Why Challengers Beat Incumbents: The Role of Technological Innovation

This article explores the reasons why challengers are able to beat incumbents in business, focusing on the role of technological innovation. It discusses the advantages that challengers have, such as agility, flexibility, and competitive pricing, and how incumbents often struggle to adapt to disruptive technologies. Examples of successful challengers are provided, including EasyJet, Netflix, and Tesla. The article concludes by emphasizing the importance for incumbents to embrace innovation and adapt their business models to stay competitive in the rapidly changing market.

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Innovation and Technology
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Introduction
In business, incumbents are organizations that have a leading market position while the
challengers are the new rivals that seek to gain market share. Due to radical innovations, the
incumbents are often upended and at times rendered obsolete because they experience difficulties
in addressing the challenges posed by such innovations. The reason behind their inability to
address these challenge is due to inertia, tendency to exploit current competencies, organizational
rigidity, internal culture and complacency, issues related to incentive and resource allocation
process, as well as deficiency in organizational capabilities. The challengers often beat the
incumbents due to their greater agility, the vision of the organizational leaders, quick innovation
capability, a culture of risk-taking and experimentation, and highly digitalized services and
products.
Examples of incumbents and challengers include; EasyJet has challenged mainstream
airlines such as British Airways and Ryanair which have experienced the collapse of the
Monarch and a meltdown in their IT. EasyJet has positioned itself by taking advantage of the
present market opportunities. Also, Netflix has challenged Blockbuster and rivaled Walmart due
to its quick reaction to emerging technological shifts. Blockbuster was the leading video-rental
chain and Walmart rented DVDs. Walmart backed out of DVD rentals in 2004 while
Blockbuster applied for bankruptcy in 2010. IBM PC inclusive of its clones challenged
minicomputer manufacturers such as DEC, Wang, and Apollo. Additionally, Tesla, - best known
for focusing on electric cars- has cemented its status as an icon of innovation and technology,
thus challenging organizations such as Ford and General Motors. Big organizations such as
PepsiCo, Anheuser-Busch InBev, and Wal-Mart have placed huge orders for the electric semi-
autonomous truck from Tesla, hence increasing its competitive edge. In this paper, the reasons

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why incumbents are being beaten by challengers are addressed, including an explanation of the
role of technological innovation including disruptive technologies and how these technological
innovations have impacted businesses, especially incumbents.
Why challengers beat the incumbents
Start-ups are faced with several challenges and struggles that incumbents are not worried
about. The challengers have to deal with concerns regarding cash flow, limited resources, a non-
existent reputation, and speculative information of their target demographics. Considering these
factors, it may appear that the challengers cannot out-compete the incumbents unless they have
possessed an in-demand solution that no other organization has globally. However, this is only
one side of the story (Blank, 2013, pp.65). The truth is that the challengers hold a number of
great advantages over the incumbents. The reasons why incumbents are being beaten by
challengers are as follows;
First, the challengers are agile as compared to the incumbents. Despite having a solid
business plan as well as an operations strategy, the new competitors do not have anything that
confines them to such structures. However, the incumbents have got many reasons to remain
confined to their business plan and operations strategy such as maintaining their strong asset
bases, maintaining their turnover, and meeting the stakeholders’ interests. A recent session with
IBM delivered a message that if incumbents want to survive the perilous and unexpected changes
in their respective industries, they have to reinvent themselves with startup thinking. The
phenomenon has been dubbed the name uberization, a derivative from Uber, -the ride-sharing
service that has revolutionized the chauffeur as well as the taxi industries and has threatened
their existence. Yann Girard, - an entrepreneur and investor- in a LinkedIn post, wrote that

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organizations are too riddled with red tape, politics, regulations, protocol, as well as the risks for
their staff to take on the unknowns that associated with new competitors’ practices, where the
long-run rewards are immense. Digital music history is a good example of this scenario.
Previously, the electronics space was dominated by Sony. The company dates back during the
period of transistor radios, through the iconic 1979 Walkman cassette player, and on to the CDs
(Du Gay, et al., 2013, n.d.). However, by the closure of the 2000s, the brand that all customers
were interested in was Apple and not Sony. Apple invented the iTunes and the iPod, and soon,
almost every person was plugged into the iTunes ecosystem. Regardless that Sony had more
resources compared to those of Apple, it also faced challenges in its long product development
cycles and slow communications between its different points of production (INSEAD
Knowledge, 2019). Lack of agility and coordination lagged Sony’s efforts in developing MP3,
allowing Apple, with its startup and quick to market culture to occupy the gap. Since then, Apple
has developed and has become one of the leading electronics producers globally, outdoing many
other incumbents.
The other reason why the incumbents are being beaten by challengers is due to less
bureaucracy and lack of flexibility. The ability of large and entrenched competitors to ignore
some new profitable opportunities cannot be underestimated, particularly if such opportunity is
outside the company’s “core” activity. Unlike for new competitors, in large corporations, it is a
requirement that everything is formalized and there are rules surrounding all organizational
practices. Multiple people and departments are involved in evaluating decisions. As such, the
gears of bureaucracy slow everything. However, the new competitors do not have a fraction of
such bureaucracies that are adopted by incumbents. Thus, decisions are made faster and work is
done more efficiently. In addition, incumbents are rigid in the manner they operate while the new

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competitors are more flexible. For example, Tesla has not tried making a gasoline car an electric
one like the case of the Ford Focus Electric (Van Den Steen, 2014, pp.413). Rather, Tesla aimed
at making the best car, using electricity as its source of power. The company started early and
put its resources into the best possible solution and in 2013, according to the Consumer Reports,
the Model S received 99/100 points, making it the highest rated electric car, and the highest rated
car ever reviewed. Also, unlike other car manufacturers such as Ford that sell their products
through franchised leaderships, Tesla makes use of direct sales (Perren, 2013, pp.166). The
organization has come up with an international network of company-owned galleries as
showrooms. Tesla thus owns the sales channel and the clients only deal with the company’s
service staff and salespeople. Tesla has as well come up with its own Supercharger stations
where the customers can fully charge their Tesla vehicles for free. On the other hand, the
incumbent only focus on their core business allowing the new competitors to take up small
segments keeps plugging means to solve problems, learn how to make their better and outdo the
incumbents.
In addition, incumbents have got high administrative overheads. On the other hand, the
new competitors offer their products and services more efficient, in a cost-effective and
competitive manner. Startups tend to be aware of their limitations. As such, they mainly focus on
their core competencies and the clients benefit from a superior value proposition. For example,
when the movie rental industry began changing to online services and streaming, Blockbuster did
not adapt but rather stuck to its guns and maintained their usual business model. Blockbuster
penalized its clients for late fees. However, Netflix, a new competitor, eliminated the physical
stores thus saving on the overhead costs, and offered a subscription model, - the customers did
not have to worry about late returning of a film. Hence, the customers were able to watch films

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for as long as they intended (Square2marketing.com, 2019). Blockbuster maintained the thought
that all that the clients wanted was to walk into a store pick a movie as well as snacks. In reality,
the customers wanted to watch and eat snacks and not walk out of their houses to rent a film. In
the fast-changing technological environment, an organization’s brand strength or its past success
is not enough to compete in such an environment. When Netflix was still a niche business,
Blockbuster still earned billions in revenue. Netflix started with the shipments of DVD but
immediately shifted to online streaming. Netflix adopted this technology when no other
organization was doing so and became a leader and by the time Blockbuster thought of adapting
the technology, it was too late. Netflix had already overtaken the market.
Competitive pricing is the other reason why incumbents are being overtaken by new
competitors. Organizations do consider different factors when pricing their products. For
instance, in food product development, incumbent and large organizations have a pricing
advantage since they can access more equipment and save money per piece on items. For
example, Uber has positioned such that it offers competitive prices compared to taxis.
Combining modern technology, flexible payment as well as pricing strategies, Uber has
disrupted the taxi industry (Wallsten, 2015, pp.7). Rather than being a taxi industry, Uber is a
ride-sharing service thus it is not subject to license fees and taxes. Uber has also managed to do
away with expensive transactions that include reservation costs, and it has the advantage of
contracting its drivers as agents rather than employees (Cramer and Krueger, 2016, pp.177). The
company’s drivers are not subject to expensive permits, municipal costs or even increased
insurance rates, but in the essence, they turn their current cars into an income-generator. As such,
Uber is able to offer competitive prices to its customers, unlike the taxi industry which
overcharges its clients.

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Conclusion
The emerging trends in business organizations, regardless of the industries in which they
operate face the challenge of new technologies. This technological innovations pose a host of
potential business opportunities as well as generating challenges for the companies. Changes of
technological innovations reflect positively on business through increased performance by
offering new competitive opportunities and consequently distinctiveness in part of the
competitors (Solée, et al., 2013, pp.19). This was the case between Netflix and Blockbuster. The
advent of the internet to offer streaming services saw Netflix taping into the market gap by
offering streaming services. However, the incumbent Blockbuster was stuck in its video renting
business and soon enough the company was rendered obsolete. It is therefore apparent that
organizational transformations greatly benefit from the agility of technological innovations
providing new ways of positioning themselves in the market and expanding the boundaries of the
business (Bergek, et al., 2013, pp.1220). In relation to this, companies should be concerned by
the ability of their business models to adapt to the emergence of new technologies. This will give
the company the leeway to evaluate the shift brought about by the threat of technological
advancement and react accordingly by realigning their product mix to new and robust
operational models (Kim, and Min, 2015, pp.49). However, some companies fail in adapting
their business to new models occasioned by technological innovation. This results in disruptive
business models at a critical point where emerging innovations and technologies have taken root.
This was seen in the case of Sony digital whereby the company did not align their operational
model to the new technology of mp3 players. Apple took the opportunity of this market gap and
position itself strategically into the market. The emergence of this technology was disruptive to
the way Sony operated. The organization of business structures towards innovation, the

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launching of new products and services and new business models is a general concern for the
leadership of businesses. This is because the market trends dictate adaptation of innovative
models to gain competitive advantage.
The disruptive impact as a result of technological innovation result to the discontinuation
of normal business processes and disruption of already established operation trajectories,
therefore, causing rampant market shock and reconfiguration of business structures in the
incumbents (Christensen, Raynor, and McDonald, 2015, pp.50). This is supported by the fact
that disruptive technologies offer a very different value proposition to the market in relation to
the existing market mechanisms. The challengers enjoy the autonomy of aligning themselves
with the new technologies before hitting the market (Osiyevskyy, and Dewald, 2015, pp.65).
Technological innovations have a significant impact on the business environment. The disruptive
process does not only impact the incumbents but also the challengers (King, and Baatartogtokh,
2015, pp.77). This is because innovations have peculiar characteristics such as shifting market
targets. For example, a recent innovation in the music industry, like the introduction of iPods and
iTunes, attracted a new target market of the millennial. Such situations generate a competitive
advantage for those companies that adopt the innovation and more often than not, failure on the
incumbent who are either slow in shifting their operation models or fail to do so altogether.

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