Managing disruptive innovation

Disruptive innovation is the Holy Grail of modern business: create a new product, service or business model so different that the established players can’t compete. The question is how do you ensure that you’re the disruptor and not the disruptee – Canon and not Kodak? In this article two of RSM’s senior faculty members express their views on the subject.



Story by Bennett Voyles

The challenge has haunted boardrooms now for nearly two decades since the idea was first formulated by Clayton Christensen, a professor at Harvard Business School in a Harvard Business Review article titled The Innovator’s Dilemma in 1995 and then published as a book in 1997.

Christensen’s idea was itself a kind of disruptive innovation. More than any other recent business thinker, Clayton Christensen’s theory gave digital entrepreneurs and anxious corporate executives a way to understand the tremendous changes that were roiling many industries, and explained why an upstart like eBay or Craig’s List or Amazon could displace not just leading firms but entire sectors almost overnight.

And the idea has not been displaced in the past 19 years. Despite a few critics who have charged him with cherry-picking cases to fit his theory, most theorists of entrepreneurship and innovation management still see disruptive innovation as a powerful economic force. 

Jan van den Ende, professor of management of technology and innovation at Rotterdam School of Management, is a strong proponent. One thing he likes about it, he says, is that it explains why otherwise capable companies are often so unable to defend themselves against a disruptor: disruptive innovations conflict with existing development trajectories of products and services, and the company follows traditional metrics so closely, that it doesn’t realise there is a problem until the newcomer is well entrenched and the market redefined.

‘One of my favourite examples is budget airlines,’ Prof. van den Ende says. ‘We all dislike flying with them, because you feel like you deserve better treatment and comfort – you have to conform to their procedures, their websites are sometimes rather customer-unfriendly, so in terms of service the quality is lower.’

Prof. van den Ende says that accustomed to competing on service, the established carriers saw only an airline with lousy service, not realising that even more than this, customers would value getting from point A to point B for less money and often more quickly, because the new airlines used smaller regional airports that were easier to get in and out of and sometimes closer to their final destination.

Even after they realised what was happening, they still couldn’t change. ‘Everything you do, you have to do in a different way with this new airline. You need to create different relationships with airports, because the financial relationship with these local airports is completely different compared to the relationships they had before. Plus, you need different relationships with your pilots, you need different relationships with your customers, you need to change everything,’ he explains.

Why do incumbents tend to ignore the disruptive innovations before it is too late? ‘The most important reason is that disruptive innovations often underperform in the traditional performance attributes,’ Prof. van den Ende says. ‘It sounds paradoxical that under-performance is so important in the definition of disruptive innovation, since it suggests that we would like under-performing products and services. But that’s not true: the point is that for a large number of customers of the existing products, the under-performing product is good enough. Customers do not always want the best product; they want a product that serves their needs adequately. Christensen claims that incumbent firms often “overshoot” the market. Focused on their most demanding users, they forget that the average user may not have such advanced demands. And, in addition, disruptive innovations may have new features on top of existing ones that may be attractive for certain users.’

Also, since disruptive innovations focus on niche or emerging market segments, incumbents may not consider the disruptors as their competitors. The incumbents may think that the disruptors cannot compete with them because they may begin life as small start-ups. Later, as the competition grows more serious, disruptive innovations conflict with existing products/services, values and processes, which creates resistance to adopt them. The incumbents therefore do not want to cannibalise their successful products/services, or may think that their offerings worked before and will work again. These incumbents could not be more wrong, as history is full examples of toppled companies, services and products.

The symptoms that a company might become a victim of disruption are often not obvious, according to Henk W. Volberda, professor of strategic management & business policy at RSM. Often, business is actually good: companies are often doing quite well at first when faced with disruption. Phone maker KPN, for example, actually found that its market share increased at first after the introduction of the iPhone. Companies sometimes miss the curve at this point by focusing too heavily on financial measurements.

Look more closely, however, and you may notice that things are not all that they seem, according to Prof. Volberda. Top talent and high-potential employees are leaving. Your turnover is almost entirely from long-established products. Finally, what were once your firm’s core competencies have become core rigidities.

Risk of disruption grows

Unlike many other business gurus of what was then called the New Economy, Christensen’s books remain a touchstone for business today. One reason is that more and more companies today face the threat of disruption, according to Prof. Volberda. ‘You have to continuously reinvent your business model, otherwise you’re gone,’ he says.

New technologies such as the Internet of Things, 3D printing, and big data are spurring reinventions. New business models too, such as Uber, the online ride-sharing service, and Airbnb, the online rental agency, are upending traditional business models in ways that neither traditional taxi services nor hotels nor regulators could contemplate.

Companies often have a hard time defending themselves against such challengers. ‘It breaks with your routines. Everything you do, you have to do in a different way,’ Prof. van den Ende says.

Responses to disruption

On the basis of a recent survey of 590 Dutch firms in his book Re-inventing business: how firms innovate their business model, Prof. Volberda found that those companies typically followed one of three strategies if they need to reinvent their business model. ‘The first is just to deny it,’ he says. ‘We call this business model fixation.’ Prof. Volberda points to the case of Kodak as one example of a company that was unable to escape from its film-based business model. Although Kodak invented some digital photography processes, it was unable to capitalise on its insights and move with the times. 

Prof. Volberda wonders if Royal Dutch Shell, which continues to focus on oil and gas despite having made some successful solar and wind innovations, is destined to follow in Kodak’s footsteps. ‘Maybe Shell is the next Kodak,’ he speculates. But on the other hand, he observes that Shell has deep pockets and might buy successful companies in renewable energy when fossil energy is really ending.

Other firms, such as McDonald’s and IKEA, have shown themselves adept at translating the same business model in a new context. ‘They replicate their business model every time and every place,’ he says.

A third and much smaller group has learned how to continuously reinvent its business model, he says. DSM, for example, a Dutch multinational, has already reinvented itself several times. In the beginning, it chose to specialise in bulk chemicals, then converted to petrochemicals and fine chemicals, and now focuses on life and material sciences and sustainable technologies. This hasn’t just been a matter of serendipity. Instead, Prof. Volberda notes, DSM innovates almost like clockwork, following a rule that 20 per cent of turnover in any given year needs to come from a new business.

The CEO’s length of tenure also seems to have an impact on how well the company is able to adapt to change. CEOs who have been with a company for less than three years or more than 13 years, Prof. Volberda found, tend not to pursue business model innovation nearly as often as CEOs who have been there for three to 12 years.

Making such shifts is not easy, as it typically involves allocating resources away from an apparently successful business toward an unproven new venture – and often, one that will even cannibalise a certain amount of the parent company’s business.

Christensen often advises pursuing two business models at the same time, but on a rigidly separate basis, the way Air France and KLM are doing with their joint venture, Transavia. While successful more often than other models, Prof. Volberda notes, a dual focus also has a high potential for failure. ‘Mastering two different business models is quite difficult,’ he says.

Typically, this approach only works for a very large company, Prof. van den Ende observes. More daringly, a firm may bet its future on an entirely new business, as Nintendo did with Wii, its motion-sensing game console.

Another strategy, popular with major pharmaceuticals, is to buy research after it reaches a fairly advanced stage of development. While apparently a lower-risk path, Prof. Volberda worries that companies that follow this model risk becoming unknowledgeable about pharmaceutical trends -- and in the end, irrelevant to the smaller, research-driven firm.

Culture matters

Culture also plays an important role in making for smooth transitions between business models. Building a company that defines itself not by a particular product but by its ability to innovate can make for more graceful transitions, according to Prof. van den Ende.

Management must play a key role in making it clear that innovation is a priority, Prof. van den Ende believes. ‘One of the most important factors is management that expresses a clear vision that the company wants to go for innovation. If that’s not clearly communicated, it becomes hard for people to come up with ideas; they may become afraid.’

However, firms must be careful about how the incentives are set up. As Prof. van den Ende explains in a recent paper he’s published, the least successful corporate innovators often don’t get discouraged, despite many failures, but don’t seem to be able to learn how to come up with better ideas either, while the most successful ones often stop after they succeed. So, he says, companies have to stimulate the successful innovators to repeatedly develop new ones, while the less successful should be educated about how to do better.

External discussions can also be helpful – whether that means crowdsourcing, customer collaboration, or the kind of external brainstorming workshop that RSM offers in its executive education programmes and in which Prof. van den Ende is actively involved. ‘When people participate in these kind of events, they can come up and develop innovations that they might not have thought about before,’ he points out.

 

Prof. Volberda is also active in bringing his perspectives to business leaders and recently challenged executives during his seminar Reinventing Business Models, which was part of the RSM Business Series. Although disruption comes mostly from without, more tools and better theories can help well-established firms to become more sensitive and open to new business models. 

Jan van den Ende is professor of management of technology and innovation at RSM, and holds the International Chair of Management, LUISS Universita Guido Carli, Italy. His field of expertise is the development process of new products and services in firms. His current research interests include firm-internal and -external idea management, control of NPD projects, design management and sustainable innovation.

Henk Volberda is professor of strategic management and business policy at RSM and scientific director of INSCOPE: Research for Innovation, a research consortium involving Erasmus University, Maastricht University, University of Twente and TNO. His recent book Re-inventing business: how firms innovate their business model is published by Van Gorcum: ISBN 9789023251460.

Type
RSM Outlook, 2014 Winter RSM Outlook