Making Waves: The Interplay between Market Incentives and Organizational Capabilities in the Evolution of Industries

Schumpeterian waves of creative destruction, are periodic bursts of innovative activity that threaten to overwhelm entrenched firms and established businesses. What factors make such a wave more likely to arise, or to arise earlier or later? What makes a wave more severe for an incumbent firm? We argue that any framework for answering these questions must examine the interplay between strategic interaction in markets and the endogenous development of organizational capability. We illustrate our argument by focusing on two important historical cases: IBM's response to the PC and Microsoft's to the Internet. In both cases we highlight the ways in which the intersection between a firm's market position and its organizational assets lead incumbents and entrants to respond quite differently to potential waves. We also explore the ways in which the incumbent firms in both cases suffered from organizational diseconomies of scope so that the realignment of organizational capabilities to serve both an existing market and a new market were costly and time-consuming. In both cases we suggest that explanations that focus only on market-based or only on organizational explanations are incomplete.