CUSTOMER POWER, STRATEGIC INVESTMENT, AND THE FAILURE OF LEADING FIRMS

Why might firms be regarded as astutely managed at one point, yet subs equently lose their positions of industry leadership when faced with t echnological change? We present a model, grounded in a study of the wo rld disk drive industry, that charts the process through which the dem ands of a firm's customers shape the allocation of resources in techno logical innovation-a model that links theories of resource dependence and resource allocation. We show that established firms led the indust ry in developing technologies of every sort-even radical ones-whenever the technologies addressed existing customers' needs. The same firms failed to develop simpler technologies that initially were only useful in emerging markets, because impetus coalesces behind, and resources are allocated to, programs targeting powerful customers. Projects targ eted at technologies for which no customers yet exist languish for lac k of impetus and resources. Because the rate of technical progress can exceed the performance demanded in a market, technologies which initi ally can only be used in emerging markets later can invade mainstream ones, carrying entrant firms to victory over established companies.