Capability-based governance patterns over the product life-cycle

We investigate patterns of vertical governance over the product life-cycle as function of the capability regime properties imitability and substitutability. We use a novel neo-Schumpeterian model to study emerging governance patterns. We find that, in the era of incremental change, firms prefer vertical specialization. In the era of ferment, no governance form dominates. Imitability and substitutability, in interplay, determine the governance form preferred. High imitability frustrates appropriation and thereby integration for synergistic advantages. However, firms need not vertically specialize: under low substitutability, incompatibilities reduce the advantages of specialization. When both substitutability and imitability are low, firms can appropriate the value of their inventions and there is no combinatorial advantage of specialization, so firms predominantly integrate. If substitutability is high and imitability is low, the combinatorial advantage of specialization balances with the synergistic advantage of integration.