Chasing innovation

The conventional wisdom is that low-competition, resource-rich and high-demand environments support innovation. But such environments only support innovation in firms that already possess resources, whereas new firm innovation is greater in markets that are small, crowded and lacking in resources.

by Academy of Management Journal 2005, Vol 48 No 5
Last Updated: 23 Jul 2013

These findings have several implications for technology strategy. First, they have identified conditions that help new firms develop products that can be used to compete against established firms. This is a valuable contribution since established firms have relatively few tools with which to predict the threat of competition from firms that do not yet exist.

Second, the results of the study of data on firms' efforts to commercialise technological inventions helps managers to predict the best structural arrangements for innovation, to define when it will be effective to innovate in-house and when it is better to license inventions to new firms for commercialisation.

Third, the results help understanding of the recent discussion among academics on exploration and exploitation in the context of innovation. By definition, all innovative activities that new firms undertake involve exploration, rather than exploitation of their existing routines. The study therefore identifies conditions under which exploratory strategies are more likely to be successful.

The findings also challenge theories about what makes innovative firms successful. Many studies suggest that new firms that undertake specific strategies or possess specific skills will be more successful, but such arguments are limited. The performance of new firms depends on their environment. Even if entrepreneurs cannot recognise the constraints and opportunities that environmental conditions impose on their new firms, these conditions influence their performance. The results suggest that the environment in which new firms operate needs to be fully incorporated in theories of entrepreneurship.

The study does not claim to have all the answers; indeed, the research raises more questions than could be answered in this paper. In particular, there is a need to discover if the same environments that make new firms innovative also make them financially successful or long-lived, and how established firms can emulate new firms to overcome the liabilities of competence.

Source: When does lack of resources make new firms innovative?
Riitta Katila of Stanford University and Scott Shane of Case Western Reserve University
Published in Academy of Management Journal 2005, Vol 48 No 5

Review by Roger Trapp

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