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Author:

• Mr. Xu LI
  PhD Candidate in Strategy and Entrepreneurship
  London Business School

Abstract:

While the Schumpeterian literature on innovation acknowledges recombination as an important source of novelty that advantages a firm, studies on market categories suggest that such hybridization triggers an illegitimacy discount, diminishing firm performance. Building on insights from both literatures, this paper posits that for a “hybrid” innovation to overcome the illegitimacy discount and benefit an innovating firm, reducing customers’ confusion over its technological deviations is crucial. Specifically, I propose that such confusion is mitigated when customers are of higher technological expertise, since experts are less easily disturbed by an innovation’s display of atypical features during evaluation. Furthermore, adopting a conventional product label for the hybrid helps to attenuate such confusion, as it distinctly suggests the identity of the innovation, making it more understandable to customers. I test these ideas using data from the traditional Chinese medicine (TCM) industry in China between 1991 and 1996, where hybrid innovations concerned TCM products’ assimilation of Western medicine dosage form designs (e.g., tablets, capsules). Despite their clear functional advancements, I discovered that hybrid TCM innovations only induced market success for the innovating firms when being launched as prescription drugs whose immediate customers were TCM practitioners (i.e., technological experts), or when being labeled with traditional style names (i.e., conventional labels).