3 Marketing and Innovation

Marketing and Innovation
Oxford Handbooks Online

Jaideep Prabhu
The Oxford Handbook of Innovation Management
Edited by Mark Dodgson, David M. Gann, and Nelson Phillips
Print Publication Date: Jan 2014 Subject: Business and Management, Innovation, Marketing
Online Publication Date: Oct DOI: 10.1093/oxfordhb/9780199694945.013.023
2013
Abstract and Keywords
This chapter examines how marketing influences innovation both as a location for as well as a source of innovation
within firms. Regarding marketing as a location for innovation, this article examines how firms innovate in terms of:
(a) who to market to, specifically, how firms identify new customer segments, choose new target segments, and
identify new market spaces; (b) what to market to target consumers, i.e., create new value propositions and
innovate around product, price, promotion, and distribution; and (c) how to market to target consumers, i.e., create
new ways to deliver the value proposition by reducing fixed costs, achieving economies of scale and exploiting
experience curve effects. Regarding marketing as a source of innovation, the chapter examines: (a) how a firm’s
market orientation impacts how it innovates, and (b) how, through the inter-functional coordination needed to
identify, develop, and deliver new offerings, marketing informs innovation in other parts of the firm such as R&D,
HR, and finance.
Keywords: segmentation, targeting, positioning, marketing mix, product, price, promotion, distribution, market orientation
Introduction
MARKETING is a process by which companies create value for customers and build strong relationships to capture
value from customers in return (Kotler et al., 2008). As such, marketing is both a business philosophy, that is, a
way to succeed at business, as well as a business function, that is, a set of activities that (marketing) managers
perform on a day-to-day basis.
Innovation, on the other hand, is the successful commercial exploitation of new ideas (Schumpeter, 1942;
Rosenberg, 1982; von Hippel, 1988; Dodgson et al., 2008; Tellis et al., 2009). As such, innovation (and hence the
management of innovation) involves identifying, developing, and exploiting new ideas to generate value.
Marketing and innovation are therefore closely intertwined. As Peter Drucker put it many years ago: ‘Because the
purpose of business is to create a customer, the business enterprise has two—and only two—basic functions:
marketing and innovation…Marketing and innovation produce results; all the rest are costs’, (see Drucker, 2003).
Specifically, marketing attempts to create and keep customers. To do so, it must identify and satisfy customers’
evolving needs. The main way to do this, in turn, is to develop new offerings for customers and find new ways to
develop and deliver those offerings, namely to innovate. Firms that are good at innovation are likely to be good at
marketing, and vice versa.
There are at least two ways in which marketing influences innovation in firms. First, marketing is a location for
innovation within firms. Because marketing is a business function, the marketing department is itself a place where
innovation occurs within the firm. Second, marketing acts as a source of innovation within firms. Because marketing
offers the firm a philosophy of how to succeed (namely, meeting the evolving needs of customers), it informs
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innovation in other parts of the company as well. Moreover, the process of developing new offerings and delivering
them in new ways involves other functional areas within the firm such as R&D and operations. Again, the inter-
functional and systemic nature of innovation implies a close relationship between marketing and other areas of the
firms.
This chapter will explore both of these ways in which marketing influences innovation in firms. Regarding marketing
as a location for innovation, the chapter will examine three major issues. First, it will examine how firms innovate in
terms of who to market to, specifically, how they identify new customer segments, choose new segments to target,
and identify new market spaces. Second, it will examine how firms innovate in terms of what to market to target
consumers, that is, how they create new value propositions and innovate around product, price, promotion, and
distribution. Third, it will examine how to market to target consumers, how to create new ways to deliver the value
proposition by reducing fixed costs, achieving economies of scale, and exploiting experience (learning) curve
effects.
Regarding marketing as a source of innovation, the chapter will examine the following issues: (a) how a firm’s
market orientation, namely its unrelenting focus on meeting customers’ evolving needs better than its competitors,
impacts how it innovates, and (b) how, through the inter-functional coordination needed to identify and develop
new offering as well as new ways to develop and deliver them, marketing informs innovation in other parts of the
firm such as R&D, HR, and finance.
Innovation in Marketing Itself
Successful innovation involves addressing three questions well: who to market to (target consumers), what to
market (the value proposition), and how to market (how to deliver this value proposition). As it turns out, these are
key marketing questions as well. Indeed, marketing managers within firms, whether they be product or brand
managers, are typically involved with performing precisely these functions on a day-to-day basis. This section will
examine in detail each of these three questions and how marketing acts as a source of innovation in each case. In
doing so, the section addresses the profound links between marketing and what is increasingly referred to as
business model innovation, namely the simultaneous adoption of new ways of offering a new value proposition with
new ways of delivering it (see IBM Global CEO Study, 2006; Zott and Amit, 2008; Johnson et al., 2008; Gambardella
and McGahan, 2010; Velu et al., 2010).
Innovation in who to Market to
Innovation is the commercialization of new ideas. It therefore presupposes the existence of a group of customers
to commercialize new ideas for. The process of identifying such a group of customers typically falls to the
marketing function within the firm and, by extension, to the marketing manager. Identifying such a group, in turn,
involves processes such as segmenting markets, identifying consumer needs, choosing segments to target, and
identifying new ways of creating/finding a market space. This subsection looks in detail at innovation in the context
of each of these issues.
Segmenting Markets and Identifying Consumer Needs

Segmentation is the process of dividing the market into distinct groups that: (a) have common needs and (b)
respond in a similar way to marketing actions (e.g. price, promotion, etc.). Firms segment markets by using a
variety of data and approaches including demographics (age, gender, incomes, education, geography, ethnicity,
etc.), psychographics (attitudes, lifestyles, and value), usage (heavy versus light users), and benefits sought
(convenience, affordability, availability, etc.). A significant way in which marketing contributes to innovation is in
how it goes about segmenting markets. Thus the move from a purely demographic approach to using
psychographic and behavioural data is a major example of this.
A key aspect of segmentation is identifying the needs of consumers and tying this to demographic data. There are
two broad ways in which marketers go about identifying consumer needs: (a) qualitatively, though ethnographic
and projective approaches, and (b) quantitatively, through surveys and secondary, behavioural data. While
qualitative approaches help answer ‘why’ questions and provide insights and tentative hypotheses, quantitative
approaches help answer ‘how much’ questions and test hypotheses. Marketing can also act as a source of
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innovation by developing both quantitative and qualitative approaches to identifying consumer needs. For
example, many approaches such as focus groups, interviews, and surveys rely on consumers being able to
articulate their needs. However, in really new categories (e.g. mobile phones when they first became available)
consumers lack experience and therefore are either unaware of their needs or are unable to articulate them. In
such cases, a major innovation has been the use of ethnographic approaches which involve deep, longitudinal
observation of consumers in their habitat to generate inferences about their behaviour, motivations, and need. For
instance, Nokia uses large number of ethnographers it calls ‘global nomads’ who travel the world, live with
prospective consumers, and identify their needs based on this experience. These insights then go into new phones
that Nokia makes or into the re-design of existing phones.
Selecting Segments to Target

Once marketers have segmented markets, they need to decide on which segment or segments to target with
potential market offerings. This process is called targeting and involves two related questions: (a) How many
segments to target and (b) Which segments to target? Addressing these questions, in turn, requires the marketer to
not only know a great deal about consumers in each segment (their purchasing power, their lifetime customer
value, etc.) but also to be able to assess their firm’s ability to attract and retain customers in each segment relative
to competitors.
Finding and Creating New Market Spaces

A major way for firms to innovate is by finding new market spaces. These new spaces can either be in gaps within
existing markets that have been hitherto undiscovered or in entirely new markets that have been hitherto ignored.
Finding a new space within existing markets. When markets grow and mature, the competitive space becomes
increasingly crowded, even saturated. It is hard, in such a situation, for any players, new or old, to successfully
differentiate themselves from others and provide a new value proposition to consumers within the rules of the
existing game. In the language of strategy: one is now playing a red ocean. In order to move to a blue ocean of
new possibilities and relatively little competition, firms need to innovate in how they think about the market: they
need to create new market spaces. There are at least six possible ways in which they can do so (Chan and
Mauborgne, 1999). First, they can identify a space between existing substitute industries. For example, Home
Depot created the market space of DIY in the space between existing substitute industries of hardware stores and
building contractors. Similarly, Southwest Airlines created a market space for low-cost airlines between the existing
substitute industries of long-distance flying and driving/car rentals. Second, firms can create a market space
between strategic groups within industries. For example, Ralph Lauren Polo created a market space between
designer labels and high-volume classics. Third, firms can create a market space between chains of buyers. For
example, Bloomberg created a new market space by focusing on the needs of traders and analysts within broker
firms rather than the needs of the IT managers within these firms (as had been the case previously). Fourth, firms
can create a market space between complementary products. For example, Borders innovated by creating a
market space between the book and leisure industries. Fifth, firms can create a new market space by switching
from an emotional appeal to a rational appeal, or vice versa. Thus, Starbucks innovated by making coffee a
lifestyle choice rather than an off-the-shelf choice about price. And the Body Shop created a market space by
making cosmetics about functionality rather than emotionality. Finally, firms can innovate by looking across time
and creating a market space in advance of a new trend. Thus, Cisco Systems created a market space by
innovating for the time when the Internet would be so pervasive that high speed data transfer would be a major
market need.
Finding a new space within new markets. While the above typology focuses on finding a new space within an
existing saturated market, firms can also find new market spaces in hitherto untapped markets. These can be
either new geographical markets or segments of an existing market that have been ignored.
Perhaps the most significant such market is the Bottom of the Pyramid (BoP) market, or the so-called next 4 billion
consumers who live on less than $3000 purchasing power parity and make up more than half the world’s
population (Hammond et al., 2007). These consumers have typically been ignored by for-profit firms, but this is
changing as firms increasingly recognize that such consumers (a) are increasingly aspirational and empowered;
(b) are very large in number; and (c) are a relative blue ocean with little competition targeted at their needs. Of
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course, significant innovation is needed in order to successfully reach and attract such consumers. And marketing
has a substantial role to play in making this innovation happen. First, because the needs of these consumers are
very different from relatively affluent consumers, and because little market research has traditionally been done on
these segments, marketers have much to contribute by studying such consumers’ needs. Second, once their
needs have been understood, firms have to develop and deliver appropriate solutions for these needs. Products
have to be simple and affordable, distribution has to be extensive and economical, and promotion has to be suited
to the culture and background of these consumers. Again, marketing has an important role to play in ensuring this
happens within firms targeting the BoP.
Innovation in what to Market to Target Consumers: the Value Proposition
At the core of marketing as a business function sits the marketing mix or the 4 Ps of product (or service), price,
promotion, and place (or distribution). The 4 Ps together form the value proposition that firms offer to their
customers. Thus, at the heart of marketing managers’ role on a day-to-day basis is innovation around these tools
to ensure a better fit between the firm’s offerings and customers’ preferences. This section examines innovation in
each of the 4 Ps in turn.
Product/Service Innovation
A product is anything that can be offered to a market that might satisfy a want or need (Kotler et al., 2006). Thus,
products can be tangible goods like mobile phones (e.g. the iPhone), MP3 players (e.g. the iPod), or tablet
computers (e.g. the iPad). Or they can be intangible services like overnight delivery (e.g. UPS), financial services
(e.g. Internet banking), or leisure spaces (e.g. Starbucks). Moreover, they can be business to business (e.g.
enterprise software like SAP) or business to consumer (e.g. video games).
Innovation to products includes not only changes to their design and features (e.g. the user interface of the iPod)
but also their packaging (e.g. milk and juice in tetrapack containers) and branding (extending a brand, e.g. when
Bic, which used to make disposable ball point pens, also began offering disposable lighters under the same brand).
Frequently the boundaries between tangible products and intangible services break down. And increasingly,
innovation to tangible products involves adding intangible service elements such as convenience or after-sales
maintenance (e.g. Amazon doesn’t just sell books and e-readers, it also sells convenience and information), while
innovation to intangible services involves adding tangible technology that underpins the delivery or use of the
service (e.g. Apple doesn’t just sell software, it also sells the products that run the software).
Price Innovation
In developing a value proposition suited to consumers, marketing managers not only innovate around the product
features, design, packaging, or brand, they also frequently innovate around the price. Pricing innovation can take
many forms including the pricing of individual products, groups of products (such as bundling of substitute or
complementary products), or whole portfolios of products (such as with retailers).
Pricing innovations around individual products include: reference pricing (a strategy in which a product is sold at a
price just below its main competing brand); psychological pricing (pricing designed to have a positive
psychological impact, e.g. selling a product at £1.95 or £1.99, rather than £2.00); dynamic pricing (a flexible
pricing mechanism which allows companies to adjust the prices of identical goods to correspond to a customer’s
willingness to pay, e.g. when airlines charge different rates depending on when customers make their booking);
pay what you want pricing (where buyers pay any desired amount for a given commodity, sometimes including
zero); and ‘freemium’ pricing (where the basic product or service is free but a premium is charged for advanced
features, functionality, or related products and services).
Pricing innovations around grouped products include: bundling (a strategy that involves offering several products
for sale as one combined product with the combined price less than the sum of the individual products); loss
leader or leader pricing (when a product is sold at a low price to stimulate other profitable sales, e.g. when firms
sell razors cheap to make a profit on the blades); and premium decoy pricing (where the price of one product is
set very high in order to boost the sales of a lower priced product).
Finally, pricing innovations around portfolios of products (as in retailing) include: high–low pricing (where the
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goods or services offered by the organization are regularly priced higher than competitors, but through
promotions, advertisements, and or coupons, lower prices are offered on key items); and everyday low pricing (a
pricing strategy where consumers can always expect a low price without the need to wait for sale price events or
comparison shop, e.g. Walmart).
Promotion Innovation
Promotion is a complex and powerful tool at the disposal of marketing innovators. As such, promotion takes many
different forms including advertising, sales promotions, public relations, contests, sponsorships, and so on. The
recent rapid diffusion of technological innovations such as the Internet and mobile phones (along with changes in
demographics and lifestyles) has led to a revolution in how firms do promotion.
The twentieth century was mostly characterized by the dominance of mass communication vehicles such as radio
and television and the 60 second spot. The dominant model of promotion, therefore, was the ‘interruption model’,
one in which the advertiser interrupted consumers as they were going about their lives to send them a company
sponsored message.
In the twenty-first century this model has given way to a ‘permission model’ in which the advertiser asks
consumers for permission to send them a company-sponsored mission through a medium of their choice and at a
time of their preference. Indeed, given the democratization of social media, consumers increasingly actively seek
out information about firms and products themselves or even create their own sources of information either
individually (for instance through blogs) or collectively (by setting up brand communities on Facebook and the
like). With this revolution and the shift of power from producers (and hence advertisers) to consumers, innovation
in promotion could even be said to have shifted from firms to its consumers. Nevertheless, creative firms are
innovating how they promote their products by using social media to monitor and engage consumer-led
promotional initiatives. Firms increasingly maintain their own Facebook sites, systematically use Twitter to send
messages and engage relevant stakeholders, and employ company-sponsored bloggers to write about the firm’s
products and activities. Even television advertising has undergone a change with the advent of devices, such as
TiVo, which enable consumers to take a more proactive role in what ads they watch and when. Again, creative
firms and advertisers have found ways to use the technology to their advantage, for instance by targeting their ads
more accurately to only those consumers who have an active interest in their products and services. And again,
the Internet is a medium which firms increasingly exploit to ensure their advertising is targeted at only high-value
consumers with an active interest in what the firm has to offer.
Place or Distribution Innovation

Distribution involves the process of getting products and services from the firm to the consumer. Prior to the rise of
the Internet, even digitizable products such as music, books, and news required some form of physical distribution
chain. Hence the dominance in these industries of music retailers, bricks and mortar booksellers, and newsagents.
In recent years, however, thanks to the Internet (and latterly mobile telephony and high-speed broadband) firms
can go direct to consumers with music or news or books, leading to the rise of virtual booksellers such as
Amazon.com, e-book readers such as the Kindle, and consumer electronic devices (and ecosystems) such as the
iPod and iTunes. Even in physical distribution systems, mobile telephony, the Internet, and broadband have
enabled process innovations in supply chain management and logistics.
Increasingly, exchange takes place not only between firms and consumers, but consumers themselves. Such P2P
or person to person exchange may, however, be mediated by firms (such as in the case of eBay for goods and
services or Zopa in the case of peer to peer lending). With the inevitable advent of mobile-based payments
solutions (such as already exist in African and Asian countries), P2P innovations are likely to be a significant
aspect of how marketers innovate the way products and services are distributed in the twenty-first century.
Innovation in how to Market to Target Consumers: Delivering the Value Proposition
Marketing managers not only innovate around who to market to or what to market, they also innovate around how
to market to consumers, namely in how to deliver the value proposition in an efficient and effective way. Much of
this sort of innovation is to do with how to reduce the cost of marketing operations. There are three broad ways in
which firms can do this: they can innovate to (a) reduce fixed costs, (b) achieve economies of scale, or (c) reduce
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variable costs. This section discusses each of these broad strategies in turn.
Reducing Fixed Costs

There are three major ways in which firms can innovate to reduce the fixed costs associated with making,
distributing, and promoting products and services: outsourcing (to reduce manufacturing costs), franchising (to
reduce distribution costs), and the use of generics (to reduce advertising/promotion costs).
By outsourcing the manufacturing of elements of products or entire products, firms avoid incurring the major fixed
costs of setting up and maintaining factories and a salaried workforce. This strategy is especially effective in
commodity businesses where the market is more efficient than any individual firm can expect to be. But the
strategy doesn’t just help the firm reduce its costs and become efficient. It also frees up management time and
helps the firm to focus on other marketing activities such as branding and differentiation. Thus, Nike does very little
of its own manufacturing, preferring instead to focus on design and branding activities that enable it to remain
globally effective against stiff competition in a fast moving sector. Similarly, the Indian telecoms service provider
Bharti Airtel chose to outsource key functions like setting up and maintaining network equipment (to Ericsson) and
customer billing (to IBM), thus reducing fixed costs as well as freeing up time to focus on rapidly reaching more
consumers affordably.
Franchising, pioneered by the American sewing machine company Singer in the nineteenth century, has come to
be a dominant means by which firms from various sectors, such as fast food and retail, achieve global distribution
reach in a short period of time without incurring the huge fixed costs of setting up and maintaining a physical
distribution system themselves. Besides the costs and time efficiency benefits, franchising also reduces risk for the
franchising firm.
Finally, many firms avoid the fixed costs involved in advertising and promoting products by selling generic
products that are unbranded. This strategy is particularly popular with retail chains which offer consumers who visit
their stores the unbranded versions of products such as cereals, beer, milk, eggs, and bread at lower prices (and
often equivalent quality) to branded products in these categories. This strategy is also seen in the pharmaceutical
industry where generic firms rush to produce a non-branded version of a branded drug as soon as the drug goes
off patent. Such generics have the advantage of not having to incur the huge fixed costs of R&D that go into drug
discovery and testing.
Achieving Economies of Scale

A powerful way in which firms can reduce their fixed costs indirectly is by achieving economies of scale. For
instance, by pursuing market share, firms can spread the fixed costs of manufacturing, distribution, and promotion
out across a larger number of consumers thus reducing per unit costs overall. This strategy is particularly popular
in sectors which are commodities and where the fixed costs are so high that a business is only viable if it is
assured of a large part of the market. Industries such as telecommunications, electricity, postal services, airlines,
and defence were once so capital intensive that they were designated as natural monopolies that were typically
owned and maintained by the state. With technological progress and the reduction of minimum efficient scale,
these sectors have been increasingly deregulated, but high fixed costs still mean that only a few firms, each with a
large market share, tend to dominate. The strategy is also popular with large fast-moving consumer goods firms
such as Unilever and P&G that pursue large market shares of commodity sectors such as soap and shampoo as a
way of gaining economies of scale.
Reducing Variable Costs

As firms gain more experience with manufacturing products, their unit costs of manufacturing typically decline
exponentially. Actively pursuing these ‘experience curve’ effects can be a powerful way in which firms can reduce
their variable costs over time. In sectors where such costs can be particularly large, the promise of such learning
effects could induce firms to attempt to enter early and thus erect barriers to entry for competitors, or to do R&D to
identify new process technologies that might move the firm onto an entirely different learning curve with
substantially lower costs from the start. The drawback of pursuing such experience curve effects is that it doesn’t
necessarily provide firms with a long-term competitive advantage as other firms can also learn over time.
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How Marketing Informs Innovation in Other Parts of the Firm
Innovation involves at least three phases: the detection or identification of ideas, the development of these ideas
into processes or products, and the commercialization of these processes or products (Chandy et al., 2006; Yadav
et al., 2007). As discussed in the section above, the marketing function within firms has an important role to play in
each of these phases. Marketing helps identify unmet or latest consumer needs and hence aids detection. It helps
design and test prototypes to ensure they meet customer specifications, and hence aids development. And
marketing helps with hastening the adoption and use of offerings in the marketplace, and hence aids
commercialization. However, other functional areas within the firms, such as R&D, operations, and finance also
have an important role to play in each of these phases. As such, marketing informs and works with other functional
areas within the firm to make successful innovation happen.
This section elaborates on how marketing informs innovation activities in other parts of the firm. Specifically, it
addresses the following issues. First, it looks at how marketing informs the strategic orientation of the firm and the
push towards inter-functional coordination in the firm’s innovation activities. A key focus here is on the notion of
market orientation, namely the need for firms, in order to survive and prosper, to systematically collect, analyse,
and respond to information on customers and competitors over time. Second, the section considers the role that
top managers, including C-level marketing executives, play in driving innovation within the firm. Third, and related
to the issue of leadership, is the role that the human resources department (in relation to marketing) plays in
creating and fostering a culture of innovation with the firm. Fourth, the section addresses the relationship between
marketing and R&D in the conversion of ideas into products and processes. Fifth, the role interplay between
marketing and finance in the commercialization of innovations is examined.
Market Orientation and Inter-Functional Coordination
At least since Kohli and Jaworski (1990), a major stream of research has focused on how marketing informs the
firm’s approach towards its survival and growth (see also Narver and Slater, 1990; Jaworski and Kohli, 1993, 1996;
Kohli et al., 1993). A major assertion and finding of this research is that firms that are more market oriented tend to
be both more innovative (Athuene-Gima, 1995, 1996; Ottum and Moore, 1997; Han et al., 1998; Hurley and Hult,
1998; Narver et al., 2000; Frambach et al., 2003) and to have higher profitability in the long run. Market orientation
in turn involves the ‘organization-wide generation of market intelligence, dissemination of the intelligence across
departments and organization-wide responsiveness to it’ (Kohli and Jaworski, 1990).
By their very nature, therefore, market-oriented firms have proactive marketing departments that work closely with
other functional areas within the firm such as R&D and operations, to not only identify new market opportunities but
also devise new products and services in response to these opportunities which the firm as a whole then seeks to
commercialize ahead of the competition. In market-oriented firms, therefore, the marketing function plays a central
role driving and coordinating innovation in other parts of the firm.
CEOs, CMOs, and Innovation
Top managers have an important role to play in driving innovation within their firms. A survey by Boston Consulting
Group (BCG) found that 45 per cent of managers believed that their firms’ CEO was ‘the biggest force driving
innovation’ in their company (Boston Consulting Group, 2006). And the business press is full of stories of the
legendary exploits of CEOs like Steve Jobs (Apple), and Andy Grove and Gordon Moore (Intel) and their role in
driving innovation in their firms.
Top managers play a crucial role in driving innovation in their firms in at least four ways (Tellis et al., 2009; Boyd et
al., 2010). First, top managers help identify new market opportunities and direct the attention of others in the firm
towards these opportunities. Second, top managers decide the level and type of innovation-related investments the
firm makes. Third, top managers determine the firm’s relationships with its main innovation-related stakeholders
such as major customers, investors, alliance partners, and employees. Finally, top managers drive the attitudes
and practices within the firm that determine its innovation culture.
Given the important role that top managers play in driving innovation in the firm, various approaches have been
used to examine what types of managers are more likely to play such a role well. Accordingly, one approach
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examines top managers’ education and experience as a means to predict and explain their focus on innovation.
For instance, some research in this stream suggests that top managers with experience in ‘output’-oriented
functions, such as marketing, R&D, and sales, focus more on product innovation than top managers with
experience in ‘throughput’-oriented functions, such as accounting/finance, production, administration, and legal
(Hambrick and Mason, 1984; Finkelstein and Hambrick, 1996). Still other research suggests that CEOs who focus
on the future and on entities external to the firm are more innovative than others (Yadav et al., 2007). Taken
together, a great deal of this research suggests that marketing (and related areas such as sales) drive innovation
in the firm from the top through CEOs and other C-level executives with a marketing and sales background.
Marketing and Human Resources: Creating a Culture of Innovation
A key challenge for firms is not merely the creation of value, but its capture. Namely, even if firms manage to
develop the next big thing, they are not always successful at being able to commercialize it successfully. Indeed,
firms that have been particularly successful at innovation in the past are particularly susceptible to failing at
commercializing new products in the future. This is because their commitment to existing markets and technologies
makes it hard for them to focus on new markets and technologies (see Christensen, 1997; Chandy and Tellis,
1998). Thus, Kodak, which for over nearly a century created and dominated the photographic film industry, failed
to repeat the same trick with digital photography, despite actually having been the first to invent the digital camera
(see Munir, 2005). Similarly, Xerox, the pioneer in copy machines, invented in its Palo Alto Research Center (PARC)
all the key elements of the paperless office of the future (including the desktop PC, mouse, email, Ethernet, printer,
etc.) but failed to commercialize any of these inventions.
A major impediment to commercialization therefore is organizational (as opposed to technological). The solution to
this problem is in turn one of culture: namely, the management of attitudes and practices within the firm. It is here
that marketing, innovation, and human resources intersect. Marketing’s forte is commercialization and markets;
human resources’ forte is the creation of culture; and innovation is the link between organization, technologies,
and markets. Firms that possess key attitudes and practices deep within their organizational DNA are consistently
more successful at innovation than those that do not. There are three key attitudes: a focus on future markets and
technologies (not just current markets and technologies), a willingness to cannibalize current products and
services in favour of new ones, and a willingness to take on the risks that doing so entails. Supporting such
attitudes entails three key practices: (a) the use of product champions (i.e. employees at all levels of the firm
empowered to identify and take forward new ideas); (b) the use of asymmetric incentives (rewarding success but
tolerating failure up to a point); and (c) using internal markets and competition to break organizational monopolies
and guard against complacence or inertia (see Tellis et al., 2009). Creating such a culture of innovation requires
close cooperation between the firm’s marketing and human resources departments and managers.
Marketing and R&D: Commercialization and Complementary Assets
In many firms, especially large firms in industries like automobiles, pharmaceuticals, consumer electronics, food,
and fast-moving consumer goods, the division within the firm most central to innovation is R&D. Such firms have
huge R&D departments with large budgets, massive numbers of science and technology employees, and deep
patent pools. The R&D department in these firms develops new technologies, tests them, and—in many cases—
identifies routes to market for them. Even in such R&D-driven firms, marketing has an important role to play. For
instance, marketing, because of its close relationship with customers, can direct R&D towards new market
opportunities which in turn determine the projects that R&D works on. However, marketing’s key role in the
innovation process is typically in the commercialization of new products and services. Even in R&D-intensive and
technically driven industries like pharmaceuticals, the firm’s marketing resources, such as the salesforce, as well
as its marketing assets such as brands, can play a vital role in capturing the value that R&D creates. Specifically,
complementary assets such as advertising and salesforce (namely product support) enhance the effectiveness of
the firm’s new products by convincing more people to adopt more of these products more quickly (see Sorescu et
al., 2003).
Another role that marketing increasingly plays even in traditional R&D-driven firms is through its traditional links
with other external stakeholders such as customers, suppliers, competitors, and industrial partners (Prabhu et al.,
2005; Rao et al., 2008). Given that even large R&D-driven firms such as P&G are moving towards an open
Page 8 of 12
innovation model in which upwards of 50 per cent of the firm’s new ideas may come from outside the firm,
marketing has an increasingly important role to play in making this model successful (see Rigby and Zook, 2002;
Chesbrough, 2004; Huston and Sakkab, 2006). Marketing’s relationship with lead users can bring crucial feedback
on new ideas back into the firm as well as take new ideas from within the firm out into the market for early and
relatively risk-free feedback (von Hippel, 1986). More generally, marketing’s relationship with consumers enables
the firm to tap into the growing participation of customers in the innovation process (see Prahalad and
Ramaswamy, 2000; O’Hern and Rindfleisch, 2009; Hoffman et al., 2010; Hoyer et al., 2010) Marketing’s links with
suppliers can also help identify solutions for new product challenges that the firm lacks or would find time
consuming or expensive to develop.
Marketing and Finance
The role of the finance function within the firm is to maximize cash flow and shareholder value. This role suggests a
crucial link between marketing, finance, and innovation. Given marketing’s role in helping firms capture the value
inherent in their new products, marketing can help firms better realize their obligations to shareholders (Chaney et
al., 1991; Sood and Tellis, 2008). Marketing assets such as brands and marketing tools such as salesforce and
advertising can enable the firm to convince more consumers to adopt its products and services sooner, thus
increasing not only the cash flows that the firm accrues but also their net present value (Sorescu et al., 2003;
Sorescu et al., 2007).
Firms increasingly manage relationships not only with their consumers but also with sources of ideas and
knowledge such as universities. Managing these relationships often falls to marketing executives within the firm.
Research shows that universities not only provide a vital source of new ideas and solutions for the problems the
firm faces, they also provide legitimacy to firms that then increase their access to key resources including funding
(see Zucker et al., 1998). For instance, new ventures in biotechnology attract more venture capital and gain more
from the launch of their new products if they have star scientists on their board than firms that do not (see Rao et
al., 2008). Marketing is therefore involved with more than simply managing relationships with consumers. By
managing relationships with other key stakeholders such as scientists and investors, marketing can help firms
achieve their innovation objectives through accessing ideas, gaining legitimacy, and attracting investment.
Conclusion
This chapter has explored two major ways in which marketing influences innovation in firms. First, it has examined
how marketing is a location for innovation within firms. Second, it has examined how marketing acts as a source of
innovation within firms.
Regarding marketing as a location for innovation, the chapter examined three major issues: (a) how firms innovate
in who to market to; (b) how firms innovate in terms of what to market to target consumers; and (c) how firms
innovate in how to market to target consumers.
Regarding marketing as a source of innovation, the chapter considered: (a) how a firm’s market orientation impacts
how it innovates; (b) the role of top managers, especially top marketing managers, in driving innovation in the firm;
and (c) how, through the inter-functional coordination needed to identify and develop new offerings as well as new
ways to develop and deliver them, marketing informs innovation in other parts of the firm such as R&D, HR, and
finance.
By highlighting these issues, the chapter has attempted to show the profound and various ways in which marketing
contributes to innovation in firms. This influence, while it has been gathering momentum during the last few
decades, is only likely to grow in the years to come. As consumer power grows and as technologies break down
the barriers between firms and consumers, the role of marketing in innovation is likely to become more important
than it has been before. As such, academics and managers involved in studying and developing these links are
likely to find themselves in much demand in a brave new world in which marketing and innovation, as Peter Drucker
(1974: 54) once put it, form the ‘two…basic functions or the firm…[that] produce results…[and] all the rest are
costs’.
Page 9 of 12
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Marketing and Innovation

Oxford Handbooks Online

Marketing and Innovation

Abstract and Keywords

Innovation in Marketing Itself

Innovation in who to Market to

Segmenting Markets and Identifying Consumer Needs

Selecting Segments to Target

Finding and Creating New Market Spaces

Innovation in what to Market to Target Consumers: the Value Proposition

Place or Distribution Innovation

Innovation in how to Market to Target Consumers: Delivering the Value Proposition

Reducing Fixed Costs

Achieving Economies of Scale

Reducing Variable Costs

How Marketing Informs Innovation in Other Parts of the Firm

Market Orientation and Inter-Functional Coordination

CEOs, CMOs, and Innovation

Marketing and Human Resources: Creating a Culture of Innovation

Marketing and R&D: Commercialization and Complementary Assets

Marketing and Finance

Drucker, P. (1974). Management: Tasks, Responsibilities, Practices. Oxford: Butterworth Heinemann.

Schumpeter, J. (1942). Capitalism, Socialism, and Democracy. New York: Harper.

Science, 28(3): 442–56.

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