Exploratory Innovation in New Product Development and Profitability: Some Preliminary Findings

At the dawn of the 21(st) century, global competition continues to increase at an accelerating rate and exploratory innovation is recognized as the ultimate means for achieving sustainable competitive advantage. Academics, practitioners and consultants share the belief that exploratory innovation is important to the long-term financial success of firms. Nevertheless, empirical studies on the relationship between exploratory innovation and firm performance were dominated by analyzing survey data and thus provided little concrete evidence on the financial impact of exploratory innovation. In this study we trace the financial performance of publicly traded manufacturing firms in the United States that introduced exploratory innovations over the period 1986-2000 and examine if exploratory innovation lead to superior financial performance. We employ the event-study method, matching each sample firm with a control group in the same industry with similar pre-event performance and firm size. Our preliminary results show that while exploratory innovation helps firms maintain sales growth, the profitability of firms is not significantly improved. Manufacturing organizations actually suffer from a decline in profitability upon the introduction of exploratory innovation in new products.