Responding to Disruptive Innovation

This semester John and I used a simulation exercise in our MBA class. It gives you a chance to run a battery company that is facing a disruptive innovation (there’s a good description of it here). The company is in a market that is evolving – the majority of demand and revenue comes from the traditional NiMH market. However, there is a growing demand for new ultracapacitor batteries. One of the key challenges to doing the simulation is to figure out when (or if) to make a strong commitment to the new technology.

This is a huge problem for established firms. In an excellent post today, Irving Wladawsky-Berger talks about some of his experiences at IBM trying to manage this kind of transition. You should read the whole post, but here is part of what he says:

I have seen first hand how difficult entrepreneurship and innovation is for large enterprises. But I also have etched in my mind what usually happens to a company if it is not able to cope with the forces of innovation, having lived through IBM’s near-death experience in the early 1990s. In my long career, I have also seen countless companies in the IT industry go out of business, or become shadows of their former selves, because of their inability to adapt to disruptive technology and market changes.

I have thought a lot about what it takes for large companies to successfully embrace disruptive innovations, especially in the last few years as I have been teaching courses and giving seminars on the subject. The key, in my experience, is for the company to leverage its organizational, digital and physical assets, and successfully integrate the disruptive innovations with these core assets. If it can do so, the now rejuvenated and transformed assets will provide the company an advantage over both established competitors and startups. If it cannot, that is, if the disruptive innovation does not fit well with the company’s existing organization and assets, – the future looks rather bleak.

This makes sense, and his examples are really interesting. The problem is that this approach is built on the idea that you can adapt your core competencies to the new disruptive technology. Sometimes you are able to do this, but in many cases this isn’t so easy.

I was reminded of this by another post I read today, this time by Dan Conover, discussing business models for news. This is another must-read article, but here’s one of the key quotes:

News-media “innovations” that don’t present a sustainable and fundamentally different approach to our traditional advertising-subsidized valuation of information are not innovations. Doesn’t matter who endorses them. Doesn’t matter who funds them. They are status quo failures waiting to happen, and no matter how clever, they are doomed by sensitivity to initial conditions.

I’ve talked before about some of Conover’s ideas about business model innovation for journalism – I think they’re pretty interesting. He is essentially saying that building on core competencies to adjust to disruption as suggested by Wladawsky-Berger isn’t possible in this case. Instead, the market will be shaped by organisations that are able to blow-up the current business model and generate a new, novel method for generating revenue from news.

This contrast points to one of the key problems in adapting to disruptive change. Building on core competencies is an attractive option – after all, those are the things that you are really good. The difficulty is that this isn’t always possible. In that case, you may have to break down your old business model completely and start again. And when you’re right in the middle of disruptive change, it’s pretty hard to tell which route is the right one to follow.

The one thing that you can’t do is sit tight. Here is how Wladawsky-Berger sums up the case against not reacting to innovations in your market:

In the end, entrepreneurship and innovation is the only way for an established company to compete effectively against hungry startups chasing it in the marketplace with creative new offerings. There is no alternative – the very survival of the company is at stake.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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