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Technological change, disruptive innovation & the impact on the business operating environment
Session 2 of BMAN 71942: Technology, Innovation Management & Business Strategy
Dr Andrew [email protected]
Tel: +44 161 275 5860
Innovation leadership & followership
Creating an innovative organisation
Frugal innovation
Factors in strategic choice at the business level
The influence of:•Environmental forces
•Accessible resources & capabilities•Expectations
Bases of competitive advantage:• Price-based strategies
• Differentiation strategies• Focus strategies
Sustaining competitive advantage:• Sustaining low-price advantage
• Sustaining differentiation advantage• Lock-in
Competition & collaboration
TECHNOLOGICAL CHANGE & DISRUPTIVE INNOVATIONGlobalisation of research &
technologyOpen innovation & crowd sourcing
Managing the innovation processManaging the globalisation of
research & technologyIntellectual property
Standards
Today’s session• What do we mean by the business operating
environment?
• What do we mean by technological change?
• What do we mean by technology life cycle?
• What are the dynamics of innovation in an industry?
• What can be the impact of a radical innovation on established businesses?
• What do we mean by “disruptive innovation”?
THE OPERATING ENVIRONMENT FOR A BUSINESS
What do we mean by “business operating environment”?
• The macro-environmental influences which might affect an organisation (PESTEL framework)
• The competitive conditions in the industry in which the organisation operates (Porter’s five forces)
• (These are different but may be complementary)
The influence of environmental forces
• Forces on the operating environment of a business are normally analysed using the PESTEL framework: – Public policy– Economic conditions: macroeconomic conditions;
market demand; competitive environment;– Socio-cultural: changing demographics, cultural
change, customer preferences– Technological change– Environmental– Legal & regulatory
These can act at sectoral/market,
National or international
levels
Influence of each varies between
markets & sectors
Technological change can act on any of Porter’s five forces to change the terms of
competition in an industry
Potential entrants
Substitutes
BuyersSuppliers Competitive rivalry
THREAT OF ENTRYTechnological change can increase/ decrease barriers to entry. e.g. Disruptive innovation allowed low cost carriers to enter airline industry
BARGAINING POWERTechnological change can increase/decrease bargaining power of a firm’s suppliers. e.g. Auto makers dependence on component suppliers
THREAT OF SUBSTITUTESTechnological change can create direct substitutes for existing products. (e.g. Digital cameras replace film)
BARGAINING POWERTechnological change can increase/decrease bargaining power of a firm’s buyers. e.g. E-purchasing
INTENSITY OF COMPETITIONInnovation can increase/decrease rivalry between existing firms in an industry. E.g. Fuji’s innovations in film increased rivalry with Kodak
DISCUSSION POINTSQ1: Why should an analyst of global business be concerned about the
business operating environment?_____________________________________________________________________________________________________________________________________________________________________________
Q2: What is the difference between PESTEL and Porter’s five forces?______________________________________________________________________________________________________________________________________________________________________________
Q3: Think of an example of the impact of technological change on the operating environment of a business?
____________________________________________________________________________________________________________________
TECHNOLOGICAL CHANGE
Technological change
Types of technological change:
• Incremental-radical
• Continuous-discontinuous
• Sustaining-disruptive
Technological change is caused by:
• Technology push: new technological knowledge (may be from scientific developments but can come from non-scientific sources as well (remember the broad definition of “technology from last week”, technological change is about more than changes in artefacts & is different to scientific invention)
• Market pull: new demands may stimulate search for new technological solutions
Evolutionary change & creative destruction
Joseph A. Schumpeter,1883-1950
• Any market has periods of comparative quiet, when firms that have developed superior products, technologies or organisational capabilities can earn positive economic profits
• These quiet periods are punctuated by fundamental “shocks” or “discontinuities” that destroy old sources of advantage & replace them with new ones
• Firms & entrepreneurs who exploit the opportunities these shocks create achieve competitive advantage during the next period of comparative quiet
Waves of technological development, 1770-1990 (see Dodgson et al, pp.26-30)
1770 1840 1890 1940 1990 ?
Early mechanisation
Steam power& railways
Electrical & heavy engineering
Fordist mass production
Information & communications technology
THE TECHNOLOGY LIFE CYCLE
The technology life cycle (TLC)
Time
Per
form
ance
Emerging Transitional Mature
Major technical challenges are overcome
Technology reaches its physical limits
The technology life cycle (TLC) for film
Time
Per
form
ance
(cou
ld b
e m
easu
red
by
imag
e qu
ality
and
/or
spee
d)
Emerging Transitional Mature
c 1890?
1940s
1980s
These products reflected changes in the technologies underpinning photographic film
The move from one technology to another is called a “technological discontinuity”
Key issue here is whether the technological
discontinuity is competence enhancing or competence destroying for a business
(see session 1)
Uncertainty in the technology life cycle
• Uncertainty over rate & timing of technological development
• Some emerging technologies may fail to deliver on the early claims of their advocates (A)
• Some may be superseded by another technology (B)
• Only some will reach the stage where they are used in new products, services, processes (C)
• Where we are on the curve is open to debate (?)
A
B
C
Emerging Transitional Mature
Time
Pe
rfo
rman
ce ?
Product life cycle is different to the technology life cycle
The product life cycle (PLC)
DISCUSSION POINTSQ1: Why should an analyst of global business be concerned about the
technology life cycle?_____________________________________________________________________________________________________________________________________________________________________________
Q2: What do think are the main sources of uncertainty when analysing the life cycle of a technology?
______________________________________________________________________________________________________________________________________________________________________________
Q3: What do you think are the main management challenges during the (a) emerging phase; (b) mature phase of the TLC?
______________________________________________________________________________________________________________________________________________________________________________
THE DYNAMICS OF INNOVATION IN AN INDUSTRY
Utterback (1996) Chapters 1, 2 &4
The dynamics of innovation in an industry (Abernathy & Utterback, 1978; Utterback,1996)
Ra
te o
f maj
or
inn
ova
tion
Fluid phase Transitional phase Specific phase
Product innovation
Process innovation
Experimentation with product design & operational characteristics
amongst competitors
Major product innovation slows as a standard (“dominant”) design
emerges. Major process innovation increases
Rate of major innovations declines. Focus on cost,
volume & capacity. Incremental innovation in
product & process
The dynamics of innovation in an industry: e.g. the car industry
Ra
te o
f maj
or
inn
ova
tion
Fluid phase Transitional phase Specific phase
Experimentation with product design & operational characteristics
amongst competitors
Major product innovation slows as a standard (“dominant”) design
emerges. Major process innovation increases
Rate of major innovations declines. Focus on cost,
volume & capacity. Incremental innovation in
product & process
1898
1908-1927 Model T Ford
1914: Trafford Park
Dominant design
“A dominant design in a product class is the one that wins the allegiance of the marketplace, the one that competitors & innovators must adhere to if they hope to command a significant market following. The dominant design usually takes the form of a new product (or set of features) synthesised from individual technological innovations introduced independently in prior product variants” (Utterback, 1994: p.25)
The dominant design for the motor car (4 wheels; internal combustion engine)
Not (yet?) electric powered
How does a dominant design emerge?
• The emergence of a dominant design is not predetermined but is the result of the interplay of technical & market choices
• Factors other than technology come into play:– A firm’s access to “Collateral assets”
(Utterback) or “complementary assets” (Teece, 1986)
– Industry regulation & government intervention (including standards)
– Strategic manoeuvring at the firm level– Communication between producers & users
The dynamics of innovation influences the evolution of an industry
• Product: from high variety, to dominant design, to incremental innovation on standardised products
• Process: manufacturing progresses from heavy reliance on skilled labour & general-purpose equipment to specialised equipment operated by low-skilled labour
• Organisation: from entrepreneurial organic firm to hierarchical mechanistic firm with defined tasks & procedures and few rewards for radical innovation
• Market: from fragmented & unstable with diverse products & rapid feedback to commodity-like with largely undifferentiated products
• Competition: from many small firms with unique products to an oligopoly of firms with similar products
DISCUSSION POINTSQ1: What kind of business strategy would you recommend for a
business that is in an industry in the fluid phase?_____________________________________________________________________________________________________________________________________________________________________________
Q2: What kind of business strategy would you recommend for a business that is in an industry in the transitional phase?
______________________________________________________________________________________________________________________________________________________________________________
Q3: What kind of business strategy would you recommend for a business that is in an industry in the specific phase?
______________________________________________________________________________________________________________________________________________________________________________
THE IMPACT OF RADICAL INNOVATION ON A STABLE BUSINESS
Utterback (1996) Chapter 7
Radical technological change
• A new technology may have the potential to deliver better product performance or improved production or both
• Radical technological changes may:– Create new businesses– Transform incumbents– or - Destroy incumbents
Continuous or discontinuous innovation (Tushman & Anderson, 1986; Utterback, 1996)
• Discontinuous innovation is “Change that sweeps away much of a firm’s existing investment in technical skills and knowledge, designs, production technique, plant and equipment” (Utterback, 1996: p.200)
• Discontinuities may be competence enhancing where they build on know-how embodied in the technology it replaces e.g. turbofan engines built on jet engine technology
• Discontinuities are competence destroying where they render obsolete the technology that it replaces e.g. vacuum tube producers replaced by integrated circuits
Performance of an established & new product
t1 t2 Time
Pro
duct
pe
rfo
rman
ce
New product
Established product
t1: new technology appears. The established technology offers better performance or cost than does products incorporating the new technology. The new technology is still to be perfected. It may be seen by incumbents & thier customers as “crude”, leading to the belief that it will find only limited application.
t2: the new technology enters into a period of rapid improvement – just as the established technology enters a stage of slow incremental improvement. The newcomer improves the performance of products/technology to the point where they match (t2) & overtake established products
The response of established technologies to a new technology...
t1 t2 Time
Pro
duct
pe
rfo
rman
ce
New product
Established product
Established players rarely sit back . Most respond to the threat posed by new technology.
Incumbents may seek to fight back by investing more in established technologies
The result may be that the established product may enjoy a brief period of performance improvement
But by t3 the pace of improvement in the new product technology allows it to meet & then surpass the established product
t3
Burst of improvement in established technology in response to new technology
... we call this “the sailing ship effect”
• In the 50 years after the introduction of the steam ship, sailing ships made more improvements than they had in the previous 300 years
• The improved sailing ships were still eventually overtaken by steam ships
• (and some of the new sailing ship designs proved so unwieldy that they sank or ran aground!)
DISRUPTIVE INNOVATION
Sustaining or disruptive innovation (Clayton Christensen, various papers)
• Sustaining innovations – improvements to existing products & services on dimensions historically valued by customers
• Disruptive innovations – introduce a new value proposition– Low-end disruptive innovations – offer
existing customers a low-priced, relatively straightforward product
– New-market disruptive innovations – bring a product or service to “nonconsumers” by making it easier for people to do something that historically required deep expertise or great wealth
Singapore airlines…. … Ryanair
Disruptive technologies may be ignored or dismissed by incumbents
(Bower & Christensen, 1995)Sustaining technologies “tend to maintain a rate of improvement; that is, they give customers something more or better in the attributes they already value”
Disruptive technologies:• Initially, simpler, cheaper & lower
performing in the attributes that matter most to mainstream customers
• Promise lower margins, not higher profits
• Initially, leading firms’ most profitable customers generally can’t use & don’t want them
• Commercialised first in emerging or insignificant markets
• Ultimately, disruptive technologies substitute for established technologies & products
Sony’s TR-63 “pocketable”
transistor radio
How disruptive innovations displace established products/services
a: disruptive innovation meets the performance demanded at the low end of the market and begins to substitute for established product (low-end disruptive innovation)
b: performance of established products as a result of sustaining innovation exceeds that demanded even at the highest end of the market creating overshot customers & making incumbent even more vulnerable to low end disruptive innovation
a-c: disruptive innovation becomes mainstream but itself becomes vulnerable to disruption
Potential customers for disruptive innovations
Customer group
Identifier What could happen
Signals
Non-consumers Lack ability, wealth or access to easily accomplish important tasks for themselves: they either hire someone or put up with sub-optimal solution
New market disruptive innovation
Product/service that help consumers meet existing tasks more easily
Rapid rate of growth in new market or new context of use
Undershot customers
Consume a product but are frustrated with its limitations: they display a willingness to pay more for functionality that is important to them
Sustaining up-market innovation (radical & incremental)
New, improved products & services for existing customers
Overshot customers Stop paying for further performance improvements in areas that historically merited price premiums
Low-end disruptive innovations
New business model emerges to serve least demanding customers
Why incumbent companies can find it difficult to respond to disruptive innovation: a resource based view
• The paradox of disruptive innovation is that “well managed companies”, doing what is regarded as the “right thing” can be swept away
• Incumbent’s resources do not allow it to respond
• Incumbent’s processes (routines) & capabilities are optimised for sustaining innovation & limit its ability to identify & respond to disruptive innovation
• Values cause what turn out to be incorrect prioritisation/assessment of disruptive innovation
• Core competencies become core rigidities (Leonard-Barton, 1992)
A resource based view of a business & its strategy
Term Definition What to look for
Resources Tangible & intangible assets that a firm owns or can access
Tangible assets: technology; products; balance sheet; capital equipment; distribution network
Intangible assets: human capital; organisational knowledge; brands
Processes (routines) & capabilities
Ways of doing business
Difficult problems that the company has repeatedly solved over time
Typical processes: recruiting & training; product development; manufacturing; planning & budgeting; market research; resource allocation
Values Factors that determine prioritisation (motivation)
Business model:• Cost structure• Size & growth expectations
Investment history – what has been prioritised in the past?
Strategies that are used by new entrants
New entrant strategy:
Definition: Signals:
Asymmetric motivation New entrant does something that incumbent does not want to do (provides a shield protecting from incumbent response)
• Size of market
relative to firm size• Target customers• Business model in
market relative to
existing business
models
Asymmetric skills New entrant does something incumbent is incapable of doing (provides sword to use during attack on incumbent)
• Mismatch between
established
processes &
processes required
for success
Incumbent response strategies when faced by disruptive innovation
Incumbent strategy:
Definition: Signals:
Ceding Incumbent leaves a market to an entrant
- Company announces refocusing on core customers- Abandoning lower-tier markets- Plans to discontinue low-end products
Co-opting Incumbent attempts to fight an attack using internal resources
- Company building or acquiring disruptive innovations
Growth-driven Incumbent targets entrant’s customers
- Incumbent targeting entrant’s market with modified version of core product- Announcements by incumbent that entrant’s market is a strategic priority
Defensive Incumbent attempts to build wall around its existing customers to block entrant
-Incumbent bringing new product to low-end of existing customer base- Incumbent announcement that entrant’s market is not a priority
How can incumbents respond to disruptive innovations? (Christensen et al, 2004)
• Establish a spin-off unit to focus on innovative technology
• Create learning ventures (& accept and learn from failure)
• Selectively use resources from the parent organisation to address the disruption (without leveraging its processes & values)
• Develop new markets that value the attributes of the disruptive products
• Do not wait for a disruptive product to evolve into a sustaining technology in mainstream markets
Criticisms directed at Christensen’s notion of disruptive innovation (Schuh)
Source of criticism Issues
Lack of clarity in definition
Danneels (2004)
Govindarajan & Kopalle (2006)
•Is a technology inherently disruptive or is disruption contingent?•Can it be defined as disruptive ex ante?•Is there a formal measure of “disruptiveness”?
Limited predictive value
Danneels (2004)
Adner (2002)
•Why do some incumbents win?•Why do some disruptive innovations fail?•What are the basis of customer decisions?•Examples are cherry-picked & have limited generalisability
Overstretch Markides (2006)
Charitou & Markides (2003)
•Is the theory valid for business model innovation?
Inadequate recommendations
Danneels (2004) •Spin-offs are a partial solution at best
DISCUSSION POINTSQ1: Do you think that digital imaging was a disruptive
innovation for Kodak? Why? ______________________________________________________________________________________________________________________________________________________________________________
Q2: Why did digital imaging (invented at Kodak in 1975) drive Eastman Kodak into Chapter 11 bankruptcy (in 2012)?
__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
What are your key learning points from this morning?
1. ____________________________________________________________________________________________________________________________________
2. ____________________________________________________________________________________________________________________________________
3. ____________________________________________________________________________________________________________________________________
Summary
• Analysis of global business environment requires an understanding of the potential impacts of technological change
• Technology life cycle can impact industry structure & influence business strategy
• Disruptive innovation can undermine the position of incumbents & provide opportunities for new entrants unless incumbents respond
Additional readings
• Abernathy, WJ and, Utterback, JM (1978) “Patterns of industrial innovation”, Technology Review, 80 (7): 40-47.
• Leonard-Barton, D (1992) “Core capabilities and core rigidities: A paradox in managing new product development” Strategic Management Journal
• Teece, DJ (1986) “Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy”, Research Policy, 15 (6): 285–305
Your next steps:
• Read the recommended texts for this session
• Research and look further at Kodak and other relevant examples to develop a better understanding of today’s discussion & in preparation for individual assignment/exam
