Decoupling Market Incumbency from Organizational Experience: Locating the Real Sources of Competence in the Research and Development of Radical Innovation

This paper examines the proposition that, during a radical technological change, incumbents’ “incompetence” in researching the new technology results from their organizational inertia. I argue that prior studies have inappropriately assigned the disadvantage of organizational inertia and (implicitly) the advantage of competence re-use (both consequences of previous organizational experience) only to incumbents or to diversifying entrants respectively (both categories of experienced firms), because they failed to decouple market incumbency from organizational experience. I explore this proposition in the context of the anti-cancer drug market as it is disrupted by the biotechnology revolution through a combination of direct observation (based on semi-structured interviews and industry presentations) followed by statistical analysis (based on several sources to understand the market in the period 1949-2004). I find that when destroyed and reusable competences are considered, the significant firm categories to compare are no longer incumbents vs. entrants, but experienced (i.e., incumbents and diversifying entrants) vs. de novo firms. Moreover, within the area of R&D with the most competence destruction, I find that, counterintuitively, incumbents outperform all other firms, supporting my final proposition to integrate the corporate diversification framework into creative destruction studies.