Cozzolino & Rothaermel's Competition & Cooperation Model

COMPETITION AND COOPERATION MODEL
(AFTER TECHNOLOGICAL CHANGE)
COZZOLINO & ROTHAERMEL, 2018
DISCONTINUITIES, COMPETITION, AND COOPERATION: COOPETITIVE DYNAMICS
BETWEEN INCUMBENTS AND ENTRANTS. (STRATEGIC MANAGEMENT JOURNAL,
https://doi.org/10.1002/smj.2776)
SLIDES EDITOR: FRANCESCO PERNICIARO SPATRISANO (UCD SMURFIT GRADUATE CLASS OF
2018)
UCDMICHAELSMURFITGRADUATEBUSINESSSCHOOL

Cozzolino & Rothaermel (2018)
TABLE OF
CONTENTS
UCD Michael Smurfit Graduate Business School | ITS 1
Theory Overview
Paper Purpose
Industry-Level
Dynamics of
Competition Matrix
Key Takeaways

TECHNOLOGICAL DISCONTINUITY
KEY DEFINITIONS & THEORIES
“(A discontinuity) offers sharp price-performance
improvements over existing technologies [...] technical
advantage so significant that no increase in scale,
efficiency or design can make older technologies
competitive with the new technology”
*Tushman & Anderson, 1986
**tables from Tushman & Anderson, 1990

PROCESS & PRODUCT
KEY DEFINITIONS & THEORY
Product Innovation
Process Innovation
Rateofmajorinnovation
Stage of development
*Abernathy-Utterback, 1978
“Usually new entrants gain advantage from technological
discontinuities over new entrants”

INCUMBENTS AND ENTRANTS
RELEVANT THEORIES AND EXAMPLES FROM CASE STUDIES
Incumbents | Old players in the industry, tend to
feel threatened by new entrants
Entrants | Usually owners of ”knowledge-breaking”
technology
“Incumbents frequently lose their
advantage after discontinuous
technological change”
* Abernathy & Utterback, 1978; Christensen & Bower,
1996; Henderson & Clark, 1990; Tushman & Anderson,
1986. Henderson & Clark, 1990; Tripsas & Gavetti, 2000
(Cited in Cozzolino & Rothaermel, 2018)

INCUMBENTS AND ENTRANTS [2]
RELEVANT THEORIES AND EXAMPLES FROM CASE STUDIES
Incumbents
Concentration
Cash
Requirements
Competitive
Rivalry
Degree of
Assets-
Specialization
Expected
Retaliation
Legal or
Governmental
Barriers
(Artificial)
*Michael E. Porter, The Five Forces That Shape
Strategy, 2008

CORE KNOWLEDGE & COMPLEMENTARY ASSETS
KEY DEFINITIONS & PRACTICAL FRAMEWORK
CORE KNOWLEDGE | Set of core skills
of a company
COMPLEMENTARY ASSETS | What is built
around the core knowledge [e.g.
marketing, after-sales etc.]
SPECIALIZED ASSETS | Potential bottlenecks
for new entrants [ ]
GENERIC ASSETS | Not valuable, rare nor
costly to imitate
Valuable
Rare
Imitable
Non-substitutable

DISCONTINUITY & CK/CA
CONNECTING THE DOTS (TEECE, 1986)
Upstream Core Knowledge
Value Creating
Downstream Specialized C. Assets
Value Capturing
Strategic Alliances
Access Core Knowledge
Retain Value
Incumbents can use S. Alliances to
Catch Up with Innovation

SCOPE OF THE PAPER (IN SMJ 2018)
A MODEL OF COOPERATION AND COMPETITION AFTER TECH CHANGES
Add a
complementary
assets research to
existing literature
Build a matrix as a
tool to better
identify strategic
location of the firm
Respond to the
questions how,
when and why
(Bacharach, 1989)
Stimulate empirical
research by creating
falsifiable
propositions

INDUSTRY-LEVEL DYNAMICS OF COMPETITION
ASSETS-DISCONTINUITY VS. KNOWLEDGE-DISCONTINUITY
Are the incumbents’ complementary assets needed to
commercialize within the new technology?
Istheincumbents’core
knowledgeneededtoproduce
withinthenewtechnology
YES NO
NO
YES
• Steady-State
Competition
• Cooperation among
incumbents to compete
against entrants
incumbents to cooperate
with entrants
Quadrant I Quadrant IV
Quadrant IIQuadrant III
Complementary-asset discontinuity
• Cooperation between
incumbents and entrants
• Acquisitions of entrants by
incumbents
Core-knowledge discontinuity
• Schumpeterian
Competition

PREDOMINANTLY COMPETITIVE DIAGONAL
AN ALWAYS-BELLIGERENT SCENARIO
YES NO
NO
YES
• Steady-State
Competition
Quadrant I
Quadrant II
• Schumpeterian
Competition

QUADRANT III & IV
ASSETS-DISCONTINUITY VS. KNOWLEDGE-DISCONTINUITY
YES NO
NO
YES
against entrants
with entrants
Quadrant IV
Quadrant III
• Cooperation between
• Acquisitions of entrants by
incumbents
Core-knowledge discontinuity

COOPERATION WITH ENTRANTS
QUADRANT III INSIGHT & STRATEGIC SOLUTION
QUADRANT III
§ LACK OF CORE KNOWLEDGE
§ SPECIALIZED ASSETS
AVAILABLE
BACKWARD INTEGRATION
NOT VIABLE
WHY?
§ Internal innovation is time-consuming
and resource-dependent (Dierickx &
Cool, 1989)
§ High risk due to lack of dominant
design (Abernathy & Clark, 1978)
INDUSTRY DILEMMA
STRATEGIC
ALLIANCES
§ Williamson (1991) suggests
interfirm cooperation
§ Teece (1992) suggests
cooperation with entrants

COOPERATION AMONGST INCUMBENTS
QUADRANT VI INSIGHT & STRATEGIC SOLUTION
WHAT IS THE NEW ENTRANTS’
STRATEGIC POSITIONING?
WHAT IS THE
INCUMBENTS’
STRATEGIC
POSITIONING?
WHAT IS THE
INCUMBENTS’
STRATEGIC
POSITIONING?
§ CORE KNOWLEDGE NON-
OBSOLETE
§ COMPLEMENTARY ASSETS
DISRUPTED
QUADRANT IV
WHO DISRUPTS? § THEY OWN NEW COMPLEMENTARY
ASSETS
§ THEY CAUSE A VALUE-CHAIN
DISCONTINUITY WITHIN THE INDUSTRY
DOWNSTREAM ENTRANTS
§ STRATEGIC VALUE CHAIN
ADVANTAGE
§ COMPLEMENTARY ASSETS ARE
VALUE CAPTURING ELEMENTS IN
THE STRATEGIC GAME
§ ENTRANTS ARE ALSO
PERCEIVED AS A STRONG
THREAT (PROSPECT THEORY,
KAHNEMAN & TVERSKY, 1979)
§ PROSPECT THEORY SUGGESTS LIKELIHOOD OF AN
OVERREACTION
§ INCUMBENTS CREATE VALUE THAT WOULD BE
CAPTURED BY NEW ENTRANTS IN CASE OF
ALLIANCE
UNLIKELY STRATEGIC ALLIANCES BETWEEN
INCUMBENTS AND NEW ENTRANTS
COOPERATION AMONGST INCUMBENTS
§ TEECE (1992, P.12) SUGGESTS THAT “HORIZONTAL
ALLIANCES CAN ASSIST IN THE DEFINITION OF TECHNICAL
STANDARDS FOR SYSTEMIC INNOVATION”
§ THIS ALSO LEAVES ROOM FOR NETWORK EXTERNALITIES
EXPLOITATION

INTRODUCING THE IP-VARIABLE
CODIFIED & TACIT METHODS IN A STRATEGIC ENVIRONMENT
Appropriability Regime
CORE-KNOWLEDGE DISCONTINUITY
STRONG WEAK
Quadrant III.b
Quadrant IV.a
COMPLEMENTARY-ASSET
DISCONTINUITY
Quadrant III.a
Quadrant IV.b
Ø Cooperation between
v Pharma industry
after biotech or
Eli Lilly-Gentech
Ø Cooperation among
with entrants
v Music industry
(Spotify)
v Movie industry (Hulu)
Ø Unstable cooperative
equilibrium
Ø Acquisitions of entrants by
incumbents
v Medical diagnostic
industry (Mitchell,
1989)
Ø Cooperation among
incumbents to
compete against
entrants
v News media
industry

INTRODUCING THE IP-VARIABLE
CODIFIED & TACIT METHODS IN A STRATEGIC ENVIRONMENT
Appropriability Regime
CORE-KNOWLEDGE DISCONTINUITY
STRONG WEAK
Quadrant III.b
Quadrant IV.a
COMPLEMENTARY-ASSET
DISCONTINUITY
Quadrant III.a
Quadrant IV.b

QUADRANT IIIB. FURTHER INSIGHT
THE BUILD-BORROW-BUY FRAMEWORK (CAPRON & MITCHELL, 2012)

THE PLATFORM THEORIES
QUADRANT IV INSIGHT
YES NO
NO
YES
against entrants
with entrants
Quadrant IV

EXTERNALITIES-PLATFORMS
MARSHALL (1920) – GREVE & SONG (2017)
Externalities and
advancement in factors
of production (e.g.
internet and
electronics) tend to
enhance firms’
economies of scale
(and learning)
(Marshall, 1920)
Firms tend to use these
externalities to growth
not internally, but
externally
Many platforms grew
exponentially, probably
as a downstream-
reaction to external
causes (Greve & Song,
2017)

FIRM-LEVEL HOMOGENEITY/HETEROGENEITY
QUADRANT IV, A FURTHER INSIGHT
High-Status
Incumbents
Complementary Assets
Discontinuity
Overproduction The Podolny effect (1993)
Partner with other high-status
organizations
Status Accumulation
Low-Status
Incumbents
The Podolny effect (1993)High Status Are not Interested
Consider high-status
new entrants
Might guarantee
technological
leapfrog and status
enhancement

A VALUE CHAIN-ORIENTED TIME ANALYSIS
CORE KNOWLEDGE DISCONTINUITY (QUADRANT III)
UPSTREAM
DOWNSTREAM
§ Incumbents and entrants strive for vertical
integration on the long run to capture value
§ Complementary assets lose specificity (e.g.
commoditization phenomena)
§ Mutual learning over time
§ Two possible scenarios:
1. UNCERTAINTY SURROUNDING CORE
KNOWLEDGE DECREASES: Incumbents
are likely to backwardly integrate by
developing new core knowledge;
2. UNCERTAINTY SURROUNDING
COMPLEMENTARITIES DECREASES: New
entrants are more likely to forwardly
integrate

A VALUE CHAIN-ORIENTED TIME ANALYSIS
COMPLEMENTARY ASSETS DISCONTINUITY (QUADRANT IV)
UPSTREAM
DOWNSTREAM
§ Incumbents are more likely to cooperate with
a successful new entrant
§ New entrants might be platforms (benefit
from network externalities)
§ Platform leaders are downstream value
capturing entities
§ Two possible scenarios:
1. A DOWNSTREAM ENTRANT EMERGES AS
PLATFORM LEADER: Incumbents are
likely build strategic alliances with such
dominant figure;
2. INCUMBENTS SUCCEED IN JOINTLY
DEVELOPING COMPLEMENTARITY ASSETS:
New entrants are more likely to
backwardly integrate

PROPOSITIONS
TABLE-SUMMARY
Proposition 1a (P1a) Incumbents are more likely to form strategic alliances with upstream entrants introducing the new core
knowledge (rather than with other incumbents)
Proposition 1b (P1b) Incumbents are more likely to acquire upstream entrants introducing the new core knowledge (rather than to
cooperate with them)
Proposition 2a (P2a) Incumbents are more likely to form strategic alliances with other incumbents (rather than with downstream
entrants)
Proposition 2b (P2b) Incumbents are more likely to form alliances with other incumbents and also to cooperate with downstream
entrants introducing the new complementary assets
Proposition 3 (P3) High-status incumbents are more likely to form strategic alliances with other high status incumbents
Proposition 4 (P4) Low status incumbents are more likely to form strategic alliances with high status downstream entrants (rather
than with high-status incumbents)
Proposition 5a (P5a) Over time, incumbents are more likely to backwardly integrate, and commensurately, more likely to exit
alliances previously entered with upstream entrants
Proposition 5b (P5b) Over time, upstream entrants are more likely to forwardly integrate, and commensurately, more likely to exit
alliances previously entered with incumbents
Proposition 5c (P5c) The likelihood of successful backward integration by incumbents is higher than the likelihood of successful
forward integration by upstream incumbents
Proposition 6a (P6a) Over time, if a downstream entrant emerges as a platform leader, incumbents are more likely to enter
strategic alliances with the platform leader
Proposition 6b (P6b) Over time, if incumbents succeed in jointly developing new complementary assets, downstream entrants
are more likely to backwardly integrate

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