Innovation in the Time of Disruptive Rule-Breaking

When new technology makes an industry ripe for disruption, a leading wave of innovators simply pursue the possible. As consumers embrace their new choices, the trailing wave of popular demand means incumbents are better served preparing for the future than digging in to protect the old paradigm.

Adapt or die, to borrow an idea from Charles Darwin. But adapting is hard for incumbents, as Clayton Christensen so famously detailed in his book The Innovator’s Dilemma.

Mike Lenox, Tayloe Murphy Professor of Business Administration and Darden’s senior associate dean and chief strategy officer, says disruptive insurgents are imbued with advantages like superior nimbleness. In addition, Lenox says the sheer number of entrepreneurs — those Bill Gates-esque “guys in the garage” — means that countless new solutions are attempting disruption from every direction.

“It only takes one to be wildly successful to disrupt an industry,” Lenox said. “We remember the successes; not the countless failures.”

Among those successes: The breakout Nest Learning Thermostat hit the market and started a consumer frenzy, which prompted long-dominant Honeywell to respond with a patent lawsuit. Uber disrupted the taxi industry by harnessing the power of the crowd through an app that can connect anyone with a car to anyone in need of a ride, which has been met with a slew of lawsuits from taxi drivers and their trade associations. A similar story is unfolding for Airbnb.

Even regulated electric utilities, which enjoyed state-mandated monopolies for decades, are faced with new distributed energy technologies like solar panels — a threat so existential that the Edison Electric Institute wrote a 2013 report warning that the industry faces a “cycle of decline that has been previously witnessed in technology-disrupted sectors (such as telecommunications).” In other words, a death spiral.

With today’s accelerated competitive lifecycle, even disruptors are finding themselves disrupted within a generation. Just look at the mobile phone industry, Lenox says, in which Palm, Blackberry, Nokia and Motorola all fell to the rise of Apple and Samsung smartphones before the smoke had even cleared from the decimation of the wires and poles phone business.

“Disruption isn’t new; it’s been around since the beginning of markets,” Lenox said. “But it feels like disruption is occurring more quickly in technologies around software and in high technology. There’s strong anecdotal evidence when you look at the growth of companies like Uber or Facebook.”

So far, electric utilities have been largely successful pushing back against disruption with a complex and coordinated defense to preserve their industry business model. Lenox calls tactics like those, as well as the efforts of Honeywell and the hotel and taxi industries, “non-market strategies.” For their part, Lenox notes that solar power providers, Uber, Airbnb and many other emerging companies have responded with aggressive non-market strategies of their own.

While those strategies can’t be ignored, they’re not what he focuses on with students or his business clients. Non-market strategies often skirt tricky ethical boundaries and can work against the noble pursuit of serving customers’ best interests.

Instead, Lenox focuses on how established companies can position for ongoing success in a fast-changing business world.

While incumbents face some disadvantages trying to innovate, Lenox stressed that they risk even more by failing to try. “Innovation requires two things,” Lenox said. “Creativity and appropriability — appropriating the gains from an innovation by locking it up with patents and other intellectual property protections.”

How to Thrive as an Incumbent in an Era of Disruption

Lenox says incumbents are not defenseless when disruption comes knocking at their door, but preparing for disruption requires vision and planning. Lenox encourages his corporate clients to do two things to increase their chances of being in the right position when disruption occurs:

• Study when and how disruption is likely to occur in their markets.
• Prepare for disruption by thinking through how it affects the current strategy.

Several business strategies can also protect incumbents from disruption, Lenox says:

• Leverage capabilities that are complementary to startups, such as manufacturing capacity and distribution networks. In biotech, pharmaceutical giants use the power of their unparalleled distribution systems to secure lucrative licensing agreements with innovative startups developing promising new drugs.
• Lead in capital intensive sectors. GE has survived through generations of technological disruption because manufacturing things like large turbines and engines requires so much capital. Entrepreneurs have struggled to find ways to innovate past those capital-intensive solutions and face an intimidating funding gap when they do.
• Follow fast. First-mover advantages are well documented, but there are also “second-mover advantages,” which cash-rich incumbents are primed to seize. As first movers fight in the fog of an untested market, corporations can wait until a winning solution emerges, then use their resources to build or buy into the nascent market before a shake-out of weaker competitors allows any player to establish a dominant position.

The above post is excerpted from a longer piece in the winter 2016 issue of The Darden Report.