Economics of Company Performance
The performance of a company is highly influenced by the environmental factors. Both internal and external factors (macro and micro-factors) determine the success of the company. Newly established businesses might either flop or remain relevant to the industry with their new ideologies and economies of scope. When these firms remain relevant to the latter, their implications to the new firms, therefore, are either to embrace the changes or fight them through the old existing strategies. Technological advancements are the most dynamic economic ventures (Bresnahan, Greenstein, & Henderson 65). New businesses and business ideas are constantly developed in the industry to ensure that new inventions are made to satisfy the constant needs of the customers. However, old business ventures implemented different strategies from those strategies used in the present day. This not only poses a challenge of adoption of the new strategies of the entrants, but also makes the former firms irrelevant.
Nevertheless, there exists interplay in the external factors such as timing of entry, pricing of the firms products, distribution of the market share, changes in organizational leadership in the determination of the success of either the old businesses or the new entrants. These factors, coupled with the economies of scope determine the diffusion of technology and the incentives of market circumstances. While considering the IBM and Microsoft cases presented in this article, it is identifiable that both companies used strategies that have been considered outdated and failed to embrace the new business economies of scope to remain relevant to business and compete with the new entrants.
Competition is a common phenomenon in the business environment. While new entrants into the market might offer competition to the old firms, determining the resultant victor would be difficult and unfair to consider the internal factors in the dominant incumbent firms, long successful in existing technologies. Through detailed case of histories of IBM’s response to the invention of the PC and Microsoft’s response to the invention of the browser indicate that the presence of necessarily shared assets have a critical role to play in the aforementioned phenomenon (Bresnahan, Greenstein, & Henderson 56). Both cases indicate that the old incumbent firms have difficulties in creating and developing the required fresh organizational capabilities required to compete with the new firms in the new markets. The new markets have become so diverse with new challenges and interplaying factors, which have ensured that all the businesses operate in an interrelated mutually beneficial interaction rather than the old independent operations. For instance, in the Microsoft case presented in this article, while they left the firm as dominant in one new Internet technology, the browser, they forced the firm to pursue a very different strategy with respect to the Internet than those pursued by successful new entrants. On the other hand, the IBM Company could not keep up with the competition for control over standard PC business and was later forced to quit the business and sell the PC department to Lenovo (Bresnahan, Greenstein & Henderson 68)
Unlike the new entrants, the old incumbent firms such as IBM and Microsoft have posited organizational decisions on the managers especially on legacy control over the new businesses. This is considered an old method that the new firms have learnt to deal with it. While the old incumbent firms operate in isolation under the control of the managers, the new entrants share resources amongst themselves, thereby building a competitive base against the former. This not only provides a competitive advantage, but also disorganizes the old firms, which have failed to identify the new economies of scope. This threatens the competitive advantage of the former and reduces such assets as firms’ reputation and distribution channels.
Business conflicts are likely to arise in any environment. The old incumbent firms have in the past tried to minimize these conflicts by ensuring that they reduce the interaction with competing firms. However, avoiding new entrants as competitors can no longer minimize these conflicts in the business environment. While the old incumbent firms have a tendency of protecting assets such as reputation and distribution channels, the new entrants operate in interdependence that ensure that no specific company can enjoy the specific reputations or claim responsibility to the interrelated efforts resulting into success (Bresnahan, Greenstein, & Henderson 76). Old incumbent firms have used their old business incentives to ensure that they preserve their identity and reputation, which contradicts the economies of scope. The latter indicates that the new entrants might not have the best methods to manage economies of business operations. While it is generally assumed that the old incumbent firms have become irrelevant in the present business environment, some old strategies have proved advantageous over the new entrants’ techniques.
While financial competence is important in ensuring that the old incumbent firms compete against the new entrants, who might have small capital bases compared to the former, market relevance is very important in the development and exploitation of the shared assets. While a firm might have all the required resources to produce specific assets, serving the interests and needs of these markets is equally important in ensuring success (Bresnahan, Greenstein, & Henderson 54). Therefore, the old firms might fail to compete successfully with the new entrants in new markets since the latter might develop stronger strategies as opposed to the former, which might only rely in financial base. Therefore, using shared or different assets in different markets depend on the relevance of the assets in the specific market, which must be assessed prior to business engagement. Nevertheless, the incumbent firms should have an advantage over the new entrants in entering new markets through taking advantage of the economies of scope through using the existing assets (Bresnahan, Greenstein, & Henderson 98). On the contrast, they can choose to build new assets and compete with the new entrants on their own terms. However, in case the incumbent firm becomes unable to develop a new asset to serve the new market, especially the necessarily shared assets, it may be at a great disadvantage in competing in these new markets.
In conclusion, the interplay of interrelated factors in the business environment ensures that every business organization adapts to the economies of scope. Dynamism is a common phenomenon in business that might keep some firms irrelevant, especially the old incumbent firms. New entrants often offer challenges to the former, which implies that the old incumbent firms require adjustments to match the new entrants and economies of scope, necessarily shared assets also ensure that both the old incumbent firms and the new entrants in the business environment share responsibilities. Nevertheless, the old incumbent firms have an advantage over the new entrants if they use proper economies of scope coupled with their large financial base because the ideas require financial backing for proper implementation.
Timothy, Bresnahan, Shane Greenstein, & Rebecca, Henderson. “Schumpeterian competition and diseconomies of scope; illustrations from the histories of Microsoft and IBM.” Harvard Business School, 2003. pp. 1-69