We study the impact of software-based innovation on the value of patented inventions, firms’ competitive position in the product market, and the market value of the firms in the U.S. information and technology (IT) hardware industry. Our analysis of over 227,000 patents by 741 public IT hardware firms in the period of 1996?2006 reveals several novel findings. Patented inventions with greater software intensity are more frequently cited and more likely to be renewed for legal protection. This effect is stronger for software patents than non-software patents, though it varies across firms depending on business scope and patent value measures. Increases in software innovation are associated with greater software contents in the subsequent period’s business profile while those of non-software innovation orient business away from software-based products and services, and this pattern is particularly strong for pure IT hardware firms. Greater software innovation also drives the shift toward more software-intensive business, allowing firms to differentiate themselves from rivals in product and service offerings. This differentiation benefit appears unique to pure IT hardware firms. Despite the advantages of pure firms in software-enabled technological value creation and competitive positioning, diversified firms are no less likely to create firm value from software-based innovation. We find evidence that firms optimize their innovation strategies along the dimension of exploitation and exploration subject to their business scope constraints. Our study offers one of the first evidence that software innovation helps mitigate product market competition and thus substantiates a mechanism through which software-based innovation creates economic value.