Influence of innovation on competitive advantage

University of Otago, New Zealand

Innovation and Competitive Advantage

Written by: 

Jörg-Stefan Schöttler

Contents

1. INTRODUCTION 2

2. THEORETICAL APPROACH 2

2.1. Terms and Definitions  2
2.2. Statement analysis  3

3. PRACTICAL EVIDENCE 4

4. OWN THOUGHTS AND CONCLUSION  5

1. Introduction

Companies have always tried to create and capitalize on competitive advantages, ensuring profitability and long term survival. Due to the increasing competition in most markets, mainly caused by globalization, liberalisation and better information of the customers, the need to gain advantages in competition is now more essential than ever. Relevant to the quotation above, this essay discusses the proposition of GARY HAMEL that innovation is the key to achieve this goal.¹ Additionally the links between innovation and competitive advantage are exa mined.

2. Theoretical Approach

2.1. Terms and Definitions

Innovation
Like the latin root novus (new) indicates, the main characteristic of innovation is novelty and change, by means of newly emerging ways of doing or producing something. Being the first to bring up the notion of innovation, SCHUMPETER established the term of “creative destruction”, stressing the power of innovations and implying the destruction of old economies while new ones are incessantly created.² HAMEL, however, dwells a bit more on the single company’s point of view. According to him, radical (in contrast to rather incremental) innovation means the only way for a firm to “escape the ruthless hypercompetition” by “going around” the competitors instead of battling them and create a competitive advantage.³

Competitive Advantage
After SIMON competitive advantage stands for providing a lasting and appreciated benefit to the customers which no one else can offer.⁴ More specifically, competitive advantage can be described as either having lower costs or having a differentiated product, resulting in two “generic” strategies – either low-cost or differentiation, both being mutually exclusive (PORTER).⁵ Moreover, PORTER states that doing things differently is more important than just doing them better.⁶

2.2. Statement analysis

So how can radical innovation lead to new competitive advantages for a firm? As mentioned, an innovation always means something completely new, hence the innovator is not only the first, but also the only one in the market with this new product / technology⁷ - what makes him different from his competitors and provides him an advantage over them.

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1 Hamel, G. (2000), p. 62

2 Schumpeter, J. (1942), p. 83

3 Hamel, G. (2000), p. 14, 62, 72

4 Simon, H. (1996), p. 465

5 Porter, M. (1998), p. 11 ff.

6 Porter, M. (1999), in: Executive excellence, p. 13

7 for simplification and for space reasons in the following innovation means „product innovation” unless stated otherwise