Innovation or technological change can be quite disruptive to the current competitive order. If we think back to our idea of S-curves, what you might see over time our inter lapping curves as new technologies emerge. Often these new technologies might be worse at first, but as they improve they will overtake existing technologies. Now that's not guaranteed, in many cases the technology fails to ever overtake the old, but in some cases it does. What's interesting about this is in many cases when this occurs, older firms that can't adapt are basically driven from the marketplace. This raises an interesting question that if this type of change can be disruptive does it have to be fatal? Why is it that so many incumbent firms struggle and some of them die when faced with the disruption? Let's start with the question of why do incumbent firms often fail when faced with these disruptions. The first argument is very simply, there are no better position than new entrance when a new innovation or technology comes along. In essence, the innovation renders existing capabilities valueless, either technologically organizationally or market wise. We go back to Swiss watchmakers, they were really good working with small mechanized devices. Now comes along a new technology and that whole expertise they had was rendered useless in this new digital world. As a result, they were no better position than new entrance and lots of new entrants could come in and intentionally do better than them. Second, they could actually be worse position than other entrance in the industry. Incumbent firms might actually fail to see the value of the new innovations and have a difficult time adapting. This is what is sometimes referred to as core rigidities. The idea being what made you successful in the past, what might have been your core capability actually becomes a core rigidity as the industry shifts because you're unwilling to make the change. Think about Borders. Borders had made a huge sunk investment in terms of their physical brick-and-mortar stores that they had established throughout North America. Along comes online book sales. They might have falsely thought the sunk investments needed to prevent them from making a heavy investment in online. Take Kodak for example, Kodak once again was very aware of the emergence of digital technology, yet over the preceding decades where they were trying to make this transformation they always seem to be just a step behind. Maybe one of the arguments for why they struggled was they were basically a chemical company, all of their talent, their resources were round chemical engineering and the like and now they're making this transition, and that's very hard for a company who had such success to suddenly make a bold transition to a new technology or industry. Let me give you one last example, General Motors back in the 1980s tried to reinvigorate their ability create small energy-efficient cars. Especially given the competition they were receiving from Japanese companies like Toyota and Honda. They created their first new car division in decades called Saturn. Saturn early on was very successful, they started from scratch. They did a whole number of innovative things. They got out of Detroit the built-in Tennessee. They had new labor relationships with the unions. They even had an innovative way of selling cars that didn't rely on haggling. Early on Saturn was a big success. But then over the coming years the Saturn vehicles really weren't improved at all. In fact, they were the same cars 10 years in as they were basically when you originally could buy a Saturn. What happened? Why did General Motors stop investing in their Saturn Platform? At least the argument that some have made, was that it was an internal political battle. Chevrolet and other divisions starved Saturn of resources that they were concerned were cannibalizing their products. Now I'm not sure if this is exactly what happened with the Saturn case, but it's an example of how political and fighting sometimes exist in large corporations and once again could make them actually worse position than new entrance during a technology shift. The third thing we might want to think about is that in some cases firms might simply select not to change. Maybe there's a fundamental trade-off between the long run competencies they need and the short long-term advantages that they have. Maybe they're worried about cannibalizing their existing products. Take Blockbuster for example. Carl Icahn the activist investor, argue that Blockbuster shouldn't try to make the transformation to be an online streaming business. They had no inherent capabilities there, and it was better for them to take their resources and basically milk the cash cow that they had which was the retail stores, until they basically went out of business, planned obsolescence. That's very hard for companies to do, but it can be the most logical response when you get disrupted. Let's flip this around we just gave you a whole set of reasons why incumbent firms fail. Why do incumbent firms succeed? What is the ability of these firms to thrive when there is disruption? Well first, innovation might require extensive capital and expertise it might require R&D in the like, that only a large incumbent firm with resources is able to handle. Maybe small or newly founded firm simply don't have the expertise that are necessary. Think about IBM and their Watson technology. They were able to pivot in the late 1980s into the early 1990s from basically becoming a hardware computer manufacturer, to being more of a business analytics company leveraging higher-level digital technology like artificial intelligence. They were able to take that inherent technology advantage they had built up over decades of experience and pivot into a more lucrative and more promising piece of the competitive marketplace than others would be able to do. Sometimes customers simply desire assurance from established firms when new markets are emerging. Maybe the customers are risk-adverse, maybe they're unwilling to try new things or they just like the assurance of established brand name when they move into a nascent market. It's going to be interesting to see in the electric vehicle market how BMW and Volvo do to well-established brands well-respected brands that are becoming more aggressive into the electric vehicles. Whether they'll have an advantage perhaps over Tesla other stars and space, it's a interesting question to have. That even though these companies don't have the history Tesla and the like the these companies have. Third thing you might want to think about, is that sometimes incumbent firms may leverage some type of complementary resource or capability to their advantage. Think about Nikon in the camera industry once again they were able to make the transition to digital by emphasizing their lenses. They're able to use this technology and this advantage they had in understanding lenses to survive once this transition was taking place. In BMWs case perhaps it's their manufacturing service capabilities that will allow them to survive and thrive in a world of autonomous vehicles and electric vehicles. Again, leveraging existing capabilities to succeed in a new marketplace. The fourth and last thing we might want to think about in terms of why do incumbent firms succeed, is that perhaps the incumbent firm has somewhat what we might refer to as a dynamic capability. Basically the ability to adjust the changing business conditions. Probably the prototypical example of this in recent years has been Apple. Apple was a pioneer not only in digital music players, but smart phones and of course they have the iPad as well. They were a well-established firm though having roots all the way back to the 1970s. Under Steve Jobs and especially the second 10-year of Steve Jobs they were able to create a dynamic ability to reinvent themselves in the face of changing market conditions and in many ways this is the golden ideal that many companies are trying to achieve when they think about their own innovative capabilities. How do we create the set of capabilities to allow us to be dynamic and responsive to changing market conditions as we might go through a digital transformation?
