 Looking deep into the future to
anticipate unmet or even unarticulated
consumer needs.
 Betting on alternative technologies.
 Investing in the development of new
products and new capabilities to produce
and deliver those products to market.
 Being the first to introduce those
products to the marketplace to benefit
from early-mover advantages.
 Creative Destruction,
evolutionary process
described by Joseph
Schumpeter.
 Quiet periods in markets
are punctuated by
fundamental “shocks” or
“discontinuities” that
destroy old sources of
advantage and replace
them with new ones.
 The entrepreneurs who
exploit the
 Comparative Quiet is
time in market where
firms that have
developed superior
products, technologies,
or organizational
capabilities earn
positive economic
profits.
 Competition between new
products, new
technologies, and new
sources of organization
are more important than
Economic
Profitab
ility
Economic
Profitab
ility
Sustenance of
Advantage
Developmen
t of
Advantage
Erosion
of
Advanta
ge
Static Efficiency is the
optimal allocation of
society’s resources at a
Tim
e
Tim
e
Dynamic efficiency, is the
achievement of long-term
growth and technological
improvement. Static
Efficiency is less
Class of technologies that has
higher B-C than their
predecessors, but does so through
a combination of lower B and much
lower C.
For examples, PC(replacing more
powerful mainframes) Ink Jet Printers
(replacing higher resolution laser
printers) E-Mail (replacing “snail
mail” and telephones) MP3’s (replacing
higher audio resolution compact disks)
 These products are inferior to the
ones that they replaced, but the
consumers did not put a high value
When spending on
R&D, firm may choose
a research method,
firms must consider
what the competition
is doing 2
dimensions when
choosing the method:
 Riskiness of research
method
 Degree to which
success of one method
is correlated to
success of another
 Prahalad, and Hamel’s ideas.
 Strategic Intent- Idea that the
fundamental focus of a firm’s
strategy that commits it well
beyond its current resource
profile.
 Strategic Stretch- Idea which
combines commitment to the
firm’s ambitions with the
flexibility to change with
circumstances.
 A firm that does not create new
sources of advantage will be
displaced by more innovative
rivals.
 Common in environments of rapid
 D’Aveni’s Argued that the
sources of competitive advantage
are being created and eroded at
an increasingly rapid rate.
 Hyper competition- Phenomenon
that the length of sustainable
advantage is decreasing.
 A firm can sustain positive
economic profits only by
continually developing new
sources of advantage.
 Firms goal should be to disrupt
existing sources of advantage in
its industry (including its own)
and create new ones.
More
much
less
with
powerful companies can be overtaken by companies with a
smaller resource base. Small firms are more nimble and
bureaucratic and more willing to innovate and break
established practices.
 The Sunk Cost - occurs when a firm has already made a
commitment to a particular technology or product
concept. A firm that has not yet committed to a
technology can compare costs of all options and choose
the best one.
 The Replacement Effect - Occurs when a firm have
monopoly power over the industry by adopting the new
technology. The innovation would firstly hold by a
firm who already had monopoly power and new entrant in
the market.
“Through innovation an entrant can replace the
monopolist, but the monopolist can only replace itself
 The Efficiency Effect - occurs if the firm can
anticipate innovation by new entrants. A monopolist
 firms are competing to
innovate first and gains a
big advantage by issuing
patents, to be first-mover
advantage, and build good
consumer perception
 Firms in a patent race must
anticipate the R&D
investments of competitors
 R&D spending must increase
chances of winning the
patent race
 Research methods often have
completely different
Research methods may be
correlated so that if one is
successful, the other is
more likely to be successful
More beneficial to pursue
uncorrelated strategies to
increase the probability
that at least one approach
will be successful
If many firms are competing
and use same strategy, a
research strategy would be
likely has a low probability
of success.
The firm that uses the
uncorrelated strategy stands
 A firms decisions determined by routines: well practiced
patterns of activity inside the firm, includes methods of
production, hiring procedures, and policies for
determining
advertising
expenditure.
 Routines
determine
its distinctive
capabilities, or what they do
better than competing firms
 Firms will seldom change there
routine because getting their
staff to change what has worked
well in the past is an “unnatural
act”. However, Firms must find
ways to continually change their
act in order to survive.
It defines as a firm’s
ability to maintain the
bases of it’s competitive
advantage.
 Firms with strong dynamic
capabilities adapt their
resources and
capabilities over time
and take advantage of new
market opportunities to
create new sources of
competitive advantage.
The Limitations
 Path Dependency
It is typically very hard for a
company to ignore what has been
done in the past and conceptualize
a new idea.
 Complementary Assets
Assets that are valuable only in
connection with a particular
product, technology, or way of
doing business, I.e. “Old school”
Farmers.
 Uncertain “Windows of
Opportunity”
When Firms get “locked out” by
 The argument that competitive  Related and Supporting
advantage originates in the
Industries - these firms
local environment in which
usually have a strong base
the firm is based.
of internationally
competitive supplier or
 Factor Conditions - describe
support industries and will
a nation’s position with
be positioned favorably to
regard to factors of
achieve competitive
local management
production (human resources,
advantage in practices,
global markets.
infrastructure) that are
necessary to compete in a
particular industry.
 Demand Conditions - include
size, growth, and character
 Strategy, Structure
and
organizational
Rivalry - includes
structure,
corporate
governance, and
the nature of
Managing Innovation
creates a dilemmas.
 Formal structure and
controls are needed to
coordinate innovation
 But looseness and
flexibility can foster
innovation,
creativity, and
adaptiveness to
changing
circumstances.
Firms attempts to manage
innovation
 Creation or corporate venture
departments

Larger corporations recognize the need
to exploit opportunities for innovation
beyond current products, processes, and
Spinoffs,
services. joint
ventures, and
strategic
alliance
Educational
institutions
(Stanford and the
Silicon Valley) will
help facilitate
Discussion