Fundamentals of Business

A typical example of his thesis is illustrated

A typical example of his thesis is illustrated in the curve of Fig. 1 which shows the number of automobile manufacturers in the US over a 60 year period.

The Automobile Industry circa 1923
In 1923 there were some 75 manufacturers, and Ford had more than a 40% market share with the Model T, a car that it had produced since 1909! By 1925 the number of manufacturers had shrunk to 38. In 1926 Ford made no cars for several months as it desperately sold off inventories of the Model Tand retooled to build the Model A. If Ford had not had $300 million cash in the banks in 1925, it would not have survived. It took Ford over 50 years to rebuild its market share to a mere 17%!

The event that precipitated this consolidation and the perilous decline in Ford's fortunes was the introduction of the closed steel body chassis in 1923 by the Dodge brothers. By 1926, 80% of automobiles sold in the USA had closed steel body chassis. (According to Jim Utterback, two other standards, the internal combustion engine and rear wheel drive, were dragged along with the closed steel body chassis.) The customers made this innovation a dominant standard by voting with their wallets. Ford's Model T didn't meet the standard with its assembled chassis, high off the ground and far less comfortable. Neither Ford's market share nor its dominant distribution system slowed the stampede to the dominant standard. Prior to 1923 the automobile industry was in what Prof. Utterback calls the product innovative phase of its life cycle: when a variety of technically changing products are supported by a multitude of suppliers. The suppliers make relatively small numbers of widely varying products. New suppliers enter the market on the basis of technical innovations that create products with unique advantages.

After 1923, when the dominant standards emerged, the automobile industry moved into what Prof. Utterback calls the process innovative phase phase. In this phase, successful innovation is limited to product improvements that enhance the standards, to manufacturing improvements, and to improvements in marketing and distribution. Products that directly attack the market standard are doomed. (Front wheel drive and the Stanley Steamer died in 1923.) Once a market standard emerges, the number of suppliers shrinks and those who survive must effectively produce and sell large quantities of standardized products. Their manufacturing efficiencies and the effectiveness of their distribution channels determine their relative market shares and profits.