Vincent Mak.

Motivated to innovate?

19 May 2011

The article at a glance

The traditional view of dominant firms being lethargic is misinformed: dominant firms can actually be highly successful innovators Dr Vincent Mak, University …

Dr Vincent MakThe traditional view of dominant firms being lethargic is misinformed: dominant firms can actually be highly successful innovators

Dr Vincent Mak, University Lecture in Marketing at Cambridge Judge Business School, says new research reveals that dominant firms do innovate under the right conditions.

His new collaborative research ‘Dominance and Innovation in a Dynamic Macro Environment’ turns traditional beliefs on dominant firms and innovation on their head.

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Dr Mak, who researched how firms in the UK newspaper industry, the US car rental market and the US bond markets approached innovation, says that the traditional views of dominant firms being ‘lethargic’ is misinformed. He says that we now know that under the right macroeconomic’conditions dominant firms do innovate and do succeed.

Dr Mak explains:

“The majority of previous research projects present the image of dominant firms being lethargic, with a few notable exceptions. But the more recent research shows that a sizeable number are actually inclined to innovate. We wanted to know under what conditions the traditional views prevailed and under what conditions these firms would be inclined to innovate.

“The external environment, the macro environment that surrounds the whole industry, is constantly changing. What we discovered was how these firms foresee these changes. We established that if the external macro environment is shrinking, dominant firms will fit into the more lethargic traditional view of not innovating. However, if the macro environment is growing under a lot of conditions dominant firms are more likely to be pioneering and innovating.”

Dr Mak said that in stable environments dominant firms can do well too, but they may be ‘late innovators’:

“Dominant firms will hide a little when the macro environment is stable, but not as much as if it was shrinking. In stable conditions dominant firms tend not to do a lot initially, they will bide their time and wait for the moment when they start to innovate radically and on a large scale. It is a kind of hybrid model, in stable conditions dominant firms will be innovative but as late players.”

Start-ups by comparison, says Dr Mak, rely on innovation. However, the dominant firm will have much more to lose by innovating:

“Dominant firms will be receiving quite a lot of profit from their operations, so they may think there is not much need to try something new and experiment. After all if the experiment fails, it could potentially lead to quite a significant loss. For the new start up they have relatively little to lose, and if they don’t innovate it is quite hard for them to keep surviving. So for dominant firms it is all about weighing up how much they have to lose. They may have too much to lose and that is why the traditional view has become so prevalent.”

In their paper ‘Dominance and Innovation in a Dynamic Macro Environment’ Dr Mak and his colleagues reviewed the three subject markets during certain key periods of contraction and subsequent growth:

“There are three mini case studies. In the case of the UK newspapers study, we looked at the turn of the millennium when you can see that The Guardian started innovating on a large scale through its online operation, whereas The Daily Telegraph didn’t do much with their website in such a pioneering way. It is a shrinking profitability environment and we see a classic example of a dominant firm, The Telegraph, being lethargic, while The Guardian tried to do something radical.

“The second example was the case of the US car rental market at the height of the recession in the US. The rental company, Enterprise, was pioneering in its Internet car rental scheme, bringing out a new way of operating, whereas Avis, the less dominant player in 2008, was less innovative. When the macro environment is at a low, and firms foresee it will bounce back again, dominant firms have a high incentive to innovate ahead of others.

“The third case was the US bond markets around the turn of the millennium when the external environment was relatively stable. The dominant firms, such as Morgan Stanley, innovated quite radically but entered the market later than the less dominant firm.”

Dr Mak said the research was ground-breaking and revealed why dominant firms innovated in an apparently counterintuitive way, with some adopting a ‘radical’ approach to innovation while others changed ‘incrementally’.