THESE BOOTS ARE MADE FOR WALKING? Product innovation and the evolution of demand in the U.S. footwear market
Alexander FRENZEL BAUDISCH♠ Imperial College London
Version: 10/Sept/07
ABSTRACT: This paper analyses the evolution of demand and the changing nature of product innovation as a market grows and matures. Consumer evaluations of an innovative product do not exclusively rely on new technological functions, i.e. the technological product design, but also on the perception of symbolic and aesthetic features of new products, i.e. the product form design. We argue that earlier in a technology life cycle functional product design drives for consumption growth. Later, when product technology has stabilized, symbolic and aesthetic evaluations become relatively more important for consumers’ value perceptions. Analysing the U.S. footwear market to test our hypotheses, we show that shifting the dominant locus of innovation away from product and production technology toward product form design accelerates market growth. Using time-series analysis we show that the U.S. footwear market starts to grow again after a period of stagnation, because of a surge in trademark registrations as an indicator for innovation in product form designs, given stagnant shoe patent registrations, measuring new technological product designs. We outline how innovation processes and new product features change as the demand side evolves. KEYWORDS: Demand Evolution, Product Innovation, Product form design, Time-Series Analysis ACKNOWLEDGEMENTS: This paper has partly resulted from my work at the Max Planck Institute of Economics, Jena, Germany. I am very grateful to Ulrich Witt for funding of this project. Also I would like to thank Virginia Acha, Andreas Chai, Paola Criscuolo, Wilfred Dolfsma, David Gann, Jens Krüger for the comments and help.
♠ Corresponding author: Alexander Frenzel, Innovation and Entrepreneurship Group,
Tanaka Business School, Imperial College London, South Kensington Campus,
London, SW7 2AZ UK, Email: [email protected]
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I. INTRODUCTION
The product life cycle is a central rallying point for how different disciplines view the
evolution of industries (Abernathy & Utterback, 1978; Klepper, 1997). Concretely,
the theoretical concept of the industry life cycle explains how firms evolve over the
life cycle of a product’s technology. In this sense, this theory rests on strong
assumptions about regularities of dynamics in consumer behaviour. Nevertheless, the
focus of most of the strategy and organizations literature has been on what is
essentially the ‘supply side’ of technical change (Nelson & Winter, 1982; Teece &
Pisano, 1994). Breaking away from this tradition, this paper analyses the evolution of
demand as it is driven by product innovation, a research stream that is dawning
(Adner, 2004; Adner & Levinthal, 2001; Guerzoni, 2007; Malerba, Nelson, Orsenigo,
& Winter, 2007; Priem, 2007; Windrum, 2005). Given the lack of empirical work
focusing on demand evolution, the paper is one of the first formal analyses of the
innovation-driven dynamics of the demand side, with Windrum (2005) being a
notable exception.
Concretely, this paper aims at answering the question how consumers’ perceptions of
product innovations and, hence, the value that they attribute to different
characteristics of new products change, as a market matures. Consumer evaluations of
an innovative product do not exclusively rely on new technological functions, i.e.
technological design, but also on the perception of symbolic and aesthetic features of
new products, i.e. product form design (Rindova & Petkova, 2007). We link Rindova
and Petkova’s conceptualization of product design with Bianchi’s (2002; 2003)
analysis of the intrinsic value of product novelty and its effect on consumer
behaviour. We argue that early on in an industry life cycle functional aspects of
products dominate the value perceptions of consumer. Later in the industry life cycle,
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when most functional requirements of consumers are increasingly met (Adner, 2004;
Aoki & Yoshikawa, 2002; Witt, 2001) and/or product technology has stabilized
(Adner, 2004), symbolic and aesthetic features of new products become relatively
more important for consumers’ value perceptions. Shifting the dominant locus of
innovation away from product and production technology toward product form design
should therefore rejuvenate mature markets to regain growth momentum, even
without the occurrence of significant technological advancements in product designs.
This paper contributes to an ongoing debate in business strategy and evolutionary
economics that is grounded in the criticism that the evolution of the demand side is
underresearched (Adner, 2004; Aoki et al., 2002; Aversi, Dosi, Fagiolo, Meacci, &
Olivetti, 1999; Bianchi, 1998; Malerba, 2006; Priem, 2007; Witt, 2002). Furthermore,
the paper’s demand-based analysis of the changing nature of innovation late in a
product life cycle, i.e. as product technology stabilizes, contributes to the study of
‘low-tech” industries (von Tunzelmann & Acha, 2005). Using patents and trademarks
as indicators for technological innovation and form design innovation respectively is a
methodological advancement as it is new practise of measuring innovation
(Mendonca, Pereira, & Godinho, 2004; Smith, 2005).
In the next section of the paper, we develop hypotheses about the changing nature of
product innovations that drive the market growth over time. We theoretically analyse
changes on the demand and on the supply side. In section 3, we introduce the data and
methods to test our demand-based perspective on a market’s evolution. As a case
study we choose the U.S. footwear industry, as it is a fast-growing though mature
market, where products are characterised by a generally stable product architecture,
which in turn provides stable industry’s boundaries. This enables us to analyse the
effect of innovation in product form design on market growth, separate from the effect
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of innovation in technological product designs: The U.S. footwear market is
characterized by a stagnant number of patent registrations for products and production
processes, albeit trademark registrations in the U.S. shoe market have surged since
1970, as we outline in section 3. Taking trademark filings as an indicator for
innovation in product form design (while patents are a measure of new technological
designs), we statistically show that the U.S. footwear market starts to grow again after
a period of stagnation, because of this surge in trademark registrations. We
statistically show that this structural break in market growth rate is driven by the
shifting of the innovation focus from technological product design toward innovation
in product form designs. In section 4, this paper presents the result of our time-series
analysis of the introduced data. Section 5 discusses these results to develop our
understanding of the changing nature of innovation in industries from a demand-based
view. In section 6, we conclude by deriving implications for industry organization and
for firms given the evolution of demand environments.
II. Theory
The correlation between innovation and market growth holds independent of the
maturity of a market (Bils & Klenow, 2001). Nevertheless, the issue has been raised
that changes in the nature of demand and innovation occur as markets grow and
mature (Aoki et al., 2002; Guerzoni, 2007; Lancaster, 1991, pp. 59; Malerba, 2005;
Malerba et al., 2007; Witt, 2002). In this section, we first theorize about consumer
evaluations of product innovations. Then we develop hypotheses about how these
evaluations change as a market matures. .
Innovation has been conceptualized as change in the product characteristics
(Henderson & Clark, 1990; Lancaster, 1991; 1966). However, consumers need to
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understand how to use the technological features of products to attain the services that
they want (Griffith, 1999; Rindova et al., 2007; Saviotti, 1996). Consumers have to
link changes in technological characteristics of a new product to the changes in
service characteristics, the product offers them (Saviotti, 1996). Taken this consumer-
based perspective on changes in product characteristics, value that consumers
attribute to new products relies on their perception and sense-making their new
features (Griffith, 1999; Moreau, Lehman, & Markman, 2001; Rindova et al., 2007).
Innovation researchers recognize that the uncertainty with regard to the value
potential of product innovations increases with their technological novelty
(Henderson et al., 1990; Moreau et al., 2001).
Diverging from these studies, nevertheless remaining close to the literature on the
social construction of technology (Bijker, 1995), Rindova and Petkova (2007) argue
that the evaluation of new products depends on the consumers’ perception of the
ensemble of the product’s characteristics, as opposed to the constructing a product’s
value based on one-by-one evaluations of product characteristic (Griffith, 1999;
Lancaster, 1991). Rindova and Petkova (2007) explore how the outer form, in which a
technological innovation is embodied, influences this sense-making processes through
which the innovation’s value is construed and perceived. They argue that by
embodying novel technologies in objects with specific functional, symbolic, and
aesthetic properties, innovating firms also endow their products with cues that trigger
a variety of cognitive and emotional responses. Drawing on psychological research,
Rindova and Petkova articulate how such cognitive and emotional responses underlie
initial perceptions of value and theorize how innovating firms can influence them
through product form design. Their framework explains how product form contributes
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to perceptions of value by modulating the actual technological novelty of a product
innovation and facilitating how customers cope with it.
Rindova and Petkova (2007) articulate how product form can be used strategically to
achieve specific cognitive and emotional effects and enhance the initial customer
perceptions of the value of an innovation. They exemplify two different ways of how
product form design is strategically used to increase the value of a product. Product
form design can be used to decrease the perceived incongruity of radical technological
innovations with pre-existing consumer knowledge structure. Or in the opposite way,
product forms can be designed to increase this cognitive incongruity for incremental
technological innovations. The TiVo is an example for the former case: it is a
technologically radical innovation in the home entertainment market, but its form was
designed so that consumer perceived it as an enhanced VCR. An example for the
latter case is Apple’s iMac, which has not been a radical technological innovation, but
its form design distinguished it from other products in the market and made it the
most successful personal computer ever sold. Apple was able to increase the
perceived value of the incremental technological design innovations by radical
product form design.
In economics, the quality of ‘novelty’ of a product design as such has been analysed
most prominently by Tibor Scitovsky (1976), informed by cognitive psychology
about emotional responses to novel and aesthetic stimulation (Berlyne, 1971). Bianchi
(2002; 2003), drawing on Scitovsky’s works, elaborates on the intrinsic value of
novelty for consumers.1 She mentions examples of consumer behaviour with respect
to fashion and collecting, but does not explicitly conceptualize about features of
1 Bianchi (2002, 2003) elaborates on the dynamics of fashion as been essentially driven by the intrinsic
value of novelty to consumers.
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product innovations. So, the distinction between technological product design and
product form design is a complication of the concept of product innovation that we
exploit to establish the importance of novel and aesthetic stimulation for consumer
demand, as being conceptually different from, but complementary to consumer
evaluations of new technological product designs. We hold that innovative product
form designs distinguish a product – that needs not be technologically different –
from the older and other ones, and that this implies that it is generally evaluated
positively by consumers due to the intrinsic value of the ‘new’. In short, we hold that
innovative product form designs can trigger positive evaluations due to the intrinsic
value of novelty, even though the technologically product design remains (relatively)
stable.
Now, we theorize about the relative importance of technological product design and
product form design over a product’s life cycle. Our basis argument is that product
form designs gain importance for mature product technologies, because they provide
producers with an alternative means for product differentiation, i.e. as opposed to
innovation in technological product form.
Our argument resonates that consumer requirement must be satiated with respect to a
particular product functionality or set of functionalities (Adner et al., 2001; Witt,
2001) in order for product form design to become the main source of consumption
motivations. If functional requirements of consumers become increasingly satiated as
a market mature (Witt, 2001), expressing itself in a decreasing marginal utility that
consumers derived from new functional product characteristics (Adner et al., 2001),
other non-functional characteristics of new products, like symbolic and aesthetic
feature, become relatively more important. Symbolic and aesthetic stimuli do not
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underlie the same satiation processes as the functionality of products, because of the
intrinsic value of ‘novelty’ for consumers (Bianchi, 2002; Scitovsky, 1976; Witt,
2001).
Now, we want to reflect our argument about the changing importance of technological
product design and product form design against theories of industrial dynamics.
Earlier in an industry’s life cycle competition relies on differences in technological
product designs (Klepper, 1997) and subsequent improvement of a dominant design
(Abernathy & Utterback, 1975). As markets mature, technological stability can be
conditioned on the satiation of functional requirement of consumers (Adner, 2004;
Adner et al., 2001; Aoki et al., 2002; Lancaster, 1991; Witt, 2001), or on the sheer
lack of technological innovation (Tripsas, 2007). In the latter case, new innovation
cycles can be spurred by new entrants (Windrum, 2005) or new applications of
technologies that were developed in other industry sectors (Tripsas, 2007). Adner
(2004; 2001) holds that late in an industry life cycle, firms place renewed emphasis on
product innovation. Adner’s notion of innovation is inherently focused on
technological product designs, as he does not have a conceptualization of product
form design. Drawing on demand differentiation is common strategy in market that
are characterized by stable technology, i.e. low tech industries or industries with
increasingly standardized product architectures (von Tunzelmann et al., 2005). Going
beyond von Tunzelmann and Acha (2005), our argument focuses on how products can
be differentiated even if the functional product design remains stable using new
product form designs.
We have argued that even if technological product designs remain stable or are only
marginally changed, consumers value new products for their new product form
designs. This implies that firms should be able to increase sales by focussing on
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innovation in form design, as product technology stabilizes in maturing or low-tech
industries. So, at the aggregate level, a mature market that is characterized by little
technological innovation can be expanded by the continuous introduction of new form
designs.
Hypothesis 1: Earlier in an industry life cycle product innovations that are
predominantly based on new technological product designs drive market
growth.
Hypothesis 2: Later in an industry life cycle given relative stability of
technological product designs, product innovations that are predominately
based on new product form designs drive market growth.
This change in the nature of product innovation has not been statistically analysed
with respect to the stylized fact of the correlation between the growth of consumption
and product variety (Bils et al., 2001).
III. DATA AND METHOD
The section describes the evolution of the U.S. footwear market in order to test our
hypotheses about the evolution of the demand side. We choose this industry for its
clear-cut delineation over time due to the stability of the core technological
architecture of a ‘shoe’. This allows us to assign data series like patents, trademarks,
expenditure etc. to this market for time period of over 70 years. We elaborate on the
methods that we will use to test our analysis and then in the next section present the
results.
1. The U.S. Footwear Market
From the 1910s to the 1940s, the average U.S. consumer bought around two pairs of
shoes per year. (Mack, 1956; Szeliski & Paradiso, 1936), while in 2003 the average
U.S. citizen bought 7.8 pairs per year (AAFA, 2005). Figure 1 shows the development
of real shoe expenditure per capita (ShExp) on the left scale and the percentage of
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shoe expenditure of per capita with respect to real personal income on the right scale.
The U.S. footwear market grows continuously between 1929 and 2005, hinting at an
overall characterization of footwear as a normal good (income elasticity > 0). The
early empirical studies of the U.S. footwear market by Szeliski and Paradiso (1936)
and Mack (1956) classify shoes as normal goods till the 1950s.
FIGURE 1: Real shoe expenditure per capita and its relation to real disposable income per capita, U.S., 1955-2003 [US$ of the year 2000] (Bureau of Economic Analysis, National
Income and Product Accounts, 2003)
.004
.006
.008
.01
.012
.014
Inco
me
shar
e sp
ent o
n fo
otw
ear
5010
015
020
0
Sho
e co
nsum
ptio
n pe
r ca
pita
(20
00)
1920 1940 1960 1980 2000time...
Shoe consumption per capita (2000)Income share spent on footwear
Contrary to these earlier studies of U.S. shoe consumption, later studies mention
product variety, new designs, and fashion as the main drivers of consumption growth
(Barff & Austen, 1993; Hadjimichael, 1990; Weisskoff, 1994), but do not provide any
statistical analyses on this topic. Present market studies of the U.S. footwear market
stress the importance of fashion and new designs for the growth of this market. Kim
(2003) finds structural change and an increase of income elasticity in U.S. demand for
clothes and shoes in 1970, but shows no theoretical ambition to explain this change.
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Figure 1 illustrates this structural change as the share of income spent on footwear is
decreasing between 1930 and the early 1970s, and then increases since the late 1970s.
Figure 2 plots the registrations of patents and trademarks in the U.S. footwear market
(United States Patent and Trademark Office, 2007a, , 2007b). A patent for an
invention is the grant of a property right to the inventor, issued by the United States
Patent and Trademark Office. Generally, the term of a new patent is 20 years from the
date on which the application for the patent was filed in the United States. The right
conferred by the patent grant is “the right to exclude others from making, using,
offering for sale, or selling” the invention in the United States or “importing” the
invention into the United States. Patents are classified by categories, among which
one is “Footwear” (No. 36) and one is “Boot and shoe making” (No. 12). Figure 1
shows annual registrations in these patent categories. Today, 14 out of the top 15
organizations holding active patents in the U.S. footwear market are firms focused on
the athletic shoes (United States Patent and Trademark Office, 2007b).
A trademark is a word, name, or symbol that is used in trade with goods to indicate
the source of the goods and to distinguish them from the goods of others. Trademark
rights, issued by the United States Patent and Trademark Office, may be used to
prevent others from using a confusingly similar mark, but not to prevent others from
making the same goods or from selling the same goods or services under a clearly
different mark. Trademarks are classified in a similar way like patents. Here the
relevant category includes clothing and shoes, which why we search for the explicit
mentioning of “shoe” or “footwear” in the description of the mark within this
category. This mentioning is controlled by the USPTO examiner of the trademark
filing, and it is removed, if the trademark will not or is not used for shoes.
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Trademarks, unlike patents, can be renewed as long as they are being used in
commerce, and they are abandoned, if they are not used anymore. So trademarks
accumulate over time, while patent licenses run out after some time. Trademark
renewals are costly and therefore indicate the economic activity associated with the
trademark.
Patents have been used as indicators for innovation in numerous studies of
technological change. Patent time series in figure 1 for shoes indicate innovation in
the technological product design, respectively in the production processes of
shoemaking. Trademarks are registered to distinguish goods from those manufactured
or sold by others and to indicate the source of the goods. Therefore, we hold
trademark registrations as a proxy for the variety of new product form designs in this
market, because they have explicit goal to distinguish new goods from others, using
symbolic or aesthetic features, that the trademark protects. Trademarks have been
rarely used as an indicator for innovation, but have been shown to be a good indicator
of market-directed activities of firms (Giarratana & Fosfuri, 2007; Greenhalgh &
Rogers, 2006; Mendonca et al., 2004; Seethamraju, 2003).
We want to illustrate the trademark registration practise of firms in the U.S. footwear
market to justify our operationalization of trademarks as indicators of new product
form designs. Today, trademarks are highly valued by companies; all companies in
the footwear industry that are listed on the New York Stock Exchange emphasize the
importance of the strength of their trademarks and brands in their communication to
investors. The Brown Shoe Company calls its trademarks “important” and “long-lived
assets”, it registers trademarks on all its products and sometimes licences these
trademarks to third parties. Here a quote from an annual report of Nike Inc.:
We utilize trademarks on nearly all of our products and believe that having
distinctive marks that are readily identifiable is an important factor […]. We
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consider our NIKE® and Swoosh Design® trademarks to be among our most
valuable assets and we have registered these trademarks in over 100 countries.
[…] In addition, we own many other trademarks that we utilize in marketing our
products. [… ] (Nike, 2006, p. 8, emphasis added)
Other large athletic footwear companies like Adidas-Salomon and Reebok pursue
similar general strategies of trademark registration. Wolverine World Wide, Inc., that
owns brands like Cat, Merrel, or Hushpuppies, calls on his trademarks as intangible
assets in its balance sheet. Likewise, Collective Brand Inc., the holding of
PaylessShoe Source – the largest U.S. footwear retailer – owns brands like Airwalk,
American Eagle, Champion, Keds, Tommy Hilfiger footwear, Saucony – and also
balances trademarks. We take this practise of balancing trademarks to stand for the
practices of firms to register trademarks for new products. All these footwear firms
have several hundred trademarks filed for their products (United States Patent and
Trademark Office, 2007a).
Figure 2: Patent and net trademark registrations in the U.S. footwear market, 1963-
2002 (U.S. Patent and Trademark Office, 2007a, b)
050
010
0015
0020
0025
0030
00T
rade
mar
k co
unt
s
050
010
00P
aten
t cou
nts
1900 1920 1940 1960 1980 2000time
Footwear patentsShoemaking patentsFootwear trademarks (right axis)
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Patent registrations for shoes and shoemaking are cointegrated in their developments
till the 1970s. Both curves show high levels in the 1910s till 1930s. While
shoemaking patent registrations continuously decline since then, and eventually
become marginal, patents in footwear resurge in the 1980s. Trademark registrations
pursues a very flat lapse till the mid 1970s, when registrations take off and constantly
increases in the 1980s and 1990s. In accordance with these figures, Payson (1994, pp.
118) finds a surge in the variety of new shoes supplied since 1968. Weisskoff (1994,
p. 59) also emphasizes this increase in product variety mentioning new styles and cuts
since the 1970s. Note that registration number of trademarks and patents differ by
about one order of magnitude.
2. Time-series analysis
We use the introduced time series to test hypotheses 1 and 2 with data between 1930
and 2003. In all models the dependent variable is the real annual U.S. shoe
expenditure per capita, as we want to explain consumption, respectively market
growth. The main explanatory variable is the real annual income per capita. Testing
the impact of product innovation on market growth, we hold that patent filings for
footwear design and registrations of footwear trademarks operationalize technological
product design and product form design, respectively. These four time series – shoe
expenditure and income per capita, trademark and patent registrations – are integrated
of order 1, as a augmented Dickey-Fuller (1981) test for non-stationarity is not
rejected at the 5% level. The time series are nevertheless not cointegrated (Johansen,
1991) over the observation period, implying a change in relation or a non-linear
relation between them. A vector autocorrelation VAR modelling approach is therefore
inappropriate, as the time-series are not cointegrated; error-correction models ECM
require the correct specification of the relationship between the time-series, which is
14
in fact the subject of our analysis. So, ECM are therefore not applicable either, and we
use a Box-Jenkins methodology (Hamilton, 1994; Luetkepohl, 1993).
Before the Box-Jenkins analysis, the time series are logarithmized to account for
substantial level differences between the variables, adding the prefix ‘ln’ to the
variables’ names. The annual differences in all data series are taken for the analysis,
adding a ‘d’ to the variables’ names. All logarithmized, first-annual-differenced time
series pass an augmented Dickey-Fuller test for unit roots at the 5% level. All models
can be estimated by means of OLS regressions, although we need to use robust
Newey-West errors to account for the heteroskedasticity in the time series given the
lack of cointegration. All models omit regression constants because all data series are
transformed into time series of annual differences, rendering constant regressors
obsolete.
IV. RESULTS
As the lack of cointegration has hinted at a structural break in the data, we test model
1 for a structural break using a rolling window technique (StataCorp, 2006). We
estimate the relationship between income and footwear expenditure in window of 25
years that rolls over the time series, see table 1. The regression coefficient of income
on footwear expenditure in windows starting before 1970 are below unity, and
afterwards above2. This exploratory analysis finds an increase in income elasticity
since 1970, i.e. the regression coefficient for income on shoe expenditure is below
unity almost all the time before 1970 and significantly and consistently above unity
after. At the beginning of the time series shown in figure 1, the share of income spent
2 Given that [ ][ ] xxx
xfxfxf
dx
dfx
fxd
xfd
/)(
)(/)()(1
log
)(log
−∆+−∆+≅= is interpreted as the elasticity of f with respect to
x, i.e., the percent change in f resulting from a 1% increase in x (Hamilton, 1994, pp. 717).
15
on footwear decreases (0 < income elasticity < 1), while at the end of the time series it
increases (income elasticity > 1). The growth rates of shoe expenditure are lower than
those of overall income in the 1930s to the 1960s, hinting at a characterization of
shoes as a necessity, while they are higher in the 1970s to 2003, identifying a luxury
market for shoes, that Kim (2003) hinted at.
Having established the increase in income elasticity, we use the indicators for
technological design and product form design innovation to explain this change of
demand according to your hypotheses. Table 2 yields the estimation results. In
addition to the adjusted R2 of the model we provide the Durbin-Watson statistic for
each model. The nonexistence of autocorrelation cannot be rejected for any of the
models. We estimate separate models for the phases with different income elasticities,
namely Model 2 and 3, and find this increase in income elasticity to significant.
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Table 1: Rolling windows estimation of a structural break
Regression equation: dln(Shoe expenditure) = β*dln(Income)+ε
start end Coeff. β SE t-value
1930 1944 0.35 0.11 3.08
1931 1945 0.23 0.08 2.85
1932 1946 0.21 0.09 2.22
1933 1947 0.31 0.13 2.43
1934 1948 0.25 0.10 2.39
1935 1949 0.14 0.09 1.52
1936 1950 0.28 0.12 2.39
1937 1951 0.15 0.09 1.63
1938 1952 0.09 0.11 0.86
1939 1953 0.09 0.11 0.83
1940 1954 0.23 0.11 2.10
1941 1955 0.22 0.10 2.10
1942 1956 0.30 0.16 1.90
1943 1957 -0.02 0.32 -0.07
1944 1958 0.08 0.24 0.33
1945 1959 0.16 0.19 0.81
1946 1960 0.27 0.18 1.56
1947 1961 0.40 0.23 1.76
1948 1962 0.05 0.22 0.22
1949 1963 0.18 0.14 1.33
1950 1964 0.37 0.16 2.32
1951 1965 0.30 0.21 1.44
1952 1966 0.50 0.13 3.95
1953 1967 0.48 0.11 4.21
1954 1968 0.59 0.12 4.84
1955 1969 0.59 0.12 4.86
1956 1970 0.32 0.24 1.33
1957 1971 0.33 0.24 1.37
1958 1972 0.45 0.15 2.95
1959 1973 0.53 0.12 4.53
1960 1974 0.58 0.13 4.31
1961 1975 0.57 0.12 4.61
1962 1976 0.60 0.13 4.77
1963 1977 0.65 0.14 4.49
1964 1978 0.83 0.23 3.58
1965 1979 0.81 0.30 2.70
1966 1980 0.91 0.33 2.75
1967 1981 0.95 0.39 2.44
1968 1982 0.97 0.38 2.54
1969 1983 1.01 0.43 2.33
1970 1984 0.90 0.32 2.81
1971 1985 1.12 0.23 4.87
1972 1986 1.29 0.21 6.07
1973 1987 1.27 0.24 5.34
1974 1988 1.31 0.29 4.45
1975 1989 1.30 0.27 4.76
1976 1990 1.34 0.29 4.57
1977 1991 1.40 0.35 4.00
1978 1992 1.36 0.34 4.03
1979 1993 1.14 0.16 7.32
1980 1994 1.17 0.18 6.39
1981 1995 1.20 0.20 5.95
1982 1996 1.19 0.24 4.93
1983 1997 1.23 0.21 5.91
1984 1998 1.17 0.19 6.12
1985 1999 1.62 0.16 9.87
1986 2000 1.52 0.15 9.81
1987 2001 1.41 0.16 8.77
1988 2002 1.42 0.16 8.86
1989 2003 1.64 0.17 9.55
Model 4 through 6 use patent and trademark registrations as additional independent
variables, which results in increases of R2 up to 150% (comparing model 1 with 4, 2
with 5, and 3 with 6 respectively). Model 4 using the complete time series indicates
that patents and trademarks have both a positive effect on the shoe consumption. The
R2 of model 4 increases significantly with respect to model 1, and also the income
elasticity decreases in model 4 decrease as patents and trademarks are added to
explain expenditure.
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Table 2: Time-series models of the changing nature of product innovation in the U.S.
footwear market expenditure, 1930-2003
Model 1 2 3 4 5 6 Start year 1930 1930 1971 1930 1930 1971 End year 2003 1970 2003 2003 1970 2003 Observations 74 41 33 74 41 33 IV / DV dln(Shoe expenditure)
dln(Income) 0.471 0.331 1.283 0.359 0.339 0.94 [0.1314]*** [0.0929]*** [0.1225]*** [0.0999]*** [0.1152]*** [0.1472]***
dln(Patents) 0.062 0.074 0.031 [0.0249]** [0.0348]** [0.0219]
dln(Trademarks) 0.104 -0.06 0.094 [0.0520]** [0.0924] [0.0429]** Adj. R-squared 0.15 0.09 0.59 0.23 0.15 0.64 Durbin-Watson d-statistic 2.01 2.25 1.79 2.07 2.21 1.94 IV / DV = Independent and Dependent Variables Robust Newey-West (1987) standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1%
Model 5 shows a significant effect of patents on expenditure, but none of trademarks
in the years 1930 to 1970, which increased the R2 with respect to model 2. This result
substantiates hypothesis 1, which predicted a significant positive influence of patents,
i.e. technological product innovation, on expenditure earlier in the market’s history.
The coefficient of trademarks is not significant.
Respectively model 6 shows a significant effect of trademarks on expenditure in the
years 1971 to 2003, which also increased the R2 with respect to model 3. In this later
period it is trademark registrations, not those of patents that have a significant positive
effect on consumption expenditure, which in turn substantiates hypothesis 2.
Remarkably, the income coefficient determined by model 6 is below unity, i.e. the
introduction of trademark registrations as an independent variable explains away or
mediates the increase of income elasticity above unity. Following our
operationalization, the increasing focus on new product form designs in the U.S.
footwear market explains why its growth is accelerated since the 1970s. To test the
robustness of this result on the reason for the increase of growth rate, table 3 shows
18
the results of a Granger causality test (1969). The result indicating that the surge in
trademark registrations precedes the surge in income elasticity, and not the other way
around. The registration of trademarks in the U.S. footwear market Granger-causes
the acceleration of its growth since 1970. So, there are statistical reasons to belief that
the increase in product variety created by new product form designs causes the U.S.
footwear market to expand since the 1970s.
Table 3: Granger causality (1969) test of the relation between trademark registration
and footwear consumption3
Granger causality Wald tests (lags = 2; obs = 31; start 1971, end 2003) Variable Is NOT Granger-caused by chi2 df Prob > chi2 ln(Shoe expenditure) ln(Trademarks) 16.581 2 0.000 ln(Trademarks) ln(Shoe expenditure) 2.3263 2 0.312
V. DISCUSSION
The results of our analysis of the relation of product innovation and the market growth
have substantiated our hypotheses on the changing nature of product innovation as the
U.S. footwear market matures. These results related back to the theoretical works that
we build our hypotheses on. First, our analysis showed that the correlation between
innovation and market growth holds unrespectable of the age of the industry. Product
innovation, comprising both innovation in technological product design and product
form design, positively influences market growth at all times. While this finding
accords with economic theory (Bils et al., 2001; Dixit & Stiglitz, 1977), our analysis
showed that this result must be further qualified, because the nature of product
innovation changes as U.S. footwear market matures. The notion that consumers get
satiated with respect to certain functional product characteristics (Lancaster, 1991, pp.
59; Witt, 2001) has been one of the building blocks for our argument. Nevertheless,
3 The lag structure for the Granger causality is established using Luetkepohl’s methods as the time
series is relatively short (n<50) (Hamilton, 1994)
19
satiation and expenditure stagnation in the product category ‘shoes’ cannot be shown.
This implies that studies of the evolution of consumption need to focus at the product
characteristic as their unit of analysis (Guerzoni, 2007), because at the level of the
product category different motivations of consumers cannot be distinguished and
analysis of changing consumer motivations cannot be execute at this level. So, at the
level of product category the correlation between innovation and market growth
holds, but cannot be explained at this level.
More interesting, the acceleration of expenditure growth is not statistically linked to
technological developments of new functionalities after 1970, but to innovation in
product form designs. The distinction between innovation in product form designs and
technological product design (Rindova et al., 2007) was able to explain differences in
market growth phases in the U.S. footwear market. This distinction was based on an
analysis of the cognitive processes how consumers develop an understanding between
technology and service characteristics of new products (Saviotti, 1996). We link this
distinction to an analysis of how consumers attribute intrinsic value to the quality of
‘newness’ (Bianchi, 2002, , 2003), as opposed to the value consumers attribute to a
product because of its functionality. We argue here that theorizing about changes in
demand should be based on the analysis of evolution of the form of product
innovations and then should be linked to the analysis of consumption motivations,
like we have done here.
Adner (2004; 2001) holds that late in an industry life cycle firms place renewed
emphasis on product innovation. Qualifying Adner’s notion of innovation by using
the distinction between technological and design innovation based on a distinction in
consumer motivations, we argue and show that, given that product technology
stabilizes or that consumer get “technologically satisfied”, product form design
20
innovations become more important for the market growth late in an industry life
cycle. Drawing on Adner’s (2001) criticism of Abernathy and Utterback’s (1975)
model of the succession product and process innovations, we hold that the surge in
product form design innovations in the U.S. footwear industry since the 1970s is
outside of their model. It seems that what we observe in this market is a third wave of
innovation, namely in product form design, late in the product life cycle, and that this
wave expands the market considerably. To sum up, the main result of this paper is
that we have empirically shown that even when product technology remains relatively
stable, demand can continuously expanded by new product form designs.
This leads us to the limitations of this paper. We decided to analyse long time-series
data to study the dynamics of innovation-driven market growth over time. The
approach we use comes with inevitable limitations that arise from the data that we
use. Focusing on aggregate market growth we cannot make claims about individual
firm behaviour or concrete changes in product characteristics. Nevertheless, we
believe that we analysed how market growth is correlated with product innovation,
and that we showed the very nature of product innovation changes over time in this
market, as we can measure different forms of product innovations at the aggregate
level using patent and trademark filings.
The sudden surge in trademark registrations in the 1970s implies a change in the
practice of protecting new products in the U.S. footwear market, which potentially
would be spurious to our analysis. Nevertheless, since this surge is due to firms’
decisions to start protecting symbolic and aesthetic differentiations of their products
as the market matures, this surge is coherent with our theory. However, it is beyond
the research focus and space limits of this paper to answer why firms started filing
21
trademarks in the large volumes precisely in the 1970s, as we want to show here the
importance of trademarks and the change in the demand environment for firms. The
explanation we proposed was that, given that product technology stabilized in (some
segments of) the footwear market, technological design cannot distinguish products
anymore, so product form design becomes more important for product differentiation.
Patent registrations are relatively stagnant since the 1950s and cannot explain the
acceleration the aggregate market growth, nevertheless patent registration increase
slightly in the 1980s. It is the athletic footwear sub-market is technologically
dynamic; in fact, most patents are registered in the U.S. footwear market by firms
focused on the athletic shoes. Nevertheless, athletic footwear firms like Nike, Adidas-
Salomon, Reebok also register trademarks for most of their products to protect the
differentiations. They are also among the organizations with most trademark
registrations in the market. So, even for technologically innovative shoes the form
design is protected, which links the argument on how radical product form design can
be used to increase the perceived novelty of incremental technological product
designs. This argument applied to this context relies on the assumption that
technological innovations in shoes, even athletic shoes remain incremental.
Another interesting finding of the paper to be further investigated is the cointegration
of patents for shoes and shoemaking till the 1970s and the lack thereof later on. As
imports of shoes become increasingly important since the 1970s (Weisskoff, 1994),
innovation in shoemaking was declining, at the same time as shoemaking was
declining. This reconfiguration in the industry architecture, then, probably also
affected the trademark registration practise, because U.S. firms needed to heighten
barriers to entry for low-cost producers abroad. So, there might be a link between
changes in the industry architecture and the practise of managing intellectual property
22
rights like trademarks to be analysed in future studies. Producing in low wage
countries like South Korea, Taiwan in the 1970s, and later in Vietnam and China
might have been the trigger to enable firms to introduce this ever increasing variety of
new product designs in the U.S. footwear market (Weisskoff, 1994). The bottom line
is that this acceleration in product varieties was driven by new product form designs,
and this in turn led to the acceleration of growth in the U.S. footwear market.
The use of trademarks as well as patents as indicators for innovation can be and is
criticised. While the analysis of patents is well-established in innovation economics
and management despite these criticisms, the analysis of trademark is not – yet
(Mendonca et al., 2004). A common criticism is that firms do not rely exclusively on
these protections of their intellectual property, and therefore the observations of patent
or trademark registrations are biased as firms have particular reasons why they
register or not. We have seen that the use of trademarks dramatically changes in the
1970s, but we have argued that this change in the practice of using trademarks
actually strengthens our point about the increasing importance of product form
designs, because it is the firms’ choice to file more trademarks. Today’s brand and
trademark licensing even implies that trademarks are direct means in value-generating
processes for firms and not merely protection of some valuable product and its design.
So, today’s practise almost guarantees that all new distinguishing features of new
products get trademarked in this market.
The focus on one market or industry always raises concerns about the generalizability
of the findings from that one setting; in particular if this market was chosen for its
model character. So, comparative studies between different industries should be made
to validate our findings. Focusing on the U.S. footwear market, we have qualified
Adner’s (2004) notion of resurge in product innovation in later stages of a product life
23
cycle. Nevertheless, his examples of computers and video recorders show that the
resurge in product innovation is based on improvements in technological
characteristics, which are sometimes radical – like the change between different CPU
designs – but that the service characteristics of the products only change
incrementally, i.e. within a given set of parameters, without changing the parameter
space. The stabilization of service characteristics can be linked to interdependencies
between several different products in a complex architecture of modules and use
patterns, for personal computer, or to strong network effects between video tapes,
stores, etc. and recorders. So, comparative studies have to account for stability in
technology and service characteristics, and maybe even the reasons for these
stabilities. We have argued for product form design to drive consumption of products
with relatively stable technological characteristics, but it is conceivable that even if
product characteristics are technologically-dynamic, innovative form designs may be
important features to increase sales, like for mobile phone or music players. This
implies that nature of consumer practises, for example their visibility to other
consumers, have to be taken into account as well to choose comparative case studies.
Again, however, the exploratory nature of the research and the need to pay significant
attention to issues of longitudinal analysis and data availability constitute, in our view,
legitimate reasons for our decision to curtail in some ways the complexity of the
empirical setting for the study. Despite its inevitable and obvious limits, we believe
that our research offers new insights for both theory development and managerial
practice, and represents a useful starting point for future research in many directions.
VI. CONCLUSIONS
The present paper analysed the evolution of demand and the changing nature of
product innovation as a market grows and matures. Starting from the theoretical
24
accounts that consumer evaluations of an innovative product do not exclusively rely
on new technological functions, i.e. technological product design, but also on the
perception of symbolic and aesthetic features of new products, i.e. product form
design.
We argued that earlier in a technology life cycle functional product design drives
consumption growth. Later, when product technology has stabilized, symbolic and
aesthetic evaluations become relatively more important for consumers’ value
perceptions, because consumer value the generic newness of products – even if
products are not or only incrementally innovative with respect to their technological
product design. The paper tested this theoretical account on how the nature of product
innovation changes by analysing the growth process of the U.S. footwear market
between 1930 and 2003. Our statistical analysis show that innovation in technological
product design positively affects consumption growth in the early phase of the
industry evolution, while product form design innovations propels market growth in
the later phase, as the number of technological product designs stagnates.
The paper’s results contribute to the stream of research on demand evolution and
technological change that has evoked prominently in the field of evolutionary
economics (Malerba, 2006; Witt, 2002). In addition, the paper contributes to research
in strategic management as we will outline as well.
The rise of the importance of innovation in product form design for market growth
implies that the appropriation regime changes in the U.S. footwear industry (Malerba,
2002), i.e. the way that the producer of knowledge can appropriate the benefits from
it. New product form designs can be imitated more easily by competitors than new
technological product designs, if products are increasingly valued for their innovative
product form design, this implies that competition increases due to easier and more
25
imitation by competitors. The increased competition due to the increased ease-of-
imitation of new products also implies that trademark registrations become ever more
important for firms, because they protect new and easy-to-imitate product form
designs; thus, this process of increasing importance of trademarks can be called self-
reinforcing.
Moreover, if changes in the demand environment affect the value of firm resources
(Adner & Zemsky, 2006), then this urges incumbent to reconfigure their resources,
but it also opens up opportunities for new entrants. In effect, Windrum (2005) stresses
the entrance of new producers in the innovation cycle late in the industry life cycle.
Analyses of the U.S. footwear industry find significant changes over time (Audia,
Sorensen, & Hage, 2001) and emphasis the importance of imports and new entrants
(Korzeniewicz, 1992; Weisskoff, 1994). So, the observed change in the nature of
product innovation in the U.S. footwear industry does not only have implications at
the firm level, but also at industry level of analysis.
So, taking a consumer perspective on value creation (Priem, 2007), we propose that
given the absence of significant technological design innovations, firms can expand
their market by demand differentiation using new product form designs. The question
is whether the resources and capabilities, firms need to do that, change, as the demand
environment changes. We know that firms probably need distinct resources and
capabilities to develop new products (Brown & Eisenhardt, 1995; Verona, 1999). It is
highly probably that a change in the nature of product innovation implies that
different capabilities are needed. In effect, using Verona’s terminology, it is likely
that firm rely less on technological capabilities and more on marketing capabilities for
innovating in product form design than in technological product design. Along our
hypotheses we would propose that as product form design become more important,
26
marketing capabilities become more important for firm performance. In any case,
such changes in the demand environment as we observe in this market urge for an
integration of marketing considerations into how firms strategically manage their
resources (Srivastava, Fahey, & Christensen, 2001). As this change in the demand
environment is occurring under the condition of technological stability of products,
the importance of marketing capabilities or other forms of costumer services may be
particularly important for firms in “low tech” industries (von Tunzelmann et al.,
2005).
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