Disruptive Innovation: Strategic Advantage or Distraction

It is difficult to read a book on business strategy that does not make a strong remark about the need for companies to innovate.
Innovation, either in the form of new products, services or business model is identified as a key source of sustainable competitive advantage.

However, innovation comes in different flavors and unless you have a clear objective, it may turn into a black hole of resources with no clear return on investment.

In the next couple of paragraphs I will focus on product innovation.
Two clear different groups are used to classify product innovation: incremental vs disruptive.

There is common agreement into this classification:

- Incremental innovation on a product extends its life cycle and may add new features that will allow it to remain competitive in the market. Within the company product portfolio it may achieve sales growth slightly above company average for a couple of years.

- Disruptive innovation usually involves the introduction of a new product or service that provides access to a new segment, creates one or has such competitive advantage that turns competition obsolete. If successful it should deliver growth several times faster than company average and unless there is cannibalization on an older product line, it should all be incremental business.

If we look at the risk associated with the development of innovative products, incremental innovation poses lower risk as it is usually within the market space that the company already knows and uses resources that are within the company value network (third party engineering, suppliers, etc)

On the other hand, disruptive technology risks are more difficult to evaluate. It is general unclear if these innovative products will deliver the performance required, address market needs or be accepted by customers.

Being able to do an objective assessment of a new technology potential becomes critical in the way organizations judge and prioritize investments. But market research on disruptive products is very difficult to get and marketing organizations are not familiar or do not look through the correct lenses to understand the value created.
Much has been written on real options about financially assessing innovation, but unless your company has gone through the experience many times it is difficult to price the different possible outcomes. Furthermore, sales volume on this kind of technologies is difficult to quantify and the whole exercise loose credibility as a consequence.

So,

Should disruptive innovation come from within, should it be done in an organization isolated from the rest or should they be acquired?

For those that have been working in technology related companies will agree that is not enough to have good ideas. You need an organization in place to make it happen. Without the proper engineering, marketing and sales organization in place those ideas will never turn into dollars. On the other hand, as described in Innovator's Dilemma, disruptive technologies may require an independent organization to make it successful. Organizations that have been successful with certain technologies may steer a disruptive technology too hard into the wrong direction.

How do you handle the risk of disruptive technologies?

Everyday companies are created and destroyed in a competitive market environment. The market, through angel investors and venture capitals, funds efficiently this natural selection of new ideas. As financial theory goes, through a portfolio of disruptive technologies, investors diversified their risk.

But what happen with this risk if you try to drive radical innovation within your company. With limited resources there are so many projects that you can target.

Disruptive Innovation is an unquestionable source of long term growth. However, most of our organizations are not properly set to drive it from within. Management skills and capabilities to "execute" disruptive innovation is not the same as the one required for incremental innovations. Trying to execute a strategy without the right organization capabilities rearely deliver results.

Daniel