Disruption, radical and incremental innovation

I am continuing with my sprint to write down the ideas and concepts that I am explaining regularly at different events and meetings (The earlier posts are all available on www.cunningham.org.za). The ideas about the fourth industrial revolution being disruptive are now discussed and repeated even by people who have very little understanding of technology or innovation, nevermind management (see post “what is the difference between 4IR and Industrie 4.0?”). There are subtle yet important differences between disruptive, radical and incremental innovation. These differences matter for policymakers, entrepreneurs and economic development practitioners.

In business management literature a distinction is often made between incremental, radical and disruptive innovation[1]. Incremental innovation introduces relatively minor changes to an existing product, process or technology, while radical innovation is based on a different set of engineering, scientific and business principles and often opens up new markets and applications. While incremental improvements may be small, the cumulative effects of an ongoing series of incremental improvements could be huge.

Incremental innovation exploits the potential of an established design and often reinforces the dominance of established firms. It mainly originates from within the sub-sector or system, and the informed or connected firms are often aware of the changing trends[2]. While it hardly requires new science, incremental innovation draws on incredible skills, deductive reasoning and experience, and over time can have significant cumulative economic consequences. Most businesspeople hardly recognise incremental improvement as innovation, although when prompted, many are able to identify several incremental improvements to their products, processes and organisational arrangements. Incremental innovations are chosen by the market if they offer savings, or add more value to what already exists. The market chooses an improved idea if it exceeds their existing expectations.

Radical innovations occur when new technologies are introduced into an existing market or technological domain. In the evolutionary technological change process, a radical innovation can start one of the change cycles (start a fluid phase), or it can be a blip in the performance of the technology during the amplification or selection phases.

Christensen (2000) argues that both incremental and radical innovations based on a specific technological paradigm often benefit incumbent firms, and describes them as sustainable innovations (for incumbent firms).  Incumbents and markets can recognise the benefits of the radical innovation and quickly adapt to it, or integrate it into their operations.

Disruptive innovation is different in that it often favours the new entrants (called the attackers by Christensen), who often combine different product, process and marketing innovation with a different business model. This part of the business model is really important.  Disruptive innovations are hardly about the product/service or the process, it is really about a different business model. These business model innovation often originate in niche markets where an innovator works very closely with niche market players to refine an idea in an iterative process before it is taken up by other markets. Incumbents have a really hard time to defend against this because they can copy some of the products, service or process features, but they often cannot copy the culture of the attacker.

Christensen et al. (2015) explains that disruptors often challenge incumbent firms with new business models, and attack incumbents by targeting marginal or even low-end markets[3]. Firms with resources and adaptive management systems are often able to exit these markets or to shift into new (often higher-value) market segments. While incumbents may be able to adapt their products and processes, it is often a matter of time before newer business models of the attackers outperform their traditional arrangements.

There are examples of famous and powerful firms going under or losing market dominance because they were disrupted by a new technological paradigm introduced by actors from another sector. Recent research comparing the US Fortune 500 companies in 1955 and 2017 shows that only 60 firms were in both lists (Perry, 2017). It is already hard enough for firms to stay abreast of technological changes and innovations within their sector and in related industries, therefore many established firms are often blindsided by technologies developed in other sectors that may in future disrupt them[4].

Some remarks about these ideas:

For most companies, radical and incremental innovations occur on a frequent basis. It may require rethinking a product, making changes to a process, finding new material suppliers or changing prices. While a competitor launching a new product, or announcing a change in pricing may disrupt your plans or cause a lot of stress, this is not what is meant with disruption. Disruption means that you cannot proceed in the same way. The markets you have served in the past now have new criterial which they use to select between alternatives and you have a weaker offer.

Disruptive innovations are disruptive because they require a rethink or demand a change of the core business model. Clients don’t want a price cut or an added feature. Some countries (like Singapore) promote disruptive technologies into their economies because it leads to increased innovation and much higher awareness by incumbents of global technological changes. Other countries try to defend against disruptive technologies, but in a way, they may only be postponing the inevitable.  What is clear to me is that companies cannot afford to only look for technological solutions within their industry or sector, but that they have to scan much broader. For an incumbent company to respond to a big disruption may require more business model innovation. For instance, our South African manufacturers have lost many competitive battles with manufacturers from Asia. Yet, very few manufacturers innovated in the business models by opening their own factories in Asia to learn from those markets.

Which brings me to a final remark. To get more companies hyper-sensitive to technological change, policymakers have to find ways to promote competition. It is only when small improvements make a big difference that incumbents would be willing to search beyond their current sectors for alternatives that offer even a small advantage.

Notes:

This is the 4th post that draws from the research and advisory work I am currently busy with to strengthen South Africa’s technological capability to detect and better respond to discontinuous technological change. The citation information for this post is at the bottom of this post, and a link to the research report that I have copied this from is here.

[1] While this literature is increasingly popular since the publications of Clayton Christensen, it is not new. Schumpeter (1934) and Freeman and Soete (1997), among others, already wrote about this much earlier.

[2] Several trends, such as the increasingly important knowledge-intensive business service sector, or new ways of sharing and protecting knowledge, play an important role in providing firms with access to new or relevant information.

[3] Christensen, Raynor and McDonald (2015) argue that from a disruptive theory perspective Uber is not seen as disruptive, as many taxis have been using apps for a long time, and Uber did not really enter the market by starting in underserved markets. However, due to the violent protests by traditional taxi owners, Uber is often described as being disruptive.

[4] An ironic example of a company that failed to recognise one of its own innovations as disruptive is Kodak. Management was so set on its film-based business and technology model that it chose to ignore its own market research that showed the disruptive potential of digital technology that one of their engineers developed in 1975. Not only did digital technology disrupt Kodak, it created many completely new industries, markets and applications.

 

Sources:

CHRISTENSEN, C.M. 2000.  The innovator’s dilemma: when new technologies cause great firms to fail. 1st Ed. New York, NY: HarperBusiness.

CHRISTENSEN, C.M., RAYNOR, M.E. and MCDONALD, R. 2015.  What Is Disruptive Innovation? Harvard Business Review, December 2015.

FREEMAN, C. and SOETE, L. 1997.  The Economics of Industrial Innovation. 3rd. London: Pinter.

PERRY, M. 2017. Fortune 500 firms 1955-v-2017.:   http://www.aei.org/

Citation for this text:

(TIPS, 2018:21-22)

TIPS. 2018. Framing the concepts that underpin discontinuous technological change, technological capability and absorptive capacity. Eds, Levin, Saul and Cunningham, Shawn.  1/4, Pretoria: Trade and Industry Policy Strategy (TIPS) and behalf of the Department of Trade and Industry, South Africa.   www.tips.org.za DOWNLOAD

Why are digital technologies absorbed so rapidly in many developing countries?

Globalisation-weary politicians and advocates of local capability developments and geeks or technology promoters have one theme in common: technologies developed in the First World not only disrupt domestic companies, but upset whole sociotechnical regimes in developing countries.  While the benefits of digital technologies are not disputed, what is disputed is how to solve this problem.  This is where the two groups of lobbyists part ways.

One argument is that if local companies had some protection, better incentives, more support and everything else on their wish lists, then local entrepreneurs would be able to come up with similar digital technologies. How long this is likely to take and whether it will succeed is usually not discussed to any real extent.

The other argument is that disruption is good, and that the services of, say, Uber or Amazon disrupt local monopolies and save consumers millions while allowing “new” entrants into the markets. What happens when these global companies lose interest and withdraw suddenly, or when all local capacity to compete has been eroded is also not discussed.

I will steer clear of these and other flashpoints. For me the key differentiator that counts in favour of global digital technologies is that they create MARKET platforms. By market, I don’t just mean a space where sellers and buyers can meet. These platform technologies invest heavily in overcoming many market and institutional failures. For instance:

  • Many digital marketplaces carefully create trust systems where buyers and sellers can check each other out.
  • Most digital marketplaces give you lots of technical information, reviews from other users, and links to comparable products in higher and lower price brackets.
  • Most digital marketplaces coordinate logistics, customs, invoicing, tracking and customer support.
  • They accept numerous currencies and numerous payment methods.
  • Users can switch seamlessly between different platforms (add something to the shopping basket on your phone, complete the order on your computer).

This means that these global platforms overcome many of the market, coordination and government failures that keep developing country entrepreneurs so busy. Even though I have shifted my understanding of how economies evolve beyond market failures, I still see them everywhere. Maybe they are not as quantifiable as many economic theorists would make them sound, but their archetypes and characteristics still show up. I have made a note to explore these market failure archetypes in a next post. (other posts on 3D printing, IoT; tech push fallacy article over here)

The most disruptive digital technologies can be described as platform technologies, which means that they create marketplaces with their own institutions, rules, laws, recourse systems, fair play policies and competition between providers. These platforms crowd in both sellers and buyers. That is what makes them so easy to use, for both buyers and sellers. They personalise the options for market players. They integrate service providers and even regulatory requirements. So even if a better local digital technology may be available, consumers will go where there are more products, and sellers will go where there are more buyers. These platforms often displace or disrupt previous widespread platforms. The mobile phone has in many cases displaced several platforms, including newspapers. 

The only way developing countries can respond is to make sure that they create the right market-supporting institutions. The challenge is that while global platforms often start in one or two markets and then scale up, developing country governments have whole economies that are in need of interconnected and interdependent platforms. The challenge is to figure out which platforms would be the best learning places for rapid learning, adaptation and dissemination.

If you would like to keep informed of my progress on this topic, you can sign up in the box on the left of this post (or here) to receive a personal newsletter from me. I promise not to clog your inbox with junk mail. The sign-up form will help me to figure out what topics you are more interested in.

The difference between the terms Fourth Industrial Revolution and Industrie 4.0 matters

There are two terms that many of my clients use interchangeably, which really bothers me. The first is the term “the Fourth Industrial Revolution”, and the other is “Industrie 4.0”. What bothers me is that these two labels represent two concepts that only partially overlap. Sometimes they are conjoined with an “and” in a sweeping statement to emphasise just how pervasive and disruptive a specific technology is, and how utterly unprepared everybody is.

The Fourth Industrial Revolution is a concept that was popularised by Klaus Schwab and the World Economic Forum (although the name goes back almost 50 years). Many international consultancies have also developed instruments and advisory services around this theme (I admire their animations and graphics). The Fourth Industrial Revolution is a banner over many new technologies. Most of the technologies that are highlighted by the WEF are not new, e.g. 3D printing, sensors and artificial intelligence, whereas the narrative of the Fourth Industrial Revolution highlights the effects of the convergence of several scientific and technological domains (take a look at this link to read more about some of the technologies). Due to the reach of digital technologies, smartphones and global software platforms, new applications of technology are spreading very fast. It almost seems as though the rapidity of technological development is increasing, and that the depth and breadth of convergence and its impact on industries, firms, governments and whole societies is potentially disruptive. Hence the “revolution” part.

I must add that not everybody is convinced of this revolution. Some argue that we are still in the third revolution, albeit in a second or third extension. Others argue that we are already undergoing the fifth or sixth revolution. Then one might also argue that revolutions are usually not predictable, or that revolutions go hand-in-hand with massive social, political and institutional upheavals, which we have not yet really seen. Others, like Carlota Perez argue that these revolutions are unavoidable, and that governments have a key role to play in preparing for societies to cope with these wave of change. In fact, we have not seen massive employment displacement in Europe attributed to massive technological disruption, despite all the machines, robots and drones. I for one am also not convinced that the technologies and their convergence are revolutionary. What I find really eyebrow-raising is the immense interest of capital and political elites in technology, and all the hype around these technologies. I must also confess that I am impressed by how well the applications, use cases and adaptation paths of many of these technologies are described on the web. For instance, take a look at the Blockchain use cases on the WEF site here.

The second label is Industrie 4.0. It is usually spelled this way because the concept originated in Germany as the rallying cry of their new “High-Tech Strategy” which has emerged over the last ten years. The German high-tech strategy has a dual focus. The first and often overlooked emphasis is on continuing the incremental and export-oriented technological development that German manufacturers are known for. It builds on Germany’s current excellence and ability to innovate, especially at the level of product and process technologies.

The second and more frequently discussed drive of the German Industrie 4.0 strategy is all about digitalisation, knowledge intensification, trust building, dialogue and networking (some topical areas are described here). Digitalisation is not only about connecting things to the internet, but also about manufacturers being smart about integrating their suppliers, clients and internal processes. Improving the competitiveness of German manufacturing and making the society, workplaces and communities healthier and happier in the future are recurring themes. So are the environment, the circular economy and the importance of investing in longer-term technological platform and capability development. What only a few people in Germany would acknowledge is that this high-tech strategy was a response to the realisation that Germany was not as digitally savvy as one would have expected (to see the Tuft Universities renowned digital performance assessment of countries head over here). The Industrie 4.0 strategy in Germany (and now also in many other countries) is already quite mature, decentralised and, dare I say, pervasive. Also, Germany is very critical of its own performance. For instance, the Federal Ministry for Economic Affairs and Energy (BMWi), publishes an annual assessment (only in Germany) of the digital performance of Germany on their website at www.bmwi.de).

 

In Germany, and increasingly in other EU countries, it seems that every university, technology centre, industry association and consultancy is involved in cluster activities, Industrie 4.0 readiness assessments, technology demonstration, research and so on (look here to see a list of “testbeds” in Germany). The snowball is gaining momentum. Different ministries and spheres of government are coordinating around clearly described projects that are managed transparently and concurrently (look at the Platform Industrie 4.0 website to see the number and composition of initiatives). Many initiatives, such as industry mobilisation, making constructive policy inputs, developing standards for data integration, compatibility, etc. are being driven by private sector organisations, private sector representatives, science and engineering bodies or associations (Here is a link to the National Academy of Science and Engineering website).  Manufacturers in Germany are at this moment spoiled for choice when it comes to choosing which technology service provider to use to solve a problem or test a new solution (link to use cases, link to tech support centres). Both public and private service providers are striving to be relevant, at the cutting edge and valuable to the private sector.

Now this second label, Industrie 4.0, is something that the developing world should take note of. This industrial strategy is about much more than adding digital capability to existing products and processes. It is about a modern digital business model which is smart, has strong feedback loops within the organisation and beyond, and reaches out to suppliers, supporting institutions, clients and devices ( go here to assess your readiness and to see how wide this assessment is). It is not only a public strategy, but has now become a private sector strategy too. It is about deep integration, collaboration on long-term technology and capability development, co-funding, skills development and standards, and is globally focused.

I believe that this second label has the potential to disrupt the developing world far more than the Fourth Industrial Revolution notion can. If we do not respond, our developing country manufacturers may be left behind.

This is not about tweaking existing products, adding sensors or tracking data. It is about improving the ability of organisations to make sense of change, future possibilities and their performance within this fluid context. It means that those local companies that could be globally competitive would be under pressure if they were not able to tap into or track this gaining momentum in Europe and elsewhere.

Decision makers in business and government in developing countries often underestimate the funding and effort that go into building trust, collaboration and joint problem solving or policy making in Europe and beyond. Both Industrie 4.0 and the Fourth Industrial Revolution are not about products or process technologies, they are about new business models and new ways of collaborating, with the long-term intent of laying new foundations for the future.

If you are a supplier to European manufacturers, be alert, be proactive! Get involved.
If you are competing with European products and businesses, be awake!

This is not a project for your design team, your IT department or functional managers. This is a strategic re-think of your whole organisation and how it develops new capabilities, how it measures and interprets data and how it works with other organisations. This is not a quick fix, this requires a longer-term holistic re-think of your technological capability, of the new applications that may be possible and of new forms of collaboration, co-competition and integration all enabled by digital technologies.

So why do I argue we need to understand these terms? I see the Industrie 4.0 movement as a strategic and intentional approach to shaping the future. While the Fourth Industrial Revolution narrative of the WEF and others helps us to understand what has already changed. It helps us to respond better, while the other urges us to actively get involved in shaping the future. I know this difference is subtle, and I know that the WEF is also trying to shape the future, but the popular narrative about the revolution is unfortunately often about technologies and how we respond to them.