Disruption, or better: radical innovation, spells doom for incumbent firms. The arrival of new technologies, developed by dynamic new entrants, poses challenges for old and tired companies and they, supposedly, are not able to adapt to the new reality and succumb. In reality, however, this classic tale of David and Goliath only holds to some extent and many incumbents have survived multiple technological revolutions already. What does radical innovation entail, how may incumbents respond and what is the role of consumers in all of this?
- The term disruption is widely, and all too loosely, used today, but Clayton Christensen’s original definition of disruptive innovation refers exclusively to cases in which innovative solutions are targeted at the low-end of a market where incumbents’ make little profit. As such true disruptors start under-the-radar of incumbents and work their way up to their core markets with ever improving technology and higher quality product offerings. The term radical innovation applies more generally to industry-shaking innovation.
- Digital technology, and today’s digital giants especially, poses a challenge for incumbent firms across the economy. With their technical knowhow and large swaths of capital, firms such as Alphabet and Amazon enter markets well beyond their original footholds. This is all too different from the Great Innovators of the past like Ford or General Electric which also diversified their offerings.
- Several great companies have folded under the pressure of new technology. Kodak, no doubt is the most famous victim of radical innovation, but others like DEC, Blockbuster, Xerox and Western Union have also suffered heavily as a result of technological change. Besides these household names, technological revolutions in the past have hit far more SMEs that most of us never heard of; the unknown soldiers of creative destruction.
- The literature on innovation and technology management points to several reasons why big firms fail to develop or adopt radical innovation. Economically, incumbents tend to reinforce their existing business model to fight off competitors, rather than to develop new technology that lowers barriers to entry for new entrants or directly cannibalizes a firm’s cash cow. Organizationally, large companies are, almost by definition, designed to be stable, predictable and reliable, while radical innovation, by contrast, is all about uncertainty. Strategically, the focus of incumbents is on satisfying current needs of customers, investors, suppliers, regulators and this commitment limits their ability to go off the beaten path.
- Many giants have managed to survive periods of radical innovation; either because they innovated along with their challengers (e.g. Siemens, General Electric, IBM) or because they were able to adopt new technology in their own processes and products (e.g. Walmart, Thomas Cook).
- Disney is an example of old giant who has managed to make use of a new entrant (i.e. Netflix) to learn about new technology and user practices before developing its own technological solution (partly through the acquisition of another startup BamTech) and conquering a larger share of its (media) value chain.
Connecting the dots
It’s clear that radical innovation can negatively impact incumbent companies when they fail to switch to the new technology in time or not at all. Decades of scientific literature about innovation has focused on companies that succeed or suffer because of radical innovation. That is, the literature concentrates on makers of various types of disk drives, computers, photo cameras, cars and ships and asks whether and why those producers managed to switch to a radically different technological paradigm. From our perspective, however, this literature only tells one part of a much bigger story. The substitution of photographic film by digital image sensors, for instance, may have been dramatic for Kodak, but the real story is that low-cost, high-quality and instantly shareable digital images have given rise to a radically visual culture and, in the process, have spawned new businesses like Facebook and Snapchat.
To recognize those real stories of radical technological change, one needs to zoom out and consider the impact of new technology on the entirety of an existing or altogether new value chain. The railways, for instance, directly substituted canals and horse-drawn modes of transport, but, much more than that, they shook up value chains in food, retail, media and finance. Even more so, they inspired completely new value chains around new rail-based practices such as day tripping and attending sports games. From a business perspective, the question is thus really whether a firm manages to remain relevant in a changing or new value chain. We can distinguish between three degrees of radical innovation that may threaten (or empower) incumbent firms. First, there’s the classic model of radical innovation and firms have
to do R&D and master the new technology themselves as part of their core processes (e.g. car manufacturers developing a self-driving car). Second, another set of businesses does not necessarily have to develop the technology themselves, but nevertheless requires a deep understanding of the technology to implement it and remain relevant for their consumers (e.g. traditional media going digital). Third, and most difficult to grasp, technology may drive changes in consumer practices that can wipe out value chains or create wholly new ones from which companies profit that have little to do with the technology themselves. To illustrate, hotels and restaurants were “given” masses of new customers thanks to the automobile and practices of automobile touring and parcel services profit greatly from exploding e-commerce deliveries. Paradoxically, even some businesses which suffered from radical innovation in the past (e.g. Polaroid and vinyl pressing plants) may regain relevance as some consumers return to low-tech practices.
Even when new entrants appear better equipped to develop or apply the new technology, it does not mean incumbents will necessarily be outcompeted. They may have the capital for M&A’s or to “buy time” and catch up with the new entrants and they are typically well-known and trusted and have the political capital to lobby for favorable regulations that raise barriers for new entrants.
- Digital technology seems to permeate much deeper into existing value chains than the great technologies of the past. Also, since most IT products are only semi-finished (i.e. in need of programming or tailoring), they require much more knowhow to use effectively than electrical equipment or combustion engines. This implies that the boundary between developing and implementing IT is quite blurred and incumbents can only keep up with new entrants by becoming IT specialists themselves.
- Some of the world’s oldest companies have, directly or indirectly, lived through several technological revolutions already. The innovation literature suggests that companies that have gone through much turbulence in their past, know best how to respond to the threat of new technology.