An example of a category that emerged around new technologies is collaboration software, which was pioneered by companies that were originally in videoconferencing. Collaboration software introduced a much more technically advanced product in which remote users could modify documents and spreadsheets and mark up presentations. Companies that developed this software invented new technologies not only for video cameras and telephony, but also for advanced mathematical algorithms and graphical display, which were different from technologies for traditional videoconferencing. Nevertheless, it is possible that videoconferencing could have evolved into a very broad category to include collaboration software. “The technologies for collaboration software were very different, but there’s not a strong reason that customers couldn’t have considered these products to be videoconferencing but with additional features,” says Pontikes.

Just like the car, videoconferencing had a very clear meaning in the eyes of consumers—they readily associate it with talking on a telephone with a video camera, and nothing else. Consequently, it was easier for collaboration software to elicit a new set of expectations and eventually evolve into an entirely new category. In other words, it was easy for consumers to see that collaboration software was not videoconferencing. And in this case, developing a new category also made it easy for organizations in collaboration software to credibly command a much higher price for their goods. “It’s not enough that the technology was new, but also that the existing category was constraining,” Pontikes says. “Videoconferencing was very well-defined, and collaboration software didn’t fit into that category.”

Testing the Hypothesis: A Look at the Software Industry

Pontikes turned to the software industry to investigate whether organizations are indeed likely to create a new category when their inventions are different, depending on whether they belong to constraining categories. The software industry provides a good test case because it contains a myriad of labels, some of which are meaningful and some difficult to define, and technical knowledge is obviously very important in the industry.

In order to test this hypothesis, Pontikes coded a program to track the categories with which software companies affiliate, using their statements in press releases. She ran this program with over 260,000 press releases issued by software companies from 1990 to 2002, and constructed a data set that matches software companies to categories during this time period. Because any company can issue a press release, these data capture small companies and categories that would otherwise be hard to track, resulting in over 4,000 companies and 400 categories. In addition, these data capture the first time a label is used by a company, allowing for the study of category emergence. From these data she identified new category creation, and measured “leniency” for existing categories.

In addition, Pontikes used patent and patent citation data to identify organizations that created very novel inventions.

Allowing for the two measures to interact, Pontikes found what she expected—novel inventions lead managers to create new categories, but only when the company is already in a constraining category. The more lenient a category is, the weaker this relationship becomes. For organizations in very lenient categories, the relationship between technical novelty and new category creation disappears. Managers are more likely to create a new category of goods when their companies both have created novel technologies and belong to a constraining category.

These results indicate that the evolution of categories in the marketplace is not simply the result of enterprising organizations that introduce new technologies. Novelty also depends on the existing category structure, which acts as the lens through which people view organizations.

A Lesson for Entrepreneurs

Pontikes’ research has implications for entrepreneurs who are trying to figure out the best way to position their latest invention in the market.

Often, companies will try to differentiate themselves from the rest of the industry in terms of their technology while giving little attention to the categories around them. “What my research shows is that no matter how new your technology is, if the categories around you aren’t well-defined, it’s going to be hard to position that product as something new,” says Pontikes. “You’re probably better off saying that you’re exactly like what the other guys are doing.” Otherwise, the product itself may seem like a failure if the new label is not accepted.

An example of an unsuccessful software category is partner relationship management, which positioned itself against a very big class of software called customer relationship management (CRM). The label ‘partner relationship management’ failed to become popular because people did not have a clear idea about what CRM really means to be able to tell the difference between the two categories.

The lesson to be learned is to always consider the environment in which a new product will be placed against other categories—as much as the technology—when thinking about how it will best fit in. Whether or not an entrepreneur’s product will be accepted as something truly novel partly depends on how different the technology is and partly on how people’s expectations have shaped the evolution of labels in the market.

Research by Elizabeth G. Pontikes, assistant professor of organizations and strategy at the University of Chicago Booth School of Business.