New Entrant or Incumbent Advantage in Light of Regulatory Change: A Multiple Case Study of the Swedish Life Insurance Industry

• DOI: http://doi.org/10.1111/emre.12345
• Published date: 01 March 2020
• Date: 01 March 2020

New Entrant or Incumbent Advantage in

Light of Regulatory Change: A Multiple Case

Study of the Swedish Life Insurance Industry

MARTIN SKÖLD,

1

ÅKE FREIJ

2

and JOHAN FRISHAMMAR

3,1

1

Stockholm School of Economics, House of Innovation & Scania Research Center, 113 83, Stockholm, Sweden

2

Stockholm School of Economics, House of Innovation, 113 83, Stockholm, Sweden

3

Entrepreneurship and Innovation, Luleå University ofTechnology, SE-971 87, Luleå

When an industryis disrupted, the predominantview is that new entrants benefit at the expenseof incumbents, who

are pictured as slow-moving, inert, and incapable to change. Based on a longitudinal multiple case study with data

over a 15-year period, we challenge this view. By studying the action responses of three incumbent firms and three

new entrants to a major regulatory change in the life insurance industry, we find that both incumbents and new

entrants can succeed if complementary assets are correctly managed. In particular, firms need to acquire and refine

certain key assets needed for exploiting new business opportunities and, subsequently, need to enhance the value of

their complementary assets by transforming them from generic to specialized and on to co-specialized stages. These

findings have theoretical implications for the literature on strategy and innovation management. In addition, we

outline important managerial implications to transform complementary assets to stages with higher value.

Keywords: Incumbents; new entrants; complementary assets; mature industries; innovation

Introduction

Prior research in strategy and innovation management

postulate that incumbent firms have great difficulties in

effectively responding to disruptive changes (Abernathy,

1978; Henderson and Clark, 1990; Christensen and

Rosenbloom, 1995; Hill and Rothaermel, 2003; Benner

and Tripsas, 2012; Cozzolino et al., 2018). This view,

rooted in Schumpeter’s (1934) notion of creative

destruction, offers two main explanations for the

difficulties of incumbents in responding (Bergek et al.,

2013).

First, incumbents fail when competence-destroying

technologicalinnovations render their existingknowledge

base obsolete. The background is that incumbents are

incentivized to invest in incremental innovation, thus

adding to their established knowledge base and current

stream of rents (Hill and Rothaermel, 2003). A failure to

respond is thus explained by the existence of core

competences (Prahalad and Hamel, 1990) and familiar

technological trajectories (Tushman and Anderson,

1986). Incumbents develop incrementally along a familiar

technological trajectory within a well-understood

technological paradigm (Tripsas, 1997).

The second explanation focuses on customer and

market dynamics that challenge incumbents when new

entrants introduce product attributes that incumbents first

perceive as unimportant. For example, the Swiss

watchmaking industry was almost destroyed by one of

its own inventions, the quartz (Rothaermel, 2001a). New

entrants such as Seiko and Timex were extraordinarily

successful in commercializing this ‘quartz movement’in

watches (Jacobides and Winter, 2005). Another example

is Smith Corona, a dominant actor in the typewriter

industry, which failed to adapt to personal computers

and word processing software and went bankrupt as a

result (Hill and Rothaermel, 2003). One last example is

how industry incumbents specializing in bias-ply tire

technology suffered when radial tire technology emerged

(Ansari and Krop, 2012). Incumbent firms that otherwise

do everything right, that is, remain in tune with the

competition, listen to customers, and invest aggressively,

Correspondence: Martin Sköld, Scania Assistant Professor, Stockholm School of Economics, House of Innovation & Scania Research Center, 113 83

Stockholm,Sweden. E-mail martin.skold@hhs.se, +46739094029

DOI: 10.1111/emre.12345

©2019 European Academy of Management

European Management Review, Vol. 17, –(2020)

209 5

–22,

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may lose market leadership when confronted with

disruptive changes caused by new technologies

(Christensen, 1997).

However, both explanations are premisedon the notion

that incumbents are incapable of adapting to disruptive

changes, foreseen or unforeseen. However, the type of

change, that is, technological or regulatory, can play a

major role in how incumbents and new entrants respond,

and what the outcomes of those responses will be. Most

prior research on industry disruption has studied

technological change (Christensen, 1997; Kaplan and

Tripsas, 2008; Benner and Tripsas, 2012). However,

regulatory change has also been pointed out as important

because such changes set the boundary conditions for

competition (Rothaermel, 2001b; Jacobides et al., 2006;

Teece, 2006) and can cause environmental shocks (Tee

and Gawer, 2009). Regulatory changes can favor

incumbents because such changes do not necessarily

depreciate the value of core competences. In fact, they

can allow incumbents to pursue incremental innovation

(Ansari and Krop, 2012) and to control existing

ecosystems (Gawer and Cusumano, 2008).

However, regulatory change can also favor new

entrants. When the new Markets in Financial Instruments

Directive (MIFID)regulation in the EU was introduced in

2007 (Degryse, 2009), the new firm Chi-X managed to

quickly capture 10–15% of trading volume in major

financial instruments. Chi-X was first to offer a

‘multilateral trading facility,’which could respond to the

demand of executing trades for the best price available

across different capital markets (e.g., Stockholm,

London, and Frankfurt).

1

In a different industry, the US

airline industry,regulatory change in 1978 led to the entry

of low-cost airlines (McGahan and Kou, 1995).

Who is better capable of exploiting market

opportunities when an industry is disrupted by regulatory

change—incumbents or new entrants? To us, that is still

an open question. In cases of technological disruption

the story seems more straightforward. New entrants then

have an advantage because they do not need to account

for invasive patterns or existing competences or modes

of thinking and working. However, regulatory change is

not driven by a technologically disruptive innovation

initiated by a new entrant who uses resources and

knowledge in a new way, but by a regulator. This means

that incumbents and new entrants both need to adapt to a

new situation.

What allows such adaptation? A key factoris the assets

an actor initiallycontrols and develops. Firms withaccess

to the ‘right’complementary assets have, in theory, a

distinct advantage to exploit potential value (Tripsas,

1997), and this may hold true when providing products

as well as services (Hill and Rothaermel, 2003; Jacobides

and Winter, 2005;Teece, 2006). Complementary assetsis

thus a framework for explaining why some firms fail to

appropriate returns while others succeed (Funk, 2003;

Colombo et al., 2006; Dahlander and Wallin, 2006). This

framework is especially relevant in industries with weak

appropriabilityregimes (Teece, 1998),that is, in industries

where formal protection of IP provides weak protection.

The life insurance industry is an example of such an

industry.

While prior research is clear on the pivotal role of

complementary assets, it is unclear whether new entrants

or incumbents havea more favorable position to put these

assets to work to manage regulatory changes (Huesig

et al., 2014). It is also unclear how complementary assets

are transformed or reconfigured for exploiting new

business opportunities in times of regulatory change (Hess

and Rothaermel,2011; Teece, 2018). Our study intends to

shed light on these issues.

The rest of the paperis organized as follows. In the next

section, complementary assets are introduced and

reviewed as a framework to determine challenges faced

by incumbents and new entrants in times of regulatory

change. The third section then presents the research

design, sample selection procedure, data collection,

coding, and methods for analysis. Thereafter, data from

a major regulatory change in the life insurance industry

are presented, analyzed, and discussed. The paper

concludes with a discussion of the results as well as

theoretical and managerial implications.

Theoretical background

Complementary assets: Definition and characteristics

Assets are complementary when investments in one

increase the marginal return of the other. For example, if

Tesla, the manufacturer of electric cars, manages to

increase its volume output of cars, that would increase

the marginal returns of their R&D and technology

development. In the strategy and innovation literature,

complementary assets are those needed to support the

commercialization of new products or services but which

are not directly associated with their creation (Teece,

1986; Rothaermel, 2001a).

The idea of complementary assets originated in Teece

(1986), who proposed a theory to explainhow firms profit

from innovation. Teece concluded that assets are a source

of competitive advantage if they are non-tradeable or

supported by a regime of strong appropriability (Teece,

1998). To assess how innovators (new entrants or

incumbents) benefit in regimes of weak appropriability,

Teece proposed the concept of complementary assets

while challenging the notion that being an innovator is

1

https://www.thetradenews.com/chi-x-picks-up-market-share-despite-europe-

wide-dip/

M. Sköld et al.

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