Analyzing the Dynamics of Incomplete Technological Substitution.
How Swiss Automatic Watch Producers Survived the Quartz
Federico MUNARI
Department of Management
University of Bologna
Via Saragozza, 8
40126 Bologna – ITALY
Phone: +39 051 2093954
[email protected]
Raffaele ORIANI
Filippo Carlo WEZEL
Department of Management
University of Bologna
Via Saragozza, 8
40126 Bologna – ITALY
Phone: +39 051 2093956
[email protected]
Department of
Organization and Strategy
Tilburg University
P.O. Box 90153, 5000 LE
Phone +31 13 466 3260
[email protected]
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Please do not quote without permission. Cite OK.
Paper prepared for the Conference
“What Do We Know About Innovation? A conference in Honor of Keith Pavitt”,
SPRU, Brighton, UK, November 2003.
THEME: The industrial dynamics of innovation and competition
Analyzing the Dynamics of Incomplete Technological Substitution.
How Swiss Automatic Watch Producers Survived the Quartz
INTRODUCTION
What is the likelihood of an established technology to survive the emergence of a radical technology?
Different theoretical angles were used to approach a similar question (e.g. Tushman and Anderson,
1986; Hannan and Freeman, 1977; Jovanovic and MacDonald, 1994; Tripsas, 1997; Winter 1987). Over
time two broad camps have emerged. On the one hand, a ‘supply-side’ perspective acknowledges the
limited adaptive ability of incumbents (Tushman and Anderson, 1986; Henderson and Clark, 1990).
According to this mainstream perspective, radical technologies emerge as the new standard, completely
displacing established ones over time. On the other hand, a ‘demand-side’ perspective has recently
recognized the importance of customers’ preferences when studying on technological evolution (Adner
and Levinthal, 2001; Christensen and Bower, 1996; Malerba et al., 1999; Munari, Oriani, Wezel, 2003;
Tripsas, 2002). According to this second narrative, customers’ preferences represent a key factor in
giving rise to technological innovations, potentially leading to dual market structures (Adner, 2002).
Scant attention has been devoted to study the survival chances of incumbents in presence of
incomplete technological substitutions. In this paper we argue that a supply-side explanation of
technological evolution needs to be complemented by a demand-side analysis of market heterogeneity.
In particular, we move from the insights of a ‘demand-side’ perspective to argue that regimes of
incomplete technological substitution – i.e. coexistence of established (inferior) technologies, with emerging
(superior) technologies – emerge because of heterogeneous, non-overlapping customers’ preferences.
2
Our main goal is to investigate the factors leading incumbents to survive in presence of incomplete
technological substitution. To reach this goal we compare the technological competences and market
positioning of surviving incumbents with those of exiting firms. Empirically, we discuss the evolution
of the Swiss watch industry that in the late seventies experienced the emergence of the quartz
technology. The new technology opened a fierce competition especially from Far East companies
(Landes, 1983; Glasmeier, 1991). We focus our empirical analysis on the information collected on the
histories of Swiss automatic (self winding) watch manufacturers during the period 1964-1988.
The remaining of the paper is organized as follows. In the next section we introduced the theory and
the analytical framework. We then present the setting, data and methods used for the analysis. We then
move to illustrate the results of the analysis. We conclude by discussing the supply- and demand-side
conditions that are likely to determine the emergence of a regime of incomplete technological
substitution and the main implications for incumbents’ strategies in such context.
THEORETICAL BACKGROUND
Radical technological innovation and the failure of incumbent firms
Either adopting an incremental perspective on technological evolution (e.g. Basalla, 1988) – or
supporting the discontinuous nature of technological change (e.g. Tushman and Anderson, 1986),
technological innovation can be considered as a strong force of environmental selection. A similar idea
can be traced back to the early work of Schumpeter (1932 and 1943). Schumpeter considers
technological innovation as the major source of competition and change within industries. In his
words, “'[T]he opening up of new markets, foreign or domestic, and the organizational development
from the craft shop and factory to such concerns as US Steel, illustrate the same process of industrial
mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the
old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about
capitalism' (Schumpeter 1943: 83). Thus, technological innovation can be seen as critical in detmining
3
environmental discontinuities (Anderson, 1995, but also Hannan and Freeman, 1989). Because of
increasing selection pressures, technological innovation modifies the demographic composition of
industries. A large empirical literature provides compelling evidence on how technological innovation
shapes industrial evolution (e.g. Tushman and Anderson 1986; Henderson and Clark, 1990; Tushman
and Rosenkopf, 1992; Anderson and Tushman, 2001).
.
The particular innovations responsible for similar changes are usually labeled as radical. The radical
component of these innovations can be better understood relatively to the ‘old technology’. A radical
technological innovation dramatically advances the performance of the previous counterpart by
significantly modifying either the product or the process (Tushman and Anderson, 1986). Product
discontinuities represent radical improvements in quality, performance or cost over previous product
generations. Process discontinuities define new ways of producing a product that improve its
quality/cost ratio. Either way, radical innovations render obsolete the know-how of incumbents
(Afuah, 2001; Henderson and Clark, 1990; Hill and Rothaermel, 2003; Tushman and Anderson, 1986).
That is why “competence destroying discontinuities will be associated with increased entry-to-exit ratios
and an increase in interfirm sales variability” (Tushman and Anderson, 1986: 446). Because of a their
superior performance and competence-destroying nature–, radical innovations are expected to increase
the likelihood of failure of incumbents vis-à-vis to new entrants.
Different lenses can be used to interpret the inability of incumbents to react to radical changes (e.g.
Henderson, 1993; Hill and Rothaermel, 2003; Kaplan et al., 2003). On an economic standpoint, new
entrants, compared to incumbents, have a stronger incentives to invest, develop and commercialize a
new technology (Henderson, 1993). Because radical innovations are at risk of cannibalizing existing
products, incumbents have a lower incentive to invest in it (Gilbert and Newbury, 1982; Reinganum,
1983). Strategically, under dynamic conditions of competition, a superior performance does not simply
result from exploiting current resources or assets. Rather, it hinges upon the ability to create new
4
competitive advantages by reconfiguring and transforming those resources in a new fashion
(Schumpeter, 1934; Penrose, 1959; Henderson and Cockburn, 1994). In presence of innovation-based
competition, learning to “integrate, build, and reconfigure internal and external competencies” (Teece,
Pisano and Shuen, 1997: 516) represents a critical condition for being able to consistently innovate over
time. Nonetheless technological innovation, as many other organizational processes, is cumulative,
based on routines that change only gradually over time (Levitt and March, 1988; Nelson and Winter,
1982). Because of the self-reinforcing nature of these processes, competency traps (Levitt and March,
1988) and myopia (Levinthal and March, 1993) are at risk of locking the organization into sub-optimal
choices. In a similar way, internal resource allocation processes (Burgelman, 1994) and the commitment
to existing customers are likely to distract the firm from the development of market-based innovations
(Christensen and Bower, 1996; Christensen and Rosenbloom, 1995). On a cognitive standpoint, radical
innovations decrease the speed and effectiveness of incumbents’ response (Tripsas and Gavetti, 2000;
Kaplan et al., 2003). As boundedly rational actors, managers develop their beliefs according to historical
experience. When the environment is unpredictably changing, top managers face major difficulties in
making sense of it and, thus, developing an adequate strategic response. The delay of Polaroid in
shifting from analog to digital imaging provides an example of how managerial cognition boosts
organizational inertia in presence of radical technological changes (Tripsas and Gavetti, 2000).
The impact of demand heterogeneity on technology competition and substitution
Despite discussing the foundations of ‘creative destruction’, it is not clear whether or not radical
technological innovations may lead to phenomena of incomplete substitution. In principle, the
mainstream literature assumes that the new radical technology completely overtakes the established
one. Only recently evolutionary researchers have begun to study the conditions under which a new
technology is likely to replace an established one (Adner, 2002; Adner and Levinthal, 2001; Levinthal,
1998). It is worth noting, however, that several examples of incomplete or slowly progressing
substitution can be found in different industries – e.g. gas vs. electric lighting, steam vs. sail ships and
5
semiconductor vs. valves (see Howells, 2002). As Howells (2002: 903) argues, similar industries exhibit
the “coexistence of apparently substituting technologies through long periods of time”. Much earlier
than him, other scholars – e.g. Strassman (1959) – had underscored the existence of incomplete
substitutions, proposing a general reconsideration of the processes of technological substitution.
Nevertheless, whether or not a technological substitution is complete greatly depends on the range of
customers it targets. In presence of heterogeneous, non-overlapping, customers’ preferences
substitution can hardly be complete. As Howells (2002: 903) put it, although dissimilar technologies
never existed in an identical market, “[I]f the new technology evolved in steps and substituted for
segmented markets over time, then ‘coexistence’ is not a problem”. The existence of high demand
heterogeneity in terms of customers’ preferences explains the emergence of a regime of incomplete
technological substitution, in which the old technology survive and prosper within market niches. As Adner
(2002: 686) put it, “the degree of preference asymmetry specifies firms’ differential incentive to
compete for new market segments.” In other words, radical innovations taking place in highly
heterogeneous markets, allow the old technology to coexist with the new one.
Recent findings of demand-based empirical research seem to point in a similar direction. According to
this literature, the emergence of disruptive technologies and the extent to which old and new
technologies compete) is related to the structure of customers’ preferences (Adner, 2002; Christensen,
1997; Tripsas, 2002). Adner and Levinthal (Adner, 2001; Adner and Levinthal, 2002), for instance, have
proposed a demand-based model of competition between technologies. Using a simulation model,
Adner and Levinthal (2001) showed how market demand heterogeneity influences firms’ technological
innovation, as well as the evolution of product technologies. In a follow-up study, Adner and Levinthal
(2002) argued that new technological breakthrough often emerge as an application of an existing
technology in a new market domain. The authors provide several examples of emerging technologies such as xerography, home video recording and CAT scanning – initially occurring in relatively small
6
and secondary market segments, ultimately becoming widely diffused. In a similar vein, the work by
Christensen (Christensen and Bower, 1996; Christensen and Rosenbloom, 1995; Christensen, 1997)
pointed out several cases in which the established and the disruptive technology compete in market
segments characterized by different customers’ preferences. All in all, as the literature suggests,
heterogeneous market niches directly affect both the emergence of radical innovations and the degree
of completeness of substitution.
Incumbent survival under incomplete technological substitution
Building on the seminal contribution of Abernathy and Utterback (1978), the technology management
literature has hypothesized that in presence of radical technological changes, the likelihood of failure of
incumbents increases (Tushman and Anderson, 1986; Anderson and Tushman, 1990; Christensen and
Rosenbloom, 1995; Christensen and Bower, 1996; Christensen, 1997; Anderson and Tushman, 2001).
However, several scholars have recently questioned the universality of this principle, proposing that
incumbents can withstand the threat of a radical innovation, by leveraging their specific advantages –
i.e. knowledge stock, market power, complementary assets, alliances. The proponent of a dynamic
capabilities approach (Teece, Pisano and Shuen, 1997), for instance, conceive radical innovations as the
by-product of speciation processes – i.e. the application of the existing technological knowledge to new
domains of application. According to this perspective, those firms proactively seeking new challenges
to their current capabilities are more likely to increase breadth of their knowledge base and, thus, to
transform environmental shifts into incremental steps (Levinthal, 1998). In a related way, Iansiti (2000)
has showed how experimentation and new knowledge creation enabled several firms in the
semiconductor industry to successfully manage the transition to new technologies. In a study on the
medical digital imaging industry, Mitchell (1992) suggested that in presence of product design
discontinuities not affecting the structure of customers’ preferences, market assets retain their value and
allow incumbents to successfully shift to the new technology. Similarly, in a longitudinal analysis of the
typesetting industry, Tripsas (1997) has underscored the role of complementary assets (Teece, 1986),
7
such as specialized manufacturing capability, sales and assistance network, in assuring incumbents’
survival. Rothaermel (2001) has shown the importance of interfirm cooperation in the
biopharmaceutical industry as a critical driver for incumbents to adapt to radical technological change.
Hill and Rothaermel (2003) echoed these findings developing a theory of incumbents’ survival based on
R&D investments, creation of autonomous divisions, partnerships with new entrants and
organizational slack as the factors allowing incumbents to withstand radical innovations.
Although presenting a new perspective on incumbents’ survival, the above studies have explored this
question under the assumption of the adoption of the new technology by incumbents. That is mainly
due to their presumption of the new technology completely replacing the old one. Nevertheless, under
a regime of incomplete technological substitution, the problem of incumbents’ survival should be
reformulated and approached from a different angle. Since incomplete technological substitution
presupposes asymmetric, non-overlapping preferences, “the invading firm pursues consumers at the
low end of its rival’s segment with low priced offerings, the invaded firm can either defend its position
at the low end through price reductions or focus on its own high end consumers with higher price and
performance offers” (Adner, 2002: 679). Differently stated, incumbents can choose between investing
in the new technology, or keeping consistent with their histories and offering improvements the old
technology. We believe that the most reasonable solution for incumbents to survive is to stick to the
old technology and avoid direct competition with the new technology. Consider, for instance, the
deleterious effects of shifting to a new technology. Developing new technological skills and routines
disturbs the smooth functioning of organizational operations (Hannan and Freeman, 1984; Nelson and
Winter, 1982). As Hannan and Freeman (1984) have argued, organizations strive towards consistency
of replication and high levels of reliability and accountability to withstand the selection pressures of the
environment. As organizations evolve over time, and enhance their practices, routines become well
established and acquire further consistency. Stable and reproducible routines are the foundation of
reliable performance. Since the ability to reproduce a structure with high fidelity strengthens resistance
to change, structural inertia is the end result of selection. Furthermore, pressures against organizational
8
change also stem from the path-dependent nature of organizational learning. Learning tends to be
incremental and anchored in routines that evolve only gradually over time in response to the degree to
which outcomes conform to predefined aspiration levels (Levitt and March, 1988; March, 1994). Helfat
(1984) and Martin and Mitchell (1998) provide empirical evidence of path dependency in organizational
R&D. Although using different theoretical lenses, these theories share the basic idea that organizations
can be conceived of as bundles of routines. Any disruption that unravels existing bundles of routines
increases the risk of firm dissolution. That is because organizations, while dealing with relevant
changes, face political, economic, social, and evolutionary constraints that lead them to experience
higher risks of failure (e.g. Amburgey et al., 1993). Besides the higher risk of failure associated with core
changes, blurring the boundaries between different market segments will also increase the degree of
ecological competition between firms. As the organizational environment can be conceptualized as an
n-dimensional space comprising several distinct niches, organizations are more likely to compete against
one another the higher is the degree of similarity or niche overlap between them (see Hannan and
Freeman, 1989; Baum and Singh, 1994). Shifting to the new technology will imply to increase the risk
of failure both due to inertial pressures and to an increase head to head competition – i.e. niche
overlap. In cases in which heterogeneous customers’ preferences support the development of
incomplete technological substitution, incumbents may enhance their survival chances by sticking to
the old technology, and leveraging their knowledge by improving the technological sophistication of
old products. Especially in presence of mass-market radical innovations, our claim becomes consistent
with a ‘resource partitioning approach’ (Carroll, 1985): sophisticated consumers may prefer the
products of peripheral producers, partly because they are able to offer unstandardized products
different from mass-producers. Furthermore, Adner (2002: 683) simulation findings seem to point in a
similar direction. Under pressure to justify their price to existing high-end customers, incumbents
facing radical innovations boost their differentiation from the mass-market by sticking to the old
technology and improving the performance of their products. In the following section of the paper we
9
will try to spell out the implications of our narrative by examining the evolutionary dynamics of the
Swiss automatic watch industry.
EMPIRICAL ANALYSIS
The watch industry was selected because of its radical changes both market structure and in technology,
due to the advent of quartz wristwatches. This industry represents an ideal context to study the
effectiveness of incumbents’ strategies in a regime of incomplete technological substitution. The rise of
the quartz watch and the strong competition from Japanese and Honk-Kong manufacturers
significantly challenged (Glasmeier, 2000; Landes, 1983). We focused on the Swiss population because
of its relevance in history of the industry. Although quartz watches were characterized by higher
performance levels and lower prices than mechanical watches, they did not completely displace the
mechanical technology.
Research methods
Our data were obtained from an original dataset on the population of all the Swiss automatic-watch
manufacturers during the period 1929-1988 (for a detailed description, see Munari et al., 2003). The
first quartz watch introduced in 1969 –i.e. the Astron SQ produced by the Japanese firm Seiko – was
identified as the critical discontinuity. To analyze incumbent’s market and technology strategies, we
identified a ten-years window around 1969. We then selected all the firms producing automatic (self
winding) movements between 1964 and 1974, obtaining a sample of 33 firms. In particular, 31 of them
were already producing automatic calibers before 1964, whereas 2 started the production only after
1969 (Frederic Piguet in 1970 and Ronda in 1972).
Our data collection was based on the books of watchmaking historians and collectors, particularly of
Hampel (1994) reporting information on all Swiss manufacturers of automatic watches over the period
10
1926-1988. Other sources such as Brunner and Pfeiffer-Belli (1999), Glasmeir (2000), Landes (1983)
and Pritchard (1997) were used to double check and complement the information collected.
By combining these sources, we were able to gather data on the following firm-level characteristics:
year of foundation, location, entry into automatic caliber production, exit from automatic caliber
production, number of new caliber models introduced on the market in each year. For each base caliber
produced by each single firm we had data on: year of introduction on the market, type of winding
mechanism, diameter, height (measured in millimeters), frequency (measured in beats per hour, BPH),
running reserve, other main features (e.g., chronometer, alarm, calendar,…).
In the second stage of our data collection, we gathered data on the patents assigned by the Swiss Patent
Office over the period 1890-2001 from the web-site of the European Patent Office
(www.espacenet.ch). We referred to Pritchard (1997) to reconstruct the corporate structures of the
firms and to assign to each firm all the patents granted, included those registered by subsidiaries. For
each patent, we then collected data on the grant year and the 7-digit IPC technology class. Finally, data
concerning the export figures of were provided by the Federation of the Swiss Watch Industry (FHS).
In order to investigate market and technological strategies, we compared product features and patent
portfolios of surviving and exiting firms during the period 1964-1974. The results of our descriptive
analysis are reported in the next sections.
Competing technologies: mechanical vs. quartz watches
A mechanical watch comprises three main parts implementing different functions: a source of power
(the mainspring), a series of wheels that transmit the power (the train) and a regulating mechanism
(balance wheel and escapement). The mechanical watch is therefore driven by the mainspring, acting as
a power source that delivers the energy to the indicators (dial and hands) through the regulating organs.
11
Mechanical watches can be divided into two broad families - hand-wound watches and automatic
watches. In the case of automatic ones, there is no need to manually wind the watch, thanks to the selfwinding mechanism, a device that uses the motion of the wrist to wind the mainspring of the watch.
First hand-wound mechanical wristwatches became diffused at the end of the 19th century, whereas the
first automatic watch was introduced in 1929, thanks to John Harwood (Hampel, 1996).
As far as quartz watches are concerned, their functions are performed electronically – and not
mechanically. A battery provides the source of power that is transmitted to an integrated circuit. The
latter receives the impulses of a quartz crystal (the oscillator), transforming them in a frequency of
32,768 Hz. Quartz watches may either have analog or electronic displays (LCD, liquid crystal display).
Although the first quartz clock was invented in 1928, the commercialization of quartz wristwatches
required major achievements in terms of miniaturization of the main components (see Table 1 for the
most important milestones). At the end of the 1960s, its Accutron model, Bulova replaced the
oscillating balance wheel by using a transistor oscillator to tune the forks. A battery replaced the windup main spring of mechanical watches. Although the Swiss were the first to develop a quartz watch
prototype in 1967 (the model Beta 1), it was first commercialized by Seiko in 1969 (the 35SQ Astron).
The performance levels of first quartz watches were very low at the time of their introduction in terms
of thickness and battery consumption. Nevertheless, the technology improved very fast and in a short
period of time quartz watches outmatched mechanical ones. The accuracy level of a quartz watch was
incomparably higher than the one of a mechanical watch. The level of precision of a wristwatch is
related to the number of vibrations of the regulating organ in an hour (beats per hour, BPH). At the
end of the ‘60s with the frequency of the balance wheel reached a maximum of 5 cycles per second.
12
Since the standard vibration rate of the quartz crystal inside a common quartz watch is 32,768 times per
second1, its accuracy is allows imperfections of just a few seconds a month.
To include the new electronic components early quartz prototypes were extremely thick. Yet, thanks to
miniaturization of the main components their design significantly improved over time. In this respect, it
is worth mentioning that in 1979, the Swiss firm ETA launched the “Delirium” quartz wristwatch - just
1.98 mm thick including the case – establishing the world slimness record for a watch.
Finally, thanks to the exploitation of learning curves, quartz watches experienced dramatic cost
reductions. Whereas the first models were extremely expensive, with prices ranging from $1,000 to
$2,000, in just five year the cost of a digital watch with a LED display dropped to $50 (Glasmeier,
2001). In 1977, Texas Instruments launched a plastic-encased digital watch for $9.95. The end of the
1970s saw the emergence of Honk Kong as the world’s strongest manufacturer of low-priced watches,
thanks to the comparative advantage in the cost of labor-intensive assembly activities.
In a nutshell, as David Landes (1991) puts it, “the quartz technology is actually superior to the
mechanical one for what concerns the measurement of time”. Because of the above-mentioned
characteristics, the introduction of the quartz is often cited as an example of radical innovation
(Glasmeier, 1991; Tushman and Rosenkopf, 1992; Tushman and Anderson, 1986).
The impact of quartz on the Swiss watch industry
The fragmented structure of the Swiss watch industry is one of the most important causes to explain its
slow reaction to the commercialization of the quartz technology (Glasmeier, 1991). Over its history, the
1
The superiority of quartz watch accuracy level was dramatically demonstrated at the precision competitions
traditionally held at the Neuchatel Observatory. In 1967 ten prototypes of newly-developed quartz movement were
submitted to the competition. They immediately occupied the first ten places in competition against mechanical
watches, reaching twelve times their accuracy. Because of this dominance, precision competitions at the Observatory
lost their value and were discontinued the following year (Brunner and Pfeiffer-Belli, 1999).
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Swiss watch industry maintained a fragmented structure with hundreds of suppliers delivering their
products to hundreds of assemblers (so-called “etablisseurs”), mostly selling watches under their name2.
A more limited number of integrated companies, the so-called “manufactures”, produced and sold their
own products.3
The dispersed production structure is one of the reasons why small firms did not have enough capacity
to make investments in new technologies. Nevertheless, during the early years, the Swiss industry was
able to respond to threats posed by the quartz technology. A number of manufacturers joined their
forces to set up a collectively funded R&D center – i.e., the Horological Electronics Centre (CEH,
Centre Electronique Horologer) in Neuchatel. In 1967 this centre unveiled the first prototype of a
quartz wristwatch, the Beta 1, which was commercialized in 1970 under various Swiss brand names.
However, the lack of an independent microelectronics industry and the conception of watches as highly
crafted pieces of jewelry, led many producers to undervalue the enormous potential of the quartz
technology (Glasmeier, 2000; Landes, 1986). During the same years, Swiss firms obtained major
improvements on the old mechanical technology. As for automatic watches, the main performance
improvements concerned the increase in running regularity, the reduction of movement height and the
incorporation of additional features, such as the alarm, the perpetual calendar or the chronograph4. This
phenomenon is known in literature as a “sailing-ship effect” (Rosenberg, 1972), corresponding to the
performance improvements of an existing technology under the threat of a new one5.
2
Since the economic crisis of the 1920s, the vast majority of watch and movement manufacturing in Switzerland has been
undertaken by specialized companies operating under two different holding groups, Ebauches S.A. and AUSAG.
3
Nowadays, this circle includes companies such as Audemars-Piguet, IWC, Jaeger-LeCoultre, Patek Philippe, Piaget, Rolex
and Zenith.
4
The running regularity of the watches, and thus their accuracy, increased steadily and reached a maximum of 36,000 BPH
in 1965, with the Gyromatic model developed by the firm Girard-Perregaux. Significant achievements were also reached in
reducing the thickness of the watches: whereas the flattest automatic watch in the 1940s measured 4.9 mm, the caliber 2000
developed by Bouchet-Lassale S.A. in 1978 reached the incredible height of only 2.08 mm.
5 The name derives from the study by Gilfillan (1935), which documents the exceptional improvements of the sailing ships
in the years following the introduction of the steam ship.
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U.S. firms soon took the lead in the quartz production thanks to their expertise in microelectronics
research. Many new U.S. semiconductor companies – i.e. Texas Instruments, Fairchild and National
Semiconductors – started mass production of quartz watches. Subsequently, companies from countries
with cheap labour supplies, such as Honk Kong, entered the market with low priced quartz watches.
At the beginning of the 1980s, Swiss watchmakers significantly reduced their presence in the low end
segment, dominated by Hong Kong manufactures, and lost much of their share in the mid-priced
market to Japanese watchmakers, such as Seiko, Citizen or Casio. During the seventies, the electronic
revolution forced the Swiss watch industry to make radical structural changes. A major wave of
liquidations, mergers and acquisitions consistently redefined the industry structure.6 As a result of the
structural change brought by the quartz revolution, the number of Swiss watch companies dropped
from about 1.600 in 1970 to 600 in the early 1990s, whereas the number of employees in the industry
fell from around 90.000 in 1970 to 35.000 in 1983 (Glasmeier, 2000).
Incomplete technology substitution in the watch industry
The higher precision coupled with the consistently lower price of the quartz technology clearly threaten
mechanical producers. Figure 1 concerning watch movement production exhibits the typical pattern of
substitution between the old and the new technology.7 The figure shows that the Swiss production of
quartz movements, peaked up at the end of the 1970s and after a few years outmatched the production
of mechanical ones. Although in 1980 around 80% of watch movements exported by Swiss firms were
still mechanical, at the end of the decade this percentage fell to 16% (21% in 2001). However, the same
data interpreted in value rather then in volume highlight that the quartz didn’t displace the existing
technology completely from the market. On the contrary a substantial demand for mechanical watches
6
Over the ‘70s, several failing Swiss watch firms were acquired by the AUSAG group. In 1983, Ebauches merged with
AUSAG. The latter merged with SSIH (whose flagships were Omega and Tissot) in December 1983, and they were
subsequently combined with a number of previously independent watch manufacturers to create the AUSAG/SSIH group
(1983), later turned into the SMH group (1985) and finally into the Swatch Group (1998) under the guide of Nicholas
Hayek.
7
The movement (also called caliber) represents the inner engine of the watch and its production constitutes the more
technologically advanced activity in the industry. It represents the inner engine of an automatic watch and consists of the
self-winding mechanism, the mainspring, the train, the escapement, and the regulating elements.
15
remained. At the end of the 1980s the market share (in value) of mechanical movements was 24%, but
it steadily increased over the 1990s, when mechanical watches returned fashionable, reaching a
maximum of 48% in 2001.
--- Insert Figure 1 about here ---
Figure 2 reports the time-varying average value of the watch movement exported, and allows us
understanding why quartz watches didn’t completely substitute mechanical ones. Figure 2 shows that,
at the beginning of the 1970s, electronic movements were extremely expensive, but their cost
dramatically fell as cumulated volumes peaked. On the contrary, the value of the average mechanical
movement produced by Swiss firm steadily increased from the early 1980s, reaching a maximum in
2000. In 1980, the average value of a mechanical movement was comparable to that of a quartz,
whereas twenty years later the value of mechanical movements is three-times higher.
--- Insert Figure 2 about here ---
Although the quartz technology displaced mechanical watches in the mass-market, a substantial
demand for high-priced mechanical watches increased over time. As we argued in our theoretical
development, to understand incomplete technological substitution is necessary to investigate the
heterogeneity of customers’ preferences.
The primary function of a watch is to tell the time. In this sense, although a mechanical watch cannot
achieve the same accuracy of quartz products, it offers an sufficient precision for several categories of
owners. Such observation is coherent with the idea of “performance oversupply” introduced by
Christensen (1997) and developed by Adner (2002) that explains why consumers may decide not to
16
adopt more sophisticated technologies. According to this principle, once customers’ requirements for a
specific functional attribute are met, further enhancements have little effect on consumers’ utility.
Purchasing a watch is only partially driven by the consideration of purely functional factors. On the
contrary, it is largely influenced by emotional factors. Market analyses confirm that the consumers
identify a watch primarily by its brand (UBS, 1986). In particular, high-quality, luxury watches represent
status symbols, for which consumers’ willingness to pay is largely influenced by brand reputation.
Moreover, other watch characteristics - such as design and appearance, technical complications,
materials – are more valuable in the high-end of the market. This may explain why high-quality, luxury
mechanical watches were not displaced by quartz products: they simply competed for different
segments and the heterogeneity of customers’ preferences allows explaining the emergence of a regime
of incomplete technological substitution.
Technological innovation and incumbent survival: the case of Swiss automatic watch
producers
In this section, we analyze market and technology strategies of Swiss automatic watch producers. We
first identified all those firms that produced and put on the market automatic movements over the
1964-1974 period – i.e. 33 firms. We then divided these firms into two samples: survivors and exiters.
The first group was constituted by those firms that, at 1988, had not failed or been acquired, or if
acquired, had continued the production of automatic calibers. The second group includes the firms that
ceased the production of automatic calibers because of failure or acquisition. The year 1988 was
selected because this is the last year of full coverage of our data sources. After this classification, 16
firms belong to the group of survivors and 17 to the group of exiters.
To analyze their market positioning and capability development, we tracked product and patent
characteristics of both these two groups of firms. In doing that, we focused on the characteristics of the
17
existing technology (automatic mechanical watches). Our goal is to show how firms survived the
technological discontinuity created by quartz introduction through the improvement of the existing
technology.
With respect to market positioning, we analyzed the main features affecting the performance and the
perceived quality of a watch. Measuring the technological performance of a systemic product is a
complex task: it is inherently a multidimensional concept that should be articulated according to several
dimensions. We decided to focus on three major indicators of technological performance of a watch
(Hampel, 1996): frequency, height and jewels. Frequency refers to the number of vibrations of the
regulating organ (measured in beats per hour, BPH) and it is linked to the accuracy of the watch
(usually expressed in terms of number of seconds of departure from the true time). As reported above,
the introduction of quartz made the accuracy of mechanical watches not comparable to that of quartz
watches. Height, measured in millimeters, refers to the distance between the top and the bottom of the
dial plane. Early automatic watches, including the self-winding mechanism, were significantly thicker
and more voluminous than the manually wound ones. To make automatic-watch more attractive for a
wider set of customers, manufacturers made extraordinary efforts to reduce the height of their calibres.
The number of jewels refers to the number of stones (rubies) used in the movement, including those
without a function. Jewels are fitted into a watch wherever friction occurs. They used to be rubies and
they were eventually substituted by man-made corundum. The higher the quality of mechanical watches
the larger the number of jewels adopted.
For each firm of our sample, we calculated the maximum frequency, the minimum height and the
maximum number of jewels of the movements ever produced. As for frequency, Figure 3 presents a
comparison of the two groups of firms. Both surviving and exiting firms increased the frequency of
their movements until 1970. That was driven by the introduction and diffusion of fast-beat watches,
characterized by 36,000 BPH frequency, an innovation first launched by Girard-Perregaux in 1966 – i.e
18
the Gyromatic model. Figure 3 shows that, after 1970, the frequency of the calibers of survivors
remained almost steady until 1974, whereas, in the case of exitors, the frequency monotonically
increased until 1973.
--- Insert Figure 3 about here ---
Interestingly enough, the pattern of the second feature – i.e. caliber height (Figure 4) – confirm this
pattern. Whereas survivors sharply reduced the height of their calibers, the latter remained almost
constant in case of exitors. The most striking height reduction was accomplished by Jaeger LeCoultre,
with a caliber measuring only 2.45 mm. Since height has been recognized as one of the features most
valuable to watch buyers (Hampel, 1996), the attention of surviving firms on the thinness of the
movement could be an important factor in explaining their long-lasting success.
--- Insert Figure 4 about here ---
Consistent evidence can be obtained by observing the dynamics of the third feature – i.e. the number
of jewels embodied in the movement (Figure 5). The movements of survivors contained a significantly
higher number of jewels than those of exitors. As the number of jewels is strictly related to the
performance and perceived value of the watch (Hampel, 1996), a similar trend of results suggests that
surviving firms focused on high quality, high value, primarily leveraging the old technology.
--- Insert Figure 5 about here ---
Furthermore, we aimed at comparing the different technological capabilities of the two groups of firms.
As other studies (e.g. Pavel and Pavitt, 1997), we refer to firm-level patent data. The stock of patents
was calculated summing up all the patents registered by the focal firm since 1898 and, then, applying a
15% constant annual depreciation rate (e.g., Hall et al., 2000). Although during our window of
19
observation the stock of patents of exitors was significantly higher, our data allowed us decomposing
this aggregate value and showing the relative importance of the old versus the new technology in the
product portfolio of survivors and exiting firms. Building on IPC classes indicating the technological
field of the patent, we divided the total firm’s stock of patents into 4 technological categories: general
mechanical (IPC G04B, except for subclasses G04B5 and G04B7), automatic (IPC subclasses G04B5
and G04B7), electronic and electromechanical (IPC G04C and G04G), and other (all the IPC classes
other than G04). The first category includes the patents on the mechanical movements, except those
regarding the automatic components of a mechanical movement, which were assigned to the second
category. The third category comprises the patents on electrical and electronic movements, whereas the
fourth includes the patents in the other non watch-related technological fields. For each category we
computed the share of patents on the total stock held by the focal firm.
Surviving and exiting firms showed similar patterns with respect to mechanical and common patents.
Yet, interesting differences emerged when comparing the subclasses related to automatic and electronic
movements. Figure 6 shows the pattern of the share of patents in automatic watches. While survivors
increased their stock of patents in this subclass (even with a slight decrease after quartz introduction),
exitors remarkably reduced their share over time. This evidence suggests that exiting firms downplayed
the old technology, whereas those firms leveraging their expertise in the old – automatic - technology
were rewarded with a higher likelihood of survival.
--- Insert Figure 6 about here ---
A similar conclusion can be reached by examining the share of electronic movements patents (Figure
7). In 1964 exiting firms exhibited a higher share of patents than surviving, and the gap increased until
1968, but, then, it disappeared after 1970. This suggests that in the period preceding the emergence of
20
the new technology exitors focused on the development of technological capabilities in the field of
electronic watches rather than on reinforcing of their capabilities in automatic watches.
--- Insert Figure 7 about here ---
To summarize, our descriptive evidence seems to suggest that incumbents were able to survive under a
regime of incomplete technological substitution by focusing on the high-quality, high-price segment of
the market. Those firms - including Audemars Piguet, IWC, Jaeger-LeCoultre, Patek Philippe, Piaget,
Rolex and Zenith - continued the in-house production of the movements boosting their image of
manufactures of luxurious mechanical watches. Although it is not possible to say that they completely
ignored the new radical technology, - as the patents assigned in the technological class regarding
electronic watches suggests – they deliberately chose to focus their technological capabilities and
market positioning on high-end mechanical watches.8
CONCLUSIONS
In this paper we analyzed the factors affecting incumbents’ survival in a regime of incomplete
technological substitution. So far, the broad literature on incumbents’ performance in presence of
radical innovations has devoted scarce empirical attention to this issue. In doing so, built on a set of
recent studies that have remarked how in presence of heterogeneous and non-overlapping customers’
preferences, technological substitution can hardly be complete (Adner and Levinthal, 2001; Howells,
2002). In this paper, we have tried to address this shortcoming, advancing that in presence of a regime
of incomplete substitution, incumbents may increase their likelihood of survival by sticking to in the
old technology and reinforcing their market position and competencies.
8
The case of the Swiss firm ETA deserves a separate analysis. ETA, the largest Swiss watch manufacturing conglomerate,
held a dominant share of the market. ETA was able to exploit its economies of scale in technological development and
manufacturing not only in the mechanical technology, but also in the quartz technology. After achieving important results in
the development of the new technology, such as the development of the first integrated circuit for a wristwatch in 1959 or
the launch of the slimmest quartz watch in the world - the Delirium in 1979 -, it introduced the Swatch concept in 1983.
21
Empirically, we study the watch industry because its history is marked by a clear-cut radical
technological change – i.e., the commercialization of the quartz wristwatch at the end of the 1960s. In
particular, we assembled an original dataset on the population of all the automatic-watch manufacturers
from Switzerland over the period 1964-1988. We provided descriptive evidence on the evolution of
incumbents’ product features and patent portfolios over a period of 11-years. We showed that
surviving incumbents continued to improve the old technology, and offered higher quality products.
We believe that our paper offer two main contributions to the existing literature. First, it deepens the
analysis of the role of demand for technological change, arguing that heterogeneous customers’
preferences may generate regimes of incomplete substitution. Previous studies have already dealt with
this subject, although adopting simulation techniques (Adner and Levinthal, 2001; Adner, 2002). In this
respect, the empirical evidence from the watch industry reported here, reinforce previous descriptive
and simulation studies findings, calling for a more thorough consideration - both theoretical and
empirical - of the interplay between technological change and demand environment.
Furthermore, this paper takes a different perspective on the relationship between radical technological
change and incumbents’ survival. Our claim that incumbents’ survival improved by focusing on the old
technology is rather unexplored in the literature, that, by and large, assumes the adoption of new
technologies by incumbents a necessary condition for their long-term survival (Mitchell, 1992; Tripsas,
1997; Hill and Rothaermel, 2003). By adopting this different perspective, the results of our preliminary
analyses have managerial implications. While facing disruptive technological changes managers should
examine whether the market presents the pre-conditions of incomplete substitution, and, use this
information to decide shifting to the new technology, or sticking to the old one.
22
The evidence reported in this paper is partial, and suffers from all the limitations that descriptive
analysis. We believe, however, that the results presented here encourage us to implement a quantitative
analysis clarifying the set of contingencies affecting firm survival in presence of radical innovations.
23
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27
Table 1: The development of the quartz watch: key-events
Year
Event
Characteristics
Inventor
1928
First quartz clock
Installed at the Greenwich Observatory in 1939. It was accurate to
within 0.001 of a second a day
1958
First electric watch
Ventura model by Hamilton. New technological trajectory
1959
Integrated circuit for
electronic watches
They substituted for all parts of the gear trains and introduced new
functions
CEH
(Switzerland)
1960
Launch of the Bulova
“Accutron”
Tuning fork movement. Accurate to within one minute per month
Bulova
(U.S.A.)
Development of Beta 1
The first prototype for a Swiss quartz wristwatch
1966/67
Horton and Marrison
(U.S.A.)
Hamilton Watch Company,
(U.S.A.)
CEH
(Switzerland)
1969
Launch of the first quartz
The 35SQ Astron by Seiko is introduced in Japan.
watch in the world
1970
Launch of the first quartz The “Pulsar” is launched in the U.S.A by . It has no moving parts
watch with LED display and tells the time via a red digital LED display.
1979
Launch of the “Delirium”
The flattest analog quartz wristwatch in the world. It was just 1.98
mm thick, including the case.
ETA
(Switzerland)
1983
Launch of the “Swatch”
Plastic case, reduction of the components from 91 to 5, innovative
design.
ETA
(Switzerland)
28
Seiko
(Japan)
Hamilton
(U.S.A)
Figure 1 – Watch Movements exported by Swiss firms (in volume): mechanical vs. quartz movements
N. of movements (in thousands)
25000
mechanical movements
20000
electrical movements
15000
10000
5000
0
80
Mechanical
70
Electronic
60
50
40
30
20
10
Year
29
2000
2001
1999
1998
1996
1997
1995
1993
1994
1992
1990
1991
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1977
1978
1975
1976
1974
1972
1973
1971
0
1970
Average value of movement exported movement (Swiss
Francs)
Figure 2 – Average value of movement exported: mechanical vs. quartz
Frequency (BPH)
Figure 3. Average maximum frequency (in BPH) achieved by surviving and exiting firms
30000
28000
Exiting
Surviving
26000
24000
22000
20000
18000
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
Height (mm)
Figure 4. Average minimum height (in millimeters) achieved by surviving and exiting firms
4.8
4.7
Exiting
Surviving
4.6
4.5
4.4
4.3
4.2
4.1
4
3.9
3.8
1964
1965
1966
1967
1968
30
1969
1970
1971
1972
1973
1974
Number of jewels
Figure 5. Average maximum number of jewels achieved by surviving and exiting firms
32
30
Exiting
28
Surviving
26
24
22
20
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
Figure 6. Average percentage of patents in the automatic watch technology on the total: surviving vs.
% patents on the automatic movements
exiting firms
0.2
Exiting
Surviving
0.18
0.16
0.14
0.12
0.1
0.08
0.06
1964
1965
1966
1967
1968
31
1969
1970
1971
1972
1973
1974
Figure 7. Average percentage of the patents in the of movements technology on the total: surviving vs.
% patents on the elctronic movements
exiting firms
0.14
Exiting
Surviving
0.12
0.1
0.08
0.06
0.04
0.02
0
1964
1965
1966
1967
1968
32
1969
1970
1971
1972
1973
1974