Incumbents’ advantage
Frank T. Rothaermel
Most academics and practitioners highlight the advantages enjoyed by new entrants (Foster, 1986; Christensen, 1997). New entrants are often viewed as initiating a Schumpeterian process of creative destruction (see creative destruction), frequently replacing industry incumbents and rising to dominance. Yet there are many examples of incumbents who success fully weather waves of radical change in a wide range of industries, including computing and the life sciences (Hill and Rothaermel, 2003). Thus, entrepreneurs and entrepreneurship scholars need to be aware of the advantages enjoyed by incumbents that may retard entrepreneurial success.
The pioneering work of Schumpeter (1934, 1942) is not clear on whether incumbents or new entrants are likely to succeed in commercializing innovation, because it suggests that both – new entrants and incumbents – can have the upper hand when innovation occurs. Schumpeter at tributed the incumbents’ advantage to monopoly power that allows for limited competition and scale advantages in access to capital and R&D funding, among other advantages. Later work in industrial organization economics, emphasizing differential economic incentives, clarified that incumbents are likely to be successful when an innovation is incremental, while new entrants are favored when an innovation is radical (Tirole, 1998) (see radical innovations).
More recent theoretical work has highlighted the importance of complementary assets in determining whether incumbents or new entrants are more likely to profit from an innovation (Teece, 1986). The commercialization of an in novation ‘‘requires that the know how in ques tion be utilized in conjunction with other capabilities or assets. Services such as marketing, competitive manufacturing, and after sales sup port are almost always needed. These services are obtained from complementary assets, which are specialized’’ (Teece, 1986: 288). Examples include the commercialization of the CAT scan ner or soft drink innovations like diet cola, where the innovators (EMI and RC Cola) lost to incumbents (GE Medical Systems and Pepsi, Coke) due to a lack of specialized complementary assets.
Following Teece (1986), we suggest that the type of complementary assets necessary to commercialize an innovation is likely to be para mount in determining the performance consequences for incumbent firms. In particular, we argue that incumbents are advantageously positioned when the complementary assets needed to commercialize an innovation are specialized or co specialized to the innovation. Specialized complementary assets exhibit unilateral dependence between the innovation and the complementary assets, while co specialized complementary assets are characterized by a bilateral dependence. A stellar reputation for quality and service in hospital equipment is considered a specialized complementary asset, while specialized repair facilities for Mazda’s rotary engine would be a co specialized complementary asset. We use the term specialized complementary assets to denote both specialized and co specialized complementary assets.
Recent empirical research has shown that incumbents even benefit from radical innovation through leveraging specialized complementary assets. Tripsas (1997), in her longitudinal study documenting multiple waves of innovation in the typesetting industry, showed that incumbents who were able to leverage specialized complementary assets like manufacturing cap abilities, proprietary font libraries, or a sales and service network, continued to thrive in the incumbents’ advantage 151 face of radical technological innovation, time and time again. Rothaermel (2001a) also provided some evidence for the notion that incumbent pharmaceutical firms were able to leverage their complementary assets in downstream value chain activities, such as clinical trial and regulatory management as well as drug distribution, through interfirm cooperation with new entrants. This alliance strategy has not only yielded superior firm performance for some incumbents, but also improved the overall industry performance of incumbents as a group, because they were able to extract significant innovation rents despite the fact that the innovation was introduced by new entrants (Rothaer mel, 2001b). The key to continued superior incumbent performance in both the typesetting and pharmaceutical industries was specialized complementary assets held by incumbents. These assets are frequently non technological in nature and are built over long periods of time.
Thus, complementary assets needed to commercialize an innovation ought to be of particular interest to entrepreneurs and entrepreneurship scholars. Hill (1997) posited that new entrants should go it alone if they have the re quired complementary assets and barriers to entry are high. When new entrants lack complementary assets, they should enter into a cooperative arrangement with an incumbent firm. New entrants may be able to obtain complementary assets in strategic factor markets (Barney, 1986), and if they are priced below their rent generating potential, new entrants are well positioned to extract the profits from innovating (see competitive advantage). Taken together, innovation is the sine qua non of entrepreneur ship. Yet incumbents enjoy many advantages that have a direct bearing on whether entrepreneurial ventures will succeed or fail. This fact offers abundant research opportunities to enhance our understanding of entrepreneurship and to more accurately inform practice.
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