The Three Stages of Disruptive Innovation
When large and established firms have faced imminent disruption, they have embraced innovation to develop new growth businesses. However, a firm’s efforts to innovate can be unsuccessful if they do not manage discontinuous and incremental innovation differently. Incremental innovations exploit existing assets and capabilities. Discontinuous innovations develop new capabilities and assets that are often sold to new groups of customers.
To manage disruption, leaders have to balance exploiting a core business and exploring new areas. When organizations are faced with potential disruption from competitors, they often commit resources to explore new ideas, but struggle to convert these ideas into meaningful businesses. This is often unsuccessful, because the new ventures take assets and capabilities away from existing profitable businesses in exchange for lower margins.
For disruptive innovation to work in large companies, firms have to be ambidextrous
Ambidextrous firms
Ambidextrous firms are able to EXPLOIT mature markets and EXPLORE new markets.
In mature markets, efficiency, control, and incremental improvements are of importance while in new markets, flexibility, autonomy, and experimentation are key.
There are three distinct disciplines that firms have to master in the face of disruptive change:
- Ideation: generating potential new business ideas;
- Incubation: validating these ideas in the market;
- Scaling: relocating the assets and capabilities needed to grow the new business.
Managers are often too concerned on the first two disciplines and neglect scaling, although it is critical to the success of new and innovative corporate ventures. An individual discipline is not successful by itself, all three are needed.
Ideation: generating ideas for new business
Because of the pressure to sustain revenue and profit performance, businesses tend to focus more on incrementally improving the current business, rather than developing a new one.
New approaches have been designed to address this weakness, four of which are listed below:
- Open Innovation; firms can tap into the creativity of those outside the firm or the firm can
contribute ideas to others beyond the firm; - Corporate Venture Capital;
- Design Thinking;
- Employee Involvement; the role of employees in the innovation process has evolved to
include online suggestion systems, internal contests, and hackathons.
Corporate venture capital
The objective of corporate venture capital is to identify and exploit a relationship between a startup and a larger firm, and provide opportunities for growth.
When firms invest in startups, they provide financial capital, access to customers, and expertise in exchange for access to new technologies, new business models, and/or new markets. The ultimate goal of many of these investments is future acquisition.
Design thinking
The goal of design thinking is to release the human capacity for creativity that has been limited by mature organizations. The process first encourages creativity through empathetic listening and then narrows the focus through implementation, for example rapid prototyping or testing.
Design thinking relies on five principles:
- Empathize: Deeply understand your customers’ problems by empathetically understanding
their environment; - Define: Be willing to change the initial definition of the problem based on new insights
about the cause of the problem; - Ideate: Use brainstorming to generate alternative ways to address the customer’s problem;
- Prototype: Develop prototypes to test the key insights about customers;
- Test: Share the prototype with the user and use their reactions to develop a deeper
understanding of their needs. You may need to redefine the problem.
A limitation of design thinking is that it does not evaluate the value of the proposed solution and whether it is justified to take assets and capabilities away from the current business.
Employee involvement
The techniques generally promote incremental innovation. However, there is actually evidence that if a firm is better at promoting incremental innovation, they are worse at discontinuous innovation.
This is because they are focused on fitting within existing business models. Firms therefore need to go beyond just open innovation or design thinking if they want to create ideas for disruptive innovation.
There are two practices that help ideation produce suitable ideas for validation, scaling, and ultimately disruptive innovation:
- Scale of ambition. The scale of ambition is set equal to the opportunity or threat of disruption, because an ambitious target helps to stop people from thinking in terms of small and incremental advances;
- Hunting zones. The hunting zones provide boundaries that focus on the ideas for a new business. The boundaries include markets, business models, types of problems and customers. This helps the firm to focus their ideas on the areas that are most likely to lead to disruptive innovation.
If ideation meets these two requirements and is validated with research, then there is a high probability that the company will succeed in disruptive innovation.
Without these conditions, an “experiment zoo” may emerge in which people and resources are scattered across multiple areas of opportunity.
Despite these considerations, many ideas that are generated are not good, and hence incubation is needed to determine which ideas meet the market test.
Incubation: validating the new idea
Incubation is a process that decides if an idea meets a market test. There are three methodologies that do this:
- The lean startup. The lean startup aims to work backward from the intended business results to reduce unnecessary practices and instead quickly test and build on hypotheses. The approach uses build-measure-learn logic which consists of: quickly developing a minimum viable product (MVP), testing the product with customers, and then rapidly iterating and pivoting based on what is learned;
- The business model canvas. The business model canvas consists of nine building blocks that establish a new venture. Going through this can help a firm identify which parts of the original hypothesis need to be tested further;
- The Stanford Launch Pad.
The three incubation approaches offer little guidance and information on scaling. As mentioned, scaling is the designing of the organization to ensure that the growth trajectory is sustained. Although the lean startup methodology works, big companies do not know how to scale the new venture.
The Stanford Launch Pad
The Stanford Launch Pad emphasizes listening to the customer, rapid prototyping, and fast iteration. Participants begin with an idea for a product or service and apply the following three questions:
- Who is the hyper-specific target user?
- What is their specific pain point?
- What single function have you performed to reduce this pain?
After the questions, participants are required to talk to a minimum of 100 potential customers.
The three practices that established firms can adapt to increase the likelihood that incubation activities lead to scalable businesses
- Hypothesis testing: This practice suggests that organizations should not just build an entire solution, but formulate a series of small tests of limited hypothesis to avoid scaling based on unproven assumptions;
- Feedforward measurement: Feedforward measurements are created by a feedforward system that tracks performance toward a strategic goal. This is different from typical measurement systems that review data on past performance, compare it with expectations, and act to correct errors;
- Executive oversight: This practice occurs when senior managers are formally involved in decision-making during experiments in the incubation process. This allows them to create a clarity and shared understanding about the new venture. It also avoids conflicts with the already profitable business units that do not want to divert investments into the new unit.
Scaling: growing the new venture
Scaling a new venture is easier in entrepreneurial firms, because they can grow by attracting new capital and employees. It is also less difficult for incremental innovation, since the new idea can be integrated into existing structures and processes.
However, scaling in large firms is more challenging and needs commercial and organizational vulnerability.
Organization vulnerability requires coordinating growth and managing internal political dynamics, which is more prominent during disruptive innovation.
There are three ways an “explore” unit becomes vulnerable when scaling
- Managers in the core may be sceptical of it, because it is receiving resources and attention;
- It may initially offer lower margins and cannibalize the exploit business, which the leaders of the exploit business do not like;
- If it becomes successful, the unit could end up being evaluated using the rigorous “exploit”
management system. According to this system, it might be seen as underperforming financially.
To scale a new venture successfully, the venture needs to add customers, capacity, and capability quickly to maximize the market opportunity. Larger firms have access to more assets and capabilities than entrepreneurial firms and, therefore, should theoretically be able to scale faster.
Strategies that firms may use when scaling
- Acquire; mergers and acquisitions (M&A) accelerate scaling for a new venture as they provide access to customers, capacity, and capability;
- Build; committing to a significant investment and building capacity internally;
- Partner; partners may provide the resources that a venture needs to scale;
- Leverage; a mature business can leverage assets such as customers, capacity, and capabilities for the new venture.
The acquire and build options are often regarded as the most attractive. Acquisitions allow the firm to acquire the elements of the business and capture the opportunity quickly.
However, the success rate is low, since acquiring startups may only provide an unproven business model, and it may be difficult to integrate startups into the corporate culture.
The build approach can be difficult too because there is a greater chance of corporate scrutiny and intervention. Therefore, the scope of the innovation is often reduced so that it is less risky and can be accomplished more quickly.
The partner and leverage approaches are seen as more complex because companies have to reconcile competing interests and navigate inter- or intra-company politics. However, the pay-off can be much greater.
Leverage is, therefore, a successful model for scaling new ventures that is often underused. The key to success is leadership that provides a supportive and enabling environment.
Three elements are critical for successful leadership for leverage:
- Active sponsorship from senior leaders. Sponsorship from senior leaders provides the
new venture with the necessary assets and capabilities, while overriding corporate norms and politics. This is necessary as the internal dynamics of the core business are likely to oppose the new venture because they feel that it is not important or competes with the core business, which may, in turn, slow down or end the new business; - Separate explore and exploit units. The separation of the units is necessary, since it allows the new venture to autonomously act quicker than the exploit units;
- Ambidextrous leadership. A leader has to be able to lead the explore unit, while also balancing both the explore and exploit business. To lead the explore unit, the leader has to be entrepreneurial and leverage the organization’s resources, while dealing with tensions between the two sides.
The Ambidextrous organization
One of the toughest managerial challenges is being able to both explore new opportunities and exploit existing capabilities. Most successful companies can refine their current offering, but are unable to pioneer radically new products and services. The reasons for this is a point of debate between scholars and schools of management thought.
According to this article, companies that can both exploit the past and explore the future are called “ambidextrous organizations”. These organizations separate their new, exploratory units from their traditional, exploitative ones because it allows for different processes, structures, and cultures. They manage this organizational separation through a tightly integrated senior team.
Exploiting and exploring
To succeed in the long run, companies need to maintain a variety of innovation efforts.
There are three types of innovation:
- Incremental innovations; small improvements in their existing products and operations
that create more efficient operations and greater value to customers; - Architectural innovations; applying technological or process advances to fundamentally
change a component or element of the business; - Discontinuous innovations; radical advances that profoundly alter the basis for
competition in an industry, often making old products or ways of working obsolete.
A map of Innovations
A map of Innovations is a matrix that plots the types of innovation and a firm’s targeted markets.
The matrix helps companies to compete, because plotting the companies’ innovation efforts in the matrix below will reveal areas that might have been overlooked.
Why do ambidextrous organizations succeed
Ambidextrous organizations succeed because the organizational separation stops the new units from being overwhelmed by the other day-to-day business, and the established units are shielded from the distractions of launching new businesses.
Furthermore, tight coordination at the managerial level allows the new units to receive important resources from the traditional units.
How to become an ambidextrous organization
An ambidextrous organization requires an ambidextrous senior team and managers who understand and are sensitive to the different needs of different kinds of businesses.
Another requirement is that a company’s senior team must operate ambidextrously, even if the members are not ambidextrous.
Furthermore, a clear and compelling vision is necessary, as it provides an overarching goal that facilitates exploitation and exploration to coexist.
Strategic renewal
Strategic renewal is an opportunity for the company to align with the environment. This means that the company’’ internal resources and competencies should stay fit with the environment, which is external.
This “fit” needs to be able to change with the continuously developing environment. It is most important to change your strategy at the point where you are most successful.
Companies use strategic renewal in order to stay innovative and competitive in the market.
When should managers start thinking about strategic renewal?
Managers should start thinking about strategic renewal, when one of the following things happens.
● Most of the profits are being made in maturing businesses, where there is not a lot of room
for growth;
● There is a big threat targeting the origin of your profits;
● There is a lot of room for opportunities outside the core market that is being reached;
● There are other ways of making profit that are threatening to your core capabilities.
The more your company fits these criteria, the bigger the urgency of your strategic renewal. But be prepared that no matter how successful something is, it can be of a very short period.
Example of radical innovation
An example of radical innovation was the Alessi company, which used to produce kitchenware for restaurants and hotels. When the company started losing out to the competition, they knew they needed to change something. In the first period, they started to radically change and differentiate with interesting and new designs, in a collaboration with Salvador Dalí. The only problem with these products was that they couldn’t be mass-produced, so they weren’t very successful. After this failure, they went back to their original sturdy kitchenware, with only making incremental changes to the products. In the third period, they learned from their mistakes of the first one. Alessi decided to make original designs, without losing the practicality of the second period kitchenware. It was a blend of both worlds. In the fourth period, Alessi started to truly innovate, with unique products that improved the experience of cooking.
