The article of Schumpeterian Competition and Diseconomies of Scope suggests that in the past, the incumbent and otherwise successful firms fail in a new market is because of the strategies that they use in the market. Some assert that the framers of these big companies are rigid to changes in technology, which at times make them irrelevant to the dynamism in business. Others still consider the fear of cannibalization coupled with underinvestment as the reason for failure. However, the waves of innovative technology and activity threaten the existence of several big and small firms despite of their size or market control. These bursts are what are referred to as Schumpeterian bursts.
Nevertheless, the article indicates the existence of interplay of the external factors such as timing of entry, pricing of the firms products, distribution of the market share, changes in organizational leadership in the determination of the success of either the old businesses or the new entrants. These factors, coupled with the economies of scope determine the diffusion of technology and the incentives of market circumstances. While considering the IBM and Microsoft cases presented in this article, it is identifiable that both companies used strategies that have been considered outdated and failed to embrace the new business economies of scope to remain relevant to business and compete with the new entrants.
Competition is a common phenomenon in the business environment. While new entrants into the market might offer competition to the old firms, determining the resultant victor would be difficult and unfair to consider the internal factors in the dominant incumbent firms, long successful in existing technologies. Through detailed case of histories of IBM’s response to the invention of the PC and Microsoft’s response to the invention of the browser indicate that the presence of necessarily shared assets have a critical role to play in the aforementioned phenomenon. Both cases indicate that the old incumbent firms have difficulties in creating and developing the required fresh organizational capabilities required to compete with the new firms in the new markets. The new markets have become so diverse with new challenges and interplaying factors, which have ensured that all the businesses operate in an interrelated mutually beneficial interaction rather than the old independent operations. For instance, both cases presented about the two companies indicate that these incumbent firms failed to adjust to the new technologies, which led to failure in their respective businesses (Bresnahan, Greenstein, & Henderson, p. 5).
The organizational structure is also very important in determining success in a competitive business environment. Entrusting the managerial decision-making procedures with the managers has proved irrelevant in several instances. For proper business decision making, firms implement consultative decision-making procedures, which ensure that the choices taken, especially regarding upgrading information technology, are the best in the interest of the firm as opposed to individual opinion.
This article proposes the argument that diseconomies of scope are the key to explaining the failure of the incumbent firms to thrive in a new technological era and market. The assertion that the source of the variations in the diseconomies of scope is valid. The shared assets by closely related firms are vulnerable to several forces in competition including loyalty and reputation, thereby making dealing with such difficult. On the other hand, asserting that certain shared assets will likely to be mismatched fails to explain the reason why the flexibility of other shared assts do not guarantee control and success in new technology.
Choosing from merging to control rights are some of the choices that firms need to make, especially when faced with new technologies and new entrants into the market. Despite the fact that these choices do not warrant failure or success in the market, they play a crucial role in designing the decisions that firms make in the market. The article asserts that, such choices change the management drastically, and consequently their behavior. This implies that this diseconomy is responsible partly for failure in the market. Nevertheless, this is a mere assumption, which fails to consider the management of new entrants is not the only reason for success.
While financial competence is important in ensuring that the old incumbent firms compete against the new entrants, who might have small capital bases compared to the former, market relevance is very important in the development and exploitation of the shared assets. While a firm might have all the required resources to produce specific assets, serving the interests and needs of these markets is equally important in ensuring success. Therefore, the old firms might fail to compete successfully with the new entrants in new markets since the latter might develop stronger strategies as opposed to the former, which might only rely in financial base. Therefore, using shared or different assets in different markets depend on the relevance of the assets in the specific market, which must be assessed prior to business engagement. Nevertheless, the incumbent firms should have an advantage over the new entrants in entering new markets through taking advantage of the economies of scope through using the existing assets. On the contrast, they can choose to build new assets and compete with the new entrants on their own terms. However, in case the incumbent firm becomes unable to develop a new asset to serve the new market, especially the necessarily shared assets, it may be at a great disadvantage in competing in these new markets.
In conclusion, the interplay of interrelated factors in the business environment ensures that every business organization adapts to the economies of scope. Dynamism is a common phenomenon in business that might keep some firms irrelevant, especially the old incumbent firms. New entrants often offer challenges to the former, which implies that the old incumbent firms require adjustments to match the new entrants and economies of scope. Necessarily shared assets also ensure that both the old incumbent firms and the new entrants in the business environment share responsibilities. Nevertheless, the old incumbent firms have an advantage over the new entrants if they use proper economies of scope coupled with their large financial base because the ideas require financial backing for proper implementation.
Timothy Bresnahan, Shane Greenstein, & Rebecca Henderson. “Schumpeterian competition and diseconomies of scope; illustrations from the histories of Microsoft and IBM.” Harvard Business School. Pp. 1-69