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The Potential and Peril of Radical Innovation

2012 August 26

Nobody likes the status quo.  It’s boring.  The companies that we admire are radical.  They have the courage, smarts and verve to do something truly different.

The problem is that radical innovation is rarely a prudent course.  It not only disrupts competitors, but also your value network: customers, suppliers, partners and even employees.  It’s one thing to lead the charge, quite another to get anyone to follow.

So what to do?  If you stand still you’ll get run over, but if you go chasing every half-baked idea that makes its way onto TechCrunch, you’ll lose focus on your core business and decrease competitiveness.  Some firms, however, have learned how to harness disruptive technologies not by being first movers, but by learning how to follow intelligently.

The Business of Running a Business

Most managers aren’t focused on innovation.  They are, perhaps unsurprisingly, mainly concerned with running their business.  They have suppliers to keep in line, demanding customers who always want more, employees who need to be trained and motivated and competitors who want to eat their lunch.

At any given time there is an active crises going on.  An unhappy customer is about to bolt; a competitor comes out with a hot new product; a facilities problem or any one of a million things going on threatens to spiral into a company-threatening morass.  A good manager is a good problem solver and that’s where the bulk of time and effort are spent.

That’s why business schools teach good management principles.  Effective strategic analysis tracks competitors, evaluates consumer needs and preferences and formulates a plan of action.  Organizational theory helps organize the company in an effective way. Sound finance ensures that you have enough money to invest in the future and so on.

If you follow solid principles, chances are that you’ll do pretty well.  Unless, of course, you get disrupted.

Why Good Companies Fail

Even companies who do the right things sometimes falter.  Clayton Christensen, a professor at Harvard Business School set out to understand why.  He looked at strong companies, whose management graced the covers of prominent business magazines, invested heavily in R&D, listened to their customers and delivered on promises.

What he found was that adhering to these time honored practices not only didn’t help them, they accelerated their demise.  The problem wasn’t that their competitors outperformed them or that customers abandoned them, but that they got blindsided by a completely new market.  Christensen called this phenomenon disruptive innovation.

As incumbents continued to make their products better and better, they overshot what consumers really needed and the basis of competition changed.  That opened the door for new companies to offer a product that was worse from a traditional standpoint, but performed better in areas such as price or convenience and a new market would develop.

Incumbents would usually ignore these new markets because they still needed to keep their existing customers happy.  The new upstarts served a different kind of customer that seemed tangential, niche and less profitable.

Unfortunately, as we have seen in categories ranging from digital music and photography to video rental and discount brokerage, is that disruptive technologies have the unruly habit of eventually invading the mainstream.

The Difference between Radical Innovation and Revolutionary Breakthrough

The fact that so many industries have been disrupted has led some to conclude that big, established companies don’t innovate well.  They are fat, lazy and unwilling to break new ground or the story goes.  In fact, nothing could be further from the truth.  If there is a breakthrough, it is most likely to come from someone already working in the field.

The microchip, for example, was not a disruptive innovation, but a breakthrough on a well known and clearly defined problem.  In much the same way, Steve Jobs was not, for the most part, a disruptive innovator, but used Apple’s vast resources to come up with novel solutions that revolutionized existing products.

As I explained in an earlier post, disruptive innovation thrives because it creates solutions to undefined problems.  Nobody ever demanded a digital camera or a discount broker, people were generally happy with the cameras and brokers that they had.  Moreover, when disruptive innovations first come to market, they tend to be crappy and are therefore ignored.

It is only when a disruptive innovation goes beyond early adopters that it becomes a threat to established companies.  By that time though, the incumbents have usually missed out. Or have they?

How Disruptors Get Disrupted

Contrary to popular belief, first movers do not usually dominate the markets they pioneer. Amazon was not the first online bookseller, nor was Google the first search engine or Southwest the first discount airline.  Somebody else was there first, defined the category and then fell behind.

This is puzzling, especially since we hear so much about first mover advantages.  Early entrants have a head start on technology, can snap up choice assets and build loyalty with consumers.  Why is it that they so rarely succeed?

Geoffrey Moore gives a very convincing explanation in his book Crossing the Chasm, which is summarized in the chart below:

Early adopters are excited about new capabilities.  They are usually technology enthusiasts who will put up with a few glitches in order to be on the cutting edge.  As performance gets better, their appetite grows and helps create a viable market.  However, as the base widens, it attracts a different type of consumer who wants convenience and usability.

Early MP3 players were popular with the tech crowd, but once the technology improved, Apple was able to provide a greatly enhanced experience and blew everybody else out of the water.  When digital cameras became good enough, Canon was able to capitalize on their expertise in lenses and become a market leader.  The list goes on.

Taming the Beast

Radical innovation is not nearly as sexy as some would have us believe.  As mythical beasts go, it’s less like an elegant Pegasus on which we can ride into the sunset than a many-headed Hydra that can bite us from just about any angle.

However, as we have seen, rushing to be first is rarely the best policy.  Early stage technologies have limited viability, a small customer base and low profitability.  However, it is possible to have the best of both worlds: timely adoption of emerging technologies while maintaining focus on the core business.  Here’s how to do it:

Identify:  A growing number of companies are establishing dedicated innovation units which are responsible for keeping up with emerging trends.  For reasons I explained in an earlier post, these units should be primarily made up of junior employees who aren’t directly involved with strategy formation.

Evaluate: While identifying hundreds of potential technologies is a low level exercise, putting them into strategic context requires more senior involvement.  Executives need to be trained to spot salient aspects of disruptive innovations and how to evaluate the potential for these to “cross the chasm.”

One of the most curious things about famously disruptive companies like Netflix and Google is that they approached the market leaders early on and were rebuffed.  If Blockbuster and Yahoo had an ongoing evaluation program running, they might have been able to make better decisions.

Test and Learn:  In rare cases, like IBM’s PC development, the opportunity is clear enough that immediate resource deployment makes sense.  However, usually the picture is hazy and muddled.  There are a number of technologies that look promising, but no way of knowing which ones will pan out.

That’s why it’s essential to have an active “test and learn” program where a number of pilot projects are continually running.  The aim here is not so much to produce successful ROI, but to be able to fail cheaply.  As Thomas Edison said of his long road to inventing the lightbulb, “I didn’t fail 1000 times, I found 1000 ways it didn’t work.”

In the final analysis, radical innovation is no longer an option, but a necessity.  As I’ve pointed out before, technological cycles are becoming shorter than corporate decision cycles. By the time something has been shown to be strategically significant, it is often to late to capitalize on it.

– Greg

2 Responses leave one →
  1. August 26, 2012

    Great piece, Greg.

    In my own ventures, I’ve often made the mistake of being too early. In the companies we build and/or invest, we look at problem (and market) definition as the most important criteria, along with the team itself. I would add a couple of things:

    – In today’s accelerated cultural and tech environment, business models need to be vetted more experimentally, either as prototypes and/or customer experiences (testing the product/service with your targets in market);

    – Along the same lines, “disruption” needs to be vetted as a behavior and handled transitionally (i.e. we need to get customers more intimately familiar with the product and/or service and its uses); most companies defer to extensive A/B or multivariate testing ala clicks and usability tests and completely ignore the applied uses of the product or service. For example, my Instagram app might be well-designed, but what are people actually doing with the app? Are they simply sharing more photos, or are they developing a stronger visual literacy? Connecting to a different set of friends through new shared interests? In what ways? How does the platform scale in this regard?

    Both scenarios imply that “disruption” is also something that can be discovered without knowing what the problem or opportunity might be — Microsoft created both when it turned MS-DOS into Windows. Apple knew there was a need for personalized computing and but also created a dependency around its product suites. I would even argue that with the Samsung/Apple patent suit, the ability to disrupt hinges on trying something completely new, as opposed to solving a “problem of parity” (“there are 5B mobile users who need X, so let’s offer expanded services around a device everybody is used to”).

    As you infer, I just don’t think these elements of disruption are as teleological or black-and-white as we might think. In fact, they’re not at all. I saw this in spades as an executive at an ad agency in charge of “innovation initiatives” — if we were hamstrung in trying to run the business (with no discretionary investment), and we couldn’t make enough margin to experiment, then how could we innovate?

    Best,

    Gunther

    [Reply]

    Greg Reply:

    Gunther,

    I agree on all counts. I would also add that “disruptive” is also often used in a very undisciplined way. People often deploy it to mean something that they think is exceedingly cool and clever, rather than what Christensen really meant (i.e. targeting light or non consumers, requiring a change in business model, etc.)

    I also think that there is no point in aiming to be either a first mover or a fast follower. You are what you are (which over time ends being a bit of both) and you need to understand and live with the advantages and disadvantages that entails.

    – Greg

    [Reply]

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