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The relationship between firm survival and innovation: An introduction to the literature
Carol Dalglish
Senior Lecturer, Brisbane Graduate School of Business, Queensland University of Technology, Brisbane QLD
Caroline Newton
Casual Instructor, Brisbane Graduate School of Business, Queensland University of Technology, Brisbane QLD
Abstract
The rapid growth in use of the Internet as a business tool provides a new perspective in the study of the organizational challenges of new technologies. The innovation literature has grown vastly since its establishment in the 1920s, covering a broad range of disciplines (Foxall 1984) and measures a wide variety of variables (Rogers 1995).
At first glance, studies that look at the relationship between innovation and firm survival appear contradictory. However, the results appear compatible when additional factors, such as industry type, organizational age, company size or the duration of the study are taken into account.
Keywords
innovation, firm survival, industry type, organizational age, company size, study duration
Article Text
The recent growth of the dot com and the Internet provides a new perspective for innovation studies. Innovation of computer related technologies allow researchers to develop new theories by measuring new variables (Van de Ven 1988 as cited in Rogers 1995, p.390).
Understanding of innovation is vital to Internet firms, competing in an environment characterised by high uncertainty and a high rate of change. Companies that disregard the importance of technology will not survive or will become marginalized (Han, Kim et al 2001). In a study '... of the 100 leading incumbent firms in the United States at the turn of the century, all but 16 have either perished or become marginalized as the result of having compromised their technological orientation' (Han, Kim et al 2001).
Even relatively young companies struggle with technology: Microsoft nearly failed to innovate in preparation for the Internet, and Bill Gates believes that Microsoft is 'always two years away from failure' (Hamel 1998). Discontinuous change makes it unlikely for a company to be successful in either defending an old position or successfully entering a new position (Cooper 1976 cited in Utterback 1996).
The goal of this article, then, is to firstly present a broad overview of the history of innovation literature. Secondly, we will take a very narrow subsection of this topic to look at empirical studies that examine the relationship between firm survival and innovation.
History of innovation literature
At present, innovation literature is immense (Frost & Egri 1991). Rogers (1983, p.xv) notes the vast interest in the topic of diffusion of innovations, with 405 publications in 1962 growing to 3085 in 1980.
There are three main streams in innovation literature being (Wolfe 1994):
- Diffusion of innovation
- Organizational innovativeness
- Process theory models
Similarly, Kay (1993, p.112) says the literature falls into the following broad categories:
- Patterns of innovation and diffusion,
- Relationship between organisational structure and technological capabilities, and
- Economics of technology and innovation.
Past research into the diffusion of innovation can be broken down into eight general categories (see Figure 1) (Rogers 1983, p.80).
Figure 1 Types of Diffusion of Innovation Research
The foundations for present innovation research can be sourced back to the economist Josef Schumpeter. Schumpeter's main interest in the field of innovation was economic development (eg Schumpeter 1939 cited in Gronhaug & Reve 1988, p.332; Schumpeter 1942 cited in Hope 1988). Seminal thinking by Schumpeter includes the basic premise that technological innovation drives economic growth (Tushman & Anderson 1997). Schumpeter also developed an important theory on the process of 'creative destruction', whereby waves of discontinuous technological change destroy old industries, and new industries are born (Senge, Carstedt et al 2001).
Another influential theory of current innovation literature is the 'S-curve' (Rogers 1995; Utterback 1996; Boar 1997). The rate of adoption of a hybrid seed corn in Iowa fit an s-shaped curve over time (Ryan 1943 cited in Rogers 1995). This theory, that only a small number of people adopt an innovation at first, and then the adoption rate increases sharply, followed by a slowing of the laggards adopting the innovation, has been used to explain the diffusion rate of most innovations (Rogers 1995).
In the 1950's and 1960's innovation was studied from an invention point of view with the focus being scientific research laboratories (Kemp, Little et al 1964, p.145).
In addition to innovation / invention studies, diffusion of innovation research was being developed. Diffusion of innovation studies focus on the identification of variables that determine the speed of diffusion (Nelson 1972).
The study of innovation is not limited to a single discipline (Foxall 1984). Prior to the 1960's, diffusion of innovation research was investigated by various disciplines separately eg communication, farming, anthropology, marketing, geography, and education in the US and Europe (Rogers 1983). Over time, diffusion of innovation studies became more cross-disciplinary and then moved towards standardisation (Rogers 1983, p.39).
Early diffusion studies were individual based, but by the 1970's, several hundred studies were done of organisational innovativeness (Rogers 1995). These studies looked at what variables made an organisation more or less innovative, for example organisational size or organisational structure (Rogers 1995), and were generally based on some type of computer based technological innovation (Rogers 1995).
The topic of organisational innovativeness draws on organisational theory and technological change theory. Influential organisation literature can be traced back to Max Weber's theory of bureaucracy (Blau 1972) that noted the increase in rule-based organisations (Schulz 1998) following the Industrial Revolution (Clawson 2000). Research in organisational technological change has been dominated by the technological determinism theory (Barley 1986 and Child 1987 cited in Laurila 1997) that is based on technology driving change (Hearn, Mandeville et al 1998). And research on the growth and survival of firms has traditionally been studied from an economics view (Utterback 1996).
Academic criticisms of current innovation literature include:
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Research results in organizational innovation literature are inconsistent (Wolfe 1994).
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Most literature has focused on incremental innovations. Radical innovations have not been studied as much as they are uncommon (Gerwin 1988)
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Innovation research tends to have a pro-innovation bias (Rogers 1983, p.92) in that we know more '(1) about the diffusion of rapidly diffusing innovations than about the diffusion of slowly diffusing innovations, (2) about adoption than about rejection, and (3) about continued use than about discontinuance.' (Rogers 1983, p.94)
Firm survival and innovation
Studies of the competitive consequences of innovation represent a small subsection of innovation research. Past empirical studies have looked at the relationship between innovation and outcome variables such as profit, survival, growth and competitive advantage.
Innovation has been identified as an important factor in firm survival (Starbuck 1983; Utterback 1996; Han, Kim et al 2001).
Companies in high technology industries, such as Sony, are often discussed as examples of firms that depend critically on the continued succession of new product innovations for survival (Martin 1994 p.67, Dwyer 1989 & Barney 1995 cited in Roberts 1999). This continuous innovation is difficult to achieve: to survive, the firm must meet customer demands for rapid incremental improvement; yet also master infrequent revolutionary technological change (Utterback 1996, p.191). Based on a study of the disk drive and other industries (Christensen 1997, p.xii), 'there are times when it is not right to listen to customers, right to invest in developing lower-performance products that promise lower margins, and right to aggressively pursue small rather than substantial markets.' This is the paradox of innovation.
Showing some similarities to the high technology industry is the pharmaceutical industry. Repeated introduction of innovations in the pharmaceutical industry was found to maintain profitability of the firm (Roberts 1999). Industry type may play a part in the need for a firm to innovate: a study found that innovation had a negative effect on some industries and a more positive effect on other industries (Roberts 1999; Hall & Tozer 2000). But another longitudinal study of both new and old-economy industries over a thirty-six year period indicates that industry type does not affect the need to innovate (Foster & Kaplan 2001). This study found that even the best companies in old economy industries such as the chemical or pulp and paper, are unable to sustain high levels of performance for more than ten to fifteen years based on incremental improvements (Foster & Kaplan 2001).
The extended time frame of research may explain the different results of these two studies. Some innovations take many years before any return is gained (Mechlin cited in Gronhaug & Kaufmann 1988). Perhaps short-term innovation studies are taking a snapshot of the environmental characteristics for that particular industry. Waves of technological change happen in all industries (Senge, Carstedt et al 2001). Technology goes through periods of incremental change followed by radical technological breakthroughs, and thus the innovation response must vary to suit the environment (Tushman 1986 cited in Hage 1998). Some authors suggest that because we are entering a new epoch, moving from the industrial age to the information age, that all businesses are being forced to discover new ways of working (Boar 1997). The 'new economy' has created an environment whereby incremental innovation may lead to corporate failure, and that companies should make non-linear innovations to survive (Hamel 1998).
But whatever the organisational response of existing firms, chances of success are low (Cooper 1976 cited in Utterback 1996). Longitudinal research has shown how changes in the technological environment often change the market leader as firms opportunistically re-position themselves (Tushman & Anderson 1986; Ghazanfar 1987 cited in Bogner, Thomas et al 1994; Sorensen and Stuart 2000). Incremental innovation is known to reinforce the dominance of established firms, yet radical innovation destroys the usefulness of the established firms capabilities (Henderson and Clark 1990). This is often referred to as the 'competency trap', whereby existing companies do not adapt to external conditions (Levitt 1988 cited in Vermeulen & Barkema 2001).
The competency trap allows opportunities for start-up firm. Recently, with the advent of the Internet, many 'dot-com' start-ups took the lead on established companies. For example, new online book retailer, Amazon.com built a worldwide brand in less than 18 months, beating established book chains (Cortada 1998). Yet it has been noted that start-ups often do not live past the first strategy (Hamel 1998). The ability to again and again innovate is important for the long-term survival of a company.
This leads us to consider the age of the organisation to predict firm survival. Organisational aging has been researched extensively with conflicting theories about the effects of aging on firm survival (Sorensen & Stuart 2000). For example a prominent theory known as the 'liability of newness' positions that survival chances increase as organizations age (Stinchcombe 1965 cited in Barnett 1997). Yet a more complicated relationship has been identified: whereby mortality rates for young firms are low, and then the mortality rate rises with age (Hannan 1998). Finally the mortality rate declines over the long-term with organisational age (Hannan 1998). Despite extensive research into organisational aging and firm survival, little research has looked at the link between organisation age, innovation and survival (Sorensen & Stuart 2000).
Another factor that influences the innovation gains for a particular industry is the effectiveness of the patent system. For example, the pharmaceutical industry has a good patent system that makes it more difficult for a competitor to imitate (Roberts 1999). Whereas, the information technology industry does not widely use the patent system (Basberg 1988) as it does not provide effective innovation protection.
Company size may also be a factor in determining a firm's need to innovate. A study found no general relationship between innovation and turnover growth, unless industry type and company size were identified. For example small manufacturing firms that were innovative had high turnover growth, yet larger firms in the same industry did not (Hall & Tozer 2000).
Some authors researched the likely success / failure outcome of certain innovation categories. For example, rate of innovation adoption was positively linked to relative advantage and compatibility of innovation and complexity was found to be negatively linked (Tornatzky & Klein 1982 cited in Rogers 1995, p.210).
Conclusion
Taken in isolation, studies on the relationship between innovation and firm survival appear contradictory. But the results appear compatible when additional factors such as industry type, environment, organisational age, company size and even the time length of the study are taken into account. The study of innovation is complex - multiple theories of innovation exist which depend on the circumstances in which it takes place (Wolfe 1994).
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