23 Jul 2001  Research & Ideas

How One Center of Innovation Lost its Spark

It's no secret that innovation is what has always made places like Silicon Valley and Hollywood so special. Creativity and expertise centered in one location, it seems, spurs yet more innovation at ever increasing speeds. But what happens when the well runs dry?

 

Editor's Note— How do once-thriving centers of innovation slow down, falter, and in some cases all but grind to a halt?

That's a question that fascinates HBS professor Donald N. Sull. In a new working paper describing his in-depth research, Sull focused on the travails of one former community of innovation—the Akron, Ohio tire cluster—to try to discover how Akron companies turned into what he calls a "community of inertia." Drawing as well on research by other scholars, including Harvard University Professor Michael E. Porter, Sull's work provides a new way of thinking about how to counter some of the downsides of the cluster phenomenon.

After the French tire maker Michelin introduced radial tire technology—which in effect doubled a tire's useful life—Akron tire companies quickly began to lose their edge. The Akron firms faltered in the 1970s and 1980s, says Sull, and in the span of 18 months, three of the four tire manufacturers there ceased to exist as independent corporations.

In this excerpt from "From Community of Innovation to Community of Inertia: The Rise and Fall of the Akron Tire Cluster," Sull describes how this seemingly invincible industrial center went downhill. He also suggests several promising new paths for more research on the problems of inertia in organizations.

Sull's paper, in a slightly condensed version, was recently selected for publication in the Academy of Management Best Paper Proceedings.—Martha Lagace, HBS Working Knowledge

The findings from a historical analysis of the U.S. tire industry from 1900 to 1990 suggest that the firms clustered in Akron initially led the industry in innovation, but later failed to respond effectively to the introduction of radial-tire technology.

To understand why the Akron cluster evolved, it is helpful to disentangle two distinct consequences of the geographic co-location of competitors in the same industry. Geographic co-location increases the ease with which "communities of practice" can form, and these tightly interwoven social and professional networks provide the conduits through which tacit knowledge flows. These knowledge flows, in turn, contribute to cumulative incremental innovations in both product and process technology among firms embedded in the cluster.

I use the term 'active inertia' to describe the tendency of firms to respond to changes in their competitive environment not by doing nothing, but by accelerating past organizational routines based on established assumptions.
— Donald N. Sull

The benefits of this knowledge sharing, however, are likely to decline over time as the industry settles on a dominant design and converges on the optimal production process. While the knowledge sharing benefits of clusters takes off, the liability of institutionalization rise steadily as a function of time. These costs consist primarily of foregone flexibility resulting from persistence of established behaviors and taken-for-granted assumptions that may outlive their usefulness as the competitive environment changes, leaving the firms within the cluster susceptible to an environmental jolt.

The findings from the study also contributes to our understanding of organizational inertia. Hannan and Freeman [scholars] define inertia in terms of the relative speed of adaptation and argue that organizations suffer inertia when they fail to change as quickly as the environment.

Although the tire firms delayed closing redundant capacity, they responded fairly quickly to the introduction of radial tires by extending bias technology with the belted bias tire. The tire firms also invested rapidly to build radial tire production capacity once the OEMs [original equipment manufacturers] switched to the new technology.

In the case of investment in radial manufacturing capacity, the tire firms may have actually acted too hastily, given the high capital investment costs and predictably low return. The tire companies did not respond to radial technology by doing nothing or by delaying necessary actions, but rather responded by accelerating activities—such as incremental extensions of the existing product and building new plants—that had worked in the past and were based on assumptions that had at one point been consistent with the competitive environment. I use the term "active inertia" to describe the tendency of firms to respond to changes in their competitive environment not by doing nothing, but by accelerating past organizational routines based on established assumptions.

The tire industry data also provide insights into the micro-processes that contribute to inertia. Taken-for-granted shared assumptions about the industry were enacted through established organizational routines, and these assumptions and routines mutually reinforced one another. Tire executives apparently assumed that the bias tire would continue as the dominant design, and this assumption was enacted through their company's well-honed new product development process which had produced a steady flow of incremental extensions to the dominant design throughout the preceding decades.

Similarly, the assumption that tires was a growth industry was enacted through the capital budgeting process that resulted in a steady stream of new factories being built to meet rising demand. When faced with the radial technology, executives responded with investments in new plants that resulted from their well-honed capital budgeting process and was consistent with their assumption that tires was a growth industry.

Because none of the four Akron tire companies had closed a factory prior to 1975, these firms lacked a process for disinvestment, and their capital budgeting process stalled in reverse.

This study suggests opportunities for future empirical research. Future studies could analyze the evolution of once-comparable clusters such as the financial centers in Paris and London or shoemaking districts in different regions of Italy. Comparative historical case analysis could also explore how differing trajectories of technological development influence the evolution of industrial clusters.

It would also be interesting to chart the attempts by many regional development boards and business associations to capture the benefits of clustering by imitating Silicon Valley.

A broader extension of this study would explore how various contexts contribute to entrepreneurship and innovation, and compare industrial clusters with other possible contexts, such as incubators or large corporations. Future clinical research could compare, for example, similar entrepreneurial ventures within an industrial cluster, an incubator, and a large corporation to understand how each context promoted or hindered the venture.

An empirical study might categorize different contexts and analyze how they contribute to survival rates. Future theoretical research could elaborate the dimensions along which contexts for entrepreneurship vary and how these contribute to or hinder the pursuit of opportunity.