November 13, 2015    6 minute read

The Role of Innovation in Firm Competitiveness

   November 13, 2015    6 minute read

The Role of Innovation in Firm Competitiveness

The ultimate goal of any company is to achieve a competitive advantage over its competition; in other words being able to outperform its competitors in terms of profit, market share and sales. These days, markets are ever changing entities and everything is changing rapidly. Change is driven by consumers who demand more and more, by competitors who continuously come up with new offerings to satisfy the needs of the consumers and by technology which is growing day by day. If firms do not keep up with their markets’ changing and evolving needs they face “strategic wear out”.

As markets are constantly changing, innovation and the ability to produce new to the world products is becoming one of the main ways companies manage to achieve a competitive advantage. Research suggests that there is a relationship between sales and profit and the level of innovation of a company; with pioneering products and services providing increased sales and profit. Consider Bert Claeys, a company from Belgium that operates movie theatres. What Bert Clayes managed to do was to create the world’s first megaplex called Kinepolis and bring a change in a shrinking market. Within its supposedly unattractive market, Kinepolis achieved huge profits and a spectacular growth. Instead of battling its competition with similar services, Bert Clayes introduced a completely new and unique innovation to the film industry and made its competition irrelevant.

When talking about innovation it is important to mention the Blue Ocean strategy. Kim and Mauborgne introduced this strategy and argued that companies who compete head to head do not achieve growth and profit and end up competing in a bloody red ocean as they fight over shrinking profits. Furthermore, they argued that success and achieving a competitive advantage comes not from battling competitors, but from making the competition irrelevant by creating blue oceans of uncontested marketplace. An example that shows that the creation of blue oceans can bring profit and growth is Ford and the Model T. In 1908 Ford came up with a new innovation, the Model T, and created the automobile industry as we know it today. This strategic move helped Ford’s market share to rise from 9 to 61 percent.

Unfortunately, most firms are afraid to create new innovations and seem to stand still in their red oceans. Kim and Mauborgne (2005) examined the business launches of 108 companies and discovered that 86 percent of those new ventures were line extensions and only 14 percent were aimed at creating new industries or markets. Even though line extensions accounted for 62 percent of the total revenues, they managed to deliver only 39 per cent of the total profits. By contrast, the 14% invested in the creation of new industries and markets delivered 38% of total revenues and a surprising 61% of total profits. This being said, the creation of new markets can bring profit to a company; but it is important that once the company has created the blue ocean it should prolong its profit and growth by swimming as far as possible in the blue ocean, distancing itself from potential imitators. Lets take Nokia for example. Despite an impressive history of innovation – it was a pioneer in wireless infrastructure, was perhaps the first company to transform cell phones into fashion accessories, and actually created the first smartphone back in 1996 – Nokia never really successfully transitioned into the new age. Even though Nokia created a blue ocean, their success did not last, ending up with huge losses and with selling its handset division to Microsoft.

It has become imperative that a company has to be innovative in order to survive and gain a competitive advantage and innovation is a critical determinant of business performance. Innovation is particularly vital for small entrepreneurial companies with limited money and resources. An innovative firm can use, build, integrate and reconfigure their capabilities, assets and competences to face and address changing external environmental needs and respond to or even drive market change.

Importantly, resources play a huge role in the success of a company. By using their available resources, companies can outperform their competition and gain huge profits. Apple, by using its rare, non-substitutionable and hard to imitate resources has made its competition irrelevant and is one of the richest companies in the world. Likewise, Sharp and its knowledge of flat panel display technology and constant innovation in this area has enabled it to dominate the £7 billion LCD business.

However, innovation in some markets might not be appreciated and adopted quickly by consumers. Products and services are adopted at different paces and companies need to understand how quickly something will be adopted in order to produce the right offerings to their consumers. Moreover, new innovations do not always work and are not always embraced by consumers. Lets take Dyson’s washing machine for example. James Dyson, the person who transformed the simple vacuum cleaner into a futuristic machine, created a washing machine that in his opinion was a revolutionary way of washing clothes. Even though this machine was unique, it was not embraced by consumers and brought huge losses to the Dyson company because of its high price to purchase (almost £1,000) and its complexity.

Additionally, innovative companies and pioneers do not always succeed as their way of thinking in terms of achieving a competitive advantage can be costly, disruptive and time consuming. Moreover, there is always the issue with competitor replication and companies who try to be different are in a constant fight as they try to be on top of the game. Finally, the risk of “innovation wear-out” (Atkinson, 2013) is always present. Firms, by constantly trying to keep up with the evolving technology and by constantly creating and offering new products and services, some consumers can lose their interest in the firm and be turned off by its offerings creating a negative image in their minds.

All in all, innovation can help a company achieve a competitive advantage and help the company to get bigger and stronger. As the era we live in is characterised as dynamic, the ability of a company to function like a well-oiled machine, be creative and offer new to the world products to consumers can make or break the company. It is important that companies identify opportunities and formulate strategies to take advantage of the opportunities as they arise. The most profitable companies of our time are the most innovative companies and that shows how important it is to be different and think out of the box. There are some issues that have to be taken into consideration by a company which constantly comes up with new offerings but through the correct modelling of an organisations internal and external dynamics and through the right strategic decisions, these issues can be tackled.

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