Demand-side inertia factors and their benefits for innovativeness

Abstract

Inertia reflects a firm’s inability to change or innovate and may be fostered by many sources. Though researchers have focused on internal inertia factors, we examine inertia factors within a firm’s customer base: switching costs, customer preference stability, and network externalities. New products at 279 firms are examined to assess the role of these demand-side inertia factors in determining innovativeness and, ultimately, financial performance. The inertia factors are hypothesized to have differential innovativeness effects for early and late entrants. Overall, demand-side factors affect innovativeness positively, contrasting with firm-based factors (e.g., routines or assets), which typically inhibit innovativeness. Consumer preference stability is the only factor negatively related to innovativeness, though only for early entrants. Network externalities and switching costs increase innovativeness (particularly for early entrants). Demand-side inertia factors are critical determinants of innovativeness and may now be placed within the previously internally focused set of factors engendering early mover advantage.