Innovation’s Uncertainty Factor

For the past two decades, companies have assumed that they know the disruption playbook. It’s an S curve of progress: a series of cumulative advances as a new value proposition progresses to outperform a given industry’s prevalent offers. A company introduces gradual improvements in a new, innovative value proposition. Initially, the offering is not attractive to mainstream users and established incumbents, but eventually it becomes good enough and then achieves market dominance. Disruption of the incumbent is complete.

This perspective on disruption provides a valuable guide with respect to how investment returns on innovative efforts may unfold over time. Progress during early efforts tends to be slow, followed by takeoff and a period of sustained growth.

The launch of Netflix’s DVD-by-mail service at the turn of the century represents a classic example. The service was initially targeted at movie enthusiasts who were early DVD adopters. These were consumers who agreed that the trade-off of selecting films through online search was worth the wait (often several days) for the movies to arrive in red envelopes in the mail. At the time, this value proposition was not attractive compared with the mainstream video rental market. However, as Netflix improved its offer — via an unlimited subscription service, an online recommendation engine, a more efficient distribution network, and newer and original content — the company was able to disrupt video rental incumbents such as Blockbuster.

But this view of disruption is oversimplified or, at a minimum, incomplete. What the prevailing imagery for S-curve progress misses is the fact that there is significant uncertainty regarding the rate of progress within the new disruptive value proposition. Some innovations can reach mainstream status in a matter of years, whereas others may take decades. And others, despite their disruptive potential, may never reach fruition. Video streaming services took off rapidly around the globe in a matter of years. In contrast, it has taken online degree programs more than a decade to establish a strong foothold in the education sector. And gene therapy, touted as a major advance in personalized medicine for several decades, has yet to take off.

The importance of factoring in uncertainty to understand the trajectory and impact of a disruptive value proposition on either a startup or an incumbent can’t be overemphasized. When it’s not anticipated, an otherwise promising upstart might leap forward with a product or service based on the assumption of a strong product-market fit without ever finding its audience. Or an incumbent can find itself taking its eye off its bread-and-butter existing products and services based on the assumption that a new innovation will skyrocket to success and provide the growth engine for the future. Neither path is a good one.

Uncertainty and disruption are two sides of the same coin; they can’t be separated. And yet much of the established thinking around managing disruption focuses on incumbents grappling with the threat of market incursions and identifying opportunities to develop their own, and on new entrants managing the opportunities around disruption.1

Although it’s true that the progression of each disruptive innovation may be shaped by the specific strategies of incumbents and entrants, decision makers should bear in mind that there is substantial uncertainty around whether a disruptive value proposition will materialize in the first place. Why is this important? Because an explicit consideration of uncertainty can help decision makers recognize the risks that surround the execution of the disruptive strategy. It can help them set more realistic market-growth expectations and evaluate strategic contingencies that can be experimented with and validated.

In our ongoing research, we have found three key sources of uncertainty — around technology, ecosystems, and business models — that are pivotal to understanding the process of disruption. When companies carefully consider these sources of uncertainty and how to address them, they can better position themselves to manage disruption and achieve superior performance outcomes. When entrepreneurs and executive teams overlook these factors, it opens up their companies to foreseeable challenges, such as the following:

• Failing to recognize the time and the extent of resources that might be required for the disruptive value proposition to take hold. This can lead to misjudgments about investments in a disruptive innovation initiative, such as giving up too early or sustaining significant spending too long, or starving other, more viable initiatives of resources and attention.
• Focusing on the new technology or the new business model while overlooking the challenges within the company’s ecosystem of suppliers, business partners, and customers that may be critical to the realization of the new value proposition. This can lead to prematurely optimistic projections about the potential of a disruptive innovation and risks wasting resources.
• Missing opportunities they could otherwise identify and seize around business model innovation across different markets. The risk here is that a company limits the potential appeal of a disruptive innovation or narrows the innovation’s paths to market without examining all the possible variations around the business model.

These uncertainties do not influence every company to the same degree, of course. Startups tend to be adept at experimenting with new technologies and business models, even though they may be resource-constrained. In contrast, established companies tend to be endowed with significant resources but face significant adjustment costs when they pursue disruptive value propositions while managing their core business. (Although startups and established companies often compete, collaboration can help both manage the uncertainties of disruption. See “The Potential for Collaboration in the Face of Uncertainty.”) But without a deep understanding of how uncertainty can affect the speed and resource-intensiveness of the disruptive arc of development, startups and incumbents alike can find themselves failing at what otherwise might have been a successful disruptive innovation.

Three Sources of Uncertainty

How is it that otherwise savvy companies tend to overlook or ignore potential sources of uncertainty? They might not be looking in the right places, or they may be locked into a specific strategic perspective too early. Our research has identified three key sources of uncertainty surrounding the question of whether the disruptive value proposition will reach fruition in a given market.

1. The enabling technology. Questions can persist about whether the technology that is enabling the disruptive value proposition can achieve the performance-cost threshold required for adoption by mainstream users (that is, for achieving product-market fit). For example, for commercial space travel, there are technological questions related to performance and cost, and although a large number of companies are pursuing the new value proposition, it remains unclear which technological design may be most feasible.

2. The surrounding ecosystem. Uncertainty may also stem from not knowing whether actors in the ecosystem will contribute to the disruptive value proposition through supporting investments, complementary innovations, or standards and regulation. For example, there remain important gaps in understanding regarding the use of augmented reality for instruction and training; it’s unclear whether there will be sufficient complementary content and suitable hardware devices for users to benefit from the new value proposition and how such virtual offerings might be regulated.

3. The business model design. Finally, there can be unsettled issues around the viability of the business model. Will the revenue and profit streams reach sustainable levels for the companies pursuing the disruptive value proposition? For example, there is significant uncertainty around whether the business model for autonomous vehicles looks more like traditional private and fleet vehicle ownership or like a fee-based mobility-as-a-service offering.

These uncertainties are not isolated. As our research on gene therapy has revealed, they can sometimes combine to heighten the challenge of commercializing innovations with disruptive value propositions.2

Gene Therapy’s Suspenseful Story

Gene therapy has faced challenges since its emergence in the 1980s. It has the potential to be a game changer for patients with genetic disorders that have no known cure, because it promises to cure the diseases by fixing defective genes instead of treating symptoms. When seen through the lens of the three uncertainties, however, it’s clear that the path to disruption is a steep climb.

Early attempts in gene therapy development proved ineffective, and some clinical trials led to severe patient side effects and deaths, raising questions about the time and resources required to bring this innovation to market. The business model for gene therapy is also unsettled. Because the treatments can mean a permanent cure or less frequent treatments than prevailing methods, calculating pricing and insurance reimbursements has proved difficult. Companies have discussed several business models, including a pay-per-treatment approach, payments spread over a fixed time line, or a pay-for-performance model in which payments are halted if the treatments have stopped working.3 Gene therapy also confronts significant ecosystem uncertainty. Treatments need to be administered by trained physicians in specialized settings, and they need to be reimbursed by insurance plans. But the availability of trained physicians, gene therapy facilities, and insurance plans that provide coverage is difficult to establish.

Even when a gene therapy treatment wins approval, it can face a cloudy future. A recent case illustrates the challenge: Gene therapy company uniQure pursued a treatment for lipoprotein lipase deficiency, a rare disorder that prevents a person who lacks certain proteins from breaking down fat molecules. The company and health care insurers found it difficult to price the treatment for such a small patient population. UniQure, which had won European approval for the treatment, subsequently withdrew it because of the pricing challenges and the rarity of the disease.4 The fate of this treatment is emblematic of the obstacles other gene therapy companies face. The disruptive potential of their innovations is enormous, but even after a company overcomes the technological and R&D hurdles and creates a new offering, it must confront business model uncertainties.

The life-and-death implications of gene therapy as a potential disruption make it a dramatic example. But this analysis of uncertainties is applicable whenever products and services with a disruptive value proposition emerge. Using this lens to assess the circumstances in which their company enters a particular market enables leaders to make precise decisions about resource allocation and timing — and guides their expectations about returns.

Considerations for Established Companies and Startups

How might established enterprises and startups be affected by these sources of uncertainty? Their motivations for pursuing disruptive innovations differ, and their strategies are shaped by their available resources and how they measure performance. So each type of company must weigh different considerations.

While nearly all disruptive startups are motivated by the possibility of replacing the industry’s status quo, many of them confront resource constraints in their efforts to develop a disruptive value proposition. In the case of gene therapy, startups have attracted a lot of attention, but many could not continue in the face of technology setbacks as their resources and new sources of funding dried up. Highly promising gene therapy startups like Introgen Therapeutics and NeuroLogix ultimately filed for bankruptcy in the U.S.

Established market leaders face other challenges. Although they typically have significant resources available to explore disruptive innovations, they cannot focus solely on this quest. They have to simultaneously manage their core business and measure progress against prevailing key performance indicators (KPIs) and short-term investor expectations. And established companies also may be industry incumbents facing a direct threat from a disruptive innovation or from players active in adjacent industries who see their own opportunity to grow in a related industry at the incumbent’s expense. In our research, we saw evidence of several established pharmaceutical companies, such as GlaxoSmithKline and Merck, investing in gene therapy research but holding back its commercialization because of business model and ecosystem uncertainty.

Analyzing a company’s resource availability and the need to manage performance carries over to the three key uncertainties for disruption.

Resolving technological uncertainty requires significant resources over time to achieve the performance-cost threshold necessary for product-market fit. Given that startups tend to be resource-constrained, they may be more adversely affected by this type of uncertainty. For example, in the case of companies pursuing new solar power technologies, many promising startups had to exit the industry once they lost the technology race to alternative solutions, whereas many established firms were able to continue directing significant resources toward the emerging market opportunities.5 For example, Solyndra entered the renewable energy market with a promising solar power technology called copper indium gallium selenide, but it ended up losing the battle for market dominance to crystalline silicon, resulting in an abrupt bankruptcy.6

Resolving ecosystem uncertainty represents a coordination dilemma, given that business leaders need to manage significant investments across multiple actors, including business partners, suppliers, customers, and regulators. Failure to account for critical actors such as regulators and creators of complementary innovations can cause progress bottlenecks and constrain the value proposition of the disruptive innovation. In such situations, startups may have a steeper challenge: Not only are they resource-constrained, but they may also lack scale and credibility among members of the ecosystem to influence their supportive actions.

Consider the case of Better Place, with its disruptive value proposition around electric cars. Its model to offer battery-charging and -swapping services in addition to selling vehicles helped resolve the technological uncertainty for motorists for whom the low battery performance and high cost of electric cars did not offer a strong value proposition. But, as it pursued its growth trajectory across different geographies, Better Place was unable to orchestrate the ecosystem and align the different actors — including customers and the governments in its targeted markets of Denmark and Israel — and sold only about 1,300 cars before going bankrupt in 2013.7

Autonomous vehicles are another example of a potential auto industry disrupter, with a number of established automakers launching deliberate, collaborative efforts to develop an ecosystem. BMW, for one, is working with Mobileye (Intel’s vision-safety venture) and Fiat Chrysler, as well as parts suppliers like Aptiv, Continental AG, and Magna International, with the goal of commercialization by 2021.

Resolving business model uncertainty requires continuous experimentation and the ability to reconfigure one’s approach to unlock the potential of the disruptive innovation for the innovation’s users and the innovating companies. Established companies are more likely to struggle with such uncertainty because experimenting with new profit formulas runs counter to existing metrics. Executives face pressure to meet KPIs. Scrutiny by investors and analysts, meanwhile, typically rewards sustaining rather than disrupting profit models. Conversely, startups are not entrenched in prevailing business models and may be better equipped to manage business model uncertainty.

The recent struggles of electric utilities to adapt to more decentralized business models exemplify the challenges for established companies. In a decentralized model, users (such as homeowners) consume electricity that is generated at or near the point of use, often through a combination of rooftop solar photovoltaic systems, batteries, and digital management of the electricity grid. Incumbent companies that were entrenched in the old, centralized business model had lower performance outcomes when pursuing the disruptive value propositions.8

For example, NRG, a U.S.-based energy incumbent, reported large losses from its pursuit of a decentralized model, resulting in the CEO’s firing. His departure was followed by a number of articles in the trade press describing the internal conflicts between the centralized and decentralized businesses, unforeseen delays, cost overruns during the implementation of the decentralized model, and the extensive competition NRG faced from new entrants.9 Incumbent energy companies elsewhere, such as AGL in Australia and RWE in Germany, have faced similar challenges.

Managing the Uncertainty of Disruption

Pursuing a disruptive innovation means taking on risk that the effort may fail. Analyzing the uncertainties that any disruption faces, however, can help you mitigate those risks by making informed decisions about the supporting technology, the surrounding ecosystem, and the business model foundation required for success.

The following five questions can help innovators — incumbent companies and startups — manage uncertainty.

1. What are the opportunities for a disruptive value proposition? Opportunities can be related to creating new markets, such as space tourism, or penetrating existing markets, such as global tourism.

2. Where are the key sources of uncertainty — technology, ecosystem, and business model — in different markets? Uncertainty doesn’t have to be prevalent across all areas. It is typically a subset of the three sources that can create bottlenecks for market growth. Management practices such as scenario planning and discovery-driven planning can be more effective if they explicitly incorporate the different sources of uncertainty.

3. How can the different sources of uncertainty be addressed? Experimentation with respect to customers and others in the ecosystem, business models, and technology choices can be valuable in resolving uncertainty. However, if uncertainty is severe across the three sources, decision makers may need to say no to investments at the outset or stop specific disruptive innovation initiatives.

4. Can I pursue this disruption on my own, or do I need strategic partners in the ecosystem to help resolve uncertainty? Identification of ecosystem activities and actors where uncertainty resides — and coordination among them — can be a critical aspect of managing such uncertainty.

5. How can I align partners to cocreate value? Partners can have different business models and motivations around the disruptive value proposition. It is important to identify which partners may have mutually beneficial objectives and to ensure that those objectives are aligned for the long run.

This exercise widens leaders’ perspectives on the opportunities before them. By openly considering these questions, leaders improve their ability to identify the risks of any strategy to develop a disruptive innovation. Based on the answers to these questions, they can make more nuanced decisions about their plans — which innovations to pursue, how much to invest, which partners to collaborate with, and the timing for all of these choices — than they otherwise would. They can revisit their evaluations and adjust their investments and the timing of them. And they can calibrate their expectations for progress on a particular value proposition and whether it has the potential to disrupt an established market based on additional evidence and insights.

Well-established cases show what’s possible for both established companies and startups. For the iPhone, Apple managed ecosystem uncertainty (What parties will work with us on this disruption? How?) through the creation and maintenance of its App Store and its calibrated rollout of available telecommunications carriers. Apple also navigated business model uncertainty in part through its use of exclusive vendors when rolling out the iPhone. Tesla has managed technology uncertainty by investing in batteries and software in order to offer a high-performance electric car. Regarding questions about its business model, Tesla set up direct sales. And the company is working to manage ecosystem uncertainty (how to keep electric cars charged) by developing infrastructure through initiatives like its Supercharger network of charging stations.

Disruptive innovations have made us more productive, better informed, and more mobile. They improve our health. They entertain us. And there are many more disruptive innovations to come — indeed, the next one may be at your company. To prepare for the best possible outcome, it’s important to understand not only the reach of an innovative idea but also the risks that lie in its path to realization. With our eyes open to confront uncertainties around the technology, ecosystem, and business model of each potential disruption, we can better understand what to expect along the way and better devote the time and resources to strengthen our chances of success.