“If you went to bed last night as an industrial company, you’re going to wake up this morning as a software and analytics company.” Jeff Immelt, former CEO of General Electric
The second wave of digitization is set to disrupt all spheres of economic life. As venture capital investor Marc Andreesen pointed out, “software is eating the world.” Yet, despite the unprecedented scope and momentum of digitization, many decision makers remain unsure how to cope, and turn to scholars for guidance on how to approach disruption.
The first thing they should know is that not all technological change is “disruptive.” It’s important to distinguish between different types of innovation, and the responses they require by firms. In a recent publication in the Journal of Product Innovation, we undertook a systematic review of 40 years (1975 to 2016) of innovation research. Using a natural language processing approach, we analyzed and organized 1,078 articles published on the topics of disruptive, architectural, breakthrough, competence-destroying, discontinuous, and radical innovation. We used a topic-modeling algorithm that attempts to determine the topics in a set of text documents. We quantitatively compared different models, which led us to select the model that best described the underlying text data. This model clustered text into 84 distinct topics. It performs best at explaining the variability of the data in assigning words to topics and topics to documents, minimizing noise in the data.
The topic model allows us to analyze similarities and overlap among topics between published papers. For example, the model revealed that the topic “disruptive innovation” is often mentioned alongside the topic “business model” in many studies. We then used a community detection algorithm to map the overall global inter-connectedness of all topics in the network. Two topical communities stood out as being linked to the largest number of the other topics: disruptive innovation and radical innovation.
Disruptive innovation research describes a process in which new entrants challenge incumbent firms, often despite inferior resources. This may happen in two ways. Entrants may target over-looked segments of the market with a product considered inferior by incumbent’s most-demanding customers and later move up-market as their product improves. Or, they may create markets where no market exists and turn non-consumers into consumers. Importantly, the research landscape we mapped out suggests that disruption is not about technology alone, but rather the combination of technologies and business model innovation.
Radical innovations, on the other hand, stem from the creation of new knowledge and the commercialization of completely novel ideas or products. Research on radical innovation therefore focuses on the types of organizational behavior and structures that explain and predict the commercialization of breakthrough ideas.
To be disruptive, a business must first gain acceptance in the low end of the market, the segment by and large ignored by incumbents in lieu of more profitable high-end customers. A prime example is Netflix. The initial mail-order movie rental business was not appealing to a large group of Blockbuster customers. It appealed to a niche of film nerds. Only with the rise of technology, including eventually the ability to stream over the Internet, was Netflix able to grow its business and eventually offer on-demand movies and TV to a huge audience, conveniently and cost-effectively. It was the initial encroachment from the low-end of the market that made Netflix disruptive. A focus on a larger market segment initially might have induced a fighting response by Blockbuster. Gaining a low-end foothold allowed Netflix to move upmarket with a completely different business model that was eventually attractive to Blockbuster’s core customers. The Netflix case also shows that disruption may take time. Netflix was founded in 1997; Blockbuster went bankrupt in 2010. Now, Netflix is targeting other entertainment providers and is set to disrupt yet another part of its industry.
While disruptive innovation is inextricably linked to variations of business models and low-end market encroachment, radical innovation is reliant on organizational capabilities and individual and organizational human capital. Whereas incremental innovation — e.g. a razor company’s fifth razor blade — helps firms to stay competitive in the short-term, radical innovation focuses on long-term impact and may involve displacing current products, altering the relationship between customers and suppliers, and creating completely new product categories. In doing so, firms often rely on advancements in technologies to bring their firm to the next level. Even in its 181st year of existence, John Deere has revolutionized the agriculture industry through the creation of the most encompassing eco-system for agricultural products.
As early as 2012, the company saw the potential of big data in the agriculture industry. Customers who bought John Deere equipment were able to connect their equipment with several software packages that were later combined into the open myJohnDeere.com platform. Innovation like this requires, among other things, technological aptitude. (Of course, radical innovation can lead to business model changes, too, as in the case of John Deere’s transition to a platform-centric business model. But unlike in disruptive innovation, technology comes first.) Not surprisingly, our topic model suggests that radical innovation are related to topics such as organizational culture and capabilities, social and human capital, and project management. Radical innovations completely transform the way firms engage with the marketplace, and they require completely new technical skills and organizational competencies by firms pursuing this path.
Our text analysis confirms what scholars of innovation have long believed: conflating disruptive and radical innovation is problematic. These types of innovation are caused by very different mechanisms and require very different organizational strategies to respond. So what does that mean for managers and their companies?
When faced with a potentially disruptive innovation, the answer for incumbent firms lies in a focus on organizational strategies: new business units and new business models. Firms that want to respond successfully to disruptions need to focus on the organization as a whole and need to be willing to eventually cannibalize their own revenues to compete with disruptions successfully.
By contrast, research on radical innovation emphasizes dynamic and organizational capabilities. Leveraging core competencies or scaling faster than competitors are important when faced with new technological breakthroughs. Similarly, the literature on radical innovation has a clear focus on people. Imagination and the ability to envision the future of technology are important to the generation of the novel ideas required for radical innovation. Therefore, hiring better and more capable employees equips an organization to cope with sudden and drastic change. However, it may not ensure against disruption if an understanding of customers’ needs gets lost in translation. In other words, companies can be great at generating breakthrough ideas yet still suffer from the managerial myopia that creates potential for disruption.
Disruptive and radical innovations are complex phenomena, but they are important to distinguish from one another. While Marc Andreesen expects many industries to be disrupted by software, with new firms overtaking incumbents, technology may at the same time enable the incumbents to radically transform their businesses, especially with new customer-centric business models embedded in product-service-ecosystems. Many examples highlight how radical innovation may help incumbents to insure against disruption. For instance, Daimler is using their Car2Go strategy to secure market positions against the Uber’s and Lyft’s that may become disruptive to their core business model. Daimler as of recent even announced a partnership with BMW to join forces and to build a joint mobility platform and eco-system.
For disruptive innovation, the key to organizational renewal may lie in the needs of the customers, whereas for radical innovation, it may lie within the capabilities of the incumbent firm itself. To mistake one for the other may in fact do more harm than good.
from HBR.org https://ift.tt/2GJGypv
