Marketing’s influence on innovation enhances profits

AMES, Iowa – Firms are constantly developing new products and services to stay competitive in a global marketplace. Creating a product that sells and doesn’t flop takes the right combination of innovation and marketing, according to new research.

Sridhar Ramaswami, a professor of marketing; and Pol Herrmann, professor and chair of management in Iowa State University’s Ivy College of Business, were part of a research team that surveyed nearly 200 manufacturing firms in India to examine how entrepreneurial orientation (willingness to innovate, take risks and be proactive) and marketing capabilities (sensing and responding to market changes, extracting value from products and services) come together to affect firm performance.

The researchers found firms with high levels of marketing capabilities enhanced profits. Ramaswami says these firms used specialized market knowledge of consumer needs and trends to develop new products and services. They also excelled at communicating the benefits and uniqueness of their innovations with consumers.

“We found an increase in profits based on the level of specialized marketing capabilities,” Ramaswami said. “Firms that excel at not only communicating the benefits of new innovations, but also increasing customers’ willingness to pay extra for the innovations, performed better.”

The study found the level of marketing capabilities matters as lower levels negatively affected profits. Herrmann says without superior market knowledge, firms may miss opportunities or invest in the wrong one and struggle to launch the product successfully.

In their paper, published by the Journal of the Academy of Marketing Science, Ramaswami and Herrmann, along with S. Arunachalam, lead author at Indian School of Business, India; and Doug Walker at Kansas State University, use the example of Sony’s Blu-ray disc to illustrate how a highly innovative company can miss the mark because it did not understand customer needs or market trends.

Limit risk, cost

Market conditions and consumer needs are ever changing. To keep up with those changes, a marketing department must always build upon its knowledge of market opportunities specific to the firm’s social, technological and competitive environments, the researchers said.

The life cycle of most products has shrunk considerably, which puts pressure on firms to maintain growth as products become obsolete. Investing in research and development may increase a firm’s innovative output, but the research shows it does not guarantee success. To limit the cost and risk of innovation, Herrmann says companies must recognize the value of marketing in product development. He adds that in many firms marketing focuses only on advertising, branding and sales.

“Management needs to allocate resources to building marketing capabilities to capture the value of innovation,” Herrmann said. “Any firm can have creative people with great ideas for products, but a great product is not enough to be successful. A firm must understand what the market needs, before developing a new idea.”  

Gillette capitalized on a market opportunity when it redesigned its traditional razor to meet the needs of men in rural India. In the paper, researchers explain how the company’s product team recognized Indian men often shaved in the dark without a mirror. In response, the company designed a razor with a single blade to limit risk of men cutting themselves. The researchers say Gillette’s market share grew to 50 percent as a result.    

While the study sample included firms in a developing country, Herrmann and Ramaswami say their results still have value for companies in more developed markets. For example, firms in the U.S. tend to invest less in marketing capabilities and more in creative and operational capabilities. Researchers say boosting the investment in marketing can improve profits derived from innovation efforts.