Why Disruptive Innovation Can Help Market Leaders
Talk to any CEO about
what haunts them the most and disruptive innovation will be at the top of the
list. It is a logical fear: A company whose existence depends on established
technologies could face extinction or loss of market leadership if a revolutionary
innovation comes along. Just ask smartphone maker BlackBerry after Apple
launched the iPhone.
But a study soon to be
published in Management Science discovered that disruptive innovations need not
lead to an incumbent’s fall, despite prevailing academic theory arguing
otherwise. The paper, “Dynamic Commercialization Strategies for Disruptive
Technologies: Evidence from the Speech Recognition Industry,” was authored by Wharton
management professor David
Hsu, Matthew Marx, a professor of technological
innovation, entrepreneurship and strategic management at MIT, and Joshua Gans,
a professor of strategic management at the University of Toronto.
Indeed, the authors
discovered that start-ups introducing disruptive technologies with long-term
potential are more likely to end up licensing to incumbents or agreeing to be
acquired rather than turning into rivals. While these start-ups would initially
compete with established firms, the motivation is to prove the worth of their
innovation to a skeptical industry that has not seen it before.
But once the
technology is proven, among other factors, start-ups tend to form alliances or
merge with market leaders — pursuing what is called a cooperative
commercialization strategy — thus preserving the status quo. “This result calls
into question the notion that disruptive technologies necessarily result in the
demise of incumbents,” the researchers write.
The
Siri Approach
Consider Vlingo, the
authors say: Five years before Apple’s Siri personal digital assistant service
was released as an iPhone app, Vlingo was already demonstrating a similar
“grammar-free” speech recognition technology for phones in which a person did
not have to say certain groups of pre-arranged words to be understood.
Back then, Vlingo was
different in that its technology was software-based and embedded in a mobile
app at a time when most speech recognition features were built into the phone
hardware itself through a special chip, meaning functionality was limited to
such things as dialing phone numbers by voice. Vlingo went to market as a
competitor to prove its technology, and then later switched business strategies
by licensing to device manufacturers.
The authors found out
that many disruptive start-ups take the same path as Vlingo after examining
data on hundreds of speech recognition companies worldwide spanning nearly six
decades. They call a start-up’s switch from competition to cooperation with
incumbents a “dynamic technology commercialization strategy.” Such a view
stands in contrast to existing academic literature, which assumes that a
start-up stays on one path.
“The static view of, ‘We’re just going to make
one choice of strategy as a start-up and we’ll stick to that,’ is quite an
unrealistic one as we compare it to practice,” Hsu notes. Start-ups with new,
unproven technologies tend to have issues with credibility and could have a
tough time attracting investments from incumbents, at least initially. But once
the fledgling firm’s technology is proven to be viable, incumbents will be more
willing to invest. At this stage, a start-up is more likely to change course
and license its innovation or sell itself, the authors say.
According to the
researchers, one reason why the switching strategy had not been considered by
other academics was the lack of lengthy records tracking start-ups as they grew
and evolved. To remedy that, Marx and his research assistants manually pored
through 15,000 pages of trade journals and other sources to track all companies
entering the automatic speech recognition, or ASR, industry from its birth in
1952 to the end of 2010. “The paper not only talks about this on a theoretical
basis … it actually, importantly, validates it in the data,” Hsu says.
Switching
Gears
The authors chose the
automatic speech recognition industry as their test bed because it is a market
where neither a cooperative nor competitive strategy dominates. Also, start-ups
that choose to enter the ASR market alone will find it relatively feasible
because the costs and complexity to do so are not as daunting as those for
other industries, such as automotive or biotech.
Moreover, the level of
innovation is high with companies having filed more than 3,000 ASR patents, but
“considerable uncertainty” still surrounds the value of new technology, they
write. In part, that is because these companies all claim to have 99% accuracy,
so it is hard to pick the true winners. These potentially disruptive
innovations include software-only technologies; word-spotting, which locks onto
keywords instead of capturing all of the words to decipher speech, and
grammar-free recognition similar to what Vlingo uses.
Hsu, Marx and Gans
tracked the progress of 579 privately held, innovative ASR-related start-ups
over nearly six decades, focusing on their commercialization strategies. Did
they go to market alone, or did they cooperate with their larger rivals by
licensing their technology or agreeing to be acquired? Did they stick to their
initial strategy or switch after a while? What are the implications for
incumbents, which might by wary and fearful of new technologies?
In the study, 60% of
the firms started out competing in the market while 38% cooperated with market
leaders. The other 2% adopted a hybrid strategy. A fifth of the start-ups
pioneered or became early adopters of software-only technologies, word-spotting
or grammar-free recognition — the three innovations the authors focused on. All
started out with one innovation, but some later incorporated more than one. For
example, Voice Control Systems began with word-spotting and added a
software-only approach several years later, the paper says.
The researchers find
that early adopters of disruptive technology were much less likely to cooperate
with incumbents, with only 21% doing so, compared with 36% of start-ups whose
businesses were based on existing technologies. But early adopters or
disruptors were more likely to switch from a competitive to a cooperative
strategy: 12.7% did so, versus 7.8% for non-disruptors. (The switch from a
cooperative to a competitive strategy was not meaningfully different between
the two groups.)
From
Underdog to Top Performer
But the path to
success for a disrupting technology is not without bumps. Indeed, the authors
write that disruptive technologies initially underperform existing technologies
before eventually outperforming them as the innovation improves. For example,
when the 5.25-inch disk drive came out, it had lower capacity, slower access
speed and was more expensive than existing eight-inch disk drives. This
underperformance led minicomputer manufacturers at first to reject it. But as
the smaller disk drive improved, it came to dominate the market.
The same goes for the
speech recognition industry. Hsu, Marx and Gans measured the performance of ASR
companies using vocabulary size instead of accuracy because everyone claims to
be similarly accurate. By the authors’ measure, the more words and phrases an
ASR technology can identify, the better it performed. The study found out that
start-ups with potentially disruptive technology had half the initial
vocabulary size of incumbents and thus underperformed. And just like in the disk-drive
market, market leaders at first rejected it.
However, a truly
disruptive innovation later gains ground, they note. The authors analyzed the
financial performance of disruptor ASR start-ups and compared them to rivals
that used the prevailing technology. The new firms started out with
comparatively low sales per employee but eventually would surpass their
competitors. “Thus, it appears that disruptive ASR technologies, though they
initially trade off performance, indeed improve over time,” the researchers
write.
The takeaway for
disruptive start-ups is to factor in the possibility early on that their
strategy could change. But not many entrepreneurs think this way, Marx notes.
Too often, their idea of strategic change means building multiple versions of
their product to see which ones people will like the most. Some firms do end up
switching to a cooperative strategy, but only after they “stumble onto it,” he
says.
Advice
for Incumbents
Hsu adds that the
paper deviates from the principles of the “lean start-up” movement, which
advocates that fledging firms continually get feedback from consumers as they
develop products or services. Instead, the authors recognize that a disruptive
innovation might not get much public support at first because it is so new.
“It’s compounded when you are trying to do something radical,” he says. Thus,
the start-up should earn credibility by commercializing its technology. “[By
doing so] you have told the marketplace and the incumbents, ‘This is not just
us talking, this thing is real,’” Hsu notes. “Now, everyone comes to the
table.”
From the incumbents’
point of view, there are legitimate reasons for rejecting a new technology. If
it underperforms, there is no business case for adopting it unless there is
improvement. Moreover, if the innovation is truly different, then the incumbent
would have to overhaul its systems and operations to adopt it. That means high
integration costs — and another reason to be wary of new innovation. But market
leaders would be willing to make changes if a new technology proves to be truly
disruptive and the long-term benefits are worth it, the researchers say.
To be sure, incumbents
could be tempted to set up their own internal innovation labs to develop
disruptive technologies themselves. But it is tough to spot a winner: “It’s
actually a hard thing to do,” Marx notes. “You sort of have to predict the
future. What we’re saying is, you don’t have to predict the future. There may be 30 start-ups out there
trying different disruptive or potentially disruptive technologies. So, you can
take this wait-and-see approach Twitter ” until the market shakes
out, then license or acquire the winning technology.
http://knowledge.wharton.upenn.edu/article/why-disruptive-innovation-doesnt-always-hurt-market-leaders/
No comments:
Post a Comment