Disruptive Innovation - Making it happen in Organizations
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Authors
Authors: Sanjib Dutta, Anil Kumar Kartham
Senior Faculty Member, Faculty Associate
ICMR (IBS Center for Management Research).
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Japanese companies gained success through disruptive innovation. But disruptive innovations have a limited applicability. The best customers of these companies become sophisticated and demanding. They stop accepting disruptive products. In order to serve sophisticated and demanding customers, the Japanese companies planned in advance, and this enabled them to compete in established markets. But as companies get used to serving their best customers5 in a planned way, they lose their capacity to be aggressive, take risks, and create new markets. When they attempt to enter new markets or lower segments, their profit margins fall. As a result, they tend to get stuck in the upper segment of the market.
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But once they reached this segment, they realized that there were not enough volumes to sustain growth. This resulted in painful consolidation.
According to Christensen and Thomas, both the Japanese and the US companies face the innovator's dilemma when the approach the high end of the market and are not able to pursue disruptions at the lower end of the market. But according to them, the US economy has performed better than the Japanese economy in recent years, because the United States was able to repeat the cycle of disruption. When the top US companies are stuck at the upper segment in their markets, their employees leave the company, approach venture capital firms, and start companies that create disruptive innovations. All the American companies mentioned in the paragraph above, played the disruptive game once. But, even when established stop disruptive innovation, fresh cycles of disruptive innovation have been seen in the Silicon Valley, where fluid labor and capital markets have attracted the resources necessary to create these innovations.
Japanese companies were once disruptive innovators. But today, they no longer have the same growth options. They cannot even attempt disruptive innovations now, as the Japanese industrial structure is very inflexible. In the Japanese economy today, it is difficult to start new companies that promote disruptive innovations. Immobility of labor is one major obstacle.
Japanese employees usually stick to a single large company for life. They aspire to climb the corporate ladder of the company rather than start their own. This tendency is a hindrance to the development of a vibrant venture capital infrastructure in Japan. In a cyclical way, the absence of venture capital keeps talented people in the same old companies where innovation is not possible.
Most Japanese firms rely on debt from financial institutions to fund their finance needs, rather on the more flexible private and public equity markets seen in the US. Financial institutions offering loans look for clear plans and predictability in the firm's revenues. But successful disruptive entrepreneurs have to create new markets where the new technology is valued. The initial business plans, product concept, and expected customer reaction are quite uncertain. As a result lending institutions discourage disruptive innovations. Successful disruptive innovations take place when outstanding talent from established companies and venture capital is available.
5] Who represent major portion of company's profits.