How do you respond to innovation threats? In this blog we are going to learn more about what to do when you discover disruption in your industry.
Different Types of Innovation
First, what kind of innovation are we talking about? Gary Pisano offered a matrix which is now a very accepted set of innovation definitions in his HBR article, “You Need an Innovation Strategy”.
This matrix helps us understand the different types of innovation and the characteristics of each. The innovation type that is typically known as disruptive innovation, Pisano calls architectural disruption. Architectural disruption is where a new business model is introduced, and new technical competencies are required as well, like Amazon and digital bookstores. This is the hardest type of disruption for a company to face because it requires changes across multiple areas of the business. No matter what kind of innovation has crept into your industry, you need to decide what to do about it.
Disruptive Innovation Response Matrix
Charitou and Markides, in their MIT Sloan Management Review article, created an effective matrix to help businesses understand their options when facing disruptive innovation.
As the matrix indicates, the responses are based on the company’s motivation and ability to respond to change.
Low Motivation to Respond
Options 1 (Routine) and 2 (Disruptive) are based on a low motivation to respond. The recommendation is ‘Focus on your own business’ – ‘Ignore the innovation’.
If there is no motivation or a low ability to respond, then the obvious response is to focus on your own business. While this may seem short-sighted, it may be the best strategy. When disruptive innovation happens not all the businesses are disrupted. While many or most may disappear in extreme cases, the “old way” will survive to some degree and the last one standing will be the company with a unique value proposition or the one that can exist at the lowest prices/costs, in a more generic market. Once everyone else is forced out of the market, a kind of monopoly for the old business exists, and profit levels can return. Companies like Quad Graphics in printing demonstrate that phenomenon. After years of digital transformation, they are the last big printer standing. Kodak still produces film despite the overwhelming transition to digital cameras. Kodak 35mm film sells for $20+ a role, which is much higher than I remember film costing before digital cameras. The point is that if you are not capable or motivated to tackle an innovation that has just invaded your space, you need to be the best at what you do with the lowest cost base so that you are the last one standing.
If you decide on options 1 or 2 don’t kid yourself that the disruption is not part of your business. As we discussed in previous articles, disruptions serve the unserved and underserved. Customers of the disruption are looking for something different than the features of the traditional product. People who took digital pictures in the beginning were looking for convenience over quality. Users of Google apps were looking for low cost and collaboration over the exhaustive features offered by Microsoft Word and Excel. Also, think through the consequences of the disruption and how those might affect your industry. Uber was aimed at the taxi industry, but it has also impacted car buyers, especially in big cities. If transportation can be so convenient, reliable and inexpensive, why do people need to own a car? If you choose to ignore the disruption make sure you have the resources to wait out the industry upheaval expected.
High Motivation to Respond
Option 3 (Architectural) is based on a high motivation to respond. The recommendation is ‘Adopt and separate / Adopt and keep internal / Attack back and disrupt the disruption’.
Option 3 implies that you understand the disruption, you think it may be a threat to your business and you intend to do something about it. Now the main question is, can you get your organization behind the adoption, or do you need to create the new product outside of your existing organization? I have watched organizations mired in status quo bias for decades. The SQB organization seems to welcome the new product or business approach and then shutters it, making excuses that it “won’t work here”. When I worked at R.L. Polk & Co. years ago, I watched a terrific case study in ‘adopt and separate’ take place.
R.L. Polk & Co was a data analytics company that specialized in automotive data. They purchased the registration data for US consumers. They used that data to help automotive manufacturers understand patterns in car ownership. Their data was kept on a mainframe computer for decades. Senior executives had tried many times to update the platform, but the attempts failed over and over again and the mainframe lived on.
When I went to work for the company in 2004, I was horrified to discover that the company was running on this ancient technology. Sometime after I started, however, the president decided that there was a new opportunity to start a consulting firm to help companies manage and monetize their data. As part of the project the new company would be developing a modern data management system based on current tools in the market. A carefully selected IT team was assigned the task. They worked in a separate facility a few miles from our HQ. Within a year or so they had a working platform, and they were testing the Polk data to ensure that they could deliver the same results as the mainframe. Once the results were acceptable, the new system was moved back into the HQ, a new product was born, and the mainframe was retired along with the “new consulting company”.
Why did they need to go through all this trouble? Polk was a very generous company, where a person could start working for them in the mail room out of high school with no formal training and move up into better and better jobs. They had scores of IT people who had done this and made a very good living without any transferable IT skills. These IT employees were taught how to generate reports on that mainframe system. They understood the keystroke sequence to get the report out, but they didn’t understand the underlying technology. So, when something went wrong, they had no idea what had happened or how to fix it. These employees understood that if the mainframe was replaced, they would be too. Any chance they got, they made sure any new platform failed. The new system the company needed was a relational database system. The data was fluid and reporting was wide open to sophisticated analysis which the existing IT team did not understand. The president understood that the former attempts were being sabotaged by the internal employees so the only way to succeed was to get the project away from those employees, outside the boundaries of the company. I believe this is the strategy today at Ford, as well. The new Ford model E company and its separation from the ICE heritage looks like textbook ‘adopt and separate’ to me.
Option 4 (Radical) is also based on a high motivation to respond. The recommendation is ‘Embrace the innovation and scale it up’.
Option 4 is when a company accepts the idea that the disruption is going to negatively impact them if they do nothing and decides to produce the disruption itself and provide the resources to make it as successful as their existing offering, which might mean replacing the existing offering. This means that the company has the skills to embrace the new product or process and is highly motivated to do so. This option is most appropriate for the biggest hitters in the industry being disrupted. Adopting the innovation puts the company in the best position to capitalize on profitability as they have a chance to move through the product development stages into process development and stabilization as the new innovation gains momentum in the market.
In my next article we will look at a mini case study that demonstrates ‘Embrace the innovation’ and reflects the innovative culture of consumer goods company Procter & Gamble and their constant watch over the ever-changing laundry soap market.
