Joseph Schumpeter in his book, Theory of Economic Development, states that compared to established firms, small entrepreneurial firms are most likely to be the source of radical innovation. Since the onset of the Industrial Revolution a number of revolutionary technological breakthroughs were contributed in overwhelming proportions by independent investors and small, newly founded enterprises, and not by major firms (Grieco, 2005).
Based on the standard innovation process model, a large number of economic and organisational reasons have been offered explaining why incumbent companies are generally more enthusiastic towards incremental innovation than towards radical innovation. Radical innovations tend to change the rules of competition and markets by challenging established products, technology, knowledge and practices and hence by their very nature tend to be disruptive for incumbent organisations .It targets less demanding customers with low cost models, knowing that established players cannot cut costs to compete with new entrants. It is observed that incumbents unknowingly create opportunities for new entrants to innovate newer business models with low costs and improved product features, while consistently failing to retain their foothold in managing market discontinuity during times of radical innovation. IBM, for example, failed to recognise the emergence of mini computers.
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At the same time there are enough examples of incumbent companies that have been flexible enough to adapt themselves and have not only survived the market discontinuities due to radical innovation but have shown sustained improvement in performance. Their customer base remains unaffected by the winds of change.
Customer awareness and learning accelerate the desire for more. The growth in economy and markets reflect a parallel growth in the personal needs of the customer. However, technology generally grows faster than the markets, and incumbents who are ahead in the technology curve create "technology niche" (Christensen) for new entrants to occupy. There are several managerial and organisational challenges incumbents face in handling "creative disruption" (Schumpeter, 1934). Lack of advance knowledge of strategy to be adopted or probability of a success of a fuzzy idea, how to overcome organisational inertia to change and divert resources from established markets to emerging markets are some of the inhibiting factors. For most radical innovations to succeed, a strong and passionate leadership with an entrepreneurial mindset is an absolute must.
This paper examines the concept of radical innovation in the backdrop of economic, business strategy, motivation and organisational issues for both incumbents and new entrants. It highlights how new entrants are better able to absorb the high risk and high reward nature of disruptive technologies. It examines the entry barriers that incumbent firms face when embracing radical innovation and how cognition impacts organisational inertia (Tripsas M, Gavetti G, 2000). The paper then goes on to present evidence of cases where incumbents being accustomed to incremental innovation have gone ahead and successfully adopted radical innovation. Through innovative business models these incumbent companies have overcome their disadvantages and been able to defend their leadership position.
Radical innovation: Impact on incumbents and new entrants
As opposed to incremental innovation, whose aim is to enhance / improve existing product lines and services; radical innovation tends to render existing products and services non-competitive and often implies changes that destroy the competences that exist in an established organisation. Radical changes produce an entirely new set of performance features within an organisation and lead to a significant cost reduction (Leifer, McDermott, O'Connor, Peters, Rice, Veryzer, 2000).
Radical innovations by their very disruptive nature open up new market opportunities or "technological niches" (Christensen) while at the same time impacting demand for existing product lines. Radical innovations address markets in three different ways: by targeting underserved / not served customer category thereby creating a new customer segment or by attracting customers who have no need for the feature rich and high priced incumbent product and lastly by adopting a low cost business model and hence a lower priced product.
Mainstream customers resist radical innovations. Whilst these may not be very different from a technological perspective, but they introduce new product attributes which these customers do not value. They lack product quality and performance in key parameters, for example while Sony offered small size and portability it sacrificed sound fidelity in the earlier radio models , at the same time it created a new market for portable radios (Bower, Christensen,1995).
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Whilst radical innovations may or may not have linkages to incumbent technologies, they bring in uncertainty for both incumbents and new entrant companies. As they provide a number of possible replacement candidates, it becomes difficult to predict with certainty the timing and commercial promise of any innovation. Adopting strategy propounded by Tsun Zu the chinese philosopher in his book "The Art of War", new entrants view disruptive innovations as an opportunity to gain entry into the market .With their lower cost structures they initially focus on emerging markets, once they have established a presence and improved performance they move upwards by out flanking incumbents and capture mainstream customers.
Because radical innovations cover underserved or new segments, they focus on solving unaddressed customer issues and concerns. In the case of incumbents, a strong customer focus becomes an inhibiting factor for adopting innovation especially if their key customers feel that the product concept or business model does not intersect with their strategies and needs. In doing so incumbents create a "competency and complacency trap" for themselves which inhibits their capabilities and results in organisational inertia (Govindarajan V, Kopalle P, 2004). Interestingly on the other hand, a strong customer focus emerges as a strength for new entrants as it allows them to target customer segments and their needs overlooked by the incumbents. Conner Peripherals focused on selling its 3.5- inch drives to Compaq in emerging markets of portable computers and desktops while Seagate the dominant incumbent focussed on feedback from IBM who felt no need for 3.5 inch drives for its mainframes because they had limited storage capacity, By the end 80's the mini computer market boomed and by the time Seagate realised the market potential for 3.5 inch drives it was too late (Bower, Christensen, 1995).
As discontinuities create uncertainty, it is difficult for organisations to ascertain whether the change impacts its technological competencies or does it alter existing business models and strategic beliefs as well. Incumbents are better able to handle radical innovation if the change is in one dimension only i.e. it does not impact its sales and marketing engine which is needed to commercialise the innovation. If these assets remain intact, incumbents have a better probability to stitch alliances with technology entrants. In the case of Polaroid, while it handled the technology changes well, it failed to adapt to the radical changes needed in its business model and strategic beliefs about the market.
Cognition: Organisational Inertia & Capabilities
Organisational inertia is believed to be one of the key reasons why incumbents fail to absorb radical innovation. Two schools of thought explain how both capability and cognition playing a role in explaining organisational inertia (Garud and Rappa, 1994). Behaviour of companies are a reflection of their legacy manifesting itself in the learning process they adopt when confronted with a need to acquire disruptive technologies. When managers work together over time they often develop a set of beliefs, or 'dominant logic' for the firm based on their shared history (Prahalad and Bettis, 1986). Cognition shapes the strategic belief and frames the mental make up of managers forming the basis by which they process information to articulate business problems and seek answers. Cognitive representations are typically based on historical experience as opposed to current knowledge of the environment (Kiesler and Sproull, 1982).
A strong relationships exist between a manager's view and how an organisation builds its competencies. They play an important role in organisational inertia with companies running the risk of falling into competency traps, as core competencies become 'core rigidities' (Leonard-Barton, 1992). Evolving business environments require managers to adapt mental models and strategic beliefs. In such cases, placing an undue reliance on historical business models as against current market conditions to shape beliefs and organisational responses brings in poor results. In the case of Polaroid, even after substantial resource allocation and availability of necessary technical capability, it failed. This was primarily due to cognitive inertia amongst its executives and cognitive differences between executives and mid managers due to different interpretation of the market signals (Gavetti 1999).
How do Incumbents survive Radical Innovation?
It is widely believed that incumbents struggle to manage discontinuities, however, some incumbents ( like 3M and Corning) survive and pioneer radical new technologies that have allowed them to consistently dominate the post discontinuity marketplace (Ahuja & Lampert ,2001). For incumbents to survive the turbulence of a discontinuous marketplace, organisations have to overcome inertia that besets them either due to dogmas, cultural beliefs or a historical baggage of following established strategy contrary to market conditions. By institutionalising a culture which encourages accountability and empowerment of individuals and by creating systems and procedures (March, Simon, 1958), incumbents are ready to receive radical technological innovation when it arrives. Employees in Intel are encouraged to openly debate the merits of different strategic initiatives (Hill, Rothaermel, 2003), this allows mid level managers who have a feel of the pulse of the market, to challenge the status quo promoted by top managers. In the case of 3M, a firm-wide initiative was launched which aimed at retaining the best talent by creating an environment fostering innovation. Radical concepts were captured in "the fuzzy front end" and products developed with regular inputs from their clients. (Schein, 1985). This innovative culture succeeded because it permeated, across the organisation in all functions and down at a team and individual level.
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To consistently survive discontinuous innovations, incumbent organisations need to develop an "absorptive capacity" (Cohen, Leventhal, 1990) that is needed to assimilate the radical technology. This may involve a technology shift which is outside its "trajectory of improvements" (Christensen C, Anthony S, 2005) as visualised by incumbents for their mainstream customers (Exhibit 1). Incumbents need to create an ability to support different business models and an emerging customer segment orientation. To survive this change, incumbents need to create self contained and autonomous units which are managed on an arms length basis by corporate managers (Hill, Rothaermel, 2003). This organisation structure allows the autonomous unit to function like a "start up" without loosing focus on the emergent customer segment. Through selective financial resourcing and avoiding the bias of an established strategy (focussed on mainstream customers) , the autonomous unit is kept insulated and in case it meets with commercial failure it does not effect the entire organisation. This increases the chances of an incumbent company committing more resources to support radical technology and therefore be ready to absorb discontinuity when it comes. Exhibit 2 shows how incumbents can simultaneously create a capability to foster both incremental and discontinuous innovation. Govindarajan and Kopalle state that incumbents who perceive technology developments as a vehicle for growth are best suited to exploit opportunities by incorporating new technologies into their market strategies, To be successful, incumbents who manage a high level of disruptive innovations (Quadrant 4 Exhibit 2), must develop an emergent customer focus and a willingness to value and adopt disruptive technology as a vehicle of growth. At the same time, incumbents who have low tolerance for disruption focus on incremental innovation (Quadrant1).
Executives in incumbent companies must learn to personally monitor available intelligence on progress of pioneering companies if they have to prevent new entrants from dominating the markets. Incumbents realise that the mantra to succeeding is to manage disruptive technologies like a start up with a fast time to market and a low cost base which allows profits even in emerging markets.
Exhibit 1: Disruptive Innovation, Clayton Christensen
Exhibit 2: Govindarajan V, Kopalle P, How Legacy Firmes can Introduce Radical and Disruptive Innovations, 2004
Implicit in the standard innovation model is the fact that the performance of incumbents decline while new entrants take a leading role during periods of radical innovation. However, enough evidence is available that some incumbents remain ahead of the technology curve, whilst others survive by managing discontinuities. Eg: in the pharmaceutical industry the lead players have consistently remained on top for decades (Rothaermel F, 2001). Irrespective of the type of industry, disruptive technologies force a change in the technological and market life cycles of incumbent organisations. Executives in these organisations need to recognise this and give freedom to managers of disruptive innovation a free rein to realise the technology's full potential - even at the cost of the mainstream business (Bower J, Kirk D, 1995).
Managerial cognition is seen to play an important role in creating organisational inertia which affects the organisations capability to absorb disruptive change. It conditions the way managers view a problem and form their strategic perceptions based on it (Tripsas M, Gavetti G, 2000). Polaroid was an example of a technologically strong company failing because the mindset of its managers was influenced by prior history and an analysis of markets where they had been doing well new entrants seem to suffer less from this as their view of the world has no legacy and an innate desire to create a niche. Incumbent companies which are able to avoid the inertia trap, do so by institutionalising organisational best practices and by creating autonomous units who follow different business evaluation norms and keep their operations insulated from the main business of the company.
During periods of discontinuity, incumbent companies find that as long as the sales and marketing engines needed for commercialising an innovation remain intact, they are able to weather the storm of radical innovation. Hill and Rothaermel (2003) feel that history also has a part to play, and incumbents who have been successful in navigating discontinuities are more likely to do so in future also.