LEVERAGING PRODUCT INNOVATION TO GAIN COMPETITIVE

ADVANTAGE : A SURVEY OF IMPACT OF INNOVATION ON CUSTOMER

SATISFACTION AND BRAND LOYALTY AMONG SAMSUNG HANDPHONES
USERS IN MALAYSIA
CHAPTER TWO
LITERATURE REVIEW
1. Introduction

1.Theoretical construct of competitive advantage

The term competitive advantage, despite its widespread use and popularity, has no uniformly
acceptable definition (Peteraf 2005, pg 178). Most often, it is described (as opposed to
defined) in term of superior financial performance (Winter, 1995 cited in Peteraf 2005, p.
179). Michael Porter (1985, p.3 cited in Bredrup 1995,p. 43), the strategic management guru
who popularised the term described competitive advantage as:
Competitive advantage grows out of value a firm is able to create for its buyers that
exceeds the firm's cost of creating it. Value is what buyers are willing to pay, and
superior value stems from offering lower prices than competitors for equivalent
benefits or providing unique benefits that more than offset a higher price. There are
two basic types of competitive advantage: cost leadership and differentiation.
Echoing Porters definition above, Saloner, Shepard and Podolny (2001) say that
most forms of competitive advantage mean either that a firm can produce some service or
product that its customers value than those produced by competitors or that it can produce its
service or product at a lower cost than its competitors. They also say that In order to
prosper, the firm must also be able to capture the value it creates.In order to create and
capture value the firm must have a sustainable competitive advantage.

In Peteraf and Barney (2003, p.314 cited in Peteraf 2005,p. 179), competitive advantage has
been described as follows :
An enterprise has a competitive advantage if it is able to create more economic value
than the marginal (breakeven) competitor in its product market.
It has been stated that in order to achieve a competitive advantage, a company needs
to pursue strategies that build on its existing resources and capabilities and formulate
strategies that build additional resources and capabilities (develop new competencies) (Hill
and Jones, 2010, p.103).

Strategies are formulated after considering various factors external and internal. There
are at least three analysis tool to evaluate a company's competitive advantage in relation to its
competitors. The first one of them is PEST analysis. PEST analysis is an overview analysis of
the environment that the business is in. In PEST analysis, four factors are considered namely
Political factors, Economic factors, Social factors and Technological factors (Turner,
2010,p.56).
Recent trend in the field of strategic management advocates the inclusion of a further
two factors namely, Environmental factors and Legal Factors. All combined the macro
environment factors analysis will be known as PESTEL. Environmental factors include
weather and climate, climate change which may affect the industry. Whereas Legal factors
includes legislation which may have effect to the business (Paladino, 2011, p.112).
A more focused, industry level analysis is done using the Porter's Five Forces Model.
According to Hill and Jones (2010), once the extend of the boundaries of an industry has
been identified, competitive forces in the industry environment can be analyzed using the
Five Forces Model developed by Michael E. Porter. According to Porter, there are five forces
that shape competition within an industry namely (1) the risk of entry by potential

competitors; (2) the intensity of rivalry among established companies within an industry; (3)
the bargaining power of buyers; (4) the bargaining power of suppliers; and (5) the closeness
of substitutes to an industry's products. Finally, SWOT analysis can also achieved the same
objective. SWOT stands for Strengths, Weakness, Opportunities and Threats and is a tool for
analyzing an organization's competitive position in relation to its competitors. Analysis of the
strengths, weaknesses, opportunities and threats brings together the results of both internal
company analysis and external environmental analysis. The common and beneficial
applications of SWOT are gaining of better understanding and insight into competitors and
market position (The Stationery Office of The Government of the United Kingdom,
2010,p.88).

2. Theoretical construct of Innovation

Innovation, as an academic construct, has been given various definitions in the literature.
Innovation leading theoretician is Joseph Schumpter (1883-1950). Schumpter has a broad
vision of the concept of innovation. According to Schumpter, innovation encompasses new
products, new production processes, new markets, new raw material and new forms of
organizations. However, to Schumpter, there is a common thread between all these changes in
that they involve carrying out new combination which are qualitatively important and
introduced by dynamic business leaders or entrepreneurs (OECD,2006,p.86). There has been
no significant change to the definition which is linked to any particular theorist up to recent
times (OECD,2006,p.86).
Among the newer definitions which is still anchored on Schumpter definition is that
innovation is the generation of a new idea and its implementation into a new product, process
or service leading to the dynamic growth of the national economy and the increase in
employment as well as to a creation of pure profit for the innovative business enterprise

(Urabe, Child and Kagono,1988,p.3).

3. Innovation as Competitive Advantage The Consumer as Judge of Value

As has been pointed out in the preceding paragraphs, the common theme in the definitions of
competitive advantage is value creation- and topical in our research is how innovation create
this value to the business. In the final analysis, it is the consumer who will be the judge of the
value this innovation is supposed to create (OECD,2006,p.86). The relationship between
these variables (i.e. innovation, competitive advantage and the consumer as arbiter of value)
is succinctly explained by Jean-Paul Flipo (2001 cited in OECD,2006,p.86) when he states
that :
(Innovation) is a process of creating new value (which is) geared first towards
customers, as the main arbiters of business competitiveness, but one that can also involve
other

stakeholders

as

major

beneficiaries,

such

as

the

organization

itself

(employees),shareholders (profitability), external partners, etc.

What this mean is that in todays economy, to be successful, business must provides
customers with the service or product they want in any form, at any time and in any place and
in order to accomplish this, the business must be a customer oriented company
(Poza,2010,p.182). According to Poza further, what matters most to customer oriented
companies is the outcome from the perspective of the customer who is using their product or
service. Only if customers see value in what a particular organizational capability does for
them can that capability turn into competitive advantage for the firm. This proposition
necessitates us to explore the definition of value in the literature.
Value has always been regarded as the fundamental basis for all marketing activity
(Holbrook, 1994 cited in Ulaga,2003,p.678). Anderson, Jain, and Chintagunta (1993 cited in
Ulaga,2003,p.678) define value in business markets asthe perceived worth in monetary units

of the set of economic, technical, service, and social benefits received by a customer firm in
exchange for the price paid for a product offering, taking into consideration the available
alternative suppliers offerings and prices.
Obviously, Anderson, Jain and Chintaguntas definition above is not the only singular
definition of value.Explaining further, Ulaga (2003) citing several literature, states that while
the marketing literature contains a variety of definitions stressing different aspects of the
concept of value, four common themes can be identified: (1) Customer value is a subjective
concept; (2) it is conceptualized as a trade-off between benefits and sacrifices; (3) benefits
and sacrifices can be multifaceted; and (4) value perceptions are relative to competition. In
short, customer value is generally defined as the trade-off between the benefits (what you
get) and the sacrifices (what you give) in a market exchange (Zeithaml, 1988 cited in
Ulaga,2003,p.678).

4. The Quest to Understand Customer Value

Understanding what buyers value within a given offering, creating value for them, and then
managing it over time have long been recognized as essential elements of every market
oriented firms core business strategy (Drucker, 1985, Porter, 1998; Desarbo, Jedidi and
Sinha, 2001 cited in Atalik,2009,p.85).
Companies, therefore, are continuously searching for new and better ways to create
value and differentiate their market offerings from their competitors to attract and retain
customers and make a profit (Bendapudi, Leone 2003 cited in Atalik,2009,p.85).In order to
do this (i.e. identifying ways to create value), many businesses are interested in Customer
Value Analysis which involves a structural analysis of the antecedent factors of perceived
value (i.e. perceived quality and perceived price) to assess their relative importance in the
perception of the buyers. Atalik (2009,p.85) explains further that customer value has

something to do with the benefit which a product or service creates in customer in return for
the cost that customer bear in order to get that service. The concept of value is often
compared to quality and price. Quality is a feature (a variable) that increases or decreases the
value of a product or a service. This can therefore be stated that quality = customer
satisfaction. Similarly, price factor is the money demanded for a product or a service but it
does not necessarily indicate the value of that product or service. The value of a product or
service is the proportion of the benefit it brings to customer relative to the price or cost.

Delivering customer value more effectively than competitors is perceived in many industries
as being quite straightforward customers are offered products and services that solve a
certain problem or fulfill a certain need, and for that they are willing to pay a reasonable
price. Firms that can provide this value more efficiently or in a better way than others have
been seeing their revenues increases (Pynnonen, Ritala and Hallikas (2011,p.51).
Today however, as services and products are becoming increasingly intertwined and
the competition increasingly global, delivering customer value is not as simple as it used to
be.Pynnonen, Ritala and Hallikas (2011) discussed about systemic customer value in order to
ascertain customers need. According to Pynnonen, Ritala and Hallikas (2011,p.52), The
essence of the concept of systemic value is in customer value creation. In order to beat the
competition the firm has to provide value for its customers, and the value of its offering has
to be higher than that of its competitors in the eyes of the customer (Bowman and Ambrosini,
2000 cited in Pynnonen, Ritala and Hallikas 2011,p.52). It thus has to know what customers
need and how to fulfill these needs. Therefore, after successfully figuring out what customers
want, it might seem straightforward to analyze customer value since, in general, customers
value products and services that solve a certain problem, entertain them, or provide other
specific benefits.

A firm that is able to deliver these benefits more efficiently and effectively will be
successful in the long run. However, in many cases the delivery is not straightforward
because the value the customer perceives may derive through several different but
intertwined attributes that are differently preferred by the customer. In order to provide
insights into this issue Pynnonen, Ritala and Hallikas (2011,p.52) has built a framework for
the systemic analysis of customer value.

5. Theoretical Framework of the Relationship Between Constructs in this Review

A theoretical framework of the relationship of innovation with customer satisfaction and
brand loyalty has been proposed by Nemati, Khan and Iftikhar (2010,p.303) as follows :

CUSTOMER SATISFACTION

INNOVATION

BRAND LOYALTY

Figure 1: Relationship of innovation with customer satisfaction and brand loyalty

The above diagram is based on the hypothesis that innovation has positive relationship with
customer satisfaction and brand loyalty. The diagram further indicates that customer
satisfaction and brand loyalty are dependent variables whereas innovation is an independent
variable and relationship between them is positive (Nemati, Khan and Iftikhar, 2010,p.303).

Nemati, A.R., Khan, K. & Iftikhar, M.(2010). Impact of Innovation on Customer Satisfaction
and Brand Loyalty, A Study of Mobile Phones users in Pakistan. European Journal of Social

Sciences. 16 (2), pp. 299- 306

This research proposed a refinement of Nemati et. al. (2010) theoretical framework above as
follows :

CUSTOMER SATISFACTION

INNOVATION

BRAND LOYALTY

Synthesis of the Literature Review and Conclusion

Competitive advantage of a product is closely connected to its value in the perception of the
consumer (i.e. the customer value). However, researches on customers value is still an area
with many potentials of growth. Most analysis focused on the trade off between quality and
price in order to ascertain customer value. Innovation, in this regard, is a subset of quality
which is ascertainable. There is a gap in the literature whereby study on Samsungs mobile
phone innovation as value in the eyes of its consumer is not investigated. Hence, this current
study.

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