Radical Innovation: How Mature Companies Can Outsmart Upstarts

by Richard Leifer, Christopher M. McDermott, Gina Colarelli O'Connor, Lois S. Peters, Mark P. Rice, and Robert W. Veryzer

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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