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If everyone can do it, its difficult to create and capture value from it.
or, alternatively

In In a perfectly competitive market, no firm realizes economic profits (rents).

Change is the only constant.

or, alternatively

Over time, economic profits (rents) tend to dissipate as markets evolve.

(Industrial Organization View)

Monopoly Rents

(Resource Based View)

Ricardian Rents

Schumpeterian Rents
(Dynamic ( y Capabilities p View) )

S P S MC 1MC 2 P AC 1 q1 q2 AC 2

D Q

-Barriers to entry -Industry structure matters

-Barriers to imitation -Firm structure matters

-Markets are dynamic -Innovation matters

The Dynamic Capabilities Perspective:

Premise that markets are dynamic Economic rents due to temporal advantages (i.e. p ) Schumpeterian rents) Timing and adaptation is critical

High

Annealing

Dis sruption

Sh hakeout

Cumulative Revenues

Margins (?)

Firms
Low Emergent Phase Growth Phase Mature Phase

Source: Dobrev et al., 2003

Source: Carroll et al., 1993

Source: Wade 1996

In the beginning beginning, an era of ferment

innovation focuses on product features is largely exploratory often led by small entrepreneurial firms profits are made through differentiation and niche placement

Over time, a dominant dominant design design emerges

innovation shifts to process, delivery, and service only a few large, efficient firms remain pioneering firms often whither away

A new technology or business model emerges

exogenous technological change (technology push) changes in market due to consumer shifts (demand pull)

Emergence of a new dominant design

New technologies may be worse at first! New technologies supplant old as they improve Some new technologies may fail to improve fast enough and thus disappear

Older firms that cannot adapt are driven from the market!

No better positioned than new entrants

Innovations render existing capabilities valueless:

technologically, organizationally, and market-wise.

Worse positioned than entrants

Incumbent firms fail to see value in new innovations and

have difficulty adopting: core rigidities

Select not to change

There may be a fundamental tradeoff between short-term

and long-term competencies (e.g., cannibalization)

Innovation often requires extensive capital and expertise (not easily available to small/newlyfounded firms) Customers desire the assurance of established firms (often risk averse, unlikely to try new things) Incumbent firms may leverage complementary resources or capabilities to their advantage Incumbent has a dynamic capability to adjust to changing business conditions

Mature Phase

Disruption

Emergent Phase

The Competitive y Life Cycle

Speed

Growth Phase

Mature Phase
iPod

Disruption n

Emergent Phase

The Competitive Life Cycle

Speed

iPad

Growth Phase

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Phase Disruption Annealing Shakeout Overall

Timing Howlongismaturephase? Howlongisemergentphase? Howlongisgrowthphase? Slowly evolvingorhyperdynamic?

Severity Radical or incremental? Dominantdesignormultipledesigns? Winnertakeall,duopoly,contested? Firstmoveradvantage?

How important is innovation/adaptation?

Do we have an innovation capability? Can we appropriate value from innovation (ours or others)?

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Organizational incentives and mechanisms to integrate diverse technical knowledge. The firms ability to recognize knowledge generated outside the boundaries of the firm and incorporate it into the organization.
External Development (CVC, Alliances) Internal Development (R&D, NPD) Acquisition (M&A, Licensing)

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Strength of intellectual property protection

(both the nature of the legal system and the nature of the technology and market)

Control of complementary assets

(those assets necessary to exploit the innovation such as marketing, distribution, and di ib i d supporting i technology)
customers suppliers innovator imitators, competitors
Total value created by the innovation

Legal protections such as patents, copyrights, and trademarks are enforceable. There are substantial first-mover advantages such as learning curves, customer loyalty, or branding. Standardization is critical due to product compatibility or network externalities. Diffusion among customers is fast (e.g., a large, lucrative products l ti market k t where h d t are easy to t adopt). d t) Imitation by competitors is slow due to trade-secrets, technologically or socially complex innovation, or the need for specialized complementary assets.

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Strength of intellectual property protection

(both the nature of the legal system and the nature of the technology and market)

Control of complementary assets

(those assets necessary to exploit the innovation such as marketing, distribution, and di ib i d supporting i technology)
customers suppliers innovator imitators, competitors
Total value created by the innovation

Depends on How important is a complementary asset? How tightly held is the complementary asset? Innovation strategies in one technology often require rapid innovations in complementary technologies for the consumer (and producer) to realize any benefit. Firms can encourage g complementary p y technology gy development through interface design, investments that shift incentives toward complementary innovation, protecting the profits to complementary products.

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Industries evolve through life cycles. Industries are periodically disrupted by new innovations and business models that may alter the existing competitive order. Competitive success is often determined by how you navigate these changes over time. Successful both S f l innovation i i requires i b h the h capacity i to innovation and the ability appropriate value from innovations.

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