Competence Destruction Theory of Entrepreneurship
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.
Video: Tushman and Anderson Explained
References
Christensen, C. M., & Bower, J. L. (1996). Customer power, strategic investment, and the failure of leading firms. Strategic Management Journal, 17(3), 197-218.
Tushman, M. L., & Anderson, P. (1986). Technological discontinuities and organizational environments. Administrative Science Quarterly, 31(3), 439-465.
