Magazine Spring 2016 Issue Research Feature

Keep Calm and Manage Disruption

Just whisper the word “disruption” if you want to scare the life out of many business leaders. But contrary to some claims, disruption can be averted, and many businesses find ways of managing through it.

Joshua S. Gans Reading Time: 21 min 

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Keep Calm And Manage Disruption Crown
One strategy for dealing with a potentially disruptive competitor is to acquire it.

If you want to capture the attention of a business leader, say the word “disruption.” At least, that was the reaction of Andy Grove, then the CEO of Intel Corp., when he first heard the disruption theory espoused by Harvard Business School professor Clayton M. Christensen.1 Christensen argued that even when a company does everything right — for example, focuses on its customers — it remains vulnerable to competition from unexpected sources. Christensen had seen a pattern of market leaders being upended by entrants in the hard disk drive and steel industries, among others. Grove called Christensen’s message “scary,”2 and indeed, over the past 20 years, Christensen’s observations have led to widespread fear and paranoia. In the minds of many executives, disruption is just around the corner, and the fear is palpable.

Seeing that fear has led some researchers3 to question whether such emotion is justified. Using the examples of disruption that Christensen cited or anticipated, academics such as historian Jill Lepore, writing in The New Yorker, and Andrew A. King and Baljir Baatartogtokh, writing in MIT Sloan Management Review, have attempted to test the facts against the theory by looking at questions such as whether the claimed disruptions actually ended up causing businesses in their path to fail.4 Although both analyses were more nuanced than determining that simple relationship, the researchers found that the claimed link between a disruptive innovation and significant trouble for established companies often did not hold up. This led them to conclude that the theory did not have a solid basis and that managers could place less weight on such concerns.

However, just because the hypothesized link between disruptive technologies and the failure of a company is weak does not necessarily mean disruption cannot happen. Instead, my contention here is that two decades of managerial scholarship has revealed a set of reasons why that link might not be present strongly in the data. Specifically, contrary to some claims, disruption can be averted. Indeed, although disruption can happen, many businesses find ways of managing through it, and this can weaken any relationship between a disruptive event and the actual disruption. To be sure, facing disruption is no picnic.

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About the Author

Joshua S. Gans holds the Jeffrey S. Skoll Chair in Technical Innovation and Entrepreneurship at the University of Toronto’s Rotman School of Management and is the author of the book The Disruption Dilemma (MIT Press, forthcoming in April 2016).

References

1. T. Mack, “Danger: Stealth Attack,” Forbes, January 25, 1999, www.forbes.com.

2. A.S. Grove, on the cover of C.M. Christensen, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” (Boston: Harvard Business Press, 1997).

3. J. Lepore, “The Disruption Machine,” The New Yorker, June 23, 2014; and A.A. King and B. Baatartogtokh, “How Useful Is the Theory of Disruptive Innovation?,” MIT Sloan Management Review 57, no. 1 (fall 2015): 77-90.

4. Documented in Christensen, “The Innovator’s Dilemma,” and anticipated in C.M. Christensen and M.E. Raynor, “The Innovator’s Solution” (Boston: Harvard Business Press, 2003).

5. Christensen, “The Innovator’s Dilemma.”

6. In my forthcoming book “The Disruption Dilemma,” I point out that alongside Christensen’s demand-side theory of disruption, there is a supply-side theory that originated with the work of Rebecca Henderson and Kim Clark; see R.M. Henderson and K.B. Clark, “Architectural Innovation: The Reconfiguration of Existing Product Technologies and the Failure of Established Firms,” Administrative Science Quarterly 35, no.1 (March 1990): 9-30. That theory shows how successful businesses, precisely because they are well organized to innovate continuously, may themselves be unable to switch to new technological paths that are based on what the authors term “architectural” innovations. In this article, I concentrate on the managerial response to demand-side disruption because the response to supply-side disruption is harder to achieve. In the book, I argue that to survive such disruption requires preemptive changes in organizational structure rather than relying on a reactive response.

7. R.N. Foster, “Innovation: The Attacker’s Advantage” (New York: Summit Books, 1986).

8. T.F. Bresnahan, S. Greenstein, and R.M. Henderson, “Schumpeterian Competition and Diseconomies of Scope: Illustrations From the Histories of Microsoft and IBM,” chap. 4 in “The Rate and Direction of Inventive Activity Revisited,” J. Lerner and S. Stern, eds., National Bureau of Economic Research conference report (Chicago: University of Chicago Press, 2012).

9. This fact is established in research by M. Igami and K. Uetake, “Mergers, Innovation and Entry-Exit Dynamics: The Consolidation of the Hard Disk Drive Industry,” unpublished ms., Yale, July 2, 2015.

10. See J.S. Gans and S. Stern, “Incumbency and R&D Incentives: Licensing the Gale of Creative Destruction,” Journal of Economics and Management Strategy 9, no. 4 (winter 2000): 485-511; and J.S. Gans and S. Stern, “The Product Market and the Market for ‘Ideas’: Commercialization Strategies for Technology Entrepreneurs,” Research Policy 32, no. 2 (February 2003): 333-350. The authors study the incentives of entrepreneurial entrants to do all manner of cooperative deals with incumbents. These range from licensing of intellectual property to alliances to acquisition. They demonstrate that the stronger potential competition is between the entrant and incumbent, the more likely the two are to agree to a cooperative commercialization deal.

11. M. Marx and D.H. Hsu, “Strategic ‘Switchbacks’: Dynamic Commercialization Strategies for Technology Entrepreneurs,” Research Policy 44, no. 10 (December 2015): 1815-1826.

12. Ibid.

13. M.B. Farrell, “Nuance to Buy Vlingo, its Rival in Speech Recognition,” Boston Globe, Dec. 21, 2011.

14. M. Tripsas, “Unraveling the Process of Creative Destruction: Complementary Assets and Incumbent Survival in the Typesetter Industry,” Strategic Management Journal 18, no. S1 (July 1997): 119-142.

15. The disruptive events that arose in typesetting were not disruptive technologies of the type I have defined and discussed here but instead architectural technologies that were redesigned and new ways of doing the same thing. Thus, customers often wanted these new technologies immediately, but incumbent companies faced costs associated with understanding and integrating them. Nonetheless, typesetting illustrates the broader point that key complementary assets can buy a company time

16. See the discussion in Bresnahan, Greenstein, and Henderson, “Schumpeterian Competition and Diseconomies of Scope.”

i. M. Marx, J.S. Gans, and D.H. Hsu, “Dynamic Commercialization Strategies for Disruptive Technologies: Evidence From the Speech Recognition Industry,” Management Science 60, no. 12 (December 2014): 3103-3123.

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Comments (2)
Travis Barker, MPA GCPM
Disruption, as a model, often represents systemic change most often leveraged by larger corporations. This article provides some evidence that the attributes and advantages of smaller companies, including agility, can support capabilities that larger corporations may not have. 

More specifically, being able to continue growing with the needs of their customers; entrenched systems and architecture dedicated to previous product or service lines are presented at a different scale than larger (read national/international) corporations, and the cost of adjusting strategic direction based on incoming information/feedback is less as a result. This recognition does not intend to minimize the issue of available capital for changing/clarifying direction, but instead seeks to acknowledge that smaller companies have the ability to lead the way.  

The customer development model creates some risks as the innovative mechanisms and outcomes pursued are not yet registered, copyrighted, or patented until the deliverable 'end-point' is discovered, validated, and documented. Finding ways to avoid this exposure is key. When a small corporation or #startups assets are defended their efforts have the ability to be just as #disruptive. The key to competition is scalability, agility, and   
iterative innovation. Never stop disrupting locally in the pursuit of systemic disruption. Defend your niche. Acquiescence to entrenched corporations is not a foregone conclusion. 

Travis Barker, MPA GCPM
Innovate Vancouver
Praveen Kambhampati
Great article. Each read through the article gives a renewed perspective to the definition of disruption. 

For large organisations, their size is in itself, a threat to their sustenance. By the time they prepare themselves to, a buyout or compete, decision the disruption is actually obsoleting them technically and managerially. 

Facebook, clearly, has seen an opportunity in the threat and adapted an 'invest and encourage' strategy to buy the companies and still keep them independent. Smartly so, both the entities, though successful and well absorbed into the market are kept away from an integrated facebook view. This also indicates the start of a decline in the conglomerate concept of business acquisitions. 
Disruption needs agility which in turn needs a micro size and ready to adapt, mannerisms that facebook has deployed despite its growth as a gaint, successfully.

Interestingly, baselines of legacy, and linear thinking are becoming redundant history while disruption is providing, to the end users, more sophistication. Players still working on premium margins are forced to rethink. 

In the near future, consolidations and takeovers could be less heard, while funding and partnering for development could mean a lot more beneficial.  Business sustenance and longevity seems assured for smart and agile thinkers who have read the disruption capabilities, positively.