Question

It is said that incremental innovations are more likely to come from incumbents, while drastic innovations are more likely to come from entrants to an industry. Explain why.

Answer 1

Reasons Why Disruptive Innovations Come From New Entrants

Disruptive innovation is a process through which a new entrant to a market or business segment challenges the existing and incumbent firms. Many-a-times, these firms also have inferior resources. Also, most of the times disruptive innovation occurs when the new entrants target certain overlooked market segments. They gain entry through a product that is considered to be inferior to the offerings made by an incumbent to the most demanding customers. Later, the new entrant moves up the ladder and keeps on improving its product. Sometimes, a new idea/technology or any other measure may create an entirely new market for a new entrant where no market existed initially. The development can convert the non-consumers into the consumers of a new entrant.

Disruption may not only be about technology but a combination of technologies that may be new and innovative and the business model. The combination proves to be innovative and provides for crucial competitive advantages. A new entrant often has scarce resources and cannot match the capability of the existing firms. Therefore, the new businesses focus on finding out the loopholes where they can provide a breakthrough. Entrepreneurs may work on their ideas, provide them suitable tangibility or appeal, create the prototypes, and raise funding based on it. For new business, these may be the only options available to work on, when it wants to disrupt the industry and unfollow the usual path of building a business brick-by-brick in the usual time required for growth. The discoveries and inventions also create interested inventors, but prior efforts are necessary for these as well. The ideas and insights to create a balanced and technology-aided business model, or achieving substantial insights into a market segment to find out the deficit areas that can be fulfilled through something new or improved takes a lot of research and effort. But because research and efforts can compensate for astronomical capital amounts needed for research and development, the new entrants follow this path. The new entrants are short on capital and resources, and genuine investors and angel investors only back credible ideas and business plans.

In many cases, the new disruptive process gives the result to offerings that are easily and quickly accepted by the lower end of a market, the space that is neglected by the incumbents as it provides for lesser profitability. In such instances, gaining approval in the lower end of the market is quite crucial for a business with a disruptive process and innovation. An example here can be that of Netflix. The “mail-order movie rental” business that it had initially did not appeal to the large group of customers, which stuck to Blockbuster. Netflix was able to grow the business by combining its services with the technology that also rose and improved for it luckily. The encroachment that Netflix made from the lower-end section of the market made it disruptive.

Reasons Why Incremental Innovations Come From Incumbents

Incremental innovations help companies stay competitive in its existing market segment. These innovations take the form of a series of small improvements to the existing services or products. The company does not create a new product category or concept but focuses more on achieving the marginal improvements on certain specific aspects of any of its existing offerings.

The incumbents are more stable companies in a market that have an existing market base and customer loyalty. Keeping things, the way they are profitable for these businesses. Therefore, the efforts of these firms are not creating something that disrupts the existing market. The incumbent firm hence focuses on improving its existing offerings so that they improve over some time and match the current trends and excel or match the offerings of the competitors. The improvements also keep the viability of the market and keep the customers engaged, impressed, and interested. The bigger the financial scale of operations of a business, the greater financial sense and security it makes for an incumbent firm to choose the incremental innovations. An example of incremental innovations can be seen practiced by the company's Gillette, where it introduces improvements in its existing razors. Ensuring stability and profitability are primary reasons why most of the incumbent firms spend the majority of their budgets towards incremental innovations and too little towards disruptive or breakthrough innovation.