The article titled “Schumpeterian competition and diseconomy of scope; illustrations from histories of Microsoft and IBM” by the authors Bresnahan, Greenstein and Henderson is a great attempt to address the creative destruction problem that face organizations mostly in the technology-led and innovation-based industries. In that respect, this paper is a reaction to the authors’ arguments with a view on their focus on diseconomy of scope in addressing the possible cause of the creative destruction problem. To achieve that objective, the argument begins by reviewing the author’s argument and introducing a counter argument that is then supported by a further review of their argument’s validity as well as the strength of the counterargument. (Bresnahan, Greenstein & Henderson, 2011)
Schumpeter’s view of competition is that companies’ innovation is continuously destructive to processes and assets. In that respect, new technologies displace the older ones making way for greater growth than in the conservative and stable markets. The authors’ review of the failure by IBM and Microsoft provides a good description of that Schumpeterian competition and diseconomy of scope. In that analysis, the author’s address the question on the causes of creative destruction through which they challenge the view that failure in new technological areas by companies that have been successful in theindustry is explained by two scenarios. One being that the companies fear the cannibalization hence ends up under-investing in the new market. The other explanation challenged is that the companies tend to develop cognitive frameworks and organizational capabilities that slow their identification and response to new opportunities. In that respect, the authors argument is that the problem that faces such companies is the diseconomy of scope that greatly relates to the assets involved hence the initial success that is usually followed by failure for such new ventures. (Nerkar & Paruchuri, 2005)
Contrary to the authors’ argument, the new development and ventures by the old large firms in the industry enjoys economies of scale and scope that provides a comparative advantage against new entrants and competitors. In addition, market imperfections provide large companies like IBM and Microsoft with advantages in Research and development. Further, the large companies are capable of spreading fixed costs in addition to the ability to exploit the economies of scale and scope for actions like Research and development. Finally, the firms have a better access to downstream capabilities and complementary technologies. In that respect, those companies can enjoy economies of scope and scale hence the issue of diseconomy of scope is as a weak basis for explaining their failure with new ventures. (Nerkar & Paruchuri, 2005)
Schumpeterian competition’s definition in itself provides a preview of the nature of the market that organizations face. It...