Disruptive Change and Corporate Response to it

Innovation, Hypercompetition, Incumbent Firms


Seminar Paper, 2009
19 Pages, Grade: 1,0

Excerpt

Index

1. Introduction

2. Methodology

3. An overview of the phenomenon „disruptive change“
3.1 Defining disruptive change
3.2 The pathway of disruptive innovation
3.3 Why incumbent companies fail to cope with disruptive change

4 disruptive change lead to?
4.1 The concept of hypercompetition and linkages to disruptive change
4.2 The new 7-Ss as a strategic orientation for incumbent firms
4.3 Reorganizing the incumbent firm in order to create abilities to become disruptive

5. Conclusion

References

Appendix 1
Figure 1
Figure 2
Table 1

Abstract

This paper addresses the understanding of disruptive change by highlighting the problems that arise when incumbent firms face disruptive innovations within their markets. In order to generate a new understanding of the competition that arises through disruptive change, disruptive innovations are linked to the concept of “hypercompetition” made by Richard A. D’Aveni. This concept implies the possibility to disrupt the market by implementing a new strategic orientation called the new “7-S Framework”. However this implies the necessity of reorganizing the incumbent firm. A possible approach is introduced. With this paper the author tries to identify a possible method to become disruptive for incumbent firms. The topic is “disruptive change and corporate response to it”.

Key words: Innovation, change, hypercompetition, organizational structure, strategy

1. Introduction

In today’s business world one can often see the phenomenon that giant companies and market leaders got scared to their cores and worst been driven out of their market. Faster information flows, the convergence of markets and hence a constantly changing environment of the firm have evoked the fear of disruptive change. Many examples have shown the importance of identifying disruptive change: Kodak in the photo industry did not realize the danger of digital cameras and got forced out of their market leadership position, many major players in the hard disk drive industry are not existent anymore (Christensen 1997) and leaders in the phone industry see their customers fade because of Apple’s Iphone (D’Aveni 2007).

Once the disruptive change has evoked, the loss of successful business activities is usually already in progress. Hence this paper tries to address the topic with an angle of how companies can prevent themselves from disruptive change by becoming the disruptive force themselves.

According to a Chinese General called Sun Tzu: “Attack is the secret of defence” (Sun Tzu 6th century BC.).

2. Methodology

In order to identify a possible approach for incumbent firms to prevent themselves from being hit by disruptive changes, it is important to identify the meaning of the terminology “disruptive change”, the factors that cause it and the failures of incumbent firms to react against it. This is done in section 3 of this paper and represents a literature review of disruptive change. In section 4 a connection line is drawn from the understanding of disruptive change to the emergence of competition. Within this section the impact of disruptive innovations on competition is analyzed and compared to the model of “hypercompetition” from Richard A. D’Aveni. This is done in order to identify whether disruptive changes lead to a new way of competition that needs a new understanding of strategy and business models. Following this section, the strategic concept of the “New 7-Ss”, also from Richard A. D’Aveni, is introduced in order to identify whether this tool is suitable for incumbent firms to cope with the new way of competition. Furthermore, the 7-Ss are held in contrast to the incumbent firm’s ability to implement these in order to identify necessary changes to become disruptive. In addition, a method to create a more dynamic company to meet the challenges of disruptive innovations is discussed. In section 5 an overall conclusion is made.

3. An overview of the phenomenon “disruptive change”

3.1 Defining disruptive change

Disruptive change can be characterized as the process over time in which the environment of the firm constantly changes. Disruptive innovation is the factor provoking disruptive change. Disruptive innovation is exercised by new competitors within a market. Disruptive innovation, also called “disruptive technology” or “disruptive strategy”, is a process performed that successfully establishes new processes, new technologies and new business models within an industry or ma]rket which leads to the creation of new products or new services (Thomond, et al. 2003; Tidd, Bessant & Pavitt 2005). Disruptive innovations fundamentally change the old competitive rules, the demands and needs of the existing customers and hence the market structure and segments of existing industries (Christensen 1998, Gilbert & Bower 2002; Charitou & Markides 2003).

3.2 The pathway of disruptive innovation

As Christensen (1997) has shown within his analysis of the hard disk drive industry from the 1970’s until the 1990’s, the emergence of disruptive innovation happens through loopholes in an industry or market that offers new players the possibility to enter. Incumbent companies try to win the battle of competition by constantly improving the existing products. This process of sustaining innovation leads to over performance and attribute-mixes which are not demanded by the customers. This exhaustion of the incumbent’s innovations creates the loopholes for new companies to enter the market (Adner 2002).

In contrast, new entrants offer a new mix of attributes in services and products that target a different set of customers than the mainstream segment at first. Usually this innovation is inferior to the offerings of an established company and hence meets needs of a smaller customer group than the mainstream market (Christensen 1997). According to Farshad and Kampas (2002), the new entrant matures out of this niche market or segment due to gaining profits and attractiveness to customers. Within this process of maturity, further delevelopment of the innovation raises the performance until the mainstream performance requirements are met (Adner 2002).

If the incumbent firm does not respond correctly against this disruptive innovation, the firm will be displaced by the new competitors (Christensen & Overdorf 2002). Figure 1 illustrates the process:

-- Insert Figure 1 about here -

But why do incumbent firms fail to cope with disruptive change?

3.3 Why incumbent companies fail to cope with disruptive change

In his Article “Why Great Companies Lose Their Way”, Christensen (1998) introduced the “failure framework” through he derives two major reasons for the failure of established companies to react against disruptive innovations:

1. Established firms are too well managed: The capabilities of a firm decide what a company can do and what not. Determining for these actions are three core internal capabilities namely i) resources, ii.) processes and iii.) values. Within the evolution of the firm these capabilities gets stained with an ongoing strategic orientation. This fact creates static routines within these capabilities. Most commonly the strategic orientation of established firms entitles growth, return on investments and hence shareholder satisfaction (Christensen & Overdorf 2000).
2. The second element is that in order to fulfil the above stated orientation, established firms listen too heavily to their core customers: Established companies within a market care about fulfilling their core customers’ needs in order to generate higher profits and margins for growth. Hence the firm provides great capabilities toward constantly improving and upgrading their current products. This implies only sustaining innovation into the firm. Hence the possibility to identify future needs and identifying new products with new technologies is not persistent (Chistensen 1998).

Because of these two major limitations in dealing with disruptive innovations, it is rarely possible for established companies to identify and create future needs and new markets which determine survival when faced with disruptive change (Christensen & Rosenbloom 1995). This lack of dynamic capabilities therefore only results in an improvement in sustainable innovation suitable for stable markets (Adner & Zemsky 2005).

Furthermore, small niches in which disruptive innovations evoke do not appear on the radar screens of many incumbent firms because the market growth and profits do not fit into their strategy (Christensen 1998).

However, altering the strategy quickly as a response to the disruptive innovation and trying to integrate it into the existing business usually fails. Gilbert and Bower (2002) have found that established companies classify disruptive innovation as either a threat or as an opportunity once it arises. If a firm sees disruptive innovation as a threat it usually rushes into action and spends big budgets into doing research and into developing own disruptive ideas. This technique often fails because the money is spent before the disruptive innovation has met the new customer needs. If an established company identifies evoking disruptive change as an opportunity, it usually waits to integrate it into their business until it is too late. In both time framed scenarios companies will loose their position and the market (Gilbert & Bower 2002). - But where will...

4. ... disruptive change lead to?

As Foster and Kaplan (2001) have pointed out: Destruction through creativity and hence disruptive innovations have reached the market itself. As seen in section 3 the securities such as competitive advantages in strategy, products and boundaries created by established firms in their old environment, no longer determine the survival. As one example: The American computer company Apple has successfully entered the mobile phone market and forced established players to share their cake with the Iphone (D’Aveni 2007).

It seems that a new way of competition evokes in which the core understanding of what a company can do successfully has to be altered. Hence a simple respond-action-plan which is combinable with the old strategies is not sufficient anymore. Established firms have to become disruptive themselves in order to survive (Charitou & Markides 2003).

D’Aveni (1994) has introduced a new concept of competition which he calls “hypercompetition”. His concept addresses competitive analysis under conditions in which competitive advantages quickly vanish, established rules are destroyed, markets merge and customer loyalty becomes more fickle (D’Aveni 1994). The above mentioned case and the whole section 3 underline that disruptive change brings these attributes along with its existence and capture of existing markets.

4.1 The concept of hypercompetition and linkages to disruptive change

A hypercompetitive environment evokes in which the competition among the players gets more dynamic. Specifying, a more dynamic competition erodes the time lasting of competitive advantages (D’Aveni 1997). The competition escalates into four arenas: i.) cost and quality, ii.) timing and know-how, iii.) strongholds and entry barriers and iv.) deep pockets (D’Aveni 1994). The question arises:

How does disruptive innovation influence these arenas in order to make the competition more dynamic and harder for incumbent firms?

[...]

Excerpt out of 19 pages

Details

Title
Disruptive Change and Corporate Response to it
Subtitle
Innovation, Hypercompetition, Incumbent Firms
College
Copenhagen Business School
Grade
1,0
Author
Year
2009
Pages
19
Catalog Number
V162517
ISBN (eBook)
9783640775804
ISBN (Book)
9783640775811
File size
480 KB
Language
English
Tags
Innovation, Disruptive Change, Competition, Incumbent Firms, Organizational Structure, Response
Quote paper
Tim Nierobisch (Author), 2009, Disruptive Change and Corporate Response to it, Munich, GRIN Verlag, https://www.grin.com/document/162517

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