To Innovate or Imitate? Entry Strategy and the Role of Market Research
Published 10/1/2008
Author: Elie Ofek and Ozge Turut
View this content
Executive Summary
This research sheds light on a major dilemma a firm faces when contemplating entry into a market dominated by an incumbent. Such an entrant needs to decide what kind of product to develop and how aggressively to invest in research and development (R&D). One option is to attempt to develop a product similar to that which the incumbent offers—an imitation strategy. The other option is to attempt to develop a novel and superior product relative to what exists in the marketplace—an innovation strategy. In navigating this new product dilemma, the entrant needs to account for three critical factors: (1) R&D is uncertain, and the different entry strategies entail different development risks and costs; (2) there can be considerable upfront market uncertainty about the rewards, which affects the potential return to each of the entry strategies; and (3) there is competitive pressure; facing the threat of entry, the incumbent devises a response that will allow it to innovate and sustain industry leadership. The authors analyze this business context and offer important managerial guidelines. Specifically, they provide entrant firms guidance on which entry strategy to select, innovation or imitation, and discuss how this is based on market research that may have been conducted. In turn, incumbents are given advice on whether they can draw inferences about the market rewards from the entrant’s new product strategy; in other words, guidance on when they can free ride on the entrant’s market research efforts and when they should conduct their own market research. The conclusions account for how aggressively each firm should pursue development, yielding insights into the R&D investments each firm should make.
The authors briefly outline the main managerial implications. At best, imitation results in duopoly rewards, whereas being the only firm to successfully develop an innovation results in monopoly rents; thus, a key factor in understanding how firms should behave is related to the relative attractiveness of these two profit levels. The authors show that a change in the profit levels can trigger an opposite R&D response by the two firms; if the entrant pursues innovation, higher duopoly profits should prompt an incumbent (entrant) to increase (decrease) its R&D level; if the entrant pursues imitation, higher monopoly profits should prompt an incumbent (entrant) to increase (decrease) its R&D level. With the aid of these findings, the authors then establish how firms should behave when the rewards to new product introductions are uncertain. Under duopoly profit uncertainty, what matters is the upside potential of duopoly profits (i.e., how high are duopoly profits if the best-case scenario outcome materializes) relative to known monopoly profits. If the upside potential is sufficiently attractive, the entrant should conduct market research and base its decision to innovate or imitate on what it discovers. Consequently, the incumbent can forgo costly market research and make the following inferences: An imitating (innovating) entrant means that duopoly profits are high (low). Under uncertainty about innovation rewards (i.e., whether consumers will value the innovation and adopt it), if duopoly profits are attractive relative to monopoly profits, the entrant should always imitate. The incumbent needs to realize that it cannot infer anything from the entry strategy and should conduct its own market research to learn the innovation’s commercial value. Conversely, if duopoly profits are unattractive, the entrant should conduct market research and base its new product strategy on the information learned. Consequently, the incumbent can draw an accurate inference about innovation rewards from the innovation–imitation decision.
Biography
Elie Ofek is Associate Professor in the Marketing Department of the Harvard Business School. Elie’s research focuses on new product strategies in fast-changing, technology-driven business environments. He explores relationships between research and development and marketing decisions and is particularly interested in how firms integrate marketing input when they formulate innovation strategy. In addition, his research examines the implications of information technology on product offerings. His work has also appeared in Marketing Science and Management Science. He received his PhD in Business from Stanford University and holds an MA in Economics (Stanford University) and a BSc in Electrical Engineering (Technion). Before entering academia, he worked as a development engineer in the audio/video multimedia division at an IBM research center. At Harvard, he teaches an MBA elective and an executive education course on marketing of innovations.
Ozge Turut is Assistant Professor of Marketing in the Olin Business School at Washington University in St. Louis. Her research focuses on how firms make innovation decisions in the face of market uncertainty. She also studies the strategic role of marketing communications, such as preannouncements, at the front end of new product decision making. She teaches the core marketing course to undergraduate students. She received her PhD in Marketing from the Harvard Business School, her MBA from Carnegie Mellon University, and her undergraduate degree in Electrical Engineering from Bogazici University. Ozge held marketing positions at several high-tech firms in the semiconductor industry before entering academia.
J Research, Volume 45, Number 5, October 2008
View Table of Contents.