Raghunath Singh Rao, Rajesh Chandy, & Jaideep C. Prabhu
Executive Summary
New ventures in emerging industries live and die by their ability to introduce new products. New products critically impact such firms’ ability to garner resources for survival and growth.
Why are some new ventures rewarded more than others for their new product introductions? Many authors have noted that new ventures inherently suffer from a “liability of newness.” This liability may also rub off onto the products these firms introduce, causing uncertainty about their potential and lowering the rewards to their introduction. How are some new ventures able to overcome this liability?
The authors argue that the new ventures that gain the most from innovation are those that adopt strategies that give them legitimacy in the eyes of stakeholders. New ventures can gain legitimacy and overcome the liability of newness by creating associations with established entities; such associations can be internal or external to the firm. The authors test these ideas by examining the stock market gains of all products introduced between 1982 and 2002 by all public firms in the U.S. biotechnology industry. The results show that, all else being equal, new ventures that acquire legitimacy externally by forming alliances with established firms gain more from their new products than new ventures that do not form such alliances. Among new ventures that do not form alliances, those that acquire legitimacy internally by creating a history of product launches or by hiring reputed executives or scientists gain more from their new products that those that do not. Moreover, not all forms of internal legitimacy are created equal. A history of successful product launches (historical legitimacy) has the greatest impact on gains from product introduction, followed by the presence of executives (market legitimacy) and respected scientists (scientific legitimacy) on the board. Therefore, for firms that go alone, it pays more to have introduced a new drug before, followed by adding a reputed executive and then by adding a reputed scientist onto the firm’s board.
Finally, the authors find that though new ventures can gain from either external or internal legitimacy, the pursuit of external legitimacy by firms that already have internal legitimacy leads to lower rewards to innovation.
A key implication of this study for managers of new ventures is that they need not and should not duplicate the legitimacy gained through internal means with the legitimacy gained through alliances. The markets view such duplication as unnecessary and costly. Thus, if new ventures do not have internal legitimacy, they should form alliances. Conversely, if they have internal legitimacy, they should bring their products to market on their own steam.
Marketers have extensively studied the positioning of products. This research suggests that new ventures in emerging industries also need to position themselves to gain more from their new products. Given two products of the same quality, the product introduced by the more legitimate firm gains more. For new ventures facing intense competitive pressures and serious resource constraints, these gains could make the difference between life and death.
Biography
Raghunath Singh Rao is Assistant Professor of Marketing in the McCombs School of Business at the University of Texas at Austin. He previously taught at the University of Minnesota, where he received a master’s degree in Applied Economics and a PhD in Business Administration. His areas of research include issues in durable goods markets, competitive strategy, and consumers’ bounded rationality. He uses game theory, secondary data, and lab experiments to study these topics, and his work is currently under review at Marketing Science and Journal of Marketing Research.
Rajesh Chandy is the James D. Watkins Chair and Professor of Marketing in the Carlson School of Management at the University of Minnesota. His research has received several awards, including the Journal of Marketing Harold Maynard Award for contributions to marketing theory and thought, the American Marketing Association’s Early Career Award for Contributions to Marketing Strategy, and the MSI Alden Clayton Dissertation Award. Chandy teaches in the full-time MBA, part-time MBA, and executive education programs in the Carlson School of Management. His teaching awards include the Carlson School Outstanding Professor of the Year Award, the Carlson School Award for Excellence in Teaching, and the Outstanding Faculty Dedication Award. Chandy currently serves on the U.S. Commerce Secretary’s Advisory Committee on Measuring Innovation in the 21st Century Economy. He is also a member of the Academic Council of the American Marketing Association and the Knowledge Development Coalition of the American Marketing Association. Chandy received his PhD from the University of Southern California.
Jaideep C. Prabhu is Professor of Marketing in the Tanaka Business School at the Imperial College London and has previously been on the faculty at Cambridge University, Tilburg University, and University of California, Los Angeles. He has a BTech from the Indian Institute of Technology (New Delhi) and a PhD from the University of Southern California. He has taught and consulted with executives from ABN Amro, British Telecom, EDS, Egg, ING Bank, Nokia, Oce Copiers, Philips, Roche, and Xerox, among other companies in the Colombia, Finland, Germany, Netherlands, Portugal, Switzerland, the United Kingdom, and the United States. He has also consulted for the U.K. Government’s Department of Trade and Industry for whom he cowrote a white paper on innovation. He has recently been awarded a fellowship from the U.K.’s Advanced Institute for Management Research to work on a large project on the off-shoring and outsourcing of innovation by the world’s largest multinationals. His research interests include radical innovation and managerial learning, particularly in high-technology industries such as pharmaceuticals and e-banking.
Journal of Marketing, Vol. 72, No. 4, July 2008
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