Sean T. Hsu andSusan K. Cohen

Disruptive Innovation and the Incumbent Dilemma

We have entered an era of continual disruption in which incumbents’ inabilities to successfully appraise disruptive innovations have contributed to their shrinking average lifespan. Disruption theory has posited that this incumbent dilemma results from the tenets of good management (e.g., cater to your dominant customers, invest to achieve threshold rates of return) and experience that instills lessons regarding how to abide by those tenets. In particular, incumbents (firms that have established competitive positions in an industry and particular product markets constituting the industry) discount the financial and strategic importance of disruptive innovations because their appraisals are anchored by technology frames – assumptions and knowledge regarding how to use technology to address customer needs. The purpose of this study is to examine how incumbents attenuate this dilemma in order to pursue ‘new market disruptions’ – nascent markets created by potentially disruptive product innovations.

Roles of Multimarket Contact in Shaping Firms’ Competitive Experience during Disruption

Competitive experience from salient competitors may attenuate this incumbent dilemma if the experience provides incumbents with information or insight that helps them assess the potential market opportunities associated with disruptive innovation. To identify salient rivals, we turned to the literature on multimarket contact (MMC). Incumbents have multimarket contact with rivals they encounter in more than one product market, which not only indicates common interest in certain customers, but also affords multimarket rivals substantial opportunity to influence incumbent technology frames. We hypothesize MMC increases the likelihood an incumbent pursues a new market disruption under two conditions: MMC rivals from the same industry as the incumbent (Insider MMC) enter the new market, triggering an information-based response, and MMC with industry outsiders (Outsider MMC) broadens an incumbent’s technology frames, attenuating the tendency to narrowly evaluate disruptive products. 

Using data from the telecommunications equipment industry from 1991 through 2005, we investigated relationships between MMC and incumbent entry into a new disruptive market, packet-based networking switches.  We found MMC linearly increased the likelihood of incumbent entry, and that observable entry patterns are consistent with Insider and Outsider MMC affecting entry through distinctive mechanisms.

The Relevance and Impact of a Competitive-Experience Lens

The supportive results matter in two aspects. The literature has lacked a robust understanding of when incumbents pursue the new opportunities created by disruptive innovations.  In addition, despite evidence that competitors’ actions influence strategic choices under uncertainty, how an incumbent’s competitive experiences shape its responses to new market disruption remains largely unexplored and undertheorized.  We advance both aspects by explaining how, during a period of new market disruption, multimarket contact can influence incumbent responses contemporaneously (information-based responses to Insider MMC rivals that enter the new market) and through exposure to product market rivals that approach customers differently (frame-based responses shaped by prior experience with Outsider MMC rivals). 

The central takeaway from our findings is that the incumbent dilemma can be re-conceptualized by viewing the market entry decision as jointly responsive to the industry affiliation of MMC competitors and the degree of uncertainty regarding the potential value of new market disruptions. Exposure to competitors through multimarket contact can overcome the dilemma, and the impact of exposure to different industry-affiliation competitors may change as the degree of uncertainty regarding a new market’s disruption uncertainties evolves. Our findings are pertinent for researchers who are interested in nascent markets and/or new ecosystems, as well as the impact of competitive context on disruptive innovation.

Opportunities to expand practical implications, albeit this article has not sketched, are abundant. As an illustration, two directions warrant further attention. Incumbents are increasingly challenged by start-ups with disruptive business models, and platform ecosystems juxtapose firms from diverse industries via a mixture of collaborative and competitive relationships. This raises an important question for disruptive innovation theory: has this new competitive landscape fostered more flexible technology frames and evaluative processes?  To what degree does the incumbent dilemma disadvantage established firms as they navigate these new markets, looking for attractive business opportunities?  The concept of multimarket contact is relevant here, but, to accurately distinguish firms’ competitive experiences, researchers may need to incorporate the multiple roles ecosystem members often play.

Another exemplar direction is related to research on nascent markets and ecosystems that encourage a relational lens on disruptive phenomena.  Crafting novel relationships to support disruptive business models (e.g., Uber, Airbnb) and managing relational dependence to launch disruptive platforms (e.g., TiVo, Spotify) are central challenges.  Outsider influence, like corporate venture capital and other modes of engaging with start-ups, expose incumbents to alternative relational models, and may afford an advantage creating disruptive innovations, which we have not examined in this study.

Keywords: Disruptive innovation, Competitive experience, New market disruption, Nascent Market entry, Technology frame

The full article is available at the website of Journal of Management Studies and can be accessed here: https://onlinelibrary.wiley.com/doi/10.1111/joms.12719