This study will be a systematic literature review in the business administration discipline. It will provide an answer to the research question with the use of existing academic literature.

How leading companies can prevent from being overthrown by disruptive innovations

By Jorn Oosterveld [s1877100]

Supervisor: dr. W.W.M.E. Schoenmakers

Abstract

This paper explores how leading companies can prevent themselves from being overthrown by disruptive innovations. The study is a systematic literature review. It conducts an overview on how the companies leading in their market can defend themselves against disruptive innovations. It analyses different theories on how those leading companies can stay on top and be disruptive themselves. It looks at why companies stay focused on the higher tiers of the market while they are aware of the potential threat from lower tiers. This study showed how leading companies can anticipate the future needs of their customers and how to attract non-customers. Furthermore it analyses how the leading companies can use small companies and their strategy advantages to their own benefit.

Keywords: Disruptive innovations, non-customers, customers’ future needs, leading companies

Study overview

This study will be a systematic literature review in the business administration discipline. It will provide an answer to the research question with the use of existing academic literature.

This study will start with an introduction where the problem is defined and the research question is conducted. The reasoning behind the subquestions is what follows. After this the conclusion comes with the answer to the main research question. Then the discussion follows where the author shines his light on the theories, followed by the implications and limitations of this study. At the end there is an executive summary.

Acknowledgement

I would like to express my gratitude to the supervisor dr. W.W.M.E. Schoenmakers and co-

assesor E.P.M. Croonen for their guidance in conducting this study.

I

Introduction

In today’s world the technologies and innovations are changing faster than ever before. One after the other new innovations enters the market and form a continuously growing threat for leading companies. The most occurring reason for leading companies to fail is when technologies or markets change, with Kodak, Blockbuster and Polaroid as famous examples who all failed to cope with the changing environments (Bower & Christensen. 1995; Lucas &

Goh, 2009; Omansky, 2012; Danneels, 2004).

There are different theories why the large companies fail to cope with change and fail to stay on top. Christensen & Overdorf (2000) state that large companies fail to innovate because they are designed to be bad at innovation (Christensen & Overdorf. 2000). They are designed to create operational efficiency and develop sustaining innovations. They focus on improving existing products over and over again to stay ahead of the competition (Christensen & Overdorf. 2000; Singer et al., 2009). But by focusing too much on improving existing products, they forget to invest in innovation. This is known as the exploitation trap (Sirén, Kohtamäki, & Kuckertz, 2012).

If a company wants to excel at operational efficiency it must be bureaucratic and hierarchical. This makes them inflexible and leaves minimum room for innovation and agility (Hill & Rothaermel, 2003).

Markides & Geroski (2004) state that large companies fail to create those innovations because they are designed for “consolidating” an innovation: make it operationally efficient so it can become a mainstream success. While the small and agile companies are better in

“colonizing”: discovering a product or service idea, test it, and place it in a market niche. And while large companies are designed to be operational efficient, it troubles colonizing for them (Markides & Geroski, 2004).

A theory that is in line with the above is the theory from Schumpeter (1942). It states

that the opening of new markets together with organizational development illustrate the

process of industrial mutation that continuously revolutionizes the economic structure from

within, continuously destroying the old one and continuously creating a new one. This

process is called creative destruction. Creative destruction occurs when something old is

replaced by something new, when leading companies are replaced by new companies

(Schumpeter, 1942). According to Schumpeter (1942) innovations cause market disruption,

this gives room for creative destruction and new firms to rise and dominate the market

(Schumpeter, 1942; Spencer & Kirchoff, 2006).

Markides & Geroski (2004) state that the companies that once lead the market will be replaced by new firms through what they call radical innovations. They define radical innovations as innovations that dramatically influence the consumer’s habits and behaviors together with the established firm competencies and assets. (Markides & Geroski, 2004).

Discontinuous and radical innovations can been seen as synonyms (Veryzer, 1998).

Therefore in the rest of this study only the term discontinuous innovations will be used to refer to those innovations. These innovations introduce new value propositions (Veryzer, 1998). There is strong evidence that when discontinuous innovations are successful they have opportunities to weaken the position of incumbent competitors (Birkinshaw, Bessant, &

Delbridge, 2007; Christensen, 2001; M.L. Tushman & O’Reilly III, 1996; Reid & de Brentani, 2004).

More interesting is the threat from below, the threat from disruptive innovations

(Christensen, 1997). It seems inevitable that leading firms are getting displaced by disruptive

innovations (Christensen, 1997; Thomond, Herzberg and Lettice. 2003). These innovations

do not feel as a threat at first by incumbents, but eventually slays those very same

incumbents (Christensen, 1997). This phenomenon makes that the focus of this study is on

disruptive innovations. Disruptive innovations are seen as particular type of discontinuous

innovations because they both represent a new customer offering, but disruptive innovations

have their commercial footings in simple or new market niches (Veryzer, 1998; Thomond,

Herzberg and Lettice. 2003). They enter at the lower tiers of the existing markets (low-end

disruptions) or create new markets (new-market disruptions) and work their way up,

displacing the leading incumbents (Christensen & Raynor, 2013; Thomond, Herzberg and

Lettice. 2003). The products based on disruptive innovations first underperform compared to

their high quality counterparts and do not offer what the customers in established markets

want. But there is a group of customers that does not want the highest quality for the highest

price what leading companies are offering (Christensen, 1997). Products based on disruptive

innovations offer less and therefore cost less or they make acquiring the product more

convenient. This makes it accessible for the group of customers at the bottom of the market,

which does not care for the highest quality, the overshot customer, and the non-customer,

people that are locked out of the market, or acquire the products in an inconvenient way

(Christensen, 1997; Christensen, Anthony, Roth, 2013). The products are placed in lower

tiers or emerging markets unimportant to the mainstream, so leading companies do not see

The phenomena of leading companies failing due to the introduction of disruptive innovations is creative destruction at work (Schumpeter, 1942; Spencer & Kirchoff, 2006). This process is illustrated in the following image:

(Christensen, 1997)

As you can see the technology (and product) gets improved too much through sustaining innovations and over time it moves further away from the needs of the (high-end) customers. The gap between the technology/product and the needs of the customer becomes wider over time. Meanwhile the disruptive technology starts at the lower tiers of the market, performing less than the original sustaining technology but with certain aspects that gets valued. In time the performance of this technology gets improved and climbs towards the needs of the low end customers and later the high end customers. Doing so, it conquers more and more customers in the market and eventually also the high-end customers from the original technology (Christensen, 1997).

In conclusion, disruptive innovations form a threat for leading companies so they need to find a way to deal with this threat (Bower & Christensen, 1995; Christensen, 1997;

Thomond, Herzberg and Lettice, 2003; Veryzer, 1998). Therefore the following research question is conducted:

How can the large, leading companies prevent from being overthrown by disruptive innovations?

II

Subquestions

A threat for the leading companies comes from the disruptive innovations starting in market niches and the lower tiers of the market (Veryzer, 1998; Christensen, 1997).

Apparently there are reasons why leading companies stay focused on the higher tiers while you can assume they are aware of the existence of disruptive technologies. So there must be reasons why leading firms choose to or are not able to defend themselves from disruptive innovations. The question arises what those reasons are and what they can do about it.

Hence:

Subquestion 1 What drives leading companies to keep on focusing on the higher tiers of the

market?

Leading companies are able to invest in the right technologies to retain their customers, but often fail to invest in the technologies that will let them meet their customers’

future needs (Bower & Christensen, 1995). Because of the fact companies are improving their products over and over, their products become overqualified for a great part of their customers (Christensen, 1997). This makes those customers vulnerable for alternatives, the disruptive innovation (Christensen, 1997; Anthony, Sinfield, Johnson, Altman, 2008).

One of the powers of disruptive innovations is that it can enlarge a company’s market by opening the doors for customers who historically faced a constraint to consume their products, the non-customer (Anthony et al., 2008). There are four kinds of constraints for a potential customer. There are skill-related constraints where a customer cannot consume the product because it lacks the skills to do so, wealth-related constraints where a customer cannot consume because of the lack of financial resources, access-related constraints where a customer can only consume in specific area’s and time-related constraints where a customer does not consume because it is too time consuming (Anthony et al., 2008).

Connecting with non-customers is one of the best ways to make a disruptive innovation an opportunity instead of a threat (Anthony et al., 2008).

So the leading companies need to find a way to keep current customers and to

Subquestion 2: How can the leading companies meet both the current and future needs of

their customers and their non-customers?

Small and large companies perform differently with different types of innovations. New entrants are more likely to innovate and create new products while the incumbents are more likely to use sustaining innovations to become more operational efficient (Christensen, 1997;

Spencer & Kirchoff, 2006). The leading incumbents struggle when technologies and markets change (Bower & Christensen, 1995). They are characterized by its bureaucratic organization, which discourages innovative initiatives of employees (Singer et al., 2009).

Because of their bureaucratic design they tend to be slow and less agile. Due to their tight internal control large companies might kill all entrepreneurial activities (Nohria & Gulati, 1996). On the contrary, small companies have the reputation to be more agile, less bureaucratic and therefore more responsive (Acs & Audretsch, 1990; Kassicieh, Walsh, Cummings, McWhorter, Romig, & Williams, 2002). These characteristics are more successful when having to deal with changing technologies and disruptive innovations (Acs &

Audretsch, 1990; Nohria & Gulati, 1996; Christensen, 1997; Christensen & Overdorf, 2000).

Therefore smaller companies are more capable of pursuing emerging markets (Christensen

& Overdorf, 2000). So small companies tend to hold the advantages when dealing with disruptive innovations. And while large companies need, for their operational efficiency, to be tight in control and therefore bureaucratic, using small companies can create an advantage.

Hence:

Subquestion 3: How can large companies use small companies and/or their strategies to

their advantage?

The best way for a leading company to deal with the threat of disruptive innovations is to be disruptive themselves (Anthony et al., 2008; Bower & Christensen,1995; Christensen, 1997;

Christensen & Overdorf, 2000; Thomond, Herzberg & Lettice, 2003). However that does not

go easily. Leading companies need to identify opportunities for disruptive innovations while

these are the hardest to identify (Bower & Christensen, 1995; Gilbert & Bower, 2002). So

what can a company do in order to spot and identify the opportunities for disruptive

innovations? Once identified the company needs to develop disruptive innovations. In order

to create disruptive innovations there are several barriers to be overcome. What are these

barriers and how can leading companies overcome them. Therefore subquestion 4:

Subquestion 4: How can leading companies spot opportunities for disruptive innovations

and overcome their barriers?

III

Methodology

This study is a systematic literature review (Keele, 2007; Smith, Devane, Begley, & Clarke, 2011). It is built upon existing academic literature. It analyzes different theories regarding disruptive innovations, why companies keep focusing on higher tiers of the market, how companies can meet current and future needs of their customers next to attracting non- customers and how leading incumbents can use small companies and their strategies. Upon those theories, conclusions and recommendations are made and it is the input to answering the research question. The search is made as wide as possible in order to maximize the odds of capturing relevant data. In order to retrieve relevant academic literature for this study, two search engines were used: Business source premier and Google Scholar. The academic articles and books found with those search engines together with the references made in that literature is used for this study.

The strategy that is used for Google Scholar is as follows. First, the titles were scanned. If they showed potential to be relevant the abstract was what follows. If the abstract showed that it could be relevant for this study, the article was read and if it contained useful information, it was used for this study. Because Google Scholar showed too much results to scan them all, only the first ten pages were scanned for relevant articles. With Business Source Premier the search was limited to full text articles from peer reviewed journals. The search strategy was performed in the same way as with Google Scholar.

Different search terms were used in both the search engines. After the search terms the amount of articles that Business Source Premier showed are noted. Because with Google Scholar only the first ten pages were scanned, Google Scholar showed every time 100 potential results. The first search terms were “disruptive innovations (BSP: 162)” and

“disruptive technologies: (BSP: 147)”. Second set of search term was “future need of customers (BSP: 23) & consumers” (BSP: 17). Then the search terms “non-customers (BSP:

6)” and “non-consumers (BSP: 18)”. The following set of search terms was a combination of three terms divided over the three subject boxes in Business Source Premier: “large company & small company & innovations (BSP: 18)” and “large firm & small firm &

innovations (BSP: 93)”. Last set was a combination of “barriers & disruptive innovations (BSP: 6)/technologies (BSP: 4)”.

All the useful articles found with this search strategy together with the articles found

through the references in those articles is the literature used in this study. A total of 44

articles and books were used in order to conduct this study.

While most literature dates after 2000, the theories described in them are still relevant today and contributes to the reliability of this study. Multiple authors are used to gain different perspectives on disruptive innovations, which contribute to the objectivity of this study. In addition a lot of the used literature is published in respected journals, which contributes to the quality of this study.

In the appendices there is an overview of the articles used to answer the research

questions. It provides an overview of the authors, title and year of publication. Furthermore it

mentions the methodology and core ideas of the article/book. In the last column it shows the

argumentation why there is decided to use this article in this research. Every subquestion

has it’s own overview and shows it’s own specific arguments why it is used for that

subquestion.

IV

In the higher tiers of the market are the company’s best customers who want the highest quality products and are willing to pay the highest price for it. This comes paired with the highest margins for a company, making it interesting to keep on focusing on higher tiers (Christensen, 1997). The technologies that improve the existing products to higher qualities are called sustaining technologies (Christensen, 1997). Historically this process of continually improving existing products has delivered the company success, because the products become of such a superior quality the company can ask the highest prices (Christensen, 1997). However, this process of improving existing products eventually leads the company to produce products that are too complicated and too expensive for a part of their customer base, the overshot customers (Christensen, 1997; Christensen, Anthony & Roth, 2013). This creates room for disruptive innovations. Products based on disruptive innovations are too simple and affordable and therefore do not fulfill the needs of their best customers (Christensen, 1997). This creates a dilemma for companies; do they need to keep focusing on improving their products for better profits for their best customers, or do they need to make underperforming products with different attributes that may be unwanted by their customers and kills their margins (Christensen, 1997). Because improving existing products historically have given the company success and delivers the highest margins, companies often keep focusing on the higher tiers (Christensen, 1997).

Companies not only choose to keep focusing on the higher tiers, sometimes they have to. They invested too much in current technology, that they do not have the resources to develop an adequate new technology. Managers feel like they only have the resources for one or the other and they do not want to abandon their current customer base. Therefore they keep focusing on improving existing products with current technology, instead of investing in a new disruptive one (Spencer & Kirchoff, 2006).

Although improving existing products produces the greatest profitability, this is only for a limited period. These companies focus’ only on the higher tiers of the market and are therefore creating opportunities for disruption (Christensen, 1997; Thomond, Herzberg &

Lettice, 2003).

An organization could also choose not to focus on lower tiers with lower margins because it could create resistance in different layers of the organization (Christensen &

Overdorf, 2000).

Senior management could want to sell more products for lower margins in order to boost

profits and equity values but that does not mean everyone in an organization feels the same

way.

Employees in lower layers of an organization could have different interests (Christensen &

Overdorf, 2000). For example the senior management of Toyota wanted to rejoin the entry- level tier by introducing the “echo”, a 10,000-dollar car. And while the senior management decided to launch this cheap model with lower margins, many people in the Toyota organization, including dealers, did not share the same enthusiasm because they mad less profits on those models (Christensen & Overdorf, 2000).

On the contrary proposals coming from lower layers in the organization to create new businesses in emerging markets are often declined by the managers (Bower & Christensen, 1995). Managers are often in current position due their past successes (Spencer & Kirchoff, 2006). They thank their position to their ability to generate profits from the old technology (Bower & Christensen, 1995; Spencer & Kirchoff, 2006). Using new technologies and entering new markets is unpredictable and may challenge their position and expertise (Bower

& Christensen, 1995; Spencer & Kirchoff, 2006). Therefore managers often back up projects in which market success seems guaranteed (Bower & Christensen, 1995). By focusing a company’s resources on their lead customers, managers reduce the risk and their careers are secured (Bower & Christensen, 1995; Spencer & Kirchoff, 2006).

Furthermore, when a company grows, managers are choosing fewer opportunities to

spend resources on (Christensen & Overdorf, 2000). An opportunity may be interesting for a

small company but not for a larger one. Because a company’s stock price represents its

value, most managers feel obligated to not only maintain growth but to maintain a constant

rate of growth (Christensen & Overdorf, 2000). When companies grow bigger, they need

bigger business opportunities in order to gain the same percentage growth. Companies with

a net worth of 10 million only need 1 million in new business to grow 10% while companies

worth 50 million already need five times as much in order to grow the same percentage. So

managers in large companies are choosing fewer innovations to spend resources on and

spend more on improving existing products for higher margins (Christensen & Overdorf,

2000; Christensen, 1997).

V

Customers play an important role when dealing with disruptive innovations. Therefore it is important that a company can address current and future needs of their customers next to attracting non-customers. While leading companies can invest in the right technologies to retain their customers, they often fail to invest in the technologies that addresses their customers’ future needs (Bower & Christensen, 1995). Short-term investments, self-serving managers, bureaucracy, poor planning, all play a role in that failure (Bower & Christensen, 1995). But a more important reason for that failure is that companies stay too close to their customers. They do not look beyond their customer base for innovations, which leads them only to sustaining ones (Bower & Christensen, 1995).

Today’s market demand can differ from the technology that is offered. This means that innovations might not appear useful to the customers today, like disruptive innovations, but will address their needs in the future. Recognizing this, companies cannot expect that their customers will lead them to innovations that they do not yet need (Christensen, 1997).

Therefore, if a company wants to address the future needs of their customers, they must gather the necessary information outside its customer base (Christensen, 1997). In fact, using its customers can lead to misleading information regarding disruptive innovations. So companies need to find other ways to address the future needs of its customers (Christensen, 1997).

A way to do so is to look differently to their products. Customers use products to get a job done (Christensen & Raynor, 2013; Johnson, Christensen & Kagermann, 2008, Christensen, Anthony & Roth, 2013). So companies need to know for what job their products are used for. Knowing for what job a products is getting used for together with knowing what jobs are not getting done good enough can give companies a clear guideline to improve their products towards what customers value (Christensen & Raynor, 2013; Johnson, Christensen

& Kagermann, 2008; Berthon, Pitt, McCarthy, & Kates, 2007). Companies need to learn what

people are trying to achieve for themselves. Trying to attract customers with products that

are designed for a job that customers do not have prioritized to get done, is destined for

failure (Christensen & Raynor, 2013). Therefore, if a company wants to address the future

needs of its customers, it needs to know what future jobs their customers need to be doing

(Christensen, 1997; Christensen & Raynor, 2013). Companies that know what circumstances

customers find themselves in and are able to target their products on those circumstances,

are companies that launch predictably successful products (Christensen & Raynor, 2013).

If a part of their customers is starting to complain about certain aspects, for example that the product is getting too expensive or too complicated, and they have never complained about it before, it signals that they are getting overshot (Christensen, Anthony & Roth, 2013).

The company must then start treating them different as their best customers in higher tiers who still want sustaining innovation (Christensen, Anthony & Roth, 2013). The company must find out what job they want to get done and what aspects of their current product are not desired by that certain part of their customer base (Anthony et al., 2008). It then must create a different affordable solution in order not to lose those overshot customers (Christensen, Anthony & Roth, 2013).

Non-customers do not consume the company’s product at all, or in inconvenient settings (Christensen, Anthony & Roth, 2013). They want just as everybody to get a job done, but face constraints to do so (Anthony et al., 2008; Christensen, 1997; Christensen &

Raynor, 2013; Gilbert, 2003; Gilbert & Bower, 2002). As said before there are four types of constraints, skill-related, wealth-related, access-related and time-related (Anthony et al., 2008). Companies need to identify the constraints non-customers face and try to dissolve them (Anthony et al., 2008; Christensen, 1997).

Non-customers are comparing disruptive products with having nothing at all (Christensen & Raynor, 2013). So when trying to attract the non-customers, the product does not need a high quality because they are already delighted to buy it (Christensen & Raynor, 2013; Markides, 2006; Gilbert, 2003; Gilbert & Bower, 2002). The product needs to be affordable, convenient and easy to use, so that the people with less money and skills are attracted (Anthony, 2008; Christensen & Raynor, 2013; Gilbert, 2003; Gilbert & Bower, 2002). If the constraints are time and access related, a company must improve convenience in acquiring the product, for example by making the product more accessible (Anthony et al., 2008).

By spending time in the market, employees can observe how customers are using

certain products and find out how people say they value certain aspects because they do not

know any alternatives (Anthony, 2012). Spending time between customers and potential

customers, employees can see what jobs they want to fulfill but currently cannot fulfill or in

inconvenient ways (Anthony et al., 2008; Anthony, 2012). If customers are creating

workarounds in order to use the product, it signals that there are limitations for that specific

solution (Anthony, 2012). This can be the inspiration for a disruptive innovation and a better

She always used a scissor or screwdriver to open the Tide box, because the woman did not want to break her nails. She did not know any alternatives and therefore said she loved the packaging, while in reality she had to create a workaround. These observations can identify that customers work around the limitations of current solutions and can therefore find a lot of new innovation opportunities (Anthony, 2012). Furthermore by spending time in the market employees can observe in what situations experts are used for getting a job done, or when customers need to go to certain locations in order to use the product (Anthony et al., 2008;

Anthony 2012). This also signals that there are noncustomers waiting for a disruptive

innovation (Christensen, 1997; Anthony et al., 2008; Anthony, 2012).

VI

Large companies are characterized by their bureaucracy, which discourages innovative behavior (Singer et al., 2009). Their focus on profits and efficiency makes that they cannot be as agile and responsive as their smaller counterparts (Christensen & Overdorf. 2000; Singer et al., 2009). When dealing with disruptive innovations, things are uncertain and smaller companies tend to cope better with uncertainty (Christensen, 1997; Kassicieh, Walsh, Cummings, McWhorter, Romig, & Williams, 2002). When operating in a market where technologies change, agility and responsiveness are characteristics that would favor a company (Acs & Audretsch, 1990). When companies are smaller, they are more capable of pursuing emerging markets. While they could struggle with available resources, their cost structures can endure lower margins on products. Furthermore their values can embrace small growing markets. This can give small companies the advantages that can add up to the huge opportunity for the company what will do what needs to be done and whose values prioritize those activities (Christensen & Raynor, 2013).

New small companies have the advantage in strategy that can place themselves ideally in the market to deal with the unmet needs of the customers (Spencer & Kirchoff, 2006). They do not have to reckon with an existing customer base in that market. So they are set free from the problem of listening to their best customer (Spencer & Kirchoff, 2006). This gives them the opportunity to approach problems and opportunities in a liberate manner.

Next to this, small companies are not heavily attached to older technologies (Spencer &

Kirchoff, 2006). They do not have to fund and sustain multiple technologies, which gives

them the opportunity to focus all their resources on the development of the new technology

(Spencer & Kirchoff, 2006). Therefore if a large incumbent wants to create a disruptive

innovation successfully, it must create a situation where those criteria apply. It must place

itself ideally in the market. But when your business is a well-known brand, this is almost

impossible (Spencer & Kirchoff, 2006; Sawhney, Wolcott, & Arroniz, 2011). Therefore an

incumbent can choose to develop a spin-out organization, where to will be returned later in

this study, or it can create a new unknown brand (Sawhney, Wolcott, & Arroniz, 2011). This

way it can use the advantages of small company’s strategy and place itself in the desired

way and place in the market and does not have to deal with an existing customer base

(Spencer & Kirchoff, 2006; Sawhney, Wolcott, & Arroniz, 2011).

When companies deal with disruptive innovations they deal with new markets or market segments and they lack information about customers and what dimensions of the product will be valued. Therefore managers must create information. In order to create this information they need to experiment with the product and the market in a fast and repeatedly manner (Bower & Christensen, 1995). This is almost impossible to do for the large leading companies due their bureaucratic organization and therefore need to use small companies (Bower & Christensen, 1995; Christensen & Overdorf, 2000).

In addition to the previous mentioned advantages using small companies holds more advantages (Christensen & Overdorf, 2000). Those small start-ups have the advantages large companies cannot create (Dyerson & Pilkington, 2006). Smaller start-ups are better able to deal with uncertain situations and are agile in changing product and markets strategies in response of feedback (Bower & Christensen, 1995; Kassicieh et al., 2002). They are more agile in changing strategies due to their lack of deeply rooted routines (Carayannopoulos, 2009). Small companies’ time to market is one-fourth compared to the larger companies (Walsh, Kirchhoff & Newbert, 2002). This gives them the opportunity to receive feedback multiple times in the same time period as larger companies get it once. In this way the company learns a lot about the technology and the customers learn about what they value and what not (Bower & Christensen, 1995; Walsh, Kirchhoff & Newbert, 2002).

Therefore a collaboration is desired (Walsh, Kirchhoff & Newbert, 2002).

Collaboration with those small entrants gives leading companies also the opportunity to act as gatekeepers to the market (Dyerson & Pilkington, 2006). They keep holding influence in the market and the collaboration facilitates selective control and development of new markets. Instead of taking a defensive position, the collaboration could lead them to a win-win situation (Bower & Christensen, 1995; Dyerson & Pilkington, 2006; Walsh, Kirchhoff

& Newbert, 2002). This collaboration will support in existing product introductions and give them competitive advantage against existing competitors. In addition, it gives the leading company the possibility to absorb the new technology (Dyerson & Pilkington, 2006).

Next to collaborating with smaller companies, leading companies can also pursue the

second-to-invent strategy, let small pioneers lead the way into unknown markets, learn from

them and then enter the market. Like IBM let Apple develop the personnel computer, then

entered the market itself aggressively and built a profitable personnel computer business

(Bower & Christensen, 1995).

VII

How to spot disruptive innovations

It is easy to spot a disruptive innovation after it has proven to be a successful one.

However whether or not an innovation is disruptive is not clear in the beginning (During &

Parayre, 2000). Therefore managers need to know how to identify disruptive innovations.

First they need to act in new ways. Instead of focusing on the demanding customers it needs to focus on the customers that cannot consume their product or in inconvenient settings or at the least demanding customer who could want a different solution (Christensen, Anthony &

Roth, 2013; Anthony et al., 2008).

If a company wants to identify disruptive innovations it could check the internal disagreements over innovations. Managers with the financial and managerial incentives are not likely to support a disruptive innovation (Bower & Christensen, 1995). On the other hand technical personnel will claim that a new market will emerge for the innovation. These conflicts often signal that an innovation is disruptive (Bower & Christensen, 1995).

Disruptive innovations may also be spotted with the use of performance estimations from technologists. Most managers compare the estimated performance improvements of the new technology with the old one, while with disruptive innovations they need to compare it with the estimated market performance improvement demand. If the innovation’s performance improves faster than the market’s demand for performance improvement, it might be disruptive (Bower & Christensen, 1995).

Next to internal signals, the market and it’s competitors and customers signal if innovation is to be expected (Christensen, Anthony & Roth, 2013; Sandberg, 2002). If competitors are introducing up-market sustaining innovations and there are no complaints, there is still room for improving existing products and often no need for disruptive innovations (Christensen, Anthony & Roth, 2013).

Looking at the customers, non-customers are the people who do not consume at all, or in inconvenient settings and are locked out of the market. In order to attract them companies must create new-market disruptive innovations (Christensen, Anthony & Roth, 2013). Non-customers hire professionals to do the job for them (Christensen, Anthony &

Roth, 2013). So if a company notices that the people in their market use professionals to get

the job done, it signals that there are non-consumers in the market (Christensen, Anthony &

Customer segments like students, teenagers and hackers normally put up with the performance imperfections of the product because it makes it easier for them to do something that they only could not do in an inconvenient way or not at all (Christensen, Anthony & Roth, 2013). Another signal is short after a product introduction. If a company notices that there is short after the introduction a high and increasing rate of growth, it signals that the company might have created new-market disruptive innovation Christensen, Anthony

& Roth, 2013).

If people start to complain about things that they ignored in the past, like that the product is too expensive or too complicated, it signals that customers are getting overshot (Christensen, Anthony & Roth, 2013). The product is getting too improved for a group of the company’s customers and the company is starting to lose them. If customers are getting overshot, it creates room for low-end disruptions (Christensen, Anthony & Roth, 2013).

Barriers to disruptive innovation and how to overcome them

If a company wants to create disruptive innovations, there are some barriers for them to overcome. (Anthony et al., 2008; Bower & Christensen,1995; Christensen, 1997;

Christensen & Overdorf, 2000; Thomond, Herzberg & Lettice, 2003) Some barriers to create a disruptive innovation are: lack of strategic awareness, lack of creative opportunity generation, lack of funds for the start of potentially disruptive innovations and lack of good management of ideas, which leads to potentially disruptive innovations being killed (Christensen, 1997; Thomond, Herzberg & Lettice, 2003). If a company wants to overcome those barriers it must start with acknowledging and recognizing the strategic importance of disruptive innovations (Thomond, Herzberg & Lettice, 2003). It must actively try to identify potential disruptive innovations as early as possible in order to be able to respond strategically. If a potentially disruptive innovation rises, a company must adapt and adjust their technology strategy (Christensen, 1997; Thomond, Herzberg & Lettice, 2003). A technique that can be used to do so is organizing a forum where employees, partners and stakeholders can present and discuss their ideas and projects (Thomond, Herzberg &

Lettice, 2003).

In order to overcome the lack of creative opportunity generation, employees must have the opportunity to share their ideas and fragments of their ideas, which could be used for the development of full project proposals, or for later projects (Thomond, Herzberg &

Lettice, 2003; Gilbert & Bower, 2002). Organizing a forum for employees creates the opportunity for them to share their ideas and insights (Thomond, Herzberg & Lettice, 2003). It gives the employees feedback on their ideas, outside their normal working network.

The best ideas are presented to the management and if approved adapted in the technology

strategy (Thomond, Herzberg & Lettice, 2003).

The decision whether or not an idea gets funded, depends on its attractiveness and fit to strategy (Thomond, Herzberg & Lettice, 2003). If the management is transparent in it’s funding decisions and provide employees with a description of the process from idea to project proposal, it helps the employees to prepare their ideas for the evaluation. This transparency helps to overcome that potential disruptive ideas are not funded because they are not presented or managed right (Thomond, Herzberg & Lettice, 2003).

Another barrier to disruptive innovation is that mangers fail to link disruptive innovations to the changing market and customer needs (Paap & Katz, 2004). Managers are too busy finding the “next” disruptive innovation by focusing primarily on new innovations.

While they need to focus on changing customer needs in order to match their disruptive innovation to the needs of the customer (Paap & Katz, 2004). Innovations begin with a need and the technology to address that need. If current technologies become unable to address certain needs, technologies may be substituted. So when customers’ needs change, technologies can change and disruptive innovations could arise (Paap & Katz, 2004).

Therefore a company must focus on the factors that change customer needs. If companies want to have the next disruptive innovation, they need to anticipate on upcoming changes, by observing if customers are using their products in a different manner, look out for changes on complementary products that require adjustments on their own and look out for shifts in customers preferences, goals and activities (Paap & Katz, 2004; Sandberg, 2002).).

Leading companies can struggle with disruptive innovations because it is incapable of coping with change (Bower & Christensen, 1995; Christensen, 1997; Christensen &

Overdorf, 2000). If a company lacks the capabilities to cope with change and therefore disruptive innovations it can have three causes. It can be caused by the processes, resources or values of the company (Christensen, 1997; Christensen & Overdorf, 2000;

Christensen & Raynor, 2013). Processes are the patterns of interaction. The communication and coordination employees use to transform their resources into products or services with increased value (Christensen & Overdorf, 2000). Resources include the tangible resources like cash, people and technologies and the intangible resources like information, product designs and brands (Christensen & Overdorf, 2000). Values are defined as the standards by which employee judge whether an idea is attractive or not, whether a customer is important or not, whether an order is attractive or not (Christensen & Overdorf, 2000).

When the company’s processes are preventing it from coping with disruptive

New organizational boundaries lead to new patterns of working together that could lead to new processes (Christensen & Overdorf, 2000). What a company can do if resources or values are the cause can be found in the next section.

Using a spin-out organization

A technique large incumbents can use to create disruptive innovations is to develop a spin-out organization. The cost structure of large incumbents is designed to be successful in high-end markets, which makes it hard to be profitable in small emerging markets as well (Christensen & Overdorf, 2000; Christensen & Raynor, 2013). Disruptive innovations require different cost structures and resource allocations necessary. Because the incumbent cannot change this due to their main business, it needs to develop a spin-out (Christensen &

Overdorf, 2000; Gilbert & Bower, 2002).

To fall back on the situation when a company’s resources are the cause for failing with disruptive innovations, setting up a spin-out organization creates the opportunity to leave their cost structure and resource allocation untouched for their main business, while creating a new organization with its own cost structure and resource allocation (Christensen &

Overdorf, 2000; Gilbert & Bower, 2002). Managers often think that developing such new organization means they need to abandon the old one, which they resist to do because it has proven to be profitable and successful. But instead of abandoning the old one, they need to run two businesses in tandem. Critical for this model is that the disruptive business does not have to compete with the main business for the same resources (Bower & Christensen, 1995; Christensen & Overdorf, 2000; Anthony et al., 2008).

In a similar way this applies when a company’s values are the reason for failure.

When a company grows, their values are changing with it. Opportunities that were interesting before seem not profitable enough anymore. Customers that were important before do not seem interesting enough anymore. (Christensen & Raynor, 2013; Christensen & Overdorf, 2000). So when a company’s values are interfering with the opportunities, customers and orders that are desired for the disruptive innovation, then again it needs to develop a spin-out organization (Christensen & Overdorf, 2000; Gilbert & Bower, 2002).

Next to developing a spin-out organization, a company can acquire a new organization that already has the capabilities needed for the innovation (Christensen &

Overdorf, 2000; Anthony et al., 2008). If an acquisition is made for the new business’ values

or processes, the new business needs to be a stand-alone. Integration of the acquired

business will destroy its values and processes. Instead it must be injected with resources

from its parent business, once again, it must not compete for the same resources as the

main business.

On the other hand, if a business is acquired for its resources and not for its values or processes, it makes sense to merge it into the parents business (Christensen & Overdorf, 2000).

How to use a spin-out organization

When using a spin-out organization for the disruptive innovation it needs to have its own responsibility (Bower & Christensen, 1995; Gilbert & Bower, 2002; Anthony et al., 2008).

The disruptive organization can only dominate emerging markets if it is independent from the main company and the disruptive organization does not have to battle for the same set of resources as the main business (Bower & Christensen, 1995; Anthony et al., 2008).

Disruptive innovations can feel like a threat or opportunity to managers. If it feels like a threat managers tend to overreact (Gilbert & Bower, 2002). They focus too much on defending the current business model and use large shares of their resources for it. They also tighten the authority too much (Gilbert & Bower, 2002). Disruptive innovations that feel like opportunities can be just as harmful because no one feels threatened, so no one feels the need for change (Gilbert & Bower, 2002). So separating organizations holds the advantage that the new organization does not see the disruptive innovation as a threat or opportunity like the main organization but sees it as an independent opportunity and can design their organization to it (Gilbert & Bower 2002; Christensen & Overdorf, 2000).

The main organization must invest in the disruptive one in stages. Disruptive innovations have unique attributes that some customer value. The trick is to find new markets that would value those unique attributes and learn what customers value (Bower &

Christensen, 1995; Gilbert & Bower 2002). By cutting of the investment flow until those markets are found, the managers responsible for the disruptive innovation are better motivated to learn precisely what customers value about the disruptive innovation (Gilbert &

Bower 2002). Although financial commitment must be significant on the new organization, it

must be in stages so that it can be guided to success (Gilbert & Bower 2002). Within the

separate organization their need to be managers involved that have experience outside the

main organization. These managers tend to see the threat for the main organization less,

therefore leading the disruptive organization more independent (Gilbert & Bower 2002). Next

to this there must be an integrator who mediates the relationship between the main and

disruptive organization Gilbert & Bower 2002).

VIII

Conclusion

So disruptive innovations create not only threats for leading companies, it also creates opportunities. Their challenge is to seize them. The following conclusion is the answer to the research question: “How can the large, leading companies prevent from being overthrown by disruptive innovations?”

First, leading companies need to widen their vision. While most of the time they are only focusing on the higher tiers with their best customers and highest margins, they need to widen that focus towards the lower tiers. There are the overshot customers who do not want to buy the products anymore because they became too complicated and expensive and the noncustomers who do not purchase the products due to certain constraints. While the leading companies definitely must not abandon their main business with their best customers, who brought them in their position where they are today, they must not ignore the remaining (potential) customers. They need to keep investing in sustaining technologies to improve existing products for their best customers, but next to that they need to look for disruptive innovations for the overshot and non-customers.

In order to be able to do so they need to expand their vision outside their customer

base. Customers do not know what they want in the future, so it cannot be expected that

they will deliver the next disruptive innovation. If a company wants to know the future needs

of their customers, it needs to know what jobs they want to have done in the future. Because

every customer buys a product or a service not because they want the product or service,

but they want to get a job done. Therefore a company needs to send their employees to the

marketplace. Observe their customers. Look how they use their products and for what job

they are using the product. As the example of Tidal’s box has proven, interaction with the

customers could spot new innovation opportunities because customers sometimes do not

know about any alternatives, and therefore can not give the information needed for disruptive

innovations. In the Tidal example the employee found opportunities to innovate in the

packaging of Tidal, while most customers reported that they loved the packaging from the

product. Those customer’s did not know any alternatives and therefore they could P&G never

lead to the innovation opportunities that the interaction between employee and customer has

lead them to. Then a company can see if customers are using the products in the way the

company intended they should use it and if they are using it for the job it was created. If

customers are using it differently or need to create workarounds in order to use it, it signals

that there is room for improvement because there are limitations to the solution.

The job gets not done in the intended way or in inconvenient ways. This gives opportunities for low-end disruptive innovations, a simple and affordable solution in order to get that job done.

Furthermore, when spending time in the marketplace, employees can notice if there are non-customers, (potential) customers who face time, location, skills or wealth related constraints in order to purchase the product. For example when customers are using professionals to do it for them or they need to go to specific locations to use their product or service it signals that there are opportunities for new market disruptive innovations.

A company can remove those constraints and attract a whole new market by offering an affordable alternative in a more convenient way to acquire.

A way to offer that alternative without harming the loyalty of their best customers is to offer it under a new brand name. This way the superior quality and status associated with the main brand does not get affected by the simpler, more affordable alternative.

Another way to control the lower tiers is to collaborate with small entrants. In this way it can exercise selective control and hold influence on the development of new markets. Or it can let the small entrant take the lead, learn from it and then aggressively take over.

While the above makes it sound that there lays a clear path for leading companies to be disruptive, there are certainly some barriers. In order to overcome those barriers the company must hold a pro-active attitude in finding disruptive innovations. Employees, stakeholders, partners and other people involved must have the opportunity to share their ideas and give feedback to them. The management must show transparency in decision criteria in order to let employees develop worthful ideas and concepts. The company must anticipate on upcoming changes in order not to miss the boat and the ideas and concepts from their employees help them with it.

A final approach to cope with disruptive innovations is to develop a spin-out organization and run it next to their main business. This gives them the opportunity to run their valuable main business for their best customers next to an organization for the disruptive innovation. Critical is that this disruptive organization is managed independently from the main organization and must not compete for the same resources. A variant to this strategy is instead of developing a spin-out organization, it can acquire one.

IX

Discussion

This study did research on how leading companies could prevent from being overthrown by disruptive innovations. The theories certainly make sense and it feels logical and the presented cases by for example Christensen (1997) and Thomond, Herzberg, & Lettice, (2003) even proof the theories work. However they all take place in an ideal, predictable world. While looking at what jobs customers wants to get done gets you close to predicting the future, it stays unpredictable. There may occur unforeseen situations that make all given advice and theories worthless. So following the theories does not guarantee success.

Therefore the theories must be seen as guidelines what could help managers with disruptive innovations.

Also the factor luck is not involved. While managers may do all the right things regarding disruptive innovations, some are just created by luck (Tushman, 1997). Next to that a product can become a hype because of a certain event. Especially these days with social media, products can become a hype overnight without the company that produces the products has done anything. For example influential persons can boost the sales of certain products without a theory behind it (Moynihan, 2004).

While spending time in the market can give you a good overview on how customers use certain products and what jobs they want to get done with it, the employees who observe might be biased by personal experiences with the product or their ideas for product improvement. This might interfere with the fact that the focus must lay on what job needs to be done and prevent that the innovation fit to the needs of the non-customers (Anthony et al., 2008; Christensen & Raynor, 2013).

Using small companies is a good solution in order to avoid the disadvantages from

the bureaucratic structure from the main business. Either create a spin-out, acquire a start-up

or collaborate with one, it creates opportunities to hold influence in lower tiers, chances to be

disruptive and keep earning on your most profitable customers with your main business

(Christensen & Overdorf, 2000). However it could be difficult to distinguish whether the

company fails because of the values or the processes because it both involves employees

(Christensen & Overdorf, 2000). Either the company fails because the combination of people

that work together is wrong, or just the judgment from one of those persons is wrong

(Christensen & Overdorf, 2000). So a company should not too hasty acquire new persons

but first shift internally in patterns of interaction.

And while the second-to-invent strategy is not often mentioned when dealing with disruptive innovations, it seems an easy way to lift on the success of others. And with a well-known brand name the chances are that customers will choose your product over that from the unknown new entrant (Bower & Christensen, 1995).

It can be assumed that leading companies are aware of disruptive innovations and their potential threat because there are more than plenty examples of where disruptive innovations take out leading companies. So with that knowledge they cannot ignore the lower tiers of the market and only keep focusing on the best customers. Directors, managers, stakeholders and employees can no longer look the other way. They need to collaborate and create an atmosphere where managers not only are motivated and occupied with short term profits, but they need to feel motivated to work on long distance future from the company as well (Christensen, 1997; Bower & Christensen, 1995; Christensen & Overdorf, 2000). There needs to be transparency in an organization. This will reduce the resistance in different layers of an organization and get them more aligned (Thomond, Herzberg & Lettice, 2003).

Closing the eye to disruptive threats could mean the end of the whole organization

(Christensen, 1997; Bower & Christensen, 1995; Christensen & Overdorf, 2000).

X

Limitations and implications

This study comes not without limitations. First of all in this study there is no distinction made between industries, therefore harming the generalizability and external validity. One may assume that in one industry, for example a technology intensive industry, a company needs to innovate faster than in another (Stuart, 2000). Second, different disruptive innovations are treated as one. In this study disruptive product innovations are the same as disruptive innovations in business models, while they may require different approaches (Markides, 2006). Third limitation is that due to the extreme high amount of results Google Scholar showed not all results could be scanned, therefore some relevant articles may have been left out. Fourth is that there might be reasons for a company to keep focusing on higher tiers that are not researched, because there could be company/manager specific reasons to do so (Spencer & Kirchoff, 2006; Christensen & Overdorf, 2000).

Further research could analyze how different types of innovations need different ways in order to deal with them and affect the market differently. The practical implications of this study are that it gives managers from large companies guidelines regarding its customers and disruptive innovations (Christensen, 1997; Christensen & Raynor, 2013; Gilbert &

Bower, 2002). It gives them an overview how to meet current and future needs of their customers next to how to attract non-customers (Christensen & Raynor, 2013; Gilbert &

Bower, 2002). Furthermore it shows them how to spot opportunities for disruptive innovations

and how to create disruptive innovations (Christensen, 1997; Christensen, Anthony & Roth,

2013; Anthony et al., 2008). It shows them the barriers it may stumble on and how to

overcome them (Christensen, 1997; Thomond, Herzberg & Lettice, 2003). In addition it gives

them guidelines why and how to use spin-outs in the process of overcoming those barriers

Bower & Christensen, 1995; Gilbert & Bower, 2002). The theoretical implications are that it

combines different theories regarding disruptive innovations into one study. Different authors

and their vision about disruptive innovations are included in this study, which give it an

objective view on disruptive innovations, and therefore contributing to the literature.

XI

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