Fortune at the bottom of the innovation pyramid:

The strategic logic of incremental innovations

Rajan Varadarajan
Mays Business School, Texas A&M University, 4112 TAMU, College Station, TX 77843-4112, U.S.A.
1. Radical vs. incremental
innovations: The question of relative
emphases
Radical innovations refer to innovations that are
new to the rm, market, and industry; which incor-
porate a substantially different and new technolo-
gy; and which provide substantially higher customer
benets relative to current products in the industry.
In contrast, incremental innovations refer to im-
provements in a rms existing product offerings
that better satisfy the needs of its current and
potential customers. Incremental innovations man-
ifest as adaptations, renements, enhancements, or
line extensions, incorporating new features that
offer additional benets. To the extent that incre-
mental innovations entail changes in the underlying
technology, those changes in the technological tra-
jectory tend to be relatively small and place limited
strains on a rms existing competencies (Benner &
Tushman, 2003; Chandy & Tellis, 1998; Garcia &
Calantone, 2002).
A cursory examination of innovation literature
indicates competing points of view regarding the
relative emphases that rms should place on radical
versus incremental innovations. For instance, Leifer
et al. (2006) note that while incremental innova-
tions can enable large companies to remain com-
petitive in the short run, only radical innovations
can change the game, leading the way to long-term
growth. Along similar lines, Moore (2005) observes
Business Horizons (2009) 52, 2129
www.elsevier.com/locate/bushor
KEYWORDS
Radical innovation;
Incremental
innovation;
Competitive strategy;
Marketing strategy;
Marketing
Abstract It is not uncommon to come across appeals in business literature exhorting
managers to devote greater effort to the pursuit of radical innovations, or to see
comments admonishing managers for devoting too much energy to the search for
incremental innovations. Over the years, successful radical innovations have undis-
putedly had a signicant impact on the fortunes of a number of companies. At the
same time, rms cannot afford to overlook the role of incremental innovations in
enhancing and sustaining the revenue and prot streams of successful radical
innovations. From the standpoint of survival, growth, and protability, both home
runs, meaning radical innovations, and singles, meaning incremental innovations,
matter. The fact that home runs are generally infrequent underscores the importance
of frequent singles. This article explores the various competitive strategy contexts in
which incremental innovations can be leveraged effectively against that backdrop.
# 2008 Kelley School of Business, Indiana University. All rights reserved.
E-mail address: varadarajan@tamu.edu
0007-6813/$ see front matter # 2008 Kelley School of Business, Indiana University. All rights reserved.
doi:10.1016/j.bushor.2008.03.011
that rather than concentrating on a few bold ideas,
most rms spread their resources, often creating
product enhancements that dont actually enhance
the bottom line. On the other hand, Treacy (2004)
notes that while breakthrough innovations may cre-
ate a buzz in the boardroom and lesser forms of
innovation go unnoticed, the slow and steady ap-
proach of incremental innovation usually beats up
exotic innovation strategies.
Realistically, in todays intensely competitive
market environment, simultaneous pursuit of both
radical and incremental innovations is an impera-
tive. For instance, Kanter (2006) characterizes the
innovation strategy of successful innovators as an
innovation pyramid comprised of a few big bets at
the top, a larger number of promising midrange
ideas in the test stage, and a broad base of early
stage ideas or incremental innovations. She notes
that not every innovation idea has to be a block-
buster, and that sizeable prots can also result from
a sufcient number of small or incremental innova-
tions. Against this backdrop, this article focuses on
the role of innovations at the bottom of the innova-
tion pyramid (i.e., incremental innovations) in a
business competitive strategy by exploring how
they can be leveraged to compete more effectively
in the marketplace.
2. Incremental innovations and
competitive strategy
In general, the competitive differentiation advan-
tages of a business in the marketplace, such as a
products distinctive features that offer specic
benets to customers, are susceptible to erosion
as a consequence of being neutralized by compet-
itors actions and changes in consumers preferen-
ces. This highlights the imperative for rms to
continuously explore new avenues for achieving
competitive differentiation advantages in the mar-
ketplace. In this regard, incremental innovations
can play an important role. Table 1 provides an
overview of the role of incremental innovations in
various competitive strategy contexts. A detailed
discussion of these innovations with illustrative ex-
amples follows.
2.1. Extending the time horizon of the
revenue stream from radical innovations
As noted earlier, in todays intensely competitive
market environment, the simultaneous pursuit of
both radical and incremental innovations is an im-
perative. One example of the former is the 787
Dreamliner currently being developed by The Boeing
Company; examples of the latter are the numerous
variations of the Boeing 747 that have been intro-
duced since that models launch in 1970. Boeing
views its 787 Dreamliner, which is based on a radi-
cally different approach to aircraft design, as a
game-changer that will transform aviation (Wayne,
2006). The Boeing 787 Dreamliner is being designed
as a highly fuel-efcient plane that can be cong-
ured with a seating capacity of 200 to 290, and
which can y from and to any point in the world.
When launched, it will be the rst commercial jet to
be made of more than 50% carbon ber and other
lightweight plastics, rather than aluminum. Boeing
views its 787 Dreamliner as a better t for the
22 R. Varadarajan
Table 1. The role of incremental innovations in competitive strategy
Extending the time horizon of the revenue stream from radical innovations
Entering new markets in product categories in which the rm currently has a presence
- New types of markets
- New market segments
- New geographic markets
Entering new product-markets in product categories in which the rm currently does not have a presence
- New product-markets that currently are fragmented industries
- New product-markets that emerge or become attractive as a consequence of changes in the legal and regulatory
environment
- Related new product-markets with entrenched competitors
Achieving and defending product category leadership
- Preempting shelf space by preempting potential entry points of competitors
- Responding to price sensitivity and variety-seeking behavior driven brand switching
- Protecting agship brands with anker brands
Commanding a higher price relative to the product being supplanted by the incremental innovation, or a price
premium relative to competitors offerings, to achieve higher margins
Adapting to the structural constraints of the industry ecosystem
emerging needs of the commercial aviation market.
It envisions that an increasingly larger percentage of
future international air travel will be point-to-point
between city-pairs, meaning travel between mid-
size cities, such as Houston to Osaka and Dallas to
Berlin, and between large gateway and midsize
cities, such as London to Philadelphia, rather than
between two large gateway cities, such as London to
New York.
At one level, the product attributes of the Boeing
787 Dreamliner, including greater fuel efciency in
an environment of increasing fuel prices and a
design that will allow the plane to y from and to
anywhere in the world, constitute potential sources
of competitive advantage. At another level, should
more future international air travel evolve toward
point-to-point travel between city-pairs, as opposed
to travel between major international gateway cit-
ies on a plane like the Airbus 380 with a seating
capacity of 555 for commercial air travel, the
Dreamliner will have a competitive advantage by
virtue of being a better t for the markets needs. At
the same time, Boeings substantial resource outlay
for the 787 Dreamliner, and the prospect of com-
petitors offerings eroding some of these competi-
tive advantages over time, suggests that subsequent
investments in incremental innovations will be crit-
ical in order to achieve new dimensions of competi-
tive advantage and extend the time horizon of the
revenue stream. An earlier highly successful inno-
vation by Boeing, the 747, is instructive in this
regard. Incremental innovations of the original
747 have enabled Boeing to garner a sizeable share
of the market and continue to keep the product in
the sky. These incremental innovations are reected
in the 747-400 and 747-400 Freighter models, which
were major aerodynamic improvements over earlier
747 models; the 747-400ER and 747-400ER Freighter
models, which have an extended range (ER); and the
747-8 Intercontinental and 747-8 Freighter models,
which were new high-capacity 747s.
2.2. Entering new markets
Incremental innovations can play a major role in the
entry of rms in product categories in which the rm
currently has a presence into new markets, includ-
ing: new types of markets, such as a rm operating
in the business-to-consumer (B2C) market entering
the business-to-business (B2B) market; new market
segments; and new geographic markets. A brief
discussion of these follows.
2.2.1. Entering new types of markets
Scott Paper Companys successful inroads into the
institutional market for bathroomtissue and related
paper products, such as paper napkins, is illustrative
of the role that incremental innovation plays as an
enabler for entering a new type of market. Prior to
its acquisition in 1997 by James River Corporation,
and its subsequent merger with the Georgia Pacic
Corporation in 2000, the Fort Howard Paper Compa-
ny enjoyed a dominant market position in the insti-
tutional market for bathroom tissue and related
paper products such as used in public washrooms
in government buildings, universities, and commer-
cial establishments. Unlike most of its competitors,
who use wood pulp to manufacture bathroomtissue,
Fort Howard uses a mix of wood pulp and recycled
paper. While bathroom tissue manufactured using a
mix of wood pulp and recycled paper tends to be of
lower quality, which is reected in the products
softness dimension, the raw-material costs are con-
siderably lower than tissue manufactured using
wood pulp. As a result, Fort Howard was able to
offer its products at a lower price relative to
its competitors product offerings based on wood
pulp.
Rather than attempting to compete against Fort
Howard on price, Scott Paper Company explored
alternative potential entry points. It found that
dispensers used in Europe were designed to hold
bigger rolls of paper. Scott Paper Company recong-
ured its manufacturing equipment to manufacture
larger rolls of bathroom tissue: rolls with six times
the number of sheets compared to standard rolls of
bathroom tissue. The size of these tissue rolls re-
quired Scott Paper Company to also invest in the
production of tissue dispensers. These dispensers
were initially provided free of charge to institution-
al customers, in light of their potential to create a
captive market for the larger rolls of bathroom
tissue manufactured by Scott Paper Company.
The incremental innovation of bathroom tissue in
larger rolls bestowed a competitive advantage on
Scott Paper Company for some period of time,
thanks to the potential benet it offered for insti-
tutional customers through savings in labor costs
due to building staff having to replenish the facili-
ties less frequently, and the lead time competitors
required to recongure their manufacturing equip-
ment to manufacture larger-size rolls of bathroom
tissue and dispensers. In effect, the institutional
customers that Scott Paper Company was able to
cultivate with the above incremental innovation
were less vulnerable to being attracted by compet-
itors for some length of time. Fort Howard did
subsequently come out with a pilfer-proof dispenser
designed to accommodate four of its regular-sized
bathroom tissue rolls. Nevertheless, the Kimberly-
Clark Corporation, which acquired Scott Paper
Company, continues to command a sizeable pres-
Fortune at the bottom of the innovation pyramid: The strategic logic of incremental innovations 23
ence in the institutional market for bathroom tissue
and related paper products.
2.2.2. Entering new market segments
Christensen, Johnson, and Rigby (2002) note that
companies seeking to create disruptive growth
should rst search for ways to compete against
non-consumption. They point out that non-con-
sumption of a product by certain segments of the
market could be due to reasons such as the product
being too expensive or too complicated. One exam-
ple of rms successfully entering such market
segments with incremental innovations is the mar-
keting of single-use shampoo sachets in developing
and less developed country markets. Historically,
salon-quality shampoo has been sold in large con-
tainers. As salons utilize generous quantities of
shampoo on a daily basis, this bulk packaging makes
sense in terms of both volume and cost. Individual
users, however, could consider both the volume and
cost of bulk-packaged shampoo to be overwhelming.
While a salon may use several liters of shampoo per
week, an individual consumer might take several
months to consume 1 liter; buying in bulk, a salon
might also pay far less for a liter than an individual
would have to pay. To attract those customers who
might not otherwise purchase salon-quality sham-
poo as currently packaged, single-use shampoo sa-
chets could prove to be a protable alternative.
Such innovations constitute adaptive market re-
sponses to marketplace realities, such as non-con-
sumption of a product by a market segment due to it
lacking the purchasing power to buy a product in
quantity or volume in which it is normally packaged
and marketed (e.g., shampoo in 16 ounce contain-
ers) and less frequent use of the product.
2.2.3. Entering new geographic markets
By developing a solar-powered portable charging
system for its digital cameras and photo printers,
Hewlett-Packard has been able to make successful
inroads into the vast Indian rural market. This in-
cremental innovation has enabled HP to successfully
sell digital cameras and printers to consumers living
in villages in India that have not yet beneted from
the national rural electrication program. However,
unlike the customers targeted for HPs digital cam-
eras and photo printers in the urban markets of
India, HP has successfully nurtured rural female
entrepreneurs as customers for its mobile solar-
powered photo studio with digital camera and
printer. The mobile photo studio allows these en-
trepreneurs to process and deliver on-the-spot pho-
tographs taken for purposes like government IDs, or
at social events such as marriages and festivals. In
addition to the incremental innovation in the prod-
uct arena being a source of competitive advantage
in the rural marketplace, the business model em-
ployed by HP to tap into the potential of the rural
market is also innovative. Unlike in urban markets
where the camera and printer are sold outright to
customers, the village entrepreneurs lease the
equipment and purchase consumables from HP. An-
other major contributing factor to HPs success in
penetrating the rural market in India was knowledge
about rural communities that it was able acquire
through the immersion of a team of HP employees
into the homes of local families for a couple of
days, and from attending community meetings
(Hewlett-Packard, 2005).
2.3. Entering new product-markets
Incremental innovations can facilitate a rms entry
into new markets, such as product categories in
which a rm already has a market presence as
discussed in the previous section, as well as into
new product-markets, meaning established product
categories in which a rm currently does not have
a market presence. As a case in point, in 1985
Chesebrough-Ponds entered the market for lip
care, a product category in which it did not have
a market presence, by launching Vaseline brand
petroleum jelly packaged in a 0.35 ounce plastic
tube, and directly applicable on the lip, under the
brand name Vaseline Lip Therapy. Applying Vaseline
petroleum jelly on dry or cracked lips, particularly
during the winter season, is one of the many uses for
which the product has long been promoted. Howev-
er, compared to petroleum jelly in a jar, the same
product packaged in a 0.35 ounce tube that is
contoured at the tip for ease of application offers
greater form utility, or ease of use, as well as place
utility and time utility, because it can be slipped into
a pocket or carried in a handbag and used where and
when needed. Besides facilitating entry into a new
product-market, it is conceivable that the prot
margins associated with the incremental innovation
are considerably higher. While Vaseline brand
petroleum jelly in a 13 ounce plastic jar retails
for about $2.99 ($0.23 per ounce of jelly), the same
product packaged in a 0.35 ounce tube retails for
$1.99 ($5.69 per ounce of jelly). The above illustra-
tion addresses the role of incremental innovations in
the context of entering newproduct-markets broad-
ly construed, while the sections that follow focus on
more specic product-market contexts.
2.3.1. Entering fragmented product-markets
Afragmented industry refers to an industry in which a
large number of rms tend to be relatively small in
respect to measures such as annual revenues, prots,
24 R. Varadarajan
and assets, and are often regional. All else being
equal, investments in innovation at the aggregate
industry level, as well as at the individual rm level,
are likely to be relatively lower in fragmented indus-
tries in comparison to more concentrated industries.
Incremental innovations can enable a relatively larg-
er rm entering a fragmented industry through ac-
quisition to establish a national market presence and
nurture a national brand in the product category. For
instance, prior to being acquired by Unilever in 1987,
Chesebrough-Ponds acquired a regional brand in an
ethnic food product category, Ragu brand spaghetti
sauce, and took it national. Product variety, such as
spaghetti sauce in a variety of avors, is one of the
areas in which incremental innovations brought
about by the acquiring rm is evident in the brands
current product line. Understandably, incremental
innovations as a source of competitive advantage by
themselves could not have enabled the Ragu brand to
achieve a dominant market position in the market-
place. Theresources andskills of theacquiring rmto
promote and distribute the product nationally were
also major contributing factors.
More generally, incremental innovations can be
potential pathways for rms to enter commodity-
product categories and establish a national market
presence by investing in branding and incremental
innovations. A natural consequence of differentia-
tion through branding and incremental innovations
in erstwhile commodity-product categories, such as
common salt, edible oil, and milk, is increasing
industry concentration. That signies that frag-
mented industries are evolving into increasingly
concentrated industries.
2.3.2. Entering product-markets following
changes in the regulatory environment
In 1997, in an effort to combat iodine-deciency
disorder, a major health problem and leading cause
of mental disorders including retardation and lowIQ,
the Indian government banned the sale of non-io-
dized salt. Since almost everyone consumes salt,
iodized salt was viewed as an effective means for
providing sufcient iodine to the population. Howev-
er, due to the primitive storage and transportation
conditions in certain regions of India, standard meth-
ods of iodizing salt tended to be ineffective because
the iodine leached out over time. Hindustan Lever
Ltd. (HLL), a subsidiary of Unilever, researched ways
of keeping the iodine content of salt intact under
transportationandstorageconditions inIndia. Rather
than chemically encapsulating iodine with a protec-
tive coating around both it and the salt particle, HHL
researchers developed a method of protecting the
iodine at the molecular level, which kept it intact
until releasedintheacidic environment of thehuman
stomach. Currently, HLLs Annapurna brandsalt is one
of the two leading brands in the branded-salt cate-
gory in India (Prahalad, 2004).
2.3.3. Entering related product-markets with
entrenched competitors
Economies of scope, or scope effects, refers to
competitive cost advantages a rm is able to derive
by virtue of entering into new businesses character-
ized by cost or demand interdependencies with one
or more of its current businesses. Illustrative of cost
interdependency is a rm broadening its product
line from facial tissue to facial tissue and bathroom
tissue, as was the case with Kimberly-Clark, while a
rm broadening its product line from carbonated
beverages to salty snack foods, as was the case in
the merger of the Pepsi-Cola Company and Frito-Lay
in 1965, is illustrative of demand interdependency.
When entering a related product-market with en-
trenched competitors, in addition to the scope-
based competitive cost advantage, competitive dif-
ferentiation advantage based on incremental inno-
vationsspecically, incremental innovations
relative to the present offerings of entrenched
competitorsmay be an imperative in order to
attract the customers of entrenched competitors.
2.4. Achieving and defending product-
category leadership
Key to achieving and defending product category
leadership are incremental innovations-based prod-
uct differentiations that enable a rm to pursue a
multi-brand strategy through differentiated product
positioning and target marketing. These differentia-
tions are also critical fromthe standpoint of enabling
a rm to preempt retail shelf space by preempting
the likely entry points of potential competitors.
2.4.1. Preempting retail shelf space by
preempting potential entry points of
competitors
In the face of intense competition for shelf space at
the retail level, incremental innovations-based
product variety (forms, avors, features, price
points, and so on) can enable rms to acquire retail
shelf space by preempting the likely entry points of
potential competitors. Incremental innovations, be-
sides preempting potential entry points for compet-
itors, can also enable rms to garner a greater
proportion of the retail shelf space allocated to a
specic product category. For instance, consider
Procter & Gamble, the market share leader in
the household laundry detergents category in the
United States. In addition to Tide, its agship brand,
P&Gs other differentiated brand offerings are the
Fortune at the bottom of the innovation pyramid: The strategic logic of incremental innovations 25
Cheer brand positioned as formulated to help pro-
tect against fading, color transfer and fabric wear;
the Dreft brand positioned as formulated to rinse
out thoroughly and promoted as the number one
choice of pediatricians for years; the Era brand
positioned as tough on stain; the Gain brand posi-
tioned as a detergent with fabric softener; and the
Ivory brand positioned as a mild cleansing deter-
gent.
However, consider the following caveat. In the
past, it might have been possible for rms to pursue
a strategy of product proliferation void of incremen-
tal innovations, meaning line extensions with new
avors, forms, sizes, and so on that offered no other
compelling benet to consumers. Although rms
incurred certain costs in pursuing such a strategy,
it did serve the purposes of garnering larger amount
of shelf space at the retail level, and deterring entry
of competitors. However, the current information-
rich business environment severely constrains the
ability of rms to achieve meaningful results by
employing such practices. One consequence of re-
tailers greater ability to objectively measure the
revenue and prots associated with the retail shelf
space allocated at the product category level, brand
level, and stock keeping unit (SKU) level is the more
effective and efcient utilization of retail shelf
space. That means that more or less shelf space is
allocated at the product category and brand level
based on these measures, and that the stocking of
SKUs within brands that fail to deliver is discontin-
ued. Furthermore, the practice of slotting allow-
ances that retailers levy to make shelf space
available for new products, as well as new SKUs
within existing product categories and brands, are a
deterrent to manufacturers pursuing a strategy of
product proliferation void of incremental innova-
tions.
2.4.2. Responding to price sensitivity and
variety-seeking behavior driven brand
switching by consumers
In product categories that exhibit low brand loyalty,
a rm can increase the likelihood of brand switching
occurring within its multiple brand offerings by
offering an incremental innovations-based differen-
tiated portfolio of brands, and thereby discourage
switching from its brand offering to the brand offer-
ings of its competitors. Brand switching can occur
for reasons such as price sensitivity and variety-
seeking behavior. In the former, a rm that ensures
that, at any point in time, one of its differentiated
brands is available as a featured price promotion
brand, such as with a cents-off coupon or weekly in-
store special, may be able to retain the patronage of
the price sensitive segment of the market. By dis-
persing the incidence of price promotions across
various brands, a rm can also lower the risk of
dilution of the image of any of its brands that might
result due to frequent price promotions.
2.4.3. Protecting agship brands with anker
brands
Incremental innovations can enable a rm to differ-
entiate its anker brands, or brands that occupy
positions adjacent to a rms agship brand(s) on
either side in retail store shelves, from its agship
brand. At the retail store shelf level, the anker
brands serve to increase the physical distance be-
tween the rms agship brand and competitors
brand: for example, in the laundry detergents cat-
egory in the United States, anker brands increase
the physical distance between P&Gs agship brands
Tide and Cheer from Unilevers agship brands Wisk
and All. In addition, for products that trigger a
greater degree of variety-seeking behavior by con-
sumers, anker brands increase the probability of
brand switching occurring within the rms brand
offerings, and lower the probability of the user of a
rms brand offering switching to a competitors
brand offering.
However, a few caveats should be considered
regarding the multi-brand strategy-incremental in-
novation nexus discussed here in the context of (a)
responding to price sensitivity and variety-seeking
behavior driven brand switching by consumers, and
(b) protecting agship brands with anker brands.
First, in recent years, in their quest to nurture and
develop global brands in the face of high costs
associated with developing global brands, a number
of rms have resorted to downsizing their brand
portfolios by deleting marginal brands. Second, with
the deletion of marginal brands, a shift from inter-
brand differentiation to intra-brand differentiation
seems to be taking root (Varadarajan, DeFanti, &
Busch, 2006). In other words, incremental innova-
tions are increasingly launched as line extensions of
existing brand names rather than under new brand
names. For instance, the following is a partial list of
differentiated variations in which Procter & Gamble
currently markets its agship brand of laundry de-
tergent: Tide, Tide Liquid, Ultra Tide Liquid, Tide
Powder, Tide Simple Pleasures, 2X Ultra Tide, Tide
with Febreze Freshness, Tide with a Touch of Downy,
Tide Coldwater, Tide with Bleach, and Tide with
Bleach Alternative (http://www.tide.com). Third,
the label not withstanding, a anker brand cannot
be based on a lackluster incremental innovation. As
noted earlier, in todays information rich environ-
ment, retailers are much better equipped to make
effective and efcient utilization of retail shelf
space in their stores.
26 R. Varadarajan
2.5. Commanding a higher price or price
premium
An incrementally innovative new product can enable
a rm to command a higher price as well as realize
higher margins than the product it replaces in the
marketplace. For example, in 1971 the Gillette Safe-
ty Razor Company (acquired by P&G in 2005) intro-
duced the Gillette Trac II brand, a razor with two
blades tted in a shaving cartridge. In 2006, it intro-
duced the Gillette Fusion brand, tted with ve
blades in a cartridge for shaving plus a sixth blade
for trimming. The history of the price per replace-
ment cartridge for Gillette brand razors, spanning
the 35 year period from 1971 to 2006, summarized in
Table 2, is instructive in this regard. The price per
replacement cartridge unadjusted for ination, and
the price per replacement cartridge adjusted for
ination on the basis of consumer price index and
expressed in 2006 equivalent dollars, is presented in
the second and third columns, respectively.
Incremental innovations can also enable a rm to
command a price premium in the marketplace. For
example, the Energizer Brand Quick Switch ash-
light can be used with two AA, C, or D size batteries.
While most ashlights in the marketplace, which are
designed for use with only AA, C, or D size batteries,
retail for about $3, the Energizer Brand Quick Switch
ashlight retails for about $15.
Understandably, the more important issue is
whether an incremental innovation will enable a
rm to achieve a higher margin rather than com-
mand a higher price, compared to its previous prod-
uct offering, or a price premium, relative to
competitors product offerings. Two broad sets of
criteria, price and non-price criteria, inuence the
buying or brand choice decisions of individuals and
organizations. With incremental innovations, a rm
can enhance the salience of non-price criteria vis-a`-
vis price in buyers choice decisions. Since the rm
will incur certain costs in incorporating incremental
innovations in its product offering, such a strategy
will enable the rm to enhance its nancial per-
formance, provided the marginal cost associated
with the incremental innovation is lower than the
increase in price that the incrementally innovative
product is able to command in the marketplace.
2.6. Adapting to the structural
characteristics of the industry ecosystem
Often, the structural characteristics of the industry
ecosystem in which a rm operates may call for the
simultaneous pursuit of both incremental and radi-
cal innovations. This may be particularly imperative
when the ecosystem where a radical innovation has
been introduced is still in the nascent stages. In the
automobile industry, for example, it may be an
imperative for rms to pursue both incremental
innovations, such as hybrid vehicles and ex-fuel
vehicles, and radical innovations, such as electric
vehicles and hydrogen fuel-cell-based vehicles, in
light of the current state of the industry ecosystem.
However, while a nationwide network of automobile
service stations equipped to service electric ve-
hicles and hydrogen fuel-cell-based vehicles, mean-
ing service stations at which the batteries in an all
electric vehicle can be recharged or replaced, does
not currently exist, the existing network is adequate
in the current context of hybrid vehicles and ex-
fuel vehicles.
3. Marketplace outcomes of
incremental innovations
While the foregoing discussion and illustrations pro-
vide insights into the centrality of incremental in-
novations to a business competitive strategy, a
related issue is empirical evidence on the market-
Fortune at the bottom of the innovation pyramid: The strategic logic of incremental innovations 27
Table 2. Commanding higher prices through incremental innovations
Product version Price per replacement cartridge
Unadjusted for
ination
1
Adjusted for
ination
2
Gillette Trac II (1971, two-bladed cartridge); Two blades
are better than one.
$0.20 $1.00
Gillette Sensor (1990, spring-mounted blades); Can sense
and adjust to the contours of your face.
$0.79 $1.22
Gillette Mach3 (1998, three blades); You take one stroke,
it takes three.
$1.63 $2.02
Gillette Fusion (2006, ve blades plus a trimmer);
The comfort of ve blades, the precision of one.
$3.00 $3.00
1
Source: Marketing marches on. (2006, February 6). Business Week, 12.
2
Expressed in 2006 equivalent dollars. Adjusted for ination on the basis of consumer price index (see Williamson, 2008).
place outcomes that result from pursuit of incre-
mental innovations. Research pertaining to incre-
mental innovations that manifest as line extensions
suggest that a product-line-proliferation strategy
can have three primary effects: (a) it increases
overall demand faced by the rm, (b) affects supply
by increasing costs, and (c) has strategic consequen-
ces such as deterring entry of competitors and
thereby allow an incumbent rm to increase prices
(Bayus & Putsis, 1999). Research on incremental
innovations that manifest as added new features
in a rms current product offerings suggests that
those added features provide positive differentia-
tion by giving a product perceived advantages over
competitors products. Consumers seem to use
added features in an instrumental-reasoning pro-
cess that makes the brand with more features ap-
pear superior in a choice set (Brown & Carpenter,
2000; Carpenter, Glazer, & Nakamoto, 1994).
The later nding serves to reiterate a point made
early on. In the face of erosion of a business com-
petitive differentiation advantages in the market-
place as a consequence of being neutralized by
competitors actions, newdimensions of competitive
differentiationadvantageresultingfromincremental
innovations can be critical. While it is conceivable
that the effect of some of the incremental innova-
tions on a business competitive differentiation ad-
vantage and performance may be marginal at best,
the cumulative effect of a sequence of incremental
innovations can be expected to be signicant. This
highlights the importance for rms to pay careful
attention to analysis and management of their port-
folio of incremental innovations by focusing on issues
such as the current stockpile/inventory, pipeline,
optimal launch time, and evolutionary path of a
sequence of incremental innovations.
4. Final thoughts and implications
Although the illustrations presented here are in the
context of goods, or tangibles-dominant products,
the underlying competitive strategy contexts in
which they are presented is also pertinent for serv-
ices, or intangibles-dominant products. The follow-
ing example is illustrative of the importance of dual
emphasis on radical and incremental innovations in
service industries. In the 1970s, using a eet of jet
aircraft and a hub-and-spokes model for shipment of
time-sensitive freight, FedEx Corporation revolu-
tionized the express delivery service business,
which represented a radical innovation. Over time,
the incremental innovations that have followed
include the installation of drop boxes; a centralized
computer system to manage people, packages,
vehicles, and weather scenarios in real time; a
hand-held bar code scanner system to capture de-
tailed package information; an electronic customs
clearance system to expedite regulatory clearance
while cargo is en route; and software that allows
customers to process and manage shipping from
their desktop computer.
A number of key implications emerge from the
foregoing discussion on the strategic logic of incre-
mental innovations. First, in todays intensely com-
petitive environment, pursuit and effective
exploitation of both radical and incremental inno-
vation opportunities are imperatives. Managed ef-
fectively, every radical innovation can serve as a
springboard for a steady stream of incremental
innovations that generate new revenue streams or
prolong the principal revenue stream. In turn, the
prot streams associated with successful incremen-
tal innovations enhance a rms ability to pursue
radical innovation opportunities by serving as a
source of funds to support both initial investments
in R&D and subsequent investments in manufactur-
ing and marketing.
Second, in their attempts to emphasize the im-
portance of innovations, rms routinely set innova-
tion-related performance objectives, such as the
percent of revenues or prots that various busi-
nesses in the rms portfolio should derive from
new products introduced in the recent past, mean-
ing past 3 to 5 years. It is important to ensure that
the scope of such innovation performance related
objectives encompass performance objectives and
metrics specic to incremental innovations.
Third, rms should strive to nurture organization-
al conditions, including organizational climate, pro-
cesses, policies, structure, and systems, conducive
to superior performance in the realmof incremental
innovations. An organizational climate and top-
management mindset that downplays the impor-
tance of incremental innovations, or fails to recog-
nize and reward mangers for superior performance
in the realmof incremental innovations, can have an
adverse impact. Specically, the continued effec-
tiveness of the competitive strategy of businesses in
a rms portfolio as well as their long-term growth
and prot outlook can be at peril.
Finally, the importance of incremental innova-
tions to a rms long-term growth, protability, and
survival notwithstanding, there is a need to guard
against internal organizational conditions such as
managerial biases and inertia resulting in an exces-
sive focus on incremental innovation to the detri-
ment of pursuit of radical innovations. For instance,
researchers have drawn attention to organizational
pathologies that inhibit breakthrough inventions.
They include the familiarity trap (favoring the
28 R. Varadarajan
familiar), the maturity trap (favoring the mature),
and the propinquity trap (favoring search for solu-
tions near to existing solutions). By experimenting
with technologies that are novel (technologies with
which the rm lacks prior experience), emerging
(technologies that are recent or newly developed in
the industry), and pioneering (technologies that do
not build on any existing technologies), rms can
overcome these traps and create breakthrough in-
ventions (Ahuja & Lampert, 2001).
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