Schumpeterian Competition and Diseconomies of Scope: Illustrations from the Histories of Microsoft and IBM

Timothy F. Bresnahan, Shane Greenstein and Rebecca M. Henderson

in The Rate and Direction of Inventive Activity Revisited

Published by University of Chicago Press

Published in print April 2012 | ISBN: 9780226473031
Published online February 2013 | e-ISBN: 9780226473062 | DOI:
Schumpeterian Competition and Diseconomies of Scope: Illustrations from the Histories of Microsoft and IBM

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This chapter discusses the detailed case studies of two historically important transitions: the introduction of the personal computer and the browser. Its analysis allows it to both assess the adequacy of existing theories (e.g., ant cannibalization concerns or the potential for organizational barriers within incumbents) and to identify key patterns that seem to characterize the process of creative destruction. The chapter points to a novel driver of creative destruction: diseconomies of scope induced by the presence of necessarily shared assets within the firm. When the strategic commitments made by an incumbent are necessarily reflected in business activities for both the old and the new technological trajectory, the incumbent may not simply be able to create a “firm-within-a-firm” to preempt competitive entry. The fact that the incumbent must simultaneously sell both the new and the old technologies may put them at a disadvantage in both technologies relative to an entrant; this disadvantage can be observed through the significant organizational conflicts that accompany technological transitions. This leads to a novel hypothesis about the underlying forces that may be at the heart of many cases of incumbent failure in the face of the gale of creative destruction.

Keywords: Schumpeterian competition; personal computer; browser; firm; technological trajectory; hypothesis

Chapter.  35341 words.  Illustrated.

Subjects: Economic Development and Growth

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