Disruption and Ambidexterity: How Innovation ... - Science Direct

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ScienceDirect Procedia - Social and Behavioral Sciences 235 (2016) 782 – 787

12th International Strategic Management Conference, ISMC 2016, 28-30 October 2016, Antalya, Turkey

Disruption and Ambidexterity: How innovation strategies evolve? Lütfihak Alpkan a, Evrim Gemici b, a a

Istanbul Technical University, Istanbul, 34367, TURKEY Yildiz Technical University, Istanbul, 34349, TURKEY

b

Abstract To be able to adapt successfully to the rapidly changing and uncertain external environment, foreseeing and adapting to the changes are very critical but not enough; because it just makes us followers but not prospectors or proactive entrepreneurs. It is also possible to change the rules of the game to one’s own advantage instead of just trying to adapt to the established norms. This is not only innovation but also disruption. Especially those small or newly established organizations might try to disrupt the already established way of doing business dominated by the more powerful, larger, and older competitors. Since they are already integrated and adapted to the status quo it would be difficult for them to admit the importance of radical change; but for the smaller and potentially more dynamic and adaptable newcomers, disruption is not only easier but also a must for survival. Established firms facing the unexpected or marginal innovations coming from some successful disruptors need to develop counter attacks to preserve their market shares. In such a marketplace, the old normal standardized value propositions begin to disappear, and new innovative avenues emerge in the margins causing a duality for selection: either low quality and cheaper novelties or luxurious ones. These response strategies may force firms to choose one of these once marginal segments and try to enlarge these segments to new markets. In biological terms this is disruptive selection leading to the emergence of two new and different species out of an older one. But still we have another alternative instead of selecting one, why not selecting both at the same time, i.e. ambidexterity: successful combination of seemingly conflicting alternatives. Not only successful disruptions but also successful responses may turn old business sectors to a new ambidextrous status quo until another wave of change.

© Ltd.. This is an open access article under the CC BY-NC-ND license 2016The TheAuthors. Authors.Published Published by Elsevier Ltd © 2016 (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of the organizing committee of ISMC 2016. Peer-review under responsibility of the organizing committee of ISMC 2016. Keywords: Ambidexterity, disruption, innovation, disruptive selection

1. Introduction Biological terms which were originally developed to explain the evolution of the species in the natural environment are widely used in the business literature to understand competition and survival. Especially theories on organizational ecology deal with such concepts as variation, selection, and retention. For instance, according to the perspective of “population ecology of organizations”, organizations within the same population compete for similar resources or similar customers; some can adapt and survive, some cannot (e.g. Hannan & Freeman, 1977). Those who can adapt survive a process of institutionalization to be selected by the environment. Those who cannot are eliminated because of their inertia and/or bounded rationality. Similarly, in

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1877-0428 © 2016 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of the organizing committee of ISMC 2016. doi:10.1016/j.sbspro.2016.11.080

Lütfihak Alpkan and Evrim Gemici / Procedia - Social and Behavioral Sciences 235 (2016) 782 – 787

this study, it is tried to adopt biological concepts, such as disruptive selection and ambidexterity to develop propositions for organizations about how to survive the intense competition in the marketplace based on some cases from different industries. In order to surpass and survive competition and crises, the theories on institutionalization propose in general to craft distinctive forms, processes, strategies, competences, etc. for internal integration and external adaptation (Eren et al., 2003). However, to be able to adapt successfully to the rapidly changing and uncertain external environment, foreseeing and adapting to the changes are very critical but not enough; because it just makes us reactors or followers but not prospectors or proactive entrepreneurs (e.g. Miles and Snow, 1979). Attempts for distinctiveness at the beginning by various organizations then may end up with standardized large and formal structures of few similar organizations. For instance, according to “the new institutional theory”, a theoretical perspective that tries to develop cognitive and cultural explanations not for variation but for homogeneity among organizations (e.g. Meyer & Rowan 1977; DiMaggio & Powell, 1983 Powell & DiMaggio, 1991), in the initial stage of their life cycles, organizations present diversity in terms of approach and form; then in the maturity stage, as they get institutionalized, they become isomorphic with each other. Making them more similar can contribute to their legitimacy, but it does not guarantee their efficiency and survival. Beyond or even at the expense of legitimacy, adaptation, or institutionalization we need something more radical to survive, this is innovative change. In other words, if it is possible to change the rules of the game to one’s own advantage instead of just trying to adapt to the established norms, why to wait for a new wave of change and then react. Instead we have to initiate change that we can exploit by to our special and distinctive competencies. This is not only innovation but also disruption. Especially those specialized but small or newly established organizations might try to disrupt the already established way of doing business dominated by the more powerful, larger, and older competitors. Since they are already integrated and adapted to the status quo it would be difficult for them to admit the importance and accept the risks of disruptive change; but for the smaller and potentially more dynamic and adaptable newcomers change is not only easier but also an obligation to survive. Therefore, innovation is important for every type of companies, but the appropriate type of innovation strategy may change. As the business strategy researchers, we can categorize the appropriate innovation strategies according to firm characteristics, just like the biologists who investigate the reactions of the species. A few large firms with an entrepreneurial climate where employees are highly committed and innovative (Ergun et al. 2004; Bulut and Alpkan, 2006) would increase their market value by sustaining innovations both incremental and radical. Other large firms not so much innovative would try to follow these innovations and adapt incrementally. Smaller or newcomer firms would try to imitate the established institutional way of doing business. But there is also another category, i.e. those who are not trying to imitate or adapt but disrupt the status quo by not only offering the customers something cheaper and simpler but also providing totally new value propositions than the normal ones. This is something very risky, but if successful they totally change the norms of the market. Established firms facing the unexpected or marginal innovations coming from some successful disruptors need to develop counter attacks to preserve their market shares. Especially when coupled with appropriate technological, cultural, economic, demographical or other marketplace changes disruptive innovations may force once leading firms to acquiesce in the new terms or even respond with another disruption. If not, the older species would be selected out. Therefore, while disruption strategies are extremely risky, response strategies towards the successful disruptions if any, are also extremely obligatory. Even if they used to be corporate entrepreneurs, the established firms may lose their leading role and proactivity; they may become reactors or followers. In this concern, there are some possible response strategies. Some firms may choose to ignore the challenge and continue to preserve and even invest in the old status quo, some firms choose to admit the potential of the new normal and try to adapt, and some others admit the potential of not only adapting but also counter attacking by another disruption. In such a marketplace, while a glass ceiling for the old normal i.e. standardized value propositions is appearing on the way to the future, new innovative avenues emerge in the margins causing a duality for selection: either low quality and cheaper novelties or luxurious ones. These response strategies may force firms to choose one of these once marginal segments and try to enlarge these segments to new markets. In biological terms this is disruptive selection leading to the emergence of two new and different species out of an older one. But still we have another alternative instead of selecting one, why not selecting both at the same time, i.e. ambidexterity: successful combination of seemingly conflicting alternatives. Not only successful disruptions but also successful responses may turn old business sectors to new ambidextrous status quo until another wave of change. 2. The concept of disruptive innovation Disruptive innovation, a term coined by Clayton Christensen (1997), describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors. It involves products, services or approaches that transform existing markets or create new ones by trading off raw performance for the sake of simplicity, convenience, affordability and accessibility. The main objective of disruptive innovation is not to bring the best performance, product or service to current customers but, it is to bring lower performance products or services to market by the introduction of other benefits. Disruptive innovation theory is based on initial

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low-cost model but at the same time with lower performance features (Yu & Hang, 2009). It explains the failure of established companies when they encounter certain changes in the market. Basically, three main factors play a significant role in leading companies to the failure. This failure stems from the methodological difference in pursing sustaining and disruptive technologies, the rate of improvement that customers can utilize or absorb in the market and the revenue and the cost structure of established companies (Christensen & Raynor, 2003). The core of disruptive technology is to change the performance metrics along which firms compete (Danneels, 2004). Since disruptive technologies introduce different product features that were of no or little value before, they therefore change the basis for competition. Disruption occurs when the performance trajectories of disruptive technology intersect with that of the performance in the mainstream market (Christensen & Raynor 2003). Some examples of disruptive innovation include: Personal computers vs. Mainframe and mini computers; Mini mills vs. Integrated steel mills; Cellular phones vs. Fixed line telephony; Discount retailers vs. Fullservice department stores; Retail medical clinics vs. Traditional doctor’s offices (http://www.claytonchristensen.com/key-concepts/#sthash.JJJzzTQy.dpuf, 2016). 3. The encroachment of the disruption Disruptive innovations are the examples of simply transforming a niche market into a mass market process; thereby providing the opportunity for the new entrants that invade the market and offer the product from the niche market to the mass market (Markides & Geroski, 2005). Both the successful penetration of the disruptive innovation beginning from a niche market and the shrinking shares of established firms’ sustaining innovations in the mass market increase the awareness and popularity of the new value proposition among both competitors and customers. This trend at the expense of standardized mainstream solutions opens new avenues for high end or low end marginal solutions. Schmidt & Druehl (2008) use the term encroachment to define a situation where a new product takes away sales from an existing one. Low-end encroachment is explained in a way when a new product first displaces the existing one in the lower-end of the old products market and then penetrates upward. On the other hand, high-end encroachment starts at the high-end of the old product’s market. In the low-end market, customers are least willing to pay, whereas high-end market’s customers are the most willing. High-end encroachment is consistent with sustaining innovation activity in opposition to low-end encroachment. It is outlined that both new market disruption and low- end disruption, as they are defined by Christensen, result in the patterns suitable to low-end encroachment diffusion process. The new product takes away sales from the old product either immediately which refers to low-end disruption or after opening up a new market which refers to new-market disruption. However, we cannot necessarily argue that only low end innovations which will bring success. Both low and high end solutions may have important advantages and share the new market. 4. The concept of disruptive selection Failure of old ones and growth of new species is not only social about also a biological phenomenon in the nature. One of the important questions in biology is: How do new species develop? Friedl (2016) mentions that one evolutionary mechanism that may be at play is disruptive selection. Though rare in nature, Disruptive Selection occurs when environmental conditions favor those on both extremes over intermediate ones (Tennant, 2014). For example, some individuals are very fast runners, and some are very slow. Overall, most individuals are close to average: they are neither very fast nor very slow. When the average is expressed in nature, this is referred to as stabilizing selection. Sometimes, however, one or more extreme is actually what is favored and the average is selected against. When only one extreme is selected, it is called directional selection. It can lead to the development of two separate species. When both extremes are selected for equally it is called disruptive selection. Disruptive selection favors both extremes. Disruptive selection is the rarest of these three types of natural selection, but is a major driving force of evolution (Friedl, 2016).

Fig 1. Disruptive Selection


We can try to use this biological explanation in the evolution of ways of doing business in the marketplace. All of a sudden, low end or high end value propositions may become much more attractive for the customers instead of continuing to buy mainstream products. Such radical shifts in the market norms stem first of all from disruptive innovations. Without the penetration of such disruptive value propositions, just because of market saturation, radical technology push or other environmental developments market norms would not change at the expense of sustaining innovations. Therefore, disruptive competitive moves of newcomers initiate the encroachment effect. Only after this attack, established firms and newcomers would move towards extremes and turn marginal solutions into the new normal. In this process of evolution of the market conditions, every single player should explore a suitable strategic position to exploit the future. Some will remain the same, some will move towards the low end and imitate the disruption and some will prefer to try to concentrate on the high end segments which are not attacked for a while by the first disruptors. When we consider the watch industry and the crisis in the Swiss watches in early 1980s, we can observe similar evolutionary paths. Japanese plastic electronic watches suddenly captured the old market of watches used to be dominated by Swiss brands. One extreme alternative to override this disruptive attack was to produce and market cheap plastic watches to compete with Japanese disruptors, the other extreme to focus only on luxurious watches to compete with jewelry products. Proposition 1: Established firms should try to respond proactively to the disruptive innovations 5. The strategies to respond the disruptors Disruptive moves of new players change the status quo by attacking the rules of the game set by the established firms, and force the latter to admit the necessity of trying to respond to this attack. Charitou & Markides (2003) stated that a response to disruptive innovation could vary from industry to industry or from market to market and determined five ways to respond. The first response suggests to concentrate on the traditional business. The main idea behind this response is that a new way of doing business would not necessarily capture the whole market. Therefore, improving value proposition for the already targeted market could be the best way to respond to disruptive innovation. The second way to respond is to ignore the disruptive innovation since it has a different value proposition and target different customer segments. This response represents an understanding that underestimates the threats that may be associated with this disruption. The third response proposes to exchange roles in order to disrupt the disruptor through playing a totally different game. This response emphasizes still different product attributes than those of the disruptor. The fourth way of responding is to embrace and scale up only the disruption at the expense of the old way of doing business. In this strategic choice the original disruptor is not disrupted by a new type of counter disruption but face a challenge of intensified competition in its new market. The fifth response is to adopt the disruption while at the same time trying to keep the traditional business as is. This response necessitates to hold two conflicting or seemingly conflicting positions, simultaneously. In this context, setting a separate organizational unit that is autonomous is a common approach. As a derivative of the fifth way of responding, a totally autonomous strategic unit can be established to cope with the disruption while the existing organization continues its own traditional way. Christensen & Raynor (2003) suggest that the establishment of a spin-off is necessary when the revenue and cost structure of the mainstream organization are different from the new one. On the other hand, Porter (1996) had earlier argued that operating in the same market with two different (or even conflicting) strategies is not feasible because strategic positioning requires trade-offs in order not to be stuck in the middle. Otherwise, companies can find themselves incurring huge straddling costs that may result in diminishment of the value of their current structure. The main question as to whether this is achievable in order to manage the incompatible activities within the established companies was attempted to be answered by different scholars. Markides & Charitou (2004), in their study with regards to competing with dual (or combined) strategy, found that competition in two opposing strategic positions within the same industry is possible even in the absence of a separate division (ambidexterity) (Durmuş Ö. E. & Meçikoğlu S., 2016; Lapersonne, A., Sanghavi, N., & De Mattos, C., 2015). In order to manage seemingly conflicting positions or options, the discovery of complementarity within duality is a must (Şanal, Alpkan, Aren, Sezen & Ayden, 2013; Alpkan & Aren, 2009). The main concern must be to be able to concentrate at the same time on different dimensions of a product or service feature which in turn, attract different customer needs, Then, it is crucial to determine the conflicts between two businesses and how they strategically are similar to one another, once this is done, separation can be an option. However, it is also found that separate division does not necessarily secure or guarantee success especially when mechanistic and rigid structures and routines of the traditional way of doing business are replicated. The key to success is to be able to launch the new business model in a creative manner. Proposition 2: Established firms should try to respond to the disruptive innovations by ambidextrous solutions

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6. Selecting both at the same time: ambidexterity Wood et al (2013) argue that incumbents engaged in Disruptive Innovation thrive because they demonstrate organizational ambidexterity by exploring new opportunities while exploiting established capabilities, and by differentiating the organization into specialized units while also integrating the organization as needed. In some cases, the first disruptive move may come from a newly established company who just explore. In this case, the disruptor should not necessarily be ambidextrous at the beginning but while their brand and market share grow they need to develop capabilities to exploit the fruits of the disruption. Similarly, the established companies need to be ambidextrous to respond and survive. When the markets become mature, the average, standardized, normal route to success is blocked because of shrinking market shares of numerous average competitors or because of changing demands of the over or under satisfied customers. In this type of crisis where the average or typical way doing business hits a wall of old practices, marginal and risky attempts for disruption may be selected to override the blockage. Ambidexterity defined as the combination or a set of two discrete capabilities, namely exploration versus exploitation (Menguc and Auh, 2008), alignment versus adaptability (Gibson and Birkinshaw, 2004), radical versus incremental innovation (Tushman and O’Reilly, 1996), or flexibility versus efficiency (Adler et al, 1999) is a rather new approach expected to combine the benefits of both possibilities. Tushman and O’Reilly (1996) in their seminal work on ambidextrous organizations, suggest that managers and organizations must be able to implement both incremental and revolutionary change at the same time in order to avoid the syndrome or trap of success followed by failure and thus remain successful over longer periods. The key for success here according to them is ambidexterity, i.e. the art of balancing the efforts of alignment in the present or mature environment by the realization of efficiency and incremental innovation objectives, with the efforts of adjustment to the changing conditions by the realization of flexibility, speed and radical innovation objectives. Then, He and Wong (2004) find empirical support for this ambidexterity hypothesis. It has however important difficulties to execute. According to Tushman and O’Reilly (1996) many companies which are large and wealthy enough to afford to exploit the present technologies and markets and to explore new ones may not yet be able to play these two games at the same time because of their internal conflict and inertia. It is very difficult in old and large firms to reshape the working atmosphere and managerial understandings of the top and middle managers and specialists and to build a consensus among them about the rationality of pursuing two seemingly alternative sets of capabilities and activities at the same time. The conservative proponents of one alternative may be resistant to reconcile both capabilities at the individual level (mental integration) and even at the business unit level (behavioral integration). For instance, on the one hand, proponents of exploration and adjustment may be resistant towards any attempts to increase discipline, hierarchy and bureaucracy; on the other hand, proponents of exploitation and alignment may be unwilling to face the tension and risks related to uncertainty, instability and change. Proposition 3: Successful implementation of ambidextrous solutions would increase firm performance 7. Implementation of Ambidexterity and Performance Past literature shows that ambidexterity can be implemented either by division of work or rotation in time (Raish and Birkinshaw, 2008). Division of work for ambidexterity means that different divisions, departments or individuals within the same organization may have complementary skills and tasks. For instance, while the R&D specialists focus on exploration for adjustment, production engineers may concentrate on exploitation for alignment at the same time. As for the rotation in time, different strategies and structures can be developed in different planning periods. According to Duncan (1973) and Johnston (1976) ambidexterity can be established by temporary fluctuations between periods of mechanic-routine and organic-adaptive structures/processes within the same work unit. However, the pure version of ambidexterity necessitates a more holistic framework. In other words, by definition ambidexterity should be implemented at the same time by the same agents. In this concern, in order to be effective in external adaptation and efficient in the internal integration simultaneously within the same work unit, ambidexterity should become not only as an organizational or departmental ability but also that of the individuals within this organization. Thus, an ambidextrous organization needs ambidextrous human capital to make a successful implementation of the strategies. Human capital should be mentally ready and capable of dealing with two seemingly alternative sets of responsibilities driving from the combined objectives of alignment and adjustment at the same time. Human resource management practices which are directly related to organizational performance (Erdil et al., 2004) e.g. selection and training etc. should be done accordingly. Therefore, high quality human power would amplify the performance impacts of ambidexterity.


Findings of recent empirical studies have already revealed that ambidexterity is an important driver of higher performance (e.g. He and Wong, 2004; Gibson and Birkinshaw, 2004; Auh and Mengüç, 2005; Mengüç and Auh, 2008). However, more specific cause and effect relations should be proposed and tested. Firstly, the empirical studies should make a comparison between the performance impacts of combining strategies i.e. ambidexterity and that of concentrating strategies solely on either exploration or exploitation. Then more specifically, beside overall organizational performance in terms of returns or sales growth, other performance indicators should be discussed. In this concern, operational performance indicators i.e. quality, cost, flexibility, speed (Alpkan, et al., 2003) may be tied to exploration, exploitation or both. 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