Exploring how incumbent firms deal with digital challengers

Abstract

The empirical study explored how incumbent firms deal with digital challengers by identifying the micro-foundations of dynamic capabilities. Extant literature mainly focussed on resource ownership as a consideration when incumbent firms respond to challengers. The resource-based theory proposes the ownership of valuable, rare, inimitable, and non-substitutable resources to achieve competitive advantage. In contrast, dynamic capabilities do not only focus on acquiring resources but also exploiting external resources and the orchestration of both. The study followed a qualitative multiple case study method of inquiry due to the nascent state of the dynamic capabilities literature and the explorative nature of the research questions. Four incumbent firms in telecommunications and financial services that have responded to digital challengers were selected as case companies. The study contributes to theory by identifying twenty-eight practices aggregated into eight micro-foundations of the dynamic capabilities of sensing, seizing and transforming. Out of the twenty-eight practices, seven were unique and not identified in the micro-foundations of DC literature relevant to business model innovation. A comprehensive framework of thirty-five practices aggregated into twelve micro-foundations was developed by integrating more practices and micro-foundations from two relevant literatures. Furthermore, the study identified Sixteen inhibitors to dynamic capabilities when incumbent firms deal with digital challengers. Company executives will benefit from the comprehensive framework. It will open discussions on looking beyond resource ownership and focusing on internal/external resource orchestration and agility. The study reveals that the incumbent companies struggled to deal with the digital challengers when focused on the resource-based approach. The need for good sensing skills to pre-empt digital competition threats and opportunities and be agile enough to react was highlighted. The study also revealed that incumbents must adequately transform their business models to respond to digital challengers not just from the usual customer/products perspectives but also from an investment attractiveness point of view.