In the current business environment, companies with different experiences approach their innovation management. As shown by the topics discussed at Innovation Arabia Conference (2019), companies are expected to have knowledge in smart learning, Artifical Intelligence, Health and Environment, and many more. The results of the study conducted by Hölttä-Otto, Otto, and Luo (2014) showed that, on average, an innovation introduced by new companies had more characteristics of innovation compared with products manufactured by incumbent firms.
This implies that new ventures need to be innovative to stay relevant in a particular industry and not be limited by competition. Importantly, the researchers did not find any evidence pointing to significant differences in the distributions of innovation characteristics across the different types of companies (Hölttä-Otto et al., 2014). Nevertheless, most innovations take place in the user interactions category, architecture as well as external interactions industries instead of the categories associated with reduced costs and increased functionality that represent standard focuses of the majority of programs in product development.
Large companies with experience approach innovation management through the long-term strategy of product development that includes the culture of innovation, risk-taking, and tolerance to mistakes. Incumbent firms are limited in their resources and cannot afford long-term product development. There may also be issues in corporate culture sustainability, which, in large firms, is kept on a high level due to the availability of resources and years of experience in the industry.
Innovation for New vs. Incumbent Firms
There is a difference in innovation types that suit either established or new firms. Venture capital-backed companies with active founder-inventors are more likely to produce better innovation ideas compared to startups that do not have the necessary amount of resources. In addition, it must be mentioned that employees that have worked in large companies are more likely to use innovations adopted by their previous employers.
When exploring whether some types of innovation are better for new or established firms, it is important to mention Abernathy and Utterback’s model. It is useful for explaining why new companies succeed at some innovations while failing with others. For instance, prior to developing a new design, new companies can function without the same product design that experienced companies use. Since successful firms have greater experience with design, newer companies are at a disadvantage when it comes to using the same product design.
Also, when establishing a dominant product design, companies tend to facilitate small-scale operations for the purpose of technical uncertainty minimization. New companies usually have a non-hierarchical organization because they facilitate product development and design. Due to the need to support efficiency, structures of organizations are becoming bureaucratic and hierarchal, which is inherent for large and established businesses. Before the emergence of dominant designs, the learning curves of new companies are weaker compared to established firms. This allows them to enter the industry without having to compete with very successful firms.
However, after the development of the main design, the learning curves of companies become more evident. Combined with efficient manufacturing and selling as well as the positive marketing of products ensure that new companies become more successful.
Different Models of Innovation
The process of innovation has become a new imperative for managers to consider when developing new goals. However, it is important to understand the difference between innovation and strategy. While the strategy is concerned with the achievement of established objectives, innovation considers the issues of discovery. This means that innovation deals with addressing the challenges that have not been addressed previously through the development of new methods (Satell, 2013).
The Abernathy-Utterback model is useful for providing insight into how established and new companies reach the most success in industries that focus predominantly on technologies. Generally, the fluid stage of a technology-intensive industry is the most favorable for the new companies, while the specific state is the most beneficial for established (incumbent) firms. Therefore, according to their model, technology develops through different incremental innovation periods that are interrupted by periods of radical innovation. Abernathy and Utterback describe various effects that the nature of innovation has on competition.
According to Barras, service industries implement new technologies that have been implemented in goods industries, which points to the existence of a reverse product cycle. Within this cycle, new technologies are used for making services more effective. If to compare this model with Abernathy and Utterback’s approach, it can be seen that the timing of radical and incremental change differs in service and manufacturing businesses. While manufacturing companies begin with radical innovation and move to incremental, service companies, have a reverse model.
Henderson and Clark’s model accounts for a greater number of details compared to Abernathy and Utterback. In their taxonomy, additional types of innovation are mentioned; they are architectural and modular innovation. While the latter influences changes in components from which innovation is made, the former implies the impact on the changes in links between components, leaving the components without modification.
When exploring the phenomenon of technological change, Tushman and his colleagues provided an explanation that radically new technologies do not always challenge the abilities of established firms (O’Reilly & Tushman, 2013). Instead, these technologies can prompt enhanced competence because of the growing incentives. In addition, successful forms have some major capabilities for successfully developing technologies.
Christensen’s view was different; in his opinion, incumbent companies were often the ones that invented radical innovation that were subsequently complex to adopt. Such a pattern implies that the absence of technological capabilities does not explain the failure to transition to new technologies. Rather, the source of the problem lies in the unwillingness of companies to adopt new services and products based on new technologies, not only due to the company’s technological abilities.
Dealing with Disruptive Innovation
Disruptive innovation refers to the process within which a service or product develops in simple applications at the bottom of a market and then moves up quickly, subsequently affecting the competitive advantage of established firms. Innovation is considered disruptive in the case when it was initially very sophisticated and available only to wealthy customer segments that value exclusivity and subsequently transformed into a widespread product or service that is affordable to the wider audience. Characteristics of disruptive innovations include lower gross margins, smaller (niche) target audiences, and simple solutions that appear not attractive when compared with traditional solutions. Since lower market tiers offer lower margins, they create space at the bottom for new disruptive innovations to appear.
For established firms to address the challenge of disruptive technologies, companies should stop pursuing sustaining innovations at the highest tiers of their markets. Despite the fact that historically, sustaining innovations helped large enterprises succeed, charging the highest prices to the richest and most demanding customers will inevitably lead to disruptors’ emergence. Therefore, a successful company should be prepared to be disruptive and address the demands of the market not only at the top but also at the bottom.
There are several suggestions as to how companies can address disruptive innovation. The first recommendation refers to chasing the market and is better suited for newer companies. Companies that begin realizing that a market may experience disruptive innovation should start changing their products to sell in the marketplace alongside disruptive technologies. The second strategy is finding new markets on the basis of existing experiences, which is a strategy that is more effective for established firms. This solution was used by Fuji that started producing digital photography items (Baumgartner, 2013). Overall, large firms should learn to adapt to the changing environments and prevent disruptive innovations from prevailing in the market.
From the above examples of effective strategies, some lessons can be learned by both new and established companies. First, a company should always be prepared for the emergence of innovations that come from the outside and thus challenge the success of some organizations. In order to be prepared, organizations should answer several questions, such as:
- What political or economic changes in the environment can adversely affect the existing business model?
- What can new technologies disrupt or destroy the business model?
- What actions of competitors can significantly limit the success of the business model?
After answering these questions, companies should follow up with the development of additional campaigns and strategies that will potentially generate new ideas for answering the challenges that occur in the worst-case scenarios. Second, when a company learns about a new invention that has the potential of disrupting the market, it should never be ignored. The same mistake was made by telegraph service providers during the invention of the telephone, or photography suppliers made a mistake in the advent of digital cameras.
Baumgartner, J. (2013). The best strategies for dealing with disruptive innovation. Web.
Hölttä-Otto, K., Otto, K., & Luo, J. (2013). Innovation differences between new venture startups and incumbent firms. International Conference on Engineering Design, 13, 1-17.
Innovation Arabia Conference. (2019). Introduction. Web.
O’Reilly, C., & Tushman, M. (2013). Organizational ambidexterity: Past, present and future. Web.
Satell, G. (2013). How to manage innovation. Forbes. Web.