1

2
3
If everyone can do it, its difficult to
create and capture value from it.
or, alternatively
In a perfectly competitive market, no
6
In a perfectly competitive market, no
firm realizes economic profits (rents).
4
Change is the only constant.
or, alternatively
Over time, economic profits (rents)
7
tend to dissipate as markets evolve.
Monopoly Rents
(Industrial OrganizationView)
RicardianRents
(Resource BasedView)
Schumpeterian Rents
(Dynamic Capabilities View)
P
Q
S
D
S
P
Q
S
D
(Industrial Organization View)
S
P
q
1
AC
2
MC
1
q
2
AC
1
MC
2
P
q
1
AC
2
MC
1
(Resource Based View)
q
2
AC
1
MC
2
( y p )
-Barriers to entry
-Industry structure matters
-Barriers to imitation
-Firm structure matters
-Markets are dynamic
-Innovation matters
5
The Dynamic Capabilities Perspective:
Premise that markets are
dynamic
Economic rents due to
temporal advantages (i.e.
Schumpeterian rents)
The Dynamic Capabilities Perspective:
p )
Timing and adaptation is
critical
High
n
e
a
l
i
n
g
h
a
k
e
o
u
t
s
r
u
p
t
i
o
n
Cumulative
Revenues
Margins (?)
A
n
S
h
D
i
s
Emergent
Phase
Low
Firms
Growth
Phase
Mature
Phase
6
Source: Dobrev et al., 2003
Source: Carroll et al., 1993
7
Source: Wade 1996
In the beginning an era of ferment In the 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 design emerges Over time, a dominant design emerges
innovation shifts to process, delivery, and service
only a few large, efficient firms remain
pioneering firms often whither away
8
A new technology or business model emerges
exogenous technological change (technology push) 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 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!
9
No better positioned than new entrants
Innovations render existing capabilities valueless: 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/newly-
founded 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
10
The
Competitive
Life Cycle
Emergent
Phase
Mature
Phase
D
i
s
r
u
p
t
i
o
n
y
Growth
Phase
Speed
n
The
Competitive
Life Cycle
Emergent
Phase
Mature
Phase
D
i
s
r
u
p
t
i
o
n
iPod iPad
20
Growth
Phase
Speed
11
Phase Timing Severity
How important is innovation/adaptation?
Disruption Howlongismaturephase? Radical or incremental?
Annealing Howlongisemergentphase? Dominantdesignormultipledesigns?
Shakeout Howlongisgrowthphase? Winnertakeall,duopoly,contested?
Overall Slowly evolvingorhyperdynamic? Firstmoveradvantage?
Do we have an innovation capability?
Can we appropriate value from innovation (ours or others)?
21
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.
Internal
External
Acquisition Internal
External
Acquisition
Development
(R&D, NPD)
Development
(CVC, Alliances)
(M&A, Licensing) Development
(R&D, NPD)
Development
(CVC, Alliances)
(M&A, Licensing)
12
Strength of intellectual property protection
customers
(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,
di ib i d i
innovator
suppliers
imitators,
competitors
Total value
created by the
innovation
distribution, and supporting
technology)
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,
l ti k t h d t t d t) lucrative market where products are easy to adopt).
Imitation by competitors is slow due to trade-secrets,
technologically or socially complex innovation, or
the need for specialized complementary assets.
13
Strength of intellectual property protection
customers
(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,
di ib i d i
innovator
suppliers
imitators,
competitors
Total value
created by the
innovation
distribution, and supporting
technology)
Depends on
How important is a complementary asset? 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 complementary technology g p y gy
development through interface design, investments
that shift incentives toward complementary innovation,
protecting the profits to complementary products.
14
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.
S f l i i i b h h i Successful innovation requires both the capacity to
innovation and the ability appropriate value from
innovations.
27