Reading: Strategic Management Textbook Chapter 7
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.
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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.
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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.
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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.
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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.
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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?
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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.
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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.
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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.
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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).
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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.
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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.
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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.
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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.
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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.
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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.
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Last modified: Friday, October 22, 2021, 8:46 AM