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Home arrow Management arrow Strategic Management in the 21st Century. Corporate Strategy

SIGNAL INTERPRETATION

As discussed previously, firm behaviors, whether intentional or not, are subject to interpretation by other market actors for clues as to the beliefs, assumptions, and operating philosophies possessed by the signaling firm. Since such signals may encompass a wide swath of organizational phenomena, for example, from governance to strategic decision making, market actors looking to glean specific insights must be cognizant of those signals most salient to their interests.20 For example, in assessing whether a firm may pursue an initial public offering in the near term, other market actors might explore if there were pertinent changes to the firm's board of directors. Identifying salient signaling behavior is more challenging, however, when it comes to parsing innovative behaviors of competitor firms to glean actionable intelligence for determining a competitive response. This chapter suggests, based on recent empirical work, that three factors are most likely to yield appropriate data for determining an imitation response: the innovativeness of the new product introduction, the competitor's history for introducing successful product innovations, and the competitor's perceived competence in a particular market space.21

PRODUCT-LEVEL INNOVATIVENESS

Introducing a new product to a market is no trivial act. Such a behavior represents the physical manifestation of the considerable time, energy, knowledge, and capital committed to the research, development, and marketing of the product. As such, new product introductions are credible commitments that have particular significance among observers of the innovator firm's behavior.22 In the context of signaling theory, the significance of credible commitments is that behaviors backed by tangible decisions lend credence to the behaviors and are therefore given greater weight in signal interpretation. For example, in the mid-1990s when Apple Computer was struggling, Microsoft publicly announced its intention to continue developing its popular Microsoft Office suite for the Macintosh platform. The announcement was later supported by Microsoft taking an equity position in Apple. Many analysts interpreted this investment as a demonstrable, or credible, commitment of Microsoft's long-term commitment to building products for the Macintosh platform. Given that new product introductions inherently represent specific and tangible resource commitments made by the innovator firm, even allowing for differences in the scale of the new introduction (i.e., a regional versus global product launch), such introductions are ripe for signal interpretation.

Consider that embodied in the act of new product introduction is information that provides insights on the market and technological knowledge possessed by the innovator firm. Such information includes, but is not limited to, the firm's expectations of market acceptance of the product, its belief in the growth trajectory of the new offering, its understanding of current market needs and wants, and its ability to deliver a product that is consistent with customer expectations. For example, IBM's push into enterprise information technology (IT) outsourcing in the mid-1990s reflected their recognition of changing market expectations for technology services and the need to respond to the growing complexity and cost of managing large IT infrastructures. The act of offering such services, manifested by bidding on significant outsourcing contracts and engaging in an aggressive marketing program, suggested to competitor firms that IBM believed it had both accurately gauged market expectations and had the resources necessary to meet them.

Importantly, however, whether IBM in the previous example believed it had judged market needs appropriately and whether its competitors at the time (i.e., Electronic Data Systems and Accenture) believed IBM was correct, are two different things. Although the innovator firm's behavior is a reflection of its knowledge and resources, competitors must interpret the information encompassed within the innovation signal relative to their own stock of knowledge. Thus, signal interpretation is relative to the signal receiver, and each market actor will make sense of and evaluate those signals differently. Under this rubric, we argue that the information conveyed by the signal—the innovator firm's beliefs and understanding of current market needs and expectations—is contrasted with the signal recipient's own market knowledge. In interpreting this contrast, should the signal recipient observe significant divergence between the information conveyed in the signal and its own knowledge, it is not likely to believe that the innovator's knowledge is superior to its own. Imitation may thus not be a preferable decision as this would effectively suggest that the signal recipient is abandoning its own knowledge and attributing information superiority to the innovator firm. This observation, however, begs the question of how to measure, or estimate, the degree of divergence between the respective knowledge stocks of the innovator and the prospective imitator.

Although not meant to preclude the possible significance of other measures, we posit that the relative innovativeness of the new product is a salient variable with which to evaluate prospective imitation. The act of innovation inherently involves introducing something new to the mar-ket.23 However, newness in this context is subjective and can reflect either a modest, incremental improvement in a (typically existing, though not always) product or is an extreme departure from current market norms, a breakthrough, as it were.24 For example, the addition of baking soda in toothpaste would be representative of an incremental innovation (a modest improvement to an existing product), whereas the introduction of the Sonicare® toothbrush (now owned by Phillips Oral Healthcare) was a radical innovation; for example, the use of high-speed vibration to create a new class of toothbrushes. Although classifying innovation as incremental or radical is admittedly a subjective endeavor, the assumption made herein is that relevant market actors are able to appropriately judge the innovativeness of a new offering. This assumption is predicated on the observation by Porter that industry incumbents possess at least a baseline level of common knowledge.25 The question now is how to apply signaling theory to the innovativeness of a new offering vis-à-vis the imitation decision.

We suggest that the more innovative a new product is, the greater is the likelihood that the information contained within the innovation signal— beliefs about current market expectations and other knowledge—will diverge from the knowledge stock of prospective imitators.26 As this divergence increases, the desirability of imitation as a competitive response will fall. In other words, as product innovativeness increases, imitation should decrease since prospective imitators are likely to view the innovator firm as being out of step with market expectations. The prospective imitator is likely to attribute knowledge superiority to itself rather than to its innovator competitor, particularly if the imitator has above average financial and/or market performance, and therefore, views imitation as a risky response. In contrast, the information communicated by incremental innovations is not likely to diverge significantly from the knowledge stock of the prospective imitator. In this case, imitation becomes an attractive response because it essentially represents strategic consistency between the innovator firm's and the prospective imitator's market knowledge. Notably however, there is empirical evidence suggesting that radical innovation is associated with the converse of the preceding argument. Despite hypothesizing a negative relationship between innovativeness and imitation, one study found a positive, though weak, correlation between innovativeness and the extent of imitation.27 Nonetheless, although empirical results are mixed, imitation of a radical innovation is likely to be a demonstrably risky proposition.28 As such, from a managerially prescriptive view, the appropriateness of imitation as a competitive response is likely to decrease as the innovativeness of new offerings increase.29

There are two caveats to the assumption of a negative relationship between product innovativeness and imitation. First, there is a competitive risk in ignoring a radical product introduction. Consider that before the introduction of Apple's iPad, tablet devices that lacked a tactile keyboard, mouse, and other common features were widely panned as being a "solution in search of a problem," being neither a Smartphone nor a laptop in terms of functionality. The iPad, however, became one of the most successful consumer electronic launches in history in terms of capturing significant majority market share, and has given Apple an almost insurmountable lead in the tablet market space (at least initially) despite ongoing imitation. The argument here, however, is that such radical innovations are not likely to manifest in consistently successful outcomes, and given this rarity, imitation decision making based solely on product-level innovativeness is likely to be more risky for radical than incremental new products. Second, there is the possibility that the prospective imitator possesses demonstrably similar market knowledge to the innovator firm (i.e., very low divergence in knowledge stocks) but that the innovator firm either beat the prospective imitator to the market or that the prospective imitator lacked the resources to capitalize on their market knowledge. Such a possibility raises the specter of a moderator-like influence of, for example, resource availability, on the product innovativeness-imitation relationship. Ultimately, we believe that based on based prior empirical evidence, the negative main effect is likely to predominate, though there is more research to be done in this area, particularly regarding additional contextual influences.

 
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