By Estelle Roiena, Associate (Financial Services & Blockchain)
Welcome to my short blockchain series! The series will first focus on the technological side of the innovation and will then evolve, tackling the impact of the Blockchain from a business perspective.
Understanding what type of innovation the blockchain falls into is the first step toward efficiently leveraging the technology. So let’s do a little bit of theory…
Blockchain innovation is a radical, competence-destroying innovation in that the novelty of the technology would render the current one obsolete. It is also a disruptive, architectural innovation where it’s implementation market-wide would lead to the reorganisation of business models across multiple industries.
Radical Innovation vs. Incremental Innovation
As opposed to an incremental innovation, which deals with the improvement of an existing product, service or process, a radical innovation concerns the impact of the innovation on the market in which the organisation operates. It is measured by the disruption it creates, meaning the need for totally new manufacturing or service processes to be able to use this innovation.
Gary Pisano* makes a further distinction between radical innovation and disruptive innovation. He explains that, whereas a radical innovation requires a technological breakthrough but not necessarily a new business model, a disruptive innovation is the opposite.
By removing the need for middlemen, blockchain technology has the potential to completely reshape any industry, in particular the capital markets, significantly impacting existing business models. However, before it is adopted market-wide, issues such as interoperability and scalability have to be resolved. Those challenges will allow the creation of new tools that will form a whole new ecosystem.
Competence-Enhancing Innovation vs Competence-Destroying Innovation
An innovation is said to be competence-enhancing when it builds up on an existing technology using a firm’s existing competencies.
On the contrary, an innovation is said to be competence-destroying when it replaces a technology and therefore renders a firm’s existing competencies obsolete. It is usually the case of radical innovations.
Schumpeter* wrote about the Creative Destruction, which he described as a ‘process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.’ To a certain extent, the blockchain technology can be compared to this concept within capital markets. If it is adopted by incumbents, the middle and back office functions as we know them today could become totally obsolete.
Architectural Innovation vs Component Innovation
Every object, product, system or process is made of individual components that interact and are linked together. In his work on complexity of things, Simon* demonstrated that every entity is a system of components and each component is also a system of components and so on until there is only the elementary particle left.
The component innovation, also called modular innovation, affects one or several components of the technology but does not modify the overall architecture of the system.
The architectural innovation either changes the whole way the system works or affects the way components interact together. Architectural innovation very often infers component innovation as it requires both changes in the underlying components and consequently, changes in the way they relate*. Thus, an architectural innovation combines technological and business model disruptions. The Blockchain technology can be classified as an architectural innovation as it will completely change the architecture of trade processes by removing the needs for some counterparties to be involved – or at least by changing the roles they currently have.
I will explore this question later in this series, so stay tuned!
*Sources:
- Pisano, G. (2015). You Need an Innovation Strategy. Harvard Business Review. [online] Available at: https://hbr.org/2015/06/you-need-an-innovation-strategy.
- Schumpeter, J. ed., (1942). Capitalism, socialism, and democracy. 3rd ed. New York, USA: Harper & Row., p.83.
- Simon, H. A. (1962), “The Architecture of Complexity.” Proceedings of the American Philosophical Society 106, pp. 467-82.
- Schilling, M. (2013). Strategic management of technological innovation. 4th ed. New York, US: McGraw-Hill.