Rajesh K. Chandy, Jaideep C. Prabhu, and Kersi D. Antia, 2002, 02-122

Are dominant firms laggards or leaders at innovation? Research provides conflicting and controversial answers to this important question, with most suggesting that inertia and investments in existing products reduce dominant firms’ tendency to innovate.

In this report, authors Chandy, Prabhu, and Antia attempt to resolve contradictory findings on the effect of dominance on radical innovation, and explain why some dominant firms invest aggressively while others don’t.

They argue that dominance is a multi-faceted construct, including (1) investments in current technology, (2) market share in current technology, and (3) overall wealth, each generating differing propensities to innovate. In order to identify the overall effects of dominance, it is necessary to consider the combined effects of these facets.

Further, they examine a hitherto ignored, yet potentially significant, driver of innovation: the technology expectations of managers within dominant firms. They show that these managers have widely divergent expectations with regard to the same new technology. Furthermore, even when their expectations are the same, managers of dominant firms display investment behavior at odds with their counterparts at non-dominant firms.

Study and Findings

The study combines insights from lab studies with those from field interviews, archival data, and a survey of bricks and mortar banks’ responses to Internet banking. Findings include the following: First, while two facets of firms’ dominanceinvestments and market share in the current technologytend to decrease the propensity to innovate, one facetwealthincreases this propensity. Overall, the positive effect of wealth outweighs the negative effects of the other two facets.

Second, technology expectations have potent effects on innovation. In particular, the fear of obsolescence is a more powerful motivator of investment in radical innovation than is the lure of enhancement. Dominant firms that fear obsolescence are much more aggressive in pursuing radical technologies than their less-dominant counterparts with the same expectation.

Implications

For dominant firms, the results suggest that existing research might be overly pessimistic in regard to the firms’ propensity to innovate. While it is true that some aspects of dominancegreater investments and stronger market position in the existing product generationreduce dominant firms’ motivation to invest in radical innovation, it is also true that dominant firms’ greater wealth compensates for this reduction. Across three studiestwo in the lab and one in the real world context of Internet bankingdominance, as an overall composite of its various facets, has a positive impact on investment in radical innovation.

Further, if managers of dominant firms believe that the new technology is likely to make the existing products obsolete, they are likely to aggressively pursue investments in radically new technologies. Such paranoia appears to be a much stronger motivator of investments in radical innovation than the lure of gains from enhancement. Managers who believe a new technology is likely to increase sales of their existing products will actually invest less aggressively in the new technology than managers who believe otherwise. This result suggests that product champions and change agents trying to steer a dominant firm toward a new technology should use obsolescence rather than enhancement as their rallying cry for the troops.

For non-dominant firms, these findings suggest a careful consideration of the impact of their new product announcements on the investment decisions of dominant firms. While such announcements can provide visibility and legitimacy, claims of inducing obsolescence of the existing technology could alert dominant firms to the danger of inaction, thereby increasing the odds that dominant firms will aggressively pursue the radical innovation. Dominant firms’ deep pockets and ability to sustain losses in the short term make them formidable competitors. Non-dominant firms may therefore be better off not emphasizing the issue of obsolescence in their public pronouncements.