Delaying introduction of innovations can yield market gain, revenue loss

Wait to innovate?

A new study by Natalie Mizik of the University of Washington Foster School of Business finds that some public companies artificially time the introduction of innovations in order to convince investors of the firm’s continual improvement. This “innovation ratchet strategy” is rewarded by the capital markets, though at the expense of revenue growth in product markets.

“These firms are trying to mimic the natural acceleration of innovations displayed by firms with improved innovation capabilities,” says Mizik, the J. Gary Shansby Endowed Professor of Marketing at Foster. “And the stock market doesn’t have enough information to know better.”


For the study, Mizik collaborated with Christine Moorman of Duke University, Simone Wies of Maastricht University, and Fredrika Spencer of the University of North Carolina at Wilmington.

The authors analyzed more than 13 years of innovation introductions in the consumer packaged goods industry. This included a wide range of public and private firms introducing more than 30,000 “new and improved” products—anything and everything you’d find on a grocery store shelf.

The analysis revealed that public and private firms in the same industry charted significantly different patterns of new product introductions. “The only substantial difference between the groups of firms,” Mizik says, “is that public firms have the stock market monitoring and evaluating and incentivizing them.”

Why ratcheting works

Mizik explains that the senior managers of public firms are evaluated, above all, on market performance. This reality creates a significant incentive to “ratchet” innovations—that is, to time their introduction so that they surprise the market and exceed its expectations. This accelerating pattern of innovation creates the appearance of an ascendant firm that innovates regularly and continually. Higher expectations bring higher valuations.

And the market has trouble telling the difference.

“The market is efficient, but only when it has good information,” Mizik says. “It can’t easily distinguish whether or not a firm is fudging the pattern of innovation to appear that it is improving or whether it has indeed improved innovation capabilities. Managers are the only ones to know for sure, and they’re certainly not going to share.”

And why would they? This strategy, the study confirms, is rewarded by gains in market valuation, at least in the short term. But the analysis also shows that these firms that strategically withhold innovations from consumers see significantly lower sales growth—a loss in potential revenue for every day that a new product sits idle.

Myopic management

Though this study deals exclusively in the consumer packaged goods market, Mizik believes that a similar phenomenon occurs in the technology markets—only in reverse. With greater pressure to claim a first-mover advantage and lower costs associated with imperfect products, tech companies often rush their innovations to market before all the bugs are worked out. But whether rushing tech goods to market or withholding new packaged consumer products, the motivation is essentially the same—to impress Wall Street.

It’s just another of the many ways that public companies try to impress the market when the fundamentals are maybe not so impressive. The research of Mizik and others has documented earnings management strategies that manipulate accounting, offer short-term pricing incentives, slash discretionary spending on R&D and advertising, and delay new projects—all in an effort to meet immediate earnings targets.

Innovation ratcheting, Mizik says, “is another way to game the market.”

“Myopic management of any kind is not sustainable,” she adds. “At some point you have to pay the price.”

Firm Innovation and the Ratchet Effect Among Consumer Packaged Goods Firms” is published in the November/December 2012 issue of Marketing Science.