Will the rise of ChatGPT unleash Disruptive Innovation effects on the business of Google and other search engine service providers? This is not the first time incumbent influential firms have been facing such a vital question. Anecdotal references say that seven out of ten innovation leaders suffer from losses once technology discontinuity strikes. Once, RCA was a leader in consumer electronics, and Nokia was an innovation leader in mobile handsets. Similarly, GE was an innovation leader in lighting. However, they are no longer innovation leaders in those businesses. Like them, many innovation leaders have lost their dominant position. Hence, the unfolding reality of innovation leaders becoming losers is intriguing indeed. At technology discontinuity, innovation leaders in the current technology rarely succeed in becoming leaders in new technology. It’s worth noting that innovation leaders become losers because, despite inferior beginnings, the new technology succeeds in offering better products at less cost.
As Henry Ford mentioned, “Businessmen go down with their businesses because they like the old way so well they cannot bring themselves to change.” For example, NCR could not lead the Reinvention of the cash register by changing the electromechanical technology core with electronics. Similarly, RCA and Kodak failed to alter their matured technology cores. Consequentially, they suffered from massive losses. It happens not only in High-tech. For example, due to the change in packaging technology from glass bottles to aluminum cans and paper packs, many firms suffered from significant market share erosion and lost their number-one positions.
Due to the failure to change the technology core at discontinuity, many innovation leaders have become losers. Many of them drop down the rankings. In the worst case, they withdraw from the business and go into bankruptcy. Besides, due to the failure of appropriate responses, innovation epicenters may migrate across the boundaries of nations. For example, during the last 70 years, the USA has lost the epicenter of an array of inventions like light bulbs, displays, imaging, and storage to Japanese companies. Such a reality raises a vital question: why do innovation leaders become losers?
Questioning common reasons why incumbents fail to lead the next wave
Its widely established BIG innovations unfold due to the rise of reinvention waves. Often, instead of incumbents, they come from outsiders. Besides, due to the rise of the reinvention wave, incumbents defending their high-performing reinventions suffer from disruption. Despite having resources, why do incumbents fail to lead? Instead, why do they suffer? How do we get courage and build a supportive culture to encourage and succeed in pursuing risk-taking significant innovations? By the way, the reasons and solutions often cited are not beyond question.
1.Refusal to cannibalize successful products
Numerous examples from Kodak and Microsoft to Sony show incumbents are reluctant to cannibalize profit-earning golden goose. For instance, despite having the first and many other patents for digital cameras, Kodak did not pursue it to protect the film business. Similarly, due to the piracy threat, Sony was petrified in pursuing MP3, despite having two years lead over Apple and the brand value of Walkman. On the other hand, Microsoft missed the ad revenue-based search engine business to Google because it wanted to protect the banner ad business of MSN. Why can incumbents not detect the signal of creating a far larger opportunity than the present golden goose and pursue it?
2. High failure rate discourages risk-taking
As high as more than 70% of innovative products retire without generating profitable revenue. In the case of BIG innovations through reinvention, the failure rate could be above 90%. Hence, there have been apparent reasons to be risk aversive. However, due to the potentially high payoff and the threat of losing the existing golden goose due to the rise of the reinvention wave, such an option is not the solution. Hence, we must know how to detect the potential and pursue a suitable strategy to turn the uncertainty into a big success story. However, why do resourceful incumbents fail to address it?
3. Inability to comprehend innovation dynamics as waves of Creative Destruction
Upon reaching a stable profit-making state, incumbent companies get used to a stable rise in revenue and profitability. Often, many people in the organization were not exposed to the early stage of the life cycles of current matured products. Besides, they do not understand how inventions evolve through a series of creative destructions. Furthermore, business education dominance at the top management level is also an issue. Hence, the question is how to overcome this inherent limitation.
4. Using inappropriate incentive methods
Why does not the incentive method that works well for the matured products fail to guide a new wave of innovation? Why do different levels of maturity demand varying types of incentive methods?
5. Lack of internal competition in pursuing reinvention waves
Once companies get used to making a profit from incremental advancement of existing products, there are no incentives to pursue big ideas—reinvention waves. Why do incumbent firms suffer from such a reality despite the high potential reward? Why do incumbent firms reward incremental advancement more than pursuing significant innovations?
6. Failing to have prominent innovation champions
We know Steve Jobs’ magical innovation and power in creating Apple and giving it a second life. As his inherent ability created such a success, we often term it magical power. However, not all incumbents can be blessed with such a natural gift. Is there a way to empower ordinary professionals to unleash magical innovation performance? Are there reoccurring patterns to interpret, predict, and make rational decisions in pursuing big innovations through creative destructions?
Ten reasons why innovation leaders become losers at technology discontinuity
Technology powers innovations or tools to get jobs done better. For example, a light bulb helps us get jobs done during darkness. Similarly, the camera helps capture and store images. How effectively and efficiently innovations help us get jobs done depends on the underlying technology core or essential means. However, human beings do not remain content with the current technology. They have an endless desire to get jobs done better at less cost. Hence, they have been after inventing one after another technology cores, forming technology and innovation waves. At the intersection of two waves, innovation leaders of the current technology wave require self-renewal to sustain their market shares, revenue, profitability, and leadership positions.
Due to growing competition and increasing supply of data, information, and knowledge, innovators face increasing tasks of self-renewal. However, a high failure rate indicates that the process is complex and deceptive. History tells us that innovators attempting to change to sustain competitiveness through self-renewal suffer from an inevitable period of frustration and disappointment. Although the emergence of a new wave appears fruitless and impotent initially, sometimes, it explodes into a powerful enemy or ally. Hence, such a self-renewal seems deceptive. However, it does not appear to be a random process determining success and failure. Instead, studies indicate the presence of underlying patterns. Moreover, innovation principles seem to cause events to unfold, leading to innovation leaders becoming losers. This article finds ten reasons underpinning innovation leaders become losers reality.
1.Identity trap and loss-making emergence of embryonic new technology core
2. Rejection by the mainstream market in the beginning
3. Potential of being a better and cheaper alternative remains hidden
4. Statistically, failure is far more than the success
5. Existing competence, IP assets, facility, and business models are incompatible
6. In the beginning, financial data do not reflect the loss of ground
7. Business education of top management fails to detect the signal early
8. Challenge of rational decision-making in diverting resources and adapting management culture along with the life cycles of two technology waves
9. Corporate politics, culture, and lack of shared understanding of innovation dynamics
10. Near the tipping point, not enough time is left to catch up and overcome the IP barrier and collaboration trap
Expanding them further
1. Identity trap and loss-making emergence of embryonic new technology core
Due to long success with the matured technology core, incumbents tend to get caught in an identity trap—terming them as particular technology companies. For example, in the 1970s, Kodak and a few others identified them as a film company instead of focusing on offering a solution to imaging. Hence, they tend not to focus on assessing the maturity of the current technologies and replacing them with emerging ones, resulting in avoiding creative destruction. Hence, by remaining caught in this matured technology-centric identity trap, they become a victim of disruptive innovation fueled by outsiders with emerging technologies.
Invariably, all technologies show up as inferior alternatives to existing matured ones. Besides, they also show up as costlier substitutes. However, they are based on different scientific base and have unique attributes. For example, fuel cell, battery, and internal combustion engines have three different science bases. Similarly, the OLED science base is quite different from that of LCD. There have been numerous such examples. Besides, at the early stage, you remove one impediment to unlock their hidden potential only to find another. Hence, in addition to very low R&D productivity, inferiority and higher cost are significant barriers new technologies suffer in the early stage of their life cycles. Therefore, management professionals rely on performance and financial data to run the risk of making wrong decisions.
2. Rejection by the mainstream market in the beginning
In 1974, the first digital camera prototyped by Kodak was not suitable for mainstream customers due to poor resolution, big size, and cumbersome operating procedure. Similarly, personal computers in the late 1970s were not suitable for office and professional computing. On the other hand, households using vacuum tube-based radios rejected Sony’s Transistor radio due to inferior sound quality. There have been many such examples. Consequentially, innovation leaders serving the mainstream market with superior matured products find no reason to pursue primitive reinventions in the early stage of the lifecycle.
3. Top management’s failure to detect the latent potential of being better and cheaper
Due to high operation management complexity, the top management of innovation leaders is often staffed by professionals with business and finance backgrounds. These professionals assess innovations’ health by analyzing financial data like revenue, market share, and profitability. However, such an approach fails to detect the latent potential of reinventions. Besides, due to a lack of knowledge about the underlying science, top management of innovation leaders fail to effectively interpret the information provided by the corporate R&D team and predict the likely future of the new wave. For example, in 1974, Kodak management could not envision the likelihood of reaching 2 million pixels of electronic sensors due to a lack of insights into solid-state physics. Hence, they avoided pursuing digital cameras despite developing the prototype and getting the first patent. On the contrary, Sony’s management, having a solid background in physics, believed in its latent potential and vigorously pursued it, causing a disruptive innovation effect on Kodak.
4. Statistically, failure is far more than success
As the failure rate of technology is high, many executives believe that the evolutionary approach to technology is good enough. Through writing in the Harvard Business Review, many of them, even gurus, argue that pushing the limits of technology is unimportant, let alone pursuing unproven emerging alternatives; customers will be happy with the performance below the limits of existing technologies. As the failure rate of new technologies in taking over the existing ones is relatively high, there has been a common belief among many executives that “statistically, if you bet “no” most of the time, you win. Hence, there is no point in them to believe in discontinuities. However, if they keep pursuing this path, one of those days, they will fail.
For example, several alternative approaches, including Polaroid’s instant photography, failed to take over the imaging technology pursued by Kodak. Unfortunately, the decision not to pursue the unproven emergence of electronic image sensors led to the bankruptcy of Kodak. Similarly, although many attempts to find alternatives to the filament and CFL lamps failed, LED took off as a better alternative. On the other hand, although eclectic vehicles have been struggling to take over gasoline-based automobiles, there is no doubt that one of those days, such automobile technology will be history. Hence, innovation leaders suffer from loss, statistical failure rate-based decision-making is one of the crucial reasons.
5. Existing competence, IP assets, facility, and business models are incompatible
The comparative strength of innovation leaders is underpinned by their intangible assets, patents, production and distribution facilities, supply chains, and business models. Innovation leaders use them to create entry barriers and derive Economies of Scale effects. Unfortunately, all of these strengths become irrelevant in pursuing the reinvention waves. For example, patent stockpiles of Kodak or Fuji in films, chemicals, and machinery became irrelevant to the digital camera wave. Similarly, all the assets establishing leadership in filament lamps or hard disk drives lost relevance to LED light bulbs and solid-state drives respectively. Due to such a loss in significance, in addition to losing the comparative advantage, innovation leaders also suffer from the liability of owning those assets. Similarly, business models also become incompatible. For example, the business model of losing in camera sales and profiting from film and chemicals was incompatible with the digital camera era.
6. In the beginning, financial data do not reflect the loss of ground
Due to the rejection by the mainstream market in the early stage of the life cycle, reinventors serve the non-consumption market. Often, the matured products do not serve the non-consumption market. Hence, the progress of the reinventor in serving the non-consumption market does not reflect on the matured products’ financial data. Furthermore, as the initial speed of penetrating the mainstream market is very slow, the market’s growth hides the loss of market share by the incumbents to reinventors or new entrants. Hence, financial data-based monitoring of market transition or loss of market to reinventions introduces erroneous perceptions in the management circles of incumbents.
7. Business education of top management fails to detect the signal early
The science base of technologies powering reinventions to unleash creative destruction is quite different than that of the matured technology core of incumbents’ products. Besides, such technologies appear in a primitive form as an inferior alternative. Hence, initial data do not prove superiority. The potential remains latent in the science base. Therefore, management professionals with a business education background fail to detect the embedded latent signals. As a result, they risk ignoring the creative destruction potential of emerging technology core.
For example, Kodak management could not imagine how their first patented camera could reach 2 million pixels from the demonstrated of only 10,000 pixels. Hence, they refrained from pursuing it. However, due to a strong academic background in solid-state physics, Sony’s management detected and pursued the latent potential, leading to a disruptive effect on Kodak. Hence, in the age of unfolding disruptive waves due to the highly science-centric emerging technology core, the business education background of management is not sufficient enough for detecting early signals.
8. Challenge of rational decision-making in selecting technologies, diverting resources and adapting management culture along with the life cycles of two technology waves
In addition to facing the rational decision-making challenge of diverting resources from profit-making operations to loss-making new technology, innovation leaders also suffer from loss due to pursuing the wrong technologies. For example, Nokia pursued Microsoft’s mobile OS and Lumia instead of Google Android to counter the invasion of iOS-based iPhone. Similarly, Hughes, Tansitron, and Clevite lost due to pursuing germanium to leverage Transistor technology. Besides, innovation leaders pursuing plasma displays suffered from loss. It happens because, at a discontinuity, multiple technologies keep competing. For example, battery and fuel cells are competing technologies for reinventing automobiles.
The second rational decision-making challenge has been to pursue two different management practices in dealing with maturing and rising waves. Organizational architecture— team structures, hierarchy levels, work processes, and reward systems–should be adapted to the S-curve of technology and product life cycle. For example, at the early stage of the emerging reinvention wave, teams need a more flexible work structure to navigate uncertainties and conduct experiments. Hence, incentives should be linked with progress in experimentation instead of efficiency gain. On the other hand, the matured stage of the life cycle of the incumbent products demands a well-structured management team to exploit efficiency gain. As there is a significant difference between these two management practices, Prof. Clayton suggested setting up a separate company by the incumbent to pursue a reinvention wave. However, maintaining a balance between two competing waves and seamlessly transitioning to the emerging wave poses a significant rational decision-making challenge upon crossing the threshold.
9. Corporate politics, culture, and lack of shared understanding of innovation dynamics
Innovation leaders’ critical challenge is to attack themselves while making an excellent defense to mature products. Sustaining a leadership position at technology discontinuity necessitates significant organizational change. To establish a leadership position in new technologies, often, it requires the juniors to grow in leadership positions with the money flowing from previous generation technologies. Hence, innovation leaders face significant corporate politics.
In addition to corporate politics, innovation leaders also suffer from cultural issues. Due to a lack of shared understanding of innovation dynamics, notably the role of competing waves in destroying existing markets and creating new ones, innovation leaders fail to play two games simultaneously. They fail to make decisions and manage internal change to effectively defend the old technology and attack new technologies, which will destroy the market of existing competence, facilities, and products. Hence, not all innovation leaders equally qualify and suffer. For example, Sony successfully managed the migration from CRT to LCD by maintaining a leadership role. It also led well to switching from LCD to OLED. Similarly, Toshiba maintained its leadership role at the discontinuity of hard disk and solid-state drives. However, unlike Sony and Toshiba, many companies like Seagate, GE, and Kodak could not manage two waves well, primarily due to failure in nurturing two cultures.
10. Near the tipping point, not enough time is left to catch up and overcome the IP barrier and collaboration tra
While remaining under the radar of the mainstream market while serving the non-consumption market, emerging technology crosses the infancy period and finds a clear path of progression, entering the ramp-up stage. After a long incubation period, emerging technology starts rapidly progressing, and the mainstream market starts adopting, causing a collapse of incumbents’ matured products and an explosion of reinvention. The transition speed depends on the relative economics of the matured (defending) and emerging (attacking) technologies.
At the tipping point, the transition takes place at a rapid pace, notably in high-tech. Software and network-centric reinventions have high-level economies of scale, scope, and network externality effects. Besides, by this time, reinventors have built up patent barriers while turning incumbents’ patents obsolete or irrelevant. Hence, once financial data show the mainstream market’s loss, incumbents or defenders do not get enough time to switch from matured to emerging waves. Furthermore, collaboration within and outside the boundary of incumbents also causes a barrier to transition.
