THESE BOOTS ARE MADE FOR WALKING? Product innovation and the evolution of demand in the U.S. footwear market

Alexander FRENZEL BAUDISCH♠ Imperial College London

Version: 10/Sept/07

ABSTRACT: This paper analyses the evolution of demand and the changing nature of product innovation as a market grows and matures. Consumer evaluations of an innovative product do not exclusively rely on new technological functions, i.e. the technological product design, but also on the perception of symbolic and aesthetic features of new products, i.e. the product form design. We argue that earlier in a technology life cycle functional product design drives for consumption growth. Later, when product technology has stabilized, symbolic and aesthetic evaluations become relatively more important for consumers’ value perceptions. Analysing the U.S. footwear market to test our hypotheses, we show that shifting the dominant locus of innovation away from product and production technology toward product form design accelerates market growth. Using time-series analysis we show that the U.S. footwear market starts to grow again after a period of stagnation, because of a surge in trademark registrations as an indicator for innovation in product form designs, given stagnant shoe patent registrations, measuring new technological product designs. We outline how innovation processes and new product features change as the demand side evolves. KEYWORDS: Demand Evolution, Product Innovation, Product form design, Time-Series Analysis ACKNOWLEDGEMENTS: This paper has partly resulted from my work at the Max Planck Institute of Economics, Jena, Germany. I am very grateful to Ulrich Witt for funding of this project. Also I would like to thank Virginia Acha, Andreas Chai, Paola Criscuolo, Wilfred Dolfsma, David Gann, Jens Krüger for the comments and help.

♠ Corresponding author: Alexander Frenzel, Innovation and Entrepreneurship Group,

Tanaka Business School, Imperial College London, South Kensington Campus,

London, SW7 2AZ UK, Email: a.frenzel@imperial.ac.uk

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I. INTRODUCTION

The product life cycle is a central rallying point for how different disciplines view the

evolution of industries (Abernathy & Utterback, 1978; Klepper, 1997). Concretely,

the theoretical concept of the industry life cycle explains how firms evolve over the

life cycle of a product’s technology. In this sense, this theory rests on strong

assumptions about regularities of dynamics in consumer behaviour. Nevertheless, the

focus of most of the strategy and organizations literature has been on what is

essentially the ‘supply side’ of technical change (Nelson & Winter, 1982; Teece &

Pisano, 1994). Breaking away from this tradition, this paper analyses the evolution of

demand as it is driven by product innovation, a research stream that is dawning

(Adner, 2004; Adner & Levinthal, 2001; Guerzoni, 2007; Malerba, Nelson, Orsenigo,

& Winter, 2007; Priem, 2007; Windrum, 2005). Given the lack of empirical work

focusing on demand evolution, the paper is one of the first formal analyses of the

innovation-driven dynamics of the demand side, with Windrum (2005) being a

notable exception.

Concretely, this paper aims at answering the question how consumers’ perceptions of

product innovations and, hence, the value that they attribute to different

characteristics of new products change, as a market matures. Consumer evaluations of

an innovative product do not exclusively rely on new technological functions, i.e.

technological design, but also on the perception of symbolic and aesthetic features of

new products, i.e. product form design (Rindova & Petkova, 2007). We link Rindova

and Petkova’s conceptualization of product design with Bianchi’s (2002; 2003)

analysis of the intrinsic value of product novelty and its effect on consumer

behaviour. We argue that early on in an industry life cycle functional aspects of

products dominate the value perceptions of consumer. Later in the industry life cycle,

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when most functional requirements of consumers are increasingly met (Adner, 2004;

Aoki & Yoshikawa, 2002; Witt, 2001) and/or product technology has stabilized

(Adner, 2004), symbolic and aesthetic features of new products become relatively

more important for consumers’ value perceptions. Shifting the dominant locus of

innovation away from product and production technology toward product form design

should therefore rejuvenate mature markets to regain growth momentum, even

without the occurrence of significant technological advancements in product designs.

This paper contributes to an ongoing debate in business strategy and evolutionary

economics that is grounded in the criticism that the evolution of the demand side is

underresearched (Adner, 2004; Aoki et al., 2002; Aversi, Dosi, Fagiolo, Meacci, &

Olivetti, 1999; Bianchi, 1998; Malerba, 2006; Priem, 2007; Witt, 2002). Furthermore,

the paper’s demand-based analysis of the changing nature of innovation late in a

product life cycle, i.e. as product technology stabilizes, contributes to the study of

‘low-tech” industries (von Tunzelmann & Acha, 2005). Using patents and trademarks

as indicators for technological innovation and form design innovation respectively is a

methodological advancement as it is new practise of measuring innovation

(Mendonca, Pereira, & Godinho, 2004; Smith, 2005).

In the next section of the paper, we develop hypotheses about the changing nature of

product innovations that drive the market growth over time. We theoretically analyse

changes on the demand and on the supply side. In section 3, we introduce the data and

methods to test our demand-based perspective on a market’s evolution. As a case

study we choose the U.S. footwear industry, as it is a fast-growing though mature

market, where products are characterised by a generally stable product architecture,

which in turn provides stable industry’s boundaries. This enables us to analyse the

effect of innovation in product form design on market growth, separate from the effect

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of innovation in technological product designs: The U.S. footwear market is

characterized by a stagnant number of patent registrations for products and production

processes, albeit trademark registrations in the U.S. shoe market have surged since

1970, as we outline in section 3. Taking trademark filings as an indicator for

innovation in product form design (while patents are a measure of new technological

designs), we statistically show that the U.S. footwear market starts to grow again after

a period of stagnation, because of this surge in trademark registrations. We

statistically show that this structural break in market growth rate is driven by the

shifting of the innovation focus from technological product design toward innovation

in product form designs. In section 4, this paper presents the result of our time-series

analysis of the introduced data. Section 5 discusses these results to develop our

understanding of the changing nature of innovation in industries from a demand-based

view. In section 6, we conclude by deriving implications for industry organization and

for firms given the evolution of demand environments.

II. Theory

The correlation between innovation and market growth holds independent of the

maturity of a market (Bils & Klenow, 2001). Nevertheless, the issue has been raised

that changes in the nature of demand and innovation occur as markets grow and

mature (Aoki et al., 2002; Guerzoni, 2007; Lancaster, 1991, pp. 59; Malerba, 2005;

Malerba et al., 2007; Witt, 2002). In this section, we first theorize about consumer

evaluations of product innovations. Then we develop hypotheses about how these

evaluations change as a market matures. .

Innovation has been conceptualized as change in the product characteristics

(Henderson & Clark, 1990; Lancaster, 1991; 1966). However, consumers need to

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understand how to use the technological features of products to attain the services that

they want (Griffith, 1999; Rindova et al., 2007; Saviotti, 1996). Consumers have to

link changes in technological characteristics of a new product to the changes in

service characteristics, the product offers them (Saviotti, 1996). Taken this consumer-

based perspective on changes in product characteristics, value that consumers

attribute to new products relies on their perception and sense-making their new

features (Griffith, 1999; Moreau, Lehman, & Markman, 2001; Rindova et al., 2007).

Innovation researchers recognize that the uncertainty with regard to the value

potential of product innovations increases with their technological novelty

(Henderson et al., 1990; Moreau et al., 2001).

Diverging from these studies, nevertheless remaining close to the literature on the

social construction of technology (Bijker, 1995), Rindova and Petkova (2007) argue

that the evaluation of new products depends on the consumers’ perception of the

ensemble of the product’s characteristics, as opposed to the constructing a product’s

value based on one-by-one evaluations of product characteristic (Griffith, 1999;

Lancaster, 1991). Rindova and Petkova (2007) explore how the outer form, in which a

technological innovation is embodied, influences this sense-making processes through

which the innovation’s value is construed and perceived. They argue that by

embodying novel technologies in objects with specific functional, symbolic, and

aesthetic properties, innovating firms also endow their products with cues that trigger

a variety of cognitive and emotional responses. Drawing on psychological research,

Rindova and Petkova articulate how such cognitive and emotional responses underlie

initial perceptions of value and theorize how innovating firms can influence them

through product form design. Their framework explains how product form contributes

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to perceptions of value by modulating the actual technological novelty of a product

innovation and facilitating how customers cope with it.

Rindova and Petkova (2007) articulate how product form can be used strategically to

achieve specific cognitive and emotional effects and enhance the initial customer

perceptions of the value of an innovation. They exemplify two different ways of how

product form design is strategically used to increase the value of a product. Product

form design can be used to decrease the perceived incongruity of radical technological

innovations with pre-existing consumer knowledge structure. Or in the opposite way,

product forms can be designed to increase this cognitive incongruity for incremental

technological innovations. The TiVo is an example for the former case: it is a

technologically radical innovation in the home entertainment market, but its form was

designed so that consumer perceived it as an enhanced VCR. An example for the

latter case is Apple’s iMac, which has not been a radical technological innovation, but

its form design distinguished it from other products in the market and made it the

most successful personal computer ever sold. Apple was able to increase the

perceived value of the incremental technological design innovations by radical

product form design.

In economics, the quality of ‘novelty’ of a product design as such has been analysed

most prominently by Tibor Scitovsky (1976), informed by cognitive psychology

about emotional responses to novel and aesthetic stimulation (Berlyne, 1971). Bianchi

(2002; 2003), drawing on Scitovsky’s works, elaborates on the intrinsic value of

novelty for consumers.1 She mentions examples of consumer behaviour with respect

to fashion and collecting, but does not explicitly conceptualize about features of

1 Bianchi (2002, 2003) elaborates on the dynamics of fashion as been essentially driven by the intrinsic

value of novelty to consumers.

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product innovations. So, the distinction between technological product design and

product form design is a complication of the concept of product innovation that we

exploit to establish the importance of novel and aesthetic stimulation for consumer

demand, as being conceptually different from, but complementary to consumer

evaluations of new technological product designs. We hold that innovative product

form designs distinguish a product – that needs not be technologically different –

from the older and other ones, and that this implies that it is generally evaluated

positively by consumers due to the intrinsic value of the ‘new’. In short, we hold that

innovative product form designs can trigger positive evaluations due to the intrinsic

value of novelty, even though the technologically product design remains (relatively)

stable.

Now, we theorize about the relative importance of technological product design and

product form design over a product’s life cycle. Our basis argument is that product

form designs gain importance for mature product technologies, because they provide

producers with an alternative means for product differentiation, i.e. as opposed to

innovation in technological product form.

Our argument resonates that consumer requirement must be satiated with respect to a

particular product functionality or set of functionalities (Adner et al., 2001; Witt,

2001) in order for product form design to become the main source of consumption

motivations. If functional requirements of consumers become increasingly satiated as

a market mature (Witt, 2001), expressing itself in a decreasing marginal utility that

consumers derived from new functional product characteristics (Adner et al., 2001),

other non-functional characteristics of new products, like symbolic and aesthetic

feature, become relatively more important. Symbolic and aesthetic stimuli do not

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underlie the same satiation processes as the functionality of products, because of the

intrinsic value of ‘novelty’ for consumers (Bianchi, 2002; Scitovsky, 1976; Witt,

2001).

Now, we want to reflect our argument about the changing importance of technological

product design and product form design against theories of industrial dynamics.

Earlier in an industry’s life cycle competition relies on differences in technological

product designs (Klepper, 1997) and subsequent improvement of a dominant design

(Abernathy & Utterback, 1975). As markets mature, technological stability can be

conditioned on the satiation of functional requirement of consumers (Adner, 2004;

Adner et al., 2001; Aoki et al., 2002; Lancaster, 1991; Witt, 2001), or on the sheer

lack of technological innovation (Tripsas, 2007). In the latter case, new innovation

cycles can be spurred by new entrants (Windrum, 2005) or new applications of

technologies that were developed in other industry sectors (Tripsas, 2007). Adner

(2004; 2001) holds that late in an industry life cycle, firms place renewed emphasis on

product innovation. Adner’s notion of innovation is inherently focused on

technological product designs, as he does not have a conceptualization of product

form design. Drawing on demand differentiation is common strategy in market that

are characterized by stable technology, i.e. low tech industries or industries with

increasingly standardized product architectures (von Tunzelmann et al., 2005). Going

beyond von Tunzelmann and Acha (2005), our argument focuses on how products can

be differentiated even if the functional product design remains stable using new

product form designs.

We have argued that even if technological product designs remain stable or are only

marginally changed, consumers value new products for their new product form

designs. This implies that firms should be able to increase sales by focussing on

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innovation in form design, as product technology stabilizes in maturing or low-tech

industries. So, at the aggregate level, a mature market that is characterized by little

technological innovation can be expanded by the continuous introduction of new form

designs.

Hypothesis 1: Earlier in an industry life cycle product innovations that are

predominantly based on new technological product designs drive market

growth.

Hypothesis 2: Later in an industry life cycle given relative stability of

technological product designs, product innovations that are predominately

based on new product form designs drive market growth.

This change in the nature of product innovation has not been statistically analysed

with respect to the stylized fact of the correlation between the growth of consumption

and product variety (Bils et al., 2001).

III. DATA AND METHOD

The section describes the evolution of the U.S. footwear market in order to test our

hypotheses about the evolution of the demand side. We choose this industry for its

clear-cut delineation over time due to the stability of the core technological

architecture of a ‘shoe’. This allows us to assign data series like patents, trademarks,

expenditure etc. to this market for time period of over 70 years. We elaborate on the

methods that we will use to test our analysis and then in the next section present the

results.

1. The U.S. Footwear Market

From the 1910s to the 1940s, the average U.S. consumer bought around two pairs of

shoes per year. (Mack, 1956; Szeliski & Paradiso, 1936), while in 2003 the average

U.S. citizen bought 7.8 pairs per year (AAFA, 2005). Figure 1 shows the development

of real shoe expenditure per capita (ShExp) on the left scale and the percentage of

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shoe expenditure of per capita with respect to real personal income on the right scale.

The U.S. footwear market grows continuously between 1929 and 2005, hinting at an

overall characterization of footwear as a normal good (income elasticity > 0). The

early empirical studies of the U.S. footwear market by Szeliski and Paradiso (1936)

and Mack (1956) classify shoes as normal goods till the 1950s.

FIGURE 1: Real shoe expenditure per capita and its relation to real disposable income per capita, U.S., 1955-2003 [US$ of the year 2000] (Bureau of Economic Analysis, National

Income and Product Accounts, 2003)

.004

.006

.008

.01

.012

.014

Inco

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ent o

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ear

5010

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Sho

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(20

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1920 1940 1960 1980 2000time...

Shoe consumption per capita (2000)Income share spent on footwear

Contrary to these earlier studies of U.S. shoe consumption, later studies mention

product variety, new designs, and fashion as the main drivers of consumption growth

(Barff & Austen, 1993; Hadjimichael, 1990; Weisskoff, 1994), but do not provide any

statistical analyses on this topic. Present market studies of the U.S. footwear market

stress the importance of fashion and new designs for the growth of this market. Kim

(2003) finds structural change and an increase of income elasticity in U.S. demand for

clothes and shoes in 1970, but shows no theoretical ambition to explain this change.

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Figure 1 illustrates this structural change as the share of income spent on footwear is

decreasing between 1930 and the early 1970s, and then increases since the late 1970s.

Figure 2 plots the registrations of patents and trademarks in the U.S. footwear market

(United States Patent and Trademark Office, 2007a, , 2007b). A patent for an

invention is the grant of a property right to the inventor, issued by the United States

Patent and Trademark Office. Generally, the term of a new patent is 20 years from the

date on which the application for the patent was filed in the United States. The right

conferred by the patent grant is “the right to exclude others from making, using,

offering for sale, or selling” the invention in the United States or “importing” the

invention into the United States. Patents are classified by categories, among which

one is “Footwear” (No. 36) and one is “Boot and shoe making” (No. 12). Figure 1

shows annual registrations in these patent categories. Today, 14 out of the top 15

organizations holding active patents in the U.S. footwear market are firms focused on

the athletic shoes (United States Patent and Trademark Office, 2007b).

A trademark is a word, name, or symbol that is used in trade with goods to indicate

the source of the goods and to distinguish them from the goods of others. Trademark

rights, issued by the United States Patent and Trademark Office, may be used to

prevent others from using a confusingly similar mark, but not to prevent others from

making the same goods or from selling the same goods or services under a clearly

different mark. Trademarks are classified in a similar way like patents. Here the

relevant category includes clothing and shoes, which why we search for the explicit

mentioning of “shoe” or “footwear” in the description of the mark within this

category. This mentioning is controlled by the USPTO examiner of the trademark

filing, and it is removed, if the trademark will not or is not used for shoes.

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Trademarks, unlike patents, can be renewed as long as they are being used in

commerce, and they are abandoned, if they are not used anymore. So trademarks

accumulate over time, while patent licenses run out after some time. Trademark

renewals are costly and therefore indicate the economic activity associated with the

trademark.

Patents have been used as indicators for innovation in numerous studies of

technological change. Patent time series in figure 1 for shoes indicate innovation in

the technological product design, respectively in the production processes of

shoemaking. Trademarks are registered to distinguish goods from those manufactured

or sold by others and to indicate the source of the goods. Therefore, we hold

trademark registrations as a proxy for the variety of new product form designs in this

market, because they have explicit goal to distinguish new goods from others, using

symbolic or aesthetic features, that the trademark protects. Trademarks have been

rarely used as an indicator for innovation, but have been shown to be a good indicator

of market-directed activities of firms (Giarratana & Fosfuri, 2007; Greenhalgh &

Rogers, 2006; Mendonca et al., 2004; Seethamraju, 2003).

We want to illustrate the trademark registration practise of firms in the U.S. footwear

market to justify our operationalization of trademarks as indicators of new product

form designs. Today, trademarks are highly valued by companies; all companies in

the footwear industry that are listed on the New York Stock Exchange emphasize the

importance of the strength of their trademarks and brands in their communication to

investors. The Brown Shoe Company calls its trademarks “important” and “long-lived

assets”, it registers trademarks on all its products and sometimes licences these

trademarks to third parties. Here a quote from an annual report of Nike Inc.:

We utilize trademarks on nearly all of our products and believe that having

distinctive marks that are readily identifiable is an important factor […]. We

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consider our NIKE® and Swoosh Design® trademarks to be among our most

valuable assets and we have registered these trademarks in over 100 countries.

[…] In addition, we own many other trademarks that we utilize in marketing our

products. [… ] (Nike, 2006, p. 8, emphasis added)

Other large athletic footwear companies like Adidas-Salomon and Reebok pursue

similar general strategies of trademark registration. Wolverine World Wide, Inc., that

owns brands like Cat, Merrel, or Hushpuppies, calls on his trademarks as intangible

assets in its balance sheet. Likewise, Collective Brand Inc., the holding of

PaylessShoe Source – the largest U.S. footwear retailer – owns brands like Airwalk,

American Eagle, Champion, Keds, Tommy Hilfiger footwear, Saucony – and also

balances trademarks. We take this practise of balancing trademarks to stand for the

practices of firms to register trademarks for new products. All these footwear firms

have several hundred trademarks filed for their products (United States Patent and

Trademark Office, 2007a).

Figure 2: Patent and net trademark registrations in the U.S. footwear market, 1963-

2002 (U.S. Patent and Trademark Office, 2007a, b)

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050

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1900 1920 1940 1960 1980 2000time

Footwear patentsShoemaking patentsFootwear trademarks (right axis)

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Patent registrations for shoes and shoemaking are cointegrated in their developments

till the 1970s. Both curves show high levels in the 1910s till 1930s. While

shoemaking patent registrations continuously decline since then, and eventually

become marginal, patents in footwear resurge in the 1980s. Trademark registrations

pursues a very flat lapse till the mid 1970s, when registrations take off and constantly

increases in the 1980s and 1990s. In accordance with these figures, Payson (1994, pp.

118) finds a surge in the variety of new shoes supplied since 1968. Weisskoff (1994,

p. 59) also emphasizes this increase in product variety mentioning new styles and cuts

since the 1970s. Note that registration number of trademarks and patents differ by

about one order of magnitude.

2. Time-series analysis

We use the introduced time series to test hypotheses 1 and 2 with data between 1930

and 2003. In all models the dependent variable is the real annual U.S. shoe

expenditure per capita, as we want to explain consumption, respectively market

growth. The main explanatory variable is the real annual income per capita. Testing

the impact of product innovation on market growth, we hold that patent filings for

footwear design and registrations of footwear trademarks operationalize technological

product design and product form design, respectively. These four time series – shoe

expenditure and income per capita, trademark and patent registrations – are integrated

of order 1, as a augmented Dickey-Fuller (1981) test for non-stationarity is not

rejected at the 5% level. The time series are nevertheless not cointegrated (Johansen,

1991) over the observation period, implying a change in relation or a non-linear

relation between them. A vector autocorrelation VAR modelling approach is therefore

inappropriate, as the time-series are not cointegrated; error-correction models ECM

require the correct specification of the relationship between the time-series, which is

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in fact the subject of our analysis. So, ECM are therefore not applicable either, and we

use a Box-Jenkins methodology (Hamilton, 1994; Luetkepohl, 1993).

Before the Box-Jenkins analysis, the time series are logarithmized to account for

substantial level differences between the variables, adding the prefix ‘ln’ to the

variables’ names. The annual differences in all data series are taken for the analysis,

adding a ‘d’ to the variables’ names. All logarithmized, first-annual-differenced time

series pass an augmented Dickey-Fuller test for unit roots at the 5% level. All models

can be estimated by means of OLS regressions, although we need to use robust

Newey-West errors to account for the heteroskedasticity in the time series given the

lack of cointegration. All models omit regression constants because all data series are

transformed into time series of annual differences, rendering constant regressors

obsolete.

IV. RESULTS

As the lack of cointegration has hinted at a structural break in the data, we test model

1 for a structural break using a rolling window technique (StataCorp, 2006). We

estimate the relationship between income and footwear expenditure in window of 25

years that rolls over the time series, see table 1. The regression coefficient of income

on footwear expenditure in windows starting before 1970 are below unity, and

afterwards above2. This exploratory analysis finds an increase in income elasticity

since 1970, i.e. the regression coefficient for income on shoe expenditure is below

unity almost all the time before 1970 and significantly and consistently above unity

after. At the beginning of the time series shown in figure 1, the share of income spent

2 Given that [ ][ ] xxx

xfxfxf

dx

dfx

fxd

xfd

/)(

)(/)()(1

log

)(log

−∆+−∆+≅= is interpreted as the elasticity of f with respect to

x, i.e., the percent change in f resulting from a 1% increase in x (Hamilton, 1994, pp. 717).

15

on footwear decreases (0 < income elasticity < 1), while at the end of the time series it

increases (income elasticity > 1). The growth rates of shoe expenditure are lower than

those of overall income in the 1930s to the 1960s, hinting at a characterization of

shoes as a necessity, while they are higher in the 1970s to 2003, identifying a luxury

market for shoes, that Kim (2003) hinted at.

Having established the increase in income elasticity, we use the indicators for

technological design and product form design innovation to explain this change of

demand according to your hypotheses. Table 2 yields the estimation results. In

addition to the adjusted R2 of the model we provide the Durbin-Watson statistic for

each model. The nonexistence of autocorrelation cannot be rejected for any of the

models. We estimate separate models for the phases with different income elasticities,

namely Model 2 and 3, and find this increase in income elasticity to significant.

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Table 1: Rolling windows estimation of a structural break

Regression equation: dln(Shoe expenditure) = β*dln(Income)+ε

start end Coeff. β SE t-value

1930 1944 0.35 0.11 3.08

1931 1945 0.23 0.08 2.85

1932 1946 0.21 0.09 2.22

1933 1947 0.31 0.13 2.43

1934 1948 0.25 0.10 2.39

1935 1949 0.14 0.09 1.52

1936 1950 0.28 0.12 2.39

1937 1951 0.15 0.09 1.63

1938 1952 0.09 0.11 0.86

1939 1953 0.09 0.11 0.83

1940 1954 0.23 0.11 2.10

1941 1955 0.22 0.10 2.10

1942 1956 0.30 0.16 1.90

1943 1957 -0.02 0.32 -0.07

1944 1958 0.08 0.24 0.33

1945 1959 0.16 0.19 0.81

1946 1960 0.27 0.18 1.56

1947 1961 0.40 0.23 1.76

1948 1962 0.05 0.22 0.22

1949 1963 0.18 0.14 1.33

1950 1964 0.37 0.16 2.32

1951 1965 0.30 0.21 1.44

1952 1966 0.50 0.13 3.95

1953 1967 0.48 0.11 4.21

1954 1968 0.59 0.12 4.84

1955 1969 0.59 0.12 4.86

1956 1970 0.32 0.24 1.33

1957 1971 0.33 0.24 1.37

1958 1972 0.45 0.15 2.95

1959 1973 0.53 0.12 4.53

1960 1974 0.58 0.13 4.31

1961 1975 0.57 0.12 4.61

1962 1976 0.60 0.13 4.77

1963 1977 0.65 0.14 4.49

1964 1978 0.83 0.23 3.58

1965 1979 0.81 0.30 2.70

1966 1980 0.91 0.33 2.75

1967 1981 0.95 0.39 2.44

1968 1982 0.97 0.38 2.54

1969 1983 1.01 0.43 2.33

1970 1984 0.90 0.32 2.81

1971 1985 1.12 0.23 4.87

1972 1986 1.29 0.21 6.07

1973 1987 1.27 0.24 5.34

1974 1988 1.31 0.29 4.45

1975 1989 1.30 0.27 4.76

1976 1990 1.34 0.29 4.57

1977 1991 1.40 0.35 4.00

1978 1992 1.36 0.34 4.03

1979 1993 1.14 0.16 7.32

1980 1994 1.17 0.18 6.39

1981 1995 1.20 0.20 5.95

1982 1996 1.19 0.24 4.93

1983 1997 1.23 0.21 5.91

1984 1998 1.17 0.19 6.12

1985 1999 1.62 0.16 9.87

1986 2000 1.52 0.15 9.81

1987 2001 1.41 0.16 8.77

1988 2002 1.42 0.16 8.86

1989 2003 1.64 0.17 9.55

Model 4 through 6 use patent and trademark registrations as additional independent

variables, which results in increases of R2 up to 150% (comparing model 1 with 4, 2

with 5, and 3 with 6 respectively). Model 4 using the complete time series indicates

that patents and trademarks have both a positive effect on the shoe consumption. The

R2 of model 4 increases significantly with respect to model 1, and also the income

elasticity decreases in model 4 decrease as patents and trademarks are added to

explain expenditure.

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Table 2: Time-series models of the changing nature of product innovation in the U.S.

footwear market expenditure, 1930-2003

Model 1 2 3 4 5 6 Start year 1930 1930 1971 1930 1930 1971 End year 2003 1970 2003 2003 1970 2003 Observations 74 41 33 74 41 33 IV / DV dln(Shoe expenditure)

dln(Income) 0.471 0.331 1.283 0.359 0.339 0.94 [0.1314]*** [0.0929]*** [0.1225]*** [0.0999]*** [0.1152]*** [0.1472]***

dln(Patents) 0.062 0.074 0.031 [0.0249]** [0.0348]** [0.0219]

dln(Trademarks) 0.104 -0.06 0.094 [0.0520]** [0.0924] [0.0429]** Adj. R-squared 0.15 0.09 0.59 0.23 0.15 0.64 Durbin-Watson d-statistic 2.01 2.25 1.79 2.07 2.21 1.94 IV / DV = Independent and Dependent Variables Robust Newey-West (1987) standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1%

Model 5 shows a significant effect of patents on expenditure, but none of trademarks

in the years 1930 to 1970, which increased the R2 with respect to model 2. This result

substantiates hypothesis 1, which predicted a significant positive influence of patents,

i.e. technological product innovation, on expenditure earlier in the market’s history.

The coefficient of trademarks is not significant.

Respectively model 6 shows a significant effect of trademarks on expenditure in the

years 1971 to 2003, which also increased the R2 with respect to model 3. In this later

period it is trademark registrations, not those of patents that have a significant positive

effect on consumption expenditure, which in turn substantiates hypothesis 2.

Remarkably, the income coefficient determined by model 6 is below unity, i.e. the

introduction of trademark registrations as an independent variable explains away or

mediates the increase of income elasticity above unity. Following our

operationalization, the increasing focus on new product form designs in the U.S.

footwear market explains why its growth is accelerated since the 1970s. To test the

robustness of this result on the reason for the increase of growth rate, table 3 shows

18

the results of a Granger causality test (1969). The result indicating that the surge in

trademark registrations precedes the surge in income elasticity, and not the other way

around. The registration of trademarks in the U.S. footwear market Granger-causes

the acceleration of its growth since 1970. So, there are statistical reasons to belief that

the increase in product variety created by new product form designs causes the U.S.

footwear market to expand since the 1970s.

Table 3: Granger causality (1969) test of the relation between trademark registration

and footwear consumption3

Granger causality Wald tests (lags = 2; obs = 31; start 1971, end 2003) Variable Is NOT Granger-caused by chi2 df Prob > chi2 ln(Shoe expenditure) ln(Trademarks) 16.581 2 0.000 ln(Trademarks) ln(Shoe expenditure) 2.3263 2 0.312

V. DISCUSSION

The results of our analysis of the relation of product innovation and the market growth

have substantiated our hypotheses on the changing nature of product innovation as the

U.S. footwear market matures. These results related back to the theoretical works that

we build our hypotheses on. First, our analysis showed that the correlation between

innovation and market growth holds unrespectable of the age of the industry. Product

innovation, comprising both innovation in technological product design and product

form design, positively influences market growth at all times. While this finding

accords with economic theory (Bils et al., 2001; Dixit & Stiglitz, 1977), our analysis

showed that this result must be further qualified, because the nature of product

innovation changes as U.S. footwear market matures. The notion that consumers get

satiated with respect to certain functional product characteristics (Lancaster, 1991, pp.

59; Witt, 2001) has been one of the building blocks for our argument. Nevertheless,

3 The lag structure for the Granger causality is established using Luetkepohl’s methods as the time

series is relatively short (n<50) (Hamilton, 1994)

19

satiation and expenditure stagnation in the product category ‘shoes’ cannot be shown.

This implies that studies of the evolution of consumption need to focus at the product

characteristic as their unit of analysis (Guerzoni, 2007), because at the level of the

product category different motivations of consumers cannot be distinguished and

analysis of changing consumer motivations cannot be execute at this level. So, at the

level of product category the correlation between innovation and market growth

holds, but cannot be explained at this level.

More interesting, the acceleration of expenditure growth is not statistically linked to

technological developments of new functionalities after 1970, but to innovation in

product form designs. The distinction between innovation in product form designs and

technological product design (Rindova et al., 2007) was able to explain differences in

market growth phases in the U.S. footwear market. This distinction was based on an

analysis of the cognitive processes how consumers develop an understanding between

technology and service characteristics of new products (Saviotti, 1996). We link this

distinction to an analysis of how consumers attribute intrinsic value to the quality of

‘newness’ (Bianchi, 2002, , 2003), as opposed to the value consumers attribute to a

product because of its functionality. We argue here that theorizing about changes in

demand should be based on the analysis of evolution of the form of product

innovations and then should be linked to the analysis of consumption motivations,

like we have done here.

Adner (2004; 2001) holds that late in an industry life cycle firms place renewed

emphasis on product innovation. Qualifying Adner’s notion of innovation by using

the distinction between technological and design innovation based on a distinction in

consumer motivations, we argue and show that, given that product technology

stabilizes or that consumer get “technologically satisfied”, product form design

20

innovations become more important for the market growth late in an industry life

cycle. Drawing on Adner’s (2001) criticism of Abernathy and Utterback’s (1975)

model of the succession product and process innovations, we hold that the surge in

product form design innovations in the U.S. footwear industry since the 1970s is

outside of their model. It seems that what we observe in this market is a third wave of

innovation, namely in product form design, late in the product life cycle, and that this

wave expands the market considerably. To sum up, the main result of this paper is

that we have empirically shown that even when product technology remains relatively

stable, demand can continuously expanded by new product form designs.

This leads us to the limitations of this paper. We decided to analyse long time-series

data to study the dynamics of innovation-driven market growth over time. The

approach we use comes with inevitable limitations that arise from the data that we

use. Focusing on aggregate market growth we cannot make claims about individual

firm behaviour or concrete changes in product characteristics. Nevertheless, we

believe that we analysed how market growth is correlated with product innovation,

and that we showed the very nature of product innovation changes over time in this

market, as we can measure different forms of product innovations at the aggregate

level using patent and trademark filings.

The sudden surge in trademark registrations in the 1970s implies a change in the

practice of protecting new products in the U.S. footwear market, which potentially

would be spurious to our analysis. Nevertheless, since this surge is due to firms’

decisions to start protecting symbolic and aesthetic differentiations of their products

as the market matures, this surge is coherent with our theory. However, it is beyond

the research focus and space limits of this paper to answer why firms started filing

21

trademarks in the large volumes precisely in the 1970s, as we want to show here the

importance of trademarks and the change in the demand environment for firms. The

explanation we proposed was that, given that product technology stabilized in (some

segments of) the footwear market, technological design cannot distinguish products

anymore, so product form design becomes more important for product differentiation.

Patent registrations are relatively stagnant since the 1950s and cannot explain the

acceleration the aggregate market growth, nevertheless patent registration increase

slightly in the 1980s. It is the athletic footwear sub-market is technologically

dynamic; in fact, most patents are registered in the U.S. footwear market by firms

focused on the athletic shoes. Nevertheless, athletic footwear firms like Nike, Adidas-

Salomon, Reebok also register trademarks for most of their products to protect the

differentiations. They are also among the organizations with most trademark

registrations in the market. So, even for technologically innovative shoes the form

design is protected, which links the argument on how radical product form design can

be used to increase the perceived novelty of incremental technological product

designs. This argument applied to this context relies on the assumption that

technological innovations in shoes, even athletic shoes remain incremental.

Another interesting finding of the paper to be further investigated is the cointegration

of patents for shoes and shoemaking till the 1970s and the lack thereof later on. As

imports of shoes become increasingly important since the 1970s (Weisskoff, 1994),

innovation in shoemaking was declining, at the same time as shoemaking was

declining. This reconfiguration in the industry architecture, then, probably also

affected the trademark registration practise, because U.S. firms needed to heighten

barriers to entry for low-cost producers abroad. So, there might be a link between

changes in the industry architecture and the practise of managing intellectual property

22

rights like trademarks to be analysed in future studies. Producing in low wage

countries like South Korea, Taiwan in the 1970s, and later in Vietnam and China

might have been the trigger to enable firms to introduce this ever increasing variety of

new product designs in the U.S. footwear market (Weisskoff, 1994). The bottom line

is that this acceleration in product varieties was driven by new product form designs,

and this in turn led to the acceleration of growth in the U.S. footwear market.

The use of trademarks as well as patents as indicators for innovation can be and is

criticised. While the analysis of patents is well-established in innovation economics

and management despite these criticisms, the analysis of trademark is not – yet

(Mendonca et al., 2004). A common criticism is that firms do not rely exclusively on

these protections of their intellectual property, and therefore the observations of patent

or trademark registrations are biased as firms have particular reasons why they

register or not. We have seen that the use of trademarks dramatically changes in the

1970s, but we have argued that this change in the practice of using trademarks

actually strengthens our point about the increasing importance of product form

designs, because it is the firms’ choice to file more trademarks. Today’s brand and

trademark licensing even implies that trademarks are direct means in value-generating

processes for firms and not merely protection of some valuable product and its design.

So, today’s practise almost guarantees that all new distinguishing features of new

products get trademarked in this market.

The focus on one market or industry always raises concerns about the generalizability

of the findings from that one setting; in particular if this market was chosen for its

model character. So, comparative studies between different industries should be made

to validate our findings. Focusing on the U.S. footwear market, we have qualified

Adner’s (2004) notion of resurge in product innovation in later stages of a product life

23

cycle. Nevertheless, his examples of computers and video recorders show that the

resurge in product innovation is based on improvements in technological

characteristics, which are sometimes radical – like the change between different CPU

designs – but that the service characteristics of the products only change

incrementally, i.e. within a given set of parameters, without changing the parameter

space. The stabilization of service characteristics can be linked to interdependencies

between several different products in a complex architecture of modules and use

patterns, for personal computer, or to strong network effects between video tapes,

stores, etc. and recorders. So, comparative studies have to account for stability in

technology and service characteristics, and maybe even the reasons for these

stabilities. We have argued for product form design to drive consumption of products

with relatively stable technological characteristics, but it is conceivable that even if

product characteristics are technologically-dynamic, innovative form designs may be

important features to increase sales, like for mobile phone or music players. This

implies that nature of consumer practises, for example their visibility to other

consumers, have to be taken into account as well to choose comparative case studies.

Again, however, the exploratory nature of the research and the need to pay significant

attention to issues of longitudinal analysis and data availability constitute, in our view,

legitimate reasons for our decision to curtail in some ways the complexity of the

empirical setting for the study. Despite its inevitable and obvious limits, we believe

that our research offers new insights for both theory development and managerial

practice, and represents a useful starting point for future research in many directions.

VI. CONCLUSIONS

The present paper analysed the evolution of demand and the changing nature of

product innovation as a market grows and matures. Starting from the theoretical

24

accounts that consumer evaluations of an innovative product do not exclusively rely

on new technological functions, i.e. technological product design, but also on the

perception of symbolic and aesthetic features of new products, i.e. product form

design.

We argued that earlier in a technology life cycle functional product design drives

consumption growth. Later, when product technology has stabilized, symbolic and

aesthetic evaluations become relatively more important for consumers’ value

perceptions, because consumer value the generic newness of products – even if

products are not or only incrementally innovative with respect to their technological

product design. The paper tested this theoretical account on how the nature of product

innovation changes by analysing the growth process of the U.S. footwear market

between 1930 and 2003. Our statistical analysis show that innovation in technological

product design positively affects consumption growth in the early phase of the

industry evolution, while product form design innovations propels market growth in

the later phase, as the number of technological product designs stagnates.

The paper’s results contribute to the stream of research on demand evolution and

technological change that has evoked prominently in the field of evolutionary

economics (Malerba, 2006; Witt, 2002). In addition, the paper contributes to research

in strategic management as we will outline as well.

The rise of the importance of innovation in product form design for market growth

implies that the appropriation regime changes in the U.S. footwear industry (Malerba,

2002), i.e. the way that the producer of knowledge can appropriate the benefits from

it. New product form designs can be imitated more easily by competitors than new

technological product designs, if products are increasingly valued for their innovative

product form design, this implies that competition increases due to easier and more

25

imitation by competitors. The increased competition due to the increased ease-of-

imitation of new products also implies that trademark registrations become ever more

important for firms, because they protect new and easy-to-imitate product form

designs; thus, this process of increasing importance of trademarks can be called self-

reinforcing.

Moreover, if changes in the demand environment affect the value of firm resources

(Adner & Zemsky, 2006), then this urges incumbent to reconfigure their resources,

but it also opens up opportunities for new entrants. In effect, Windrum (2005) stresses

the entrance of new producers in the innovation cycle late in the industry life cycle.

Analyses of the U.S. footwear industry find significant changes over time (Audia,

Sorensen, & Hage, 2001) and emphasis the importance of imports and new entrants

(Korzeniewicz, 1992; Weisskoff, 1994). So, the observed change in the nature of

product innovation in the U.S. footwear industry does not only have implications at

the firm level, but also at industry level of analysis.

So, taking a consumer perspective on value creation (Priem, 2007), we propose that

given the absence of significant technological design innovations, firms can expand

their market by demand differentiation using new product form designs. The question

is whether the resources and capabilities, firms need to do that, change, as the demand

environment changes. We know that firms probably need distinct resources and

capabilities to develop new products (Brown & Eisenhardt, 1995; Verona, 1999). It is

highly probably that a change in the nature of product innovation implies that

different capabilities are needed. In effect, using Verona’s terminology, it is likely

that firm rely less on technological capabilities and more on marketing capabilities for

innovating in product form design than in technological product design. Along our

hypotheses we would propose that as product form design become more important,

26

marketing capabilities become more important for firm performance. In any case,

such changes in the demand environment as we observe in this market urge for an

integration of marketing considerations into how firms strategically manage their

resources (Srivastava, Fahey, & Christensen, 2001). As this change in the demand

environment is occurring under the condition of technological stability of products,

the importance of marketing capabilities or other forms of costumer services may be

particularly important for firms in “low tech” industries (von Tunzelmann et al.,

2005).

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