The Effect of Market Leadership in Business Process Innovation: The Case(s) of E-Business Adoption

by Kristina McElheran

Overview — The connection between market leadership and the adoption of new technologies is central to understanding how firms maintain or gain competitive advantage over time. One key determinant of firm openness to either product or process innovation is how radical or incremental a particular change is for the organization. Using the context of IT-enabled business processes for e-buying and e-selling, a setting that offers a complementary view to studies that have focused on R&D expenditure and patents as measures of innovation, HBS professor Kristina McElheran sheds light on whether, when, and why market leaders might be more likely to adopt new innovations. This study represents the first robust, multi-industry evidence that market leaders are far more likely to adopt incremental rather than radical business process innovations. Key concepts include:

  • Extensive survey data for 1999 show that e-buying constituted a relatively incremental process innovation, while e-selling was far more radical.
  • Market leaders were more likely than laggards to adopt incremental business process innovations. External market factors and internal characteristics reinforced each other to make adoption relatively more beneficial and/or easier for the largest, most successful firms.
  • Market leaders were less likely than laggards to adopt radical business process innovations. For the complex, strategically sensitive activity of e-selling, market leaders faced disproportionate risks and adjustment costs, making adoption less attractive for firms with the largest market shares.
  • The combination of complexity, strategic sensitivity, and boundary-spanning created the particular challenge observed for market leaders in the case of e-selling and potentially other business process innovations.
  • Inter-firm coordination is an important strategic consideration as businesses grow ever more dependent on the performance of their extended value chain for success. Lagging firms may discover new opportunities to leapfrog their larger competitors using certain business-to-business process innovations and IT-enabled supply chain relationships.

Author Abstract

This paper investigates the relationship between market position and the adoption of IT-enabled process innovations. Prior research has focused overwhelmingly on product innovation and garnered mixed empirical support. I extend the literature into the understudied area of business process innovation, developing a framework for classifying innovations based on the complexity, interdependence, and customer impact of the underlying business process. I test the framework's predictions in the context of e-buying and e-selling adoption. Leveraging detailed U. Census data, I find robust evidence that market leaders were significantly more likely to adopt the incremental innovation of e-buying but commensurately less likely to adopt the more radical practice of e-selling. The findings highlight the strategic significance of adjustment costs and co-invention capabilities in technology adoption, particularly as businesses grow more dependent on new technologies for their operational and competitive performance.

Paper Information