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Radical Innovation: How Mature Companies Can Outsmart Upstarts

 
12/4/2000
Incremental innovation can keep large companies competitive in the short term. But only radical innovation can change the game, leading the way to long-term growth. A new book from HBS Press reveals the patterns through which game-changing innovation occurs, and identifies the new managerial competencies large firms need to make radical innovation happen.

Radical Innovation

You have heard it a thousand times before: "Small entrepreneurial firms are the source of most radical innovations. Large companies have a tough time getting it done." 1 This widely held belief is supported by the success of entrepreneurial ventures in Silicon Valley, along Boston's Route 128, and wherever else new companies with radical innovations sprout and take root. Think of the upstart firms that have pioneered the technologies and business models that now dominate the Internet and e-commerce (America Online, Amazon.com, Yahoo!); personal computing (Intel, Microsoft, Dell); and biotechnology (Genentech, Biogen). The failure to develop and introduce breakthrough innovations puts established firms at risk of being knocked out of the game by the entrepreneurial newcomers. What if mature firms could figure out how to outsmart upstarts?

Leaders of established companies acknowledge that radical innovation is critical to their long-term growth and renewal. 2 Indeed, the relationship between business growth and innovation is widely understood by executives today, thanks in part to the writing of a number of consultants and business scholars. 3 The general understanding to be gained from these works is that becoming lean and mean can make you competitive, and incremental innovation can keep you competitive with current product platforms. But only radical innovation can change the game.

Radical innovation transforms the relationship between customers and suppliers, restructures marketplace economics, displaces current products, and often creates entirely new product categories. Radical innovation provides a platform for the long-term growth that corporate leaders desperately seek. Unfortunately, recognizing the importance of radical innovations and successfully developing and commercializing them are two different things.4

Incremental innovation is not as great a problem for established companies as radical innovation. During the 1980s, U.S. and European firms were competitively challenged in many industries by Asian firms. They took a beating in memory chips, office and factory automation, consumer electronics, and automaking. 5 These behemoths were routinely outmaneuvered by new competitors. Kodak watched as videotape camcorders reduced its home movie business to cinders. Xerox's lock on the photocopier business was broken by Canon, Sharp, and others. Consumer electronics products made by Motorola, Zenith, and RCA were largely displaced by new ones introduced by Sony, Panasonic, and Toshiba. On the automotive front, Toyota, Honda, and Nissan expanded their inroads into the North American market, winning universal kudos for quality and reliability. Effective incremental innovation and dramatic improvements in operating efficiency were the two keys to the success of these Asian firms.

In response, U.S. firms increased their competencies in managing the development of incremental innovation in existing products and processes, with an emphasis on cost competitiveness and quality improvements. 6 Extensive study of incremental innovation by both business managers and academics led to a variety of prescriptions: six sigma quality in manufacturing, concurrent engineering, reduced cycle time, just-in-time inventory management, and phase-gate product development systems, to name just a few. These prescriptions were widely adopted and helped many American companies regain their competitive positions in the world marketplace.

The attention of managers to incremental innovation, however, came at a price. It diminished the focus and capacity of America's largest companies to engage in truly breakthrough innovation. Central R&D labs, traditionally the source of radical innovation ideas, were redirected to serve the immediate needs of corporate operating units. Those units, always under pressure to maximize short-term financial performance, were reluctant to invest in high-risk, long-term projects. Instead, they sought incremental improvements to existing products and technologies.

The negative consequences of too much attention to incremental innovation have been recognized by many business scholars. James Utterback and Clayton Christensen, among others, have noted how firms that dominate one generation of technology often fail to maintain leadership in the next. 7 Either through hubris or a lack of inspiration or capability, industry leaders continue investing in the technologies that made them successful, even when more effective technologies—"disruptive technologies," as Christensen calls them—appear on the horizon. The big steel producers in the United States learned this painful lesson when Nucor operationalized continuous casting of rolled steel, a radical innovation that Big Steel had known about but had failed to take seriously. Kodak, which has dominated film-based photography since its creation by founder George Eastman, now finds itself in a race with many contenders for the next generation of picture taking, one that has eliminated film in favor of digital imaging. In each of these cases, and hundreds like them, products based on one technology were undermined by radically new ones—and incremental improvement to the old technology has done little more than delay the eventual rout.

Both business history and our own observations of the progress and failure of contemporary enterprises point to certain truths about incremental innovation. It allows firms to address the ever-changing needs of current customers and keeps cash flows healthy, but it must be supplemented by periodic infusions of radical innovation.

Of course, not every organization feels compelled to pursue new markets and customers through radical innovation. Doing so, some will tell you, is risky and cannot be relied on to produce results. They are right on both counts. Attempts at radical innovation produce more failures than successes, and the magnitude and timing of results are highly unpredictable. Faced with these double-barreled negatives, it is not surprising that executives feel more comfortable in other approaches to future growth: sticking to their knitting; gaining access to innovative technologies through acquisitions; or being a "fast follower" as new concepts enter the competitive arena. Each of these strategies has merit, but few great enterprises of the past half-century have relied on them as substitutes for real innovation. Companies that have succeeded over the long haul—such as Corning, GE Medical Systems, Hewlett-Packard, Motorola, and 3M—punctuate ongoing incremental innovation with radical innovation. 8

The difficult and unresolved problem of radical innovation for large, established enterprises is what concerns us in this book—a concern shared by many executives and R&D personnel. Though thoughtful executives recognize the importance of radical innovation, few are familiar with the process through which it emerges. The result is that when radical innovation happens, it often occurs in ways that few—inside and outside R&D—really understand. Logically, what is not understood cannot be managed effectively.

For five years, from 1995 to 2000, our team of researchers followed the development and commercialization activities of twelve radical innovation projects in ten large, established firms: Air Products and Chemicals, Analog Devices, DuPont, General Electric, General Motors, IBM, Nortel Networks, Polaroid, Texas Instruments, and United Technologies Corporation (Otis Elevator Division). Our intention in this book is to help senior executives, R&D managers, new business development managers, radical innovation project leaders, and others involved in innovation activities recognize the patterns in which radical innovation occurs and identify the managerial competencies needed to make the normally long and bumpy course of innovation shorter and more productive.

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Excerpted from "The Radical Innovation Imperative" in Radical Innovation: How Mature Companies Can Outsmart Upstarts, HBS Press, 2000.

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1 Joseph Schumpeter is credited with initiating the argument that small, entrepreneurial firms are most likely to be the source of most innovation (The Theory of Economic Development [Cambridge, MA: Harvard University Press, 1934]). Subsequent research in the field, in fact, has been inconclusive on this point. Schumpeter himself later claimed that large, established firms that possess some degree of monopoly power are the stronger agents of technical progress because of their superior access to capital and skilled labor, as well as their ability to appropriate innovations from the smaller start-ups (Capitalism, Socialism, and Democracy, 3rd ed. [New York: Harper, 1950]).

Other studies that examine the relationship between firm size, market power, and innovative activity have, in general, found no systematic relationship (see W. L. Baldwin and J. T. Scott, Market Structure and Technological Change [New York: Harwood Publishers, 1987]; and W. M. Cohen and R. C. Levin, "Empirical Studies of Innovation and Market Structure," in R. Schmalensee and R. D. Willig, eds., Handbook of Industrial Organization [New York: North-Holland, 1989]), meaning that there is no clear-cut answer to the question across industries. However, the more recent work of Rebecca Henderson, "Underinvestment and Incompetence as Responses to Radical Innovation: Evidence from the Photolithographic Alignment Equipment Industry," Rand Journal of Economics 24, no. 2 (Summer 1993): 248-270, showed that, in fact, established firms invest more resources in incremental innovation than do start-ups and that the research efforts of incumbents seeking to exploit radical innovations are significantly less productive than those of new entrants. Thus, we begin with the thesis that managing radical innovation in established organizations is a severe challenge.

2Recognition of the challenge of converting new technologies into business growth is pervasive. The Industrial Research Institute, a professional association of the senior technology managers of large, established companies committed to R&D, conducts an annual survey of its members. In 1998 "making innovation happen" was rated the top challenge facing technology leaders. Five years earlier it didn't even make the list of top challenges. The IRI report of the annual survey also indicated that IRI counterparts in Australia, Brazil, Korea, Europe, and Japan also rated "making innovation happen" at either the top or near the top of the list of the biggest problems facing their technology leaders.

3 See in particular Richard Foster, Innovation: The Attacker's Advantage (New York: Summit Books, 1986); James M. Utterback, Mastering the Dynamics of Innovation (Boston: Harvard Business School Press, 1994); and Clayton Christensen, The Innovator's Dilemma (Boston: Harvard Business School Press, 1997).

4 Numerous other writers have recognized the difficulty of managing radical innovation in large, established firms. Clayton Christensen's The Innovator's Dilemma indicates that it is highly uncommon for firms that manage established lines of business well to anticipate and respond effectively to a disruptive technology coming from an external agent, much less to commercialize one themselves. Dorothy Leonard-Barton's description of the core rigidities of the organization in Wellsprings of Knowledge: Building and Sustaining the Sources o f Innovation (Boston: Harvard Business Press, 1995) mirrors Christensen's observations, though she provides the reader with some new tools for managing against rigidity. Robert Katz and Thomas Allen describe the opposing forces in the organization that compete for organizational attention and resources, and stress the need for balance and dualism in "Organizational Issues in the Introduction of New Technologies" (in The Management of Productivity and Technology in Manufacturing, P. R. Kleindorfer, ed. [New York: Plenum Press, 1985], 275-300), much as Rosabeth Moss Kanter calls for large firms to manage both mainstreams and "newstreams" ("Swimming in Newstreams: Mastering Innovation Dilemmas," California Management Review [Summer 1989]: 45-69).

Michael Tushman and Charles O'Reilly's call for ambidextrous organizations in Winning through Innovation: A Practical Guide to Leading Organizational Change and Renewal (Boston: Harvard Business School Press, 1997) repeats the same cry. They point out that internally developed innovation is often squandered in large, established firms because of senior management's inability to lead dramatic organizational change. Deborah Dougherty's "Interpretive Barriers to Successful Product Innovation in Large Firms" (Organization Science 3, no. 2, [1992] 179-202) describes organizational resistance to innovation as a function of differing lenses or "thought worlds" that cause factions in the organization to interpret information differently. While every one of these writers has described the problem in a robust and enlightening manner, few, aside from Zenas Block and Ian MacMillan (Corporate Venturing: Creating New Businesses within the Firm [Boston: Harvard Business School Press, 1993]), have provided practical prescriptions to enhance an organization's readiness to commercialize radical innovation.

5 Joseph G. Morone, Winning in High-Tech Markets (Boston: Harvard Business School Press, 1993).

6 See, for example, Frederick Betz, Strategic Technology Management (New York: McGraw-Hill, 1993). See also Morone, Winning in High-Tech Markets, and Gary Hamel and C. K. Prahalad, Competing for the Future (Boston: Harvard Business School Press, 1994).

7 Utterback, Mastering the Dynamics of Innovation; Christensen, The Innovator's Dilemma.

8 See Morone, Winning in High-Tech Markets, and Tushman and O'Reilly, Winning through Innovation.