Product Innovation on Firm Performance - Research Paper Example

?Running Head: PRODUCT INNOVATION AND FIRM PERFORMANCE Marketing    Topic: A Study of Product Innovation on Firm Performance Date of Presentation: Abstract This study applies the perspective of new product development, brand extension and organizational change to highlight the impact of product innovation on firm performance. The paper relies on earlier research that has been carried out relating to successful product innovation and the sources of innovation. The results of the study indicate that when firms decide to allocate resources to product innovation, they expect to gain leverage in terms of competitiveness and performance. It reveals that continuous product innovation increases the capacity of a firm to serve wide ranging consumer needs thereby upholding their loyalty. The issue of early innovator and follower firms also emerge whereby a short-lived monopolistic operation is established through new product launch. The early innovators earn super profits before competing follower firms imitate their products. Generally, the study leads to the conclusion that product innovation is significant for a firm’s performance and survival. Introduction Product innovation is the introduction of a new product in the market that uses different technology and has a higher utility for the consumer than the existing products. In the contemporary competitive environment, a business requires to maintain leverage in relation to its competitors through ensuring that consumer loyalty is maintained and hence a greater market share. Precautions should be observed during product innovations since the process may have a positive or negative impact on the existing product categories. They may result in a greater market share, cannibalism and destabilization of products. Nevertheless, the significance of product innovation can not be ignored. This study explores the positive relationship between product innovation and firm performance. Product Innovation and Firm Performance Aboulnasr et al. (2008) established that innovation originates from the application of creative ideas to develop marketable products from the existing ones. This process begins through invention whereby the new ideas are generated in relation to the performance targets of business. Products usually have a life cycle that decreases over time and requires enhancement through constant innovations to maintain competitiveness in the market. Kim & Huang (2011) noted that innovations can be accomplished through development of fresh knowledge or new products in the market that increases a firm’s leverage through increased profits and consumer satisfaction. Customer preferences change with time and therefore continuous assessment of the market is needed. Innovations targeted at consumer satisfaction depend on research that helps managers to determine market dynamics in terms of consumer preferences. Studies indicate that innovativeness leads to improved quality of products and services (Lee 2010). Any invention in business is focused on the improvement of the current product in the market. Innovations emerge from understanding of the need to change the prevailing product quality to match market demand. Radical changes need to enhance product quality and to strengthen its competitiveness in the market. Firms engage in research and development to identify the gaps that hamper profitability. It also assists them to identify the strategic responses to competition. Strategic response is a continuous process that involves decision making and analyzing a firm’s strengths and weaknesses, opportunities and threats. In many situations, a firm capitalizes on its strengths and takes opportunity of the competitor’s weaknesses. With this regard, innovation is necessary to keep an organization abreast with the prevailing market circumstances hence a greater capacity to cope with competition (Kim & Huang 2011). Innovations allow product differentiation giving consumers an array of products to choose from. An organization is able to serve a wide range of consumer’s needs. Kendall et al. (2010) also view innovation as a strategy to ensure that a firm enhances performance through establishment of a monopoly of profits by satisfying all consumer needs. This is accomplished through creating new products that are consistent with customer desires. New products attract consumers while facing minimal competition making the firm to retain market leadership in terms of profitability. Even if profitability in new products may not be maintained in the long-run, a firm that consistently introduces new products is able to maintain high performance. Lee (2010) noted that productivity and organizational growth are accomplished through innovation. Lee further argued that for organizational change to occur, firms must maintain innovativeness in their operations. Organizational change is the transformation of an organization from the existing status to a desired state in future. It is a change of organizational culture that allows new values and beliefs to be integrated in the organization. It arises after introducing a new way of thinking and undertaking tasks in the organization. The change is mainly aimed at helping the organization to adapt to variations in the operating environment. Innovations include changes that affect an organization’s mission, goal or overall organizational structure. Some of these innovations may lead to change of the organization’s business name such as structural adjustments. Innovations can be triggered by factors such as technological advancement, increased competition and quality standards among other aspects of the external environment (Rodriguez-Pinto et al. 2011). On many occasions, innovation is associated with basic and radical transformations in an organization’s operations. Lee (2010) argues that the survival or death of an organization depends on innovation. Innovative products provide an opportunity for a firm to offer new utility to consumers thereby giving it minimal competition at the onset of its introduction in the market. Before competing organizations can imitate the innovative products, a firm enjoys a large market share that is similar to a monopolistic competition in the short-run. It can only make normal profits in the long-run. Initially, when the firms introduce innovative products in the market, they charge prices that give them the highest profits. Figure 1.1 portrays a firm that operates in a situation where the marginal costs (MC) are equal to Marginal revenue (MR) during the initial stages of innovative product launch thereby making super normal profits. However, this is only accomplished in the short run since follower firms begin imitating the product after being attracted by the high profits. With free entry and exit, new entrants have the liberty to introduce the product especially when the firm has no patent rights to protect its product from imitation (Artz et al. 2010). As more firms enter the market to take advantage of the prevailing situation, the demand curves of the normal firms behave as in a perfectly competitive market whereby an increase in competitors and more differentiated products in the market lead to a shift in demand to the left. Fig. 1.1: A firm that is making super normal profits at prices Pi and Quantity Qi. At this point, MC=MR. However, as more firms introduce the imitated product in the market, ARi, which is the demand curve shifts to the left, i. e. to ARii. At this point, the prices drop to Pii while the quantity remains the same. The shifts in ARi are continuous until the point that all firms earn normal profits (Fig. 1.2). Fig. 1.2: A firm Earning Normal Profits in the Long-run Lages et al. (2009) also emphasizes on the role of innovation in the enlargement of a firm’s market share through product differentiation targeted at various market segments. Market segmentation has been an important tool for the success of firms in coping with competition. It involves division of the market in to various segments that consist of groups of consumers with common characteristics. This innovative practice allows managers to know the targeted customers, identify their preferences and understand the approach of other competitors so that they can determine the most appropriate segment that is likely to bring success to the business. In case of new product launching, it is possible to target a particular group of consumers meaning that the organization is able to attract a large consumer base. Kendall et al. (2010) present a perspective of constant brand extension to maintain a firm’s performance. Brand extension is a significant strategy used by firms in marketing whereby the name of a popular brand in the market is used to market an innovative brand from the same company. The spin-off, which is the new product, is unlikely to be known by consumers on its own. The brand name under which it is sold may encourage consumers since they associate it with the quality of the original product. Brand extension raises a firm’s profitability since it deals with various products. The attitude of consumers towards a particular brand determines the success of the firm in extending it (Rodriguez-Pinto et al. 2011). The higher the value attached to the brand, the more a firm is likely to succeed in its extension. Moreover, the satisfaction derived from both products matters since the more related the products are in terms of utility, the more consumers are likely to accept the extended brand. Brand extension also revitalizes the diminishing image of the original brand. Consumers in most situations are attracted to an innovative firm whereby they are presented with creative products that they believe are an advancement of the old brand. The new products make the old brand to reappear or become more frequent than before in the market. With the understanding that the new product has an added value, they are likely to purchase more and in the process, the brand maintains its position in the market (Zhang et al. 2009). However, brand extension has various risks that it may have on the original product. If the new products are not satisfactory to the consumers, their loyalty for the core brand may decline. For this reason emphasize it is important for firms to evaluate consumer satisfaction in relation to the new products as well as assessment of the impact of brand extension on the core brand before undertaking the strategy. This would help the company to maintain popularity of the main brand while using it to create markets for new products (Yalcinkaya et al. 2007). Lages et al. (2009) further noted that organizational learning is significant in enhancing innovativeness among workers. Employees are empowered to challenge the status quo and come up with better strategies to accomplish an organization’s success. Organizational learning involves continuous acquisition of knowledge and taking risks through testing the applicability of new knowledge. A learning organization is that which makes it possible for the members to learn continuously thereby maintaining constant transformation that is necessary for the accomplishment of organizational goals. The outcome of organizational learning is innovation which helps employees to come up with solutions to the day to day issues affecting their work thereby increasing their productivity and customer satisfaction. Innovations increase customer focus since new strategies are developed through research and development which also allow specialization in the functional design characteristics of products (Yalcinkaya et al. 2007). According to Lages et al. (2009), innovation increases flexibility in production and service delivery. Firms operate in unstable environments that may influence the outcome of activities. Managers need to ensure that the external forces do not hamper the profitability of business. Firms can maintain profitability by changing to suit the changing environment and also to resist the adverse impacts of these changes. Flexibility is therefore paramount to the success of business. Flexibility is the capacity of varying the processes to give a different output over a particular time period in the production cycle. A balance between the supporting systems and the business operations is maintained through flexibility. It also allows the business to adapt to the changes in the operating environment. It is the extent of change that a business is capable of accommodating in an unstable operating environment (Zhang et al. 2009). An innovative firm applies cost effective means to vary its production processes (Aboulnasr et al. 2008). Innovative firms also use different approaches in the production processes such as constantly adopting new production techniques that allow rebranding of products to satisfy the market demand as well as the constantly changing consumer preferences. One of the innovative production strategies is the production of goods with different sizes, which are sold at different prices for the high and low end markets (Kim & Huang 2011). Innovative business models are business approaches for managing innovation in the production process such as functional transformation whereby the firm can vary the technologies applied in production to accomplish maximum efficiency. The managers ensure that employees are capable of adopting fast to the changing technology (Story et al. 2009). Efficiency in the production process portrays the degree to which time and energy are well utilised in the accomplishment of tasks or the intended rationale. Innovation that increases efficiency in production allows the firm to apply resources precisely to produce the exact output that was intended without wastage, unnecessary expenses and effort. The product serves the needs of intended consumers hence maintains their loyalty devoid of regret. Contemporary firms’ success is founded on continuous innovations that are aimed at increasing productivity with minimal inputs. For example, firms that use innovative energy saving production processes are able to lower the cost of production of the same output that could be attained at a higher energy cost. Moreover, innovations lead to a reduction in the cost of inputs by establishing cheaper raw materials and processes. A competitive advantage is accomplished when a firm attains a capacity to develop vibrant capabilities (Yalcinkaya et al. 2007). The firm makes use of resources that offer it a sustainable competitive lead through constant adjustment of resource utilization. Innovations aimed at improving service quality help in maintaining competitiveness. Service quality can be used to measure how precise a service delivered by a firm corresponds to consumer expectations. Innovativeness in service delivery facilitates satisfaction of consumer needs while the firm maintains economic competitiveness. Satisfaction of customer desires is significant for a firm’s survival and performance. Innovations for quality improvement are accomplished through recognizing and constantly improving operational processes, discovering problems fast and systematically, developing valid and consistent service performance measures as well as measuring the level of consumer satisfaction (Lau et al. 2010). According to Zhang et al. (2009), new product development is significant in leveraging an organization’s capabilities with the view of declining product lifecycles. The products act as a new or better way out to customer problems. This further leads to transformation of the existing market as well as development of new ones. In a healthy competition, many firms engage in practices that are focused on placing them at an upper hand in terms of attracting and retaining consumers. A firm has to ensure that its products are up to date to avoid other innovators moving faster to bring new products in the market rendering its products obsolete; hence lowering profitability. Lee (2010) observes that firms also do not operate in isolation. Rather there exists significant inter-dependence in the supply chain and in case of complementary products. A firm’s end product may be a raw material for another. This means if the second firm is innovative in its production process, the firm providing materials will be obliged to ensure that it remains abreast with the new developments to ensure that it is able to supply the desired raw materials, otherwise the recipient firm may seek alternative sources of inputs. Complementary products compel producing organizations to maintain high levels of innovativeness since a product from one firm has to match with its corresponding part produced by another firm. The operating environment in such a situation is influenced by counterpart players and competitors in the market and therefore it is necessary for a firm to possess means of adapting to the changing environment (Rodriguez-Pinto et al. 2011). Conclusion A firm’s performance is dependent on product innovation that increases its market power as well as its capacity to cope with market conditions. Product innovation increases a firm’s leverage in a highly competitive market. It increases consumer loyalty and satisfies a wide range of consumer needs since they are presented with a variety of products to choose from. Innovative products earn a firm super profit in the short-run that declines over time as follower firms imitate the new product. Firms have to maintain innovativeness especially for complementary products that generate inter-dependence in the market. Product innovation also increases the capacity of a firm to adapt to a constantly changing environment and hence is significant for a firm’s survival. References Aboulnasr, K., Narasimhan, O., Blair, E & Chandy, R. (2008), “Competitive Response to Radical Product Innovations”. Journal of Marketing Vol. 72 pp. 94–110 Artz K. W., Norman, P. M., Hat?eld, D. E. & Cardinal, L. B. (2010), “A Longitudinal Study of the Impact of R&D, Patents, and Product Innovation on Firm Performance”, Journal of Product Innovation Management, Vol 27 pp.725–740 Kim, K. & Huang, S. (2011), “Winning strategies for innovation and high-technology products management”, Journal of Business Research, Vol. 64 pp. 1147–1150 Lages L. F., Silva, G. & Styles, C. 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