We examine how innovation affects firms competitive positioning. Based upon localized competition, firms typically compete with similar others. But firms may choose to compete with dissimilar others when armed with an innovation of potentially high value. Focusing on size localized competition, we develop a simulation model with firms having differing probability and value of innovations. Firms chose where to locate in a two-dimensional space with heterogeneous demand and look to maximize their demand. Beyond heterogeneous demand, collocated groups of firms generate positive demand externalities. While this encourages firms to locate with competitors; adjacent firms also compete, taking demand from each other, which discourages firms from locating near competitors unless they can gain more than they lose. Innovations enable firms to capture more of their competitors demand, giving firms the latitude to locate with dissimilar others: larger competitors. We test my simulations predictions on firms trade show booth location choices at the Consumer Electronics Show and find results consistent with firms using innovation as a stepping stone to compete with larger firms.