People use categories to make sense of organizations in the marketplace. Categories help people navigate a wide array of offerings to find the companies that offer the products and services that they need. If a person wants to buy an SUV, she will expect the automobile to be truck-like, and she wouldn't be pleased if she went to a dealer that advertised SUVs only to find that they had sedan-style cars.

Categories are associated with implicit “codes” that reflect people’s expectations of what type of organization or product to expect. If an organization markets itself in one category but then does not fit with customers’ expectations for that category, it will have a hard time selling its products. It also will have a harder time attracting other customers who might be interested in its products but who do not pay attention to “typical” products from that category. Customers looking for sedan cars will not go to dealerships that only sell SUVs. Therefore, managers have a strong incentive to appropriately categorize their company and to conform to the implicit codes associated with that category.

On the other hand, managers may also be eager to break away and introduce the next “new thing” in the market. One way to do this is to be the first mover in a new category that describes a new class of goods. But it is not guaranteed that a new category will catch on and pique customer interest. If an organization has developed a revolutionary technology, it might seem that it would be easy to develop a new category based on that technology. Indeed, much research shows that technological inventions can “disrupt” the market and lead to new categories of products and services.

However, in a study titled “Fitting In or Starting New? An Analysis of Invention, Constraint, and the Emergence of New Categories in the Software Industry,” University of Chicago Booth School of Business professor Elizabeth G. Pontikes argues that the relationship between inventing new technologies in “knowledge space” and creating new categories in “market space” is not so straightforward.

“We might think that ‘novelty’ in the market implies that an organization has developed a groundbreaking technology,” Pontikes says. However, it also strongly depends on whether existing categories are more or less “constraining,” according to Pontikes. The more nebulous existing categories are, the harder it will be to introduce a new one. This could explain why a new label fails to catch on even if the invention behind it is something technically different. “New technologies do lead to new categories, but only when existing categories are well-defined,” says Pontikes.

The Role of Category Perceptions

Pontikes proposes that whether new categories emerge depends on both new knowledge and the levels of constraint within the existing classification structure. Her research looks at knowledge space and market space as two separate domains in which organizations can act, emphasizing that there is a more complicated relationship between the two. In particular, the extent to which existing categories provide or lack constraint will influence how a novel invention will be received. Her proposal brings to the forefront the idea that categories can vary in the level of constraint imposed by expectations of consumers.

A car may be easy to define, but some categories do not elicit such strong expectations. The category for “e-business applications” is an example of a category that has gained widespread acceptance even though the public does not have a clear definition of exactly what products or services they should expect from a company that identifies as an e-business applications provider. When there is no widespread consensus about what category members should or should not do, then that category is said to be “lenient,” and its members are less constrained. Entrepreneurs may market novel technologies under the umbrella of a lenient category without being questioned or ignored. However, they may have a harder time creating a new category, since the public’s understanding of the first category is unclear to begin with.

For an entrepreneur in a constraining category, on the other hand, observers can more easily recognize the differences between existing categories and a newly proposed label, which can facilitate an organization’s construction of a new category around a novel technology. In addition, an organization that creates something truly novel could violate expectations in such a way that it would be ignored or devalued by its traditional customers. Thus, for companies that develop radically new technologies, constraining categories both push and pull them into defining a new category for their products.