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7.4: Types of Innovation

  • Page ID
    53989
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    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 cliché contends that “the early bird gets the worm.” Applied to the business world, the cliché 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).

    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?

    Figure 7.4 illustrates the four types of innovation.

    An xy plot showing the relationship between Technology (x axis) and Market (y axis). The closer to 0 implies 'existing' and farthest away implies 'new'. The graph is broken up into 4 quadrants: Upper left (Architectural Innovation), Upper right (Radical Innovation), Lower left (Incremental Innovation), and Lower right (Disruptive Innovation).
    Figure 7.4: 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.

    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.

    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.

    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.

    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 Journal55(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.


    This page titled 7.4: Types of Innovation is shared under a CC BY-NC-SA license and was authored, remixed, and/or curated by Kennedy et al. (Virginia Tech Libraries' Open Education Initiative) .

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