Chapter 7: Innovation Strategies

7.1 Introduction

7.2 Entrepreneurial Orientation

7.3 Why Innovate?

7.4 Types of Innovation

7.5 Implementing Innovation

7.6 Responding to Innovation in the Market

7.7 Conclusion

Learning Objectives

After reading this chapter, you should be able to understand and articulate answers to the following

questions:

1. What is Entrepreneurial Orientation?

2. Why should companies innovate?

3. What are the four types of innovation?

4. What are the four stages of the product life cycle and crossing the chasm?

5. What are the ways firms might cooperate with their competitors?

7.1 Introduction

A firm’s philosophy toward innovation greatly impacts the business-level/competitive strategies that it

pursues. Having an entrepreneurial orientation stimulates a firm toward innovation, improving its products and

services and launching new product lines. Innovation can open new markets for a company, and being the first

mover to launch a new product or service can be an advantage over competitors, but not always. There are

four types of innovation that depend on if existing or new markets are reached or if existing or new technology

is used. Firms may also find it advantageous to cooperate at certain levels, such as through a joint venture,

strategic alliance, merger, acquisition co-location, or co-opetition.

Innovation is important in strategic management. A firm must be improving its products and services or

Chapter 7: Innovation Strategies | 163

developing new ones to stay competitive. Business level strategy will not be able to sustain any competitive

advantage by sitting still. As firms implement corporate and international strategies, discussed in the next two

chapters, cooperative and co-opetition measures help companies obtain resources and capabilities needed to

innovate and enter new markets.

7.2 Entrepreneurial Orientation

A famous Nike slogan encourages people to “just do it!” For people and organizations that have developed an

entrepreneurial orientation (EO), “just do it!” is a way of life. While often associated with starting new ventures,

an EO can be very valuable to established organizations as well. Below we describe each of the three

characteristics associated with an EO: innovativeness, proactiveness, and risk-taking.

An additional two characteristics were later added—competitive aggressiveness and autonomy. However, these

two dimensions of EO have been subject to much debate and are omitted for the purposes of this text.

Table 7.1 Understanding Entrepreneurial Orientation

Term Definition Example

Innovativeness

The tendency to pursue

novel ideas, creative

processes, and

experimentation.

3M has built its business around its mission statement: to solve

unsolved problems innovatively. 3M employs over 7,000

researchers and more than 118,000 patents as of 2019, adding more

than 4,000 patents annually. 3M’s innovativeness has led it to

develop thousands of products (such as Post-it notes and Scotch

tape) that are sold in almost 200 countries.

Proactiveness

The tendency to anticipate

and act on future

opportunities rather than

rely solely on existing

products and services.

Proactive Communications Inc. lives up to its name by focusing on

emerging and unusual opportunities. The firm embraces contracts

in war zones and natural disaster areas that are often avoided by

other telecommunications firms.

Risk Taking

The tendency to take bold

actions rather than being

cautious.

Richard Brandson’s launching of Virgin Galactic—a company that

plans to offer suborbital space flights to commercial

passengers—reflects his love of high-risk, high-reward ventures.

The Value of Thinking and Acting Entrepreneurially

When asked to think of an entrepreneur, people typically offer examples such as Elon Musk, Oprah Winfrey,

Jeff Bezos, Kylie Jenner, and Mark Zuckerberg —individuals who have started their own successful businesses

from the bottom up that generated a lasting impact on society. But entrepreneurial thinking and doing are not

limited to those who begin in their garage with a new idea, financed by family members or personal savings.

Some people in large organizations are filled with passion for a new idea, spend their time championing a new

product or service, work with key players in the organization to build a constituency, and then find ways to

acquire the needed resources to bring the idea to fruition.

164 | Chapter 7: Innovation Strategies

Entrepreneurship within an organization is called intrapreneurship. Companies often grow by offering new

services or launching new products. Rather than acquire another company that provides that product or

service, they develop it themselves. This is a method of strategy implementation called internal development.

To maximize opportunities for intrapreneurship, companies need employees with a high entrepreneurial

orientation.

Thinking and behaving entrepreneurially can help a person’s career as well. Some enterprising individuals

successfully navigate through the environments of their respective organizations and maximize their own

career prospects by identifying and seizing new opportunities (Table 7.1) (Certo et al., 2009).

Section Video

The relationship between entrepreneurial orientation and organizational performance [01:02]

The video for this lesson discusses the relationship between entrepreneurial orientation and

organizational performance.

You can view this video here: https://youtu.be/Iru7IBqc3Vk.

In the 1730s, Richard Cantillon used the French term entrepreneur, or literally “undertaker,” referring to those

who undertake self-employment while also accepting an uncertain return. In subsequent years, entrepreneurs

have also been referred to as innovators of new ideas (Thomas Edison), individuals who find and promote new

combinations of factors of production (Bill Gates’ bundling of Microsoft’s products), and those who exploit

opportunistic ideas to expand small enterprises (Mark Zuckerberg at Facebook). The common elements of these

conceptions of entrepreneurs are that they do something new and that some individuals can make something

out of opportunities that others cannot.

Entrepreneurial orientation (EO) is a key concept when executives are crafting strategies in the hopes of

doing something new and exploiting opportunities that other organizations cannot exploit. EO refers to the

processes, practices, and decision-making styles of organizations that act entrepreneurially (Lumpkin & Dess,

1996). Any organization’s level of EO can be understood by examining how it stacks up relative to three

dimensions: (1) innovativeness, (2) proactiveness, (3) and risk taking. These dimensions are also relevant to

individuals.

Chapter 7: Innovation Strategies | 165

Figure 7.1: As a college student, Michael

Dell demonstrated an entrepreneurial

orientation by starting a

computer-upgrading business in his

dorm room. He later founded Dell Inc.

Figure 7.2: Ben & Jerry’s displays innovativeness by developing

a series of offbeat and creative flavors over time.

Entrepreneurial orientation (EO) is measured at both the organizational

and the individual levels. The characteristics of an entrepreneurial

company noted in Table 7.1 also apply to individuals. Those individuals

who are less risk averse, innovative thinkers, and competitive tend to have

a higher EO and greater success at starting a business. Online EO

assessment tools exist for those wishing to determine their EO. It is

important to note that EO is not only related to high tech start-ups.

Starting a lawn care business or a beauty shop are very valid and

necessary entrepreneurial ventures, and will have a better chance of

success if an entrepreneur possesses a higher EO.

Innovativeness

Innovativeness is the tendency to pursue creativity and experimentation.

Some innovations build on existing skills to create incremental

improvements, while more radical innovations require brand-new skills

and may make existing skills obsolete. Either way, innovativeness is aimed

at developing new products, services, and processes. Those organizations

that are successful in their innovation efforts tend to enjoy stronger

performance than those that do not.

Known for efficient service, FedEx has introduced its

Smart Package, which allows both shippers and

recipients to monitor package location, temperature,

and humidity. This type of innovation is a welcome

addition to FedEx’s lineup for those in the business of

shipping delicate goods, such as human organs. How

do firms generate these types of new ideas that meet

customers’ complex needs? Perennial innovators 3M

and Google have found a few possible answers. 3M

sends nine thousand of its technical personnel in

thirty-four countries into customers’ workplaces to

experience firsthand the kinds of problems customers

encounter each day. Google’s two most popular

features of its Gmail, thread sorting and unlimited email

archiving, were first suggested by an engineer who was fed up with his own e-mail woes. Both 3M and

Google allow employees to use a portion of their work time on projects of their own choosing with the goal of

creating new innovations for the company. This latter example illustrates how multiple EO dimensions—in this

case, autonomy and innovativeness—can reinforce one another.

166 | Chapter 7: Innovation Strategies

Proactiveness

Proactiveness is the tendency to anticipate and act on future needs rather than reacting to events after they

unfold. A proactive organization is one that adopts an opportunity-seeking perspective. Such organizations act

in advance of shifting market demand and are often either the first to enter new markets or “fast followers” that

improve on the initial efforts of first movers.

Consider Proactive Communications, an aptly named small firm in Killeen, Texas. From its beginnings in 2001,

this firm has provided communications in hostile environments, such as Iraq and areas impacted by Hurricane

Katrina. Being proactive in this case means being willing to don a military helmet or sleep outdoors—activities

often avoided by other telecommunications firms. By embracing opportunities that others fear, Proactive’s

executives have carved out a lucrative niche in a world that is technologically, environmentally, and politically

turbulent (Choi, 2008).

Risk Taking

Risk taking refers to the tendency to engage in bold rather than cautious actions. Starbucks, for example, made

a risky move when it introduced a new instant coffee called VIA Ready Brew. Instant coffee has long been viewed

by many coffee drinkers as a bland drink, but Starbucks decided that the opportunity to distribute its product

in a different format was worth the risk of associating its brand name with instant coffee.

Although a common belief about entrepreneurs is that they are chronic risk takers, research suggests that

entrepreneurs do not perceive their actions as risky; most take action only after using planning and forecasting

to reduce uncertainty (Simon et al., 2000). However, uncertainty seldom can be fully eliminated. A few years

ago, Jeroen van der Veer, CEO of Royal Dutch Shell PLC, entered a risky energy deal in Russia’s Far East. At the

time, van der Veer conceded that it was too early to know whether the move would be successful (Certo et

al., 2008). Just six months later, however, customers in Japan, Korea, and the United States had purchased all

the natural gas expected to be produced there for the next twenty years. If political instabilities in Russia and

challenges in pipeline construction do not dampen returns, Shell stands to post a hefty profit from its 27.5%

stake in the venture.

Building an Entrepreneurial Orientation

Steps can be taken by executives to develop a stronger entrepreneurial orientation throughout an organization

and by individuals to become more entrepreneurial themselves. For executives, it is important to design

organizational systems and policies to reflect the three dimensions of EO. As an example, how an organization’s

compensation systems encourage or discourage these dimensions should be considered. Is taking sensible

risks rewarded through raises and bonuses, regardless of whether the risks pay off, for example, or does the

compensation system penalize risk taking? Other organizational characteristics such as corporate debt level

Chapter 7: Innovation Strategies | 167

may influence EO. Do corporate debt levels help or impede innovativeness? Is debt structured in such a way as

to encourage risk taking? These are key questions for executives to consider.

Examination of some performance measures can assist executives in assessing EO within their organizations.

To understand how the organization develops and reinforces autonomy, for example, top executives can

administer employee satisfaction surveys and monitor employee turnover rates. Organizations that effectively

develop autonomy should foster a work environment with high levels of employee satisfaction and low levels

of turnover. Innovativeness can be gauged by considering how many new products or services the organization

has developed in the last year and how many patents the firm has obtained.

Similarly, individuals should consider whether their attitudes and behaviors are consistent with the three

dimensions of EO. Is an employee making decisions that focus on competitors? Does the employee provide

executives with new ideas for products or processes that might create value for the organization? Is the

employee making proactive as opposed to reactive decisions? Each of these questions will aid employees in

understanding how they can help to support EO within their organizations.

Section Video

Entrepreneurial Orientation [02:39]

The video for this lesson explains the importance of entrepreneurial orientation.

You can view this video here: https://youtu.be/L6MqD5Hhs2U.

Key Takeaway

• Building an entrepreneurial orientation can be valuable to organizations and individuals alike in

identifying and seizing new opportunities. Entrepreneurial orientation consists of three

dimensions: (1) innovativeness, (2) proactiveness, and (3) risk taking.

168 | Chapter 7: Innovation Strategies

Exercises

1. Can you name three firms that have suffered because of lack of an entrepreneurial orientation?

2. Identify examples of each dimension of entrepreneurial orientation other than the examples

offered in this section.

3. How does developing an entrepreneurial orientation have implications for your future career

choices?

4. How could you apply the dimensions of entrepreneurial orientation to a job search?

References

Certo, S. T., Connelly, B., & Tihanyi, L. (2008). Managers and their not-so-rational decisions. Business Horizons,

51(2), 113–119.

Certo, S. T., Moss, T. W., & Short, J. C. (2009). Entrepreneurial orientation: An applied perspective. Business

Horizons, 52, 319–324.

Choi, A. S. (2008, April 16). PCI builds telecommunications in Iraq. Bloomberg Businessweek.

https://www.bloomberg.com/news/articles/2008-04-15/pci-builds-telecommunications-in-iraq.

Lumpkin, G. T., & Dess, G. G. (1996). Clarifying the entrepreneurial orientation construct and linking it to

performance. Academy of Management Review, 21, 135–172.

Simon, M., Houghton, S. M., & Aquino, K. (2000). Cognitive biases, risk perception, and venture formation: How

individuals decide to start companies. Journal of Business Venturing, 14, 113–134.

Image Credits

Figure 7.1: Ilan Costica. Michael Dell speaking at Oracle OpenWorld, San Francisco. CC BY-SA 3.0. Retrieved

from https://en.wikipedia.org/wiki/File:Michael_Dell_at_Oracle_OpenWorld.JPG.

Figure 7.2: Lam, Willis. “September 6th is National Coffee Ice Cream Day.” CC-BY SA 2.0. Retrieved from

https://commons.wikimedia.org/wiki/

File:Ben_and_Jerry%27s_2_Coffee_3_Buzz_Ice_Cream_(30650663798).jpg.

Chapter 7: Innovation Strategies | 169

Figure 7.3: Apple’s iPhone has continued to boast new features

since its initial release in 2007.

Video Credits

The Oxford Review. (2018, December 16). The relationship between entrepreneurial orientation and

organisational performance [Video]. YouTube. https://youtu.be/Iru7IBqc3Vk.

Tarlan Golkar. (2020, April 28). Entrepreneurial orientation [Video]. YouTube. https://youtu.be/L6MqD5Hhs2U.

7.3 Why Innovate?

Innovate to Capture Markets

Innovation can be a key strategy to stay ahead of the competition. Firms who sit still, perhaps satisfied

with their success, will find themselves outsmarted and left behind, with the competition winning over their

customers. An innovation strategy coupled with an entrepreneurial orientation will help keep customers

buying.

Automobile manufacturers have used this strategy of innovation for years. Every year, a new innovation of

nearly all car models comes out in the fall season. The new year’s model may look a little sleeker, have some

safety improvements, or be connected to the internet. These innovations entice consumers to sell their existing

car to have the latest look or technology. Cell phone manufacturers do the same thing, coming out with a new

model almost annually, with more memory, a faster processor, a better camera, etc. Where would Apple be

today if they stopped with the iPhone 7? Drug manufacturers are always innovating by doing research to find

the next medication to slow Alzheimers or cure skin cancer.

Innovation is usually the strategy of new startup IT

companies. A new software program is developed or a

new way to do interactive video games can meet a need

or provide a service that consumers want. It is the

innovation strategy that propels the organization

forward. This is not to discount the need for a

business-level/competitive strategy such as focused

differentiation, as the firm still needs to determine

their business-level strategy and optimize it. Often a

differentiation strategy, broad or focused, can be used

for a new, innovative product or service and priced

high, because the competitors are few or none.

Joseph Addison, an eighteenth century poet, is often credited with coining the phrase “He who hesitates is lost.”

170 | Chapter 7: Innovation Strategies

This proverb is especially meaningful in today’s business world. It is easy for executives to become paralyzed

by the dizzying array of competitive and cooperative moves available to them. Given the fast-paced nature

of most industries today, hesitation can lead to disaster. Some observers have suggested that competition in

many settings has transformed into hyper-competition, which involves very rapid and unpredictable moves

and countermoves that can undermine competitive advantages. Under such conditions, it is often better to

make a reasonable move quickly rather than hoping to uncover the perfect move through extensive and timeconsuming

analysis.

The importance of continuous learning also contributes to the value of adopting a “get moving” mentality.

Success in business often depends on executives learning from a series of competitive and cooperative moves,

not on selecting ideal moves. In some circumstances, advantages can be created by taking decisive action, even

if the decision is based on incomplete information.

Blue Ocean Strategy

It is best to win without fighting. – Sun-Tzu, The Art of War

A blue ocean strategy involves creating a new, untapped market rather than competing with rivals in an existing

market (Kim & Mauborgne, 2004). This strategy follows the approach recommended by the ancient master of

strategy Sun-Tzu in the quote above. Instead of trying to outmaneuver its competition, a firm using a blue

ocean strategy tries to make the competition irrelevant (Table 7.2). Baseball legend Wee Willie Keeler offered

a similar idea when asked how to become a better hitter: “Hit ’em where they ain’t.” In other words, hit the

baseball where there are no fielders rather than trying to overwhelm the fielders with a ball hit directly at them.

Nintendo openly acknowledges following a blue ocean strategy in its efforts to invent new markets. Perrin

Kaplan, Nintendo’s former vice president of marketing and corporate affairs for Nintendo of America noted in

an interview, “We’re making games that are expanding our base of consumers in Japan and America. Yes, those

who’ve always played games are still playing, but we’ve got people who’ve never played to start loving it with

titles like Nintendogs, Animal Crossing and Brain Games. These games are blue ocean in action” (Rosmarin,

2006). Other examples of companies creating new markets include FedEx’s invention of the fast-shipping

business and eBay’s invention of online auctions.

Firms that create blue oceans experience a temporary competitive advantage. How long “temporary

competitive advantage lasts” in a blue ocean strategy depends on the particular combination of internal and

external factors that create the opportunity in the first place. Needless to say, the more successful a company

is with a blue ocean strategy, the more attention they will receive from potential competitors who want to get

into a position to benefit from those same advantages.

It’s a big ocean out there! When pursuing a blue ocean strategy, executives try to create and exploit vast untapped

markets rather than competing directly with rivals. See several examples of firms following a blue ocean strategy

below.

Chapter 7: Innovation Strategies | 171

Table 7.2 Blue Ocean Strategy

Examples of Firms Following a Blue Ocean Strategy

The interactive features of Nintendo’s Wii transformed playing video games from a hobby for the hardcore gamers into a

treasured family event.

Coffee shops were once the domain of old men, insomniacs, and chain-smoking urban hipsters. By reinventing coffee

shops, Starbucks made the $4 latte a must-have item for college students, business people, and soccer moms.

At a time when cars were only for the wealthy, Henry Ford envisioned cars that were affordable to the typical American.

Ford priced his vehicles so that his assembly line workers could afford them.

eBay’s invention of online auctions extended the auction experience—and the chance to buy that rare Elvis plate—to

anyone with internet access.

Golf can be frustrating to even skilled players. Callaway’s creation of the Big Bertha club with an oversized head made

golf appealing to a whole new set of weekend warriors.

A classy, affordable wine for novice wine drinkers? Casella wines (maker of Yellow Tail) steered clear of wine snobs and

sommeliers and instead created fun and simple tastes for the masses.

Key Takeaway

• Firms must continually innovate to stay ahead of the competition. Blue ocean strategy is one way

that innovation can capture new markets.

Exercises

1. Find a key trend from the general environment and develop a blue ocean strategy that might

capitalize on that trend.

References

Kim, W. C., & Mauborgne, R. (2004, October). Blue ocean strategy. Harvard Business Review, 76–85.

Rosmarin, R. (2006, February 7). Nintendo’s new look. Forbes. Retrieved from

http://www.forbes.com/2006/02/07/xbox-ps3-revolution-cx_rr_0207nintendo.html.

172 | Chapter 7: Innovation Strategies

Image Credits

Figure 7.3: Fotois.com. “iPhone 4S Unbox.” CC BY 2.0. Retrieved from https://flic.kr/p/avJQdj.

7.4 Types of Innovation

Being a First Mover: Advantages and Disadvantages

The idea of first mover advantage borrows from military strategy. For example, Confederate general Nathan

Beford Forrest’s attack plan was simply stated as “git thar fustest with the mostest.”

When confronted by a poisonous snake, should you strike first or wait for the serpent to make a move? Each

option has advantages and disadvantages. In business, being a first mover might allow a firm to “rattle its rivals,

but a first move might also attract the “venom” of skeptical customers. Below are examples of successful—and not

so successful—first movers.

Table 7.3 First Mover Advantage

First Move Successes First Move Failures

At a time when using most personal computers

required memorizing obscure commands, Apple

pioneered a user-friendly interface. The firm gained a

reputation as an innovator that persists today.

Netscape’s web browser was a first mover that was popular in

the 1990s, but nearly extinct by 2002 with the advent of

Microsoft’s competitive offering—Internet Explorer.

Following World War II, Japan’s economy laid in ruin.

Ibuka Masaru used this backdrop to build a company

that would be the first in Japan to create tape

recorders and transistors radios. The company he

pioneered—Sony—has now been a fierce electronics

competitor for over a half century.

Not all of Apple’s first moves were triumphs. The firm’s

disastrous attempt to pioneer the personal digital assistant

market through its “Newton” created a loss of around

one-hundred million dollars.

A famous clich  contends that “the early bird gets the worm.” Applied to the business world, the clich  suggests

that certain benefits are available to a first mover into a market that will not be available to later entrants. A

first-mover advantage exists when making the initial move into a market allows a firm to establish a dominant

position that other firms struggle to overcome (Table 7.3). For example, Apple’s creation of a user-friendly, small

computer in the early 1980s helped fuel a reputation for creativity and innovation that persists today. Kentucky

Fried Chicken (KFC) was able to develop a strong bond with Chinese officials by being the first Western

restaurant chain to enter China. Today, KFC is the leading Western fast-food chain in this rapidly growing

market. Genentech’s early development of biotechnology allowed it to overcome many of the pharmaceutical

industry’s traditional entry barriers such as financial capital and distribution networks and become a profitable

firm. Decisions to be first movers helped all three of these firms to be successful in their respective industries

(Ketchen et al., 2004).

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On the other hand, a first mover cannot be sure that customers will embrace its offering, making a first move

inherently risky. Apple’s attempt to pioneer the personal digital assistant market, through its Newton, was a

financial disaster. The first mover also bears the costs of developing the product and educating customers.

Others may learn from the first mover’s successes and failures, allowing them to cheaply copy or improve the

product. Sony, Samsung, and others have built on Apple’s knowledge and creation of Airpods to offer competing

products. In many industries, knowledge diffusion and public-information requirements make such imitation

increasingly easy.

One caution is that first movers must be willing to commit sufficient resources to follow through on their

pioneering efforts. RCA and Westinghouse were the first firms to develop active-matrix LCD display technology

for flat computer screens, but their executives did not provide the resources needed to sustain the products

spawned by this technology. Today, these firms are not even players in this important business segment that

supplies screens for notebook computers, camcorders, medical instruments, and many other products.

To date, the evidence is mixed regarding whether being a first mover leads to success. One research study of

1,226 businesses over a fifty-five-year period found that first movers typically enjoy an advantage over rivals for

about a decade, but other studies have suggested that first moving offers little or no advantages.

Perhaps the best question that executives can ask themselves when deciding whether to be a first mover is, how

will this move provide my firm with a sustainable competitive advantage? First moves that build on strategic

resources such as patented technology are difficult for rivals to imitate and thus are likely to succeed. For

example, Pfizer enjoyed a monopoly in the erectile dysfunction market for five years with its patented drug

Viagra before two rival products (Cialis and Levitra) were developed by other pharmaceutical firms. Despite

facing stiff competition, Viagra continues to raise about $1.9 billion in sales for Pfizer annually.

In contrast, E-Trade Group’s creation of the portable mortgage seemed doomed to fail because it did not

leverage strategic resources. This innovation allowed customers to keep an existing mortgage when they

move to a new home. Bigger banks could easily copy the portable mortgage if it gained customer acceptance,

undermining E-Trade’s ability to profit from its first move.

Incremental Innovation

Innovation can be classified into four types:

1. Incremental Innovation

2. Disruptive Innovation

3. Architectural Innovation

4. Radical Innovation

The type of innovation is dependent on two factors:

1. Market – does the innovation create a new market, or address the existing market?

2. Technology – does the innovation use a new technology or an existing technology?

174 | Chapter 7: Innovation Strategies

Figure 7.4: Types of Innovation

Figure 7.4 illustrates the four types of innovation.

Incremental innovation can be described as making

improvements on an existing product or service. The

improvements are based on using existing technology

and are directed at the existing market. In the

automobile industry, the improvements made each

year to the newest model of car are incremental

innovations. No new markets are formed, and existing

technology is used to make the car better. Some other

examples of incremental innovation are presented in

Table 7.4

Incremental innovation occurs when the innovation

uses existing technology to improve a product or service

that addresses the existing market.

Table 7.4 Incremental Innovation

Incremental Innovation Examples

Each new version of Apple’s iPhone that comes out is typically incremental innovation. iPhone features such as the

camera and processor are tweaked to make an improvement over the previous model.

When Gillette went from a single razor blade to a double blade, to now up to six blades, no new markets were created, as

the same consumers are buying the blades. There was no new technology involved, so this is incremental innovation.

Residential washers and dryers have been transitioning from top-loading to side-loading, and can handle larger loads.

This incremental innovation used existing technology and created no new markets, but stimulated demand for more

purchasers at higher prices.

Disruptive Innovation

Some firms have the opportunity to shake up their industry by introducing a disruptive innovation—an

innovation that conflicts with, and threatens to replace, traditional approaches to competing within an industry

(Table 7.5). Disruptive innovation occurs when a new product or service engages the existing market with a new

technology. The iPad has proved to be a disruptive innovation since its introduction by Apple in 2010. Many

individuals quickly abandoned clunky laptop computers in favor of the sleek tablet format offered by the iPad.

And as a first mover, Apple was able to claim a large share of the market.

Disruptive innovations occur when firms introduce offerings that are so unique and superior that they threaten

to replace traditional approaches. Existing markets are disrupted by new technology. Sometimes a disruption

is so significant that it may create a “blue ocean” by finding a new market while disrupting an existing one, but

this is not typically the case. A number of disruptive innovations are illustrated below.

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Table 7.5 Shaking the Market with Disruptive Innovations

Disruptive Innovation Examples

Tablet computers disrupted laptop sales due to their versatility and portability. Reading books can be awkward on

traditional computers, but user-friendly devices such as iPad, Nook, and Kindle are popular platforms for aggressive

textbook publishers.

Many stores that relied on compact disc sales went under when downloadable digital media disrupted the music

industry. Years earlier, CDs supplanted vinyl albums and cassette tapes due to their superior durability and quality.

Music subscriptions such as Spotify and Apple Music are new technologies that are replacing downloads. What new

technology will replace subscriptions?

Digital cameras disrupted the photography industry by offering instant gratification and eliminating the cost of getting

film developed. Excellent cameras on cell phones have since disrupted the digital camera industry.

The emergence of personal computers disrupted the dominance of mainframes and made it possible for everyone to

have a computer in their home.

LED lights are a newer technology that have been disrupting and replacing incandescent lights by selling to the existing

market.

The iPad story is unusual because most disruptive innovations are not overnight sensations. Typically, a small

group of customers embrace a disruptive innovation as early adopters and then a critical mass of customers

builds over time. An example is digital cameras. Few photographers embraced digital cameras initially because

they took pictures slowly and offered poor picture quality relative to traditional film cameras. As digital cameras

improved, they gradually won over almost everyone that takes pictures. Executives who are deciding whether

to pursue a disruptive innovation must first make sure that their firm can sustain itself during an initial period

of slow growth.

Architectural Innovation

Architectural innovation occurs when new products or services use existing technology to create new markets

and/or new consumers that did not purchase that item before. For example, the smart watch used existing

cell phone technology and was repackaged into a watch. This opened up a new market of purchasers by

repackaging an existing technology. Typically, firms alter the architecture of the product to create a new

product that opens up sales to new markets. Table 7.5 provides more examples.

Firms can innovate by using and adapting existing technology to create new products or services that address

new markets and consumers. This type of innovation is called Architectural Innovation, since the architecture of

a product is changed to create a new product to reach new markets.

176 | Chapter 7: Innovation Strategies

Table 7.6 Architectural Innovation

Architectural Innovation Examples

Peloton, maker of home exercise bicycles, packages the already existent bicycle, internet, and communications

technologies to create new consumers who otherwise would not buy an exercise bike.

Some firms have leveraged solar cell technology to produce small outdoor ground lighting. This created a whole new

group of consumers who decorate their yards with these environmentally friendly lights.

Copiers used to be large and expensive machines purchased only for large offices. Canon and others reconfigured these

copiers to be small and usable on desktops, creating a whole new market of people buying personal copier/printers.

Radical Innovation

When new products or services are developed using new technology that open up new markets, the result

is called radical innovation. The airplane is a good example of a radical innovation. It used an entirely new

aeronautical technology to open up a whole new market for people traveling. Traveling across the country was

unthinkable for most people, when it would take weeks to go from New York to San Francisco by car or train.

Table 7.6 provides more examples of radical innovation.

Innovation that uses new technology to reach new consumers is radical innovation. Firms who are successful

with a new product of service using radical innovation may then employ a strategy of incremental innovation to

continually improve the product or service and generate more sales.

Table 7.7 Radical Innovation

Radical Innovation Examples

Pharmaceutical researchers often produce a new product that is radical innovation. They come up with a new

combination of chemicals to treat a medical condition that attracts new buyers. Aricept,a new medication co-marketed

by Eisai and Pfizer that helps treat the symptoms of Alzheimer’s disease, has opened new markets.

Apple’s Airpods can be considered a radical innovation. Apple developed an earpiece that could use wireless technology

to receive Bluetooth signals. Now we see people with Airpods in their ears when before they would not have been using

wired earphones nearly as much.

The Magnetic Resonance Imaging (MRI) machine uses electro-magnetic forces instead of x-rays to produce images

internal to the body. This new technology generated a brand new market for hospitals to buy these machines for new

diagnostic capabilities.

Footholds

Footholds are useful for rock climbers looking for sure footing to ascend a difficult mountain, as well as firms

hoping to gain positions in new markets. In business, a foothold is a small position that a firm intentionally

establishes within a market in which it does not yet compete. Examples of the use of footholds are illustrated

below.

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Table 7.8 Footholds

Foothold Examples

Swedish furniture seller IKEA opens just a single store when entering a new country, such as their first store in Japan.

This foothold is used as a showcase to establish IKEA’s brand; more stores are opened once brand recognition is

gained in the country.

Pharmaceutical giant Merck obtained a foothold by purchasing SmartCells Inc.,—a company developing a possible

new diabetes treatment.

The foothold concept also applies to warfare. Many armies establish new positions in geographic territories that they

have not previously occupied. The Allied Forces used Normandy, France, as their foothold to advance on German

forces during World War II.

Similarly, some organizations find it valuable to establish footholds in certain markets. Within the context of

business, a foothold is a small position that a firm intentionally establishes within a market in which it does

not yet compete (Upson et al., 2012). Swedish furniture seller IKEA is a firm that relies on footholds. When

IKEA enters a new country, it opens just one store. This store is then used as a showcase to establish IKEA’s

brand. Once IKEA gains brand recognition in a country, more stores are established (Hambrick & Fredrickson,

2005).

Pharmaceutical giants such as Merck often obtain footholds in emerging areas of medicine. In December 2010,

for example, Merck purchased SmartCells Inc., a company that was developing a possible new treatment for

diabetes. In May 2011, Merck acquired an equity stake in BeiGene Ltd., a Chinese firm that was developing novel

cancer treatments and detection methods. Competitive moves such as these offer Merck relatively low-cost

platforms from which it can expand if clinical studies reveal that the treatments are effective.

Key Takeaway

• Being the first mover can provide a firm a competitive advantage, but competitors who wait may

be the ultimate winners.

• There are four types of innovation that firms employ to increase their strength in the

marketplace.

178 | Chapter 7: Innovation Strategies

Exercises

1. Provide an example of a product that, if invented, would work as a disruptive innovation. How

widespread would be the appeal of this product?

2. How would you propose to develop a new foothold if your goal was to compete in the fashion

industry?

References

Hambrick, D. C., & Fredrickson, J. W. (2005). Are you sure you have a strategy? Academy of Management

Executive, 19, 51–62.

Johnson, S. (2010, September 25) The genius of the tinkerer. Wall Street Journal.

http://online.wsj.com/article/SB10001424052748703989304575503730101860838.html.

Ketchen, D. J., Snow, C., & Street, V. (2004). Improving firm performance by matching strategic decision

making processes to competitive dynamics. Academy of Management Executive, 19(4), 29–43.

Monster Mini Golf, KISS Mini Golf to rock Las Vegas this fall [Press release]. (2011, April 28). Monster Mini Golf

website: https://monsterminigolf.com/locations/kiss-las-vegas/?apppush.

Rosmarin, R. (2006, February 7). Nintendo’s new look. Forbes.

http://www.forbes.com/2006/02/07/xbox-ps3-revolution-cx_rr_0207nintendo.html.

Turisas. (n.d.). http://www.turisas.com/site/.

Upson, J., Ketchen, D. J., Connelly, B., & Ranft, A. (2012). Competitor analysis and foothold moves. Academy of

Management Journal 55(1), 93-110.

Image Credits

Figure 7.4: Kindred Grey (2020). “Interaction of market and technology.” CC BY-SA 4.0. Retrieved from

https://commons.wikimedia.org/wiki/File:Interaction_of_market_and_technology.png.

Chapter 7: Innovation Strategies | 179

7.5 Implementing Innovation

Product Life Cycle and Crossing the Chasm

When innovation creates a new product, it typically goes through four stages within the marketplace. This is

true whether it is a high-tech product like a new video game system or a more mundane product like a laundry

detergent. The four stages are:

1. Introduction: The product is launched, with the hopes that it catches on. Sales are low.

2. Growth: The product catches on, and sales increase with time. Competitors jump in, but the rivalry among

competitors is not really strong yet, and there are plenty of sales for all.

3. Maturity: Sales begin to level out, growth slows, and competition increases. Shake-out occurs, with some

competitors leaving the market or being acquired by others.

4. Decline: Sales start declining. More consolidation occurs, with firms looking for exit strategies. A few

firms remain.

Figure 7.5: Product Life Cycle

Figure 7.5 illustrates these four stages over time. To prevent the decline of their product after the maturity

stage, firms will often “relaunch” their product with a new and improved model. Innovation again plays a role,

making improvements to the product, so that consumers will purchase the latest model. Prime examples of

180 | Chapter 7: Innovation Strategies

incremental innovation strategy are Apple’s iPhone and car manufacturers, such as Ford and Toyota. In essence,

the new model starts the product life cycle all over again. Figure 7.6 illustrates this concept.

Figure 7.6: Product Life Cycle Extension

Profits generated during the product life cycle also usually follow a traditional pattern. During the research and

development phase of the product, the firm is investing funds into the product, generating a negative profit.

Losses continue during the introduction phase, when sales are low and marketing expenses are high. Firms

tend to recoup their investment in R&D and marketing during the growth phase, with maximum profits at the

beginning of the maturity phase. Once competition heats up in the maturity phase, price competition kicks in,

and lower prices mean lower profits. Figure 7.7 illustrates the profits during the four phases of the product life

cycle.

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Figure 7.7: Profits During the Product Life Cycle

Another phenomenon that occurs in the innovation process with new technology is called “crossing the chasm.”

When a new technology is launched, often there are technology innovators/enthusiasts who will purchase the

new technology to check it out. A few more, called early adopters, will also want to try out the new product.

But how does the firm get the product into the mainstream market? How do they get it to catch on? This can

often be challenging. Can the product make the leap to the mainstream? This is called “crossing the chasm,” and

often requires a different marketing approach.

Figure 7.6 illustrates this concept, breaking down the market into customer segments. Innovators and early

adopters make up about 15% of the market. Firms must determine a business strategy for each segment of

the market. If they cannot convince the early majority to buy their product, the product fails. Google Glass

is an example of a product that did not cross the chasm. Eyeglasses connected to the internet were quite an

innovative product, projecting internet sites in front of the eyes, or allowing the wearer to take pictures. Its true

usefulness, however, was questionable, and aside from some early adopters, it failed.

Where is the electric car in this technology adoption life cycle? The purchase of electric cars has certainly

been growing. Have they crossed the chasm? In 2019, approximately 2.2% of all car sales were electric plug-in

vehicles (Coran, 2019). Electric vehicles still need to cross the chasm. The lack of charging stations across the

nation and concern for running out of battery are limiting factors preventing the electric vehicle from selling

to the early majority.

182 | Chapter 7: Innovation Strategies

Figure 7.8: Technology Adoption Life Cycle

Making Cooperative Moves

Franklin Roosevelt once quipped, “Competition has been shown to be useful up to a certain point and no further,

but cooperation, which is the thing we must strive for today, begins where competition leaves off.” We illustrate

four commonly used cooperative moves used by firms below.

Table 7.9 Making Cooperative Moves

Joint

Ventures

Joint ventures involve two or more organizations that contribute to the creation of a new entity. For

example, Hong Kong Disneyland is a joint venture between the government of Hong Kong and the Walt

Disney Company. While the park consists of Disney mainstays such as Main Street, USA, Fantasyland,

Adventureland, and Tomorrowland, the park also incorporates elements of Chinese culture such as

adherence to the rules of Feng Shui—a set of aesthetic design principles believed to promote positive

energy.

Strategic

Alliances

Strategic alliances are cooperative arrangements governed by contract between two or more

organizations that do not involve creating new entities. For example, a strategic alliance between Merck

and PAREXEL International Corporation was formed with the goal of collaborating on biotechnology

efforts known as biosimilars—a term used to describe subsequent versions of innovative drugs.

Mergers and

Acquisitions

Mergers and Acquisitions combine two organizations into one. Mergers typically occur between

like-size firms. Sprint and T-Mobile merged to create a stronger force in the wireless communications

industry. Acquisitions usually are done by larger companies acquiring smaller ones, as when Google

acquired Fitbit.

In addition to competitive moves, firms can benefit from cooperating with one another. Cooperative moves

such as forming joint ventures and strategic alliances may allow firms to enjoy successes that might not

otherwise be reached (Table 7.9). This is because cooperation enables firms to share rather than duplicate

resources and to learn from one another’s strengths. Firms that enter cooperative relationships take on risks,

however, including the loss of control over operations, possible transfer of valuable secrets to other firms, and

possibly being taken advantage of by partners (Ketchen et al., 2004).

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Figure 7.9: ExxonMobil, a merger of Exxon and

Mobil oil companies

Joint Ventures

A joint venture is a cooperative arrangement that involves two or more organizations with each contributing

to the creation of a new entity. The partners in a joint venture share decision-making authority, control of the

operation, and any profits that the joint venture earns.

Sometimes two firms create a joint venture to deal with a shared opportunity. A joint venture was created

between Merck and Sun Pharmaceutical Industries Ltd., an Indian pharmaceutical company. The purpose of the

joint venture was to create and sell generic drugs in developing countries. In a press release, a top executive at

Sun stressed that each side has important strengths to contribute: “This joint venture reinforces [Sun’s] strategy

of partnering to launch products using our highly innovative delivery technologies around the world. Merck has

an unrivaled reputation as a world leading, innovative, research-driven pharmaceutical company” (Merck, 2011).

Both firms contributed executives to the new organization, reflecting the shared decision making and control

involved in joint ventures.

In other cases, a joint venture is designed to counter a shared threat. Brewers SABMiller and Molson Coors

Brewing Company created a joint venture called MillerCoors that combines the firms’ beer operations in the

United States. Miller and Coors found it useful to join their US forces to better compete against their giant

rival Anheuser-Busch, while the two parent companies still remain separate. The joint venture controls a wide

array of brands, including Miller Lite, Coors Light, Blue Moon Belgian White, Coors Banquet, Foster’s, Henry

Weinhard’s, Icehouse, Keystone Premium, Leinenkugel’s, Killian’s Irish Red, Miller Genuine Draft, Miller High

Life, Milwaukee’s Best, Molson Canadian, Peroni Nastro Azzurro, Pilsner Urquell, and Red Dog. This diverse

portfolio makes MillerCoors a more potent adversary for Anheuser-Busch than either Miller or Coors would be

on their own.

Strategic Alliances

A strategic alliance is a cooperative arrangement between two or more organizations that does not involve

the creation of a new entity. For example, Twitter formed a strategic alliance with Yahoo! Japan. The alliance

involved relevant Tweets appearing within various functions offered by Yahoo! Japan (Rao, 2011). The alliance

simply involves the two firms collaborating through a contractual relationship as opposed to creating a new

entity together.

The pharmaceutical industry is the location of many strategic

alliances. In another example, Merck and PAREXEL International

Corporation engaged in a strategic alliance. Within this alliance,

the two companies collaborate on biotechnology efforts known

as biosimilars. This alliance could be quite important to Merck

because the global market for biosimilars has been predicted to rise significantly (PRWeb, 2011).

184 | Chapter 7: Innovation Strategies

Mergers and Acquisitions

Another way for firms to cooperate to the advantage of both firms and their stockholders is through mergers.

Two firms decide to combine into one entity, often gaining strength in the market. The merger of T-Mobile

and Sprint is a prime example. As the number three and four players in the wireless communications industry,

combining forces makes the new firm a much stronger competitor against AT&T and Verizon. Sometimes both

firms’ identities remain in the name of the new company, such as with the merger of Exxon and Mobil oil

companies to ExxonMobil. At other times, only one of the firm’s names remains, or a new name is selected for

the merged companies.

Whereas mergers typically occur with like-size companies, acquisitions are usually done by the larger firm

acquiring the smaller firm. The end result is basically the same, with two companies combining into one.

Sometimes the acquired firm is absorbed into the acquiring company, but sometime it retains its identity.

Besides combining the strengths of both organizations with the intent of having a stronger performing

company, mergers and acquisitions reduce the number of competitors in the industry.

Mergers and acquisitions are not without risk, however. According to a Harvard Business Review report, the

failure rate of mergers and acquisitions is between 70% – 90% (Lakelet Capital, 2019). Often, the enthusiasm

of the perceived benefits of the merger overshadow the challenges of adapting two organizational cultures

into one, the total costs of the venture, and/or dealing with different technical systems. Also, an acquisition

is a quick way to increase firm revenues, a metric that may incentivize CEOs to acquire another firm without

adequate due diligence, creating an agency problem, which is discussed in Chapter 11 on ethics.

Internal Development

Another method to expand a firm is through internal development. If a firm wants to add a new product

or service line, rather than acquire that expertise by buying a company, the firm can develop that capability

themselves. Although this is more of a competitive rather than a cooperative move, this is where a firm’s

strength of entrepreneurial orientation (EO) comes into play, and when intrapreneurship is important. Instead

of acquiring Fitbit, Google could have developed this wearable technology internally by hiring those with the

expertise and paying for the research and development for product development to enter this market.

Chapter 7: Innovation Strategies | 185

Key Takeaways

• New products and services typically follow a predictable product life cycle, and must be able to

“cross the chasm” to attract buyers beyond the early adopters.

• Sometimes it is advantageous for a firm to make a cooperative move with a competitor, with

strategies such as a joint venture, strategic alliance, merger, or acquisition. Internal development

is also a method to add innovative capability.

Exercises

1. What are examples of firms that “relaunch” their products once in the maturity stage of the

product life cycle?

2. Why might local restaurants not be in the position to respond to large franchises or chains?

What can local restaurants do to avoid being ruined by chain restaurants?

3. How could a family jewelry store use one of the cooperative moves mentioned in this section??

What type of organization might be a good cooperative partner for a family jewelry store?

4. What are some reasons why a merger between Ford and Volkswagen might fail?

References

Coran, M. (2019, December 6). 2019 was the year electric cars grew up. Quartz. https://qz.com/1762465/

2019-was-the-year-electric-cars-grewup/#:~:

text=Electric%20vehicles%20(EVs)%20grabbed%202.2,new%20models%20hit%20the%20road.

Ketchen, D. J., Snow, C., & Street, V. (2004). Improving firm performance by matching strategic decision

making processes to competitive dynamics. Academy of Management Executive, 19(4) 29-43.

Lakelet Capital. (2019, June 15). Reasons shy mergers & acquisitions fail and succeed.

https://lakeletcapital.com/reasons-why-mergers-acquisitions-fail-andsucceed/#:~:

text=According%20to%20collated%20research%20and,70%20percent%20and%2090%20percen

t.

Merck & Co., Inc., and Sun Pharma establish joint venture to develop and commercialize novel formulations

and combinations of medicines in emerging markets [Press release]. 2011, April 11. Merck website. Retrieved

186 | Chapter 7: Innovation Strategies

from https://web.archive.org/web/20110608025556/http://www.merck.com/licensing/our-partnership/

sun-partnership.html.

PRWeb, Global biosimilars market to reach US$4.8 billion by 2015, according to a new report by Global

Industry Analysts, Inc. [Press release]. 2011, February 15. PRWeb website. Retrieved from

http://www.prweb.com/releases/biosimilars/human_growth _hormone/prweb8131268.htm.

Rao, L. 2011, June 14. Twitter announces “strategic alliance” with Yahoo Japan [Blog post]. Techcrunch website.

Retrieved from http://www.techcrunch.com/2011/06/14/twitter-announces-firehose-partnership-withyahoo-

japan.

Ritson, M. (2009, October). Should you launch a fighter brand? Harvard Business Review, 65–81.

Image Credits

Figure 7.5: Kindred Grey (2020). “Product Life Cycle.” CC BY-SA 4.0. Retrieved from

https://commons.wikimedia.org/wiki/File:Product_Life_Cycle.png. Adapted from https://marketinginsider.

eu/wp-content/uploads/2017/07/Characteristics-of-the-Product-Life-Cycle-Stages-and-their-

Marketing-Implications.png.

Figure 7.6: Kindred Grey (2020). “Product Extension and the product life cycle.” CC BY-SA 4.0. Retrieved from

https://commons.wikimedia.org/wiki/File:Product_Extension_and_the_product_life_cycle.png. Adapted

from https://marketing-insider.eu/wp-content/uploads/2017/07/Characteristics-of-the-Product-Life-

Cycle-Stages-and-their-Marketing-Implications.png.

Figure 7.7: Kindred Grey (2020). “Difference between profits and sales.” CC BY-SA 4.0. Retrieved from

https://commons.wikimedia.org/wiki/File:Difference_between_profits_and_sales.png. Adapted from

https://marketing-insider.eu/wp-content/uploads/2017/07/Characteristics-of-the-Product-Life-Cycle-

Stages-and-their-Marketing-Implications.png.

Figure 7.8: Kindred Grey (2020). “Technology adoption life cycle – breaking the chasm.” CC BY-SA 4.0.

Retrieved from https://commons.wikimedia.org/wiki/File:Technology_adoption_life_cycle_-

_breaking_the_chasm.png. Adapted from http://www.themarketingstudent.com/wp-content/uploads/

2017/04/chasm-adoption-lifecycle.jpeg.

Figure 7.9: Unknown Author. “ExxonMobil logo.” Public Domain, Trademarked logo. Retrieved from

https://commons.wikimedia.org/wiki/File:ExxonMobil_Logo.svg.

Chapter 7: Innovation Strategies | 187

7.6 Responding to Innovation in the Market

Executives in many markets must cope with a rapid-fire barrage of attacks from rivals, such as head-to-head

advertising campaigns, price cuts, and attempts to grab key customers. If a firm is going to respond to a

competitor’s move, doing so quickly is important. If there is a long delay between an attack and a response, this

generally provides the attacker with an edge. For example, PepsiCo made the mistake of waiting fifteen months

to copy Coca-Cola’s introduction of Vanilla Coke. In the interim, Vanilla Coke carved out a significant market

niche.

In contrast, fast responses tend to prevent such an edge. Pepsi’s announcement of a mid-calorie cola

introduction was quickly followed by a similar announcement by Coke, signaling that Coke would not allow

this niche to be dominated by its longtime rival. Thus, as former General Electric CEO Jack Welch noted in

his autobiography, success in most competitive rivalries “is less a function of grandiose predictions than it is a

result of being able to respond rapidly to real changes as they occur. That’s why strategy has to be dynamic and

anticipatory.”

So…We Meet Again

Multi-point competition adds complexity to decisions about whether to respond to a rival’s moves. With multipoint

competition, a firm faces the same rival in more than one market. Cigarette makers R. J. Reynolds (RJR)

and Philip Morris, for example, square off not only in the United States, but also in many countries around

the world. When a firm has one or more multi-point competitors, executives must realize that a competitive

move in a market can have effects not only within that market, but also within others. When RJR started using

lower-priced cigarette brands in the United States to gain customers, Philip Morris responded in two ways. The

first response was cutting prices in the United States to protect its market share. This started a price war that

ultimately hurt both companies. Second, Philip Morris started building market share in Eastern Europe where

RJR had been establishing a strong position. This combination of moves forced RJR to protect its market share

in the United States and neglect Eastern Europe.

If rivals are able to establish mutual forbearance, then multi-point competition can help them be successful.

Mutual forbearance occurs when rivals do not act aggressively because each recognizes that the other can

retaliate in multiple markets. Southwest Airlines and United Airlines compete in some, but not all markets.

United announced plans to form a new division that would move into some of Southwest’s other routes.

Southwest CEO Herb Kelleher publicly threatened to retaliate in several shared markets. United then backed

down, and Southwest had no reason to attack. The result was better performance for both firms. Similarly,

in hindsight, both RJR and Philip Morris probably would have been more profitable had RJR not tried to steal

market share in the first place. Thus, recognizing and acting on potential forbearance can lead to better

performance through firms not competing away their profits, while failure to do so can be costly.

188 | Chapter 7: Innovation Strategies

Responding to a Disruptive Innovation

When a rival introduces a disruptive innovation that conflicts with the industry’s current competitive practices,

such as the emergence of online stock trading, executives choose from among three main responses. First,

executives may believe that the innovation will not replace established offerings entirely and thus, may choose

to focus on their traditional modes of business while ignoring the disruption. For example, many traditional

bookstores such as Barnes & Noble did not consider book sales on Amazon to be a competitive threat until

Amazon began to take market share from them. Second, a firm can counter the challenge by attacking along a

different dimension. For example, Apple responded to the direct sales of cheap computers by Dell and Gateway

by adding power and versatility to its products. The third possible response is to simply match the competitor’s

move. Merrill Lynch, for example, confronted online trading by forming its own Internet-based unit. Here the

firm risks cannibalizing its traditional business, but executives may find that their response attracts an entirely

new segment of customers.

Fighting Brands: Get Ready to Rumble

A firm’s success can be undermined when a competitor tries to lure away its customers by charging lower

prices for its goods or services. Such a scenario is especially scary if the quality of the competitor’s offerings is

reasonably comparable to the firm’s. One possible response would be for the firm to lower its prices to prevent

customers from abandoning it. This can be effective in the short term, but it creates a long-term problem.

Specifically, the firm will have trouble increasing its prices back to their original level in the future because

charging lower prices for a time will devalue the firm’s brand and make customers question why they should

accept price increases.

The creation of a fighting brand is a move that can prevent this problem. A fighting brand is a lower-end brand

that a firm introduces to try to protect the firm’s market share without damaging the firm’s existing brands.

In the late 1980s, General Motors (GM) was troubled by the extent to which the sales of small, inexpensive

Japanese cars were growing in the United States. GM wanted to recapture lost sales, but it did not want to

harm its existing brands, such as Chevrolet, Buick, and Cadillac, by putting their names on low-end cars. GM’s

solution was to sell small, inexpensive cars under a new brand: Geo.

Interestingly, several of Geo’s models were produced in joint ventures between GM and the same Japanese

automakers that the Geo brand was created to fight. A sedan called the Prizm was built side by side with the

Toyota Corolla by the New United Motor Manufacturing Incorporated (NUMMI), a factory co-owned by GM and

Toyota. The two cars were virtually identical except for minor cosmetic differences. A smaller car (the Metro)

and a compact sport utility vehicle (the Tracker) were produced by a joint venture between GM and Suzuki. By

1998, the US car market revolved around higher-quality vehicles, and the low-end Geo brand was discontinued.

Chapter 7: Innovation Strategies | 189

Figure 7.10: The Geo brand was known for its low price and

good gas mileage, not for its styling.

Some fighting brands are rather short lived. Merck’s

failed attempt to protect market share in Germany by

creating a fighting brand is an example. Zocor, a

treatment for high cholesterol, was set to lose its

German patent in 2003. Merck tried to keep its high

profit margin for Zocor intact until the patent expired

as well as preparing for the inevitable competition with

generic drugmakers by creating a lower-priced brand,

Zocor MSD. Once the patent expired, however, the new

brand was not priced low enough to keep customers

from switching to generics. Merck soon abandoned the

Zocor MSD brand (Ritson, 2009).

Two major airlines experienced similar futility. In

response to the growing success of discount airlines

such as Southwest, AirTran, Jet Blue, and Frontier, both United Airlines and Delta Airlines created fighting

brands. United launched Ted in 2004 and discontinued it in 2009. Delta’s Song had an even shorter existence. It

started in 2003 and ended in 2006. Southwest’s acquisition of AirTran in 2011 created a large airline that may

make United and Delta lament that they were not able to make their own discount brands successful.

Despite these missteps, the use of fighting brands is a time-tested competitive move. For example, very

successful fighting brands were launched forty years apart by Anheuser-Busch and Intel. After Anheuser-Busch

increased the prices charged by its existing brands in the mid-1950s (Budweiser and Michelob), smaller brewers

started gaining market share. In response, Anheuser-Busch created a lower-priced brand: Busch. The new

brand won back the market share that had been lost and remains an important part of Anheuser-Busch’s brand

portfolio today. In the late 1990s, silicon chipmaker Advanced Micro Devices (AMD) started undercutting the

prices charged by industry leader Intel. Intel responded by creating the Celeron brand of silicon chips, a brand

that has preserved Intel’s market share without undermining profits. Wise strategic moves such as the creation

of the Celeron brand help explain why Intel ranks thirty-second on Fortune magazine’s list of the “World’s Most

Admired Corporations.” Meanwhile, Anheuser-Busch is the second most admired beverage firm, ranking behind

Coca-Cola.

Table 7.10 Co-location and Co-opetition

Co-location

Co-location refers to a situation when goods and services offered under different brands are located

very close to each other. Noting one common example of co-location, a comedian once joked that La

Quinta was Spanish for “Next to Denny’s.” Both hotels and restaurants are often co-located alongside

freeway exits to allow numerous choices for road-weary travelers.

Co-opetition

Co-opetition is a term that refers to the blending of competition and cooperation between two firms.

Toyota and General Motors’ creation of jointly owned New United Motor Manufacturing incorporated

(NUMMI) allowed for collaboration on automobile designs while Toyota and GM continued to compete

for market share worldwide. The NUMMI experience also inspired the comedy Gung Ho.

190 | Chapter 7: Innovation Strategies

Figure 7.11: Yum! Co-located brands

Co-location

Co-location occurs when goods and services offered under different brands are located close to one another.

In many cities, for example, theaters and art galleries are clustered together in one neighborhood. Auto malls

that contain several different car dealerships are found in many areas. Restaurants and hotels are often located

near one another as well. “Big Box Stores” like Target. Staples, Best Buy, Lowes, etc., are almost always found

clustered together with other retailers. By providing customers with a variety of choices, a set of co-located

firms can attract a bigger set of customers collectively than the sum that could be attracted to individual

locations. If a desired play is sold out, a restaurant overcrowded, or a hotel overbooked, many customers simply

patronize another firm in the area.

Because of these benefits, savvy executives in some firms co-locate their own brands. The industry that Brinker

International competes within is revealed by its stock ticker symbol: EAT. This firm often sites outlets of the

multiple restaurant chains it owns on the same street. Marriott’s Courtyard and Fairfield Inn often sit side by

side. Yum! Brands takes this clustering strategy one step further by locating more than one of its brands—A&W,

Long John Silver’s, Taco Bell, Kentucky Fried Chicken, and Pizza Hut—within a single store.

Co-opetition

Although competition and cooperation are usually

viewed as separate processes, the concept of coopetition

highlights a complex interaction that is

becoming increasingly popular in many industries.

Ray Noorda, the founder of software firm Novell,

coined the term to refer to a blending of competition

and cooperation between two firms. For example,

drug manufacturers Merck and Roche are rivals in

some markets, but the firms are working together to

develop tests to detect cancer and to promote a hepatitis treatment. NEC, a Japanese electronics company, has

three different relationships with Hewlett-Packard Co.: customer, supplier, and competitor. Some units of each

company work cooperatively with the other company, while other units are direct competitors. NEC and

Hewlett-Packard could be described as “frienemies”—part friends and part enemies.

Toyota and General Motors provide a well-known example of co-opetition. In terms of cooperation, Toyota and

GM vehicles were produced side by side for many years at the jointly owned New United Motor Manufacturing

Incorporated (NUMMI) in Fremont, California. While Honda and Nissan used wholly owned plants to begin

producing cars in the United States, NUMMI offered Toyota a lower-risk means of entering the US market.

This entry mode was desirable to Toyota because its top executives were not confident that Japanese-style

management would work in the United States. Meanwhile, the venture offered GM the chance to learn

Japanese management and production techniques—skills that were later used in GM’s facilities. NUMMI offered

both companies economies of scale in manufacturing and the chance to collaborate on automobile designs.

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Meanwhile, Toyota and GM compete for market share around the world. In recent years, the firms have been

the world’s two largest automakers, and they have traded the top spot over time.

In their book titled, not surprisingly, Co-opetition, A. M. Brandenberger and B. J. Nalebuff suggest that

cooperation is generally best suited for “creating a pie,” while competition is best suited for “dividing it up”

(Brandenberger & Nalebuff, 1996). In other words, firms tend to cooperate in activities located far in the

value chain from customers, while competition generally occurs close to customers. The NUMMI example

illustrates this tendency—GM and Toyota worked together on design and manufacturing but worked separately

on distribution, sales, and marketing. Similarly, a research study focused on Scandinavian firms found that,

in the mining equipment industry, firms cooperated in material development, but they competed in product

development and marketing. In the brewing industry, firms worked together on the return of used bottles but

not in distribution (Bengtsson & Kock, 2000).

Section Video

Innovation Strategy [04:16]

The video for this lesson explains innovation strategy.

You can view this video here: https://youtu.be/B-tY6citUHw.

Key Takeaway

• Cooperating with other firms is sometimes a more lucrative and beneficial approach than

directly attacking competing firms.

192 | Chapter 7: Innovation Strategies

Exercises

1. Divide your class into four or eight groups, depending on the size of the class. Each group should

select a different industry. Find examples of competitive and cooperative moves that you would

recommend if hired as a consultant for a firm in that industry.

2. What types of cooperative moves could your college or university use to partner with local,

national, and international businesses? What benefits and risks would be created by making

these moves?

3. If a new alternative fuel was found in the auto industry, what are two ways existing car

manufacturers might respond to this disruptive innovation?

4. How might a firm such as Apple computers use a fighting brand?

References

Bengtsson, M., & Kock, S. (2000). “Coopetition” in business networks—to cooperate and compete

simultaneously. Industrial Marketing Management, 29(5), 411–426.

Brandenberger, A. M., & Nalebuff, B. J. (1996). Co-opetition. New York, NY: Doubleday.

Ritson, M. (2009, October). Should you launch a fighter brand? Harvard Business Review, 65–81.

Image Credits

Figure 7.10: Rutger van der Maar (2014). “Geo Prizm.” CC BY 2.0. Retrieved from

https://flic.kr/p/ooQzaF.

Figure 7.11: Cantnot. “Older design of Taco Bell restaurant currently in use, adjacent to sister Yum Brands

restaurant KFC, near Burlington.” Public Domain. Retrieved from

https://en.wikipedia.org/wiki/File:TBOldDesign.JPG.

Video Credits

Kuczmarski Innovation. (2016, May 17). Innovation strategy [Video]. YouTube.

https://youtu.be/B-tY6citUHw.

Chapter 7: Innovation Strategies | 193

7.7 Conclusion

This chapter explains how innovation impacts strategy development. An entrepreneurial orientation helps a

firm develop and implement new innovations. Being the first mover can present advantages, but is not without

the risk of competitors learning from the first mover and eventually beating them. Executives may also choose

a more conservative route by establishing a foothold within an area that can serve as a launching point or

by avoiding existing competitors overall by using a blue ocean strategy. There are four types of innovation:

incremental, disruptive, architectural, and radical. New products typically follow a predictable product life cycle

with four stages: introduction, growth, maturity, and decline. Firms often use incremental innovation to relaunch

products with improved features, starting the product life cycle over again. New products and services

must “cross the chasm” to get them into the mainstream. Firms may cooperate with competitors through joint

ventures, strategic alliances, mergers, and acquisitions, or through co-location and co-opetition. Executives

may also react to competitive attacks by using fighting brands. All of these efforts by firms are part of the

strategic management process that executives must respond to if they want their companies to be successful.

Exercises

1. Divide your class into four or eight groups, depending on the size of the class. Each group should

think of one example for each of the four types of innovation: Incremental, Architectural, Radical,

and Disruptive. Report out to the class.

2. Divide your class into four or eight groups, depending on the size of the class. Each group should

think of one product or service that launched but did not “cross the chasm.” Report out to the

class.

194 | Chapter 7: Innovation Strategies


Last modified: Friday, October 22, 2021, 8:46 AM