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Article Excerpt
Firms facing disruptive innovation often exhibit incompetence and respond inappropriately. The organizational structures, routines and systems that were tailored to existing operations prevent these same firms from adapting to the quite different processes of calibrating inventions and turning them into innovations. Instead, they will tend to invest in minor, incremental innovations that fit their current organizational design.
Patterns of behavior that inhibit innovation arise naturally in maturing organizations. First, as firms mature they tend to become too comfortable doing what they normally do; this comfort leads to myopia and also discourages risk-taking outside their comfort zone. Second, core values and the structures in place become rigid over time, thereby encouraging only a narrow focus on operations and mission. This results in incremental innovations compatible with existing structures. Third, firms lose the drive that got them where they are; that is, they lose the creative energies, the openness to risk-taking and experiments that allowed them to carve a niche and disrupt the incumbents when they first entered the market.
Losing creative energies that lead to disruptive innovations is a significant problem for incumbent firms.
Consider, for example, how Google has so far beaten Microsoft in the search engine business. Although Microsoft had better financial resources and the ability to be a leader in the business, it failed to recognize search as a business opportunity. Microsoft spent too much time and too many resources on improving its existing business products and services.
Apple's takeover of the online music business by iPod is another example. Sony, the inventor of the Walkman, had an opportunity to lead in that business. However, it focused on improving its existing products and did not come up with a product to integrate the online music business.
In this paper, we report on the challenges faced by firms trying to build sustainable innovation programs. Our findings derive from an examination of innovation programs in over 30 organizations based in North America, Europe and Asia. Seventy percent of the firms studied were listed in the Fortune 100. The remaining firms were smaller and newer, operating in high technology and working on emerging products (e.g., bioengineering) and services (e.g., information technology). They ranged from information technology firms, to manufacturing centers, to government research and development laboratories. We interviewed well over 50 executives, with most interviews lasting about two hours, and taking a semi-structured form. Our findings were presented in several executive briefing sessions and input from these sessions was used to refine our conclusions.
Innovation Inhibitors
As firms grow, they tend to exhibit common behaviors that prevent them from being adaptive to new environments, thereby limiting their ability to sustain their innovation drive. In this section, we briefly discuss the inhibitors that incumbent firms face as they build sustainable innovation programs. The inhibitors are summarized in Table 1.
Pursuit o)C stability
Organizations create formal structures that are often still based on Taylor's principles. The silo structure, which groups people by expertise and the specialist work they perform, ensures high levels of efficiency. Moreover, institutionalized mechanisms, such as appraisal, personal performance plans and bonus systems linked to the delivery of individual pieces of work, reinforce stability (1). These mechanisms result in changes to the order or content of work being in no one's interest. Organizations that achieve high levels of stability operate in a state of internal equilibrium.
However, organizations do not exist in a vacuum; they have to thrive and survive in a dynamic marketplace in which stakeholders--customers, suppliers, regulators, and competitors--produce change every time they modify their expectations. These can take the form of customers expecting higher levels of service, better margins for suppliers, stricter regulatory controls, and employees seeking higher wages. Stakeholder theory suggests that stakeholders are rarely passive and that they will use their power to achieve their own ends (2). Organizations that resist or fail to detect changes in stakeholder expectations will struggle to compete. For instance, in the 1980s, McDonald's failed to change its packaging despite public concerns about environmental matters (specifically, CFCs). Consumers were unwilling to accept this situation and stopped buying the company's products. Eventually, McDonald's changed its packaging to be environmentally friendly. More recently, the company faced widespread concern over the increase in Americans' obesity rates and the harm being caused to their health. Actions by parents who stopped taking their children to McDonald's, as well as by individuals such as the makers of the 2004 movie Super Size Me, led to the company changing both products and practices.
Today's organizations are also faced with the astonishing speed of technological development. For the originators, disruptive technologies provide great gains, but for incumbents they create major disruptions in the business environment that require them to respond quickly. However, many established organizations fail to recognize innovations that compete for their target markets and are caught unawares when innovations change market or environmental factors. Telecom companies, for example, overlooked the rise of voice-over-Internet-protocols (VOIP) technologies. Many simply didn't want to notice because they could see their core revenues being reduced significantly, if not wiped out.
Leaders often perceive disruptive innovations as threats, while strong competitors see opportunity. These differences in perception are important because they lead to debate over the best course of action to pursue. However, senior managers may procrastinate over taking decisions and allow energy-sapping in-fighting and turf wars to be waged.
Samsung, the electronics company, tries to minimize this by creating a "hothouse"--The Value Innovation Program (VIP) Center. The VIP Center is a physical research space in which engineers, scientists and managers from different vertical competencies are brought together to create an environment that values speed of innovation. People stay in the VIP Center and don't go home for several weeks until the problem is resolved or the innovation complete. Managers are constantly under pressure to ensure that no time is wasted.
Each silo in a vertical, hierarchical structure will absorb the disruptive innovations in different ways that reflect the idiosyncrasies of an individual silo. For example, a large clothing retailer found its market share being eroded by new, low-cost entrants. The logistics director, anticipating a round of cost cutting, renegotiated terms with the delivery outsourcing supplier to reduce the numbers of deliveries to the retail stores and hence demonstrate to the rest of the organization that she had squeezed cost out of the business. Meanwhile, the marketing director, also feeling the heat of falling market share, ran major promotional campaigns to generate customer demand. Each director acted in the organization's best interests; however, the organization struggled to meet even small increases in demand because deliveries to stores had been cut back. When organizations are faced with disruptive innovations, they need a concerted, coordinated response rather than each silo taking isolated actions.
Senior managers faced with disruptive innovation have to dismantle the very edifices they have created to achieve and sustain stability. The mindset hurdle they have to overcome should not be underestimated. People who have learned to operate within these structures have to deal with the uncertainty of working without clear controls and structures. There can...
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