Category innovation in the software industry: 1990–2002

Abstract Research Summary This study investigates category innovation , when firms introduce a new label to pioneer a market category. I propose two antecedent pathways. The first is based on firms' material developments. Firms that combine categories in their products and technologies are more likely to use category innovation to communicate their position is not peripheral, but at the center of an emerging category. The second is contextual, in response to category leniency , when a market category has ambiguous social meaning. Central and peripheral firms in lenient categories use category innovation to send a clearer signal of their position. These pathways are countervailing: the more lenient a firm's categories, the weaker the relationship between category combination and category innovation. Exploratory analyses show category innovation is associated with firm success. Managerial Summary Firms use category labels to communicate the market they are in. This article studies the linguistic tactic category innovation : when firms introduce a new label to signal the firm is carving out a new market. I find firms use this tactic when they (a) develop novel, category‐combining products that do not fit into existing markets, or (b) are in a market that is not well‐defined (a lenient market category). I also find that for firms in lenient markets, the relationship between novel products and category innovation weakens. Preliminary evidence uncovers an association between firms that use category innovation and their likelihood to IPO, suggesting this linguistic tactic may be part of successful firm strategies.