New functionality development through follower substitution for a leader in open innovation

There has been a paradigm shift to a knowledge-oriented economy in the 21st century. Consequently, there has also been a shift in where innovation typically occurs. This shift has been from the production site toward the process of product diffusion. That is, innovation occurs more frequently at the point at which a product or service is moved into the marketplace where it is immediately modified through customer interaction. In this process, new “functionality” — services, the delivery method or even product changes occur in the diffusion process. Given the need to constantly create new value through new product “functionality” or new “functionality development”, firm strategy must address the issue of how to enhance innovation at this new locus — the diffusion process. Sustainable new functionality development over time has become crucial to a firm's competitiveness. In this context, firms have to develop new functionality as early and quickly as possible; leveraging whatever innovation exists in the marketplace. According to theory, the early emergence of functionality development in this context depends on a dynamic system in which the imitator (follower) is constantly substituting for the innovator (leader). This substitution corresponds to the dynamics observed in the process referred to as “open innovation”. According to this theory, functionality development through follower substitution for a leader would be critical for a firm's competitiveness in the open innovation environment. Furthermore, open innovation could be a process for sustaining the ongoing creation of new value through functionality development maximizing limited resources. This paper attempts to demonstrate this hypothesis through an empirical analysis of this process of substitution in major innovative goods and services in Japan.