Newswise – Researchers from Goethe University, Duke University and the London Business School have published a new paper in the Journal of Marketing that explains why some companies stay innovative even after they go public, while many others don’t.
The study, forthcoming in the Journal of Marketing, is titled Innovation Imprinting: Why Some Firms Beat the Post-IPO Innovation Slump and was authored by Simone Weis, Christine Moorman and Rajesh Chandy.
Growth and innovation are the main reasons for companies to go public and access resources from the stock exchange. For most companies, however, going public comes with a pronounced slump in risky innovation. Why? After companies go public, managers often perceive pressure from the stock market that reduces their incentives to invest in risky innovations. Investments may not pay off or within a predictable time frame, and investors may set strict quarterly profit targets and judge companies by their near-term performance. Elon Musk accepted those pressures when he privatized Tesla to operate “free of as much distraction and short-term thinking as possible,” as did Michael Dell, who lamented that it’s “not always possible to meet Wall Street’s quarterly requirements.” to fulfill”. Focus on innovating for clients.” Funding incremental innovation activities rather than larger, breakthrough innovations is one way to ensure the short-term performance demanded by the stock market. This pressure and resulting strategy lead to the well-documented post-IPO innovation slump, which we believe affects around 70% of IPOs.
By examining a sample of 207 companies in the consumer goods industry that go through an IPO over a 30-year period, this Journal of Marketing article shows that those IPOs that address innovation imprints before their IPO can weather that dip and continue be innovative. As Wies explains, “Innovation shaping occurs when companies set product priorities and build market capabilities associated with breakthrough innovations in the years leading up to their IPO. This imprint establishes aspirations and routines within the company that support its ability to withstand potential stock market pressures to shift priorities and capabilities post-IPO from breakthrough innovations.” Adds Moorman, “However, we show that the innovation imprint is not only maintains innovation momentum, but also performs an external signaling function, allowing these companies to attract a segment of investors whose risk preferences are more innovation-friendly and more forgiving of the short-term swings in performance that can often accompany innovation.” Importantly, the authors note that public companies will survive longer and achieve stronger financial performance if they overcome this post-IPO innovation slump.
These results challenge the notion that the stock market causes an inevitable death for breakthrough innovations. Instead, managers can help their companies stay innovative by planting the seeds of innovation before they go public. The study also challenges the pessimistic view of public companies’ ability to innovate by examining the companies that are resisting this pressure and offering concrete actions for managers to manage the transition to public status. “By examining the exceptions — not the averages — to the generally pessimistic view of public company innovation, we provide insights that help managers prevent their companies from falling victim to this effect,” says Chandy. Additionally, Wies adds, “Our research reminds managers to think about how segmentation applies to investors as well. Investors, like consumers, are not a homogenous group. Instead, there are segments among investors who have different tastes and propensities to buy company stocks with different types and levels of risk.” Just as marketing-related efforts can attract different segments of customers, a company’s marketing-related efforts pull in in the form of pre-IPO innovation imprints 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 Journal of Marketing develops and disseminates knowledge about real-world marketing issues useful to scientists, educators, managers, policymakers, consumers and other societal stakeholders around the world. Published by the American Marketing Association since its inception in 1936, JM has played a significant role in shaping the content and boundaries of the marketing discipline. Shrihari Sridhar (Joe Foster ’56 Chair in Management, Professor of Marketing at Mays Business School, Texas A&M University) serves as the current Editor-in-Chief.
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