Institution‐Infused Sensemaking of Discontinuous Innovations: The Case of the Sharing Economy

Abstract

This paper adopts an institutionalist perspective to develop a better understanding of why incumbent organizations struggle to respond to discontinuous innovations. Based on a case study of the hotel industry’s early response to the emergence of “sharing economy” businesses, it identifies three patterns of “institution‐infused interpretation” in incumbent managers’ sensemaking—i.e., interpretations that are triggered by decision makers’ perceptions of the ways in which discontinuous innovations challenge established rules, norms, and taken‐for‐granted assumptions. First, as incumbent managers perceive new entrants that introduce the innovation as violating regulative and normative rules, they develop a sense of unfairness regarding the new competition enabled by the discontinuous innovation. Second, as new entrants deviate from normative and cognitive institutions, they cause collective confusion among incumbents. Third, perceiving discontinuous innovations as challenging regulatory and cognitive institutions, incumbent managers cognitively marginalize new entrants and their offerings as illegitimate and substandard niche phenomena. Interestingly, these institution‐infused interpretive patterns not only contribute to early incumbent inertia, but also motivate incumbents to question established rules and engage in institutional work. Overall, this paper adds to the emergent conversation on the role of institutions in organizational adaptation to discontinuous innovations by revealing the importance of institutional violations for managerial sensemaking and responses in this context.

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