Competence Destroying Innovation: The Entrant's Advantage

Why do industry giants often crumble when faced with new technology? According to the seminal work of Tushman & Anderson (1986), the answer lies in whether an innovation destroys or enhances the firm's existing strengths.

The theory posits a simple rule: Competence-destroying innovations are brought to market more successfully by new entrants (startups), while competence-enhancing innovations are dominated by incumbents.

Defining Competence

To understand the theory, we must first define what makes a firm "competent."

An incumbent firm's competence is "destroyed" when a technological innovation renders their existing abilities or resources obsolete. A classic example is Blockbuster vs. Netflix. Blockbuster’s massive retail footprint (a resource) and logistics for managing physical stores (an ability) became liabilities when Netflix introduced the online streaming model.

Why Incumbents Struggle

Incumbents are naturally reluctant to adopt competence-destroying innovations. Why?

• Preservation Instinct: Firms prefer to preserve and enhance their existing investments.
• Painful Transition: Developing new competences often requires shedding old ones. This involves painful layoffs, divestitures, and restructuring.
• Organizational Friction: Coalitions form within the organization to protect the "old way" of doing things, creating friction that slows down adoption.

The Entrepreneur's Opportunity

This friction is exactly what the entrepreneur needs. New entrants benefit from adopting competence-destroying innovations because the technology effectively inoculates them against competitive responses.

While incumbents struggle to make shrewd and painful internal decisions, entrepreneurs can develop new ventures with the technology unobstructed. In this sense, competence-destroying innovations allow entrepreneurs to "fly under the radar" while the giant is fighting with itself.

The Trap: Competence-Enhancing Innovation

Conversely, if a new entrant tries to compete using a competence-enhancing innovation, they are at a severe disadvantage.

There is nothing stopping an incumbent from adopting an innovation that improves their existing product. Since incumbents usually possess superior resources, distribution channels, and experience, they will likely crush a startup in this arena. In these cases, the best strategy for a startup is often to secure Intellectual Property (IP) rights and license the technology to the incumbent rather than competing directly.

The Academic Debate: Tushman vs. Christensen

It is important to note that this theory has been challenged. Christensen and Bower (1996) positioned their Disruptive Innovation theory as an alternative to the competence-destroying view.

They argued that modern managers have become increasingly willing to make shrewd decisions, allowing them to respond to competence-destroying innovations if the customer demand is there. They suggest the failure often stems from listening too closely to current customers (Customer Power) rather than a simple inability to change competences.

1. Competence Destruction and Creative Destruction Theory

Competence Destruction Theory acts as the micro-level mechanic for Schumpeter’s macro-level Creative Destruction Theory. While Schumpeter describes the "gale" that revolutionizes economic structures from within, Tushman & Anderson specify exactly what is being destroyed: the firm's know-how. Schumpeter focuses on the arrival of the new market, but Competence Destruction explains why the old guard specifically dies—not just because of competition, but because their internal assets (skills and machinery) are rendered obsolete, turning their former strengths into dead weight.

2. Competence Destruction and Resource-Based View (RBV)

This theory presents a critical counter-narrative to the Resource-Based View (RBV). RBV argues that a firm's unique resources and capabilities are the source of sustained competitive advantage. Competence Destruction flips this logic: when a radical technological shift occurs, those same specialized resources transform into "core rigidities." The very assets that RBV praises—specialized equipment or deep employee training—become liabilities that prevent the incumbent from pivoting, while the entrant succeeds precisely because they lack these "valuable" resources.

3. Competence Destruction and Upper Echelons Theory

Why do incumbents fail to recognize competence-destroying changes? Upper Echelons Theory suggests the answer lies in the leadership's cognitive filter. If an organization is a reflection of its top managers, and those managers built their careers on the old technology, they are cognitively biased against the new. They perceive the competence-destroying innovation not as an opportunity, but as a threat to their personal expertise and status, leading to the irrational resistance that allows startups to take the lead.

4. Competence Destruction and Disruptive Innovation Theory

While often used interchangeably, Competence Destruction differs significantly from Disruptive Innovation Theory. Christensen’s disruption focuses on market positioning—specifically innovations that start at the low end of the market. In contrast, Competence Destruction focuses on technical know-how. A shift can be competence-destroying without being disruptive (e.g., it enters at the high end), but the outcome is similar: the incumbent falls because they cannot abandon their existing business model and technical infrastructure fast enough to compete with the agile entrant.

5. Competence Destruction and X-Efficiency Theory

Leibenstein’s X-Efficiency Theory explains that incumbents often operate with "slack" or organizational bloat (X-inefficiency) due to a lack of competitive pressure. Competence Destruction reveals the fatal consequence of this inefficiency. When a radical innovation hits, the incumbent’s inertia—"we've always done it this way"—prevents the rapid reconfiguration of skills needed to survive. The startup wins not just because of better tech, but because they have zero X-inefficiency and no bureaucratic legacy defending an obsolete way of working.

Video: Tushman and Anderson Explained

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