Newswise – Researchers from Goethe University, Duke University and London Business School have published a new article in the Marketing Review this explains why some companies remain innovative even after their IPO, while many others do not.
The study, to be published in the marketing magazine, is titled “Innovation Imprinting: Why Some Firms Beat the Post-IPO Innovation Slump” and is written by Simone Weis, Christine Moorman and Rajesh Chandy.
Growth and innovation are the main arguments for companies to go public and access the resources of the stock market. However, for most companies, going public is associated with a pronounced decline in venture innovation. Why? After companies go public, executives often perceive stock market pressures that reduce their incentives to invest in risky innovations. Investments may not return or do so within the foreseeable time frame, and investors may impose strict quarterly profit targets and judge companies by their short-term performance. Elon Musk captured those pressures when taking Tesla private to operate “without as much distraction and short-term thinking as possible,” as did Michael Dell who lamented that when he struggles to meet the quarterly demands of Wall Street, it’s “not always possible to focus on innovation for customers. Funding incremental innovation activities rather than larger disruptive innovation is one way to ensure short-term performance These pressures and resulting strategy produce the well-documented crisis of post-IPO innovation, which we believe affects approximately 70% of IPOs.
Looking at a sample of 207 companies in the consumer packaged goods industry that went public over a thirty-year period, this Marketing Review the article demonstrates that IPOs that engage in innovation footprint before they go public are able to overcome this crisis and continue to innovate. Wies explains that “Innovation footprinting occurs when companies establish product priorities and build market capabilities associated with breakthrough innovation in the years leading up to their IPO. This footprint establishes aspirations and routines within the company that support its ability to withstand potential stock market pressure to shift priorities and capabilities away from breakthrough innovation after its IPO. Moorman adds, “However, beyond sustaining innovation momentum, we show that innovation footprint also serves an external signaling function that enables these firms to attract a segment of investors whose Risk preferences are more favorable to innovation and more tolerant of short-term fluctuations in performance. that can often accompany innovation. Importantly, the authors find that if they overcome this post-IPO innovation crisis, publicly traded companies survive longer and show better financial performance.
These results challenge the idea that the stock market causes an inevitable death of disruptive innovation. Instead, executives can help their companies stay innovative by sowing the seeds of innovation before they go public. The research also challenges the pessimistic vision of the capacity of public companies to innovate by studying the firms that overcome these pressures and by proposing to managers concrete actions that can enable them to manage the transition to public status. “By studying the exceptions in the face of the generally pessimistic view of innovation by public companies, not averages, we offer insights to help managers prevent their companies from falling prey to this effect,” says Chandy. Furthermore, adds Wies, “our research reminds managers to consider how segmentation also applies to investors. Investors, like consumers, are not a homogeneous group. Instead, there are segments among investors who have different preferences and propensities to buy stocks of companies with different types and levels of risk. Just as marketing-related actions can attract different customer segments, a company’s marketing-related actions as a pre-IPO innovation footprint attract a segment of investors who share its values and support innovation.
Full article and author contact details available at: https://doi.org/10.1177/00222429221114317
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The Marketing Review develops and disseminates knowledge on real-world marketing issues useful to scholars, educators, managers, policymakers, consumers, and other societal stakeholders around the world. Published by the American Marketing Association since its founding in 1936, JM played an important role in shaping the content and boundaries of the marketing discipline. Shrihari Sridhar (Joe Foster ’56 Chair in Business Leadership, Professor of Marketing at Mays Business School, Texas A&M University) is the current editor.
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