One Hit Wonders: Why Do New Firms Largely Not Deliver a Second Product?

Abstract

The inability of small and early firms to successfully innovate beyond their first product is a strategic problem that has been a topic of academic attention for decades. Yet the phenomenon has not abated in practice. Extant research has most often focused on the search and planning stages, and applied the resource-based view for operational problems (e.g. within R&D), for explanations and solutions. This paper tests hypotheses that emerged from our initial field research and also builds on prior scholarship. To test hypotheses, we performed a full census of all small, newer U.S. software firms and measured the magnitude of this innovation problem (scarce follow-on products) in small/newer business settings. It undertakes to understand two constructs: 1. the degree to which follow-on innovation projects (the next product) may deteriorate more than all other R&D projects in newer firms after the first product is released , and 2. to test theory-based explanations for “the why” any such deterioration may occur. The research quantifies the following: while firms do plan for follow-on innovations (the next product), these project types become uniquely resource deprived over time from their original plan when compared to the rersource changes made to all other competing R&D projects of the firm. Furthermore, our behavioral-based hypotheses from both agency and resource dependence theories are operationalized and tested for explanatory significance.