Incumbent performance in the face of a radical innovation: Towards a framework for incumbent challenger dynamics☆
Introduction
Radical innovations can transform industrial landscapes by reconfiguring positions of leadership and are crucial to organizational and economic growth (Abernathy and Clark, 1985, Markides, 2006, Schumpeter, 1942, Tellis et al., 2009, Tushman and Anderson, 1986). Both technological innovations, such as digital imaging and business model innovations, such as low cost air travel, often pit new entrants against well-established incumbents for market leadership. Existing technologies and business models are continually challenged; Gemesis challenging the natural diamonds industry through laboratory-made diamonds (McAdams and Reavis, 2008), Ryan Air challenging mainstream airlines through its no-frills model, Apple and Google challenging the market leader Nokia through new mobile operating systems and applications and Netflix challenging incumbents through online movie rentals and enhanced customer experience (Leonhardt, 2006). But what do these innovations imply for incumbents’ performance?
In addressing this question, it is often argued that incumbent organizations suffer in the face of radical innovations (e.g., Benner, 2010, Christensen, 1997, Christensen, 2006, Foster, 1986, Hill and Rothaermel, 2003, Rothaermel and Hill, 2005, Tushman and Anderson, 1986) often due to their commitments to current value networks and technological paradigms (Macher and Richman, 2004), giving new entrants a better chance of success. Copious examples support this argument. For instance, the arrival of electronic calculators, diesel-electric locomotives, jet engines and solid state semiconductors enabled new entrants to overthrow entrenched incumbents (Cooper and Schendel, 1976, Foster, 1986, Majumdar, 1982). Swiss watch manufacturers were devastated by the transition from mechanical to quartz movement in watches (Glasmeier, 1991). Tire industry incumbents specializing in bias-ply tire technology suffered when radial tire technology emerged (Sull et al., 1997); “cultured” pearls created on farms decimated the natural pearl industry; Akron National Cash lost out with the advent of electronic business machines (Rosenbloom, 2000); and Sony, the inventor of the Walkman and market leader for portable music was upstaged by Apple through its launch of a digital music player and distribution system (Burgelman and Grove, 2007).
But why do incumbents suffer? Is it because they would rather exploit existing competences than innovate and explore (Levinthal and March, 1993, O’Reilly and Tushman, 2008)? Is it because their core capabilities turn to core rigidities, reducing their ability to adapt to disruptive innovations (Leonard-Barton, 1992)? Or is it because the dominant logic that helps incumbents sustain themselves in stable environments impedes their ability to adapt in changing environments (Bettis and Prahalad, 1986)?
Clearly, incumbents encounter formidable challenges and may even be upstaged by an innovation. But do incumbents inevitably decline whenever an innovative challenge arises, as some standard models of innovation seem to suggest (Freeman and Soete, 1997, Sull et al., 1997, Tripsas and Gavetti, 2000, Tushman and Anderson, 1986, Utterback, 1994)? In many instances, incumbents are able to fend off competitive threats (Leifer et al., 2000, Methe et al., 1997). For example, in mobile telephony, incumbent vendors were able to co-opt wireless technology and incorporate it into their service offerings, either through acquiring existing providers or by building their own networks through dedicated subsidiaries. In financial brokerage, Charles Schwab, a leading financial industry incumbent, successfully embraced online brokerage – a disruptive innovation – and overtook E_Trade, the pioneering new entrant (Cohan, 2000). In the typesetting industry, an incumbent manufacturer remained industry leader for over a century, despite three waves of technological shifts that introduced competence-destroying innovations (Tripsas, 1997). In photography, the incumbent Kodak retained control of the photography platform despite Polaroid's radical innovation (SX-70) in cameras that allowed users to obtain instant prints of the images they captured rather than wait for professional film developers (Garud and Munir, 2008); and the incumbent Hasselblad, an established manufacturer of high-end professional cameras managed the transition from analogue to digital technology through collaborations and acquisitions (Sandström et al., 2009). In computing, despite a radical innovation – the Internet – dominant software firms from the pre-Internet era such as Microsoft, have been able to adapt and maintain their leadership by controlling platform ecosystems (Gawer and Cusumano, 2008). Thus, some incumbent firms have successfully adapted and responded to radical innovations and either preserved or recaptured their previous technological and market leadership (Ahuja and Lampert, 2001, Hill and Rothaermel, 2003, Methe et al., 1997).
While there are several useful frameworks to explain why incumbents’ suffer following disruptive innovations (e.g., Anderson and Tushman, 1990, Henderson and Clark, 1990) and why challengers are often at an advantage (Christensen and Rosenbloom, 1995, Foster, 1986), less is known about how and why certain incumbent firms are able to “buck this pattern” (Macher and Richman, 2004:88) and why some have “staying power” (Cusumano, 2010). Indeed, recent empirical research suggests that the extent of the “incumbent's curse” in the face of radical innovations (Chandy and Tellis, 2000) may have been overstated. What factors then influence incumbent performance in the face of radical innovation? Why do some incumbents prosper while others fail?
Prior work has provided several explanations for differential incumbent responses to disruptive innovations. Factors such as incumbent size (Sandström et al., 2009), complementary assets (Teece, 1986), commercialisation of the innovation (Hill and Rothaermel, 2003), demand structure (Adner, 2002, Danneels, 2003), government subsidies (Levinthal, 1992), management's cognitive models (Tripsas and Gavetti, 2000), transformative costs for the challenger (Garud and Munir, 2008), institutional environment, including stock market pressures (Benner, 2010) and government policies (Garud and Karnøe, 2003, Haveman et al., 2001, Madsen and Walker, 2007), related markets’ evolution (Jacobides et al., 2006, Porter, 2008), organizational linkages involving the new technology and complementary assets (Taylor and Helfat, 2009) and luck (Burgelman, 1991) have all been shown to explain incumbent response in the face of radical innovations.
However, fewer studies have concurrently analysed these factors and the connections among them. Ahuja et al. (2008) provide a comprehensive review of innovation studies but their focus is on the determinants of technological innovation. The fragmentation of definitions and constructs tends to preclude accretive research in this space. Thus, despite decades of interest in developing and applying thoughtful models (e.g., Cattani, 2005, Rothaermel and Hill, 2005), few attempts have been made to connect the different constructs involved and structure this vast field of knowledge. In the tradition of studies such as Murmann and Frenken's (2006) systematic framework for research on dominant designs, technological innovations and industrial change, and Lavie's (2006) model of incumbents’ capabilities reconfiguration in response to technological change, we develop a holistic framework of incumbent-challenger dynamics (ICD) for explaining incumbent survival in the face of radical innovations. Survival can include a broad range of outcomes in terms of relative performance. For illustrative purposes, we draw on primary evidence from the Dutch television industry3 and archival evidence from four episodes of disruptive innovations.
We offer three contributions. First, we fuse strategic management theories at the industry and institutional levels (Dobbin and Dowd, 1997, Porter, 1980) with those at the organizational level (Barney, 1991, Teece et al., 1997) in the context of disruptive innovations and bring in the challenge dimension (including the innovation) from technology and innovation management (Anderson and Tushman, 1990, Van de Ven et al., 1999) across these levels of analysis to enrich our understanding of incumbent challenge dynamics (ICD). Second, we collate two levels of analysis and their underlying constructs: (1) the industry (complementary markets, the institutional environment, customers, suppliers and level of rivalry) and (2) the firm (incumbent) (boundaries, configuration for change, ambidexterity and complementary capabilities)4 and bring in the challenge category (innovation type, commercialization requirements and incubation period). This highlights the role of interactions among different constructs under industry, firm and challenge that, we argue may be significant in determining whether or not, an innovation is disruptive in its effects, not just ex post but also ex ante. Third, we develop a holistic multi-level framework for ICD and show that some cases of incumbent performance can only be understood when several multi-level factors are concurrently considered.
Next we review the existing literature, identifying and collating key findings for each of the three categories, derive propositions for each category and develop an ICD framework. We present primary evidence from the Dutch television industry and archival data from four examples to illustrate our arguments and offer some implications for research.
Section snippets
Structuring the theoretical field
While we do not consider administrative innovations, we adopt a ‘big tent’ approach for the term innovation, including changes in both technologies and business models. Several concepts have been used; including outside, discontinuous, breakthrough, radical, emergent and revolutionary; as well as evolutionary, continuous, and incremental (Abernathy and Clark, 1985, Cooper and Schendel, 1976, Florida and Kenney, 1990, Morone, 1993, Utterback, 1994). The concept of competency-enhancing
Illustrations of incumbent challenger dynamics
To enrich the framework, we used several illustrations – both where incumbents suffered and where they survived. We drew on evidence from our study of the Dutch television industry (see Table 2), where we interviewed consultants, TV channels (incumbents and challengers) and cable network players, and examined archival data.
We also drew on four examples on incumbent challenger rivalries; Dell versus incumbent Compaq (Rafii and Kampas, 2002); Skype versus incumbent telecoms (Buis, 2007, Bryce and
Theorizing on incumbent-challenger dynamics
We draw on these examples to illustrate our ICD arguments and the propositions we derived under three categories; the industry setting, the incumbent firm and the challenge.
Towards a framework for incumbent-challenger dynamics
We aspired to develop a multi-level holistic framework for incumbent-challenger dynamics comprising of three categories; Industry Setting, Incumbent Firm Properties and the Challenge; and their underlying constructs and interactions among them. While we derived propositions and drew on illustrations to exemplify each construct in isolation, our argument is that incumbent failure or success can best be understood when these constructs are concurrently taken into account to reflect the complexity
Conclusions and implications
We have argued for the need to develop a holistic framework for understanding incumbent-challenger dynamics in the face of innovations. We ‘connected the dots’ in existing literature and illustrated our framework consisting of: the industry setting, incumbent firm and the challenge, including their underlying constructs. We argued that our framework better reflects the complexity of incumbent-challenger dynamics within and across different settings.
We engage with the strategic management
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We gratefully acknowledge the constructive comments and helpful suggestions of our Research Policy Editor, Professor S. Kuhlmann and two anonymous reviewers on earlier versions of this manuscript. We would also like to thank the reviewers and participants for their helpful suggestions at the 3rd Annual Copenhagen Conference on Strategic Management (CCSM), Copenhagen (2007), the Academy of Management (AOM), Anaheim (2008), and the External Seminar Series at Imperial College, London (2010), Cranfield Business School, Cranfield (2011) Cass Business School, London (2011), and Strategic Management Society (SMS) conference, 2011, Miami, where earlier versions of this paper were presented. We also thank Jaideep Prabhu, Santi Furnari, Patrick Reinmoeller, Juliane Reinecke, Markus Perkmann and Lourdes Sosa for their valuable comments on previous versions of this paper.
- 1
The author is also a Visiting Assistant Professor at the Rotterdam School of Management, Erasmus University. The names of the authors are in alphabetical order.
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Tel.: +31 020 305 3700; fax: +31 020 305 3701.