3.4.1 Competitive Strategy
As alluded to previously, a change in competitive strategy is likely if the firm faces stagnant or
shrinking profit margins, no pricing power, loss of customers, etc. In response to such signals,
the firm may adopt a competitive strategy that includes increasing the number of new products
successfully introduced, entering more markets, and finding new revenue sources. Being more
innovative in this way requires being open to ideas from previously untapped sources inside and
outside of the company, and designing a firm that responds quickly and flexibly to the ideas that
represent opportunities for potential revenue growth (Blumentritt, 2004).
Strategy is about making choices, and top management needs to be as clear as possible about the
rationale for making them. Firms can compete on price or differentiation (Porter, 1980; 1985).
In the latter case, firms differentiate their products in order to avoid competing solely on price.
Non-price attributes include reputation, brand, superior product performance, and service. Top
management also must choose what products, customers, and market segments to serve.
Innovation should reinforce the basis on which the firm chooses to compete, i.e., price or
differentiation. Ideally, innovation enhances a core competence that permits the firm to surpass
its competition on dimensions that its customers value.
Many SMEs have difficulty competing on price alone. Even if they can match the prices of their
foreign or domestic competitors, operating margins may be razor thin. Using innovation to
improve operational efficiency can help firms that choose to compete on price, but we believe
that innovation will serve firms better if they focus on the development and introduction of new
products and services, especially if they can earn a price premium and higher margins
(Weerawardena and McColl-Kennedy, 2002). Innovation is essential to prevent erosion of
strategic assets, market position, and product commoditization.
Top management is responsible for articulating the company’s competitive strategy and how
innovation will serve this strategy. Companies can focus innovation on products, processes and
markets (e.g., new ways to serve customers). They also can focus on incremental or radical
innovation (McAdam et al., 2000; Weerawardena and McColl-Kennedy, 2002). Incremental
innovation modestly improves a firm’s products or processes or fine-tunes its business model,
e.g., how it creates value for its customers. Radical innovation significantly improves existing
products and services or replaces them with new ones. Radical innovation occurs less frequently
than incremental innovation in part because most firms don’t have the technical and human
resources required for radical innovation, and don’t accept or aren’t prepared for the risks and
uncertainty associated with it. The magnitude of change required to foster radical innovation in
companies with little experience in being innovative is probably beyond what they can handle in
a relatively short time, e.g., one to three years. The type of change discussed in this guide is
similar to what Nadler and Tushman (1989) call “frame bending”. Change of this type is
proactive so there is sufficient time for generative learning. It may require major changes in
elements of all four quadrants, but still emphasizes continuity of leadership and building on
existing strengths. A change strategy is essential so that companies can judge how far they have
to move and what degree of change is realistic, given their current capabilities. Section 3.6
offers guidance on development of a change strategy.