Radical Innovation, Paradigm Shift and Incumbent’s Dilemma The Case of the Auto Industry

Abstract

Radical innovations often upend the incumbents firms and even render them obsolete (Ansari & Krop, 2012; Benner, 2010), as these firms often have great difficulties in addressing the challenge posed by these innovations due to inertia (Ghemawat, 1991), tendencies to exploit existing competences (Levinthal & March, 1993; O’Reilly & Tushman, 2008), organizational rigidity (Beonard-Barton, 1992), complacency and internal culture (Tellis, 2006), problems in the incentive system and resource allocation process (Christensen, 1997), and gap in the organizational capabilities required for embracing the new technology (Henderson, 2006; Tushman & Anderson, 1986). However, as radical innovations become increasingly frequent across industries, responding to this serious threat has become a strategic priority for many incumbent firms.

Research shows that incumbents survive or even prosper in the face of radical innovations by forging effective partnerships with challenger firms (Ansari & Krop, 2012), establishing a separate entity to fend off the threat (Christensen, 1997; Christensen, Raynor & McDonald, 2015), better evaluation and investment approach (Hill & Rothaermel, 2003), appropriately configuring organizational form and structure (Ansari & Krop, 2012), coupling their basic research function with applied research functions (Hill & Rothaermel, 2003), possessing downstream complementary assets critical for the commercialization of the new technology (Ansari & Krop, 2012; Hill & Rothaermel, 2003), and more importantly by possessing a high willingness to cannibalize their core business (Chandy and Tellis, 1998). Incumbents can also thrive or overcome the so-called incumbent’s curse by pioneering radical innovations by themselves (Chandy and Tellis, 2000).

Previous studies on radical innovations focus primarily on a single product (e.g., Chandy and Tellis, 1998, 2000), technological or business model innovation (Ansari & Krop, 2012; Christensen, 1997; Hill & Rothaermel, 2003). These innovations may have the potential to shrink the incumbents’ marketspace, e.g., Gemesis’ synthetic diamonds challenging the natural diamonds (McAdams and Reavis, 2008), EasyJet challenging mainstream airlines such as BA, Netflix challenging the traditional movie rental business (Leonhartdt, 2006), or displace the incumbent market leader, e.g., IBM PC and its clones destroyed minicomputer makers such as DEC, Wang, Apollo and so on. Yet, they do not often disrupt the entire industry. But in recent years, more industry-wide disruptions have occurs due to emerge of not a single radical innovation but an array of them simultaneously from within or outside of a particular industry. In this process, it is not just the incumbent market leader or a few incumbent firms but the entire value chain, ecosystem or industry get displaced, the so-called paradigm shift, e.g., GPS device by software companies such as Google and Waze, desktop computing by mobile devices, and the traditional auto industry centered around the internal combustion engine by peer-to-peer service provider (e.g., Uber), consumer electronics (e.g., Apple), battery-driven vehicle (e.g., Tesla), and software companies (e.g., Google, Amazon). When this happens, incumbents are not fighting against a particular firm or a few firms that have introduced radical innovations based on similar technologies, but an army of very diverse entrants that are disrupting the entire industries from various directions, some of which are from remote industries with vastly different organizational capabilities, mindset and business model. How incumbents of the existing ecosystem should best cope with the massive and dramatic industry-level disruption induced by multiple radical innovations along a number of fronts or paradigm shift has largely remained unexamined. In the face of paradigm shift, can the above mentioned strategies or tactics for incumbents to combat single radical innovation or firm be adequate to deal with the fundamental existential threat? If not, what should be the appropriate strategies for them to survive or even thrive in the advent of a paradigm shift? In this paper, we attempt to sketch out a research framework to investigate this important issue.