Radical Innovation: The Winning Formula

Radical innovation: the winning formula

Radical innovation can be beneficial for both firms and consumers. For firms it can lead to long-term growth and for consumers to new products that make life more convenient. It is therefore interesting to investigate what leads to radical innovations. Firms from mature markets seem to outperform firms from emerging markets when it comes to radical innovation and the reason of this can be argued from different point of views. To correctly understand these views, a brief revisit on the terms involved is required.

Radical innovations “stem from the creation of new knowledge and the commercialization of completely novel ideas or products” (Hopp et al., 2018), e.g. the invention of the internet. Radical innovations, also referred to as breakthrough innovations by Christensen (Youtube, 2013), are a precursor of incremental innovations, which are small improvements to existing products in order to increase sales to the same customer base and maintain market share, e.g. Coca-Cola continuously making small improvements to stay relevant and compliant. These innovations enable firms to maximize margins and are said to be short-term strategies as opposed to radical.  Radical innovation must not be confused with disruptive innovation; “a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent business” (Christensen, 2015, p.4). Disruptive innovation makes a product good enough for the lower end of the market, which is overlooked by the incumbents. The quality of the product improves over time, resulting in mainstream customers preferring the disruptor`s product over those of the incumbents.

Engineering a breakthrough

Firms need to invest in radical innovations to create resources that are of value, rare, non-imitable and non-substitutable. When having these resources, the firm has a sustained competitive advantage which ensures long-term growth (Barney, 1991). Mature markets are often saturated and incremental innovation is not sufficient for sustainable growth. Interpreting Miles’s Adaptive Cycle (1978), this is how “Prospectors” would answer to their entrepreneurial problem as opposed to “Defenders”. Radical innovation comes with risks, as it requires large capital investments, resources and time without having the insurance that an invention will lead to a breakthrough that ensures long-term growth. This explains why firms tend to acquire technology via acquisitions rather than investing in their own R&D. Further to that, while firms dedicate large resources to develop incremental innovations, it prevents them from allocating these same resources to the immediate needs of the firm. The resource requirement has a large explanation factor on why firms from mature markets are better at radical innovation than their competitors from emerging markets as they have access to the required means. In contrast, firms from emerging markets have access to cheaper labour and have strong ties with their own government (often providing capital support). According to Luo and Rui (2009), these factors, combined with the idea that they are fast-learners and continuously improving their technology, finance, HR and market management, contribute largely to their success today. So why are they not leading more radical innovation? To answer this, we have to understand their level of expertise and type of strategy. Technological expertise alone can become one of the main entry barriers for firms from emerging markets to create radical innovation that competes with mature markets.  This encourages firms from emerging markets to focus on establishing collaborations in order to access the required technology. “Emerging multinationals forge global cooperative alliances with some leading western Multinational Enterprises (MNE) from which they can gain knowledge and transactional competence” (Luo and Rui, 2009, p.55). If we continue that line of thoughts, only when firms from emerging markets close the technological gap, they would be able to lead radical innovation. This is how “Reactors” would answer to their engineering problem (Miles et al., 1978, p.557). Therefore, MNEs of emerging markets are not able to respond towards environmental change. Firms must be able to respond to environmental changes in order to survive. Romanelli & Tushman (1994) researched if changes in the environment have an effect on organizational transformation. According to them, fundamental transformation happens in a dramatic period of revolutionary shift and they found that MNEs in mature markets have a high degree of drastic transformation.

Organising a breakthrough

Firms in mature markets have expanded internationally decades ago, laying the foundations for other firms to expand abroad. We explained that their technologic advantage plays an important role in succeeding in radical innovation. However, we further observe that their technological development was possible due to their organizational innovation. Firms in mature economies have been successful in reacting to the environmental changes by adapting, whenever necessary, their organizational size and structure.  According to Porter’s (1979) five forces, the intensity of rivalry among firms is one of the main forces that shape the competitive structure of an industry. The intensity of rivalry will increase if products are undifferentiated, forcing firms to rethink their organizational structure in order to differentiate themselves and adapt. This comes from the long development of corporate law, which in turn supplied the legal framework to answer organizational needs. It therefore created the conditions that stimulated radical innovation. This can be a pitfall for firms from emerging economies where the legal framework isn’t as developed and stable. Luo & Rui (2009) mention that firms in emerging economies often have strong ties to their government or are state-owned, which can be restrictive and prevent firms to make the organizational changes required on time. In the past decades, firms operating in mature economies have benefited from an abundance of studies on organizational innovation, which have been a foundation for radical innovation. As a result, these tools available for use in mature economies have created an environment that reward success in innovation and penalize the ones that were not able to adapt to change.

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