The Risk of Innovating First

A generation ago, many corporate leaders were ignorant of – or at least complacent about – the risk that technological innovations could put them out of business. Now they’re downright paranoid about it, says Joshua Gans, a professor at the Rotman School of Management. But should they be?

In 1996, Harvard Business School professor Clay Christensen proposed in his book The Innovator’s Dilemma that even the best-managed firms can do all the right things and still get blindsided by disruption.

This alarmed established business leaders, but delighted startups who saw themselves as potential disruptors. The subsequent failures of companies such as Kodak, Polaroid and Blockbuster, which proved unable to adapt to advances in imaging and video distribution, seemed to prove Christensen right.

But fear is the wrong response, says Gans, who in his new book, The Disruption Dilemma, revisits Christensen’s theories with the aim of helping managers respond to disruption more effectively. “Successful firms and their investors can calm down,” he says. “This doesn’t mean they can relax, but the fear of inevitable and imminent disruption is unfounded.”

For a start, says Gans, disruption doesn’t happen overnight. Even in cases where it does occur quickly, the evidence shows that companies have years – not weeks or months – to figure out how to respond. BlackBerry’s revenues more than tripled in the four years after the launch of Apple’s iPhone (but then collapsed over the next three years). “In most cases,” says Gans, “the companies muddle through. They’re big firms, and [unlike BlackBerry] not everything they do is being disrupted.”

Second, it’s easy to identify disruption in hindsight but not when it happens. And even when business leaders do see it at the time, it’s difficult to know how to respond, since nine times out of 10, innovators fail. The lesson: Established firms should react gradually and cautiously.

Third important point: Be sure you’re watching for the right thing. Christensen defined disruption as what happens when a competitor introduces a new low-cost, inferior product that initially attracts only the incumbent firms’ worst customers, but then rapidly improves to attract greater market share. As a result, he famously dismissed Apple’s iPhone as not disruptive because it was priced at the high end of the market.

What Christensen failed to realize, says Gans, was that the iPhone represented a different kind of disruption. It completely changed what a cellphone was, in both design (with its large touch screen) and function (apps that turned it into a pocket computer). This kind of “architectural” innovation is extremely difficult for incumbent firms to respond to and often requires a complete operational overhaul. The most effective competition to the iPhone came from a company that wasn’t burdened with an existing handset business: Google, with its Android operating system.

So how do companies insure against iPhone-type disruption? Gans says they need to assimilate emerging innovations into their operation rather than setting up a separate business unit to deal with them, as Christensen recommended. Companies that navigate disruption successfully tend to be structured in tightly knit teams, cultivate close links to customers to anticipate their future needs and experiment across multiple generations of technology. Rotating managers among different areas of the company also helps those managers embrace innovation more easily.

As Gans points out, firms that successfully adapt to new technology are often not first adopters or market leaders. They’re prepared to “be number two in the industry for a long time rather than number one for a short time.”