Critically Appraised Topic
The essay reviews relevant literature
to discourse disruptive innovation
and how incumbent firms can
Managing Disruptive Innovation
capture value for themselves and the
costumers
By Muhammad Umar Zahid, u6520643
Table of Contents
Managing Disruptive Innovation................................................................................................................... 1
Introduction ................................................................................................................................................... 1
What does “disruptive innovation” exactly means?...................................................................................... 1
Key Findings ................................................................................................................................................. 2
Organizational Structure ........................................................................................................................... 2
Acquisitions .............................................................................................................................................. 3
“Disrupt or be disrupted” is misleading .................................................................................................... 4
Implications for managers: ........................................................................................................................... 4
Limitations and external validity of the findings .......................................................................................... 5
Appendix ....................................................................................................................................................... 8
Managing Disruptive Innovation
Introduction
Majority of firms rely on innovation-driven growth to provide value for its
shareholders, and in doing so, capture value for themselves. It is imperative to
understand the various kinds of innovations as they require different strategic
approaches. Managers using the wrong connotation might end up using a
misguided approach for their given context leading to severe implications.
Therefore, it is imperative that managers understand the underlying concepts
behind the theory. The essay discourses various strategies established firms might
consider when confronted with a potential threat of disruptive innovations.
The term “disruptive innovation” has evolved over-time. The phenomenon was
first described as “disruptive technologies” by Christensen and Bower (1996) in his
study of disk-drive industry: innovations that provide different values than the
values demanded by the mainstream customers and results in worse product
performance, at least, in the near-term. However, Christensen and Raynor (2003)
renamed it “disruptive innovation” because of the widespread application of the
theory including technologies, services, and business models
What does “disruptive innovation” exactly means?
Key Point
Disruptive
innovations are
categorized as lowend or new market
disruptions that
disrupt incumbent
firms in that market
(Christensen, Raynor,
& McDonald, 2015)
The academic literature on “disruptive innovation” is copious, however, conflicting
and ambiguous. There are several issues regarding disruptive innovation that needs
further explanation.
Firstly, what is disruptive innovation? Initially, Christensen (1993) derived the
theory by studying from a series of previous technological innovations in the disk
drive industry, but it was later expanded to product and business model innovation
(Christensen & Raynor, 2003). However, this creates confusion as Markides (2006)
argued that technological innovations are fundamentally a different phenomenon
from disruptive business-model innovation and disruptive product innovation as
they create a different kind of markets and have different managerial implications.
To illustrate, in contrast with disruptive technological innovations, business model
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innovations do not necessarily grow to dominate the market as in the case of no
budget, no-frills flying which has only succeeded in capturing 10-20% of the
market (Markides, 2006).
Secondly, Govindarajan and Kopalle (2006) pointed out that disruptive innovations
go beyond the stated new market/low-end disruption. Their research concluded
"high-end" disruptive innovations, the phenomenon Christenson research didn't
cover. For instance, cellular phones were first accepted by corporate
executives(high-end) due to its portability and convenience disregarding its high
price. Over time, as the technology improved and cheaper, it satisfied the needs of
mainstream customers and was adopted by the masses.
Thirdly, (Danneels, 2002) and (Tellis, 2006) asserted that the model is defined
post hoc. However, Christenson (2006) refuted their claim and stated that the
definition of disruptiveness exists independent of the outcome. Nevertheless, it is
worthwhile to note that not all disruptive innovations completely replaced the
incumbent business as the theory predicts.
Finally, disruption is a process: it occurs when well-managed incumbent companies
are disrupted by developing disruptive technologies that penetrate from low-end of
the market or create new markets disrupting existing markets (Yu & Hang, 2010).
To avoid any misinterpretation, the essay will discourse about disruptions that
either originates at “low-end market” which is generally overlooked by
incumbents to cater for the demanding customers high for higher profits by
Key Point
Plausible ways to
manage disruptions:
1. Acquistions
2. Spin-outs
3. Ignore the
disruptions
but keep
assesing the
opportunities
constantly improving services or products to match with their needs or “new
market segments” turning non-consumers into consumers and then gradually
moving up in the mainstream (Christensen et al., 2015).
Key Findings
Organizational Structure
Organizational structure plays an indispensable part in managing innovations
because each requires its own processes and capabilities. Creating dual processes
and values within the same organization is an overwhelming task, predominantly,
for established firms that are hardwired to function in a specific way developed
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over the years of operating in a market. Christensen (1997) and Charitou &
Markides (2003) suggests setting up an “autonomous organization” to counter this
problem. The key attributes of autonomous units relate to having different process
and values as compared to parent organziation in order to develop and
commercialize disruptive innovation. Geographical distance is not as important as
the need for different organizational capabilities and structure (Christensen &
Raynor, 2003). Christenson, further argues that the incumbent firms that succeed
in disruption almost all established autonomous units (Christensen, 2006) including
computer and semiconductor industries. However, spin-out units should only be
considered if the current market is insignificant to meet the growing needs of the
organization and when the organization finds it hard to freely allocate human and
financial resources to pursue disruptive innovations (Christenson, 1997).
Acquisitions
Not all disruptive innovations end up successfully replace existing products or
markets, hence, incumbent firms investing significant resources to compete with
the disruptive entrants might end up in vain. One plausible solution is to wait and
acquire the entrant once it has proved itself in the market. Intuitively, this option
comes with a high price as well, however, it saves the incumbent from investing in
a myriad of unproven technologies or investing carelessly in potential disruptive
innovations. Empirical studies by Christenson (1997), Macher and Richman (2004)
and Charitou and Markides ( 2003) supported the claim of acquiring entrant firms.
However, Gans (2006) cautions that incumbent firms should put emphasis on
integrating the acquired firm and assist the acquired firm in developing the
disruptive technologies in order for the acquisition to be effective.
However, can incumbent firms survive disruption by incorporating dual processes
within the organization without setting up a separate unit? Tushman and O’Rilly
(1996) proposed the concept of “ambidextrous organizations” the ability to manage
incremental and radical innovation within the same organizations. Companies like
HP, J&J, and ABB successfully integrated and pursued incremental and radical
innovations using the same concept. However, since disruptive innovations initially
exhibit poor performance, potential disruptive innovations might not get the same
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attention from the existing customers or the management staff. Hence, this limits
its application to tackle disruptive innovation, making the setting up of an
autonomous unit as a more viable option.
“Disrupt or be disrupted” is misleading
Not all incumbent firms need to respond to potentially disruptive innovation. The
misconception that every potentially disruptive innovation will eventually grow
and replace the conventional way of doing business is misleading (Charitou &
Markides, 2003). What is important is that firms neither overreact or be oblivious
to the threat of disruptive innovations. Strengthening core businesses by focusing
on the relationship with the core customers by satisfying their needs through
sustaining innovation is a viable option (Charitou & Markides, 2003). However,
incumbent firms can create a new division to focus on the opportunities that might
arise from disruptive innovations which might serve the core customers in the
future. But managers should be cautious of it by not focusing on it excessively
(Christensen, Raynor, & McDonald, 2015).
Implications for managers:
Disruptive innovations, if managed carefully can open growth opportunities for
companies. However, disruptive innovations can’t be managed by implementing a
straightforward framework. Instead, managers should analyze and select the option
that is most appropriate for their organization. Disruptive innovations can be
implemented through establishing spin-out organization that is given the resources
to pursue disruptive innovations with full autonomy, gaining new capabilities
through acquisitions of emerging businesses and technologies to make sure the next
wave of disruption is not overlooked and, by acknowledging the fact that not all
disruptions eventually replace the established markets. It is thus important that
organizations neither should overcommit or disregard the potential threat. Lastly,
organizations should also consider applying the Open Innovation Theory which
may be applied to managing disruptive innovations as research suggested the
application of it beyond high-technology industries.
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Limitations and external validity of the findings
Firstly, most of the research done on “disruptive innovation” is empirical evidence
based attained from different industries. The findings in the CAT report are based
on the study of industries, such as J&J, IBM, Kodak, Facebook, Disk drive
industries. However, the apparent lack of diversity limits the generalization of the
findings. Moreover, Yu and Hang (2010) also asserts the need for quantitative
research methods on issues of disruptive innovation. Finally, the theoretical
implications from the case-based studies need further empirical evidence.
Secondly, contextual nature of the theory speculates the generalizability of the
findings. Chesbrough’s (1999) research testified that Japanese hard disk drives
industries didn’t undergo the disruptive process as observed in the US market
plausibly due to regulations, culture and the ineffectiveness of the financial system.
The significance of this finding is that disruptive process might be contextual.
Consequently, it should not be treated in the same way everywhere.
The theory itself was initially based on the study of disk drive industry in the US.
Over time, Christenson (2006) has expanded the application of theory to other
industries, such as retail, automation, airlines etc. However, King & Baatartogtokh
(2015) argues the validity and generalization of the theory itself. They further point
out that no research has been done that provides confirmatory evidence of the
phenomenon.
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References
Charitou, C. D., & Markides, C. C. (2003). Responses to disruptive strategic innovation. MIT
Sloan Management Review, 44(2), 55-63.
Chesbrough, H. (1999). Arrested development: the experience of European hard disk drive firms
in comparison with US and Japanese firms. Journal of Evolutionary Economics, 9(3),
287–329. doi: https://doi-org.virtual.anu.edu.au/10.1007/s001910050085
Chesbrough, H., & Crowther, A. (2006). Beyond high tech: early adopters of open innovation in
other industries. R&D Management, 36(3), 229-236. doi:https://doi.org/10.1111/j.14679310.2006.00428.x
Christensen, C. M. (1993). The Rigid Disk Drive Industry: A History of Commercial and
Technological Turbulence. The Business History Review, 67(4), 531-588.
Christensen, C. M. (2006). The ongoing process of building. Journal of Product Innovation, 23,
39–55. doi:https://doi.org/10.1111/j.1540-5885.2005.00180.x
Christensen, C. M., & Raynor, M. E. (2003). The Innovator's Solution: Creating and Sustaining
Successful Growth. Boston, MA: Harvard Business School Press.
Christensen, C. M., Raynor, M., & McDonald, R. (2015). What Is Disruptive Innovation?
Harvard Business Review, 93(12), 44-53.
Christensen, C., & Bower, J. (1996). Customer Power, Strategic Investment, and the Failure of
Leading Firms. Strategic Management Journal, 17(3), 197-218. Retrieved from
http://www.jstor.org/stable/2486845
Christenson, C. M. (1997). The Innovator’s Dilemma: When NewTechnologies Cause Great
Firms to Fail. Boston, MA: Harvard Business School Press.
Danneels, E. (2002). The dynamics of product innovation. Strategic Management Journal,
23(12), 1095-1121.
Gans, J. S. (2006). Keep Calm and Manage Disruption. MIT Sloan Management Review, 57(3),
83-90.
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King, A. A., & Baatartogtokh, B. (2015). How Useful Is the Theory of Disruptive Innovation?
MIT Sloan Management Review, 57(1), 77-90.
Macher, J. T., & Richman, B. (2004). ORGANISATIONAL RESPONSES TO
DISCONTINUOUS. International Journal of Innovation Management, 8(1), 87-114.
Markides, C. (2006). Disruptive Innovation: In Need of Better Theory. Journal of Product
Innovation Management, 23(1), 19-25. doi:https://doi.org/10.1111/j.15405885.2005.00177.x
Tellis, G. J. (2006). Disruptive technology or visionary leadership? Journal of Product
Innovation Management, 23(1), 34-38.
Tushman, M. L., & O Rilly, C. (1996). Ambidextrous organizations: Managing evolutionary and
revolutionary change. California Management Review, 38(4), 8-30. Retrieved from
https://doi.org/10.2307/41165852
Yu, D., & Hang, C. (2010). A Reflective Review of Disruptive Innovation Theory. International
Journal of Management Reviews, 12(1), 435-452. doi:https://doi.org/10.1111/j.14682370.2009.00272.x
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Appendix
1. Research Question
What is known in the scientific literature/research reports about disruptive innovation and the
ways in which incumbent firms can successfully manage disruptive innovations?
2. Background
The term disruptive innovation was first coined by Clay Christenson to define innovations that
penetrates low market segments or originate in the new markets (Christensen, Raynor et al.
2015). The theory posits that entrants almost always fails to compete with incumbent industries
when it comes to sustainable innovation. However, they outperform incumbents in disruptive
innovation. I am interested in finding out how well-managed firms can better tackle and capture
value from disruptive innovations.
3. PICOC
Population
Private Firms
Intervention
Disruptive Innovations
Comparison
Status Quo
Outcome
Capturing Value from disruptive innovations
Context
Organizations
4. Inclusion Criteria
a. Type of Studies: Peer Reviewed, Scholarly Journals, Research studies from Reputable
Organizations
b. Date: Published in the period 1993-2018 (Disruptive innovation phenomenon was first
discovered by Clay Christensen in his study of disk drive Industry)
c. Measurement: Studies that discourse about the inability of incumbent firms to deal with
disruptive innovation and remedies that can facilitate in coping with this phenomenon
5. Search Strategy
a. Search engine: ABI/INFORM, Google Scholar, Reputable Research Organizations
b. Filter: Peer reviewed, Scholarly Journals
c. Language: Articles in English
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d. Different combinations were used, such as “disruptive innovation”, “market leading,
incumbent, established firms/organization”, “disruption”.
6. Study Selection
The study was conducted in three phases. In the first phase, all articles related to disruption,
disruptive innovation were selected. In the second phase, articles were screened according to the
relevance of the CAT question understudy. Articles with the highest internal and external
validity were finally selected.
7. Data Extraction
Author and
Population
Year
and Type of
Design
Measures
Outcome
Comments
Level of
evidence
Organization
(Christensen
Disk Drive
Case
Introduction of
Failure to develop Study focused on
& Bower,
Industry
Study
disruptive
disruptive
disk drive
innovations by
technologies
industry only.
established
plausibly due to
Limited External
firms and
value network –
Validity
plausible
context within
reasons for its
which the firm
success or
competes
1996)
E
failure
(Chesbrough
Evidence from
Case
The use of
Open innovation
Relevance to
& Crowther,
computer,
Study
“open
can generate extra companies outside
2006)
informational
innovation” to
value from
better capture
innovation
of US is limited
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E
technology and
value from
pharmaceuticals
technological
innovations
(Charitou &
Various
Case study
To examine
Proposes five
Limited
Markides,
European and
based on
different
responses to
generalization of
2003)
North
active-
responses to
disruptive
the findings due
American
response
disruptive
innovation: Focus to limited external
companies.
framework
strategic
on traditional
and survey
innovation
business, Ignore
validity
or disrupt the
E
disruptors, pursue
traditional and
disruptive
innovation,
embrace the
disruptive
innovation
(Tushman &
Different
Case
The study of
Establishing
The study
O Rilly, 1996)
industries
Study
ambidexterity to
autonomous
explores the role
including
cope with
business units and of organizational
Apple, IBM
incremental and
having multiple
structure to
and J&J
revolutionary
cultures
facilitate
changes
innovation.
(Christenson,
Multiple
Case
The study of
Spin-offs and
Small sample of
1997)
industries
Study
why new
Acquisitions as
industries
including steel,
technologies
plausible ways to
selected.
computers,
causes leading
successfully
retailing,
firms to fail
manage
automobiles
E
E
disruptive
innovations
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(Macher &
Analysis of
Case
Studies the
Creating new
Recommendations
Richman,
three firms:
Study
organizational
organizational
based on the study
2004)
Motorola, IBM
responses to
entities,
of three
and Kodak
discontinuous
adaptation to
companies.
innovation
constant
organizational
change, joint
E
ventures and
acquisitions as
possible ways to
harness benefits
from disruptive
innovation
(Chesbrough
US, Japanese
Case
How disk
Japanese disk
Different
H., 1999)
and European
Study
industry
drive industry
responses to
Disk Industry
responded to
didn’t perform
disruptive
from 1973 to
technological
the same was as
technological
1996
shifts
disk drive
shifts in US,
industry in USA.
Japan and Europe
(Gans, 2006)
Various
Case
Examines the
Suggest strategies
Limited external
companies
Study
way in which to
such as joining
validity due to the
including
manage
disruptors,
case study
Facebook,
disruption
beating disruptors
methodology
Microsoft
E
E
or a costlier
option of
acquiring them
(King &
77 different
Surveys
Validation of the The research
Baatartogtokh, kind of
and
generalization of asserts that theory interviews and
2015)
Interviews
the theory of
has limited
surveys
disruption
predictive power.
conducted.
companies such
as Xerox,
Claim made on
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D
Toyota, Sony
etc.
(Chesbrough
Range of
Qualitative The use of open
The research
Conclusion based
& Crowther,
industries e.g.
Survey
innovation
suggests the use
on 40 companies
2006)
IBM, 3Com,
concepts outside
of open
using open
Intel
“high-
innovation
innovation
technology”
beyond high
industries
technology
industries
8. Critical Appraisal
Majority of the papers are based on case-study research methodology. The methodology allows
for in-dept analysis of an industry or group of companies: Macher & Richman (2004) analysis of
three companies and (Christensen & Bower, 1996) study of disk drive industries collected
specific and myraid data focused on specific companies or markets. However, similar to other
studies in the CAT, the conclusions devised from these papers can not necessarily be applied to
the wider population which implies its limitation of usability in industries and markets that were
not included in the research. External validity is a issue common in all the papers. Limited
sample sizes of Chesbrough, Vanhaverbeke, & West (2006), Gans (2006), and Tushman & O
Rilly (1996) demonstrates the plausible weakness of the study. However, given the exploratory
nature of problem understudy, case-study analysis offers a viable, if not the best methodological
approch to discourse the issue related to innovation.
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D