Innovation is a concept created in the last century, intending to explain the astonishing technological advances that propelled a new kind of economy based on technology and market adaptation to consumers’ needs.  Joseph Schumpeter (1942),  introduced the concept of Innovation Economy in his book Capitalism, Socialism and Democracy, where the author affirmed that the core elements of economic development are institutions, businessmen and technology, and explained that capitalism could only be understood to be an evolutionary process of constant innovation and creative destruction.

Incremental Innovation and Disruptive Innovation are the two main ways to incorporate new technologies, processes or products to the market; The aim of this paper is to analyze the concept of Disruptive Innovation and how the current business could respond to the challenge.

Disruptive Innovation

Innovation in business is a relatively new concept and consequently has many definitions, for example, in his influential book Innovation and Entrepreneurship, Practice and Principles,  Peter F. Drucker (1985), defined Innovation as “the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or service. It is capable of being presented as a discipline, capable of being learned, capable of being practiced”  (p. 16); meanwhile for Tidd and Bessant (2013), Innovation is the process of turning ideas into reality and capturing value for them (p. 21), and for the UK Department of Trade and Industry (2014), Innovation is the successful exploitation of new ideas. Schumpeter (2016), which could be considered the founder of innovation theory in the economy, characterize Innovation as the economic consequences of technological change, using new combinations of different productive forces to solve business problems.

All the authors coincide that innovation includes new ideas to improve products or services with the objective of commercialization; according to Henderson (1990) Innovation could be classified in Modular Innovation, Incremental Innovation, Architectural Innovation, and Radical Innovation.

Modular innovation is the entire reshape of the core components, leaving unchanged ties between components;  Incremental innovation Implement modifications in core elements efficiency; the word renovation would describe this type of innovation more specifically; Architectural transformation will change the nature of the relationships between the essential components while improving the core conceptual design. Radical innovation creates a new definition, a shift in the concept.

Other researchers have divided the innovation process by Incremental Innovation, that centers on savings or enhancements of new products or services and Disruptive Innovation that have as a goal to produce a radical change, expanding or even creating new markets or sectors by introducing new and revolutionary products or services.

Incremental innovation is the next generation of a product or service, reflect a clear shift in the current solution’s technology or product or business model, on Tidd & Bessant (2013) words, Incremental innovation is “doing what we do, but better” (p.30); Incremental innovation is referred to minor changes to add and maintain quality to existing products, services, and processes, adding a new feature to the existing product or creating a line extension, depending on existing technology and a current business model and is therefore low risk.

Incremental innovation can help a business remain competitive and maintain stable income streams.  According to Mukersie (2011) the key to businesses success by Incremental Innovation is to consider the empty spaces on the market, the basic customer needs and how the product or service can be tailored to better meet these needs.

In comparison, Disruptive Innovation is defined by its author, Clayton Christensen (1997), as the process by which a product or service takes root at the bottom of a market in simple applications and then steadily advances the market and eventually replaces established competitors. Disruptive innovation is a specific type of strategic development, that produce new services ort products paradigms, in conflict with the current business models.

Disruption arose when a new entrant’s initially inferior innovation gradually improved to meet the needs of the mass market, and executives had to take care of new technologies that initially did not meet their traditional clients ‘ needs.

As stated by Charittou (2003), Disruptive Innovation share three core characteristics: First, compared to conventional approaches, a different product or service attributes are emphasized; Second, disruptive strategic innovations tend to start up as small or low-margin companies. Innovations are limited and not desirable until they begin to grow; Third, Disruptive Innovations growing up to capture a large share of the established market, attracting the established business attention and forcing them to start a response strategy.

Responses to Disruptive Innovation

Business literature frequently recommend managers to make greater efforts to the pursuit  of radical innovations; successful revolutionary changes have significantly affected the destiny of  many companies and  businesses cannot allow themselves to ignore the role of innovation in improving and promoting the income and cash flows of effective disruptive innovation; however, Disruptive innovations are not inherently superior to traditional competition methods and are not always intended to conquer the market. Hurrying to accept and adopt them can be harmful to the existing companies when other approaches like avoiding innovation could make more sense.

Some researchers suggest that incumbents can leverage disruptive innovation by establishing a differentiated business unit in charge to test the new product or service (Christensen and Raynor, 2003). Other authors, as Charittou & Markides (2003, p.19), observed that disruptive model innovations “create different kinds of markets, pose radically different challenges for established firms, and have radically different implications for managers.”

According to Habatay & Homen (2014),  the response of incumbents to confront the competence of disrupting innovation must be the Acquisition or Organizational  Separation.   The Acquisition will help the incumbent business if just one company is threatening the incumbent,  leveraging previous expertise by naming internal managers will improve the effectiveness and if there a double threat acquisition of new disruptive technology will provide the incumbent with the management structure and industry competencies,  essential for the creation of a disruptive business model.

Organizational Separation refers to create a new and differentiated business-oriented to developing the Disrupting Innovation without the interference of the old business model and will be the best option when the Innovation displaces the old business model for a new one. However, the authors indicated that these strategies are not mutually exclusive and must be chosen depending on the nature of the threat.

Disruptive innovations could differ in nature and objectives; therefore, the strategy to response must be variable too. Disruptive business models, technological and new business models may have similarly disruptive effects on existing companies, but they may develop different markets and require a different approach to adapt to them.(Markides, 2006)

In their recognized article, Responses to Disruptive Strategic Innovation, Charittou, C, & Markides (2013) proposed five types of business responses to standing up to disruptive innovation:

Response One: Focus on and Invest in Traditional Business, an existing company may not automatically need to adopt the new technology. It can react by making its conventional approach or product even more attractive and successful.

Response Two: Ignore the Innovation; since the new paradigm is targeted to different customers, making different quality proposals and needing different skills and competences, the existing companies do not see innovation as a threat; the incumbent company continues to doing business as usual as if there were no disturbances.

Response Three: Attack Back,  disrupt the disruption developing a third model, hitting the innovators by highlighting different product or services characteristics.

Response Four: Adopt the Innovation but keeping the old model alive, the decision should be based on a thorough cost-benefit analysis and helps the business to keep the traditional market meanwhile explore new products or services.

Response Five: Embrace the Innovation Completely and Scale It Up.  Under this model, the company transforms radically, including the change of name, executives and processes, with the only objective to adopt the innovation completely. Adopting is a risky movement and the most difficult to incorporate and to accept for the incumbent managers.

Which answer approach is best suited to a specific incumbent depends on several aspects: The role of the company in the market, the competencies it has, the degree to which the change is that and what effect it is having on the incumbent sector. (Markides, 2006). How businesses respond depends on motivation and ability considerations. Motivation is associated to variables as to the pace at which innovation develops and is detrimental to the current business model. Ability is related to the company’s asset base of expertise, time and resources available. Skills relate to experience and knowledge in making substantial tactical adjustments. Resources are often economically associated and somehow connected to time because assets are often needed to create time for plans to create new products, services or  processes.

Conclusion

            Technology can bring benefits to all economic activities, by introducing new ventures; by producing different products of distinct quality and by helping to reduce the cost of production circles, innovations can also catalyze processes and save time and money; however, does not

exist a perfect recipe to confront disrupting innovation.

            Proven firms that successfully join new markets are developing radically different business models, using the same rationale that disruptors use to strike them, as stated by Markides & Bauman (2010) the disruptors succeeded in targeting the main market because they used a revolutionary business model. Since existing companies want to have the same effect, they also need to use the disruptive business model to enter the market that the disruptive business model has created.

            Focus on and Invest in the Traditional Business, Ignore the Innovation, Attack Back, and Adopt the Innovation but keeping the old model alive,  are the other four strategies to adopt to successfully cope with the Disruptive Innovation; executives and managers have the challenge to measure the Motivation and Ability of their companies, in order to implement the proper model.

References

Cakici, M. (March 1, 2016). The Prophet of Innovation: Joseph Schumpeter 10.13140/RG.2.2.11512.65285

Charittou, C, & Markides, C. (January 15, 2003) Responses to Disruptive Strategic Innovation. MITSloan Management Review. 55-63.

Christensen, C. M. (1997). The innovator’s dilemma: When new technologies cause great firms to fail. Harvard Business School Press, Boston, Mass.

Drucker, P. (1985). Innovation and Entrepreneurship. Harper & Row, New York. 

Habtay, S. & Holmen, M. (2014) Incumbents’ responses to disruptive business model

             innovation: the moderating role of technology vs. market-driven innovation. Int. J. Entrepreneurship and Innovation Management, Vol. 18, No. 4, 289-309

Henderson, R. Architectural Innovation: The Reconfiguration of Existing Product Technologies and the Failure of Established Firms. Administrative Science Quarterly. Vol. 35, No. 1, Special Issue: Technology, Organizations, and Innovation (March 1990), pp. 9-30

Markides, C. (2006). Disruptive Innovation: In Need of Better Theory. The Journal of Product Innovation Management, pp. 19-25.

Merkides, C. & Oyon, D. (2010). What to do Against Disruptive Business Models. Mitsloan Management Review, Vol. 51 No. 4.

Shumpeter, J. (1942). Capitalism, Socialism, and Democracy. New York; London: Harper & Brothers Tidd, J. & Bessant, J. (2013). Managing Innovation, Integrating Technological, Market, and Organizational Change. Wiley, Trento