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Making Sense of a Competitor’s Innovation: A Signaling Perspective on Whether to Imitate or Ignore the Competition

INTRODUCTION

The popular business literature admonishes managers to seek an elusive, but inherently valuable, position—that of the first mover. The colloquial notion of beating a competitor to the punch and establishing a dominant competitive position is often considered to be a strategic given. By going first, the firm stands to capture significant market share, establish brand preeminence, and exercise leadership over the market's development. Such first-mover advantages should ostensibly result in higher levels of firm performance, measured in terms of market share or other financial or market metrics. As a recent Harvard Business Review article noted, "Business executives from every kind of company maintain, almost without exception, that early entry into a new industry or product category gives any firm an almost insuperable head start."1

Yet the scholarly literature suggests a far more nuanced relationship between being first to market and accruing meaningful performance rewards. Some scholars suggest that first movers have an almost equal likelihood of experiencing competitive disadvantages; depending on the industry, being first to market may actually hamper the firm's short- and long-term performance.2 For example, Boulding and Christen found that although first movers earned a top-line revenue advantage through their pioneering activities, they were also less profitable over the long run than those firms more circumspect in their new product introductions.3 Indeed, being the second, or even third or fourth, to the market may actually be the most advantageous competitive position.3 Following the market leader has a number of inherent benefits, most notably a reduction in risk. The first mover establishes the relative market acceptability of the new product or service while also passing on critical market intelligence, such as the anticipated level of demand, preferred features or attributes of the product, and pricing levels. In short, it may pay to go second; yet this begs the question of when to follow the leader.

This chapter examines competitive product imitation—the whole or partial duplication of a competitor's innovation—and the factors that influence whether or not to pursue imitation.5 Note that the discussion is not meant to imply that firms should avoid innovation altogether, as research has consistently shown a positive relationship between innovation and critical performance outcomes.6 Rather, given that sustained engagement in innovation is not generally feasible or necessarily advisable, the argument offered is that imitation is a reasonable, and in some cases, a favored competitive response to the introduction of an innovation by a com-petitor.7 Our objective is to provide insight as to when and under what conditions firms should consider competitive imitation. Drawing from signaling theory and prior empirical work in the area of innovation and imitation, the chapter suggests that actionable intelligence is embedded within the innovations introduced by competitor firms and also resides at the organizational level of the innovator firm itself.8 Such intelligence provides potentially meaningful insights that may guide the decision of whether or not to imitate, in whole or in part, the competitor's innovation. Specifically, the chapter suggests that the innovativeness (along a continuum from more incremental or basic advancements, to more radical or extreme innovation) of the new product introduction signals the extent to which the competitor possesses information that is consistent with or divergent from broader market knowledge.

For incremental innovations, the competitor firm is signaling that they possess information that is generally in line with the information possessed by other market actors; incremental innovations are inherently low risk and tend to build upon well-established products.9 The decision to imitate such an innovation is thus relatively straightforward. The follower firm is likely to possess similar market knowledge, and imitating the competitor is correspondingly low risk (though, importantly, also not likely to generate significant performance returns). The signal sent by the competitor is, however, more difficult to parse for more radical innovations. On one hand, the competitor may be signaling that they believe they possess demonstrably better information about the market than other actors and are therefore making an aggressive move to outmaneuver competitors. Conversely, introducing highly innovative products is risky, and the innovator firm may be inadvertently signaling that they have misunderstood current market needs and have overreached. In such circumstances, making sense of highly innovative new products presents a more challenging context for follower firms to determine an appropriate competitive response (i.e., to imitate or to not).

At the organizational level of the innovator firm, the chapter suggests that two characteristics of the innovator, its record of introducing successful innovations to the market over time, and its perceived competency in a particular market space, also provide signals regarding the appropriateness of pursuing competitive imitation. For example, firms with a track record of successful past innovation (e.g., Apple, Boeing, and Nike) signal not only a competency in developing and introducing successful innovations but also that they possess demonstrably superior knowledge about current market needs and trends. In such cases, deciding to imitate highly innovative firms may be appealing as any uncertainty surrounding whether or not to imitate is reduced by the innovator firm's perceived innovation competency. Similarly, firms with a known competency in a given market space (e.g., Apple's competency in mobile devices) may be viewed by other market actors as possessing superior knowledge about this market space. By introducing an innovation within their area of specialty, such innovator firms are signaling that based on their superior market knowledge the innovation is well aligned with market needs. Again, imitation of these types of firms may prove attractive for other market actors.

Imitation decision making is likely to be multilevel in nature. In evaluating whether to imitate, prospective imitators should consider signals at the intersection of the innovation and organizational levels.10 The chapter therefore also discusses the interaction of signaling levels, and delineates suggested imitation outcomes under different combinations of innovation and organizational-level variables. For example, imitating a highly innovative new product in a market space outside the innovator firm's core market competency is less compelling than imitation of an incremental innovation introduced by a firm with demonstrable innovation competency. The chapter also discusses environmental contexts that tend to favor signal interpretation as a guide for imitation decision making. It concludes by discussing the competitive implications for managers contemplating imitation and how to develop improved heuristics for imitation decision making.

 
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