Strategic Management Journal, Vol. 10, 89-100 (1989) THE DYNAMI.CS OF CONTINUOUS INNOVATION IN SCALE-INTENSIVE INDUSTRIES YASUNORI BABA Science Policy Research Unit, University of Sussex, Falmer, Brighton, U. K. c \ This paper attempts to explain why some industries succeed in dematuring by formulating the generation and utilization of new technologies into a continuous process. By reference to the performance of Japanese scale-intensive industries (i.e. automobile and consumer electronics durables), the analysis provides a theoretical foundation for the proposition that a certain type of positive-sum game played among a variety of market entrants generates specific ‘inter-group dynamics’ (hyper-learning process). In this industrial climate the firms’ inclinations towards offensive management and product-cum-process innovation has resulted in the coupling of continuous innovation and industrial evolution. INTRODUCTION Most researchers, industrialists and investors used to believe in the relevance of the concept of ‘a mature industry’, clearly characterized by the stability of its technology. However, parts of Japanese industry (e.g. the automobile and consumer electronics durables industries) have recently been seen to succeed in dematuring (Abernathy, Clark and Kantrow, 1983) by formu- lating the generation and utilization of new technologies into a continuous process. This paper attempts to explain this new phenomenon by asking why firms in a dematuring industry have come to attach consistent importance to technical change, and what mode of competition has directed them to the new strategy of continuous innovation. The type of corporate organization and a holistic view of ‘inter-group dynamics’ in a given industry-how firms behave in relation to other groups and each other-are shown to be impor- tant explanatory factors. As my actual unit or level of analysis, I shall rely on the idea of a ‘strategic group of firms’ (Porter, 1979). In a given industry there may be groups comprising innovating firms together with either imitating firms, or innovative followers, or both. And groups of firms may compete or collaborate with each other, as the case may be: a firm may obtain or blunt a competitive edge through its innovating activities, but it may also collaborate with others by adopting, interchangeably, the roles of component and equipment-supplier, innovation-supplier (either through imitation or licensing), and so on. In this paper I shall focus attention on the regularities observable in groups’ interactions with one another, and in their responses to changes in the environment, so as to draw up typologies of their strategic patterns. The insight for its theorizing derives mainly from my observation of the industries. I shall suggest that ‘inter-group dynamics’ may have facilitated a pattern of continuous innovation, notwithstanding that individual innovations tend to be fairly ordinary and incremental. With this scenario in mind, this paper examines the type of corporate organization and its implication in firms’ strategic behaviours, the mode of ‘inter-group dynamics’, and the process of continuous innovation emerg- ing in the microelectronics age. 0 143--2O95/89/0 1 OO8%12$06.00 @ 1989 by John Wiley & Sons, Ltd. Received 1 July 1987 Revised 3 February 1988