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Strategic innovation: the construct, its

drivers and its strategic outcomes
a b
Bodo B. Schlegelmilch , Adamantios Diamantopoulos & Peter
c
Kreuz
a
Vienna University of Economics and Business Administration ,
Austria
b
Loughborough University Business School , UK
c
Future Trend Institute , Vienna, Austria
Published online: 17 May 2010.

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Strategic innovation: the construct, its drivers and its strategic outcomes, Journal of Strategic
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 JOURNAL
STRATEGICOF STRATEGIC MARKETING 11 117–132 ( JUNE 2003)
INNOVATION 117

Strategic innovation: the construct, its drivers

and its strategic outcomes
BODO B. SCHLEGELMILCH
Vienna University of Economics and Business Administration, Austria

ADAMANTIOS DIAMANTOPOULOS
Loughborough University Business School, UK
Downloaded by [New York University] at 07:35 23 May 2015

PETER KREUZ
Future Trend Institute, Vienna, Austria

Strategic innovation has been described as the fundamental reconceptualization of

business models and the reshaping of existing markets by breaking the rules and
changing the nature of competition. This paper traces the notion of strategic inno-
vation in the literature, offers corporate examples from Amazon.com and Swatch
to illustrate key drivers and outcomes of strategic innovation, and synthesizes the
insights gained in a Multiple Indicator–MultIple Causes (MIMIC) model. The model
offers a formal specification of the strategic innovation construct and provides conceptual
guidance for its operationalization in the context of empirical research.
KEYWORDS: Strategy; innovation; MIMIC model

INTRODUCTION
As the information age takes over from the industrial age, companies have been focusing their
forces on improving efficiency in order to match or beat their rivals. As a result, re-engineering,
competitive benchmarking and quality management often dominate corporate activities (Hamel,
2000). Improving efficiency by following similar strategies, however, leads to a competitive trap:
as companies try to outdo one another, they end up competing solely on the basis of incremental
improvements in cost, quality or both (Kim and Mauborgne, 1999a). However, after a number of
cost-cutting exercises and/or quality drives, even the most experienced managers will find it
difficult to further improve corporate performance based solely on improvements in efficiency
and quality. What is required are fundamentally new business ideas and strategies.
Strategic innovation is how the academic literature has come to call the combination of innovation
and strategy (Geroski, 1998; Krinsky and Jenkins, 1997; Markides, 1997, 1998; Martinsons, 1993). In
this paper we trace the notion of strategic innovation in the literature and develop a formal model
for its operationalization in empirical research. We begin by describing the nature of strategic
Journal of Strategic Marketing ISSN 0965–254X print/ISSN 1466–4488 online © 2003 Taylor & Francis Ltd
http://www.tandf.co.uk/journals
DOI: 10.1080/0965254032000102948
 118 SCHLEGELMILCH ET AL.

innovation and follow this by a consideration of its key drivers and outcomes using examples from
two well-known companies: Amazon and Swatch. We conclude the paper by synthesizing the
insights gained in a Multiple Indicator–MultIple Causes (MIMIC) model, offering conceptual
guidance on its operationalization for purposes of empirical research.

THE CONCEPT OF STRATEGIC INNOVATION

The last decade has witnessed the emergence of a rich body of research that has furthered
scholarly and managerial understanding of strategy and innovation (Mintzberg, Ahlstrand and
Lampel, 1998). However, most relevant research was focused either on strategy (and the process of
strategic planning) or on innovation (and the process of new product development); thus, strategy
and innovation have developed as largely separate schools of thought (Adler et al., 1992; Englund
and Graham, 1999; Krinsky and Jenkins, 1997). In this context, while the strategy and strategic
planning literatures have primarily focused on the corporate and business unit (SBU) levels, the
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innovation literature has focused mainly on the product level; strategy has been applied to the
product level as rarely as innovation has been applied to the corporate or business unit level
(Varadarajan and Jayachandran, 1999). Only in recent years have researchers began to challenge the
traditional mindset and combined innovation and corporate strategy (Krinsky and Jenkins, 1997).
In this article, we will refer to the concept of applying innovation to corporate strategy as
strategic innovation, the expression most often used in the literature (Geroski, 1998; Krinsky and
Jenkins, 1997; Markides, 1997, 1998, 1999; Martinsons, 1993; Yates and Skarzynski, 1999). Other
closely related expressions that are used include strategy innovation (Hamel, 1996, 1998b, 1998c,
1999), value innovation (Kim and Mauborgne, 1997a, 1997b, 1999a, 1999b; Seurat, 1999), non-
linear innovation (Hamel, 1998a), discontinuous innovation (Lynn et al., 1996a), competitive
innovation (Hamel and Prahalad, 1989), and new-style product development ( Johne, 1992). Hamel
(1998b, p. 8), for example, defines strategy innovation as the ‘capacity to reconceive the existing
industry model in ways that create new value for customers, wrong-foot competitors, and produce
new wealth for all stakeholders’. Similarly, Kim and Mauborgne (1999b, p. 43) define value inno-
vation as a concept that ‘makes the competition irrelevant by offering fundamentally new and
superior buyer value in existing markets and by enabling a quantum leap in buyer value to create
new markets’. Finally, new-style product development has been described as ‘reshaping an existing
market by changing the nature of competition . . . , by breaking existing rules, and introducing new
ones which work in one’s favor’ (Johne, 1992, p. 8).
These examples show that, in spite of the variety of labels and definitions, there are key
commonalties in the literature, including the fundamental questioning of mental models and tacit
rules (Geroski, 1998; Gilad, 1994; Hamel, 1996, 1998b; Johne, 1992; Kim and Mauborgne, 1999b;
Lynn, Morone and Paulson, 1996a; Markides, 1997, 1998; Martinsons, 1993), the establishment of
growth-visioning and creative processes to formulating strategy (Hamel, 1996, 1998a; Kim and
Mauborgne, 1999b; Krinsky and Jenkins, 1997; Martinsons, 1993), the redefinition of market space
and industry boundaries (Hamel, 1996; Johne, 1992; Kim and Mauborgne, 1999a, 1999b), and the
achievement of dramatic value for customers and high growth for companies (Krinsky and Jenkins,
1997; Markides, 1999; Seurat, 1999). Thus, based on the literature, we offer the following definition:
Strategic innovation is the fundamental reconceptualization of the business model and the reshaping of existing
markets (by breaking the rules and changing the nature of competition) to achieve dramatic value improvements
for customers and high growth for companies.
The above definition contains three key elements. The first element is the fundamental
reconceptualization of the business model. Strategic innovators must ask the most basic questions about
 STRATEGIC INNOVATION 119

their business model: What business are we in? Who are the customers? How do we achieve value?
Asking such fundamental questions forces managers to look at the tacit rules and assumptions that
underlie the way business is traditionally conducted in their industry (Geroski, 1998; Hamel, 1998a;
Markides, 1997, 1998). Strategic innovators take nothing for granted and guard against established
mental models and tacit industry rules; they ignore what their companies are and concentrate on
what they could be (Kim and Mauborgne, 1999b; Markides, 1999; Yates and Skarzynski, 1999).
The second key element is the reshaping of existing markets. Once strategic innovators are aware
of the tacit rules and assumptions that underlie a certain business, they purposefully break these
rules and reshape existing markets by changing the nature of competition ( Johne, 1992). Strategic
innovators do not only focus on rivals within their market or on their competitive position within
a strategic group; instead, they look across substitute markets and across substitute strategic groups
(Kim and Mauborgne, 1999a). Thus, while conventional strategic logic focuses on fighting for
market share in existing markets, strategic innovators invent new market space (Hamel, 1996;
Kim and Mauborgne, 1999a; Seurat, 1999). And while conventional logic focuses on outperform-
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ing competition, strategic innovators seek radically superior value to make competition irrelevant
(Hamel, 1998a, 1999). Thus, strategic innovators do not try to adapt to external trends as they
occur in their market but actively participate in shaping markets and external trends over time
(Kim and Mauborgne, 1999a; Hamel, 1998b).
The third key element is dramatic value improvements for customers. Strategic innovation is not
about making marginal or incremental improvements but about achieving quantum leaps in value
(Hamel, 1998b; Kim and Mauborgne, 1997a, 1999a; Peters, 1990). Such strong emphasis on
value places the customer, not the competition, at the center of strategic thinking. Whereas the
conventional focus on retaining and better satisfying existing customers tends to promote hesitancy
to challenge the status quo for fear of losing or dissatisfying existing customers (Johne, 1994;
Markides, 1998), strategic innovators follow non-customers closely because they provide deep
and often unusual insights into trends and changes (Geroski, 1998; Kim and Mauborgne, 1999b;
Lynn, Morone and Paulson, 1996a). As a result, strategic innovators can identify new products
and services to offer before existing customers even think of them (Seurat, 1999; Prahalad, 1993;
Peters, 1990).
Because strategic innovators question everything about their particular industry, business model
and competitors, they explore a far wider range of strategic options than other companies (Hamel,
2000). This broadens their creative scope, allowing them to find opportunities where other companies
can see only constraints imposed by external conditions (Kim and Mauborgne, 1999b). Indeed,
Hamel (1998a) considers strategic innovation to be the competitive advantage for companies
intent on winning in the new economy.

FOSTERING STRATEGIC INNOVATION

The following section synthesizes the existing literature on four key drivers that have been identified
as jointly fostering strategic innovation in a company: culture, processes, people and resources.
Throughout this discussion, examples are drawn from two companies that are widely regarded as
strategic innovators, notably Amazon.com and Swatch.
Since opening for business in 1995, Amazon.com quickly developed into one of the most
widely known, used and cited commerce sites on the Internet (SEC, 1999); we use examples from
Amazon.com to illustrate strategic innovation in a start-up company.
However, strategic innovation is not only relevant to start-up companies. Swatch’s history
illustrates that strategic innovation can also turn around an incumbent company. In the mid-1970s,
 120 SCHLEGELMILCH ET AL.

the Swiss watch industry was in a deep crisis with its world market share down to 15% from 43%
in less than 10 years (Abson, 1996). The answer to the crisis was Swatch, a slim plastic watch with
only 51 components that combined high quality with an affordable price, which first went on sale
in 1983. Today, it is the most successful wristwatch of all time and the Swatch Group, the parent
company, is the largest and most dynamic watch company in the world (Swatch, 1999). We thus
use examples from Swatch to illustrate strategic innovation in a traditional industry.

Culture
Researchers unanimously agree on the single most important cultural value necessary for strategic
innovation: the establishment of a questioning attitude (Geroski, 1998; Hamel, 1998a, 1998b;
Kim and Mauborgne, 1999b; Lynn, Morone and Paulson, 1996; Markides, 1997, 1998, 1999;
Martinsons, 1993; O’Reilly III and Tushman, 1997; Peters, 1988, 1991; Treacy and Wiersema,
1993). A prerequisite to strategic innovation is the identification of an organization’s dominant
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mental models, as manifested in its culture, routines and unwritten rules of behavior (Hamel,
1998b; Markides, 1997, 1998). A company’s most dominant mental model is its perception of the
business it is in, including assumptions about the competitive arena, customers, suppliers and
technology (Gilad, 1994). Markides (1998, p. 34), for example, considers it essential to funda-
mentally question the way business is done and mentally experiment with a few ‘whys’ and a few
‘what ifs’. Similarly, according to Hamel (1998b), companies have to create a culture that permanently
challenges orthodoxies, unleashes a deep sense of discovery, and encourages decision makers to
look through different lenses to discover new perspectives; indeed, companies are urged to start
the process of strategic innovation by identifying the 10 or 20 most fundamental beliefs that the
incumbents in one’s industry share (Hamel, 1996).
How is this played out in practice? At Amazon.com, for example, Jeff Bezos, founder and CEO,
pays very close attention that the company preserves its questioning attitude and never gets satis-
fied with the status quo. He defines his role as ‘to make sure we’re never too comfortable’ (Warner,
1998) and emphasizes, ‘I ask our people to wake up afraid and terrified every morning’ (Guglielmo,
1999). Amazon’s culture is thus characterized by a deep sense of urgency (Hazleton, 1998).
Swatch has also created a culture that challenges orthodoxies, promotes a deep sense of discovery
and encourages the discovery of new perspectives. Nicolas Hayek, co-founder and CEO of the
Swatch Group, explains that building mass-market products in countries like Switzerland is only
possible ‘if you embrace the fantasy and imagination of your childhood and youth. Everywhere
children believe in their dreams. And they ask the same question: Why? Why does something
work a certain way? Why do we behave in certain ways? We ask ourselves those questions every
day’ (Taylor, 1993, p. 101).
To establish such a culture in the incumbent company, Hayek created a deep sense of urgency:
‘I inflicted pain, made controversy, created worry’ (Taylor, 1993, p. 110). Today, the company
maintains its culture by flexible organizational boundaries, a preference for quick-changing project
teams, a chaotic workplace allowing freedom of ideas and creativity, and by supporting staff
turnover, especially in the design labs (Abson, 1996; Taylor, 1993).

Processes
The conventional strategy development process is often characterized as an analytic, calendar-
driven ritual (Camillus, 1996; Hamel, 1996, 1998b, 1999; Hamel and Prahalad, 1989; Krinsky
and Jenkins, 1997; Martinsons, 1993; Mintzberg, 1993; Yates and Skarzynski, 1999). As a result,
 STRATEGIC INNOVATION 121

strategic planning has been criticized as being reductionist, based on simple rules (Hamel, 1996,
1998b; Martinsons, 1993), obsessed with control (Mintzberg, 1993), and too reliant on historical
patterns (Hamel, 1996; Krinsky and Jenkins, 1997; Martinsons, 1993). These characteristics tend to
lead to a general acceptance of prevailing business parameters. As a consequence, the outcome of
the strategic process is constrained by current conditions and key growth opportunities might be
overlooked; in short, incrementalism prevails (Hamel, 1996; Kim and Mauborgne, 1999b; Krinsky
and Jenkins, 1997; Mintzberg, 1993).
In contrast, strategic innovation is a process of creative exploration; it is ‘a growth-visioning
and synthetic process’ (Krinsky and Jenkins, 1997, p. 38; Martinsons, 1993, p. 10), that ‘adapts a
future-pull orientation’ (Krinsky and Jenkins, 1997, p. 37), ‘synthesizes unconventional options’
(Hamel, 1998a, p. 82), and ‘transcends existing business boundaries intentionally’ (Hamel, 1996,
p. 73). As a result, uncontested competitive space can be invented and growth opportunities
overlooked by conventional processes identified and subsequently pursued (Hamel, 1996; Kim
and Mauborgne, 1999b; Krinsky and Jenkins, 1997; Seurat, 1999).
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Interestingly, the question of whether the creative process of strategic innovation should replace
or complement the traditional analytic strategy development process has not been addressed in the
literature. Only Hamel (1998a) proposes a strategy innovation process that combines parts of both
positions: First, the boundaries of (conventional) strategic thought should be expanded to develop
a rich menu of non-traditional strategic options. Then, ideas and options should be analyzed, and
senior management should set the strategic boundaries to create coherence and consistency.
Amazon.com’s process of strategy development has been described as analytic as well as creative
and growth-visioning (Donnelly, 1999; Gallivan, 1998). Bezos defined research and the thorough
evaluation of the market as key success factors for the company (Hazleton, 1998). Since Amazon.com
was a start-up that intentionally transcended existing business boundaries, it could not rely on
historical patterns or on simply extending the status quo forward. As part of the growth-visioning
process Bezos projected himself into the future (Homer, 1998), synthesized unconventional
options, and let strategy emerge: ‘Any predictions would give a false sense of precision . . . Anyone
who had predicted what has actually happened would have had to be institutionalized’ (Kellaway,
1998: 13).
After the Swiss share of the world watch market had slid dramatically (Abson, 1996), conventional
strategy development processes and reliance on historical patterns were of little help for compa-
nies like Swatch. The process that created Swatch’s strategic innovation was a growth-visioning
and creative process that adopted a future-pull orientation. Hayek strongly recommends this
approach to other companies: ‘CEO’s must say to their people: “we will build this product in our
country at a lower cost and with higher quality than anywhere else in the world.” Then they have
to figure out how to do it. We do this all the time’ (Taylor, 1993, p. 100). Swatch’s process of
strategic innovation was, however, not only a process of creative exploration; it was analytical as
well: ‘It was a meticulously planned response to the Far Eastern companies who had almost
eliminated the Swiss presence’ (Weisbrod and Gilligan, 1998: 1).

People
How companies select people to create strategic innovation is key to the success of the endeavor
(Hamel, 2000). Generally, the literature distinguishes between people within the company (i.e.,
managers and other employees) and people outside the company (i.e., customers, corporate partners,
and leading industry thinkers).
 122 SCHLEGELMILCH ET AL.

People within the company

A common criticism in the literature is that strategy is typically formulated by the senior executives
of an organization (Hamel, 1996, 1998a, 1998b; Hamel and Prahalad, 1989; Krinsky and Jenkins,
1997). For example, Hamel (1998a) points out that top executives often have the largest invest-
ment in the past and the greatest reverence for industrial dogma. He doubts that they are willing
or able to break existing rules that govern the competitive behavior in their industry and asks
ironically, ‘How often does the revolution start with a monarchy?’ (Hamel, 1998a, p. 23). He
concludes that the large amount of experience executives possess is valuable only to the extent
that the future is like the past and that in today’s fast changing environment experience might
become more and more irrelevant.
In light of the above, it is often argued that the strategy creation process is most powerful when
dialogue about strategy cuts across all functional and hierarchical boundaries, making the process
pluralistic and deeply participative (Floyd and Woolridge, 1994; Hamel, 1996, 1998b; Hamel and
Prahalad, 1989; Mintzberg, 1987; Nonaka, 1988). Krinsky and Jenkins (1997) recommend that
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everyone whose support is essential to the successful execution of a new strategy should be involved
in its creation. With specific reference to strategic innovation, representatives from R&D, sales,
marketing, finance and other key functions should play an active role in developing strategies. In
addition, the different perspectives that young people, newcomers, and those at the periphery of
an organization can bring to strategy creation should become more influential (Hamel, 1996,
1997, 1998a, 1998b). Young people, although living closest to the future and having the biggest
stake in the future, are generally excluded from the strategy process; newcomers are particularly
useful if they have experience in other industries and have not been socialized into a common
way of thinking; people at the periphery of an organization are often left out of conversations
about the future, although they are usually creative and exposed to ideas and developments that
do not conform to a company’s orthodoxies (Hamel, 1996, 1998a, 1998b; Kim and Mauborgne,
1999b; Sull, 1999).
Although there are many examples of strategic innovations created by visionaries, the majority
of the literature considers visionaries not a prerequisite of strategic innovation (Hamel, 1998a;
Krinsky and Jenkins, 1997). Strategic innovations are seen as the product of activists, be it middle
managers, representatives from different organizational functions, young people, newcomers, or
people at the organizational periphery (Floyd and Woolridge, 1994; Hamel, 1998a, 1998b; Krinsky
and Jenkins, 1997).

People outside the company

Creating a dialogue about strategy that crosses organizational and industry boundaries substantially
increases the odds that truly new strategic insights will emerge (Krinsky and Jenkins, 1997; Markides,
1997; Martinsons, 1993; Peters, 1990; Tushman et al., 1997). Indeed, strategic innovation demands
an outside-in perspective (Krinsky and Jenkins, 1997; Martinsons, 1993) so that a wide range of
credible, external perspectives can be integrated into the strategy-creating process, challenging
assumptions about the future and filling critical knowledge gaps. This outside-in perspective can
come from corporate partners (e.g., suppliers or distributors), leading industry thinkers or consult-
ants, all of whom can take an active role in driving strategy (Krinsky and Jenkins, 1997; Tushman
et al., 1997).
Although there are no signs that strategy at Amazon.com has been developed by anybody
else but the company’s top executives, their very different backgrounds and experiences
brought a variety of perspectives into the company’s strategy development process. Among
 STRATEGIC INNOVATION 123

others, executives include liberal-arts majors, rock musicians, magazine editors, and a Wall Street
analyst (Donnelly, 1999; Hof et al., 1998; Rawsthorn and Studemann, 1998).
Similarly, Swatch’s strategic innovation was clearly created under the direction of the company’s
two top executives, Nicolas Hayek and Ernst Thomke (Abson, 1996). However, the two execu-
tives brought a broad perspective with them. Neither of them had a large investment in the
industry’s past or a great reverence for industrial dogma. Hayek brought a filmmaker’s experience
to Swatch; he had been a filmmaker in Paris prior to joining the company (Parry, 1995). Thomke,
on the other hand, with university degrees in chemistry and cancer research, joined Swatch after
proving his success in the marketing department of Beecham Pharmaceuticals (Nye, 1985; Short,
1997; Weisbrod and Gilligan, 1998).

Resources
According to conventional logic, a company should leverage its existing resources, i.e., its assets
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and capabilities (Baden-Fuller and Pitt, 1996; Kim and Mauborgne, 1997a, 1999b; Martinsons,
1993; Sanjay, 1999). When these firm-specific resources are rare, valuable, non-imitable, and
characterized by an absence of equivalent substitutes, superior business performance can be achieved
(Barney, 1991; Chatterjee, 1998; Varadarajan and Jayachandran, 1999; Wernerfelt, 1984).
According to this resource-based view, companies see business opportunities through the lens of
their existing assets and capabilities and ask: Given what we have, what is the best we can do?
(Kim and Mauborgne, 1997a). Thus the key focus is on matching internal systems and capabilities
with outside opportunities (Geroski, 1998).
Much of the literature on strategic innovation criticizes this inwardly driven focus on corporate
capabilities, since it significantly limits a company’s opportunity horizon: by focusing on existing
capabilities, the status quo biases and constrains a company’s future (Baden-Fuller and Pitt, 1996; Kim
and Mauborgne, 1997a, 1999b). Strategic innovators break the paradigm of matching internal
resources with outside opportunities (Baden-Fuller and Pitt, 1996; Geroski, 1998; Kim and
Mauborgne, 1997a; Krinsky and Jenkins, 1997) and ask: What would we do if we were starting
anew? (Kim and Mauborgne, 1997a). Thus, strategic innovators are willing to look beyond current
constraints to create an ‘ideal’ picture of the future; they then work backwards to the present day and
determine what is required to reach the desired future state (Hamel, 1996; Krinsky and Jenkins, 1997).
Strategic innovators are able to break the paradigm of matching internal resources with outside oppor-
tunities because they create and sustain strong relationships with a networks of partners that
provide complementary assets, capabilities, products and services (Kim and Mauborgne, 1997b).
While a strategically innovative company does often leverage existing assets and capabilities, it assesses
business opportunities without being limited by where it is at a given moment (Kim and Mauborgne,
1997a). By looking beyond current constraints, not only do such companies gain more insight
into where value for buyers resides (and how it is changing) but they are also much more likely to
act on that insight (Hamel, 1996; Kim and Mauborgne, 1997a; Krinsky and Jenkins, 1997).
To make sure that the future of Amazon.com would not be restricted by corporate capabilities,
internal resources were built up very carefully and emphasis was placed on the development of
external networks. For example, although the company offers a selection of more than 2.5 million
titles, only about 500 bestsellers are held on inventory ( Jackson, 1996). A strong network of
partners that provide complementary assets and capabilities supplements the internal resources.
Specifically, Amazon.com has live electronic links to a dozen wholesalers, and strong relationships
with various distributors and publishers, freight companies, other Web sites and other Web service
providers (Homer, 1998; Jackson, 1996; SEC, 1997).
 124 SCHLEGELMILCH ET AL.

Swatch assembles all the watches it sells and also builds most of the components for the watches
it assembles. According to Hayek, this creates independence and freedom to maneuver in the
market (Taylor, 1993). However, with regard to design and creativity, Swatch relies exclusively
on a network of partners and collaborates with external creative units in major cities such as New
York, Tokyo, Paris, and Milan (Abson, 1996).
Table 1 summarizes the drivers of strategic innovation found in the literature and links them to
the corporate examples of Amazon.com and Swatch.

STRATEGIC INNOVATION OUTCOMES

Customers
Conventional wisdom demands that firms follow their customers’ needs and wants, satisfy them
more effectively than competitors do, and focus their energy on retaining existing buyer groups
(e.g., Kotler, 2000; Varadarajan and Jayachandran, 1999). With regard to innovation, firms are
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TABLE 1. Strategic innovation drivers: Iiterature and company examples

Driver Company Examples

Amazon.com Swatch

Culture
The single most important cultural
value that leads to strategic
innovation is the establishment of
a questioning attitude.
Process
Strategic innovation is achieved
through a process of creative
exploration.
People
Strategic innovation needs a
broad-based perspective; the
dialogue about strategy should
cross functional and hierarchical
boundaries. People outside the
company should be involved to
get an outside-in perspective.
Resources
Strategic innovators do not focus
on matching internal resources
with outside opportunities. They
create strong relationships with a
network of partners that provide
complementary capabilities.
Amazon.com’s culture is
characterized by a deep sense
of urgency. The culture perma-
nently challenges orthodoxies.
Amazon.com’s processes were
creative and growth-visioning as
well as analytic. Research and a
thorough evaluation of the
market were key success factors.
Amazon.com’s strategy has been
developed by the company’s top
executives. Their very different
backgrounds and experiences
brought a variety of perspectives
into the process.
Amazon.com. has a strong
network of partners that
provides complementary assets
and capabilities supplement
internal resources.
Swatch permanently questions
mental models. The company’s
culture encourages challenging
the status quo and discovering
new perspectives.
Swatch’s processes were creative
and had a future-pull orienta-
tion. They were also analytical: a
meticulously planned response
to the actions of Far Eastern
companies.
Swatch’s strategic innovation
was created under the direc-
tion of only two top executives.
However, neither of them had a
strong experience in the watch
industry or a large investment in
the industry’s past.
Although the production of
Swatch is mainly done in-house,
the design is created by external
creative units in Europe, Asia,
and the US.
 STRATEGIC INNOVATION 125

often reminded of the importance of listening to the voice of the market, asking customers to
identify new ideas and involving them in the product development process (e.g., Foxall and
Johnston, 1987; Johne, 1994; Markides, 1997; Parkinson, 1982; Von Hippel, 1988; Voss, 1985).
The literature on strategic innovation challenges these arguments. For example, Kim and
Mauborgne (1999b) argue that the conventional focus on retaining and better satisfying existing
customers tends to promote hesitancy to challenge the status quo for fear of losing or dissatisfying
existing customers. Similarly, Sull (1999) warns that, in a fast-paced environment, strong long-term
relationships may turn into shackles, limiting a company’s flexibility. Finally, Varadarajan and
Jayachandran (1999) point out that the need to maintain existing customer relationships can hinder
companies from developing new products and/or new markets. These arguments are supported by
studies of successful new product development practices which indicate that success derives from
proactive market interpretation, rather than from following the suggestions of key customers ( Johnson,
1999; Lynn, Morone and Paulson, 1996). Thus, strategically innovative companies create value
proactively; they provide customers with new solutions and give themselves answers to questions
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they did not ask (Kim and Mauborgne, 1999b; Markides, 1997; Seurat, 1999).
With regard to customers, Amazon.com wants ‘to be the earth’s most customer centric company’
(Guglielmo, 1999). In contrast to conventional logic, however, it did not achieve its strategic
innovation with conventional market research techniques such as concept testing, customer surveys,
focus groups or demographic segmentation. Even today, the company hardly asks customers to
identify new ideas or involves them in the service development process. Rather than following
customers’ suggestions, Amazon.com’s success results from the company’s proactive market inter-
pretation and from its relentless efforts to give customers ‘the things they want and the things they
don’t know they want’ (Guglielmo, 1999; Hazleton, 1998).
The Swatch example also appears to give credence to the strategic innovation literature on
customers. Instead of relying on conventional market research techniques, Swatch is convinced
that success can only result from a proactive market interpretation, and not from following the
suggestions of customers. The company does not ask customers to identify new ideas or involve
them in the new product development process. According to Hayek, Swatch intends to change
peoples’ habits and therefore has always to be ahead of trends (Abson, 1996; Parry, 1995).

Competition
According to conventional logic, firms should closely monitor actions and reactions of competi-
tors, continuously compare their strengths and weaknesses with those of their competitors and
focus on building competitive advantages (Kim and Mauborgne, 1997a, 1999a, 1999b; Seurat,
1999). When asked to build competitive advantage, managers typically assess what competitors
do and then strive to outperform them (Kim and Mauborgne, 1999b). However, significant shifts in
market share usually occur not because companies try to play the game better than the competition,
but because they reconceive the industry model and change the rules of the game (Markides,
1997; Hamel, 1998a).
Two major disadvantages of strategy driven by competition can be identified: First, strategies
tend to converge along the same basic dimensions of competition (Kim and Mauborgne, 1999a;
1999b; Markides, 1999). Second, competition-based strategy tends to lead to reactive, incremen-
tal, and often imitative moves. In the process, resources are absorbed in responding to daily
competitive moves, rather than being used in creating growth opportunities (Hamel, 1998a; Kim
and Mauborgne, 1999b; Seurat, 1999). As a consequence, emerging markets and changing
customer demands become hazy and, although intense competition makes innovation indispensable,
 126 SCHLEGELMILCH ET AL.

the strong focus on competition consumes most effort and makes innovation difficult to attain
(Kim and Mauborgne, 1999b).
Strategically innovative firms break the conventional logic of striving to outperform competi-
tors: competition is monitored but not used as benchmark (Kim and Mauborgne, 1997a). Instead,
the objective is to make competition irrelevant by offering fundamentally new and superior value
in existing markets and by enabling a quantum leap in buyer value to create new markets (Hamel,
1998b; Kim and Mauborgne, 1999b; Seurat, 1999). Strategic innovators first define the total
solution buyers seek when they choose a product or service and then look across complementary
product and service offerings that go beyond the bounds of the industry to discover untapped
value (Kim and Mauborgne, 1999a, 1999b). Because strategically innovative firms do not focus
on matching or beating competitors, they can distinguish the factors that deliver superior value
from all other factors the industry competes on. Thus strategic innovators do not follow a certain
strategy just because that is what their rivals are doing (Geroski, 1998; Kim and Mauborgne,
1997a). Instead, they set out to make competition irrelevant.
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Amazon.com illustrates this point: the company aims to make its ‘bricks-and-mortar’ competitors
irrelevant (Gallivan, 1998). To achieve this, Amazon.com offers its customers at least three fundamental
value improvements: a reduced price level, a much wider selection of titles, and a dramatically
improved purchasing convenience (Anderson, 1997). Although the retail book industry is intensely
competitive, the established booksellers tended to dismiss Amazon.com at the beginning as a ‘cult
venture’ with limited appeal (Rawsthorn and Studemann, 1998). Today, the company is considered
the universal model for successful Internet retailing (Hazleton, 1998; Willis, 1998). In the meantime,
the ‘bricks-and-mortar’ competitors have launched their own Web sites and are taking Amazon.com
as their benchmark (Rawsthorn and Studemann, 1998).
Swatch also broke with the conventional logic of striving to outperform competitors. Instead, it
aimed to make its Asian competitors irrelevant by creating a new market and by offering new and
superior value to customers. Swatch succeeded as a strategic innovator by making its watches fashion
accessories at a time when its Japanese competitors were offering reasonable priced timekeeping
(Fuhrmann, 1992; Pinson and Kimball, 1987). At the beginning, competitors tended to dismiss
Swatch, but followed its strategic innovation quickly and offered their own brands that appealed
to the newly created market (Weisbrod and Gilligan, 1998).
Table 2 summarizes the main arguments of the literature on strategic innovation outcomes and
illustrates them with the corporate examples of Amazon.com and Swatch.

EMERGING FRAMEWORK
Having discussed the drivers and outcomes of strategic innovation separately, Figure 1 now draws
these together in a Multiple Indicators–MultIple Causes (MIMIC) model (Jöreskog and Goldberger,
1975). Specifically, the construct of strategic innovation is represented as a latent variable (η),
which is determined by four antecedent variables (x1−x4); the latter represent the four key drivers
that combine to create the necessary conditions for strategic innovation (i.e., culture, processes,
people and resources). The outcomes of strategic innovation, on the other hand, are captured by
y1 and y2 which reflect the impact on customer value and competitive positioning respectively
(see Appendix for the formal specification of the model).1

1
In terms of measurement theory, the x-variables are formative measures, whereas the y-variables are reflective measures;
for a detailed discussion of the differences between the two types of measures, see Diamantopoulos and Winklhofer
(2001) and references given therein.
 STRATEGIC INNOVATION
TABLE 2. Strategic innovation outcomes: Iiterature and company examples
Outcome
Customer
Strategic innovators do not
focus on retaining and better
satisfying existing customers.
They follow non-customers
closely, think ahead, and identify
new offerings before customers
think of them.
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Competitive Positioning
Strategic innovators do not
focus on outperforming
competitors. They make
competition irrelevant by
offering fundamentally new and
superior value.
FIGURE 1. Strategic innovation MIMIC model.
Company Examples
Amazon.com
Amazon.com’s success results
from proactive market interpre-
tation, not from following
customers’ suggestions. The
company hardly asks customers
to identify new ideas or involves
them in the service develop-
ment process.
Amazon.com did not use
competitors as benchmark and
did not try to outperform them.
The company created a new
market by offering new and
superior value to its customers.
127
Swatch
To complement its strategic
innovation, Swatch did not rely
on market research or
customers’ suggestions.
Customers are not asked to
identify new ideas and are not
involved in the product
development process.
Swatch did not use competi-
tors as benchmark and did not
try to outperform them. The
company created a new market
by offering new and superior
value to its customers.
 128 SCHLEGELMILCH ET AL.

The advantages of modeling strategic innovation along the lines of Figure 1 are four-fold.
First, by applying structural equation modeling techniques, the overall fit of the proposed model
can be evaluated. Specifically, the model-based covariance matrix (Σ) can be compared to the actual
(i.e., sample-based) covariance matrix (S) and the discrepancy between the two matrices (S-Σ)
formally assessed.
Second, the relative importance of culture, processes, people and resources in fostering strategic
innovation can be identified, in addition to their joint (i.e., combined impact). The former can be
determined by examining the magnitude of the (standardized) γ-parameters and via the imposi-
tion of equality constraints (i.e., setting γ1 = γ2 = γ3 = γ4, re-estimating the model and noting any
change in fit), while the latter by looking at the amount of residual (unexplained) variance in η.
Third, potential interactions among the drivers of strategic innovation can be explored and the
goodness-of-fit of models containing product terms (Culture × Processes, Processes × Resources,
etc.) contrasted against the main effects-only model shown in Figure 1.
Fourth, the adequacy of customer value and competitive positioning as outcomes of strategic
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innovation can be formally evaluated by inspecting the magnitude and significance of the λ- and
ε-parameters and computing the composite (construct) reliability of y1 and y2. Thus, Figure 1
provides a theory-driven framework for studying strategic innovation in an empirical context as well as
concrete guidance for operationalizing the construct. Given empirical data, estimation of the model
can be easily undertaken by any structural equations modeling software such as LISREL or EQS.

CONCLUSION
The concept of applying innovation to corporate strategy is relatively new in academic research.
This paper provides an in-depth review of the literature in the emerging field of strategic innova-
tion and offers examples from two well-known companies to provide a managerial context for
the arguments reported in the literature.
Four antecedent drivers (i.e., culture, process, people and resources) and two strategic
outcomes (i.e., customer value and competitive positioning) of strategic innovation are identified
and subsequently synthesized in a formal model that provides concrete guidance for operationalizing
the strategic innovation construct.
To put this model into (research) practice, measures for the antecedent drivers and strategic
outcomes are clearly needed. Thus, a major challenge for future research is to develop psycho-
metrically sound composite measures (i.e., multi-item scales) of each strategic innovation driver
and outcome. In operationalizing strategic innovation drivers, a good starting point would be the
literature on organizational culture where several scales for such constructs as innovativeness
(e.g., Deshpandé et al., 1993), open-mindedness (e.g., Sinkula et al., 1997), risk aversion (e.g.,
Menon et al., 1997), and future orientation (e.g., Kitchell, 1995) have been developed. As far as
the outcomes of strategic innovation are concerned, consultation of the strategic marketing and
management literatures on constructs such as competitive strength (e.g., Burke, 1984) and new
customer marketing (e.g., Berry et al., 1991) should also generate relevant insights for operationalization
purposes.
Researchers could also develop an overall ‘strategic innovation index’ for a company to see
how it stacks up in this area. In addition, such an index could be used to explain the variance in
some other dependent variable(s), most notably corporate performance. In this context, would it
also be possible to identify companies that would have been considered strategic innovators but
which nevertheless failed? What would be the implications of such findings? Or is the nature of
strategic innovation such that it is evident only when success occurs?
 STRATEGIC INNOVATION 129

Research on strategic innovation has progressed substantially in the last few years, yet it is still a
field where the big picture is only beginning to take shape. It is neither clear how many puzzle
pieces comprise the picture nor what these pieces actually look like. The current paper hopefully
adds to the understanding of strategic innovation, but the possibilities for further study are still
substantial. A better appreciation of strategic innovation is critical in today’s rapidly changing
business environment and could provide firms with the competitive edge that is necessary for
tomorrow’s success.

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APPENDIX: FORMAL SPECIFICATION OF MIMIC MODEL

The MIMIC model depicted in Figure 1 is described by the following matrix equations:

y = Λη + ε (1)
η = Γx + ζ (2)

where y = (y1, y2) are indicators (outcomes) of η and x = (x1, . . . , x4) are the antecedents (‘causes’)
of η (both y and x are column vectors). Equation (1) indicates that the y’s are congeneric meas-
ures of η ( Jöreskog, 1971), while equation (2) shows that η is linear in the x’s plus a random
disturbance term, ζ. It is assumed that the ε’s (errors in measurement) and ζ are uncorrelated (i.e.,
Cov (ε, ζ) = 0). The Λ (Lambda) matrix contains the λ-parameters (λ1, λ2) which reflect the
loading of the y-variables on the latent construct (η). The Γ (Gamma) matrix, on the other hand,
contains the γ-parameters (γ1 − γ4) which indicate the impact of the x-variables on η. Note that,
although no correlations among the x-variables are included in Figure 1 (to avoid clutter), in
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general, Cov (xi, xj) ≠ 0, (i ≠ j) and such interrelationships are taken into account during param-
eter estimation. The latter is undertaken using the sample co-variance matrix, S, which contains
the variances and covariances of x1 − x4 and y1, y2.