By: Christian Sandström
Radical innovation presents both a threat and an opportunity to firms. It has frequently turned entire industries on their heads. History shows us that large, successful firms may very suddenly become vulnerable when the underlying technology shifts. In this in-depth article Christian Sandström examines how radical innovation can be managed, despite the seemingly insurmountable problems created by the transition from one technology to another.
Time and time again we’ve seen how large profitable firms struggle when radically new innovations are introduced in their industry. About two thirds of the Swiss watch manufacturers died in the shift to digital watches during the 1970s and 1980s. In the early 1970s, firms making mechanical calculators collapsed in the shift to electronics. Moreover, history is about to repeat itself in the video surveillance industry where the large, analogue firms have so far not succeeded in dominating the new technology, which is based upon digital cameras which are connected over the internet. The incumbents have struggled through the recession and started to lay off people while entrant firms like Axis, Indigo Vision, Mobotix and Acti have kept growing.
Why do we see such a stunningly consistent pattern? And what how can firms handle these seemingly insurmountable problems? In the Applied Innovation Management-tool Mastering Radical Innovation, I address these questions and a few of these ideas will be briefly summarized in this article.
Those firms which struggle under conditions of discontinuous change are often subject to a lot of criticism. Frequently, they are accused of being bureaucratic, arrogant or merely as incompetent. Some of these firms have clearly experienced too much success without much effort and consequently lost some innovativeness. But a closer look at such companies often reveals that they not only identified the threat, but also sought to respond to it. Kodak was the first company to come up with a digital camera prototype in 1975, the first megapixel sensor was also developed by the firm. The quartz technology used in digital watches was developed by a Swiss institution. The mechanical calculator firms invested in electronics during the 1960s and many of the collaborated with Japanese companies like Casio and Sharp. Despite all efforts, most of these companies failed miserably.
Old skills are rendered obsolete
There are several reasons why established firms struggle to survive radical innovation. One rather obvious reason is that when the underlying technology changes, many existing skills are rendered obsolete. In a shift from mechanics to electronics, an established firm needs to develop a new body of knowledge related to a different technology. In Switzerland, a well calibrated production network with suppliers, firms and distributors had evolved over centuries. This entire network of interactions, activities and skills was related to precise mechanics and it would indeed be strange if such a network did not repel a radically new technology.
New business models
A second reason is that the rules of the game often change when a radical innovation is introduced. Kodak had sustained its dominance by having a razor-blade business model, manifested in the slogan “You press the button – we do the rest”. The profits were made on consumable film rather than on cameras. Furthermore, this business model required a high degree of vertical integration. In the analogue era, Kodak controlled the entire supply chain – from raw materials to manufacturing, marketing, selling and finishing film. Thus, the entry barriers were very high for anyone who wished to compete with Kodak. In the digital era, the position and business model of the firm became a burden. Firstly, as digital photography removed film, there was very little room for those who “did the rest”. Secondly, the entry barriers became much lower and the giant consumer electronics firms could flood the market with cameras which became cheaper and better every year.
Enter early to be able to profit later
A third reason for the “incumbent’s curse” is the fact that the initial market for the technology may be small and unprofitable. And this is a problem because “big companies must think big”. If you have a turnover of 10 billion dollars and you aim for a ten percent growth, you must look for opportunities which can generate 1 billion. On the other hand, if you want to grow ten percent and your turnover is 10 million dollars, a 1 million market suffices. Hence, it lies in the very investment logic of large firms to look for megatrends and huge opportunities. But even radical innovations start off as something small by definition, since we’re dealing with something which did not exist previously. Once the trend has become big enough to be spotted on the corporate radar – it is often too late.
Going back to the shift to electronic calculators, it can be seen that these products were sold in very small volumes throughout the 1960s. Though the amount kept growing and did so at a stunning rate, the total turnover was still almost insignificant compared to the sales mechanical calculators. As the technology became better and better it suddenly became a megatrend but then it was too late to respond and consequently, many firms were rapidly displaced.
In conclusion, radical innovation presents both a threat and an opportunity for firms. While history has shown that large firms sometimes struggle to handle these changes it should also be pointed out that many companies have not only survived but also prospered. My in-depth article shows how it can be done and points out a couple of success stories we can learn from.
By Christian Sandström
About the author
Christian Sandström, PhD, is a postdoctoral researcher at the Center for Business Innovation, Chalmers University of Technology. His PhD thesis concerned the challenges that technological discontinuities and disruptive innovations present for established firms, especially from a business model perspective. Among other things, Christian studied how the Swedish camera manufacturers Hasselblad struggled in the transition to digital imaging.