Overspending on Capabilities

Given that competence and endowments are so important, why do firms not outbid each other in the process of acquiring a capability so that whoever ends up with it has paid so much for it that it is no longer profitable? In some cases firms have actually paid too much for capabilities. Some failed acquisitions can be placed in this category. For two reasons, however, winners can still end up with profitable capabilities. First, because firms may not even know explicitly if there is competition going on or what capability it is that they are competing for, there may not be enough competitors to overbid them for the capability. For example, not all firms knew that IBM was looking for an operating system to buy for its personal computers and therefore did not have a chance to compete for the standard. Second, not all firms have the right complementary endowments that are sometimes critical to build a capability. Not all firms have a Bill Gates whose shrewdness and experience helped make DOS a standard.

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