Firm growth and innovation: Towards a typology of innovation strategy

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DOI: 10.5172/impp.2013.15.1.97
Abstract
«This article discusses innovation across the firm’s life cycle. By discussing how firms’ innovation decisions change over time and across the different stages of firm growth, we add to the literature on innovation and strategy by proposing a typology of innovation strategy. In this original contribution, innovation strategies are categorized in terms of the type of innovation (product and process) and its degree of novelty (incremental and radical). Crossing these decisions we identify four innovation strategies: product development; learning by experience; discovery; and restructuring. In our integrative view of technological innovation and firm growth, we propose that each of the four innovation strategies develop over the firm’s growth stages (start-up, expansion, maturity, diversification, and exit), therefore making a conceptual contribution to our knowledge on innovation strategy. We conclude by suggesting further research on this topic.
Volume 15, Issue 1, March 2013 INNOVATION: MANAGEMENT, POLICY & PRACTICE 97
Copyright © eContent Management Pty Ltd. Innovation: Management, policy & practice (2013) 15(1): 97–111.
There are many studies analyzing the impact of
innovation in firms’ performance (e.g., Lööf
& Heshmati, 2006; Thornhill, 2006) or the fac-
tors that have explanatory power to shape inno-
vation performance (e.g., Frenz & Ietto-Gillies,
2009; Frishammar & Hörte, 2005). In fact, firms
decisions with respect to innovation are influenced
by several factors. For instance, Duguet (2006)
found that strong diversity of knowledge sources,
accompanied by both formal and informal inter-
nal research and development (R&D), and vari-
ous kinds of spillovers are important for producing
radical innovation. On the other hand, the author
noted that all these factors are not statistically sig-
nificant in the case of incremental innovations,
where equipment goods and informal sources
of knowledge are important. Hall, Lotti, and
Mairesse (2009) found that product and process
innovation are influenced by the same group of
variables (firm size, R&D intensity, investment in
equipment), though with different impact sizes.
This stimulates a genuine interest in explaining
firms’ decisions to invest in innovative outputs,
in terms either of type of innovation (product
or process) or in terms of novelty degree (incre-
mental or radical), and their impact on firms’
performance (Duguet, 2006; Hall et al., 2009;
Vega-Jurado, Gutiérrez-Gracia, Fernández-de-
Lucio, & Manjarrés-Henríquez, 2008). Product
innovation is usually linked to strategic factors
and process innovation is more driven by mar-
ket pressures (Roper & Hewitt-Dundas, 2008).
In turn, radical innovation may be a means for
a new firm to enter a market, while incremental
innovations contribute to enhancing and sustain-
ing financial performance of successful radical
innovations (Iyer, LaPlaca, & Sharma, 2006).
Moreover, radical innovation is usually identified
as crucial to economic growth, having power to
create entire industries or to significantly alter
competition in an industry by bringing large
and incumbent firms to declining while project-
ing new and small firms to market leadership
(Chandy & Tellis, 2000).
In spite of these contributions on the drivers
and impacts of innovation on firms’ performance,
little is known about the relationship between
innovation strategy and firms’ growth trajectory.
The existing literature tends to study the relation-
ship between innovation and growth, analyzing,
in particular, the impact of innovation in some
indicators such as sales (e.g., Coad & Rao, 2008)
but it lacks in explaining the innovation decisions
as a comprehensive set of strategies that may vary
over a firms life. The existing attempts in pursuing
this issue mainly focus on the differences between
new (small) and incumbent (large) firms (see, e.g.,
Chandy & Tellis, 2000) and little is known about
innovation strategies among incumbents in dif-
ferent growth stages.
Firm growth and innovation: Towards a typology of innovation strategy
Vasco Eiriz, ana Faria* and natália BarBosa*
Department of Management, University of Minho, School of Economics and Management,
Braga, Portugal; *Department of Economics, University of Minho, School of Economics and
Management, Braga, Portugal
Abstract: This article discusses innovation across the firm’s life cycle. By discussing how firms’ innovation decisions
change over time and across the different stages of firm growth, we add to the literature on innovation and strategy by
proposing a typology of innovation strategy. In this original contribution, innovation strategies are categorized in terms
of the type of innovation (product and process) and its degree of novelty (incremental and radical). Crossing these deci-
sions we identify four innovation strategies: product development; learning by experience; discovery; and restructuring. In
our integrative view of technological innovation and firm growth, we propose that each of the four innovation strategies
develop over the firm’s growth stages (start-up, expansion, maturity, diversification, and exit), therefore making a con-
ceptual contribution to our knowledge on innovation strategy. We concluded by suggesting further research on this topic.
Keywords: firm growth, innovation, strategy, technological innovation, product development, learning,
restructuring
Vasco Eiriz, Ana Faria and Natália Barbosa © eContent Management Pty Ltd
INNOVATION: MANAGEMENT, POLICY & PRACTICE Volume 15, Issue 1, March 2013
98
a discussion of its conceptual contributions and
suggestions for empirical research on the topic.
Firms growth and liFe-cycle stages
The study of firm growth is a classic topic of
research in the management and economics lit-
erature. One stream of research of firm growth
attempts to characterize the patterns of orga-
nizational growth, leading to the identification
of firms’ life-cycle stages. In his seminal work,
Greiner (1972) proposed that organizations grow
through five evolutionary stages: creativity; direc-
tion; delegation; coordination; and collaboration.
A distinguished feature of Greiner’s model is that
after each evolutionary stage, there is a ‘revolu-
tion’ or ‘crisis’ that explains the emergence of the
following stage. That is, as organizations become
older, each growth stage becomes obsolete, the
organization enters into a period of crisis/revolu-
tion, and, consequently, it starts a new stage of
growth. For instance, after the creativity stage
based on frequent and informal communication,
entrepreneurial orientation, long hours of work,
promises of ownership benefits, and reactive
management, there is a crisis of leadership that
justifies the need for a new growth pattern based
on direction.
This contribution remained in the literature
as one of the most cited works, not only because
of its intuitive appeal but also because it offered
a robust explanation for the phenomenon of
growth with practical and theoretical implications
for several fields such as strategy, organizational
behavior, and entrepreneurship. In this view,
it can be said that this model has contributed
to understand not only growth at the firm level
but also how organizations innovate and evolve
throughout their life cycle. That is, Greiner’s
model helps to understand the dynamics of orga-
nizational innovation and change over time.
Greiner’s and other contributions on firm
growth from the 1970s onward contributed
for the popularization of growth stage models,
both in terms of practice and theory. In another
remarkable contribution, Hanks, Watson, Jansen,
and Chandler (1993) reviewed the literature on
growth and compared 10 life-cycle stage models.
While some models had a very small number
This article provides a contribution to fill this
gap by proposing an original typology of inno-
vation strategies and discussing how such strate-
gies may vary over the firms life cycle and, hence,
enlarging our understanding of firm’s innovation
strategy. Our aim is to discuss how firms’ choices
with respect to their innovation decisions change
over time and across the different stages of firm
growth in order to present an original typology
that links innovation decisions with firms growth
stages. We seek to propose a typology of innova-
tion strategies that stimulate the search of answer
for questions such as: what are the main choices
a firm has when taking decisions that put inno-
vation at the core of the firm’ strategy? How do
such strategic options vary across a firm’s tra-
jectory growth? More specifically, what are the
innovation strategies a firm may follow through-
out its life cycle? In this paper we attempt to
set out the conceptual underpinning for future
empirical exercise.
Existing evidence suggests that the deter-
minants and impacts of innovation vary across
firms (Coad & Rao, 2008; Love, Roper, & Du,
2009; Veugelers & Cassiman, 1999) but also
over the firms life cycle. Although empirical
evidence on the relationship between firm life
cycle and innovation is both scarce and incon-
clusive, there is anecdotal evidence showing
that mature firms are the most innovative in
intensive technology industries (e.g., Dewar &
Dutton, 1986; Chandy & Tellis, 2000), even
though Sørensen and Stuart (2000) found a neg-
ative relationship between maturity and innova-
tion novelty in semiconductors but a positive
one in biotechnology. Therefore the identifica-
tion of innovation strategies and the discussion
of their development over time and across the
firm’s growth stages will allow a better under-
standing of multiple innovation strategies across
growth trajectories.
The remainder of the article is organized as fol-
lows. Next section reviews the literature on firm
growth stages. Then, section ‘Technological inno-
vation’ discusses technological innovation. Section
‘Integrating innovation and firm’s growth stages
proposes a typology of innovation strategy over
the life cycle of firm growth. The article ends with
© eContent Management Pty Ltd Firm growth and innovation
Volume 15, Issue 1, March 2013 INNOVATION: MANAGEMENT, POLICY & PRACTICE 99
they are concerned with the ‘how’ question, that
is, their focus is on the processes of growth and
the internal adaptations a firm had to do in order
to attain growth (Dobbs & Hamilton, 2007).
Another interesting limitation of the clas-
sic stage models arises when analyzing start-up
businesses. For instance, Churchill and Lewis
(1983) developed a model with five stages that
distinguishes three stages before growth and
maturity: existence; survival; and success. That
is, the start-up stage may be analyzed in more
detail with several smaller stages during the pro-
cess of venture creation and development that
includes, for instance, opportunity development,
opportunity recognition, and opportunity evalu-
ation (Ardichvili, Cardozo, & Ray, 2003). These
limitations were also captured by Garnsey, Stam,
and Heffernan (2006) when studying growth
paths of new firms from UK, Germany, and
The Netherlands. In their original study, based
on a Penrosean view of growth (Garnsey, 1998;
Penrose, 1995), the authors applied a sequence
analysis of the firms’ growth trajectory during
early life and found that new firms’ growth is
‘non-linear and prone to interruptions and set-
backs to an extent overlooked in the literature’
(Garnsey et al., 2006, p. 1).
Regarding these and other limitations, Phelps,
Adams, and Bessant (2007, pp. 2 and 3) noted
that stage ‘models represent reductions of large
amounts of complex, voluminous data into
manageable chunks thus permitting the oppor-
tunity, by the allocation of data into sets, for
sense-making through configuration or pat-
tern recognition’. They linked the literature on
firm growth with the literature on knowledge
and learning, stressing the importance of a firm
to absorb and use new knowledge through its
organizational growth.
Growth is therefore a more complex phenom-
enon than it appears at first glance. Its complex-
ity makes the choice of empirical measures for
growth quite challenging. The natural choice
is classic performance indicators such as sales,
number of employees – or less frequently – total
assets, since these indicators are not method-
ologically controversial and data tend to be avail-
able. However, in another view of growth, some
of stages (Smith, Mitchell, & Summer, 1985,
identify three stages), others had a large number
(Adizes, 1989, identifies 10 stages). The dimen-
sions they used to compare life-cycle stage charac-
teristics were the following: age; size; growth rate;
structural form; formalization; centralization; and
business tasks.
Using cluster analysis in a sample of 126 high-
tech organizations, Hanks et al. (1993) derived a
configuration with four growth stages: start-up;
expansion; maturity; and diversification. In their
analysis, start-up firms are young, small, with
simple organizational structures. When expand-
ing, firms become older, larger and with more
complex structures. In this stage, the firm is
still very centralized, while the simple structure
evolves toward a functional one. In turn, mature
firms are larger, more formal with less centraliza-
tion. Finally, diversified firms are still larger, with
structures based on divisions, with more organi-
zational levels.
In spite of this contribution, it could be argued
that many firms do not opt for diversification.
Another interesting point in the configuration
proposed by Hanks et al. (1993) is the absence
of decline, a stage that is referred to in the lit-
erature by other authors (Flamholtz, 1986; Miller
& Friesen, 1984). Firstly, as Hanks et al. (1993,
p. 11) argue ‘the impact of decline on organiza-
tion structure and systems is far less predictable
than changes associated with growth’. That is,
their focus seems to be on growth, not on decline.
Moreover, they also note that decline may not be
a sequential stage as it can occur at any stage of
the firm’s life cycle.
Assuming that decline – a stage of growth in
several models – may occur at any stage of the life
cycle, then, it can be concluded that an impor-
tant limitation of stage models is that they do not
contemplate growth trajectories that do not pass
through all the stages or that do have untypical
trajectories (O’Farrell & Hitchens, 1988). That
is, it is not clear whether passage through all stages
is necessary or certain, or whether some stages
may be avoided. This leads us to conclude that
the literature on growth stages is fundamentally
descriptive in the sense that stage models do not
attempt to explain what causes growth. Rather,
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INNOVATION: MANAGEMENT, POLICY & PRACTICE Volume 15, Issue 1, March 2013
100
In a recent review on small business growth,
Dobbs and Hamilton (2007) analyzed 34 stud-
ies published since the mid 1990s, and con-
cluded that these studies have featured over 30
explanatory variables that may be categorized
in the following groups: management strate-
gies; characteristics of the entrepreneur; envi-
ronmental/industry factors; and characteristics
of the firm. The variables were: (i) management
strategies: firm’s growth objective, employee
recruitment and development, product mar-
ket development, financial resources; interna-
tionalization and business collaboration; and
flexibility; (ii) characteristics of the entrepre-
neur: motivation, education, experience, and
size of the founding team; (iii) environmental/
industry-specific factors such as demand size
variations, cost and availability of resources,
competition, position of large firms; and (iv)
firm-specific characteristics such as age, size,
capacity and technology choices.
More recently, Goddard, Tavakoli, and Wilson
(2009) have also reported their findings on the
sources of variation in profitability and growth in
European manufacturing firms from 11 countries.
Their analysis showed the importance of the coun-
try, industry, corporate group and firm effects on
profitability and growth, and pointed out that the
firm-level effects (organizational resources and
management practices) were the most important
in explaining the variation in performance. In a
similar vein, Barbosa and Eiriz (2011) added a
regional dimension to the empirical analysis of the
process of firm growth and concluded that region-
specific factors such as: the degree of a regions
economic diversification; labor characteristics; or
local competition engender differences in the way
firms grow.
To sum up, growth and organizational dynam-
ics is a classic theme of study that offers immense
opportunities of researching topics such as: the
factors of growth; processes and stages of growth
and development; and consequences and results
of such growth. This article adds to the study of
the firm’s growth by linking the firms growth
stages with technological innovation and explor-
ing whether innovation strategies vary over the
firm’s life-cycle stages.
other performance indicators such as: product
portfolio; market share; value-added; and
profits, several other financial indicators, or the
rate of innovation may also be used. This leads
us to question whether the use of these perfor-
mance indicators does not generate other growth
trajectories or models. To sum up, in spite of the
use of some common indicators such as sales and
employees, it is not easy to choose the best mea-
sure for growth. Perhaps, when choosing mea-
sures, researchers, managers and policy makers
should have in mind the aims of their analysis.
This justifies, for instance, that the number of
employees is an important measure for policy
makers, while financial measures may be an
important one for investors.
It is therefore not surprising, that one
should recommend the use of several mea-
sures. Delmar, Davidsson, and Gartner (2003)
assumed that firm growth is a heterogeneous
phenomenon and applied 19 different measures
of firm growth (such as relative and absolute
sales growth, relative and absolute employee
growth, organic growth vs. acquisition growth,
and the regularity and volatility of growth
rates over a 10-year period) to a population of
Swedish firms and identified different types of
firm growth patterns.
Conversely to life-cycle stage models, another
important stream of research on firm growth
attempts to explain what causes growth. It
identifies to the firm both internal and external
factors that have power to explain its growth.
This stream of research was mostly stimulated by
Gibrat’s (1931) seminal work which states that
growth is a random process that is independent
from firm’s size, meaning that both small and
large firms have equal probabilities of growth.
This result became known as Gibrat’s law and
it has been extensively scrutinized. Empirical
evidence provided by a large number of recent
studies (e.g., Almus & Nerlinger, 2000; Barbosa
& Eiriz, 2011; Geroski, 2000; Parker, Storey, &
Witteloostuijn, 2010; Petrunia, 2008; Santarelli,
Klomp, & Thurik, 2006) casts doubt on the
validity of the Gibrat’s law, suggesting the need
to take into account firm-, industry- and region-
specific factors to explain firm’s growth.
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Volume 15, Issue 1, March 2013 INNOVATION: MANAGEMENT, POLICY & PRACTICE 101
Cefis & Ciccarelli, 2005; Coad & Rao, 2008;
Geroski, 1989; Huergo & Jamandreu, 2004; Love
et al., 2009).
Early contributions on the determinants of
innovation suggest that product innovation
is more important in the early phase of the
life cycle of the industry and process innova-
tion becomes more important in the mature
phase (e.g., Utterback & Abernathy, 1975).
When a product is introduced there is consid-
erable uncertainty about user preferences. As a
result, many firms producing different variants
of the product enter the market and competi-
tion focuses on product innovation. As the
dominant design stabilizes, firms get more con-
cerned with efficiency aspects, therefore pro-
cess innovation tends to be the focus of firms’
innovation strategies.
Klepper (1996) further shows that firms will
tend to exploit process innovations through
their own output more heavily than product
innovations due to appropriability problems.
Consequently, innovation process is an increasing
function of firm size. Second, firms possess dif-
ferent types of expertise that lead them to pursue
different types of product innovations.
Recent studies show that there is significant
complementarity between product and process
innovation (Cefis, Rosenkranz, & Weitzel 2009;
Lager, 2002). For example, process innovation
has been found as important even in industries
where product innovation is essential such as the
pharmaceutical industry, which is explained by
the growing complexity in the production pro-
cesses and by market pressures (Pisano, 1997).
A result that had already been noted by Link
(1982) who found that greater product complex-
ity increases the fraction of effort dedicated to
process innovation.
Whereas some firms pursue incremental
innovation, other firms have grown through
radical innovation. As for why and who does
radical and incremental innovation theory has
presented some conflicting predictions. Some
studies argue that when innovation is drastic
and uncertain, the R&D competitor has actu-
ally greater incentive to invent and patent the
drastic innovation before the incumbent, which
technological innovation
Technological innovation can be characterized
in terms either of type of innovation, i.e., prod-
uct or process, or in terms of novelty degree,
i.e., incremental or radical. A product innova-
tion corresponds to the generation of a new pro-
duction function which includes the possibility
to differentiate an existing product. A process
innovation can be viewed as an outward shift of
an existing supply function, which corresponds
to lower variable costs in the production of an
existing product or service, and is therefore a
productivity increase (Cohen & Klepper, 1996;
Koellinger, 2008).
Both types of innovation can be classified in
terms of novelty, where radical innovations cor-
respond to big changes, and incremental innova-
tions fill in the process of change continuously
(Schumpeter, 1934). From the marketing litera-
ture perspective, incremental innovation refers to
product line extensions or adding modifications
to existing products. As such, managers design
such products to satisfy a perceived market need
and expect that products and services to meet
these needs would be developed in a relatively
short period of time (Iyer et al., 2006). On the
other hand, radical innovations refer to the extent
to which innovation is based on substantially new
technology relative to existing technology. These
innovations are market-based in which, through
adoption, a small early segment of adopters allow
the firm to develop the product and compete in
the market, i.e., marketers of established products
find the innovation disruptive in the long term
(Iyer et al., 2006).
In any case, the payoffs of innovation can
lead to output growth and thus revenue growth,
although through different mechanisms. As such,
besides the effects on the supply side, innova-
tion can lead to increased competitive advan-
tage through a position of temporary monopoly
power and profit and other relevant advantages
through learning, economies of scale and repu-
tation (Cefis & Ciccarelli, 2005; Kazanjian &
Rao, 1999). Indeed, innovation is an important
means for firms to enter into the market, while
innovative firms are more likely to grow and
survive than non-innovators (Audretsch, 1991;
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102
innovations were larger than spillovers associ-
ated with process innovations. When considering
the novelty of innovation, most studies suggest
that radical innovation contributes more firms
productivity and growth. Duguet (2006) found
that radical innovations are the only significant
contributors to total factor productivity (TFP)
growth in French manufacturing. Marsili and
Salter (2005) found that the more novel the
innovation, the greater the concentration of
the returns.
However, we should note that the relation-
ship between innovation and performance is
not necessarily unidirectional. For example,
previous investments in technology and inno-
vation increase the learning capability of firms
and their absorptive capacity as well as the avail-
ability of complementary resources. Also, firms
that perform better may have easier access to
capital to finance further investments in inno-
vation. Koellinger (2008) concludes that the
relationship innovation performance depends
on both firm-internal and market-specific fac-
tors. Also, Li and Atuahene-Gima (2001) found
evidence that both environmental (e.g., insti-
tutional support and turbulence) and relation-
ship-based strategies (e.g., strategic alliances for
product development and political network-
ing) were important to understand the link
between innovation, namely product innova-
tion, and performance.
integrating innovation and Firms
growth stages
Traditionally, the literature on technology and
innovation focus on patterns of innovation within
the life cycle of a technology. Recently, Conway
and Steward (2009) reviewed several models
on the evolution of technology and, following
Anderson and Tushman (1991), concluded that
the understanding of technology cycles has several
management implications. In particular, technol-
ogy cycles allow managers to view their industry
from a historical and temporal perspective, and
to compare the impacts of various patterns of
innovation.
In their review, Conway and Steward (2009)
identified and reviewed the following models on
is explained by the Arrow (1962) effect or the
substitution in profits effect (Ceccagnoli, 2009;
Reinganum, 1983). On the other hand, other
studies present a rationale for the persistence of
monopolistic positions (Beath, Katsoulacos, &
Ulph, 1987; Etro, 2004).
Contributions from the management litera-
ture suggest that new entrants gain the most with
disruptive strategies, while current incumbents
mostly follow incremental or continuous innova-
tion (Guan, Yam, Tang, & Lau, 2009; Iyer et al.,
2006; Varadarajan, 2009). New entrants adopt-
ing the path of incremental innovation, espe-
cially through competitive benchmarking and
leveraging available market-sourced technolo-
gies, do not stand to gain competitive advantage.
Incumbent advantages on technology as well
as organizational knowledge and skills may far
exceed those of the new entrants. As a result, new
entrants may be able to gain market share only
from the market laggards rather than the market
leaders (Iyer et al., 2006). However, this conven-
tional wisdom about inertia-prone incumbents,
which suggests an inability or unwillingness of
incumbents to introduce radical innovations,
may be significantly moderated by firm-specific
characteristics (Chandy & Tellis, 2000; Hill &
Rothaermel, 2003).
Industry-specific characteristics can be seen
as an important driver of innovation. Industries
with greater aggregate levels of R&D intensity
are home to higher rates of firm-level innova-
tion (Thornhill, 2006) and, though innovation
is more common when industry dynamism is
high, innovative firms are likely to enjoy revenue
growth, irrespective of the industry in which they
operate. However, evidence also shows that strong
heterogeneity is present within industries (Kirner,
Kinkel, & Jaeger, 2009).
The impact of innovation on firms’ perfor-
mance and growth can vary across different types
of innovation. For example, several studies have
found that process innovation contributes more
to productivity increase than product innova-
tion (Hall et al., 2009; Huergo & Jamandreu,
2004; Parisi, Schiantarelli, & Sembenelli, 2006).
On the other hand, Ornaghi (2006) found that
knowledge spillovers associated with product
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Volume 15, Issue 1, March 2013 INNOVATION: MANAGEMENT, POLICY & PRACTICE 103
context implies that the firm uses the same
technology to diversify its product markets.
In fact, it is important to consider that when
a firm diversifies, in this context such a diversi-
fication should be made around the same tech-
nology. Otherwise, if the firm diversifies for
new product markets. That are not technology-
related with the existing technology, then the
firm is probably entering new industries. Thus,
our analysis assumes that different types and
degree of innovation novelty occur within the
same industry in which the firm is a start-up
or an incumbent. Our discussion does not con-
template innovations that have implications for
other industries, leading firms to move from an
industry to another or to diversify their busi-
ness. This is important to be done as a way to
control for industry-specific effects.
Secondly, it should be noted that the exit
stage is more complex than decline. That is, in
our view, decline is only one form of exit. When
a firm enters a period of decline, there is gener-
ally an incremental reduction of sales. However,
in other circumstances, exit may be impelled by
financial difficulties or bankruptcy. Neither are
necessarily a consequence of market decline. It is
also worth to mention other forms of exit such
as selling the firm or an initial public offering. In
these two cases, the exit of the current owner of
the firm (not the exit of market) as a consequence
of the firm’s success means that the firm needs to
access other resources to implement more ambi-
tious growth strategies.
Thirdly, different types of innovation exhibit
different impacts on firms productivity and
growth. In some cases, innovation increases
efficiency mainly through a reduction of labor
inputs. In others, innovation raises productiv-
ity mainly through an expansion of output.
Accordingly, product innovation is more likely
when a firm enters the market and needs to dif-
ferentiate its offer from incumbents than when
a firm operates in the market for a long time.
For innovating firms, innovation provides the
possibility to develop new products with more
value-added at lower costs. This is also the focus
of firms’ strategy when they become mature and
start diversifying their products as a means to
the evolution of a technology: (i) the technol-
ogy cycle model (adapted from the product life
cycle model of Levitt, 1965); (ii) the technology
S-curve model (Foster, 1986); (iii) the product-
process cycle model (Abernathy & Utterback,
1978; Utterback & Abernathy, 1975); (iv) the
dominant design model; and (v) the diffusion
curve model (Rogers, 1962). In spite of these
major contributions on the life cycle of a tech-
nology, little is known on the patterns of innova-
tion over the life cycle of a firm. There are several
models explaining how technology develops
over time but our understanding on the evolu-
tion and patterns of innovation throughout a
firm’s growth stages is an unexplored topic that
deserves attention.
This is an important topic with major theo-
retical and practical implications for innova-
tion and strategic management at the firm level.
Technological innovation is a critical variable that
not only helps to explain firm growth but is also
a major area that deserves managers’ attention
regarding their strategic decisions over the life
cycle of their firms.
Our proposal on the integration of techno-
logical innovation and growth is original because
it focuses on innovation among incumbents
and across firm’s growth stages. In this sense, it
departs from the conventional approach, which
looks at innovation differences between new
(small) and incumbent (large) firms, neglect-
ing that incumbents may pursue heterogeneous
innovation strategies. In this integrative view,
our configuration of the firm’s life cycle identi-
fies the growth stages proposed by Hanks et al.
(1993), and added the exit stage. That is, when
managing innovation in a firm, one should bear
in mind the following growth stages: (i) start-up;
(ii) expansion; (iii) maturity; (iv) diversification;
and (v) exit. In turn, as we have discussed before,
innovation decisions are classified in terms of
type (product vs. process) and degree of novelty
(incremental vs. radical).
For our purpose of understanding innova-
tion management and strategy over the firms
life cycle, some precautions need to be raised
regarding to the adopted stages. Firstly, it is
important to clarify that diversification in this
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INNOVATION: MANAGEMENT, POLICY & PRACTICE Volume 15, Issue 1, March 2013
104
often it changes the traditional business model
of the firm. In fact, radical innovation can
change the entire shape of industries and it could
make the difference between survival and exit for
many firms. The dynamic nature of radical inno-
vations fosters incumbents to not neglect it over
their growth cycles.
In order to integrate technological innovation
and firms’ growth stages, we defined four innova-
tion strategies, resulting from the crossing of types
of innovation (product and process) and degree
of innovation (incremental and radical). Figure 1
identifies these four innovation strategies and
shows that they may occur over time throughout
the stages of firm growth. This implies that each
of the four strategies may be developed differently
in each stage of growth.
Product development
This strategy occurs when firms innovate their
products incrementally. Since incremental inno-
vation is more common than radical innovation,
it is expected that product development and
overcome difficulties in expanding their busi-
ness. However, product innovation is unlikely
when the firm is expanding its existing business
because the focus of managers is on the satisfac-
tion of high market demand. Regarding process
innovation, as it was discussed in the section
‘Technological innovation’, the probability
of process innovations tends to be high in the
mature and exit stages.
It is also worth to note that incremental inno-
vations are more likely than radical ones. Since
change is always present in the daily life of a
firm, then, it could be said that there is always
some kind of innovation, generally incremental
in its degree of novelty. Moreover, incumbent
firms tend to solidify their market positions by
adopting incremental innovations. Introducing
a radical innovation could imply competi-
tion with existing products or processes, erod-
ing the incumbent’s economic benefits from
past innovations.
On the other hand, radical innovation can be
less frequent but its effects are long lasting and
FigurE 1: typology oF innoVation stratEgiEs
Product
development
Learning by
experience
Discovery Restructuring
Te of innovation
Degree of novelty
ProcessProduct
Incremental
Radical
Start-up
Expansion
Maturity
Diversification
Exit
Staes of fir rowthgmg
yp
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Volume 15, Issue 1, March 2013 INNOVATION: MANAGEMENT, POLICY & PRACTICE 105
knowledge. Such a tacit knowledge cannot be
clearly delimited implying that it is probably
more difficult to transfer between organizations
and employees. In these leaning processes, the
literature on organizational learning stresses the
importance of both the intra and inter-organiza-
tional learning processes (Easterby-Smith, Lyles,
& Tsang, 2008; Holmqvist, 2003). When learn-
ing results from experience, this implies that the
degree of novelty is often incremental with con-
sequences in the way workers and organizations
design and implement their processes. Whether
learning by experience is a continuous and simi-
lar process throughout the firms life cycle or
there are important differences across the stages
of firm’s growth is a question that deserves to be
analyzed empirically.
Discovery
A discovery happens when a firm creates a
new product based on a radical innovation. It
is not very common for firms to discover dis-
ruptive technologies that allow a radical inno-
vation in their products. Even so, this can
happen particularly when there are technologi-
cal discontinuities.
Tushman and Anderson (1986) analyzed the
patterns of technological change and the impact
of technological breakthroughs on environmental
conditions and concluded that firms that initiate
major technological changes grow more rapidly
than other firms. Therefore, since major techno-
logical changes improve the rate of growth, it is
expected that the discovery strategy contributes
to growth.
One of the main questions raised by our
proposed strategy called discovery is which
conditions contribute for radical innovation
of products. A recent contribution by Verganti
(2008) emphasizes the role of organizational fac-
tors in developing discoveries. Specifically, he
proposed a strategy aiming ‘to radically change
the emotional and symbolic content of products,
i.e., their meanings and languages, through a
deep understanding of broader changes in soci-
ety, culture and technology’. In this view, innova-
tion is pushed by a firm’s vision about possible
new products. Thus, such a radical innovation
learning by experience are also more common
than discovery and restructuring.
Product development is a critical issue for
management and innovation, especially in tech-
nology driven industries. Cooper (1979) found
that the most critical determinants of new prod-
uct success are the following: having a product
unique or superior in the eyes of the customer;
having marketing knowledge and proficiency;
having technical and production synergy and
proficiency; avoiding markets in which many
new products are introduced; being in a high
need, high growth, large market; avoiding pricing
the product higher than competitive alternatives;
having marketing and managerial synergy; and
avoiding markets which are very competitive and
where customers are very satisfied. Page (1993)
and Griffin (1997) focused on the number and
types of activities that organizations perform
during the new product development process
and the relationships between such activities and
new product performance. In spite of this and
other contributions from the product develop-
ment literature for our current knowledge on the
factors, practices and characteristics of product
development (see Krishnan & Ulrich, 2001, for
an extended survey on product development), we
still need to understand whether such features
vary across the firm’s life cycle and which main
features of firms growth stages favor product
development. That is, to what extent product
development is a strategy that may be formu-
lated and implemented differently according to
the firm’s life cycle is a question that requires
empirical studies.
Learning by experience
Through incremental innovation in their pro-
cesses, firms learn by experience. This strategy
implies knowledge accumulation resulting from
the firm’s experience with existing technologies,
processes, markets, and people, which may allow
firm to evolve over the growth stages.
Learning may occur by the accumulation
of tacit or codified knowledge (Nonaka, 1991;
Nonaka & Takeuchi, 1995). By learning from
experience we mean that there is slow accu-
mulation over time of predominantly tacit
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INNOVATION: MANAGEMENT, POLICY & PRACTICE Volume 15, Issue 1, March 2013
106
Restructuring
When firms change their processes by a radi-
cal innovation, they are restructuring their
organizational processes. Similarly to the ‘dis-
covery strategy’, restructuring is not so com-
mon as product development and learning by
experience since it implies a radical innovation.
However, when it occurs, such an innovation
takes place in the firm’s processes leading to its
restructuring in areas such as information sys-
tems, production, market research, or even in
organizational structures.
That is, in the organization there are a large
number of areas that may be restructured. For
instance, restructuring is a common strategy
in diversified firms when they need to balance
their portfolio of businesses meaning that may
be forced to divest or even to close some busi-
ness units (Hoskisson, Johnson, & Moesel,
1994). In this perspective, it is expected that a
restructuring strategy may be more common in
the mature or diversification stages than in the
start-up stage.
Restructuring may imply mergers (e.g.,
Gaughan, 2010), spin-offs (e.g., Seward & Walsh,
1996), or even subcontracting (e.g., Kimura,
2002). Restructuring may also involve activities
and routines to improve organizational respon-
siveness. For instance, downsizing and reengi-
neering processes may be considered as forms of
restructuring aiming to respond to environment
and/or organizational changes such as market
competition, demand or, among others, ineffi-
ciency of costs (e.g., Laett, Baker, Halverson, &
Aird, 1997).
Regarding our proposed model, assuming
environment stability, it is expected that times of
decline and maturity will probably favor restruc-
turing, while such an innovation strategy will be
probably less common in other growth stages,
reinforcing our main argument that firms may
pursue different innovation strategy over their
life cycle.
Each of these innovation strategies is likely to
be developed and managed differently in each
stage of firm growth. At the end, this would
imply that firms have 20 different options
regarding innovation strategies, meaning that,
may occur not only in technology but also in
the meaning associated to products. He exempli-
fies such an innovation with Italian creativity in
design such as the case of ‘playful, colorful and
metaphoric kitchenware, with corkscrews shaped
like dancing women or parrots and orange
squeezers shaped like Chinese mandarins’ and
noted that ‘this was a breakthrough change in
what kitchenware meant for people: from simple
kitchen tools to “transitional objects”, i.e., objects
of affections that talk directly to the child that is
still living inside each adult’. According to this
view, a strategy based on discovery should involve
the firm’s interaction with other actors such as
designers, firms in other industries, suppliers,
schools, artists, and media to propose new visions
and meanings for products. Thus, the access to
knowledge sources both internal and external
is a critical factor in promoting discoveries. For
instance, start-ups may enter the market with a
discovery, yet in order to be able to maintain an
innovation leadership and to face competition,
they will need to develop other competencies at
the firm level and/or create alliances with other
firms to expand market share. Therefore, the
access to external knowledge sources may become
a critical factor in the development of innovation
strategy in later stages of the firm life. On the
other hand, the incumbent firm may also need
to form alliances in order to be able to maintain
its R&D productivity and, hence, to develop its
innovation strategy.
In a similar vein, Chandy and Tellis (2000)
have argued that incumbents may have orga-
nizational climates that resemble those usually
found in start-up firms that have introduced
radical innovations, suggesting that discovery
is an innovation strategy to be likely pursued
by incumbents in different growth stages. Hill
and Rothaermel (2003) have also pointed
out that firm’s history matters, arguing that
accumulated organizational and technologi-
cal capabilities derived from prior successful
radical innovation may help to pursue a dis-
covery. This suggests that this firm’s innovation
strategy may vary over the firm life cycle, even
though the likelihood might be different at
each growth stage.
© eContent Management Pty Ltd Firm growth and innovation
Volume 15, Issue 1, March 2013 INNOVATION: MANAGEMENT, POLICY & PRACTICE 107
favor each innovation strategy in each growth
stage. By intersecting empirical variables in
Table 1 with the identified innovation strate-
gies and stages of firm growth in Figure 1, we
are able to empirically assess what are the main
firm- and industry-specific factors at work in
shaping firms’ innovation strategies.
The perceived industry-specific incentives of
innovation are driven, among other factors, by
the degree of concentration and the rate of entry
at industry level. In industries where the entry of
new firms is relatively easy, the incumbents with
market power will most likely invest in incremen-
tal innovation in order to benefit from the exten-
sion of existing competitive advantage to new
products or processes. However, under conditions
of demand uncertainty, those incentives may be
mitigated due the possibility of cannibalizing the
actual stream of profit from their existing prod-
ucts. This is particularly true when firms invest
for instance, product development (or any
other of the remaining three strategies) would
have different probabilities of occurring and
different characteristics in each firms growth
stage. That is, in spite of our speculation that
the four proposed strategies may be split in 20
options, it is beyond the scope of this paper to
identify and discuss 20 options because such
a discussion would it be only feasible with
empirical support.
It is also important to mention that, in our
view of the proposed typology, the four innova-
tion strategies are not mutually exclusive, mean-
ing that a firm may develop more than one option
at the same time. For instance, it is likely that
product development and learning by experience
occur at the same time in a give growth stage.
As we have said before, to assess whether
there are significant differences of each inno-
vation strategy over time throughout the firm’s
life cycle, the patterns of strategy development
should be empirically investigated. For instance,
as we have seen before, previous related stud-
ies suggest that product development is more
important in the early stages of firm growth. We
also expect that learning by experience is stron-
ger in the maturity stage, while discovery may
promote diversification around a given tech-
nology. In the decline stage, it may be expected
that a firm follows some form of restructuring.
However, we believe that we can always identify
enough exceptions to these arguments to make
the research on innovation strategies over the
firm’s life cycle an interesting and fruitful theo-
retical and empirical research.
In order to analyze how each of the pro-
posed four innovation strategies are developed
and managed in each stage, there are a set of
variables that may have power to explain firm’s
choices on technological innovation across
its life cycle. These variables can be classified
into two groups, namely the characteristics
of the firm and industry-specific characteris-
tics. Table 1 lists these variables that are likely
to shape the perceived incentives to innovate.
These variables are also helpful in characterizing
each growth stage, and, more importantly, to
identify firm- and industry-specific factors that
taBlE 1: Explanatory VariaBlEs oF tEchnological
innoVation across thE Firms liFE cyclE
Dimension Variables
Firm Age
Size (sales, employees, assets, market
share, capacity, profits)
Growth rate (relative and absolute,
regularity and volatility)
Degree of organizational formalization
Degree of organizational centralization
Absorptive capacity
Product portfolio
Productivity
R&D effort
Rate of innovation
Technology choices
Location
Industry Demand
Costs
Appropriability regime
Competition degree
Availability of resources
Position of large firms
Degree of concentration
Rate of entry
Based on Delmar et al. (2003) and Dobbs and Hamilton (2007).
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INNOVATION: MANAGEMENT, POLICY & PRACTICE Volume 15, Issue 1, March 2013
108
have to be surveyed over time to provide robust
empirical evidence. Moreover, the clear identifica-
tion of firms’ decisions with respect to innovative
output and the lack of mutually exclusive innova-
tion strategies raise important empirical difficul-
ties that have to be suitably solved.
The second major topic of research relates
to changes in a firms’ innovation strategy over
time and across firm’s growth stages. Four cen-
tral questions can be raised: do market pioneers
persistently develop and implement discoveries
or do they tend to relocate their strategic devel-
opment toward product development or learning
by experience? Do pioneers and early and late
followers develop similar patterns of innova-
tion strategy? In what extent is innovation strat-
egy shaped by the firms growth stage? And, to
what extent is the firm’s growth influenced by its
innovation strategy?
The development of innovation strategy over
the life cycle is also strongly calling for statisti-
cal validity and robust empirical evidence. The
most challenging issue is to identify causality
between innovation strategies and firm’s growth
stages. Some studies suggest that innovation strat-
egies based on incremental innovations contrib-
ute more to cumulative efficiency gains over time
than other type of innovation strategies. But, oth-
ers find that innovation strategies based on radi-
cal innovation contribute more to firms’ growth.
On the other hand, the perceived incentive and
conditions to develop a specific innovation strat-
egy may vary over time and across the stages of
firm’s growth, as illustrated in Figure 1. To dis-
close causality and to find robust empirical evi-
dence, researchers need to have access to detailed
firm-level data on firms’ innovation strategies,
firm- and industry-specific characteristics over an
extended time span.
The study of the characteristics and processes
of innovation strategy recommends also the in-
depth study of individual firms developing each
innovation strategy proposed in this article. For
instance, to what extent each strategy is differ-
ently managed and implemented in different
stages of growth? Could it identify different
forms of restructuring, discovery, learning by
experience, or product development along the
on radical innovation as it implies competition
with exiting products. For that reason, start-up
firms have higher marginal incentive than incum-
bent firms to develop radical innovation in the
short run.
On the side of firm-specific characteristics,
the conventional wisdom that firms have dif-
ferent knowledge stocks and R&D capabilities
which in turn will allow for different innovation
strategies (see, e.g., Etro, 2004) can be assessed
through variables such as R&D effort, rate of
innovation or absorptive capacity. Moreover, het-
erogeneous firms with respect to size and age (at
different stages of growth) may also have different
opportunities to develop and implement an inno-
vation strategy as they have dissimilar financial
capabilities to do so (see, e.g., Chandy & Tellis,
2000). Therefore, firm-specific variables are rel-
evant in assessing firm’s growth stage and hence
in understanding firm’s innovation strategy over
its life cycle.
conclusion and Further research
By combining firms’ decisions with respect to
innovative output, in terms either of type of
innovation or in terms of novelty degree, and
firm’s growth stages, this article provided an
original view on innovation strategy. Apart from
identifying the chief features of each innova-
tion strategy, we argue that distinct patterns of
strategy development are likely to emerge over
time and across firm’s growth stages. Therefore,
the contribution of our article rests in set-
ting out the conceptual foundations for future
empirical research.
In order to test the proposed typology on
innovation strategy over the firm’s life cycle,
empirical research in two major topics needs to
be carried out. These topics are the determinants
of innovation strategy and the development of
innovation strategies over time across the firm’s
life cycle.
Regarding the determinants of innovation
strategy, a key issue is to blend the determinants
of firms’ decisions with respect to innovative out-
put, in terms either of type of innovation or in
terms of the degree of novelty. Those decisions
are the main drivers of innovation strategies and
© eContent Management Pty Ltd Firm growth and innovation
Volume 15, Issue 1, March 2013 INNOVATION: MANAGEMENT, POLICY & PRACTICE 109
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would be recommended to carry out longitudinal
case studies involving firms in different stages of
their life cycle. Clearly, these empirical-oriented
avenues for research are beyond the scope of
this paper.
In spite of this limitation, this article pro-
vided an original view on innovation strategy that
deserves to be tested and developed accordingly
to the empirical results. In this original view, we
have proposed a typology of innovation strat-
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of novelty of such innovations, having in mind
firm’s growth stages. In this vein, we hope that our
conceptual proposal fosters interesting empirical
work in relation to this issue.
acknowledgement
The authors thank the financial support provided
by Fundação para a Ciência e a Tecnologia research
grant FCOMP-01-0124-FEDER-009923.
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  • ... Following literature review is mainly focused on strategies of innovation through design that would be implemented by companies. According to Eiriz et al. (2013), the determinants of innovation strategies for a firm in its life cycle is blended by the innovative outcome which is the result of key decision factors of the firm in terms of innovation types or degree of novelty. They argue that these decisions are the main drivers for innovation strategies. ...
    ... Moreover, the authors claim that innovation strategies vary over time and across firms' growth stages. Eiriz et al. (2013) argue that, in terms of typologies, the strategic approach of the firm to the innovation changes accordingly its maturity level because at the beginning of the launch of a newly designed product, the evidence from the users is inadequate so that firms at the entrance level would rely on their strategies to radical innovations. Thus, many companies focuses on product innovation rather than process innovations in which main concern of the firms are about efficiency aspects after reaching a dominance in the product segment This claim is addressed early by Utterback and Abernathy (1975) as a suggestion that product innovation is more important in early stages of a firm rather than process innovations which would be focused on in mature phases. ...
    ... The patterns of innovation strategy lies on product development, learning by experience, restructuring and discovery phases ( Eiriz et al., 2013) (see Figure 2.2.1). From this perspective, "product development" (strategy) occurs when firms incrementally innovate their products while they "learn by experience" of "existing technologies, processes, markets, and people, which may allow firms to evolve over the growth stages" (Eiriz et al., 2013, p. 105).According to their classification, "discovery" refers to creation of new products based on a radical innovation. ...
  • ... Tangible and intangible innovation investments and R&D expenditures positively affect firm competitiveness ( Tsoukatos et al., 2015). Firms' investments in technology and innovation increase knowledge capability, absorptive capacity (ability absorbing externally generated knowledge) and as well as the availability other supplemental resources ( Faria and Barbosa, 2013). R&D induces innovative capacity of firms providing competitive dynamic. ...
    ... Through innovation firms gain competitive advantage originating from technological skills, experience and knowledge ( Tidd et al., 1997;Chandy and Tellis, 2000), reducing production costs and increasing demand as well as sales. Innovative firms enhance their competitive advantage through developing a temporary monopoly power and profiting from exploiting advantages arising from their superior learning capabilities, economies of scale and reputation ( Faria and Barbosa, 2013). In the contemporary knowledge-based economy, intellectual property and technology are essential for economic development and growth ( Kitsos and Hatzikian, 2006). ...
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    Drawing on the resource-based view of the firm, investigation on the effects of internal resources and capabilities (R&D and technology) on small and medium-sized enterprises (SMEs) innovation performance is attempted. Using primary (survey-based) and financial data from 405 Greek manufacturing SMEs, new evidence on the impact of R&D activities, IT and other determinants such as ERP, size and exports on innovation performance is provided. It is found that IT (in terms of knowledge to quality management programs) enhanced positively on firm innovation performance, while R&D activities have no impact on firm innovation performance. In addition, absorptive capacity on innovation, access to finance, patents and firm size induce positively firm's innovation performance. The novelty of this study is the introduction of a proxy of innovation measuring overall innovation performance (both product and process innovation), computerisation of firm operation using ERP systems and investments in acquisition of knowledge about quality management programs as proxies of IT.
  • ... Tangible and intangible innovation investments and R&D expenditures positively affect firm competitiveness ( Tsoukatos et al., 2015). Firms' investments in technology and innovation increase knowledge capability, absorptive capacity (ability absorbing externally generated knowledge) and as well as the availability other supplemental resources ( Faria and Barbosa, 2013). R&D induces innovative capacity of firms providing competitive dynamic. ...
    ... Through innovation firms gain competitive advantage originating from technological skills, experience and knowledge ( Tidd et al., 1997;Chandy and Tellis, 2000), reducing production costs and increasing demand as well as sales. Innovative firms enhance their competitive advantage through developing a temporary monopoly power and profiting from exploiting advantages arising from their superior learning capabilities, economies of scale and reputation ( Faria and Barbosa, 2013). In the contemporary knowledge-based economy, intellectual property and technology are essential for economic development and growth ( Kitsos and Hatzikian, 2006). ...
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    Drawing on the resource-based view of the firm, investigation on the effects of internal resources and capabilities (R&D and technology) on small and medium-sized enterprises (SMEs) innovation performance is attempted. Using primary (survey-based) and financial data from 405 Greek manufacturing SMEs, new evidence on the impact of R&D activities, IT and other determinants such as ERP, size and exports on innovation performance is provided. It is found that IT (in terms of knowledge to quality management programs) enhanced positively on firm innovation performance, while R&D activities have no impact on firm innovation performance. In addition, absorptive capacity on innovation, access to finance, patents and firm size induce positively firm's innovation performance. The novelty of this study is the introduction of a proxy of innovation measuring overall innovation performance (both product and process innovation), computerisation of firm operation using ERP systems and investments in acquisition of knowledge about quality management programs as proxies of IT.
  • ... Although, innovative organisations are introducing both product/process innovations and marketing/organisational innovations, most published studies are focusing to technological innovation, to a certain extent disregarding the non-technological aspect of innovation (Souitaris, 2001;Gnyawali and Park, 2009;Subrahmanya et al., 2010;Eiriz et al., 2013). ...
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  • ... Innovation has been empirically linked with superior performance (Crossan and Apaydin, 2010). Innovation capability of firms has also been found to be the most important predictor of firm performance (seeEiriz et al., 2013;Grawe et al., 2009;Otero-Neira et al., 2009;Li and Atuahene-Gima, 2001;Kumar and Sundarraj, 2016;Roach et al., 2016). Studies such as Chen and Tsou (2012), Michel et al. (2008) and Berry et al. (2006) have posited a positive and significant relationship between market innovation and firm performance. ...
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