Discontinuous Innovation and the Growth Paradox
By Soren Kaplan, Ph.D, Managing Principal, InnovationPoint

When it comes to innovation and growth, corporate leadership faces a paradox. On the one hand, visionary opportunity identification is essential to the long-term growth of the enterprise. On the other, operational challenges and quarterly revenue objectives mandate a focus on short-term results. To make matters worse, the world of emerging "white spaces" is a big place. How do you even start to identify major growth opportunities?

At Hewlett-Packard, we are finding ways to overcome these critical issues. HP has a long history of introducing technologies and products that revolutionize existing industries or create entirely new markets. Because of this, we have grown-so much that we are on the verge of breaking into the ranks of the largest 10 companies in America. We are well aware, however, that the compound annual growth rate of the fastest growing Fortune 10 company is only about 4 percent. Faced with the "growth stall" that besets the largest organizations, we are challenged to develop a new model that will enable a $40+ billion organization to achieve uninterrupted, profitable, double-digit growth for decades to come. We are approaching this task by distilling the knowledge that has contributed to our rich history and developing new business processes and methodologies that will help us address our most pressing challenge-how to sustain substantial growth into the future.

Discontinuous Innovation

Like the pursuit of good health, the quest for corporate growth is an everlasting and disciplined exercise. Just as fit individuals must strengthen their bodies through a multitude of activities-cardiovascular, muscular, dietary, and others-corporations must pursue well-rounded growth strategies, from incremental improvements to disruptive breakthroughs that create new industries and markets.

Although incremental innovations are critical for protecting revenues through growing market share, substantial growth over the long horizon requires discontinuous or disruptive innovation.
Michael Tushman and Charles O'Reilly suggest that discontinuous innovation involves breaking with the past to create new technologies, processes, and organizational "S-curves" that result in significant leaps in the value delivered to customers. Similarly, Clay Christensen, Gary Hamel and C.K. Prahalad, and James Utterback describe discontinuous innovation as involving "disruptive technologies," "discontinuities," or "radical innovations" that permit entire industries and markets to emerge, transform, or disappear.

Hewlett-Packard's inkjet printer platform, for example, represents a discontinuous innovation; this radical technology displaced dotmatrix printing, helped create the desktop printer industry, and propelled the company into the leadership position of a multibillion dollar market.

While environmental forces such as changes in government regulations and social trends can create white-space opportunities, new technology is often central to what makes an innovation discontinuous. But scientific breakthroughs are only a means to an end. The ultimate goal is to create major new revenue streams and sources of corporate wealth. Contemporary strategists have given us many examples of organizations that have created dramatic discontinuities-Sony's Walkman, Chrysler's minivan, Netscape's Navigator-and their contributions to customer and shareholder value have been immense.

And yet, while much has been written about the importance of discontinuous innovation, the corporate world lacks a systematic framework for identifying promising discontinuous innovations and creating beyond-incremental growth opportunities. Building on experiences with strategy formulation, technology lifecycle analysis, and change management across Hewlett-Packard (and working with examples from other companies and industries), this article introduces a model to help business strategists clarify strategic options for growth.

Opportunity Identification

Discontinuities are often described as technological breakthroughs that help companies rewrite industry rules or create entirely new industries. Rarely have distinctions been made within the concept of "discontinuity," not to mention how to identify these radical innovations. For the corporate strategist, a big question remains: how to actually structure opportunity identification so it becomes a rational process-one that yields breakthroughs reliably (versus waiting for opportunities to arise serendipitously).

We have discovered four types of discontinuities through our work at HP. As a result, we have developed a framework to help leaders with discontinuous innovation opportunity identification-the process of exploring new revenue streams and identifying compelling propositions for providing heightened forms of customer value. This is the strategic intent that defines compelling new business possibilities capable of driving substantial growth.

The framework takes the perspective of an organization that wishes to explore opportunities for discontinuous innovation and is founded upon three assumptions. First, we believe discontinuous innovation involves creating new forms of customer value within existing or new markets. Second, by pursuing discontinuous innovations, organizations create new competitive space or displace existing methods of delivering value to customers.

Our final assumption involves the structure of the model itself. We define four discrete innovation strategies but suggest that these classifications not be regarded as mutually exclusive. Instead, these categories should focus efforts on opportunity identification by providing an understanding of "gray areas" that all too often cloud the definition of "discontinuity." The four strategies in our model result from distinct organizational practices. Such practices are presented as (1) opportunity identification methods specific to each type of discontinuous innovation and (2) general approaches applicable to all four innovation strategies.

Strategy One: Radical Cannibalism

Radical cannibalism should not be confused with conventional notions of product cannibalism. Traditionally, cannibalism suggests an incremental activity-replacing today's products with next generation technology-and the competition is usually not far behind in introducing similar technology and customer value. By contrast, radical cannibalism involves replacing one's own successful products or services with fundamentally new technologies or processes, providing a significant leap in customer value. While some competitors may be near, most will lack the awareness, expertise, or resources to compete. Radical cannibalism allows you to revolutionize the industry by providing a level of customer value far exceeding what has historically been possible. Not only does radical cannibalism result in increased market share, the market size itself may grow due to the heightened value introduced by the discontinuous innovation.

The lines defining radical cannibalism shift with the perspective used when exploring opportunities. Eastman Kodak, for example, is currently engaged in reinventing itself-shifting its core business from silver halide chemical-based photography to digital imaging. Kodak must maintain - and even grow - its core business and primary source of revenue (film) while transitioning to a digitally focused business. While challenging to its entire enterprise, if Kodak can move its markets from "Kodak Gold" to "Kodak digital capture and display," it may remain a leader within its industry. From the HP perspective, however, the digital photography market represents an entrepreneurial opportunity to displace existing competition (for example, through HP's PhotoSmart digital photography solution). The lines between radical cannibalism and a competitive displacement strategy change with one's perspective.

Another example of radical cannibalism involves Ethicon, a subsidiary of Johnson & Johnson and the leader in traditional medical stitching technology. Ethicon has identified a potential threat to its core business-Closure Medical Corporation's Dermabond. A tissue adhesive recently approved by the FDA, Dermabond has been recognized as a technology likely to replace stitches as the primary method of suturing wounds. Rather than risk losing its 80 percent share of the worldwide suture market, Ethicon has invited Closure Medical into a strategic partnership and plans to market and promote the startup's revolutionary technology.

There are two methods that can help reveal opportunities for dramatically elevating the value that can be delivered to existing markets. And each is rooted in a belief that "if you don't eat your own lunch, someone else will!"

Hypothesize obsolescence. Considering the opposite of growth, the scenario of corporate death, can help reveal new opportunities. Most leaders think about growth in terms of creation. Exploring competitive strategies, breakthrough technologies, and customer behaviors that could be detrimental to the business often reveals unforeseen possibilities. By pondering the organization's obituary, leadership can achieve insights derived through suspended assumptions. Silicon Gaming, a new player in the $15 billion casino gaming industry, for example, has integrated leading-edge Silicon Valley technology with "Hollywood production values" to create the next generation in interactive "wagering devices." Since little innovation (discontinuous or otherwise) has characterized the long-dormant gaming industry, it appears that traditional slot-machine competitors have never considered looking to Silicon Valley, let alone Hollywood, as the source of a new "Scurve." As a result, long-time industry leaders risk losing market leadership. If traditional slot machine vendors had hypothesized obsolescence when "multimedia" first emerged, Silicon Gaming might not represent the significant threat that it does today Scan startups.

Small-cap companies represent the seeds of industry reinvention. When major players spot high potential upstarts, mutually beneficial strategic partnerships can be created. We have seen how Johnson & Johnson's Ethicon has applied this principle in its alliance with Closure Medical in the suture market. Similarly, the computer mass-storage industry may be about to experience a similar upheaval-little known Silicon Valley TeraStor is about to introduce its Near Field Recording technology which will enable one side of a single CD-sized disk to hold up to 20 gigabytes of updatable data. Even though TeraStor's breakthrough device represents a significant threat to traditional mass-storage media-including tape, magneto-optical, removable hard disks, and so forth-Imation (3M's recent spin-off) has become a key strategic partner in enabling TeraStor to enter the market. Both companies will reap the benefits if Near Field Recording succeeds.

Strategy Two: Competitive Displacement

Competitive displacement resembles radical cannibalism, but instead of displacing your own products and technologies, you displace those of your competitors. Competitive displacement strategies involve applying existing competencies to new industries and markets, displacing the traditional competition in the process. This strategy is especially powerful, primarily because your competitors do not consider you the competition until you have entered their market. Because your disruptive innovation targets a market unrelated to your current business, you can blindside industry incumbents by providing their customers with a surprising, creative, more effective mechanism for creating value.

Although startups (companies like Silicon Gaming or Closure Medical) are well-positioned to introduce disruptive innovations, well-established organizations that creatively explore applications and markets beyond their conventional business boundaries can enter new industries and markets through competitive displacement strategies. Several years ago, GM's Hughes Electronics introduced DirectTV, a digital satellite system that transmits television and movies directly to the home. Since traditional cable television operators did not see either of these companies as a threat, DirectTV was an unparalleled and, at first, unchallenged discontinuous innovation in the cable television industry.

Hewlett-Packard is currently pursuing a competitive displacement opportunity related to digital photography HP's PhotoSmart product line-which integrates a digital camera, scanner, photo-quality printer (using special paper and inks), and image editing and management software represents an attempt to displace traditional players in the world of photography. Unlike Kodak, HP sees the shifting technology as a window of opportunity for unbridled growth rather than a painful and necessary phase of "industry evolution."

The following methods can be used to generate opportunities for moving beyond today's business opportunities to provide higher levels of value in new competitive arenas.

Elevate your business charter. Successful opportunity identification relies on the assumptions we make in defining the boundaries of strategy. Who would have expected HP to enter the photography or photocopier markets? For a company in the "communications business," however, these markets are logical extensions. By elevating the charter of the business, it becomes possible to see a broader competitive landscape. Hallmark, for example, defines itself as being in "the social expression business." By broadening strategic boundaries, Hallmark sanctions business development beyond the narrow focus of greeting cards.

Explore tangential industries. Few companies scan industry trends or talk to "customers" that have no obvious relationship to their immediate business. Why should they? Industry exploration requires a qualitative approach to understanding how core technologies can provide breakthrough customer value in industries outside your own. One of the world's leading materials companies, for example, with a strong competence in films and adhesives, recently explored "things that need to be put and stuck together" across numerous industries. One area of focus was the automotive industry, where the biggest problem is paint-rippling, chipping, and scratching. With a competency in "adhering things together," the company saw an opportunity to displace traditional automotive painting systems with sheets of color adhesive film, a new technology being developed today.

Strategy Three: Market Invention

Market invention is probably the most common approach to corporate growth. With some modification of technology and a great deal of creative market research, new applications form the basis for new ventures that provide customer value within an existing industry. This approach does not usually require cannibalistic behavior or the implementation of radically new technologies. Rather, market invention leverages what the organization already does well through logical extensions that touch customers in today's markets.

Mattel is a master of market invention. One of the world's largest toy manufacturers, the company has grown sevenfold in the last 14 years. Its core business strategy-to build its brands (Barbie, Hot Wheels, Fisher-Price*relies heavily on market invention. Mattel president Jill Barad recently commented that market invention enables Mattel to avoid the organizational complications associated with cannibalization while creating new distribution channels for new markets. For example, Mattel recently extended the Barbie doll (its most profitable "technology") into the collector's market. Serious collectors can now purchase high end Barbies for about $300 each. Another example from the same company is Mattel Media, which introduced a line of Barbie-branded software for girls in 1996. One of its programs, Barbie Fashion Designer (which allows young children to create Barbie clothing using computers and printers), set a new, one-month, CD-ROM sales record.

Other examples of market invention include Chrysler's minivan and the Gap's Old Navy brand. The minivan is a classic example of the market invention strategy; it created a new category in transportation, brought the company back from the brink of bankruptcy, and remains a major source of income for Chrysler today. Similarly, the Gap recently produced its Old Navy brand, a high-quality, trendy, yet low-cost warehouse outlet for the lower-end clothing market.

We have discovered two primary methods for exploring market invention opportunities. Both focus on leveraging existing technology and competence to create new markets for the organization.

Expand customer boundaries. When Mattel decided to sell dolls to adults, it created a $175 million Barbie collector business. When the Gap decided to sell fashionable clothes to the low-end market, it created Old Navy. Many companies become mired in their definition of "the customer." By considering the entire world as a potential market and working backward from there, companies can identify opportunities for discontinuous innovation. It is important to define "distribution" broadly, by considering a broad range of physical value chains as well as the medium of delivering value. (Delivering fashions for dolls via CD-ROMs and printers is a truly discontinuous concept.) If we begin with the assumption that everyone is a potential customer, the search becomes that of prioritizing promising markets and value chains, not conceptualizing them from scratch.

Identify systems. When Microsoft Office was introduced, the company created a single product that addressed the spectrum of customer needs-word processing, database management, spreadsheet calculations, and presentations. Microsoft extended its value to a portfolio of integrated products that met needs rooted in the "office system." HP's PhotoSmart product line involves a similar approach but focuses on providing the consumer photographer with an entire digital imaging solution. By understanding the context in which customers use a combination of disparate products, it is possible to integrate value with more compelling offerings that meet a greater number of customer needs.

Strategy Four: Industry Genesis

Industry genesis results from the introduction of new-to-the-world technology and customer value. Historically, industry genesis has been the umbrella under which consultants, managers, and academics have described the impact of discontinuous innovation. Industry genesis is also the most challenging discontinuous innovation strategy-most are never able to do it. Here we see the reasons why "discontinuity" has remained a theoretical rather than practical option for corporate strategists.

Cellular phones, microwave ovens, air conditioners, and scientific calculators are all industry-spawning innovations. In some instances, industry genesis may resemble competitive displacement, since one consequence of this approach may be displaced technology, although the ultimate impact is broader. (The first scientific calculator led to the obsolescence of the slide rule while creating a new industry and transforming many others.)

Industry genesis is distinct in three ways. First, since the strategy involves industry creation, direct competition does not necessarily exist. The breakthrough technology not only results in new forms of customer value but concurrently creates a new competitive set-a completely new population of competitors focused on replicating and incrementally enhancing the customer value that was introduced. With industry genesis, one can only guess who future competitors may be. Second, markets are not entirely definable (at least initially). They must be developed through a new-to-the-world value proposition. And third, industry-creating discontinuous innovations open windows of opportunity for organizations in tangential industries. (For example, the microwave spawned significant opportunities in both the food and packaging industries.)

Hewlett-Packard has a history of industry genesis. The HP35 represented the world's first hand-held scientific calculator and was the first product to combine both integrated circuits and LEDs. Though market research conducted by the Stanford Research Institute (SRI) suggested the product would fail because of its small size, this innovation ultimately created the calculator industry. And in 1984, HP introduced the LaserJet, the first desktop laser printer. The LaserJet created the desktop printing and publishing industries while subsequently contributing to the obsolescence of typewriters. The technology also created major opportunities for companies like Avery Dennison (now the leader in LaserJet-friendly labels) and Adobe (currently the leader in desktop publishing software).

As with many technologies that create industries, it is extremely difficult to estimate the size of the market, let alone how the innovation will be received. As a strategic alternative, industry genesis carries the highest uncertainty and risk. Following are two strategies that underlie many industry-creating discontinuous innovations.

Miniaturize. The HP35 was created by HP engineers in response to a personal challenge from Bill Hewlett. Hewlett had asked for a "desktop computer" that would fit into his shirt pocket. Tappan introduced the first microwave oven in 1952. Ten years later, the appliance was as expensive as a new car and required wall installation. Needless to say, miniaturization eventually created the consumer microwave industry Sony mastered the intricacies of miniaturization and invented the Walkman. By considering any technology and exploring diverse applications that would be enabled by miniaturization, one can identify new-to-the-world value propositions for new-to-the-world markets. Miniaturization opportunities often arise from asking "what if" questions about technologies that have not been widely applied because of size and cost.

Combine functionality. The integration of seemingly disparate technologies or functions can create new forms of customer value. Two interesting examples come from the world of sports-rollerblades (which combine ice and roller skates) and snowboards (which combine skis and surf boards). Other, more high-tech examples include the first scientific calculator (which combined integrated circuits and LEDs), edutainment software (which combines interactive entertainment with educational material), and electronic personal organizers (which combine computers and calculators with pocket calendars and organizers). Integrating functionality means creating new methods of meeting combinations of customer needs, which when satisfied together result in major new business opportunities.

Managing the Paradox

When tested through market research, the HP35 calculator, the first videocassette recorder, the fax machine, and Federal Express all received negative ratings! In many companies, leadership would have killed these new business concepts, and in most, leadership would not have made time to identify such opportunities in the first place. Even when breakthrough ideas do survive, broadbased resistance to new technologies and business strategies that represent substantial change may impede migration to the next organizational S-curve. What can be done to manage the organizational challenges associated with discontinuous innovation?

The literature is full of insightful suggestions for fostering and managing discontinuous innovation, including creating "ambidextrous organizations" (Tushman, 1997), engaging in "discovery-driven planning" (McGrath and MacMillan, 1995), and "probing and learning" (Lynn, Morone, and Paulson, 1996). Above all, leadership must establish an environment conducive to discontinuous innovation-through internalizing and then communicating the qualitative differences between conventional, analytical, strategy formulation and the search for breakthroughs.

While traditional strategy formulation focuses on reducing uncertainty, discontinuous innovation requires viewing uncertainty as opportunity. Quantification and projection will always have their place, but discontinuous innovation flourishes through qualitative speculation and trial and error. For example, conventional wisdom suggests that market research and quantified projections indicate the viability of an innovation. With discontinuous innovation, however, market research acts as a catalyst for developing and enhancing new ideas. After all, customers seldom articulate needs they don't know they have. Ten years ago, how many people would have asked for a subscription to anything like America Online? Thirty years ago, how many people would have asked for a calculator that fits into a shirt pocket-or a microwave, or a VCR, or a Walkman?

Market and customer research are needed, of course, but the purpose of gathering such data differs when seeking discontinuities. The reason why customers cannot always articulate their needs is that they rarely understand what is possible. To underscore this critical point at HP, we emphasize the importance of achieving "an imaginative understanding of customer needs" when seeking discontinuities. This motto helps market research become a means for exploring, refining, and validating ideas, rather than serving as a "go/no-go" decision-making tool.

Most reward systems provide incentives for execution (flawlessly achieving short-term objectives), but discontinuous innovation is necessarily a long-term investment characterized by sporadic failures-it took HP about 10 years to develop and successfully introduce the laser printer. Identifying a potential discontinuous innovation (not to mention moving the concept through development and delivery) takes time. Sometimes you have to work diligently on the large scale until the feasibility of miniaturization emerges. Other times you have to assemble and motivate various organizational stakeholders to integrate technologies. And because the innovation usually represents something new for the organization, trial and error are almost always necessary. Because discontinuous innovations may take years to identify, develop, and introduce, formal reward systems must leave room for sanctioned discontinuous innovation processes that include the acceptance of failure.

Conventional forecasting assumes that industry evolution and growth are linear. By contrast, discontinuous innovation management presupposes a lifecycle perspective. Infusing a new common sense into organizational culture-one that suggests that technologies and organizations are born, grow, decline, and are born again-can create a climate that supports portfolio management.

Sustained growth requires creation and re-creation by leadership and by the organization as a whole. To understand that a technology-and the company whose future success depends on it-will eventually face the end of its lifecycle inspires urgency for, and commitment to, discontinuous innovation. When the organization views success as transient, and long-term growth is contingent on creating the next S-curve, discontinuous innovation becomes a collective imperative.

References

Christensen, Clayton M. The Innovator's Dilemma: When Disruptive Technologies Cause Great Firms to Fail. Boston: Harvard Business School Press, 1997.

Hamel, Gary, and C. K. Prahalad. Competing for the Future. Boston: Harvard Business School Press, 1994.

Lynn, Gary S., Joseph G. Morone, and Albert S. Paulson. "Marketing and Discontinuous Innovation: The Probe and Learn Process." California Management Review, 1996.

McGrath, Rita Gunther, and Ian C. MacMillan. "Discovery-driven Planning." Harvard Business Review, July 1995.

Tushman, Michael L. "Winning Through Innovation." Strategy & Leadership, July/August 1997.

Tushman, Michael L., and Charles A. O'Reilly, III. Winning Through Innovation. Boston: Harvard Business School Press, 1997.

Utterback, James M. Mastering the Dynamics of Innovation. Boston: Harvard Business School Press, 1996.