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Blockchain.. What type of innovation is it?

24 October 2016  |  9614 views  |  0

Understanding what type of innovation the blockchain falls into is the first step for an efficient leveraging of the technology. So let’s do a little bit of theory…

 

The blockchain innovation is a radical, competence-destroying innovation in that the novelty of the technology would render the current one obsolete, and it is also a disruptive, architectural innovation in that its implementation market-wide would lead to a reorganization of business models of any industry and its actors. 

 

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 organization 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[i] 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, the Blockchain technology has the potential to completely reshape any industry and in particular the capital markets, significantly impacting existing business models. But 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 firm’s existing competencies.

On the contrary, an innovation is said to be competence-destroying when it replaces a technology and therefore render firm’s competencies obsolete. It is usually the case of radical innovations.

Schumpeter[ii] 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 offices functions as we know them today could become 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[iii] 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[iv]. Thus, an architectural innovation combines technological and business model disruptions. The Distributed Ledger Technology can be classified as an architectural innovation as it will change completely the architecture of trade processes by removing the needs for some counterparties involved – or at least by changing the roles they currently have. I will explore this question in a later post.

 

 

 

 

[i] Pisano, G. (2015). You Need an Innovation Strategy. Harvard Business Review. [online] Available at: https://hbr.org/2015/06/you-need-an-innovation-strategy.

[ii] Schumpeter, J. ed., (1942). Capitalism, socialism, and democracy. 3rd ed. New York, USA: Harper & Row., p.83.

[iii] Simon, H. A. (1962), "The Architecture of Complexity." Proceedings of the American Philosophical Society 106, pp. 467-82.

[iv] Schilling, M. (2013). Strategic management of technological innovation. 4th ed. New York, US: McGraw-Hill.

 

 

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