Competitive advantage and performance: the impact of value creation and costliness of imitation

We create an industrial organization type model to relate resources to the spread between product market demand and marginal cost. We define competitive advantage as the cross‐sectional differential in this spread, and performance as the longitudinal differential between what a firm appropriates in the product market and what it paid in the factor market. With factor markets imposing different costs on the innovator and potential imitator(s), competitive advantage, performance, and high resource value do not necessarily coincide. Also, the interaction between resource value and the cost of imitation is complex and affected by the number of firms in the industry. Copyright © 2009 John Wiley & Sons, Ltd.     

Patent Hold‐Up and Antitrust: How A Well‐Intentioned Rule Could Retard Innovation

Licensing technology essential to a standard can present a hold‐up problem. After designing new products incorporating a standard, a manufacturer could be confronted by an innovator asserting patent rights to essential technology. This hold‐up problem can be solved with a damages remedy provided by antitrust or some other body of law, but a damages remedy can reduce the innovator's licensing revenue and thereby retard innovation. The availability of an ex post damages remedy also alters the licensing terms in ex ante bargaining with the result that fewer socially beneficial R&D projects are undertaken.     

Profiting from innovations: the role of new game strategies in the case of Lipitor of the US pharmaceutical industry

In exploring why innovators often do not profit from their innovations, researchers concentrate on innovators versus imitators and the extent to which owners of complementary assets capture profits from innovations. The literature provides scant attention to factors that sap profits from innovations. This paper argues that an innovator's positioning vis‐à‐vis customers, suppliers, complementors, and other co‐opetitors plays a critical role in the innovator's profitability. The article explores how an innovator can use new game strategies to better positioning, thus capturing rents from innovations and enabling further innovations in the future. The study examines the case of Lipitor, one of the world's best‐selling drug, to illustrate how positioning can play in a firm's ability to profit from its innovations.     

The impact of technological convergence on firms' product portfolio strategy: an information-based imitation approach

Technological convergence in the electronics industry has enabled disparate new functionalities to be added to existing basic products. Although the main drivers of technological convergence have been examined by the technological change literature, the impact of technological convergence on firms' product portfolio strategies remains a largely unexplored issue. Drawing on the technological change and information-based imitation literatures, we develop hypotheses on how the introduction in the market of technologies from other product categories affects the way firms modify their product portfolio vis-à-vis the market leader. Data on nearly 300 imitation strategies at the product portfolio level, which cover over 3,500 handset models introduced by 55 mobile phone vendors from 1994 to 2010, show that the relationship between the level of technological convergence in a product category and the firms' level of imitation of the market leader product portfolio strategy is U-shaped. Data also show that the firm's prior experience plays an important role in moderating this curvilinear relationship.     

Revisiting the imitation assumption: Why imitation may increase,rather than decrease,performance heterogeneity

Research Summary: Imitation is a central construct in strategy theory because it is assumed to diminish inter‐firm performance heterogeneity within an industry. We revisit this assumption, which is premised on the logic that imitated practices act directly to make the imitator more similar to its target. This logic is incomplete because imitation also acts indirectly—via its effect on an imitator's post‐imitation experiential learning efforts through which it refines imitated practices and fills remaining knowledge gaps. We examine how an imitator's focus of attention during this post‐imitation experiential learning process impacts performance heterogeneity. Employing a computational model, we contrast the heterogeneity resulting from imitative entry with that from de novo (non‐imitative) entry and identify conditions under which imitation may increase, rather than decrease, inter‐firm performance heterogeneity. Managerial Summary: Imitation is commonly assumed to be a low‐risk strategy by which firms can narrow the performance gap to the market leader. This assumption is predicated on an understanding of imitation that neglects the impact of imitation on subsequent, post‐imitation, learning. Such learning serves to refine the imitated practices and fill remaining knowledge gaps. Our theory suggests that imitation is more risky than is typically assumed. Imitation leads to bifurcated performance outcomes. An imitator is more likely to: (a) catch up to the market leader, and (b) perform far worse than it would have without imitation. Key factors driving the riskiness of imitation are the observability of the market leader's practices and an imitator's decision regarding its focus of attention in post‐imitation learning.     

PATENT DAMAGES AND SPATIAL COMPETITION*

We analyze price competition between a spatially differentiated product patentee and an imitator anticipating probabilistic future patent damages. We compare the performance of three damage regimes. The ‘reasonable royalty’ regime, which yields symmetric equilibrium pricing, maximizes static welfare and yields the highest innovation incentives when patent enforcement is nearly certain. The ‘lost profits’ regime, which may deter infringement, yields the highest innovation incentives when patent enforcement is less‐than‐certain and products are sufficiently valuable. The ‘unjust enrichment’ regime yields low static efficiency and low innovation incentives. We offer new insights into the ‘hypothetical negotiation’ that courts use to construct reasonable royalties.     

Entry timing,exploration, and firm survival in the early U.S. bicycle industry

We explore the relationship between a firm's entry timing and its probability of surviving the early, uncertain period of its industry, and consider the trade‐off between entering early and potentially establishing a strong position in the industry vs. waiting until technological uncertainty is reduced. We hypothesize that, owing to inertial forces, firms that enter the industry at the earliest point in its history are least likely to make the conversion to the product generation that becomes the dominant design in the industry. Exploration through the introduction of new products appears to reflect a local search process and retards the transition to the dominant design. We also hypothesize that, though firms entering early may exhibit longer life spans, their advantages are limited to the period before the emergence of the dominant design. We test our hypotheses in the early U.S. bicycle industry, and find evidence consistent with the idea that inertia limits firms' abilities to make the transition between generations of product configurations. Copyright © 2006 John Wiley & Sons, Ltd.     

Help or Hindrance? Causal Ambiguity and Supplier Involvement in New Product Development Teams

Suppliers are increasingly being involved in interorganizational new product development (NPD) teams. Successful management of this involvement is critical both to the performance of the new product and to meeting the project's goals. Yet the transfer of knowledge between buyer and supplier may be subject to varying degrees of causal ambiguity, potentially limiting the effect of supplier involvement on performance. Understanding the dynamics of causal ambiguity within interorganizational product development is thus an important unanswered empirical question. A theoretical model is developed exploring the effect of supplier involvement practices (supplier involvement orientation, relationship commitment, and involvement depth) on the level of causal ambiguity experienced within interorganizational NPD teams, and the subsequent impact on time to competitor imitation, new product advantage, and project performance. The model also serves as a test of the paradox that causal ambiguity both inhibits imitation by competitors, but adversely affects organizational outcomes. Survey data collected from 119 research and development‐intensive manufacturing firms in the United Kingdom largely support these hypotheses. Results from structural equation modeling show that supplier involvement orientation and long‐term relationship commitment lower causal ambiguity within interorganizational NPD teams. The results also shed light on the causal ambiguity paradox showing that causal ambiguity during interorganizational NPD decreases both product and project performance, but has no significant effect on time to competitor imitation. Instead, competitor imitation is delayed by the extent to which the firm develops a new product advantage within the market. A product development strategy based upon maintaining interfirm causal ambiguity to delay competitor imitation is thus unlikely to result in a sustainable competitive advantage. Instead, managers are encouraged to undertake supplier involvement practices aimed at minimizing the level of knowledge ambiguity in the NPD project, and in doing so, improve product and project‐related performance.     

Product Change Intensity, Product Advantage, and Market Performance: An Empirical Investigation of the PC Industry

Product change decisions, such as the frequency of new product introductions, can impact product performance characteristics, sales, and market share of several generations of products and, therefore, a firm's long‐term survival and growth. The purpose of this study was to explore the impact of a firm's product change frequency, also referred to as product change intensity. A conceptual model linking a firm's product change intensity to its product advantage—and, in turn, to its market performance—with strategic product change orientation and technology competence as moderating effects, was used as a foundation for the study's hypotheses. These were tested using hierarchical and linear regressions, based on survey data collected from 55 U.S. companies in the personal computer (PC) industry. The analysis confirmed that a PC firm's product rate of change is positively associated with its product advantage and that its product advantage, in turn, is positively associated with its market share and growth performance. However, the hypothesized moderating effects were not confirmed. Rather, a firm's product change orientation and its level of technology competence are more likely to have a direct impact on product advantage. The implications of these findings are that, in general, firms that release new products frequently will have them viewed more favorably by the market than products with lower change intensities. Also, firms with higher levels of competence in the product technology domain tend to create products with greater market attraction. Finally, more radical changes to PC product architectures may pay off better than relatively minor changes. These results may not apply to other industries due to the specific design of personal computers and the nature of this fast‐paced market. Neither do the findings necessarily apply to all firms regardless of those firms' specific product and market strategies. More research is necessary to understand how a firm's adopted strategy, and the industry in which it operates, affect the relationships demonstrated in this study.     

Taking industry structuring seriously: A strategic perspective on product differentiation

Given legal impediments to consolidation and collusion, firms often resort to product differentiation to attain market power. This paper provides a formal analysis of product differentiation as a tool for such industry structuring at both the firm and industry level. We examine: how industry structure differs when firms collaborate on their differentiation decisions, and when the profitability of such collaboration is greatest; how an individual firm's differentiation decisions affect subsequent market outcomes under price competition, such as margin, market share, and profit; how mere differentiation differs from a ‘differentiation advantage’; and how changing a firm's differentiation affects its rivals through both positive externalities (by restraining rivalry) and negative externalities (by shifting competitive advantage). Our results have implications for empirical research, strategy theory, and pedagogy.     

Best Practices for New Product Pricing: Impact on Market Performance and Price Level under Different Conditions

To date, research on new product pricing has predominantly been approached as a choice between market skimming and penetration pricing. Despite calls for research that addresses other complexities in new product pricing, empirical research responding to these calls remains scarce. This paper examines three managerial price‐setting practices for new products, i.e., value‐informed, competition‐informed, and cost‐informed pricing. By engaging in these practices, managers can develop and compare quantifications in order to attain an introduction price for the product. The authors draw on consumer price perception literature, Monroe's pricing discretion model, and numerical cognition literature to develop hypotheses about the impact of price‐setting practices on new product market performance and price level. By studying the effects on market performance and price level, the paper provides insights that may help explain the growth of new products and address the problems of underpricing. The hypotheses are tested in a management survey of 144 production and service companies. The results indicate which pricing practices are superior for the achievement of either higher market performance or higher prices in specific product and market conditions. Whereas value‐informed pricing has an unambiguous positive impact on relative price level and market performance, the results also suggest that in many cases engaging in value‐informed pricing is not enough. The effects of cost‐informed and competition‐informed pricing may differ depending upon the objective (market performance or higher prices), product conditions (product advantage and relative product costs), and market condition (competitive intensity). Engaging in inappropriate pricing practices leads to a decline in new product performance. Moreover, bad pricing practices make the positive effect of product advantage on the outcome variables disappear. The latter finding suggests that companies can jeopardize their efforts and investments in the new product development process if they engage in the wrong price‐setting practices. The findings imply that managers should consider different factors in new product pricing. First, when launching a new product, they should determine their explicit pricing objective, either stressing market performance or a higher price level. To determine the most appropriate pricing practices, however, they should next assess their situation in terms of product advantage, relative product costs, and competitive intensity. Together with the pricing objective, these conditions determine the best pricing practice. On a higher level, the findings imply that companies should invest in knowledge development in order to engage in the appropriate pricing practices for each product launch.     

EXCLUSIVE QUALITY*

In the case of vertically differentiated products, Bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a high‐quality rival. Indeed, because of differentiation, the incumbent's inferior product is not eliminated upon entry. Due to the resulting competitive pressure, a retailer who considers rejecting the exclusivity contract expects to earn much less than the incumbent's monopoly rents. Thus, in equilibrium, the incumbent can always offer high enough an upfront payment to induce all retailers to sign the contract and achieve exclusion. This is true under linear pricing for intermediate levels of entry costs, and with two‐part tariffs even in the absence of entry costs.     

Adoption of Product and Process Innovations in Differentiated Markets: The Impact of Competition

The paper examines the effects of the degree of competition on firms'decisions to innovate in differentiated markets. Firms favor productinnovations if they produce close substitutes (so competition is severe) andfavor process innovations if products are differentiated (so competition isless severe). Assumptions on the strategic complementarity of product andprocess innovations and on the decreasing returns of a product innovationare found to be the critical assumptions in the sense of Milgrom and Roberts (1994).     

Impact of Knowledge Type and Strategic Orientation on New Product Creativity and Advantage in High‐Technology Firms

As different types of knowledge may have different effects on new product positional advantage, knowledge portfolio management in concert with the firm's strategic orientation is indispensable for new product success. However, previous research has not dealt with the knowledge resources and strategic implementations that affect new product development (NPD). To fill in this gap, the current study focuses on two dimensions of knowledge type (knowledge complexity and knowledge tacitness) and two forms of strategic orientation (technological orientation and market orientation), which influence the positional advantages as determinants of NPD outcomes. Drawing on the resource‐based view, this study explains how these knowledge and strategic orientation variables influence new product creativity, which comprised the novel and meaningful characteristics of new products. Finally, it demonstrates how these two dimensions of new product creativity differentially provide product advantages in terms of customer satisfaction and product differentiation, which lead to superior new product performance. A conceptual framework is developed and the related hypotheses provided to incorporate the study variables and to test their relationships in a sample based on data collected from both marketing and project managers from 100 U.S. high‐technology firms. The model estimation results from path analysis demonstrate that reliance on knowledge of high tacitness harms meaningfulness, while reliance on knowledge of high complexity increases both novelty and meaningfulness of new product. As expected, market orientation and technological orientation improve the meaningfulness and novelty dimensions of the new product, respectively. New product novelty and meaningfulness are shown to enhance new product advantage in terms of product differentiation and customer satisfaction, both of which contribute to new product performance. It is also found that the combinative use of market orientation and knowledge complexity, and technological orientation and knowledge tacitness positively influence both the novelty and meaningfulness of new products. This study, using the product‐level analysis, contributes to the literature by clarifying how the firm's different knowledge properties and strategic orientations both play a role as a source of new product creativity, and how new product creativity, as a valuable and rare resource, enhances new product advantage. The study results suggest that project/product managers should increase the transferability and codifiability of unstructured knowledge by stimulating intraorganizational knowledge sharing among NPD team members, and that they should promote both technology and market‐orientated practices to fully develop creativity of new products.     

MARKET PERFORMANCE WITH MULTIPRODUCT FIRMS*

We revisit the fundamental issue of market provision of variety associated with Chamberlin, Spence, and Dixit‐Stiglitz when firms sell multiple products. Both products and firms are (horizontally) differentiated. We propose a general nested demand framework where consumers first decide upon a firm then which variant to buy and how much (the nested CES is a special case). We use it to determine the market's biases when firms compete in product ranges and prices. The market system attracts too many firms with too few products per firm: firms restrain product ranges to relax price competition, but this exacerbates over‐entry.     

Strategic Suppliers' Technical Contributions to New Product Advantage: Substitution and Configuration Options

Current theory lacks clarity on how different kinds of resources contribute to new product advantage, or how firms can combine different resources to achieve a new product advantage. While several studies have identified different firm‐specific resources that influence new product advantage, comparatively little research has explored the contribution of strategic supplier resources. Combining resource‐based and relational perspectives, this study develops a theoretical model investigating how a strategic supplier's technical capabilities impact focal firm new product advantage and how firms combine different resources to gain this advantage. The model is tested using detailed survey data collected from 153 interorganizational new product development projects in the United Kingdom within which a strategic supplier had been extensively involved. Empirical results support our research hypotheses. First, supplier technical performance is shown to have a significant positive impact on new product advantage. Next, we show that while supplier technical capabilities have a positive influence on supplier technical performance, the a priori nature of the supplier's task moderates the relationship. Finally, our data support our hypotheses related to the positive relationship between relationship‐specific absorptive capacity and new product advantage, and the proposed negative moderation of supplier technical capabilities on this relationship. Based upon these findings, we encourage managers to recognize that strategic suppliers' with greater technical capabilities perform better regardless of the degree of creativity required by their task; but that strategic suppliers with lower technical capabilities may partially compensate (substitute) for their lack of technical capabilities, if they are able to respond to high problem‐solving task requirements. Furthermore, we suggest that the firm's development of relationship‐specific absorptive capacity is much more important when a strategic supplier is less technically capable. A buying firm's relationship‐specific absorptive capacity can, according to our data, substitute for low supplier technical capabilities. On the other hand, where the supplier has strong technical capabilities, investments in relationship‐specific absorptive capacity have no effect on new product advantage. Our findings reinforce recent calls for research on how firms can combine different resources and capabilities to achieve superior performance.     

Product innovation with vertical differentiation: Is a monopolist's incentive weaker?

This paper compares the incentives for product innovation across different market structures when the new product is vertically differentiated and of lower quality, a common case empirically. We show that innovation incentive rankings across market structures can differ substantially when the new product is of lower rather than higher quality. In particular, the incentive to add the new product can be greater for a monopolist over the old product than for a firm that would face any degree of competition from the old product. This incentive ranking cannot occur when, instead, the new product is of higher quality as has been analyzed in previous work. Moreover, in that case, the incentive ranking is the same whether the market is covered or not covered, whereas in our setting the ranking can differ. With the market covered, our setting provides another environment where the monopolist can have the greatest incentive to innovate, as previously shown when the new product is horizontally differentiated. Together, both settings show that Arrow's famous result—a secure monopolist gains less from a nondrastic process innovation than would a competitive firm—does not always extend to nondrastic product innovations. However, in all the cases analyzed here, consumer welfare (though not total welfare) is always lower under monopoly, even when only the monopolist would add the new product.     

Interorganizational Imitation and Acquisitions of High‐tech Ventures

Research summary: This article shows that there is a positive association between the changes in the number of prior acquisitions or the changes in the prominence of prior acquirers within the focal venture's subfield and the venture's likelihood to be acquired. Results are in line with the existence of frequency‐ and trait‐based imitation in acquisitions targeting tech ventures. More importantly, these positive associations are more pronounced when (a) exogenous technological uncertainty within the venture's subfield increases and (b) there are significant differences between the focal venture's and acquirer's technological resources. Our findings are in accord with the suggestion that uncertainty in the technology domain is an important boundary condition in moderating the extent of imitation in technology acquisitions. We also discuss alternative explanations and implications. Managerial summary: The findings of this article suggest that when deciding whether or not to acquire a technology venture (i.e., startup company in a high‐tech industry), managers infer information by observing other acquisitions in the venture's subfield to make assessments about the underlying value of the potential targets. We also find that receiving some informational cues from previous acquisitions would be more useful when there is high technological uncertainty in the potential target's subfield about which technologies will be dominant, and when the potential acquirer and the tech venture operate in dissimilar technological areas. This article shows that imitation can be one way to deal with decision‐making under uncertainty when making acquisition decisions in high‐tech environments. Copyright © 2017 John Wiley & Sons, Ltd.     

The Role of Product Originality,Usefulness and Motivated Consumer Innovativeness in New Product Adoption Intentions

Prior research has posited that product attributes are primary drivers of success that a firm must consider to develop a competitive advantage. Two product attributes, originality and usefulness, have been identified in the literature as significant dimensions of new product success. Customer demands differ, and more purchase intentions toward a new product depend on how consumers connect the product attributes to their own individual characteristics. Studying motivated consumer innovativeness as a personality trait may improve our understanding of the motivations for adopting innovations; however, questions remain regarding whether the effects of originality and usefulness on consumers' intentions to adopt are different when levels of these attributes are matching or dissimilar and what the relationship is between these effects and motivated consumer innovativeness. This study seeks to empirically investigate these effects and their relations by collecting data from 560 potential consumers in China. This paper uses hierarchical regression analysis to test hypotheses in four product domains as representative of higher or lower levels of usefulness and originality. The research shows that new product originality affects consumers' intentions to adopt new products only if it matches the level of new product usefulness. The results also reveal that motivated consumer innovativeness has a positive moderating role on the relationship between new product originality and consumers' new product adoption intentions when both attributes are at a lower level. The theoretical and practical implications for new product development and marketing communications are discussed.     

Alcohol Prohibition and Pricing at the Pump*

Firms often sell a transparent base product and a valuable add-on. If only some consumers are aware of the latter, the add-on's effect on the base product's price will be ambiguous. Cross-subsidization between products to bait uninformed consumers might lower, intrinsic utility from the add-on for informed consumers might raise the price. We study this trade-off in the gasoline market by exploiting an alcohol sales prohibition at stations as an exogenous shifter of add-on availability. Gasoline margins drop by 5% during the prohibition. The effect is mediated by shop variety and competition. Using traffic data, we unveil sizeable consumer-side reactions.