How to Manage Disruptive Innovation

IBM (NYSE: IBM) fellow John Cohn knows a thing or two about innovation. He has 116 patents and 36 technical papers to his name, and has helped direct IBM through four decades of computing innovation. From vacuum tubes to artificial intelligence (AI) and quantum computing, he's seen his share of technological change!

Incremental improvement

I recently spoke with John about several innovations on the horizon. Artificial intelligence and machine learning inference are quantum leaps that could forever change the computing world as we know it.

We then focused on how companies should best adapt to these types of massive market changes. Specifically, we discussed how astute leaders need to strike a healthy balance between placing short-term and long-term bets on research.

Cohn acknowledges the need for incremental improvements. Smaller innovations to existing product lines are important for companies to maintain their competitive position against others, or to provide the sales growth necessary to fund operations.

Here's what he said about incremental research in our conversation:

Swinging for the fences

But Cohn also stresses the importance of companies making larger bets and investing in disruptive innovation. Companies should encourage disruptive research that could potentially fix the industry's greatest pain points. These types of innovations aren't linked to existing products, and would often even compete against its current business.

Here's his first-hand perspective on disruptive innovation:

Cohn gives a real-life example of how IBM is investing in disruption by building out a quantum computing division:

The investing takeaway

As investors, we should respect the challenges that leadership teams must simultaneously manage.

There is a necessary balance between the time horizons. A good management team should be able to develop and articulate annual and three-year plans in order to address short-term expectations. But it should also have a close pulse on the needs of its customers, and be willing to allocate research funds to longer-term innovation.

Cohn describes that these longer-term innovations are much harder to achieve:

As long-term investors, we should take special note of companies that are also committed to their own long-term research.

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Simon Erickson has no position in any of the stocks mentioned. The Motley Fool is short shares of IBM. The Motley Fool has a disclosure policy.