The Evolution of Games of Innovation in Regulated Complex Industries: The Case of Aviation Training

Abstract

The study of industrial games of innovation is often associated with dominant theories representing various generic forms of organizational design and dynamics. The dominant theories in this area were traditionally Schumpeter’s destructive innovation, Porter’s five-force competitive analysis and Nalebuff’s value net. Other frameworks for analyzing industrial behavior include game theory and its derivative innovation games theory. For regulated high-technology industries, theoretical frameworks that do not account for interfirm coordination are often insufficient to understand or predict the industry behavior. Innovation in the aviation simulation and training industry will be presented in this paper as typical of the regulated high-technology industries. The aviation simulation and training industry emerged at the turn of the twentieth century and it was mostly demand-driven at its onset. The increase in the volume and importance of aviation resulted in government regulation of the industry in the late 1960’s. This has radically changed the industry’s game of innovation into a regulation-based coordination game. Literature described the regulation-centered innovation coordination as “an internally-coherent system of innovation.” The new game had the regulatory frameworks at the core of the innovation process as they defined the market’s acceptance and value capturing from innovative technologies. The evolution of these regulatory frameworks was almost entirely reactive to accidents and catastrophic failures that highlighted existing deficiencies in training methodologies or technologies. This ex-ante regulator-driven system of innovation exhibited recent evolutionary changes towards being a pedagogy-centered service-based system of innovation. The reason behind this transformation was a combination of endogenous and exogenous forces. Technological opportunities, economic pressures and strategic transformation by industry leaders were the three main categories of these forces. The resulting mode of innovation coordination in the industry was a service-oriented pedagogical platform, lead by supplier-user partnerships and monitored by regulation authorities. Compliance to equipment regulatory guidelines is not the principal means of value creation anymore. Rather, the pedagogic value of the training curriculum, encompassing the training devices, is the main source of value creation. A new stable equilibrium of innovation coordination is being reached by the industry, driven by its downstream-most service provision component.