Schumpeterian Competition and Diseconomies of Scope: Illustrations from the Histories of Microsoft and IBM

Timothy F. Bresnahan; Shane  Greenstein; Rebecca M. Henderson

Chapter | The Rate and Direction of Inventive Activity Revisited | 2012

Schumpeterian Competition and Diseconomies of Scope: Illustrations from the Histories of Microsoft and IBM

by Timothy F. Bresnahan, Shane Greenstein and Rebecca M. Henderson

Abstract

We address a longstanding question about the causes of creative destruction. Dominant incumbent firms, long successful in an existing technology, are often much less successful in new technological eras. This is puzzling, since a cursory analysis would suggest that incumbent firms have the potential to take advantage of economies of scope across new and old lines of business and, if economies of scope are unavailable, to simply reproduce entrant behavior by creating a "firm within a firm." There are two broad streams of explanation for incumbent failure in these circumstances. One posits that incumbents fear cannibalization in the marketplace and so under-invest in the new technology. The second suggests that incumbent firms develop organizational capabilities and cognitive frames that make them slow to "see" new opportunities and that make it difficult to respond effectively once the new opportunity is identified. In this paper we draw on two of the most important historical episodes in the history of the computing industry, the introduction of the PC and of the browser, to develop a third hypothesis. Both IBM and Microsoft, having been extremely successful in an old technology, came to have grave difficulties competing in the new, despite some dramatic early success. We suggest that these difficulties do not arise from cannibalization concerns or from inherited cognitive frames. Instead they reflect diseconomies of scope rooted in assets that are necessarily shared across both businesses. We show that both Microsoft and IBM were initially very successful in creating freestanding business units that could compete with entrants on their own terms, but that as the new businesses grew, the need to share key firm-level assets imposed significant costs on both businesses and created severe organizational conflict. In IBM and Microsoft's case this conflict eventually led to control over the new business being given to the old and that in both cases effectively crippled the new business.

Keywords: Technological Innovation; Opportunities; Competition; Information Technology; Innovation and Management; Organizations; Relationships; Information Technology Industry;

Format: Print

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Citation:

Bresnahan, Timothy F., Shane Greenstein, and Rebecca M. Henderson. "Schumpeterian Competition and Diseconomies of Scope: Illustrations from the Histories of Microsoft and IBM." In The Rate and Direction of Inventive Activity Revisited, edited by Josh Lerner and Scott Stern. University of Chicago Press, 2012.

Case | HBS Case Collection | August 2019

Twiggle: E-commerce with Semantic Search

Shane Greenstein and Danielle Golan

Four years after being founded, in 2014, by former Google executives Amir Konigsberg (CEO) and Adi Avidor (CTO), Twiggle had developed a search enhancement that plugged into an online merchant’s existing framework. The company utilized advanced structuring and linguistic tools to build search technology that understood shopper intent and matched it with the right products. Konigsberg and Avidor believed e-tailers were losing enormous revenue due to poor search results. The team built a set of proprietary tools that created a human-like understanding of customer queries in the e-commerce search experience, using natural language processing that translated text into meaning. The team also constructed a semantic model of the e-commerce world for three product domains: fashion, home and electronics. The resulting “ontology” was a set of concepts and categories in a subject area that showed their properties and the relations between them. Twiggle’s tools could also unlock significant online sales revenue by increasing click-through and add-to-cart rates, ultimately improving sales conversions. So far, the company had secured deals with more than half a dozen large e-commerce retailers, and could improve search results in three product categories: fashion, home, and electronics.
The company initially targeted large direct-to-consumer e-commerce players. Yet the cofounders encountered challenges pursuing this type of customer. The customer acquisition process included lengthy, intensive face-to-face sales cycles, expensive and technologically complex proof-of-concept testing, and requests for customization. Konigsberg and Avidor wondered if they should expand their customer focus to target a wider set of smaller e-tailers that still had significant volumes of online search queries, but whose search quality tended to be less robust and might be easier to improve. They also contemplated a variety of growth opportunities.

Keywords: e-commerce; search technology; customer acquisition; Online Technology; Technological Innovation; Commercialization; Growth and Development Strategy; Technology Industry; Israel;

Citation:

Greenstein, Shane, and Danielle Golan. "Twiggle: E-commerce with Semantic Search." Harvard Business School Case 620-025, August 2019. View Details

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Teaching note is meant to accompany Zebra Medical Vision case, which offers a look at a company’s decisions as a small startup competing with other startups and major technology companies. It also demonstrates the challenges faced by a machine learning company working on brand-new technology, including difficulties finding training data, hiring competition, and negotiating FDA approvals and other government regulations. Teaching Note for HBS No. 619-014.

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Schumpeterian Competition and Diseconomies of Scope: Illustrations from the Histories of Microsoft and IBM

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