Formative Essay. Student ID: 201130263 Course Code: MG427 Teacher: Dr.

Susan Hill Word Limit: 2500 Year of study: 2011/12

Essay topic: It is often asserted that new entrants more typically introduce radical innovations than do incumbent firms. Is this accurate? Discuss.

Introduction
In this Essay there would be described the factors seen in the scholar literature as the key incentives for the firm to introduce the radical innovation, discovered the correlation between these factors and the status of the firm (new entrant or incumbent), pointed out the changes of this correlation in historian prospective and described the current ratio of the new entrants and incumbent firms in the radical innovations and its possible future developments. Author assumes that in total established companies account for the larger percentile of radical innovations, which means that they introduce them more typically than the new entrants. It is recognized that the new entrants are more willing to introduce the radical innovation and the ratio of the radical innovations adopted by the new entrants per quantity of the new successfully founded firms might be higher that the similar ratio for the incumbent firm. Though it may lead to the assumption that the radial innovation is more typical among the new entrants it lies out of the scope of this essay. It is important to notice that different kinds of radical innovations should be distinguished. While it is common to treat the new technology as a radical innovation, here we would talk about the radical innovation both in technical and economic sense (Henderson 1993). It means that the technology should not only be absolutely new, but also account for the former solution become noncompetitive. The definition of the new entrants and incumbent firms should also be given for better distinguishing and in order to avoid inaccuracy of the data supplied in support of the assumptions reflected in this essay. Under the term incumbent firm we should understand the firm that already manufactured and offered the products, which preceded the new radically innovative product (Chandy and Tellis 2000). Subsequently, the new entrant could be defined as the company, which was not presented on the current market with its own products.

The factors influencing radical innovation

It is considered that the incumbent firms fail to implement the radical innovations and due to this lose in the competition to the new entrants. In fact history proves that before the World War

II this was the case for the majority of the firms with only 22% of the radical innovations implemented by the existing market leaders (Chandy and Tellis 2000). There are different approaches to explain this phenomenon, as originally it was seen that the incumbent firms had much more resources and capabilities to succeed in innovation (J. Shumpeter 1942).

Underinvestment of new technologies

Underinvestment of the new technologies by the big firms is introduced as one of the reasons (Henderson 1993). The existing market players pursue the goal to receive the return on their investments in the technology, which made them prosper and put significant efforts into its further improvement. Such behavior results in the incremental innovation of the existing product. In the meantime the investment in the other potentially beneficial solutions is seen as lowering the profit, because the outcome of such investments is unclear. In these circumstances new entrants as a first-mover, investing in the new technology gain a competitive advantage.

Organisational structure and strategy

Apart from underinvestment, organisational structure and strategy can affect the companys ability to innovate in the radical way. It is assumed that the environment facilitating the adoption of the radical innovation is usually created when the company embarks on the aggressive technology policy and the concentration of the specialists occurs (Ettlie, Bridges and O'Keefe 1984). Both factors are likely to coincide in the new firms rather than in incumbent firms. In the same study, the growth strategy together with complexity of the organization and established formal rules of the large companies is asserted to lead to the incremental innovation and product diversification. On one hand, this notion leads to the conclusion that the typical big firm would implement radical innovation with less probability than a new entrant. On the other the study of the Intel proves that the features usually attributed to the large corporation do not necessarily exist within the company. Intel adopted the aggressive technology policy and allowed large decentralization (Burgelman and Grove 2007). The study shows that it was done on purpose in order to let the company remain competitive against the changes in the industry. However, it is underlined that theoretically such policy is uncertain to bring positive results. The author claims that companys strategic actions will ultimately be to its advantage (Burgelman and Grove 2007, 969). This is a very important factor, which would be further discovered in this essay.

The close ties to the existing markets

Another element, which can prevent the existing company from being radically innovative, is the market it addresses to (Christensen and Bower 1996). The incumbent firms, possessing the market share, try to make the customer loyal and do their utmost to keep the customers satisfied. In this case the companies can deliver the new solution based either on the improvement of the

existing technology or on the implementation of the new one. The problem of such approach is that the companies test the new technology viabilities against the existing market conditions. Having found no profitable application of the new technology to their customer needs, incumbent companies fail to explore the opportunities the technology might give to the establishment of the new markets. New entrants working on the new technology do not restrict the exploration by the existing markets. As the technology is the only advantage they posses, they check every possibility to find the commercial application to it and often succeed in it. Saying this it is necessary to admit that it is not common that radical innovation result in the establishment of the new market.

Willingness to cannibalize
As one of the most influential factors the willingness to cannibalize is introduced by Chandy and Tellis (Chandy and Tellis 1998). They diminish the role of the size of the company and claim that the significant obstacle on the way of the established firm to the radical innovation is the threat of undermining the current companys assets value. The authors underlined the importance of the capital expenditures of the company, which existing firms are often reluctant to acknowledge as a sunk cost. The fear of abandoning the existing technology with all the investments already made in it sometimes forces managers not only to curtail the development of the new technology in the company, but also to deny the necessity of implementation of the new already proved to be successful technology (Tripsas and Gavetti 2000). There is also a problem of the lack of the autonomy in the big firms. This does not allow the best idea within the firm to find its way to production. The competitive environment within the company and decentralization are vital for the successful innovation. All these factors are incorporated in the willingness to cannibalize. In this study it is proved that the actual size or the status of the company (new entrant or incumbent) is of no importance in respect to how the company organized. It means that if the large company is properly managed, its structure is flexible and autonomous and is ready to sacrifice todays achievements for the sake of the potential future prosperity it will more likely to become the radical innovator.

Willingness to cannibalize: three-dimension prospective

The future study of the willingness to cannibalize gives the more deep understanding of this phenomenon as it is split into three categories: willingness to cannibalize on sales, willingness to cannibalize on capabilities and willingness to cannibalize on investments (Nijssen, Hillebrand and Vermeulen 2005). It is shown that the success of the radical innovation depends on the willingness to cannibalize sales and investments. In the mean time the readiness to sacrifice the capabilities does not result in the increased probability of radically innovative outcome. This can be justified by the fact that the company usually cannibalizes the capabilities in face of the existing

customers demand and therefore it leads to the more incremental improvements. The important finding, which may seem obvious that the willingness to cannibalize the investments comes to the management with the increasing competition, i.e. the company is only then ready to adopt new technology when forced by the competitors. Assuming that the new entrant radical innovation allows the company to dominate the market and become a large incumbent firm, this incentive often lacks till the very point of the introduction of the new radical innovation by the superseding new entrant.

Historical changes in radical innovation adoption and future development

Looking at the historical prospective of the issue of the radical innovation ratio between new entrants and incumbents new entrants and existing firms adopted radical innovations in almost equal proportions (53% vs. 47%) (Chandy and Tellis 2000). But these figures do not show the whole picture, as the proportion was not constant all the time. Before the World War II the nonincumbent firms accounted for the 73% of all the radical innovations. The situation with post-war innovations is quite opposed, with only 26% share of the non-incumbents. Though the research does not give the forecast for the future ratio, it can be assumed that the domination of the incumbent firms would continue, but is unlikely to significantly expand further. Surely there is a limitation of the research that explored only office goods and consumer durable, which should be taken into account. It can be argued that these industries require a lot of fund to be invested in R&D, while it is not common for all the sectors.

Conclusion
Having studied all the major factors influencing innovative behavior the author of this essay finds that in order to be successful at radical innovation adoption the firm should implement the appropriate technology policy, including sufficient funding of the R&D works, establish flexible organizational structure, constantly look outside the market searching for the new opportunities for its inventions. All this was usually done by the new entrants, which then becoming incumbent failed to pursue this path. The alteration in behavior of the managers might be provoked by the refusal to accept initial capital expenditures as sunk costs ( (Chandler 1990) and (Sutton 1991)), or in other words by the unwillingness to cannibalize on the investments and sales. The investments made at the start-up stage needed to bring the returns and it forced the incumbents to stick to the incremental innovations path. However, this case seems to be in the past, as together with the development of the markets and the scientific discussion on the innovation, the managers became aware of the potential threats and change the attitude towards the cannibalization of their own products and investments. Radical innovation, which previously was not seen as a

competitive advantage, became the central point of the strategy of many incumbent firms. Subsequently the investment policy and organizational structure were changed accordingly. It resulted in the fact that the incumbent firms achieved almost the same potential for innovation as the new entrants. The combination of this potential with the significant resources available made the large companies dominate in the radical innovation. However, there is always room for the new entrants to work in: they are capable of the attracting the significant venture capital and achieve the highest concentration of the technical specialists. The former engineers of the large companies founded many of modern new entrants, and this shows that there is always a place for the wrong managerial decision. Nevertheless it is likely that the percentile of the new entrants would remain lower and the incumbent firms would adopt radical innovation more typically.

References
Burgelman, Robert, and Andrew Grove. Let chaos reign, then rein in chaos repeatedly: managing strategic dynamics for corporate longevity. Strategic Management Journal 28 (2007): 965-979. Chandy, Rajesh, and Tellis, Gerard. Organizing for Radical Product Innovation: The Overlooked Role of Willingness to Cannibalize. Journal of Marketing Research 35 (1998): 474-487. Chandy, Rajesh, and Tellis, Gerard. The Incumbent's Curse? Incumbency, Size, and Radical Product Innovation. The Journal of Marketing 64 (2000): 117. Chandler, Alfred. Scale, scope and organisational capabilities. . 2, Scale and Scope: the dynamics of industrial capitalism, Alfred Chandler, 1446. Cambridge: Harvard University press, 1990. Christensen, Clayton, and Joseph Bower. Customer power, strategic investment, and the failure of leading firms. Strategic Management Journal 17 (1996): 197-218. Ettlie, John, William Bridges, and Robert O'Keefe. Organization Strategy and Structural Differences for Radical versus Incremental Innovation. Management Science 30 (1984): 682-695. Henderson, Rebecca. Underinvestment and Incompetence as Responses to Radical Innovation: Evidence from the Photolithographic Alignment Equipment Industry . The RAND Journal of Economics 24 (1993): 248-270. Nijssen, Edwin, Bas Hillebrand, and Patrick Vermeulen. Unraveling willingness to cannibalize: a closer look at the barrier to radical innovation. Technovation 25 (2005): 1400-1409. Shumpeter, Joseph. Capitalism,Socialism, and Democacy . New York: Harper, 1942. Sutton, John. Sunk costs and market structure: price competition, advertising and the evolution of concentration. Cambridge: MIT Press, 1991. Tripsas, Mary, Giovanni Gavetti. Capabilities, cognition and inertia: Evidence from Digital Imaging. Strategic Management Journal 21 (2000):

1147-1161.