Unraveling the Process of Creative Destruction: Complementary Assets and Incumbent
Survival in the Typesetter Industry
Tripsas (1997)
This article explores the question: Why do incumbent firms sometimes fail drastically in the face of radical
technological change, yet other times survive and prosper?'. To do so, the technological and competitive
history of the global typesetter industry from 1886-1990 is analyzed. In this time the industry has undergone
three waves of creative destruction, where competence destroying, architectural technological change
transformed the industry.
There are 2 contrasting perspectives on creative destruction: the first one is from the early work of Shumpeter
(1934)and is about fluid industries where new entrants innovate with technologically superior products and
displace incumbent firms. New entrants replace incumbents which leads to continual failure of established
firms. Around 1950, Shumpeter came up with a contrasting perspective of creative destruction, where
incumbent firms have an advantage over new entrants because they possess critical specialised
complementary assets.
This paper sheds light on these two perspectives by breaking out three crucial factors that, together, influence
the ultimate commercial performance of incumbents and new entrants:
1. Investment in developing the new technology
2. Technical capabilities
3. Specialized complementary assets
Literature review
This paper argues that the expected outcome in terms of ultimate commercial performance depends upon the
balance and interaction among these drivers. If incumbents choose not to invest in the new technology, then
new entrants that make the investment will dominate the market for the new technology. If incumbents do
invest, but their technological performance is inferior to that of new entrants, then, assuming a regime of weak
intellectual property protection, their commercial performance will depend upon whether the technological
shift also devalued the relevant specialized complementary assets necessary to appropriate the benefits of
innovation. If incumbents possess these assets, and due to their specialized nature they cannot be acquired by
new entrants, then incumbents are likely to dominate the market even if their products are technologically
inferior. If, however, the technological shift also decreased the value of these complementary assets, then the
incumbents have no buffer from competition and new entrants should dominate. Finally, if incumbents invest
in the competence-destroying technology and their technological performance is on par or superior to that of
new entrants, the commercial result is still dependent upon who possesses the necessary spe- cialized
complementary assets. If the technological change does not devalue the incumbents' complementary assets,
then they will clearly dominate in the market. If, however, incumbents' complementary assets are devalued
and diver- sifying new entrants possess relevant specialized complementary assets, the new entrants can be
expected to dominate, even if their technology is initially inferior. If neither incumbents nor new entrants
already possess specialized complementary assets, then it is unclear which firms will dominate.
Data and research setting
These issues are examined through a study of the technological and competitive history of the typesetter
industry for a period of over 100 years. Typesetting is the process of arranging text as input to the printing
process. Typesetter machines are used by newspaper organisations, commercial printers, high-end
typographers and corporate publishers. Three generations of radical technological change can be distinguished:
1. Analog phototypesetting (1949)
2. Digital CRT phototypesetting (1965)
3. Laser imagesetting (1976)
The effect of each generation on investment incentives
Each of the generations was incremental in the economic sense in that the old generation of technology
continued to compete with the new generation. Entrants were therefore not able to monopoly price. The
price/performance of each new technology did improve over time, however, resulting in eventual substitution
for the old technology.
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,The effect of each generation on technological competence
Each new generation required new skills: analogue phototypesetting required 90% new skills, digital CRT
phototypesetting required 70% new skills, and laser imagesetting required 50% new skills. These generations
were all seen as competence-destroying. All three generations were also competence-destroying from the
standpoint of their effect on architectural knowledge. The manner in which the machine logic was managed,
moved from mechanical to electromechanical to electronic to primarily software.
The effect of each generation on specialised complementary assets
Three salient complementary assets in the typesetter industry were distinguished: specialised manufacturing
capability, a sales and service network, and a font library. Only a good font library was resistant to the three
technological changes and provided the company a competitive advantage. Specialised manufacturing
capability was focused on a generation and therefore gave no advantage in the long-run, the sales and service
network was less important as clients began to buy typesetter machines for their offices.
Creative destruction in the typesetter industry
Investment behaviour of new entrants and incumbents
There was very little investment by new entrants in hot metal typesetter technology. But in the next
generations there were more entrants, and these were typically overwhelmingly diversifying firms with related
experience. Almost every firm that established presence in a typesetter generation invested in developing a
machine for the following generation. Incumbents invested earlier than new entrants.
Technological performance of incumbents vs. new entrants
Incumbents based their development of new generations' machines on their established efficient routines in
the architecture of the prior generation. For example, the first phototypesetter developed by a hot metal firm
was based on its hot metal architecture, and as a result had inferior performance. A comparison of the average
speed of the first machine introduced by each incumbent with the average speed of the first machine of each
new entrant indicates that in all three generations incumbents' machines were significantly slower. The
analysis provides limited evidence that incumbents did not catch up technologically with new entrants.
Appropriability and specialised complementary assets
when an incumbent's technological competence is destroyed but the incumbent still controls valuable
specialized comple- mentary assets, it should be able to protect its competitive position. Similarly, new
entrants that possess specialised complementary assets should have an advantage over those that do not.
Conclusion
The typesetter industry has undergone three waves of creative destruction, where competence destroying
technological change has shaken the industry. In only one of the generations were incumbents displaced by
new entrants. Incumbents in the typesetter industry invested in each new generation of technology. Despite
timely investments, research confirmed that established firms were handicapped by their prior experience in
their approach to new product development was shaped by that experience. But they did not necessarily suffer
commercial consequences as a result of their inferior technological positions. When incumbent firms possessed
specialised complementary assets that retained value in the technological shift, these assets were found to
buffer incumbents form the effects of competence destruction. The article highlights the importance of
considering multiple perspectives when examining the competitive implications of technological change.
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,Customer orientation and future market focus in NSD
Hillebrand et al (2010)
Recent studies draw attention to the limitations of close customer ties. The aim of this paper is to investigate
the differential effect of customer orientation and future market focus on organization inertia and firm
innovativeness of small and medium-sized enterprises (SMEs) in the business-to-business service industry.
Inertia concerns a firm's reluctance to change. We conceptualize it as a firm's lack of willingness to cannibalize
sales, routines and prior investments, which has been shown to be an important determinant of firm
innovativeness. Firms innovativeness refers to the degree to which a firm develops and introduces innovative
new products and services on a regular basis. It reflects the degree to which, compared to other industry
members, a firm turns out products and services that are radically different and that depart from preexisting
product and service concepts.
Customer orientation vs future market focus
The importance of a customer orientation for firm survival is well acknowledged in the marketing literature. It
benefits a firm's new product or service development, helps to increase perceived product/service quality and
ultimately raises customer loyalty. However, some authors have warned about the potential negative effects of
a strong customer orientation. Being very close to the currently served market biases perceptions and
enhances management beliefs that can prevent responding effectively to emerging trends and new
technologies. Consequently, it results in a shift towards improved solutions rather than real, more radical
innovation that may create new markets. Therefore, it has been argued that firms also needs to have attention
for emerging needs and future market developments: a future market focus. Firms with a future market focus
understand that current customers are often incapable of articulating their latent (future) needs and are not a
good source for identifying potentially new customer segments. Thus, firms should not only be customer
oriented, but also have a future market focus.
Customer orientation is the degree to which a firm believes it should try to understand and satisfy current
customers' needs and wants. Strong customer orientation will increase inertia. Future market focus is defined
as a firm's predisposition of openness to new market trends and business models. It goes beyond the scope of
current products, technologies and customers. It prevents a firm from becoming myopic and stimulates to
move forward, thus it decreases inertia.
Inertia is a reduction in a firm's willingness to cannibalize its product or service portfolio, routines and prior
investments in resources. Willingness to cannibalize is the central construct in our model.
Conceptual model
The literature suggests two mechanisms that influence firm innovativeness:
• Service R&D strength: the level to which the service firm has resources and capacity for new service
technology development compared to its competitors.
• Inertia: the lack of willingness to cannibalize (the extent to which a firm is prepared to reduce the actual
or potential value of its investments. It involves three separate dimensions:
o Willingness to cannibalize sales
o Willingness to cannibalize routines
o Willingness to cannibalize investments
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, Hypotheses
Customer orientation's role
In service firms in particular, a customer-oriented culture is key for creating superior value and developing new
services. Afraid to alienate current customers, firms focusing on their current customers tend to cling to
services in their current portfolio rather than introducing new services. SMEs experience the pressure to not
jeopardize current sales of dominant customers due to the strong effects it may have on firm profitability.
Firms with a strong customer orientation thus will be most concerned about negative effects on current sales
and hence may be less inclined to change their service portfolio.
Ø H1a: Customer orientation negatively influences willingness to cannibalize current sales.
Customer orientation results in a process of increasingly becoming used to thinking and acting in line with an
existing way of working, making the firm rigid for more fundamental responses to changes in the marketplace.
Consequently, we expect a decrease of willingness to cannibalize existing routines with increasing attention for
current customers.
Ø H1b: Customer orientation negatively influences willingness to cannibalize existing routines.
Firms that have strong links with current customers run the danger of becoming financially dependent on these
customers, reducing their strategic flexibility. As a result, these firms tend to optimize and improve existing
service technologies rather than replace them with new service technologies that are also able to address
emerging needs of the broader market.
Ø H1c: Customer orientation negatively influences willingness to cannibalize prior investments.
Future market focus' role
A future market focus makes firms more aware of market-related developments and their potential effects on
the firm. It 'broadens the horizons of managers and alerts them to new technologies, competitors and
customers. They consider new services as a necessity to capture additional, newly developing markets but also
to sustain their competitive positioning. As a result, they will be less worried about substitution of current sales
by new activities.
Ø H2a: Future market focus positively influences willingness to cannibalize current sales.
Top management attention of firms with a future market focus will be more long-term oriented than that of
their less future focused counterparts. In the process, they will also be prepared to make changes to existing
routines.
Ø H2b: Future market focus positively influences willingness to cannibalize existing routines.
Third, more focused on making explicit estimations of future returns, firms with a future market focus are less
vulnerable to the sunk cost fallacy. The sunk cost fallacy refers to the tendency of people to hang on to
investments made in the past, irrespective of the value of these investments for the future. Firms with a future
market focus have venturing capabilities typically associated with entrepreneurial firms.
Ø H2c: Future market focus positively influences willingness to cannibalize prior investments.
Method
Respondents were general managers. In SMEs, the general manager is often also (partly) the owner and
typically has a good overview of all aspects of the firm, including the innovation processes. The final sample
consisted of 217 service organizations. The responses were collected using computer aided telephone
interviews.
Results
As anticipated, firm innovativeness is the result of both R&D capital and a firm’s ability to overcome inertia; a
firm that is strong in service R&D and willing to cannibalize on routines and previous investments is more likely
to develop and introduce innovative new services. Second, the results show that customer orientation
negatively influences willingness to cannibalize current sales and prior investments which provides support for
H1a and H1c, respectively. No influence of customer orientation on willingness to cannibalize routines is found.
So, the findings do not support H1b.
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