segment level Segment level -

Technology scope

Narrow Medium Broad Medium

Cost focus - Competitiveness(segment level)

Leadership - STRATEGIES

Technology sourcing

Internal (cross-divisional)

Internal External alliances

Internal (External alliances)

Internal External alliances

Patenting Strong Medium Weak Weak Product

launching Launched several

turbines Launched

several turbines Launched several

turbines Launched

several turbines ACTIVITIES Problem-solving

Quick Concentrated

efforts

Slow Extensive efforts

Slow Failed efforts

Slow Unclear efforts; lack of resources

Some findings

• The importance of having a large and relevant capability base, builtup by R&D activities, as a foundation for product development in complex technology fields. The study emphasizes the importance of integrating knowledge from several different technology fields in order to develop new architectural solutions on a sub-system level.

• A focused technology strategy on the segment level seems to be positively related to performance. Companies that focused on a limited number of technologies on the segment level were more successful than companies having a broad technology scope.

• The study shows that the development and launching of new products may not be as important as implicitly assumed in much of the capabilities literature, but rather solving after-launch problems proved more decisive for competitive outcomes.

Power generation again…

Fuel CellsMicroturbines

Internalcombustion

engines

…or one Combined CycleGas Turbine (CCGT) plant?

Thousands of…

Magnusson, T., F. Tell & J. Watson (2005), From CoPS to Mass production? Capabilities and innovation in power generation equipment manufacturing, Industrial and Corporate Change, 14(1): 1-26

From CoPS to mass-manufacturing

Products Markets Manufacturing

CoPS Mass production CoPS Mass production CoPS Mass production

Many components

Systemic relationships

Many alternative architectures

Software/ control systems

Few components

Analyzable relationships

Fewalternative architectures

No component coordination

Oligopoly

Monopsony/politicized purchasing

Government regulation

User-producer interaction

Sophisticated buyer/operators

Competition

Multitude of individual buyers

Free markets

Arms-lengthRelationship

Non-professional buyers

High unit cost

Customization

Intensive technology

Project-based organization

Systems integration/ Breadth and depth

Low unit cost

Standardized

Long-linked technology

Functional organization

Design-modularity/ Specialization

In which technologies were the establishedmanufacturers active?

• Internal combustion engines – none• Microturbines (the most similar technology) –

very few (ABB JV)• Fuel cells – Most of them

(Tushman and Anderson, 1986)

Why?

• Distributed generation is ”plug and play” –modularized and mass produced

• Traditional power technologies require systems integration and CoPS manufacturing

• Traditional manufacturers specialized in advanced systems integration – distributedgeneration is hence competence-destroying

• Fuel cells are in this respect the most similar, not microturbines