So we've discussed that incumbent firms often fail in the face of competitive disruptions, new technologies and business models. Why is that, why do we often see these incumbent firms fail? The first argument is simply, they're no better positioned than new entrants. The innovation that comes about might render their existing capabilities valueless. So we think about the Studebaker brothers and carriage making. Now, arguably, some of those technologies, some of those capabilities they had in carriage making for horses could translate into the automobile industry. But one could also imagine that there's a whole host of additional capabilities that are needed to produce an automobile versus a horse-drawn carriage. The Swiss watchmakers, Swiss watchmaking was the dominant, premiere watchmakers in the world and then in the 1960s, we had the innovation of digital watches and in particular Quartz-based watches. And what we saw very quickly, was the emergence, especially Japanese manufacturers that made the Swiss manufacturers somewhat, obsolete. The Swiss manufacturers that had centuries of experience making old mechanized watches that you would wind up and use springs to power them. And, it took the Swiss watch industry a number of years to reemerge, emphasizing quality and design within that segment in the face of that innovation. Again, the innovation rendered their existing capabilities valueless. Now we like to give these examples of technology but as I mentioned with the Sears example sometimes it's organizationally. Sometimes it's a new business model that simply renders your existing way of organizing and way of approaching things less valuable. What's important to recognize here is that these entrepreneurs that we talked about, they're gonna come around and maybe put you out of business. What makes them so powerful is there numbers. It's not that there's just one particular entrepreneur, there's thousands of them out there who potentially could come into your market and put you out of business. All it needs is one to have a successful idea to be a competitive threat. So in many ways the incumbent firm is disadvantaged because they're in no better position than new entrants and these rivals, and there may be thousands of these new rivals. Most of them, the vast majority of them might also go out of business, however it just takes one to be successful. Now, things might even be worse than this, and people have argued that the incumbent firms are actually worse positioned than entrants. Not only are they on equal footing, but they're actually worse positioned. Why is that? Well, it's because the success the firm has had in the past actually becomes blinders to the change necessary to succeed in the future. Dorothy Leonard-Barton has a great article where she talks about core capabilities becoming core rigidities. What made you a success in the past becomes a hindrance to making the change necessary for the future there. So we think about Kodak. Once again, Kodak foresaw the digital revolution, they saw the future rise of digital imaging. But organizationally they never could get over the hump of being a chemical based, film based manufacturer first and foremost. And in many ways, that made it very difficult for them to make the transition into digital imaging. So, while it also rendered their existing capabilities in film kind of valueless, they also, organizationally, had barriers to even making the transition as well. So again, kind of a double negative. Last but not least, it's important to recognize that sometimes incumbent firms simply select not to change. There might be a fundamental tradeoff between their existing businesses and the new emerging businesses and their unwilling to cannibalize their existing products. Take Blockbuster Video for example. Blockbuster Video was the preeminent renter of DVDs and before that VHS tapes for movies in the U.S. market. Blockbuster Video had stores littered across the country. They had a very successful model, they had come to be the dominant player within their segment. Along comes the rise of first, models like Netflix with an alternative delivery model and then eventually streaming of movies online through your computer or through your cable system at home. Well, the long and short of it is Blockbuster Video eventually went out of business, as one could imagine. Well, there was an interesting argument while this change was taking place whether Blockbuster should, in fact, make the change, and try to survive this gale of creative destruction. Or, whether they should just have planned obsolescence. Now it's hard for any organization to think about planned obsolescence, but maybe it is the right strategic choice when they are disadvantaged given a new incumbent coming in. And in fact some of the investors of Blockbuster vehemently argued that's in fact what Blockbuster should do. Take advantage of their existing position as long as they can, and then eventually plan for their bankruptcy and going out of business. So it's important to note that incumbent firms don't always fail and in fact there's lots of examples of incumbent firms who succeed and even thrive in the face of these life cycles and disruptions. There's a number of reasons for this. First, innovation often requires extensive capital and expertise. Think about R&D, if you have to heavily invest in R&D it might require an incumbent firm who has expertise and has the resources to do so to be able to survive and thrive and even innovate in this new world. Think about nuclear technology. I might be wrong, but I suspect it would be very unlikely for two people in a garage to significantly innovate nuclear technology. It requires significant resources, research capabilities, facilities and the like, that a small upstart is unlikely to have. So in that segment one would suspect that innovation is probably largely driven by large incumbent firms who have the resources and expertise to survive and thrive in those segments. Second thing to think about here, sometimes customers simply desire the assurance of the established market player here. This is where we get into things like brand and reputation. Sometimes those can be sufficient to allow the incumbent firm to succeed even the face of the disruption. Consider the market for online education. One that obviously hits near and dear to my heart here. There are lots of new entrants into online education. However, it might be the case that the established players, the established universities have brands and reputations that allow them to attract students who are wanting to have that assurance of the reputation to use their technology and use their materials, versus maybe some of these upstart entrepreneurs. At least I hope that's the case. Third, incumbent firms may leverage their existing capabilities and complementary resources to their advantage. If we think about all the things that a large incumbent firm might do. They might have supplier networks, they might have distribution networks, sales forces and the like. All of those could be resources that could allow the firm to survive some disruption in the technology. I mentioned before General Electric in the face of the CAT scanner business here, leveraging their existing capabilities to survive and thrive in that marketplace there. So again, is there something that you possess that is unique, a competitive advantage, that allows you to make up for the deficiency that you might have in a core technology or an evolving marketplace? Last, but not least, it may very well simply be that the incumbent has what we might call a dynamic capability. An ability to adjust to the changing business conditions that they're facing. And in many ways, this is the hallmark of what many, many firms and organizations are trying to achieve. This is the core of the idea of being an innovative leader here. Can we structure ourselves in a way so that we can once again come up with new innovations, be the disruptor, and be able to survive the industry life cycle over time. I think there's good examples of this. I think Intel comes to mind as a company that has stayed on the forefront of microprocessing technology for decades by being able to invest heavily in R&D and being able to continually push the frontier of micro-processing technology. Will that be sufficient moving to the future? We don't know. But at least historically, they've demonstrated that dynamic capability. So this is something we'll talk about more, thinking about how you express and how do you achieve this dynamic capability within an organization.
