Firms that innovate frequently develop a knowledge advantage that allows them to gain market share from companies that don’t know either the technology or best practices that allowed them to innovate.
More Knowledge and More Innovation = More Market Share
Over time, that knowledge advantage may drive revenues that reinvested in research and development which can, in turn, drive a further knowledge advantage. Alphabet Inc., the parent of Google, for example, develops innovative products and has a robust R&D budget. It – and companies who do the same – are increasingly gaining market share and establishing best practices that hold across entire sectors. Companies who don’t innovate in those sectors tend to fall further and further behind.
In fact, there is increasing concern that companies are dividing into tiers: the innovators who aggregate innovative products, technological breakthroughs, and resultant market share gains, and everyone else. For the innovators, market share begets more market share. Everyone else gets increasingly less.
That isn’t to say that innovation is happening less. In fact, activities that lead to innovation are robust. A recent Harvard Business Review article shows that, in the 11 years between 2003 and 2014, R&D at U.S. corporations increased by 67%. The companies that invested the most in R&D also increased R&D spending even more. For the 100 U.S. firms having the most R&D spending, investment in R&D soared 92% over the period.
The Productivity Gap
The knowledge advantage often leads to a productivity gap as well. Innovative products and practices often drive improvements in technology. Companies that either don’t adopt innovative products and practices or don’t have access to them tend to fall behind. Those leading the innovative cycle forge ahead.
This pattern shows up in all sectors across the board. A 2015 Harvard Business Review piece, for example, noted that the most innovative manufacturing firms productivity increased an average of 3.5% annually. Manufacturing firms who weren’t as innovative grew at half that rate.
In services, the gap was even more notable. In the private, non-financial sector, the most innovative firms grew their productivity at an average of 5%. Average companies in the same sector increased productivity a minuscule 0.3%.
Innovation diffusion is needed across the globe.
What Is Needed for Diffusion?
The 2015 article also noted that slowdowns in productivity are not caused by failure to innovate. Innovation is going on, but not every company is benefiting. There is a diffusion gap as well, between the existence of innovation and its adoption.
How to bridge the diffusion gap. There are four key factors that need to occur:
- Global connections. There must be enough communication and dissemination for firms to know what innovative products and procedures are being produced, across the globe.
- Entry of new firms. New firms need to be able to enter the marketplace and experiment with innovative products and practices.
- Resource allocation. “Lack of product competition, rigid labor markets, failure to exit, or non-performing loans” were specifically cited as areas of inefficiency that can become obstacles to growth.
- Organizational know-how. Key people need to have the expertise necessary to lead in the right direction.
Are knowledge and productivity improvements increasingly aggregating to some firms and leaving others behind? It appears so, as innovation and best practices drive increasing market share.