How should incumbent firms innovate in IT-based services in the long term? Past empirical research and conventional wisdom suggest that firms should be fast during the radical and incremental phase. We challenge this view in the context of the knowledge economy. We contend that incumbent firms can either be fast during the radical phase or during the subsequent incremental phase of the innovation process. We draw on the innovation and organizational learning literature to argue that sequential combination of modes of learning during the innovation process explains this phenomenon.
We show that incumbent firms that learn through the path of internal knowledge creation during the radical phase followed by external knowledge transfer during the incremental phase will be slow at initial radical innovation but fast at subsequent incremental innovations. In contrast, incumbent firms that learn through any other path will be faster at radical innovation but slower at incremental innovations. We study the innovation in IT-based service of online retail banking over nine years (from 1995 to 2003) using archival data. Analysis of a longitudinal data set of 89 incumbent U.S. banks provides evidence for the thesis
