Chapter 6: Innovation and the Market Value of Firms
Alina Sorescu INNOVATION AS A DRIVER OF SHAREHOLDER VALUE A generally accepted tenet of strategy is that innovation is a critical strategic goal, a main source of competitive advantage, and a primary driver of shareholder value for firms. For decades, researchers have sought to understand the magnitude of this value and its determinants. Yet we still lack a set of clear guidelines on what type of innovation maximizes shareholder wealth, and how to organize for it. In practice, the rate of new product introductions seems ever increasing, but the rate of new product failure is also excessive, with some estimates as high as 75 percent (Cooper et al., 2004). At the same time, there is no shortage of successful innovations and we frequently encounter products, process, and business model innovations that are changing consumer behavior, rendering industry paradigms obsolete, and significantly increasing the wealth of their parent firms. For instance, Amazon.com is now selling more eBooks than hardcover editions: in June 2010 it sold 180 Kindle editions for every hardcover (Kennedy, 2010). As a result, and in spite of the recessionary period, the 2010 revenues of Amazon.com are expected to pass the $30 billion mark, up from $25.5 billion in 2009 (Alva, 2010). Zara’s implementation of the innovative ‘fast fashion’ business model has led to significant merchandising and distribution changes in the apparel industry, and has turned Zara into the world’s largest apparel retailer (Bjork, 2010). Self-service DVD rental kiosks (e.g., Redbox), or the ability to stream video rentals over...
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