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Can Innovation Build Sustainable Competitive Advantage?

Posted by Hemant Puthli on April 23, 2010

With all this hype buzzing around the idea of ‘Innovation’ I was curious to know how people thought about Innovation as a source of competitive advantage in a world where competitors were also pursuing the very same idea. I posed the following question at LinkedIn: Does Innovation give an enterprise a sustainable competitive advantage if their competition is also doing it?

My question drew considerable interest and several good answers — the general sense was that Innovation is relevant only if it represents additional value in the eyes of the customer and/ or other stakeholders in the business ecosystem. In that sense, most people seemed to think that it was not really a matter of whether or not, but a matter of how to make Innovation work for the enterprise.

The most original, relevant and comprehensive answer came from Nilesh Khare — a friend and former colleague (PwC), by email and is not posted at the LinkedIn Q&A page. I am sharing it here with his permission, and hence this may be regarded as a guest post by an associate (with minor edits by me).

Competitive innovation efforts may not lead to competitive advantage. Per se, competitive efforts at innovation are neither necessary nor sufficient. There are many aspects to the relationship between innovation and competitive advantage. I will cover some in my response here. Broadly stated, innovation alone is not enough. Only under specific conditions is innovation likely to lead to sustainable competitive advantage.

1) Research suggests that roughly 60% of patents get copied within 4 years of their filing, at substantially lower cost to the imitating rivals. It follows that when innovation can be copied efficiently it may not lead to sustainable competitive advantage.

2) Innovative first mover advantages can be retained if they lead to one or all of the following: buyer’s switching costs, technological leadership, and/or preemption of resources.

3) When only a few of the competitors can efficiently and effectively innovate or imitate each other’s innovation, a duopoly or oligopoly may emerge. Successful players may not have significant competitive advantage over each other, but each one of them will have substantial advantage against many other players (potential entrants): the soft drink industry may offer an example (in the context of packaging/ vending/ product line innovations).

4) Innovators may not always capture the gains. Innovation may depend on complementary resources for commercialization. Gains may be captured by the providers of such resources. IBM opening “PC standard” lead Intel and MS Windows to capture all the gains. Similar arguments are usually given to explain why big pharmaceutical companies may get more advantage out of drugs discovered by small “strategic” partners.

5) Innovation may be related to standards (such as VHS). Standards may be established through network effects — products for existing users become more valuable as new customers adopt the same standards. In many cases the network effect leads to “winner takes all”. Substantial competitive advantage is implied. The standard that wins does not have to be technically superior — VHS and QWERTY key board are usually cited as examples. Other examples include MS Office, Windows, Adobe etc. In some cases, multiple standards can co-exist, however. For example GSM and CDMA in wireless telecom. Radical v/s evolutionary innovation approach could be one of the ways to think about the possible outcomes of war of standards.

6) Joseph Schumpeter characterized some innovations as disruptive, which could well become game-changers. Many innovative business models on Internet were potential game changers, but the one who innovated was not necessarily the one who succeeded.

7) Lastly, a firm may innovate but fail to recognize the importance of its own innovation or to monetize/ commercialize it. Xerox’s Paulo Alto Based Research Center (PARC) innovated many path breaking products including GUI and Mouse. But Xerox as an organization failed to capitalize on any of these.

As I said in the beginning, competitive innovation efforts are neither necessary nor sufficient to lead to competitive advantage. Despite the fact that innovation may not lead to competitive advantage, firms continue to emphasize innovation, since: (a) it may lead to sustained competitive advantages in some cases, (b) it may lead to competitive parity and survival, and (c) learning from innovative efforts, despite being a possible short term competitive disadvantage, may be a source of competitive advantage in the future.

Nilesh Khare is a Doctoral Candidate (Strategy) at the Fisher College of Business, Ohio State University, Columbus OH, and Assistant Professor of Management, American University in Dubai, UAE. He can be reached at: khare.11 [at] osu [dot] edu

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One Response to “Can Innovation Build Sustainable Competitive Advantage?”

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