Labeling is key to the success of software vendor innovations, research suggests

Companies in the software industry, where innovative ideas are prized, use linguistic tactics to develop new labels for their innovations to stay ahead of their competitors. Using language to signal that something is “new and different” is an important tool for success, suggests research from the University of California, Davis.

Category innovation during a study period from 1990 to 2002 included words and phrases such as “platform” and “supply chain management” – market categories that are now established.

“There is an association between companies that use category innovation and their IPO likelihood, suggesting that category innovation is part of successful business strategies,” said Elizabeth George Pontikes of the UC Davis Graduate School of Management, study author.

The article, “Category Innovation in the Software Industry, 1990-2002,” was published in the Strategic Management Journal in January. Pontikes reviewed more than 400 labels used in press releases about innovations from more than 4,000 different software vendors over 12 years. The researchers also interviewed 12 software industry executives and venture capitalists.

Category innovation, as defined in the study, is a practice that involves companies claiming a new category label to describe the market in which they find themselves. A company may do this to differentiate itself from competitors, or to try to become a market leader or even a “category king.”

One executive interviewed as part of the study described the “tag management” label, for example, as something that “wasn’t super innovative, but it was labeling it…so it was strategic the way we were thinking about.”

The research found that 75% of labels analyzed when new had only one or two companies using them in the first two years, when it’s traditionally difficult to determine whether innovations even have a nascent market. These labels only gain traction in the second year of innovation, research has shown.

Companies sometimes engage in category innovation by borrowing and recasting a little-known term or unaware that another company has claimed the label, Pontikes said.

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