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Making Innovation Last

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Making Innovation Last:
Volume 1
Sustainable Strategies for
Long Term Growth

Hubert Gatignon
INSEAD, Sorbonne Universités, France

David Gotteland
Grenoble Ecole de Management, France

Christophe Haon
Grenoble Ecole de Management, France
© Hubert Gatignon, David Gotteland and Christophe Haon 2016
Foreword © Thomas S. Robertson 2016
Softcover reprint of the hardcover 1st edition 2016 978-1-137-56096-4
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Library of Congress Cataloging-in-Publication Data

Gatignon, Hubert, author.


Making innovation last : sustainable strategies for long term growth /
Hubert Gatignon, David Gotteland, Christophe Haon.
volumes cm
1. Technological innovations—Management. 2. New products.
3. Creative ability in business. I. Gotteland, David, 1975– author.
II. Haon, Christophe, 1972– author. III. Title.
HD45.G35 2015
658.4’063—dc23 2015026452
To Erin’s memory – HG
To Gaspard, Firmin, and Emma – DG
To Isabelle, Louis, and Elise – CH
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Contents

List of Tables viii

List of Figures xi

Foreword
Thomas S. Robertson xiii

Preface and Acknowledgments xvi

1 Introduction 1

Part I Understanding Innovations 17


2 Assessing Innovations from the Technology Perspective 19

3 Assessing Innovations from the Market Point of View 53

Part II Organizational Context for Innovations 95


4 Strategic and Market Orientations 97

5 Managing Capabilities 153

6 When to Forge Alliances? 201

Index 249
List of Tables

1.1 Firm innovativeness scale 5

1.2 Innovativeness means 5

1.3 Drivers of new product success 8

2.1 Generational consolidation scale 30

2.2 Generational expansion scale 31

2.3 Architectural innovation scale 35

2.4 Radicalness of innovation scale 37

2.5 Competence-destroying/enhancing scale 38

2.6 New competence acquisition scale 41

2.7 Examples of process innovations 42

2.8 Examples of process innovations by radicalness


and competence-destroying characteristics 43

3.1 Examples of style changes 55

3.2 Examples of product improvement 56

3.3 Examples of product line extensions 57

3.4 Examples of new products for the currently served market 57

3.5 Examples of new products for the established market 59

3.6 Examples of major innovations 59

3.7 Ansoff’s diversification matrix 59

3.8 Measures of new product innovativeness 61

3.9 Innate innovativeness scale 65

3.10 Domain-specific innovativeness scale 66

3.11 Motivated consumer innovativeness scale 67

3.12 The 15 characteristics in Fliegel and Kivlin (1966) 69

viii
List of Tables ix

3.13 Representative items for the measurement of new


product advantage 70

3.14 Multi-item scales of innovation characteristics 76

3.15 Competencies in Technology/Production and Marketing 82

3.16 Selected innovations in automotive industry according


to the transilience map 84

3.17 Air France statement on Pitot probes after the


AF 447 crash 88

4.1 Market orientation scale – behavioral approach 103

4.2 Customer orientation scale 106

4.3 Competitor orientation scale 107

4.4 Questions to assess stakeholder orientation 109

4.5 Proactive market orientation scale 112

4.6 Technology orientation scale 120

4.7 Production orientation scale 121

4.8 Selling orientation scale 122

4.9 Entrepreneurial orientation scale 124

4.10 Strategic orientation dimensions and related items 126

4.11 Market orientation means 136

4.12 Strategic orientation means 137

4.13 Market orientation values 140

4.14 Individual level of market orientation scale 142

5.1 Szulanski’s scale of absorptive capacity 161

5.2 Lane and Lubatkin’s measure of absorptive capacity 162

5.3 Jansen et al.’s measure of absorptive capacity 163

5.4 Lichtenthaler’s measure of absorptive capacity 165

5.5 Zhou and Wu’s measure of technological capability 175

5.6 Vorhies and Morgan’s scale of marketing capabilities 178


x List of Tables

5.7 Basic organizational forms and absorptive capacity 183

6.1 Benefits of partnerships 203

6.2 Transaction cost theory determinants of


governance mode 213

6.3 Measure of product category-specific assets 215

6.4 Transaction-specific asset measures 216

6.5 Other transaction-specific asset measures 218

6.6 A measure of internal uncertainty for assessing


R&D partnership 219

6.7 Internal uncertainty measures 220

6.8 Measure of demand volatility 223

6.9 Measure of environmental uncertainty 223

6.10 Measure of technology uncertainty 223

6.11 Governance mechanisms to manage perceptions


of commitment 228
List of Figures

1.1 Firm innovativeness and firm value 4

1.2 Book outline 11

2.1 An example of a complex hierarchy of nested subsystems 23

2.2 User interface of two statistical packages 27

2.3 Modular and architectural innovations 33

2.4 Cycles of product and process innovations punctuated


by dominant designs 44

3.1 A structural path among perceived innovation


characteristics 78

3.2 The extended technology acceptance model 79

3.3 Transilience map for innovations in the


automotive industry 83

4.1 General framework 99

4.2 Propensity to satisfy current versus future needs 113

4.3 Creating a market orientation 141

5.1 Model of absorptive capacity 155

5.2 Lichtenthaler’s third-order measure of absorptive


capacity 166

5.3 Moderating effect of absorptive capacity on the


relationship between technology exploration and
firm innovativeness 172

5.4 Effects of technological capability on exploration and


exploitation of knowledge in new product development 175

5.5 Organization culture and absorptive capacity


learning processes 182
5.6 Moderating effects of environmental dynamism 189

xi
xii List of Figures

5.7 Moderating effects of technological turbulence 190

6.1 Technology development governance modes 205

6.2 Capron and Mitchell’s modes of organization and


governance 206

6.3 Fundamental transaction cost analysis


conceptual framework 213

6.4 Entry mode classified by level of control of entrant 235

6.5 Foreign entry mode classifications along a


control continuum 236

6.6 A transaction cost framework for analyzing the


efficiency of entry modes 237

6.7 Modes of entry: summary of empirical findings 237


Foreword

A topic that never seems to go away is innovation – both the develop-


ment of new products and processes and their successful diffusion to rel-
evant customer segments. The literature directed to managers is replete
with ideas and advice on how to develop innovations and how to gain
market acceptance for new ideas. Similarly, the academic literature takes
innovation as a key and enduring research topic across multiple disci-
plines, such as marketing, operations management, strategy, and organi-
zational behavior.
This two-volume book by Hubert Gatignon, David Gotteland, and
Christophe Haon is an important addition to the innovation literature –
both for sophisticated managers and for innovation researchers. It is a
long overdue summary of decades of research and conceptualizations
drawing conclusions based on a rigorous analysis and questioning of
the extant literature.
The focus on innovation is indeed appropriate. As documented by the
authors, innovation is the key mechanism to achieve organic growth. A
commitment to growth in turn leads to better results than cost reduc-
tion as a long run strategy, that is, greater market share, enhanced profit-
ability, and higher market capitalization.
But we also know that a low percentage of successful outcomes are
realized in the realm of innovation. The authors conclude that “product
failure rates are much smaller than idea failure rates,” but still at a 40
percent level. Therefore, the starting point of any treatise on innovation
is to analyze the “drivers” of innovation success and the processes and
orientations most likely to lead to such success. It is also the case that
success rates vary considerably by the type of innovation. In Chapters 2
and 3, the authors do a masterful job of classifying innovations – going
considerably beyond product and process or incremental and radical.
Here is where we are exposed to a systems perspective, architectural
innovations, and dominant design – all issues which are highly strategic
for the firm.
The authors also develop the thesis that successful innovations are
not necessarily well defended and many firms succeed with a first-
generation product or process but are left behind as the market moves
to second- and third-generation technologies. This, of course, begs the
question of the value of first mover advantage, which may be important

xiii
xiv Foreword

in consumer packaged goods but seems to dissipate rapidly in techno-


logical goods.
This leads to a major advantage of their book. Although addressing
processes for successful innovation development and successful market
acceptance, much of this two-volume book is focused on sustainable
innovation at the firm level and not on one-time innovation. This leads
to discussion of a range of topics associated with a firm’s “innovative-
ness.” Paramount among these are the ability to inculcate both customer
and competitor orientations within the firm and to develop the capabili-
ties appropriate to these orientations – especially technology and market-
ing capabilities which the authors find to complement one another.
It may well be that a firm’s inability to innovate consistently is due
to a lack of these orientations and capabilities and instead an adherence
to an internally oriented focus and a tendency to adopt a “not invented
here” syndrome. The authors demonstrate, for example, the impor-
tance of external knowledge absorption – especially in turbulent times.
The logic is that in uncertain environments, the value of accumulated
internal knowledge deteriorates. While Chapter 5 develops the thesis of
external knowledge acquisition, Chapter 6 asks when this is appropriate
and in what form, such as merger or acquisition, joint venture, licens-
ing, or contracting. The decision, according to the authors, is best deter-
mined based on transaction cost economics but with added value from
the resource-based view of the firm and network theory.
Volume 2 then pursues research on the development of innovation
and the strategy to gain market acceptance. Whether innovation ema-
nates internally or externally, the value of new product teams is pro-
nounced and the authors review the literature on the staffing of new
product teams, the value of diversity, what diversity means, the leader-
ship of such teams, and the reward structure imposed. These are key
factors in the probability of team success in innovating successfully.
Relatedly, the authors take a systematic and rigorous approach to the
fostering of organizational creativity – a topic that is very often treated
nonsystematically. They recognize that creativity is a function of meth-
ods, creative people, and a supportive context. Creativity is particularly
salient in terms of idea generation and selection leading to the develop-
ment of specific concepts that guide design. Here the authors contribute
significantly by reviewing the literature identifying criteria for evalu-
ating concept viability and discussing models for estimating market
potential.
The innovation process may also be enhanced by involving custom-
ers. However, evidence is not uniformly positive and the questions that
Foreword xv

arise are the cost–benefit ratio and what “customers” to involve. The
authors review the literature on when customers are likely to be of
value and conclude that “lead users,” that is, customers who are knowl-
edgeable about market needs, are most likely to be beneficial in new
product development. Of course, identifying such lead users is some-
times not an easy task.
Given the completion of innovation development, attention turns to
gaining adoption and diffusion. Can new product acceptance be meas-
ured? What models are available for different types of innovation? The
authors present multiple models which have appeared in the literature.
However, the models, while conceptually interesting, may include vari-
ables and relationships which are difficult to measure and, therefore,
their value may be compromised in terms of predicting success. They
do provide a valuable roadmap for guiding thinking on factors affecting
innovation acceptance.
Then it is time to launch the innovation. Chapters 12 to 14 present
interesting research findings on contagion, branding, pricing, and pre-
announcing. A rich discussion is offered on word-of-mouth and how
negative word-of-mouth swamps positive. Given the importance of
word-of-mouth, can it be managed? Perhaps it can be to some extent,
since it is complementary with marketing communication efforts. If net-
work externalities are relevant, then contagion processes become even
more salient.
Should an innovation be preannounced? Here the authors assess the
customer benefits and competitive risks. They also ask to whom prean-
nouncing should be directed, how early before market launch to prean-
nounce, and what content to communicate. Finally, discussion turns to
pricing, channels, and branding: should a sprinkler or waterfall distribu-
tion strategy be used; is a pricing premium ever appropriate; and should
the product utilize the name of an existing brand, a new brand, or an
alliance brand?
And so the reader is offered a comprehensive view of innovation
development and diffusion. The approach is rigorous and relevant.
Managers will find this a useful source of ideas and researchers will find
new research directions to pursue. The end result perhaps is that the
development of innovation will be a more enlightened process and the
probability of market success will be increased.
Thomas S. Robertson
Joshua J. Harris Professor of Marketing
Wharton School of the University of Pennsylvania
Philadelphia, PA, USA
Preface and Acknowledgments

This book has grown from two decades of teaching master’s and doc-
toral level courses in marketing strategy and conducting research in the
particular area of marketing innovations. Over the years, we have devel-
oped a comprehensive view of the topic. However, this is a broad field
that requires synthesizing to grasp its complexity. Providing this synthe-
sis has been our goal in writing this book.
Innovations are clearly fundamental for the growth of firms and for
the economic well-being of citizens, regardless of the stage of develop-
ment of the society in which they are members. Innovations are essen-
tial for emerging economies, as they are for developed economies.
Firms that do not innovate are sure to decline as the markets evolve.
Innovations, then, are at the heart of business and of society.
Innovations are highly valued by individuals as well. Although indi-
viduals may at times react negatively because of fear of change, they
recognize the benefits that can come with innovations, be it at the indi-
vidual or the societal level. But innovations also engender emotions that
go beyond the pure rationalization of benefits. We as human beings are
particularly attracted to what is new, especially technology, as a source
of advancement for society and for individuals. But innovations can-
not be disseminated without sound strategies, skilled entrepreneurs, and
established firms that know how to develop and market them.
We hope this book will contribute to a better understanding of inno-
vations so that firms and individuals can take better advantage of their
environment for optimal individual and societal development. We hope
to accomplish this by not only reviewing established academic knowl-
edge but also by synthesizing that knowledge to make it more easily
understood while still being comprehensive. Therefore, while always
presenting the material from a particular perspective, which should
have merit in its own right, we hope to contribute to the dissemination
of knowledge about innovations that can be useful to two audiences in
particular. The first audience comprises managers who wish to optimize
the potential of their enterprises through successful innovation. The
second comprises those students who are seeking a more comprehen-
sive understanding of innovation strategies. In particular, we believe the
frameworks developed for this book can help innovation researchers to
identify new research directions.

xvi
Preface and Acknowledgments xvii

We wish to thank our families who must always share the burden
when we embark on the challenge of writing a book. We also want to
thank our institutions, which provided us with the necessary trust and
resources to write this book. We are grateful to our colleagues and to our
students, who stimulated our knowledge and understanding of innova-
tion strategies. We also thank Jean-Philippe Rennard, dean of faculty at
Grenoble Ecole de Management, who provided an invaluable support
during the last four years, and Stacey Malek and Yashar Bashirzadeh for
their help in editing this book.
Specials thanks go to Kathy Sheram who has provided us with detailed
editing over the last two years. She brought a friendly but acute eye to
our material to make sure academic research was expressed the best way
possible for readers of all backgrounds. We are truly indebted to her.
1
Introduction

Innovate or die. No one today would disagree that firms that are seek-
ing growth cannot realize that growth without creating new products
or services; in short, they must innovate. Indeed, political economists
and especially developmental economists do not question the role of
innovation in the creation of wealth in both developing and industrial-
ized economies.
But while nations have a role to play in fostering innovation through
subsidies, regulations in favor of competition, education, and research,
or the protection of intellectual property, the innovation process ulti-
mately resides within the realm of individual firms if not of single indi-
viduals such as entrepreneurs. Innovation has long been thought of as
originating outside the firm. This exogenous view of innovation raises
the question of what firms should do in terms of whether and when
to adopt process innovations for internal use, as well as in terms of
whether and when to introduce new product and service innovations
to the market.
However, another important research stream concerns the firm’s
internal process for developing new products and services. This endog-
enous innovation mechanism generates vital organic growth that in
turn generates the most value for firms, even after acquisitions (Favaro,
Meer and Sharma 2012). Indeed, at times, this innovation process may
require the acquisition of new knowledge and know-how that the firm
does not possess. In this book, we consider innovation as a mechanism
for sustaining the growth of a firm.
Firms must generate sustainable profits in order to remain viable.
Greater profitability can result from an emphasis on cost reductions.
The Six Sigma program is an example of a frequently adopted program
that attempts to improve efficiencies and cut costs. However, Rust,

1
2 Making Innovation Last

Moorman and Dickson (2002) show that it is an inefficient strategy.


Firms that focus on revenue expansion perform better than those that
emphasize cost reduction, and even better still than those that empha-
size both revenue expansion and cost reduction. In addition, firm per-
formance, including stock market performance, must be considered
over the long term. The objective should not be to increase profit in the
short term but rather to develop a business that will maintain and grow
its profitability in the long term. Because no competitive advantage lasts
forever, only a constant effort to innovate can help sustain growth and
performance.
The objective of this book is to reflect and build upon the current
state of knowledge established not only in the marketing literature but
also in the strategy and organizational behavior literatures that deal
with innovation as well. Because innovation strategies are multidisci-
plinary in nature, it is necessary to take these different perspectives into
account in order to provide a full analysis of such strategies. Therefore,
in each chapter of the book, we review the relevant literature to date
with the twofold objective of: (1) organizing and integrating theories
relevant to innovation strategies for a comprehensive synthesis use-
ful for researchers and (2) guiding those managers who wish to build
organizations that are capable of sustained growth through successful
innovation.
By innovation, we mean to include all types of innovations. Schumpeter
(1934) distinguishes five types of innovations: (1) new products, (2) new
methods of production, (3) new sources of supply, (4) new markets, and
(5) new ways to organize business. This last type of innovation is often
referred to as “business model innovation,” or “the search for new log-
ics of the firm, new ways to create and capture value for its stakehold-
ers, and focuses primarily on finding new ways to generate revenues
and define value propositions for customers, suppliers, and partners”
(Casadesus-Masanell and Zhu 2013, p. 464). Business model innovation
often implies finding new methods of production, new sources of sup-
ply, and new manners to organize business. In some cases, new products
or services promote business model innovation in the firm. It may also
be the case that business model innovations require new products or
services. Therefore, we consider innovations in all their dimensions, as
developed especially in Chapters 2 and 3.
In this introductory chapter, we first provide the overall scientific
evidence for the positive impact of innovations on firm performance.
Given the still substantial failure rate of innovations, it is indeed use-
ful to start with a reminder of the empirical evidence. In the second
Introduction 3

section of this introduction, we identify the key issues that must be


analyzed in order to be able to generate sustained growth through
innovation strategies. We then provide a structure for analyzing a
firm’s strengths and weaknesses with regard to such objectives. The
structure of the book corresponds to these key issues that we group
into four parts. In Section 1.2 of this introduction, we describe these
parts and provide an outline that summarizes each of their corre-
sponding chapters.

1.1 Innovation and performance

For a firm to be innovative, it must have both the will and the capac-
ity. Together these determine the level of its innovativeness, that is,
its “receptivity and inclination to adopt new ideas that lead to the
development and launch of new products” (Rubera and Kirca 2012,
p. 130). Indeed, such innovativeness requires that a firm foster a par-
ticular type of culture within itself, one that is receptive to new ideas
that can lead to a long-term competitive advantage not easily imitable
by other firms. However, the process of transforming a firm’s culture
is difficult and complex, and its success is not guaranteed. Yet build-
ing such a culture is an essential element of an innovation strategy for
sustained growth.
The link between a firm’s innovativeness and its performance has
been examined extensively for decades (e.g., Mansfield 1968, Soni,
Lilien and Wilson 1993, Thornhill 2006, Srinivasan et al. 2009,
Bowen, Rostami and Steel 2010, Rosenbusch, Brinckmann and Bausch
2011). Rubera and Kirca (2012) provide a synthesis of the evidence
for such a link by integrating the results of 153 studies into a meta-
analysis. They confirm that a firm’s innovativeness contributes to
the various components of its performance. Namely, innovativeness
contributes to: (1) the firm’s market performance (market share, sales,
or sales growth), (2) its financial performance (overall profitability,
return on assets, return on equity, or return on investment), and (3)
its stock value (market capitalization, stock price, or Tobin’s q). As
shown by Moorman et al. (2012), the stock market is especially sensi-
tive to the increase in the rate of new product introduction, which
investors use as a signal of firm capabilities. This explains why pub-
licly traded (and not private) firms use an innovation ratchet strat-
egy whereby they may delay the introduction of innovations in order
to demonstrate an increase in the rate of new product introductions
(Moorman et al. 2012). The three effects – on market performance,
4 Making Innovation Last

financial performance, and stock value – are not independent of each


other. In fact, they combine to form a chain of effects that explains
why more innovative firms have a higher stock value: the innovative-
ness of a firm contributes to its market position, which in turn affects
its financial position (Figure 1.1).
Certain conditions, partly under the firm’s control, reinforce the influ-
ence of a firm’s innovativeness on its value. Indeed, the impact of a
firm’s innovativeness depends both on industry-level factors, which
are outside the influence of the firm, and on firm-level factors that the
organization can manage for optimal results. More specifically, accord-
ing to Rubera and Kirca (2012), innovativeness is more beneficial to a
firm’s value when:

1. The firm introduces radical innovations. Radical innovations are usu-


ally difficult to imitate because they require the use of sophisticated
technologies or know-hows. Hence, a firm’s ability to introduce radi-
cal innovations guarantees to the investors that a firm will stay ahead
of its competition in the future.
2. The firm invests more in communication through advertising,
because this signals to investors that the firm is likely to obtain future
cash flows.
3. The firm is small. Because it is more difficult for a small firm to assure
investors of its success over time, innovativeness, which signals the
firm’s ability to grow, is critical.

Chain of Effects

Firm Firm
Innovativeness Value

Market Financial
Position Position

Figure 1.1 Firm innovativeness and firm value


Source: Adapted from Rubera and Kirca (2012).
Introduction 5

Given the importance of the effects of a firm’s innovativeness on its


performance, managers may be interested in comparing their own com-
pany’s degree of innovativeness with the benchmarks that are available
from the literature. For that purpose, we report in Table 1.1 the items
generally used in the literature to measure innovativeness (Hurley and
Hult 1998).
Several studies in the literature provide statistics on this measure,
including means, that can be used as benchmarks. These means are
reported in Table 1.2, and as indicated by the data, they are consistent

Table 1.1 Firm innovativeness scale

Items*

s Innovation, based on research results, is readily accepted


s Management actively seeks innovative ideas
s Innovation is readily accepted in program/project management
s People are penalized for new ideas that do not work (reverse coded)
s Innovation is perceived as too risky and is resisted (reverse coded)

* Each item is rated on a five-point scale ranging from “not descriptive” to “very descriptive.”
Source: Adapted from Hurley and Hult (1998).

Table 1.2 Innovativeness means

Mean innovativeness
Reference and sample description (standard deviation)*

Hurley and Hult (1998) 4.69 (0.25)


s 56 organizations in an agency of the US
federal government
Hult, Snow and Kandemir (2003) 4.91 (1.34)
s 764 strategic business units
Hult, Hurley and Knight (2004) 5.25 (1.15)
s 181 strategic business units
Augusto and Coelho (2009) 4.76 (1.06)
s 89 firms in Portugal
Tsai and Yang (2013) 5.38 (0.82)
s 154 high-tech manufacturing firms in Taiwan

* All the values are reported based on seven-point scales; standard deviations in parentheses;
that is, when the original study used a scale with a different number of levels, a linear
transformation was applied to provide consistency in the measurement scales in the table.
6 Making Innovation Last

across studies. The general level of innovativeness for all firms is rela-
tively high, as indicated by all the means being above the midpoint (4)
of the scale. However, some differences in the variability of the firms’
innovativeness are explained by the context in which they operate
(industrial sector, country). Such differences are reflected by the stand-
ard deviations reported in parentheses.
But even if firms are motivated to innovate, it is not easy for them
to do so successfully. For instance, Michelin was an early entrant into
the Global Positioning System (GPS) market. In 2002, the company
began marketing GPS devices, along with mobile phones and personal
digital assistant (PDA) navigation systems. Strategically, this appeared
to be a reasonable area into which Michelin could expand and inno-
vate, since the company was recognized for its expertise in related
areas, such as maps and travel guides. In spite of these competences,
Michelin abandoned the GPS business in 2008, unable to compete
when the entry price level dropped from around €400 in 2005 to €150
in 2007 (Rocco 2008).
The rates of new product failures reported in the literature have
remained stable at high levels over several decades. In their review,
Castellion and Markham (2013) report rates that can range from a low
of 33 percent up to a high of 90 percent. One explanation for the dif-
ferent rates reported in the studies reviewed is that some of these stud-
ies measure the failure rate of ideas for new products or new services,
whereas others measure the failure rate of the new products that were
actually launched. The failure rate of ideas is the percentage of ideas that
enter the development process that are not launched as new products
or new services. The failure rate of products is the percentage of the new
products launched that fail. It is not surprising that product failure rates
are much smaller than idea failure rates. Indeed, new product ideas that
have less financial and market potential are usually screened out during
the innovation process and are never introduced onto the market. In
three successive studies (Page 1993, Griffin 1997, Barczak, Griffin and
Kahn 2009), the Product Development and Management Association
(PDMA) has estimated the new product failure rates of firms predomi-
nantly located in the US and operating in various industries. The results
of these studies indicate that new product failure rates have remained
stable over time at around 40 percent.
The fact that many innovations fail has stimulated extensive research
on the drivers of new product success. This stream of research has culmi-
nated with the publication of three meta-analytical reviews (Montoya-
Weiss and Calantone 1994, Henard and Szymanski 2001, Evanschitzky
Introduction 7

et al. 2012). In Table 1.3, we report the results of the most recent meta-
analysis, by Evanschitzky et al. (2012), which extends and updates
previous meta-analytical investigations. Given the complexity of devel-
oping and launching successful innovations – as reflected by the high
levels of new product failure rates – it is not surprising that the suc-
cess of new products cannot be explained by a few factors alone. What
is perhaps more surprising is that some of these factors appear easily
controllable by the firm: (1) the characteristics of the firm’s strategy,
(2) the characteristics of the new product process, (3) the characteristics
of the firm’s organization, and (4) the characteristics of the new prod-
uct itself. It means that although innovation is risky it is a manageable
process, and firms can exert at least some control over it. Developing
and launching a successful new product does not happen by itself. It is
the result of a process that must be well defined and well managed not
only from the earliest stages of each project but, more generally, from
the earliest efforts to reshape the organization itself for effective and
continuous innovation.

1.2 Book philosophy and outline

This book takes a particular perspective on innovation strategies. First,


unlike most books on innovation strategies, which deal with the man-
agement of an innovation project, we consider the long-term success
of a firm. Although project-level analysis is an important driver of the
success of a new product or service, we go beyond innovation project
management and cover strategies that help the organization to succeed
in sustained innovation. Second, we emphasize the importance of the
customer, reflecting the marketing perspective that satisfying customer
needs is the basis for the success of all new products and services. It
is imperative to consider the interplay between the customer and the
firm’s various departments during the new product development pro-
cess as well as after the introduction of the innovation into the market.
In fact, the marketing of the innovation does not come into play only
when the new product or service is ready for launch, but rather it should
be taken into consideration throughout the entire development process.
Marketing research provides critical information that management can
then use to build expectations of how the new product or service will be
marketed and how customers are likely to receive it.
With these perspectives in mind – all of which are reflected in the top-
ics covered in this book – our goal is to provide a state-of-the-art review of
the current knowledge on innovation. While an exhaustive review of all
8

Table 1.3 Drivers of new product success

Mean
Driver Definition correlation

Firm’s strategy
Company resources Commitment of (other) company resources (e.g., knowledge, patents) to new 0.18
product development initiatives
Dedicated human resources Focused commitment of personnel resources to a new product initiative 0.29
Making Innovation Last

Marketing synergy Congruency between the existing marketing skills of the firm and the 0.19
marketing skills needed to execute a new product initiative successfully
Strategic orientation Strategic impetus, orientation, and focus of corporate strategy 0.24
Technological synergy Congruency between the existing technological skills of the firm and the 0.21
technological skills needed to execute a new product initiative successfully
Marketplace conditions
Competitive response Degree, intensity, or level of competitive response to a new product 0.12
intensity introduction (also referred to in the literature as market turbulence)
Environmental uncertainty Degree of uncertainty due to the general operating environment faced by 0.10
the firm (e.g., regulatory environment, technology uncertainty)
Likelihood of competitive Degree/likelihood of competitive response to a new product −0.02
response
Market potential Anticipated growth in customers/customer demand in the marketplace 0.21
New product development process
Cross-functional Level of communication among departments in a new product initiative 0.23
communication
Cross-functional integration Degree of multiple-department participation in a new product initiative 0.20
Launch proficiency Proficiency with which a firm launches the product/service 0.29
Marketing task proficiency Proficiency with which a firm conducts its marketing activities 0.25
Market orientation* Degree of firm orientation to its internal, competitor, and customer 0.31
environments
Predevelopment task Proficiency with which a firm executes the prelaunch activities (e.g., idea 0.26
proficiency generation/screening, market research, financial analyses)
Reduced cycle time Reduction in the concept-to-introduction time line (i.e., time to market) 0.15
Senior management support Degree of senior management support for a new product initiative 0.22
Structured approach Employment of formalized product development procedures 0.20
Organization characteristics
Degree of formalization Extent to which explicit rules and procedures govern decision-making in the 0.12
organization/project
External relations Coordination and cooperation between firms and other organizations 0.20
Organizational climate The extent to which the day-to-day decisions are governed with organization/ 0.25
group’s shared values and norms
Organizational design Organizational design such as reward structure and job design 0.10
Product characteristics
Product advantage* Superiority and/or differentiation over competitive offerings 0.34
Product technological Perceived technological sophistication (i.e., high-tech, low-tech) of the product 0.08
sophistication

* Two factors (in bold above) have a strong impact on new product success (with a correlation over 0.3): a firm’s market orientation and new product
superiority and/or differentiation over competitive offerings (product advantage).
Source: Adapted from Evanschitzky et al. (2012).
Introduction
9
10 Making Innovation Last

the relevant literature is not possible given the depth and breadth of pub-
lications concerning innovations in general, our intention is to reflect the
major schools of thoughts that have been investigated in a scientific way.
At the same time, we hope that the structure of the book will contribute
to a better organization of the knowledge base in the multidisciplinary
area of innovations with the ultimate objective to help researchers to
access knowledge more easily and to facilitate the process of creation
of new research directions. The structure that we propose should also
guide those managers who are interested in helping their organizations
become more successful innovators through the development of innova-
tion strategies that can lead to continued success and growth.
Our first task is to answer the question, “What is an innovation?”
This may seem obvious, but an examination of the literature reveals that
the answer may not be so clear. Understanding an innovation requires
understanding the technology behind it and the benefits of that tech-
nology in terms of how it meets the needs of the customer. An inno-
vation, therefore, must be assessed from different perspectives. Thus, a
technological point of view will emphasize the invention. For example,
the discovery by Jacques and Pierre Curie in 1880 of the quartz move-
ment was an important scientific event. However, it is only from the
viable commercialization of the technology in the form of the quartz
wristwatch that the market potential of the discovery was realized.
Accordingly, we consider that an invention is turned into an innovation
only when a product or service meeting a particular need for a group
of potential consumers is launched. This implies that the technological
and marketing perspectives must be considered simultaneously.
Service innovations differ from goods innovations. For instance, ser-
vice innovations are less tangible and testable; they are more difficult
to protect with patents and are therefore often perceived to be more
risky; furthermore, it is more difficult to scale them up and to have them
generate value for the firm (Dotzel, Shankar and Berry 2013). However,
service innovations share similarities with innovative goods in that they
are essentially new offerings that should bring benefits to customers:
a service innovation is “a new or enhanced intangible offering that
involves the firm’s performance of a task/activity intended to benefit
customers” (Dotzel et al. 2013, p. 259). In this book, we are interested in
all types of innovations that serve the needs of customers, and we make
a distinction between products and services only when useful.
The book is divided into four parts, which correspond to the four areas
that are critically important if an organization is to be successfully and
sustainably innovative (Figure 1.2):
Introduction 11

UNDERSTANDING INNOVATIONS

Assessing
Assessing
innovations from the
innovations from the
technology
market point of view
perspective

Chapter 2 Chapter 3

ORGANIZATIONAL CONTEXT FOR INNOVATIONS

Orienting the strategy Managing the firm’s


Forging alliances
of the firm capabilties

Chapter 4 Chapter 5 Chapter 6

ORGANIZATIONAL PROCESSES FOR INNOVATIONS

Composing a new Developing and


Getting the customer Fostering creativity in
product development selecting new product
involved the organization
team concepts

Chapter 7 Chapter 8 Chapter 9 Chapter 10

LAUNCHING INNOVATIONS IN THE MARKET

Looking ahead to
Predicting new Branding the new Launching the new
new product
product acceptance product product
diffusion

Chapter 11 Chapter 12 Chapter 13 Chapter 14

Figure 1.2 Book outline


12 Making Innovation Last

1. Understanding innovations, so that researchers and managers can


identify the sources of variation in the consequences these innova-
tions generate.
2. The organizational context for innovations, which serves as a basis
for the long-term strategies that drive innovations and their success.
3. The organizational processes for innovations, which concern the
implementation of strategies that lead to a continuous stream of suc-
cessful innovations.
4. The launching of innovations in the market, so that with the proper
marketing of these innovations, a firm can gain customer acceptance
of its new products and services.

These four parts are covered in two volumes. The first two parts (Chapters
1–6) are in the first volume and Parts III and IV (Chapters 7–15) are in
the second volume. We now introduce the content of each of these four
parts with their corresponding chapters, also shown in Figure 1.2. The
first part of this book, devoted to the definition of innovations and to
their various characteristics, adopts a dual perspective that considers
both the technological point of view (Chapter 2) and the market point
of view (Chapter 3). The second part of the book considers the internal
conditions that are likely to sustain a firm’s innovation over the long
term. Innovativeness must be an integral part of a firm’s culture; there-
fore, this second section examines the characteristics of a culture of inno-
vation and how it can be developed throughout an organization. To that
end, we examine the culture of a firm from various perspectives, includ-
ing the firm’s collective knowledge and abilities, which are reflected in
the firm’s strategic orientations (specifically the firm’s customer orien-
tation, competitor orientation, technology orientation, and entrepre-
neurial orientation in Chapter 4) and in its capabilities (Chapter 5).
We distinguish between entrepreneurship within a firm, which is
covered in this book (principally in Chapter 4), from the start-up of
a business based on an innovation. We refer the reader interested in
aspects of entrepreneurship that concern the creation of business to
that specific literature while we focus here on issues about innovation
per se. Recognizing that it is sometimes necessary or more effective to
seek capabilities and knowledge from outside the firm, we discuss the
issue of when to forge alliances with partners and what type of partners
work the best (Chapter 6). The more specific questions of how a firm
should design its innovation process are addressed in the third part of
the book. In these chapters, we consider several critical aspects of the
Introduction 13

innovation process that are relevant if a firm is to successfully innovate


over the long term with new products or services. We address the ques-
tion of how to compose and manage a new product development team
(Chapter 7) and then present the issues concerning how best to involve
customers in the innovation process (Chapter 8). We discuss the chal-
lenge of fostering creativity in a firm (Chapter 9) and present the issues
surrounding the development of new product concepts (Chapter 10).
Finally, the fourth and last part of the book deals with strategies for
launching new products or services once they have been selected and
produced. We consider four critical aspects of the launch process: pre-
dicting new product acceptance (Chapter 11), looking ahead to the dif-
fusion of a new product or service (Chapter 12), branding a new product
or service (Chapter 13), and launching a new product or service into the
market (Chapter 14).
In each of these chapters, we provide a framework for analyzing the
critical questions that must be addressed by both researchers and man-
agers. Through these frameworks, we are able to reflect the current state
of knowledge and research in the area of innovation. This in turn serves
as a guide for researchers, as they determine what further development
and testing of theories is needed, and for managers, as they assess and
seek to enhance the ability of their firms to generate sustained growth
through innovation.

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14 Making Innovation Last

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Introduction 15

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Part I
Understanding Innovations
2
Assessing Innovations from the
Technology Perspective

Technological change can have a major impact on organizations and


their performance. It is also a key factor in understanding dynamic
organizational capabilities. It is therefore critical to have a clear under-
standing of the nature of innovations. Assessing innovations in terms of
technology means that we consider a product or service as the practical
application of knowledge, especially because it uses technical processes
or methods. This corresponds to the standard definition of “technology”
found in today’s dictionaries. Since this definition applies to knowledge
in general, the technological perspective is not exclusively reserved for
products but can apply equally to services. Indeed, services are often
the result of the application of science of a technical nature. This is
clearly illustrated by web-based services such as web-shopping. But this
is also the case with more traditional services; for example, a hair salon
can be considered from the technical point of view as the use of tools,
machines, techniques, and, more generally, know-how for delivering an
applied benefit.
From such a technological point of view, a product or a service is com-
posed of a hierarchically ordered set of subsystems with linkage mecha-
nisms.1 An innovation can then be assessed depending on the changes
it makes to this structure of subsystems. A number of concepts have
been introduced in the innovation literature, but these concepts are not
independent of each other. In addition, as recognized by a number of
authors, the concepts on technological innovations can be confusing.
This confusion is due not only to the interdependence of these same
concepts but also to the complexity of the phenomena surrounding
innovations, for example, the market introduction of innovations and
their consequences on the organization, the market, and the general
competitive environmental dynamics.

19
20 Making Innovation Last

Ehrnberg (1995) provides a review of the various operational measures


that have been used for these major concepts that characterize innova-
tions and clarifies the operational definitions of the various constructs
used in the innovation literature. To shed further light on this com-
plexity, Gatignon et al. (2002) make a distinction among concepts that
concern (1) the locus of innovation, (2) the types of innovation, and (3)
innovation characteristics. Generally, the locus of an innovation con-
cerns its hierarchical position in the system and its type is determined
by the product’s set of components and linking mechanisms and by its
design hierarchy. The innovation’s characteristics are quite distinct from
these structural factors, as they concern the magnitude of the changes
and the innovation effects on the firm’s competencies.
Although we develop these different dimensions in the following
sections, we first provide an overview of them here. The locus of the
innovation is the first dimension by which to characterize the innova-
tion. Changes can occur in a central subsystem that forms the core of
the product; if not, it would appear as a peripheral level of the subsys-
tem hierarchy. Core subsystems tend to be more tightly connected with
other subsystems, and they are typically associated with strategic perfor-
mance parameters.
Type of innovation concerns changes in the combination or linkages
among the subsystems. Changes in the linking mechanisms without
changes in the subsystems themselves are architectural innovations.
These can be distinguished from innovations where the changes occur
in one or several subsystems themselves.
The most studied innovation characteristic concerns the degree of
innovativeness, that is, whether the change is technologically radical or
simply incremental (e.g., Nelson and Winter 1982, Dewar and Dutton
1986, Damanpour 1991, Green, Gavin and Aiman-Smith 1995). Radical
innovations advance the price/performance frontier at a rate that sub-
stantially exceeds the rate of progress. A characteristic more recently
introduced in the literature concerns whether the innovation builds on
existing competencies (competence enhancing) or renders existing skills
and know-how obsolete (competence destroying). Related to the nature
of the competencies required by the innovation is the notion that the
firm may not possess internally the skills and know-how required for
the innovation but instead may need to get them from outside the
organization.
Related to this notion is the distinction between products and pro-
cess innovations. It has been argued that incumbents are more likely
to develop process innovations built on their technological knowledge,
Assessing Innovations from the Technology Perspective 21

which leaves the door open to entrants with innovative products using
different technologies (Abernathy and Utterback 1978).
Gatignon et al. (2002) show that these constructs, although not inde-
pendent, can be untangled from each other, and the authors develop
operational scales that make it possible to discriminate among them. In
the next sections, we formally define the concepts and present measures
for each, including those validated in Gatignon et al. (2002).
Analyzing innovations according to these structural dimensions
is essential to assessing their impact, not only on their performance
but also on the organization itself. It can also be a source of creativity
to prepare the firm for innovations of a particular type that may be
less disruptive and build on existing competencies. We discuss some
of these implications in this chapter but only to the extent that it
helps clarify the nature and type of innovations. These definitions of
an innovation clearly drive the strategy required for the firm to sustain
its growth. Therefore, the implications of being able to assess inno-
vations from a technology perspective are discussed throughout the
remaining chapters of the book as fundamental to the firm’s innova-
tion strategies.

2.1 Innovations as subsystems or modules

Almost all entities – social, biological, technological, or otherwise – can


be viewed as hierarchically nested systems (Simon 1962). This means
that an entity is made up of a system of components and each of those
components is, in turn, a system of finer components, until the com-
ponents are “elementary particles” or until science constrains our
decomposition.
It is then commonly accepted that products or services are composed
of (1) a set of subsystems or modules (2) that are hierarchically ordered
and nested and (3) that are related to each other through linkage mecha-
nisms (e.g., Alexander 1964, Clark 1985, Sanchez and Mahoney 1996,
Baldwin and Clark 2000, Schilling 2000).
A basic example of the decomposition of a product has been described
for a chair: “the chair’s subsystems include the pedestal, stem, seat,
armrest, backrest; the subsystem interfaces include various fasteners,
coasters, and user interfaces, such as the height adjustment lever and
seat cushions” (Meyer and Seliger 1998, p. 62). Another simple example
that builds on more complex technology is the room fan; it is composed
of the blade, the motor that drives it, the blade guard, the control sys-
tem, and the mechanical housing (Henderson and Clark 1990). A yet
22 Making Innovation Last

more complex example is found with the passenger airplane industry


examined by Tushman and Murmann (1998). An airplane is the inte-
gration of a number of integrated subsystems: propulsion, lifting, land-
ing, control systems, passenger compartment, and systems architecture
(Vincenti 1990, 1994). These subsystems can then be exploded into sub-
components. One illustration is the engine which, like any engine, is
made up of a number of smaller subsystems.
A subsystem or component of a product is defined by Henderson and
Clark (1990) as “a physically distinct portion of the product that embod-
ies a core design concept (Clark 1985) and performs a well-defined func-
tion” (p. 2). The condition to perform a well-defined function is easily
understandable. The notion of core design concept recognizes that some
subsystems are more central to the product in that the choice of that
subsystem drives the possibilities for the other subsystems. Clark (1985)
gives the example of the decision to use the gasoline motor to deliver
power as opposed to other possible sources. The choice of using internal
combustion based on gasoline has conditioned the other subsystems in
the car – subsystems to start and fire the engine, the size and configura-
tion of cylinders, the placement of valves and camshafts, and so on. If
the choice had been made early on to use electric motors, key subsys-
tems in cars would have been defined around the chemistry of batteries
and other parameters of electric motors (Clark 1985, p. 243). We develop
this key notion of coreness in Section 2.2.
The hierarchical structure of a product can be quite complex. An
example of such a complex structure is provided by Christensen and
Rosenbloom (1995) for the management of the information system of
a large firm. The system involves a very complex hierarchy of nested
subsystems. This example is represented in Figure 2.1.
Figure 2.1 shows clearly the four levels of hierarchy: (1) the overall
information system which includes the configuration of terminals,
printers, and air-conditioned rooms, (2) the mainframe computer,
(3) the disk drives, and (4) the disks themselves. The disk is an element
of the disk drive that is integrated in the mainframe computer within
the overall information system.
These subsystems are integrated through linkage mechanisms. The
linkages between the subsystems define the product design architecture.
A good example is also provided by Christensen and Rosenbloom (1995)
who compare the front-wheel drive and the rear-wheel drive technolo-
gies in cars. In both cases, this is a component or subsystem of the car
which interacts with the other subsystems. The subsystems themselves,
whether front-wheel or rear-wheel drive, are very similar. However,
Assessing Innovations from the Technology Perspective 23

Management Information System

Design of MIS Physical


Reports For Environment
Management Mainframe Computer
Cooling Random Access
System Memory
Line Disk Drive
Read-Write Configuration
Printers
Motor Heads of Remote
Central Read-Only Terminals
Processing Disk Physical Memory
Unit Size
Actuator
Magnetic & Weight
Platter Material Media Constraints
Adhesives
Card Spindle
Readers Cabling Servo Design Interface Careers,
System Platter Lapping Application Technology Training, &
Techniques Process Unique
Protective Language of
Recording Disks
Codes Abrasives EDP Staff
Terminals Disk Drive
Power
Proprietary Cache
Dissipation Service &
Software IC Repairs
Controllers Packaging Requirements
Technology
Back-up Operating
Tape Storage System
Data
Commercially Collection
Purchased Software Systems
Network
Design

Figure 2.1 An example of a complex hierarchy of nested subsystems


Source: Adapted from Christensen and Rosenbloom (1995).

Christensen and Rosenbloom (1995) indicate that the way each inter-
acts with the other subsystems of the car is very different.
Therefore, a product is defined in terms of its subsystems and in
terms of the linkages between these subsystems (the product design
architecture).
The importance of the definition of the unit of analysis of an innova-
tion is clearly established in Tushman and Murmann (1998) as being at
the subsystem level. Even dominant designs are conceived at the sub-
system level. The concept of dominant design introduced by Abernathy
(1978) and Abernathy and Utterback (1978) finds its critical role as a
key transition point between eras of ferment and eras of incremental
change. Such a transition point determines technology cycles. These
authors provide many examples that correspond to either core or
peripheral subsystems but all at the subsystem level.
The implications of considering these differences will be analyzed not
only in terms of innovation and firm performance but also in terms
of the organizational changes that these differences imply. In order
to assess innovations, management must therefore have a thorough
24 Making Innovation Last

understanding of the technologies involved in the firm’s products and


services in terms of the subunits that form these products or services.
Once these subunits are clearly identified, it is critical to understand
their roles, as each can be a source of innovation with different organi-
zational and performance implications. In the following sections, we
analyze the role of the locus of a subsystem in a product or service,
the various types of innovations in terms of these subunits, and the
importance of considering the characteristics of the innovations at the
subunit level.

2.2 Locus of innovation: core versus


peripheral innovations

We briefly introduced the notion of a core subunit when explaining that


the product or service is made up of subsystems placed in a hierarchy.
We now investigate more thoroughly this notion of coreness of a subsys-
tem. We start with a definition that we then discuss and analyze.
Definition: Core subsystems are those that are tightly coupled to other
subsystems. In contrast, peripheral subsystems are weakly coupled to
other subsystems. Consequently, a core innovation is an innovation
concerning a core subsystem and a peripheral innovation is an innova-
tion that affects a peripheral subsystem of a product or service.
Core subsystems are (1) more tightly connected to or more interde-
pendent of other subsystems and/or (2) associated with strategic per-
formance parameters (Ulrich and Eppinger 1995). This relates to the
characteristic discussed by Clark (1985) and presented above where the
choice of a core subsystem determines the other subsystems that will be
part of the product or service. It follows that core subsystems are strate-
gic bottlenecks (Hughes 1983, Clark 1985). Moreover, shifts in core sub-
systems will have cascading effects throughout the product or service.
If a subsystem is not core, it is part of the peripheral subsystems that
make up the product or service. These peripheral subsystems are weakly
coupled to or less interdependent of other subsystems, and/or are not
associated with strategic performance parameters. Shifts in peripheral
subsystems will have minimal system-wide effects.
Below is a list of examples of core subsystems:

1. Engine in cars (Abernathy and Clark 1985): the choice of fuel com-
bustion engine determined some of the other subsystems, as noted
above.
2. Source of energy in airplanes (Constant 1980): the success of jet
engines drove sweeping changes in other airplane subsystems.
Assessing Innovations from the Technology Perspective 25

3. Gears and chains in bicycles: technical change in gears and chains


has triggered major changes in other bicycle subsystems (Pinch and
Bijker 1987).
4. Oscillation in watches (Landes 1983): the oscillation subsystem of
watches is tightly coupled to all other subsystems. Changes in this
subsystem trigger changes in all other subsystems.

In contrast, below is a list of examples of peripheral subsystems:

1. The bracelet subsystem in watches: this is weakly connected to


other subsystems. As such, shifts in bracelet technology have minor
impacts on the product as a whole (Landes 1983).
2. The entertainment subsystem in an airplane: although the enter-
tainment system may play a role in passenger satisfaction and even
indirectly in their security, the plane can certainly fly without such a
system.

The importance of identifying the locus of the innovation is critical


to understanding its consequences. A change due to an innovation in a
peripheral subsystem may have little impact on the product or service
because its linkages to the other subsystems are small and may be neg-
ligible. The entertainment subsystem in a passenger airplane is clearly
peripheral and fairly independent of the other subsystems. However,
the change from propeller to jet engines in the propulsion subsystem
was dramatic not only because propulsion is a central subsystem with
a critical impact on the performance of the airplane but also because it
is tightly linked to other subsystems such as the plane’s airframe. With
the introduction of the jet engine, existing airframes had to be modified
because they could not withstand the stresses generated by the power
and speed of the new engines.
This example of the switch from propeller to jet engines illustrates well
the importance of considering two key aspects of a core subsystem: that
this subsystem is (1) more tightly connected to or more interdependent
with other subsystems and/or (2) associated with strategic performance
parameters. The jet engine was a core innovation in both respects.
Innovations in peripheral subsystems appear to be paradoxically asso-
ciated with increased time to market (Gatignon et al. 2002). This is pos-
sibly due to the fact that innovations in peripheral subsystems are not
seen as strategic, and consequently, they do not receive the resources
and managerial attention needed to decrease time to market.
One additional difficulty to consider is that what is a central or
core subsystem today may no longer be a critical component of the
26 Making Innovation Last

performance of a product. This is often due to the replacement of a sub-


system by a new one. For example, springs that were at one time central
to the functioning of a watch as its source of energy were replaced by
the battery and the quartz movement technology and then became a
more peripheral subsystem (Tushman and Murmann 1998). Therefore,
the subsystem where an innovation is made may be a core subsystem,
but it may not remain so once the innovation is introduced. In spite of
these complexities, the two aspects that make a subsystem a core sub-
system (i.e., tight connectedness and the strategic significance of the
performance of the product or service) are critical aspects that demand
management’s attention, since changes in these core subsystems can
have major effects on the organization, the demand for the product or
service, and/or the competitive environment.

2.3 Innovation types: modular, generational,


and architectural

As noted in the introduction of this chapter, innovations can differ in


type according to whether the changes occur in the way the subsystems
are modified. Three types of innovations have been identified as hav-
ing different properties and consequences: modular, generational, and
architectural. We first define each type and then we discuss each one.
Definitions: A modular innovation changes at least one subsystem but
does not change the number of subsystems or the linkage mechanisms.
A generational innovation adds at least one new subsystem, subtracts
at least one subsystem, or alters the composition of subsystems. An
architectural innovation involves changes in linkages between existing
subsystems.

2.3.1 Modular innovations


A modular innovation changes at least one subsystem but does not
change the number of subsystems or the linkage mechanisms. A clear
example of modular innovation can be found in the computer hard
disk industry. Around the 1980s, most hard disk manufacturers sub-
stituted the ferrite read/write heads with thin metalheads (Abernathy
and Clark 1985). Another typical example of highly modular products
is word processors. These products are typically composed of the follow-
ing subunits: file access functions, editing functions, graphic importing,
and printing functions. They also contain internal system interfaces and
graphical user interfaces (Meyer and Seliger 1998). These components
tend to be standardized across software programs. For example, in the
Assessing Innovations from the Technology Perspective 27

Figure 2.2 User interface of two statistical packages

domain of interactive statistical software, consumers can easily learn a


new system based on their knowledge and experience of other systems
because these new systems are designed with the same components,
which translates into similar user interfaces. Examples include SAS, JMP,
LISREL, and LatentGold. To illustrate, Figure 2.2 shows two typical inter-
faces for specifying models.
In particular, these commonalities form a platform from which
new products can be easily developed and produced (faster and more
cheaply) (Meyer and Seliger 1998). Baldwin and Clark (1997) cite the
example of International Business Machines (IBM) being able to boost
its rate of innovation by having different parts of the organization, or
different companies altogether, working on specialized subunits. One
particular benefit results from having multiple organizations working
on different subunits yet on the same platform. This provides a mul-
tiplicity of experiments in parallel. “For example, a team of disk drive
designers has to obey the overall requirements of a personal computer,
such as data transmission protocols, specifications for the size and shape
of hardware, and standards for interfaces, to be sure that the module will
function within the system as a whole. But otherwise, team members
can design the disk drive in the way they think works best” (Baldwin
and Clark 1997, p. 85).
At this point, it is useful to clarify the distinction between an inno-
vation in a modular product and a peripheral innovation. The two
28 Making Innovation Last

concepts can be confused because in modular designs “changing one


component has little influence on the performance of others or on the
system as a whole” (Fleming and Sorenson 2001, p. 20). This corresponds
to the definition of a peripheral subsystem given earlier. In a modular
product, it is the full set of subunits and their linkages that are considered,
as opposed to the peripheral notion where the subunit is the unit of anal-
ysis. This is why it is useful to talk about modular designs or platforms.
To take advantage of these platforms, it is not sufficient to have a clear
division of the product into subunits. The subunits that constitute the
product architecture must be clearly identified and the functions of each
clearly specified. Less obvious but consistent with the concept of link-
ages, the interfaces between the modules should define precisely how
the modules will interact, including how they will fit together, connect,
and communicate. But in addition, Baldwin and Clark (1997) highlight
the need for standards in order to test “a module’s conformity to the
design rules (can module X function in the system?) and for measuring
one module’s performance relative to another (how good is module X
versus module Y?)” (p. 86).
Schilling (2000) develops the notion of modularity of the system form-
ing the product, that is, the degree to which a system’s components can
be separated and recombined. The tighter the coupling between com-
ponents and the more heterogeneous the inputs, the more modular the
system will be. She uses these definitions to explain why many systems
migrate toward increasing modularity while others follow a path toward
increasing integration.
Systems are said to have a high degree of modularity when their
components can be disaggregated and recombined into new configura-
tions – possibly substituting various new components into the configu-
ration – with little loss of functionality (Langlois and Robertson 1992,
Sanchez 1995).
However, a product or service can be decomposed into separate mod-
ules and yet have a low degree of modularity. This occurs when the
product or service functions better due to some specificity. The degree
to which a system achieves greater functionality by its components
being specific to one another has been termed synergistic specificity.
In this case, the combination of components achieves synergy through
the specificity of individual components to a particular configuration.
Software systems are perfect examples of such synergistic specificity
where modular programming such as with object-oriented program-
ming allows modules to interact without a programmer having to
know the details of the content of each module (Schilling 2000). More
Assessing Innovations from the Technology Perspective 29

specifically, a programmer can call a subroutine such as a matrix inver-


sion subroutine that shares data with the core program – the matrix to
be inverted – without having full knowledge of the code and method
used in the subroutine.
Schilling (2000) raises the question of “when will the ability to pro-
duce multiple configurations increase the system’s fitness?” (p. 317). The
answer to this question in general terms is when there are heterogene-
ous inputs and heterogeneous demands placed upon the system. Again,
a subroutine is a good example because writing a subroutine becomes
more useful as the number of matrix inversions to be performed increases
with new data each time (e.g., in performing a Monte Carlo simula-
tion) and varies in terms of matrix sizes. The balance between the gains
achievable through recombination and the gains achievable through
specificity determines the pressure for or against the decomposition of
the system. These advantages are particularly noticeable for production
strategies. Modular products can be produced by different companies,
each focusing on particular subunits, which may also accelerate the
innovation on specific components. Separate components also lead to a
greater standardization of these components. This tends to reduce risk
in the design of new components. As mentioned above, new products
can be easily introduced. This allows a firm to take advantage of the
product platform to have specialized modules serving the needs of par-
ticular segments (e.g., accounting software for small businesses and for
service businesses). This can serve to position the firm in a market (e.g.,
as an accounting software expert), and this proliferation of products can
also serve to create barriers to entry (Meyer and Seliger 1998). However,
it also favors incremental innovations (Fleming and Sorenson 2001). On
the other hand, integrated (i.e., low modular) products may be more
susceptible to major innovations. At the same time, these are riskier,
not only due to the risks inherent in radical innovations, but simply
because of the interdependencies among components with the conse-
quence that a problem with one component can have implications on
other components. Fleming and Sorenson (2001) illustrate this danger
with the example of the Sony Walkman but even more strikingly with
the ink-jet printer, where it took 100 years and millions of investment
dollars to resolve the interface problems.

2.3.2 Generational innovations


The addition or the subtraction of subunits seems as if it could have
a greater impact than purely modular innovations. Indeed, Rosenkopf
and Tushman (1998) describe the disruptive impact of generational
30 Making Innovation Last

innovation on the flight simulator industry’s community structure.


Also, Sanderson and Uzumeri (1995) document how Sony retained over
a 10-year period product class leadership in the highly contested port-
able stereo industry through sustained generational and architectural
innovations.

2.3.2.1 Generational consolidation


A generational consolidation innovation subtracts at least one subsys-
tem. An example can be found in Sanderson and Uzumeri’s (1995) study
of the development of the Sony Walkman. The initial product consisted
of the existing Pressman, a recording device for journalists, where the
recording function had been removed in order to focus on the playback
function. Table 2.1 lists the items of the scale developed by Gatignon
et al. (2002) to assess this type of innovation.

2.3.2.2 Generational expansion


A generational expansion innovation adds at least one new subsystem.
With the appearance of air conditioning, some of the subsystems used
in room air fans were still applicable, even if no longer core to the prod-
uct. However, new subsystems were added to form the new product. An
example of a subsystem still part of the product would be the control
system. New subsystems were compressors, refrigerants, and tempera-
ture control.
While architectural innovations seem to challenge organizational
capabilities, Gatignon et al. (2002) find that generational innovations
do not. Innovations that make a product more complex by adding sub-
systems are positively associated with perceived commercial success.
This effect is established using the scale proposed by Gatignon et al.
(2002) to assess if an innovation is of the generational expansion type.
Table 2.2 lists the items of this scale.

Table 2.1 Generational consolidation scale

s PRODUCT no longer contains at least one subsystem that it used to contain


before INNOVATION was introduced
s PRODUCT now contains at least one subsystem that combines what used to
be separate subsystems before INNOVATION was introduced
s PRODUCT now contains fewer subsystems than it did before INNOVATION
was introduced

Note: PRODUCT, INNOVATION, and SUBSYSTEM correspond to the specific example described
by the respondent.
Source: Adapted from Gatignon et al. (2002).
Assessing Innovations from the Technology Perspective 31

Table 2.2 Generational expansion scale

s PRODUCT now contains at least one subsystem that it did not contain before
INNOVATION was introduced
s PRODUCT now contains more subsystems than it did before INNOVATION
was introduced

Note: PRODUCT and INNOVATION correspond to the specific example described by the
respondent.
Source: Adapted from Gatignon et al. (2002).

2.3.3 Architectural innovations


Abernathy and Clark (1985) consider whether an innovation modifies
existing linkages among subsystems or if it conserves these linkages. An
architectural innovation involves changes in linkages between exist-
ing subsystems. An example of an architectural innovation is when the
portable fan was introduced, the majority of its components – blade,
motor, control system – remained unchanged from the room ceiling
fan (Henderson and Clark 1990). What changed was the way these parts
were put together through different linkages. “The smaller size and the
co-location of the motor and the blade in the room would focus atten-
tion on new types of interaction between the motor size, the blade
dimensions, and the amount of air that the fan could circulate, while
shrinking the size of the apparatus would probably introduce new inter-
actions between the performance of the blade and the weight of the
housing” (Henderson and Clark 1990, p. 13). Another example is given
by Christensen and Rosenbloom (1995) in the disk-drive industry, when
the disk diameter was reduced from 8 inches to 5.25 inches. “In the
8-inch drive, a 110 volt AC motor was typically positioned in the corner
of the system, and drove the disks by pulleys and a belt. In reducing the
size to 5.25-inches, the motor was changed to a 12 volt DC ‘pancake’
design and positioned beneath the spindle” (p. 251). Although it also
involved an actual change in a given component, this innovation illus-
trates the implications in terms of linkages of simply changing the size
of an existing component.
Organizations get organized around the subsystems of a product.
For example, with room fans, one group would be responsible for the
blade, another group for the motor, and so on. The architectural knowl-
edge is developed in the organization through the formal and informal
communication among these groups. For example, “the fact that those
working on the motor and the fan blade report to the same supervisor
and meet weekly is an embodiment of the organization’s architectural
32 Making Innovation Last

knowledge about the relationship between the motor and the fan blade”
(Henderson and Clark 1990, p. 15). For this reason, knowledge is devel-
oped at the level of the subunits. This has important implications when
contrasting modular with architectural innovations. In modular innova-
tions, new knowledge will be necessary for one or more components.
However, the architectural knowledge remains unchanged since the
linkages remain untouched. The opposite of modular innovation occurs
with an architectural innovation. In this case, while the knowledge of
single components will remain the same (since the subsystems do not
change), the greatest impact of this type of innovation will be on the
linkage of components.
By distinguishing between whether the impact of the innovation is
on the components or the linkages, it is possible to represent the vari-
ous types of innovations. The architectural versus modular distinction
described above corresponds to the diagonal in Figure 2.3 from the bot-
tom right quadrant (for modular innovations) to the top left quadrant
(for architectural innovations). This follows from the fact that in defin-
ing these two types of innovations, we have considered in this section
the two dimensions of linkages versus components as one versus the
other. If we can combine the two, it may be possible to represent differ-
ent characteristics of the innovation.
Indeed, an innovation that has little impact on either the product
or service components or the linkages is likely to be an incremental
innovation (bottom left quadrant in Figure 2.3). On the contrary, an
innovation that has major impact on both the subcomponents and the
linkages is likely to be considered a radical innovation. The representa-
tion in Figure 2.3, however, does not allow us to distinguish between
the innovation type and the characteristic of the innovation. Moreover,
the implications in terms of innovation radicalness may not follow at
all. Henderson and Clark (1990) demonstrate that considering innova-
tions purely in terms of the traditional characteristic of radicalness (i.e.,
radical vs. incremental) can be misleading. They show that architec-
tural innovations that may be subtle, such as a “simple” reconfigura-
tion of subsystems through different linkages, can hide dramatic shifts
in knowledge. This is especially the case when architectural knowledge
(knowledge about how subsystems are integrated) is embedded in the
structure and information-processing procedures of firms. Architectural
innovations destroy the usefulness of a firm’s architectural knowledge
but preserve the usefulness of its knowledge about the product’s com-
ponents. These changes are more difficult to recognize than those that
are apparent with radical innovations. They are also more difficult to
Assessing Innovations from the Technology Perspective 33

IMPACT ON ARCHITECTURAL KNOWLEDGE


Low High
IMPACT ON COMPONENT

High Architectural Innovation Radical Innovation


KNOWLEDGE
Low

Incremental Innovation Modular Innovation

Figure 2.3 Modular and architectural innovations


Source: Adapted from Scocco (2006).

correct. Indeed, the organization then needs to build new architectural


knowledge, which implies new communication filters and strategies
among the groups corresponding to the subsystems. However, these
groups are involved in processes and routines that may be difficult to
alter. Therefore, changes in architectural knowledge require resources
and especially time. Consequently, these innovations can be devastat-
ing for the incumbent firms. Henderson and Clark (1990) illustrate this
in their analysis of the historical development of the photolithographic
alignment equipment industry. This equipment is essential for the man-
ufacturing of solid-state semiconductor devices. When the initial tech-
nology, which used a contact alignment technology, was supplanted
by the proximity technology introduced by Canon, Kasper (the incum-
bent) did not recognize the superiority of the innovation. Although
Kasper had developed some of that technology itself, and even though
the components remained almost unchanged, the relationships among
these components were radically modified. In the proximity technol-
ogy, accuracy and precision were critical factors for good performance
of the product, which was not the case for the contact technology.
Kasper interpreted the initial problems it had in experimenting with
the technology through the lens of its own experience, which was that
of processing error by the users. Similarly, when Canon introduced its
proximity equipment, Kasper failed to recognize in what way Canon’s
product was superior to its own contact technology product. This is a
perfect example of core rigidities of an organization that has developed
competencies in a particular domain (Leonard-Barton 1992).
34 Making Innovation Last

The reasons for this problem are further illustrated by the introduction
of the second generation of stepper technology equipment by Nikon
(a stepper is a device that operates like a slide projector or a photographic
enlarger), which replaced the first-generation stepper equipment man-
ufactured by the GCA Corporation of North Andover, Massachusetts.
GCA was organized with engineers specializing in each component of
the system. This organizational structure is well adapted for gaining
incremental knowledge on the technologies involved for each subsys-
tem. However, interdepartmental communication is then limited to the
linkages between the subsystems with no one specializing in thinking
about different linkages. Consequently, this organization limits creativ-
ity in developing architectural knowledge. GCA’s communication across
groups of engineers was then limited to the first-generation linkages.
However, when Nikon introduced the second-generation stepper tech-
nology, which involved new architectural knowledge, the organization
at GCA was not responsive to understanding this new architectural
knowledge (Henderson and Clark 1990).
Therefore, when assessing innovations from a technological point of
view, we prefer to consider these notions separately, so that we avoid
confusing them with the various dimensions to be considered when
attempting to understand what makes an innovation. Once we have
defined each of these dimensions of innovation, we will consider the
overlaps and combinations that may exist within any single innova-
tion. Nevertheless, these examples illustrate the fact that architectural
innovations can challenge organizational capabilities. Henderson and
Clark (1990) show that, even if both architectural and generational
innovations can be simple from a technical point of view, they are often
associated with devastating organizational effects. In fact, every archi-
tectural and generational innovation they studied in the photolithogra-
phy industry was associated with the leading firm being replaced. Such
innovations are also often associated with longer delays and increased
time to introduction (Gatignon et al. 2002). Furthermore, architectural
innovations are not associated with greater perceived commercial suc-
cess (Gatignon et al. 2002).
Corresponding to the definitions and discussion above, architec-
tural innovations can be assessed using the items of the scale found in
Gatignon et al. (2002) and listed in Table 2.3.

2.4 Innovation characteristics

The characteristics of innovations are assessed in terms of the degree


to which they present a particular attribute. Three major characteristics
Assessing Innovations from the Technology Perspective 35

Table 2.3 Architectural innovation scale

s INNOVATION led to significant changes in the linkages between SUBSYSTEM


and at least one subsystem in PRODUCT other than SUBSYSTEM
s INNOVATION led to significant changes in the way SUBSYSTEM interacts
with other subsystems
s INNOVATION led to tighter integration between SUBSYSTEM and at least one
other subsystem
s INNOVATION made the integration of SUBSYSTEM with at least one other
subsystem a more important factor influencing the overall performance of
product

Note: PRODUCT, INNOVATION, and SUBSYSTEM correspond to the specific example described
by the respondent.
Source: Adapted from Gatignon et al. (2002).

have been identified in the literature: radicalness (i.e., radical vs. incre-
mental), competence destroying (vs. enhancing), and requirements of
competence acquisition from outside the firm.

2.4.1 Incremental versus radical innovations


Definition: Incremental innovations are those that improve price/
performance advance at a rate consistent with the existing technical
trajectory. Radical innovations advance the price/performance frontier
by much more than the existing rate of progress.
Incremental innovation involves refining, improving, and exploiting
an existing technical trajectory (Hollander 1965, Myers and Marquis
1969). This does not mean that it is static but rather that changes follow
a regular, expected tendency. At the other end of the spectrum, a radi-
cal innovation disrupts an existing technological trajectory (Dosi 1982).
Henderson (1993) takes a similar perspective but proposes a definition
more tightly linked to the economic concepts of price elasticity and sub-
stitutability: “[A]n innovation is ‘incremental’ if the older technology
remains an important substitute and thus if demand for the innovation
increases with the price of the older technology” (pp. 258–259). If the
innovation replaces the existing technology completely, each new gen-
eration should command a price premium over the previous generation.
Any innovation that satisfies an existing need, as opposed to satisfying
an as yet unidentified need, can be considered as a substitute for the
existing products and services. Therefore, this definition is based on the
degree of substitutability between the old and the new product or ser-
vice. The price elasticity is an expression of that substitutability.
However, the degree of substitutability is not solely a reflection of the
technology in the new product or service. It also reflects the benefits
36 Making Innovation Last

from the customer point of view, which are discussed in the next chap-
ter. Therefore, the above definition of the concept is not simply delineat-
ing the technological aspects it is intended to reflect.
Gatignon et al. (2002) point out that “while the radical/incremental
dimension is well established, the unit of analysis to which it has
been applied has not been clear, nor have measures been well specified”
(p. 1107). They argue that the proper unit of analysis to analyze an
innovation is at the subunit level because of the hierarchical structure
discussed above. However, most work has analyzed the effects of incre-
mental/radical innovation at the product level (Ehrnberg 1995). “For
example, Myers and Marquis’ (1969) pioneering work on innovation
characteristics defined incremental and radical at the product level
(e.g., printers). More recently, Green et al. (1995) developed multiple
dimensions for radical/incremental but apply these dimensions to prod-
uct characteristics. Similarly, with few exceptions (e.g., Rosenkopf and
Nerkar 1999), patent data have been extensively used to assess the degree
of innovation at the product or invention level of analysis (e.g., Podolny
and Stuart 1995, Fleming 2001)” (Gatignon et al. 2002, p. 1107).
The empirical literature is consistent in demonstrating that radical
innovations are riskier (with corresponding returns) and have more pro-
found organizational effects than incremental innovation (e.g., Foster
1986, Cooper and Smith 1992, Damanpour 1996). The results of the
study by Gatignon et al. (2002) differ from this general assessment, per-
haps because of the difference in the unit of analysis. The extent to
which an innovation is radical has no significant impact on speed of
introduction, and radical innovations are perceived as significantly more
successful than incremental innovations. As opposed to architectural
innovations, radical innovations seem not to impose organizational
challenges even though they have important performance impacts (see
also Christensen 1998). Although their notion is not supported by much
of the literature (e.g., Green et al. 1995), Gatignon et al. (2002) also
find that radical innovations are positively associated with commercial
success. It should be pointed out that this is a unique study in that the
effect of each dimension of innovation is not confounded with the oth-
ers due to the simultaneous assessment, and therefore the effects of all
the other dimensions are controlled for. For example, this positive effect
of radicalness on commercial success is assessed after controlling for the
innovation being on a core versus a peripheral subunit.
The scale proposed by Gatignon et al. (2002) to measure radicalness
is defined at the subunit level, consistent with their conceptualization.
However, the items mix pure technological aspects with the market
Assessing Innovations from the Technology Perspective 37

Table 2.4 Radicalness of innovation scale

s INNOVATION is a minor improvement over the previous technology (reverse


coded)
s INNOVATION was a breakthrough innovation
s INNOVATION led to products that were difficult to replace with substitute
products using older technology
s INNOVATION represents a major technological advance in SUBSYSTEM

Note: INNOVATION and SUBSYSTEM correspond to the specific example described by the
respondent.
Source: Adapted from Gatignon et al. (2002).

notion of substitutability to correspond to the definitions in the litera-


ture (see Table 2.4)

2.4.2 Competence-enhancing versus


competence-destroying innovations
In order to explain the evolution of an industry, Abernathy and Clark
(1985) consider whether the technology makes existing competencies
obsolete or if it builds on existing competencies.
Definition: Competence-enhancing innovation builds upon and
reinforces existing competencies, skills, and know-how. Competence-
destroying innovation obsolesces and overturns existing competencies,
skills, and know-how.
While still based on the technological aspects of the innovation, this
is a very different perspective in that it considers the competencies that
are required from the organization in order to succeed with the innova-
tion. This distinction is particularly significant because two firms, each
with its own organizational competencies, can see the same innovation
differently. Any given innovation can therefore be competence enhanc-
ing to one firm but competence destroying to another firm (Abernathy
and Clark 1985).
Tushman and Anderson (1986) also focus on competence-enhancing
versus competence-destroying innovations. They analyze the impact
of such an innovation characteristic on the competitive environment.
They consider how it influences patterns of entries and exits, uncer-
tainty, and environmental munificence. Their investigations in the
cement, airlines, and minicomputers industries appear to corroborate
their theory.
Tripsas and Gavetti (2000) analyze Polaroid’s response to digital imag-
ing and conclude that, in multidivisional firms, competence enhancing/
38 Making Innovation Last

destroying must be assessed at the business unit level of analysis. This


is consistent with the scale developed by Gatignon et al. (2002), shown
in Table 2.5.
We have discussed whether innovations enhance or destroy a firm’s
competencies as an important characteristic of innovations. However,
this is not independent of the notion of complementary of assets (Tripsas
1997). Complementary assets are factors such as specialized manufac-
turing capability, access to distribution channels, service networks, and
complementary technologies. They can be of three kinds: generic, spe-
cialized, and co-specialized. Generic assets have multiple applications
and can be easily contracted out. Specialized and co-specialized assets
are useful only in the context of a given innovation (Teece 1986).
Starting from the observation that not all incumbent firms suffer dra-
matically and are displaced by new entrants, Tripsas (1997) considers
the extent to which complementary assets possessed by an incumbent –
and perhaps not by the new entrant with the competence-destroying
innovation – provide a buffer. An in-depth analysis of the typesetter
industry over an extensive period (from 1886 to 1990) indicates that in
that industry, the role of specialized complementary assets has been crit-
ical in buffering the incumbents. That industry history is characterized
by four radical, competence-destroying innovations. The first nonman-
ual typesetting machine was introduced in 1886; it used a “hot metal”
technology where lead was melted in a mold containing the characters
properly entered via a typewriter-like machine to form a metal printing
plate. In 1949, the analog phototypesetting technology was introduced

Table 2.5 Competence-destroying/enhancing scale

s INNOVATION built a great deal on BUSINESS UNIT’S prior technological skills


s INNOVATION built heavily on BUSINESS UNIT’S existing experience base
s INNOVATION rendered BUSINESS UNIT’S experience base obsolete (reverse
coded)
s INNOVATION built heavily on BUSINESS UNIT’S existing technological
knowledge
s INNOVATION rendered obsolete the expertise that was required to master the
older technology (reverse coded)
s Mastery of the old technology did not help BUSINESS UNIT master
INNOVATION (reverse coded)

Note: INNOVATION and BUSINESS UNIT correspond to the specific example described by the
respondent.
Source: Adapted from Gatignon et al. (2002).
Assessing Innovations from the Technology Perspective 39

where the metal mold was replaced by a photographic image that was
then used to create a printing plate. The third technology appeared in
1965 and was the first digital cathode-ray tube (CRT) phototypesetting.
A more recent technology is laser imagesetting introduced in 1976.
Three complementary assets affect that industry: specialized manu-
facturing capability, a sales and service network, and a font library. First,
when switching from “hot metal” technology to analog phototypeset-
ting, the specialized machines (a market that by 1916 was dominated
by three firms) became obsolete, and the new manufacturing technolo-
gies required electronic products available in other industries so that
some manufacturing could even be outsourced. Although the process
changed with the introduction of the last two technologies, manufac-
turing remained a generic complementary asset.
The second complementary asset concerns a strong sales and service
network to serve the major customer segments that were newspapers and
magazines, commercial printers, and high-end typographers. However,
the new technology was much less dangerous and more reliable so that
the importance of servicing was less critical, and even more importantly,
this created the emergence of a new segment of “in-house” printing
shops. The incumbents had no channel to this new segment, which
consisted of numerous, diversified companies, and no experience with
their needs. Therefore, the new technologies decreased considerably the
value of the complementary assets of the incumbents. The last two tech-
nologies reinforced the strength of that new segment but did not change
the marketing of the products (the existing segments’ needs remained
the same with the same buying criteria and could not be served by a new
sales distribution approach).
The third complementary asset is a type specific to this industry: a
proprietary font library. The availability of a variety of fonts is an impor-
tant attribute for most of the segments of customers (somewhat less for
newspapers and magazines, which do not change their style of font in
order to preserve a particular image of their publication). For the origi-
nal “hot metal” technology, the development of these fonts required
a heavy investment and took time to develop. Even though the three
last technologies that were introduced after the “hot metal” technol-
ogy did not rely on the letter molds, the font designs that had been
created were proprietary and established firms did not want to license
their designs. The process of creating new typefaces remained difficult,
and even though fonts cannot be patented, they all have trademarks.
Therefore, this library of fonts has remained a strong complementary
asset throughout these various generations of technologies.
40 Making Innovation Last

The key to a firm’s successful innovation, therefore, rests on the exist-


ence of specialized or co-specialized complementary assets that cannot
be imitated or acquired by competitors. Marketing assets such as sales
distribution channels or customer service systems are typical examples
of such assets that enable a firm to take full advantage of an innova-
tion that, otherwise, could not be appropriated by its developer. Access
to distribution channels and exclusive supplier relationships are typical
barriers to entry.
Competence-enhancing innovations are more likely to be associated
with perceived commercial success (Gatignon et al. 2002). This is not
surprising as a firm that would rate an innovation as destroying their
own competencies would have to consider the downside of adopting
such innovations, even if these innovations were successful on the
market.

2.4.3 New competence acquisition innovations


One of the reasons incumbents fail is that they are unable to acquire
the capabilities required to compete within a new technological para-
digm (Dosi 1982) that involves a competence-destroying innovation
(Tushman and Anderson 1986). An example provided by Christensen
and Rosenbloom (1995) is when DuPont introduced radically different
technologies in the apparel industry: cotton spinners could not acquire
the financial, human, and technical resources required to compete in
the synthetic fiber market.
Related to the notion of complementary assets discussed in Tripsas
(1997), Christensen and Rosenbloom (1995) introduce the concept of
value network. Many firms only put together subsystems that can be
acquired in the market from firms focusing on the manufacturing of
these particular products. The subsystems and the network of manu-
facturers from which they can be acquired constitute a nested commer-
cial system which Christensen and Rosenbloom call a “value network.”
More specifically, a value network is defined as the context within which
the firm identifies and responds to customers’ needs, procures inputs
and reacts to competitors. Christensen and Rosenbloom (1995) consider
the advantages of an innovation in different emerging value networks,
in contrast to the established trajectory of technological progress. This
is an important consideration because a firm’s perceptions of the eco-
nomic value of an innovation are driven by the past competitive strat-
egy of the firm, especially its choice of markets to serve.
It is interesting to contrast several changes in technology in the disk-
drive industry, each of these changes corresponding to changes in the
Assessing Innovations from the Technology Perspective 41

reduction in size of the disk drives. Switching from 8-inch drives to


5.25-inch drives opened the door to new segments of consumers. The
8-inch drives were geared toward the minicomputer manufacturers.
However, Seagate and the other firms that introduced 5.25-inch drives
between 1980 and 1983 developed new applications for a new segment
of computers: desktop personal computers. The incumbents did not
lead into this market because they were focused solely on satisfying
current needs as perceived by their current customers. In contrast, the
switch from 3.5-inch to 2.5-inch disks was following the performance
trajectory of the current technology for the same value network of cus-
tomers. The laptop and notebook manufacturers – Compaq, Sharp,
Toshiba, and Zenith – had essentially the same customers. Therefore,
the leading firm in the 3.5-inch drives, Conner Peripherals, managed
to also lead in the 2.5-inch technology, even though it was not the first
to innovate.
This dimension of innovation complements research that has found
great value in the external acquisition of new competencies (e.g., Cohen
and Levinthal 1990, Tripsas 1997, Rothaermel 2001). Gatignon et al.
(2002) propose the scale shown in Table 2.6 to measure this construct of
new competence acquisition.

2.5 Product versus process innovations

The decomposition of products and services into hierarchical subunits


is relevant not only for product and service innovations but also for
process innovations. The Oslo manual (OECD/Eurostat 2005) defines

Table 2.6 New competence acquisition scale

s INNOVATION involved fundamentally new concepts or principles for


BUSINESS UNIT
s INNOVATION required new skills which BUSINESS UNIT did not possess
s INNOVATION required BUSINESS UNIT to develop many new skills
s INNOVATION required BUSINESS UNIT to learn from completely new or
different knowledge bases
s INNOVATION required BUSINESS UNIT to adopt different methods and
procedures
s INNOVATION required BUSINESS UNIT to carry out a great deal of retraining

Note: INNOVATION and BUSINESS UNIT correspond to the specific example described by the
respondent.
Source: Adapted from Gatignon et al. (2002).
42 Making Innovation Last

process innovations as “the implementation of a new or significantly


improved production or delivery method. This includes significant
changes in techniques, equipment and/or software” (p. 49). Examples
of both production and delivery method innovations are provided in
Table 2.7.
These process innovations occur at the subunit or at the system level
(Tushman and Murmann 1998). However, this distinction is independ-
ent of other dimensions and characteristics of innovations. Process
innovations can be either incremental or radical and they can be com-
petence destroying or competence enhancing. Tushman and Anderson
(1986) give examples of innovations that fall into any of the cells deter-
mined by these classification schemes (see Table 2.8).
The most important distinction between product and process inno-
vations concerns the fact that an industry develops a succession of
innovations of both types following cycles. Abernathy and Utterback
(1978) have pioneered the theory of the succession of cycles delimited
by the definition of an industry standard or dominant design. Tushman

Table 2.7 Examples of process innovations

Production
s Installation of new or improved manufacturing technology, such as
automation equipment or real-time sensors that can adjust processes
s New equipment required for new or improved products
s Laser cutting tools
s Automated packaging
s Computer-assisted product development
s Digitization of printing processes
s Computerized equipment for quality control of production
s Improved testing equipment for monitoring production
Delivery and operations
s Portable scanners/computers for registering goods and inventory
s Introduction of bar coding or passive radio-frequency identification (RFID)
chips to track materials through the supply chain
s GPS tracking systems for transport equipment
s Introduction of software to identify optimal delivery routes
s New or improved software or routines for purchasing, accounting, or
maintenance systems
s Introduction of electronic clearing systems
s Introduction of automated voice-response system
s Introduction of electronic ticketing system
s New software tools designed to improve supply flows
s New or significantly improved computer networks

Source: Adapted from OECD/Eurostat (2005).


Assessing Innovations from the Technology Perspective 43

Table 2.8 Examples of process innovations by radicalness and competence-


destroying characteristics

Competence destroying Competence enhancing

Process substitution: Major process improvements:


Natural → mechanical ice Edison kiln
Natural → industrial gems Resistive metal deposition
(semiconductors)
Open hearth → basic oxygen furnace Gob feeder (glass containers)
Individual water → planar process Catalytic cracking → catalytic
reforming
Continuous grinding → float glass
Thermal cracking → catalytic cracking Incremental Process Improvements:
Vertical → rotary kiln Learning by doing: numerous
improvements
Blown → drawn window glass

Source: Adapted from Tushman and Anderson (1986).

and O’Reilly (1996) adapt this theory, as represented graphically in


Figure 2.4.
The initial period corresponds to a period of intense product innova-
tions that develop the market through the new benefits brought by the
products or services. But with these innovations comes more intense
competition, in part fighting for the industry standard. This is especially
critical in cases of network externalities where the utility of the innova-
tion is a function of the number of users of the technology. The war of
the Video Home System (VHS) versus Betamax standards illustrates that
period until one design dominates and takes over the market. Then a
second period starts where the competition drives each firm to increase
sales (and production) volumes. This fight for volume as well as stand-
ardization and diffusion to a more price-sensitive mass-market forces
firms to lower their costs. In this second period, innovations tend to
be process innovations intended to reduce production costs to lower
prices to consumers and to maintain the margins required to reinvest
in production and new product development. The barriers to entry
in the first period come from the first entrant’s know-how and posi-
tion in the market, and firm size plays a minor role (Nelson 1995).
However, in the second period, the need to compete on the basis of
volume and the increased investments due to competition create barri-
ers to new entrants and even lead to firms exiting the market. The num-
ber of (process) innovations then decreases in this period of industry
shakeout (Tushman and Murmann 1998). The cycle is interrupted by
44 Making Innovation Last

Dominant Substitution New Dominant


Design Event Design
Rate of Innovation

Product Process Product Process


Innovation Innovation Innovation Innovation

Time

Figure 2.4 Cycles of product and process innovations punctuated by dominant


designs
Source: Adapted from Tushman and O’Reilly (1996).

another cycle corresponding to a sequence of product innovations dur-


ing a period of ferment, followed by another period of process innova-
tions (Tushman and Murmann 1998).
These periods of ferment followed by periods of incremental process
innovations correspond, therefore, to very different bases of competi-
tion to which organizations must adapt. It is then critical that a firm
understands where in the cycle they are. Additional insights into how
a firm can prepare itself to meet the challenges of changes in dominant
design paradigms are explored in Chapters 4 and 5, which deal with a
firm’s strategic orientation and how it develops the capabilities it needs
to succeed.
The cycle theory of Abernathy and Utterback finds support in a large
documentation across many industries (Abernathy 1978, Abernathy and
Utterback 1978, Utterback 1994). Nevertheless, in addition to the dif-
ficulty management has in identifying ex ante the transition period,
the tendency for either product or process innovations to develop in
each cycle must be tempered by another phenomenon that occurs
simultaneously: as complex products and services tend to be modular,
this modularization leads to less vertical integration (Williamson 1985),
which leads to the specialization of vertically disintegrated firms. This
Assessing Innovations from the Technology Perspective 45

specialization in turn leads to the development of specific know-how


that makes it more likely that a firm will discover new products at the
subunit level or at the “modular cluster” level (Baldwin, Hienerth and
von Hippel 2006). Therefore, each cycle is not clearly identified by peri-
ods of purely product innovations and periods of purely process innova-
tions, but each cycle will contain a mix of both types of innovations.
A final point needs to be recognized concerning the origin of process
and product innovations. While the competitive pressures described
above create incentives for firms within an industry to innovate based
either on benefits or on costs depending on the cycle, the motivations
so far have been within the dynamics of an industry and its market(s).
In fact, innovations often cross industries. Cooper and Smith (1992)
point out that process innovations can originate in other industries.
von Hippel (1986) and Urban and von Hippel (1988) describe the role
played in particular by lead users in the discovery of product innova-
tions that are designed to facilitate the processes used for producing the
products in their industry. This means that management must watch
out for sources of innovations outside of its own industry and especially
in industries that use processes that may be relevant to the firm’s own
markets.

2.6 The interrelated effects of the technological


dimensions of innovation

Even though we have defined each dimension of innovations in


turn and even if these dimensions correspond to different constructs
(Gatignon et al. 2002), we have referred to other aspects as we went
along because these dimensions are not totally independent and they
have different effects depending on how they combine with each other.
We now review some of the better-understood interactions among these
innovation dimensions that have been discussed in the literature.

2.6.1 Economic and organizational radicalness


Henderson (1993) combines the notion of radicalness in the economic
sense and radicalness in the organizational sense. In economic terms,
an incremental innovation is such that the existing technology remains
a substitute while a radical innovation commands a price premium. In
organization terms, a radical innovation requires new resources that
incumbent firms either do not have or are less efficient in acquiring
than newcomers; the existing knowledge is made obsolete. Henderson
(1993) integrates the two dimensions by considering the net benefit
from investing in research to be the product of the probability of success
46 Making Innovation Last

and the discounted net benefit of introducing a successful product. She


assimilates the traditional neoclassical economic assumption of having
the probability of success equal for all firms (incumbents or new) and
the only factor, then, that explains who will develop these innovations
depends on the net benefits each type of firm gets. On the other hand,
the implicit assumption of organizational work boils down to having
the net benefit constant across firms, and, consequently, the profitability
depends only on the probability of success, which may vary according
to whether the firm is an incumbent or a newcomer. Henderson then
analyzes a number of innovations in the photolithographic alignment
equipment industry in the period 1960–1985 to verify the relevance of
considering these two factors simultaneously. The data show that estab-
lished firms invested more than entrants in incremental innovation and
that incumbents seeking to exploit radical innovation were significantly
less productive than entrants.
In addition, Gatignon et al. (2002) provide evidence of several other
interactions among innovation dimensions. They are able to make
inferences about these interacting dimensions because they measure
specifically each dimension of innovation, as discussed in this chapter,
at the same unit of analysis (subunit) within the same study. Although
the measures are somewhat correlated, the tests of discriminant validity
indicate that different aspects of these innovations are reflected by these
dimensions. These measurements make it possible, therefore, to exam-
ine the potential interactions on several key outcome variables.

2.6.2 Architectural and competence-enhancing/destroying


innovations
Abernathy and Clark (1985) combine the dimension discussed earlier of
whether or not the innovation changes the linkages among the subunits
with the impact on the competencies. Based on these two dimensions,
the authors identify four groups of innovations: architectural, revolu-
tionary, niche creation, and regular. They then consider the implica-
tions that each of these types of innovations has on the competitive
evolution of the US automobile industry.
As expected, architectural innovations are associated with increased
time to introduction. However, this effect is accentuated for innovations
that build on existing competencies. Such architectural innovations may
be technologically quite simple, yet they can challenge organizational
linking capabilities. Architectural innovations that are also associated
with competence-destroying change tend to be executed more rapidly
than those that are associated with competence-enhancing change. It
Assessing Innovations from the Technology Perspective 47

may be that competence-destroying technical change triggers organiza-


tional changes that facilitate dealing with both competence and organi-
zational linkage issues.

2.6.3 Peripheral and competence-enhancing innovations


We noted in Section 2.2 that innovations in peripheral subsystems are
paradoxically associated with increased time to market. This effect is
accentuated when the innovation builds on existing competencies and/
or when it involves acquiring new competencies. This reinforces the
notion that innovation in peripheral subsystems may not be seen as
strategic and thus these subsystems are starved for resources and mana-
gerial attention. If so, it may be important to contract out innovation
in peripheral subsystems and focus scarce resources on core subsystems
and on the organizational challenges of architectural innovation.

2.6.4 Innovation radicalness and competence destroying


Gatignon et al. (2002) find that the positive impact of radical innova-
tion on perceived commercial success (see Section 2.4.1) is accentuated
for innovations that are also associated with competence-destroying
technical change. The market appears to put a premium on innova-
tions that are both radical and associated with competence-destroying
change. While competence-destroying change in core subsystems may
be difficult to execute, if firms can manage to take advantage of tech-
nological change that may be either competence enhancing or compe-
tence destroying, they may experience significant positive impacts on
commercial success.

2.6.5 Competence enhancing and new


competence acquisition
Even as new competence acquisition and competence enhancing/
destroying are inversely related, building on and acquiring new com-
petencies have distinct impacts on innovation outcomes. The most suc-
cessful innovations are those that both build on extant competencies
and involve the acquisition of new competencies. This means that firms
that innovate most successfully demonstrate exploitation of existing
capabilities as well as exploration of new capabilities from outside the
firm (Cohen and Levinthal 1990, Rothaermel 2001). Further, for innova-
tions involving core subsystems, it appears that it is easier to import new
competencies from external domains than it is to initiate competence-
destroying change within the firm. Organizational inertia seems to retard
the development of innovations that destroy existing competencies more
48 Making Innovation Last

than it retards the acquisition of new competencies from outside the


firm. If so, future research could explore the managerial and organiza-
tional challenges in building capabilities that can both build on existing
competencies and acquire fundamentally new ones (Tripsas and Gavetti
2000, Benner and Tushman 2003, Rothaermel 2001).
In this chapter, we have described an innovation systematically on the
technological dimension. This is not to imply that we should ignore the
link to the innovation’s target market (Christensen 1998). In Chapter 3,
we explore this issue of target market in terms of whether or not the
market is new to the firm, and then we discuss how to assess an innova-
tion from the market point of view.

Note
1 This chapter reflects on and builds upon Gatignon et al. (2002) and Gatignon
(2011).

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3
Assessing Innovations
from the Market Point of View

In the previous chapter, we discussed the nature of innovation and its


characteristics from the technological point of view. Now we consider
the perspective of the market, and especially how the innovation is
perceived by its customers. Several theories that have been developed
around the notion of the perceptions of an innovation by consumers can
be useful to analyze innovations from the market point of view. These
perceptions can then explain behavior, especially adoption. In particu-
lar, three different behavioral models have been compared: the theory
of reasoned action (TRA) (Fishbein and Ajzen 1975, Ajzen and Fishbein
1980), innovation diffusion theory (IDT; Rogers 1962), and the technol-
ogy adoption model (TAM; Davis 1989). Davis, Bagozzi and Warshaw
(1989) compare the TAM and TRA models conceptually and empirically.
The most general model that applies to any behavior is the TRA, which
has received much attention in the marketing literature over the last
four decades. Behavioral intentions and consequently behaviors toward
an object are the result of attitudes toward this object and of subjective
norms. The attitude component is itself made up of the composite of
beliefs about the consequences of performing the behavior. These beliefs
are weighted according to the evaluation (good–bad) of these conse-
quences. The belief components (usually six to nine are found to be
used by individuals) are specific to each behavior or object and must be
determined case by case. As we discuss in Chapter 12, TAM is a simpli-
fied version of the TRA model applied to the use of information tech-
nologies which has been used to predict acceptance of many different
technological applications. It identifies two beliefs that are thought to
be critical for this particular type of behavior: perceived usefulness of
the technology and its perceived ease of use. These two beliefs corre-
spond to attributes of an innovation. However, they are not the only

53
54 Making Innovation Last

such attributes. In fact, these two beliefs are encompassed within the
previously established theory on diffusion of innovations (Rogers 1962,
1983, 1995). Therefore, in this chapter, while we consider the particu-
larities of adopting new technologies, our focus is on the full spectrum
of characteristics of innovations identified especially in the theories of
diffusion of innovations.

3.1 The consumer’s perception of innovation

Innovativeness in the mind of the consumer can be seen as a percep-


tion by that consumer of a particular object or innovation. It can also
be seen as a trait of the consumers themselves. We discuss each of these
two perspectives in turn.

3.1.1 Customer’s perception of product or service newness


Heany (1983) proposes a classification of product and service innova-
tion along an innovation spectrum. In the increasing order of newness,
one can distinguish among six levels:

1. Style changes
2. Product line extensions
3. Product improvements
4. New products for the current market served
5. New products for an established market in which the business offer-
ing the innovation is not yet recognized as a vendor
6. Major innovations

While it is not clear that these newness levels fall on a single dimen-
sion, they do correspond to different types of effects on the market and
require different resources and skills to bring each of these innovations
successfully to market. Heany does not provide precise definitions for
these six levels, but their interpretation emerges from the extensive
examples that he gives.
For style change innovations, Heany lists the examples shown in
Table 3.1.
Style changes appear to be mostly concerned with the aesthetic fea-
tures of the product and much less with its functionalities. Nevertheless,
aesthetics has always played an important role in some markets and
especially in fashion markets. Creusen and Schoormans (2005) iden-
tify six roles that aesthetics or product appearance plays in consumers’
evaluation processing: (1) communication of aesthetic, (2) symbolic,
Assessing Innovations from the Market Point of View 55

Table 3.1 Examples of style changes

Industry Style change

Ladies’ apparel The hemline of dresses is lengthened or shortened


Automotive Tail fins are added or removed, bumpers are redesigned,
more chrome strips are added
Furniture The Spanish style may be featured one year, only to give
way to a modern, functional style the next
Watches The wrist band may be made more attractive; the watch
may be sold in a box that appears more luxurious to the
purchaser

Source: Adapted from Heany (1983).

(3) functional, (4) ergonomic information, (5) attention drawing, and (6)
categorization. Schmitt and Simonson (1997) focus on the significance
of aesthetics on the brand and the implication for the marketing strat-
egy of that brand. But product aesthetics – as characterized by materials
used; by size, shape, and proportions; and by color, ornamentation, or
reflectivity – affects product perception, comprehension, and evaluation
(Brunel and Kumar 2007). Ellis (1993) has developed a scale for assess-
ing the design of a product with seven dimensions: simplicity, harmony,
balance, unity, dynamics, timeliness/fashion, and novelty. Brunel and
Kumar (2007) use these seven dimensions to explain the perceptions of
the product personality as assessed on Aaker’s (1997) five dimensions
of brand personality (sincerity, excitement, competence, sophistication,
and ruggedness). Although the research is promising in terms of present-
ing strong evidence for some links, the various patterns and interactions
of this complex aesthetics construct need further investigation. This is
particularly important as the role of aesthetics and design in products
may be increasing in importance in today’s markets, as is clearly illus-
trated by Apple’s computer product strategy. Indeed, design has been
identified as a major source of success or failure in the Internet-based
services (Lederer et al. 2000, Palmer 2002, Yang et al. 2005, Danaher,
Mullarkey and Essegaier 2006).
Product improvements typically replace older products. They can pro-
vide additional benefits to consumers by adding new functions or
resolving issues with earlier versions of the product. Product improve-
ments are often associated with a change in packaging in order to com-
municate these improvements. Some examples provided by Heany are
listed in Table 3.2.
56 Making Innovation Last

Table 3.2 Examples of product improvement

Industry Product improvement

Telephone Subscriber is alerted to the fact that another caller is


ringing that number
Handset enables subscriber to put the first caller on “hold”
and talk to the second caller
Light bulb A 20 percent reduction in power consumption; a 10
percent increase in life expectancy
FM radio Add feature to prevent “drift”
Electric mixer Add the capability of kneading bread dough as well as
whipping cream, mixing cake ingredients, beating eggs, etc.
Automobile Reduce weight of car so as to improve gasoline
consumption by purchasing plastic rather than metal
parts from your vendors
Typewriter Add an “erasing” capability
Hi-fi system Extend warranty to two full years
Car insurance Automatic coverage for a 30-day period after the purchase
of a new car
Commercial Deposit and withdrawal at any hour of the day or night via
banking services a terminal

Source: Adapted from Heany (1983).

Many of the changes listed in Table 3.2 concern the packaging of the
product. While a priori minor, the impact of such innovations may be
dramatic. Some famous examples of almost revolutionary package inno-
vations are as follows:

1. The substitution of paper milk containers or cartons for glass bottles.


2. Throwaway bottles for soft drinks versus the once conventional, reus-
able glass containers.
3. Hanes’s decision to display L’Eggs hosiery in egg-shaped containers
(DeBruicker and Singer 1975).

Product line extensions may also not appear to be particularly innovative


in terms of new products or services. They usually concern the modi-
fication of existing products or services but not for the replacement of
the old ones. Instead, the new product or extended service is intended
to better satisfy consumer needs and to reach customer segments that
have more specialized needs. Some examples of product line extensions
provided by Heany are listed in Table 3.3.
Examining this list, some changes in products do indeed appear triv-
ial, such as a four- or six-slice toaster versus a two-slice one. However,
this is not the case with the introduction of credit cards, which require
Assessing Innovations from the Market Point of View 57

very different systems for banks (with a machine at each purchase point)
and a major change in consumer habits.
All examples of new products for the currently served market given by
Heany (see Table 3.4) correspond to added benefits for the consumer
and involve technological aspects of the product.

Table 3.3 Examples of product line extensions

Current product line Product line extension

Dishwasher permanently A mobile dishwasher


installed in a kitchen
Breakfast cereals Fortified cereals appealing to
those preferring natural foods
Canned fruit Dietetic canned fruit
2-slice toaster 4- and 6-slice models
Knitted sweaters Knitted sweaters for skiers
for tennis players
Retail bank services Credit card

Source: Adapted from Heany (1983).

Table 3.4 Examples of new products for the currently served market

Currently
served market Current product(s) New product

US households Cameras capable of Cameras capable of


producing a black- producing instant
and-white picture color pictures
within one minute
UK camera buffs Discrete lenses for “Zoom” lenses
35-mm camera
Housewares for the Toasters, coffee Smoke alarms, toaster
common market percolators, electric ovens, coffee
fry pans, etc. “systems”
US homeowners Electric hand tools Cordless power tools
with workshops (drills, sanders, etc.)
Canadian households Electric ovens Microwave ovens
Engineers, scientists, Electronic hand Calculators responding
and students calculators with to programs encoded
attending technical small memories; on magnetic strips
institutes in Western keyboard entry
Europe, the US, and
South America
Thrift market Savings accounts Life insurance

Source: Adapted from Heany (1983).


58 Making Innovation Last

These innovations are also on the radical side of the technology dimen-
sion, even if the benefits to consumers may be more or less significant.
These benefits may be used to better satisfy existing market segments
already served or to enable the firm to develop new markets. These
major technological innovations are risky to bring to market not only
because they require investment in R&D but also because the response
from consumers is as yet unknown. Will consumers appreciate the fact
that tools are cordless? Will consumers get used to heating food quickly
but without browning the food (Buzzell and Wong 1979)? In addition
to the uncertainty of consumer response, there is the risk of cannibali-
zation if serving the same market. Even if not serving the same market
(e.g., life insurance in the thrift market), while the issue of cannibaliza-
tion does not come up, to what extent are there synergies with the cur-
rently served market? Are the same skills required to sell life insurance
and manage savings accounts?
The category of new products for an established market in which the
business offering the innovation is not yet recognized as a vendor differs
from the category we just discussed due to the fact that the firm that
brings the innovation to market is starting to compete with estab-
lished competitors and is serving different needs than those of their
existing customers. The examples provided by Heany are listed in
Table 3.5.
These innovations are motivated not only by the desire to serve better
the existing customer base but also by the desire to meet the challenge
of the competition going to these same customers to meet related needs.
This requires an understanding of the customers and of the competition
defined at a level broader than the served market. The key issue is then
to understand how to define the market and the set of competitors: cur-
rent and potential.
Major innovations are innovations where the firms that brought them
to market are pioneering a completely new market and have defined
this market. Some examples provided by Heany are shown in Table 3.6.
This classification by Heany (1983) goes into greater detail but is
similar to Booz and Hamilton’s (1982) taxonomy of new products, also
followed by Wheelwright and Clark (1992) and Ali (2000), who catego-
rizes his sample of new products along the five categories of newness
of products: (1) similar to available (me-too) products, (2) improved
version of existing products, (3) line extensions, (4) next-generation
new-to-the-market products, and (5) radical or breakthrough products
that create new industries or markets. All these classifications are in part
based on Ansoff’s diversification matrix (see Table 3.7).
Assessing Innovations from the Market Point of View 59

Table 3.5 Examples of new products for the established market

Xerox Offered a word processor to Fortune 1000 firms and to


governmental agencies in direct competition with
IBM’s magnetic-card typewriter
IBM Introduced a copier for offices in direct competition
with Xerox’s line of copiers
Polaroid Offered a movie camera in direct competition with
Kodak’s movie camera; Polaroid’s viewer enabled the
user to see the results instantly; previously, Polaroid
had offered single-frame instant cameras
Texas Offered electronic watches and electronic calculators for
Instruments (TI) the US mass market; TI previously concentrated on
electronic components for the military and original-
equipment manufacturers’ market
Procter & Gamble Introduced a line of paper diapers in direct competition
with Scott Paper’s products; P&G previously offered
packaged goods for the home
Dannon Offered the US consumers a yogurt with fruit, packaged
in a single-serving container
Timex Entered the US watch market via the mass merchant
and drug store channel; its product design and
manufacturing process differed greatly from that of
the US or Swiss watch manufacturers

Source: Adapted from Heany (1983).

Table 3.6 Examples of major innovations

Computers for the home


Private air-express services featuring overnight delivery for small parcels
Wide-screen television displays
Unmanned vehicles for delivering parts to work on an assembly line or in an office
A temporary, worldwide network for broadcasting sporting events to locations
where people pay for the privilege of watching these events

Source: Adapted from Heany (1983).

Table 3.7 Ansoff’s diversification matrix

Markets/customers

Old New

Product/services Old Market penetration Market development


Lines New Product development Diversification

Source: Adapted from Ansoff (1957).


60 Making Innovation Last

For example, adding knitted sweaters for skiers to the line of knitted
sweaters for tennis players involves going after a new market segment,
and if one assumes that the same kind of sweater serves the needs of
both markets, this innovation would correspond to the market develop-
ment cell of Ansoff’s matrix. Also, the category of new products for the
currently served market is identical to the product development cell.
However, Heany’s spectrum does not appear either purely unidimen-
sional, as is suggested by the notion of a spectrum, or two dimensional,
as in Ansoff’s matrix. It combines four dimensions: the customer, the
product, the competitors, and the organization. It mixes notions of
technological newness with notions of newness of the served market
and of newness to the organization as evidenced by the discussion of
the categories and of their examples. Nevertheless, the notion of served
market is fundamental in Heany’s categories and this is indeed a criti-
cal concept because an existing product may be new in the eyes of
consumers in a particular market segment, even if not new to another
segment.
Taking the perspective of the customers or users, the marketing litera-
ture has considered more generally the radicalness of the innovation.
Kleinschmidt and Cooper (1991) define the degree of newness as “how
new or innovative the product really is” (p. 241) to assess the impact of
product innovativeness on new product success or failure. Similarly,
Calantone, Chan and Cui (2006) measure product innovativeness on
an 11-point scale from 0 to 10: “Rate how innovative the product was –
its degree of innovativeness – relative to products then in your market
area,” a measure previously proposed by Ali, Krapfel and LaBahn (1995).
However, Calantone et al. (2006) conclude their large literature review
with the observation that innovativeness does not turn out to be a sig-
nificant factor in most studies. Yet, management firmly believes that it
is an important key to success. This belief is, however, mitigated by the
realization that “less innovative products are more familiar, less uncer-
tain, may have higher synergies, and hence have a higher success rate”
(p. 241). These two negatively correlated concepts correspond to the
notions of product benefit or advantage versus familiarity (or lack of
familiarity with what is new) proposed by Calantone et al. (2006).1 But
why is “newness” by itself a quality? Why should it affect outcome vari-
ables such as new product success once other related factors such as rela-
tive advantage and familiarity are controlled? In fact, Calantone et al.
(2006) find no direct effect left once the other two factors are controlled.
Yet, the tests of discriminant validity indicate that innovativeness meas-
ures something other than relative advantage and familiarity (although
Assessing Innovations from the Market Point of View 61

these tests of discriminant validity are limited by the single-item measure


of innovativeness).
Although Fang (2008) is interested in new product innovativeness as
an outcome of the participation of customers in the development process
and does not measure it from the point of view of the perceptions of the
customers, his notion of innovativeness concerns the novelty of the idea
and how creative the product is. This is the same perspective as Moorman
(1995), who defines new product creativity as “the degree to which a new
product is novel and its introduction changes marketing thinking and
practice” (p. 324). In fact, the measure of new product innovativeness used
by Fang (2008), which adopts a six-item, seven-point semantic differential
scale, is adapted from Moorman’s (1995) new product creativity scale.
Both Fang’s scale and Moorman’s scale are shown in Table 3.8.
Moldovan, Goldenberg and Chattopadhyay (2011) use the term
“originality” to reflect a similar concept measured at the level of the
consumer: originality is defined as a “product’s newness or uniqueness
as perceived by the consumer, relative to previous offerings” (p. 110).
This definition takes the same notion of newness but adds a second
qualifier: uniqueness. It is not clear, however, to what extent these two
notions are related or independent.

Table 3.8 Measures of new product innovativeness

New product innovativeness New product creativity


(Fang 2008) (Moorman 1995)

Rate the degree to which Rate the extent to which the product has
the new component is: achieved the following outcomes during the
first 12 months of its life in the marketplace:
s Very ordinary for our s Very novel for this category/very ordinary
industry/very novel for our for this category
industry
s Not challenging to existing s Challenged existing ideas for this category/
ideas in our industry/ did not challenge existing ideas for this
challenging to existing category
ideas in our industry
s Not offering new ideas to s Offered new ideas to the category/did not
our industry/offering new offer new ideas to the category
ideas to our industry
s Not creative/creative s Creative/not creative
s Uninteresting/interesting s Interesting/uninteresting
s Not capable to generating s Spawned ideas for other products/did not
ideas for other products/ generate ideas for other products
capable of generating ideas s Encouraged fresh thinking/did not
for other products encourage fresh thinking
62 Making Innovation Last

In spite of this general interest in newness, the definition remains quasi


tautological and measurement of the construct has not received much
attention. Robertson (1971) proposes a richer definition based on the
notion of a continuum in terms of the effects that the innovation has
on established consumption patterns. At the low end of the continuum,
continuous or minor innovations build on customers’ existing knowl-
edge and experience base that these consumers use to evaluate the new
product or service. The adoption of such innovation does not change the
way in which the consumers fulfill their needs. At the other extreme of
the continuum, the new product or service changes the way consumers
behave. For example, grocery shopping may have been for some consum-
ers an unplanned task, one where they walked up and down the aisles
selecting items as they saw them. Adoption of online shopping by such
consumers, where they simply read through a list of items, may no longer
offer the opportunity for impulse buying. Also, comparing prices becomes
much easier and more salient to the extent that online customers may
become more price sensitive. However, this tendency could be weakened
if these customers simply save and reuse their previous shopping lists.
This example illustrates how the adoption of online shopping changes
the pattern of grocery shopping altogether. Building on this conceptu-
alization, Gatignon and Robertson (1991) propose three levels on this
continuum. Discontinuous innovations create new behavior patterns;
continuous innovations have minimal effect on behavior patterns; and,
in between, dynamically continuous innovations have a moderate effect
on behavior patterns. This notion is linked to the consumer learning that
is necessitated by the innovation (Gatignon and Robertson 1985). In prac-
tice, however, it is not easy to measure how much learning is required,
especially before the innovation has been introduced in the market.
This notion of learning requirement is in fact similar to Rogers’s con-
cept of compatibility, which is discussed in the next section and which
might be more directly measurable: highly innovative products may
produce some incompatibility with customers’ existing way of doing
things (see Rogers, 1983). Such compatibility is based on the customer’s
experience and to the extent to which that experience is relevant to the
new product (Olson et al. 1995, Ali 2000).
A similar idea has developed in the cognitive consumer behavior lit-
erature that is based on the concept of congruence (Meyers-Levy and
Tybout 1989). Congruence is defined in terms of the consumers’ cog-
nitive schema. It is similar to Wilton and Myers’s (1986) notion of
expectancy disconfirmation. Building on Mandler’s (1982) theory,
Meyers-Levy and Tybout (1989) test the idea that in general people
Assessing Innovations from the Market Point of View 63

prefer congruent objects that conform to their expectations and that


allow predictability. However, it is the schema incongruity that drives
attention and the consequent information processing by individuals.
Indeed, Derbaix and Vanhamme (2003) refer to “schema discrepancy”
to describe the disconfirmation of expectations or the “unexpected,”
and they demonstrate that such unexpected situations (a percentage of
which concerned new products and services) produce an element of sur-
prise (emotions that can be sometimes positive and sometimes negative).
Moderate incongruity leads to evaluations that are more favorable
toward the product. With congruence, consumers pay no attention to
the new product, and in the best cases, they process minimal informa-
tion that could lead to positive evaluation results. “Extreme incongruity
is defined as incongruity that cannot be resolved or can be resolved only
if fundamental changes are made in the existing cognitive structure
(e.g., redefining the basic soft drink schema). Such incongruities may
generate cognitive elaboration, but this elaboration may lead more to
frustration than resolution. Thus, extreme incongruities typically elicit
more negative evaluations than do moderate incongruities” (Meyers-
Levy and Tybout 1989, p. 40). Moderate incongruities are regarded as
“interesting and positively valued” (Mandler 1982, p. 22), thereby lead-
ing to more positive responses than ones elicited by schema congruity.
“Indeed, the very process of resolving the incongruity is thought to
be rewarding and thus may contribute to the resulting positive affect”
(Meyers-Levy and Tybout 1989, p. 40). Therefore, moderate incongruity
in the cognitive schema leads to an effect on the affective component of
the evaluation of the new product. This greater affect may also explain
why “people like to talk about things that they find surprising and/or
interesting” (Moldovan et al. 2011, p. 110).
In summary, the concept of innovativeness of a product contains a
notion of novelty and a surprise factor, and each plays a role in explain-
ing adoption and new product success. However, the emphasis has been
placed on the more cognitively based perceived new product characteristics
that we review in Section 3.2. Before moving to these characteristics, we
want to address one additional use of the concept of innovativeness that
is important to differentiate from new product or service innovativeness.
It is the innovativeness of the consumers themselves.

3.1.2 Innovativeness as a personality trait


Thus far, we have discussed the concept of innovativeness of a new prod-
uct or a new service as perceived by the consumers. A different conceptu-
alization of consumer innovativeness is presented in Hirschman (1980).
64 Making Innovation Last

She proposes to study the motivation for an individual to innovate.


Roehrich (2004) distinguishes between these two concepts by calling the
first product innovativeness and the second consumer innovativeness.
While traditional personality traits may be poor predictors of adoption
or nonadoption of an innovation, Hirshman’s notion of novelty seeking
is similar to Midgley and Dowling’s (1978) concept of innate innovative-
ness, also called dispositional innovativeness (Steenkamp and Gielens
2003, Gielens and Steenkamp 2007). In contrast to anterior definitions,
these constructs do not require actual adoption of the innovation (adop-
tive innovation or early adoption). For Hirschman, the individual may
adopt the product concept only by acquiring information and knowl-
edge but avoids the risks of actual purchase. This corresponds to her
notion of vicarious innovativeness.
Midgley and Dowling (1978) consider that the concept of innovative-
ness involves two distinct, albeit highly correlated, elements: “innova-
tiveness is the degree to which an individual is receptive to new ideas
and makes innovation decisions independently of the communicated
experience of others” (p. 236). They explain that actualized innovative-
ness (reflected by actual early adoption) may not follow automatically
from innate innovativeness because of the specific interest of the indi-
vidual in the product category and because of many contextual and
situational factors. Therefore, this definition contains the element of
receptivity to novelty and an element of the decision-making process
which is independent of information that could be obtained from others.
Furthermore, the definition at a high abstraction level implies that this
innovativeness applies to all categories of products or services. However,
two other levels of innovativeness can be assessed. Once product cat-
egory interests have been taken into consideration, innovativeness can
be assessed at a specific product category level. Finally, if considering
the context and situational factors, the degree of innovativeness of a
consumer could also be assessed for a specific new product or service.
However, the authors are most interested in the concept at the higher
level of abstraction. They recommend the construction of a direct
instrument through a questionnaire that would include items involving
different product categories and the acquisition decision process such as
(Midgley and Dowling 1978, p. 240):

1. I have difficulty in deciding whether or not to buy a new food product.


2. I often talk with my friends about new appliances.
3. I rely on my friends’ advice when making up my mind about new
fashions.
Assessing Innovations from the Market Point of View 65

Hurt, Joseph and Cook (1977) develop such a scale for individual innate
innovativeness reflecting an individual’s likelihood to accept change.
The items are listed in Table 3.9.
The scale appears to have good psychometric properties and meas-
ures something different than involvement (Pallister and Foxall 1998).
We should also point out the related scale of exploratory acquisition of
products (EAP) by Baumgartner and Steenkamp (1996), which measures
the extent to which individuals differ in their tendencies to engage in
exploratory buying behavior. This construct is compared to other psy-
chological constructs to check for discriminant validity, and antecedents
are analyzed in a cross-national study by Steenkamp, Ter Hofstede and
Wedel (1999). However, most evidence of the profiles of innovators has
been obtained at the product category level (Gatignon and Robertson
1985). Given this frequent level of analysis and the managerial interest

Table 3.9 Innate innovativeness scale

Indicate the degree to which each statement applies to you by marking whether you:
Strongly disagree = 1; disagree = 2; are neutral = 3; agree = 4;
strongly disagree = 5

s My peers often ask me for advice or information


s I enjoy trying new ideas
s I seek out new ways to do things
s I am generally cautious about accepting new ideas
s I frequently improvise methods for solving a problem when an answer is not
apparent
s I am suspicious of new inventions and new ways of thinking
s I rarely trust new ideas until I can see whether the vast majority of people
around me accept them
s I feel that I am an influential member of my peer group
s I consider myself to be creative and original in my thinking and behavior
s I am aware that I am usually one of the last people in my group to accept
something new
s I am an inventive kind of person
s I enjoy taking part in the leadership responsibilities of the group I belong to
s I am reluctant about adopting new ways of doing things until I see them
working for people around me
s I find it stimulating to be original in my thinking and behavior
s I tend to feel that the old way of living and doing things is the best way
s I am challenged by ambiguities and unsolved problems
s I must see other people using new innovations before I will consider them
s I am receptive to new ideas
s I am challenged by unanswered questions
s I often find myself skeptical of new ideas

Source: Adapted from Hurt, Joseph and Cook (1977).


66 Making Innovation Last

in specific product categories, it was useful to develop a scale at that


level of conceptualization as well. Goldsmith and Hofacker (1991) pro-
posed such a scale (see Table 3.10), which has been validated (Flynn
and Goldsmith 1993) and successfully used in varied domains such as
extreme sport equipment (Schreier, Oberhauser and Prügl 2007) or the
Internet (Flynn and Goldsmith 1993, Goldsmith 2001).
Comparing the predictive power of global innovativeness versus
domain-specific innovativeness, Goldsmith, Freiden and Eastman (1995)
find that while global innovativeness is an antecedent of domain specific
innovativeness, the correlation of domain-specific innovativeness with
new items in the clothing and electronic product categories is higher
than the global measure of innovativeness.
The most recent contribution to the definition and measurement
of the construct of individual innovativeness is the conceptualiza-
tion by Vandecasteele and Geuens (2010). Building on the distinction
between cognitive and sensory innovations in the conceptualization of
Venkatraman and Price (1990), they identify four dimensions of inno-
vativeness based on individual motivation: social, functional, hedonic,
and cognitive motivations. These dimensions and the corresponding
items to measure them are shown in Table 3.11.
These dimensions have a better predictive ability than other innova-
tiveness scales and lead to conclusions in terms of relationships with
demographics that go against our commonly held knowledge. For exam-
ple, older people are as functionally and hedonic innovative as younger
individuals (and somewhat less cognitively innovative), even if they are
less socially innovative. Women are also as innovative as men in terms
of functional innovativeness, although men are more innovative on the
other dimensions.

Table 3.10 Domain-specific innovativeness scale

s In general, I am among the last in my circle of friends to buy a new rock


album when it appears
s If I heard that a new rock album was available in the store, I would not be
interested enough to buy it
s Compared to my friends I own few rock albums. If a friend has a released rock
album, I would ask to hear it
s In general, I am the last in my circle of friends to know the titles of the latest
rock albums
s I do not know the names of new rock acts before other people do

Source: Adapted from Goldsmith and Hofacker (1991).


Assessing Innovations from the Market Point of View 67

Table 3.11 Motivated consumer innovativeness scale

Factors Items

Social s I love to use innovations that impress others


s I like to own a new product that distinguishes me from others
who do not own this new product
s I prefer to try new products with which I can present myself to
my friends and neighbors
s I like to outdo others, and I prefer to do this by buying new
products which my friends do not have
s I deliberately buy novelties that are visible to others and which
command respect from others
Functional s If a new time-saving product is launched, I will buy it right away
s If a new product gives me more comfort than my current
product, I would not hesitate to buy it
s If an innovation is more functional, then I usually buy it
s If I discover a new product in a more convenient size, I am very
inclined to buy it
s If a new product makes my work easier, then this new product is
a “must” for me
Hedonic s Using novelties gives me a sense of personal enjoyment
s It gives me a good feeling to acquire new products
s Innovations make my life exciting and stimulating
s Acquiring an innovation makes me happier
s The discovery of novelties makes me playful and cheerful
Cognitive s I mostly buy those innovations that satisfy my analytical mind
s I find innovations that need a lot of thinking intellectually
challenging and therefore I buy them instantly
s I often buy new products that challenge the strengths and
weaknesses of my intellectual skills
s I am an intellectual thinker who buys new products because they
set my brain to work
Source: Adapted from Vandecasteele and Geuens (2010).

All the measures of innovativeness discussed in this section are at


the level of the individual and not of the new product or service. It
was nevertheless important to discuss the innovativeness of the cus-
tomers themselves not only to make the distinction clear but also
because the perceptions of a new product or service (i.e., the charac-
teristics of the new product or service) can be a function of the innate
innovativeness of the consumer doing the evaluation. We now return
to assessing the characteristics of the innovation at the new product
or service level.
68 Making Innovation Last

3.2 Rogers’s innovation characteristics

In addition to representing innovation/innovativeness on such a spec-


trum or continuum (with the inherent difficulties we established), we
can also assess a number of characteristics from the consumer/user per-
spective. Rogers’s (1962, 1983, 1995) characteristics were developed to
explain the speed of adoption of innovations. These characteristics were
conceptualized from early research especially in the domains of farming
innovations and in the medical field but they remain very relevant today.
They have been applied to a large number of older (e.g., new hybrid corn
seeds or new drugs) as well as recent innovations (e.g., the Internet).
Rogers has categorized innovation characteristics into five groups: rela-
tive advantage, compatibility, trialability, observability, and complexity.
The article by Rogers (1976) highlights the importance of understanding
the adoption and diffusion process in order to assess the various dimen-
sions of innovations that are relevant to market acceptance. Therefore,
these characteristics are specifically identified because of the impact
they can have on the adoption and diffusion of these innovations.
One of the most comprehensive studies in terms of number of inno-
vation characteristics and number of innovations is the early study by
Fliegel and Kivlin (1966). This is the first study that sets out to explain
differences in adoption of multiple innovations by the same group
of potential adopters (229 farm operators from a single Pennsylvania
county, homogeneous in terms of being sole owner-operators of
medium-sized, commercial dairy farms and in terms of age group and
education level)2. They identify 15 characteristics, along with the corre-
sponding single-item measure for each one (see Table 3.12). These items
provide a clear definition of the attribute meaning.
They group these characteristics into six categories of attributes that
are not intended to be independent from each other. In fact, they argue
that these attributes are correlated and that any analysis of their impact
on adoption must take the interrelationships into account. The six cat-
egories are cost attributes, return attributes, efficiency, risk, communica-
bility, and congruence. Most of these overlap with Rogers’s classification.
In particular, cost, return, and efficiency are related to the relative advan-
tage of the innovation. Some aspects considered by Fliegel and Kivlin
will be discussed when dealing with relative advantage in Section 3.2.1.
It is also noteworthy that Fliegel and Kivlin categorize trialability (or
divisibility for trial) under a more general concept of risk while Rogers
has kept the separate notion of trialability as one of his fundamental
characteristics. The same comment applies to the attribute of compat-
ibility that is identified under a more general notion of congruence.
Assessing Innovations from the Market Point of View 69

Table 3.12 The 15 characteristics in Fliegel and Kivlin (1966)

s Initial cost: how much does it cost to buy or start using________?


s Continuous cost: how much money does it cost to run or to keep using________?
s Rate of cost recovery: how long does it take to get time, labor, or money costs
back on_______?
s Payoff: how well does________ pay off?
s Social approval: are people likely to look up to a farmer because he uses________?
s Saving of time: how much time does________ save in getting the immediate
job done?
s Saving of discomfort: how much does________save hard, dirty, or sweaty work?
s Regularity of reward: does________ show results every time?
s Divisibility for trial: how easy is it to try out________ first, on a small scale?
s Complexity: how easy is it to understand and use________?
s Clarity of results: how clearly do results of_______show up?
s Compatibility: how much different is________ from older ways of doing the job?
s Association with dairying: how much does________have to do directly with
cows or handling milk?
s Mechanical attraction: how much interest would________have for the farmer
who likes to work with machinery?
s Pervasiveness: how much does________ lead to other changes or practices?

Source: Adapted from Fliegel and Kivlin (1966).

The other preliminary notion that we need to point out is the fact
that these characteristics of the innovations may have an objective as
well as a subjective definition. The marketing literature has naturally
followed Rogers’s position that what counts is the point of view of the
potential adopter, as it follows from the general notion that consumers’
perceptions provide the basis for consumer behavior. We now examine
in detail the various categories of attributes considered in the literature.
We discuss their measures and their effects. We then discuss how these
various factors can be structurally interrelated.

3.2.1 Relative advantage


Generally, relative advantage expresses the degree to which an innova-
tion is perceived as superior to the ideas (in particular products or ser-
vices) it supersedes. However, several aspects of relative advantage can
be identified. Costs and returns by definition determine the benefits of
the innovation and there are different kinds of costs and different types
of returns involved. Fliegel and Kivlin (1966) distinguish between three
types of costs: (1) initial costs, (2) continuous or operating costs, and
(3) social costs. They also make a distinction between economic returns
(i.e., rate of cost recovery or payoff) with social rewards. The notion of
perceived usefulness used by Davis (1989) in the context of the adoption
70 Making Innovation Last

of new information technologies corresponds to these returns: perceived


usefulness is defined as the degree to which an individual believes that
using a particular system would enhance his or her job performance.
Efficiency is another aspect of relative advantage which Fliegel and
Kivlin consider also both from an economic (saving time) and a noneco-
nomic, that is, social point of view (saving discomfort). Ostlund (1974)
also makes the distinction between these different types of savings (time
savings vs. effort savings vs. monetary value) in his study of a single-
consumer nondurable goods innovation – a brand of oven roasting bag.
Gatignon, Eliashberg and Robertson (1989) argue also that time-saving
consumer innovations such as dishwashing machines have a different
diffusion patterns across countries explained in part by the proportion
of women (in a country) who work outside the home.
One particular beneficial aspect of the innovation is the consumer’s
ability to gain social status from adopting the innovation. It has been
pointed out, however, that this is a separate type of advantage that needs
to be considered as a separate dimension (Moore and Benbasat 1991). It
has been labeled the “image” characteristic of the innovation and is
defined as the perception that using the innovation will contribute to
enhancing the social status of the adopter (Agarwal and Prasad 1997).
Most research measures relative advantage globally. Earlier studies use
a single item corresponding to the definition. However, the most recent
literature has used multi-item measures that have revealed two com-
ponents (via factor analysis). The first dimension of relative advantage
corresponds to the qualities of the new product, while the second com-
pares the new product to the existing competing products that satisfy
the same needs. For example, representative items used by Gatignon
and Xuereb (1997) are shown in Table 3.13.

Table 3.13 Representative items for the measurement of new product advantage

Product advantage
s Overall advantage
s Product design (functionality, features)
s Product quality
Innovation similarity with competitors’ products
s Overall, this new product is similar to our main competitors’ products
s The applications of this new product are totally different from applications of
our main competitors’ products

Source: Adapted from Gatignon and Xuereb (1997).


Assessing Innovations from the Market Point of View 71

Interestingly, this measure of advantage relative to competition may


be related to the degree of similarity between an innovation and its tra-
ditional counterpart used to satisfy the same needs, which Fliegel and
Kivlin (1966) discuss under the notion of congruence and which we
present in the next section. This clearly indicates that these attributes
are somewhat conceptually interrelated and it implies that each aspect
should be considered carefully in any particular situation or research.
Regardless of how these overall measures are classified, they reflect
global assessments of relative advantage. Yet, the early research indicates
that the individual aspects that go into the general notion of relative
advantage are not identical. For example, Fliegel and Kivlin (1966) find
that the initial price of the innovation is not a deterrent to adoption
but operating costs are. The same notions are likely applicable to most
innovations, including consumer innovations where, however, the
social costs may dominate the economic costs. The distinction between
immediate versus continuing social costs may also be appropriate.

3.2.2 Compatibility
We refer earlier in Section 3.1.1 to the notion of fit of the new product
or service with the existing knowledge structure of the consumer. This
congruence notion was already introduced by Fliegel and Kivlin (1966)
to reflect the fact that the innovation is “conceived in the context of
other things and ideas, both old and new” (p. 246). Consequently,
adoption decisions are affected by “the perceived ties between the
innovation and elements of the context” (p. 246). They considered
that Rogers’s attribute of “compatibility” corresponded to this notion
of congruence. Rogers defined compatibility as the degree to which
the innovation is seen as consistent with the innovator’s existing val-
ues, past experiences, and needs. A positive impact on adoption has
been found in numerous studies (Fliegel and Kivlin 1966, Rogers and
Shoemaker 1971, Ostlund 1974, Labay and Kinnear 1981). Ostlund
makes a distinction among three sources of incompatibility: regarding
self-concept, family members, and existing habits. Although the coeffi-
cients of the discriminant function to distinguish between innovators
and noninnovators are positive (as expected) for these three sources,
the magnitude of the coefficients is among the smallest of the attrib-
utes. Nevertheless, taken as a whole, they reflect the importance of
that attribute. Therefore, this attribute should not be neglected espe-
cially as it appears to play a major role in technology acceptance, as
illustrated by Wu and Wang (2005) who find that compatibility has the
strongest link to the use of mobile commerce. These authors include
72 Making Innovation Last

another component under the category of congruence, albeit one that


has only a small impact in Fliegel and Kivlin’s study. It is the notion
of pervasiveness of consequences introduced by Menzel (1960) in his
famous study of physicians’ adoption of medicine. It concerns the
likelihood that adoption of an innovation may lead to other changes
in a sequence of effects through a network or web of relationships.
This notion deviates somewhat from the notion that we just discussed.
However, this is an aspect which has not received as much attention
as some of the other attributes identified by Rogers and which may
deserve to be included in any assessment of innovations.

3.2.3 Trialability
As far back as 1943, Ryan and Gross (1943) introduced the notion of
divisibility for trial to explain the diffusion of a new hybrid corn seed.
The importance of this factor is confirmed by Fliegel and Kivlin’s study
among farmers. Rogers calls it simply trialability defined as the degree to
which an innovation is perceived as available for trial on a limited basis,
without a large commitment. However, the importance found in these
original studies in a business-to-business context may not be as strong
for consumer markets. It is the smallest discriminant weight in Ostlund’s
(1974) study, and it is not a significant attribute in Labay and Kinnear’s
(1981) study of adoption of solar energy systems by individuals. This
could be due to the nature of those products that are less amenable to
divisibility or trial possibilities. However, one should not neglect the
possibility of trial samples or trial sizes as a means to enhance adop-
tion. It should be noted that this may be considered as an element of
perceived risk (see Section 3.3), which is how Fliegel and Kivlin (1966)
classified it, again pointing out the perhaps weak discriminant validity
among these attributes.

3.2.4 Observability
Observability is the degree to which the results of innovation are vis-
ible to others. There are two specific aspects that go with this defini-
tion. One is the clarity of the results obtained and the other is the ease
with which these results can be communicated. Although different, vis-
ibility by others is not totally independent of the notion of social risk
(Fliegel and Kivlin 1966). It does not appear to have strong effects in
either studies by Ostlund (1974) or Labay and Kinnear (1981). It may be
that these notions are not sufficiently distinguished from one another.
Menzel (1960) and Katz, Levin and Hamilton (1963) highlight the
Assessing Innovations from the Market Point of View 73

importance of the perceivability of the benefits of adoption. However,


even if isolated, this communicability attribute measured by how clearly
the results show up (Fliegel and Kivlin 1966) does not have strong effects
on adoption. It may be, however, that innovative or early adoption is
not reflected by this attribute; yet, the diffusion process through imita-
tors depends on the ability of others to see the results. This is discussed
further in Chapter 12 on the diffusion process.

3.2.5 Complexity
Fliegel and Kivlin (1966) classify complexity as being related to com-
municability. Complexity is defined as the extent to which the innova-
tion appears difficult to use and understand. This appears an important
attribute in consumer studies, although perhaps less so in business-
to-business markets such as in the adoption of new seeds by farm-
ers. Complexity is also related to the notion of ease of use, which is
prevalent in research on adoption of information technologies (Davis
1989, Davis et al. 1989). However, this complexity attribute is not
independent of the notion of perceived risk, which is discussed in the
next section.

3.3 Perceived risk

The notion of the risk perceived by the potential adopter of an innova-


tion has been identified in Fliegel and Kivlin (1966), Ostlund (1974),
and Labay and Kinnear (1981). Labay and Kinnear (1981) provide a defi-
nition of the concept as “the expected probability of economic or social
loss resulting from innovation” (p. 271) while Ostlund (1974) gives a
general definition as “the degree to which risks are perceived as associ-
ated with the innovation” (p. 24). In any case, this risk can be viewed
from both financial and social perspectives. In addition to economic fac-
tors concerned with costs, economic returns, and efficiency of the farm-
ing method, as well as other factors identified by Rogers (1995), Fliegel
and Kivlin (1966) provide indirect evidence for the role of uncertainty
and risk. However, perceived risk is not measured directly. Instead, it is
proxied by regularity of rewards and by divisibility for trial, both repre-
senting economic risks. Ostlund (1974) studies a very different context
with consumer innovations (a self-layering dessert mix and an oven
roasting cooking bag) and surveys housewives. The results confirm the
importance of perceived risk in addition to Rogers’s characteristics. In
a completely different context, the study of adoption of solar energy
74 Making Innovation Last

systems by Labay and Kinnear (1981) provides additional confirmation


of the relevance of these attributes. This context is particularly inter-
esting as it involves environmentally relevant issues at early stages of
awareness in the general population. Comparing adopters and knowl-
edgeable nonadopters, the results are consistent with the other studies
reported above. While the role of perceived risk is less surprising in the
case of the adoption of expensive investments like solar energy systems,
it is particularly interesting to note its relative importance in Ostlund’s
study of oven roasting cooking bags.
The concept of perceived risk discussed so far is defined rather broadly.
Gatignon and Robertson (1991) argue that there are three very differ-
ent kinds of risks, each with different potential consequences. The first
uncertainty and risk that they identify is related to the performance
of the new product. This could result from uncertainty about the like-
lihood of malfunction or poor functioning of the new product or it
could be the result of the inability of the consumer to imagine how
the new product would be used. For example, some relatively inexpen-
sive imitations of the iPad working under different operating systems
(OSs) may appear to have many of the features that a particular con-
sumer might wish for; however, proper functioning of such systems
requires the appropriate Wi-Fi connection, which may be unfamiliar
to the consumer. This is different from the situation where an older
consumer may be unsure of the potential use of all the features. These
risks come from the lack of standards, either industry standards or
individual reference bases. The second type of risk is social risk dis-
cussed earlier and concerned with the possible loss of social status that
could result from making an adoption mistake. The third type may
not always be critical but when relevant may be an essential decision
factor; it concerns physical risk in terms of personal harm that could
result from using the new product. The microwave oven is a clear
example of such a risk, where the radiation effects ignited a contro-
versy (Buzzell and Wong 1979).
We have presented this concept of perceived risk as a separate section
because it appears to have strong connections with a number of the
other innovation attributes and it would be important to isolate the
particular structural position of this concept within the set of character-
istics of an innovation. This is discussed in Section 3.5. However, before
analyzing these interactions, we present in the next section the scales
that have been developed to measure the innovation characteristics we
reported.
Assessing Innovations from the Market Point of View 75

3.4 Measures of innovation characteristics

Most studies have used single items to reflect the various dimensions of
innovations reviewed in this chapter, which has prevented tests of valid-
ity, especially discriminant validity among these dimensions. We men-
tioned the measurement of relative advantage in Section 3.2.1 because
it contributed to developing a more precise definition of that concept.
However, this was not part of a more global attempt at measuring the
entire set of innovation characteristics. Moore and Benbasat (1991) go
through a thorough scale development process to create scales using
multiple items for a large set of these characteristics in the context of
innovative information technologies (e.g., a personal work station).
These scales were subsequently used by Agarwal and Prasad (1997) to
analyze the use of the World Wide Web. The items for each of the meas-
ures are presented in Table 3.14. It should be noted that an additional
scale is included that has not been discussed above. The measure con-
cerns the construct of voluntariness of use, defined as “the degree to
which use of the innovation is perceived as being voluntary, or of free
will” (Moore and Benbasat 1991, p. 195). It is shown here for the sake
of readers who may be interested in explaining the extent to which a
new technology is used. However, it does not describe a characteristic of
the innovation but rather describes a context in which the innovation
is used. Nevertheless, if use is of interest as a dependent variable, this is
indeed an important factor to include.
The properties of the scales are excellent and the reliabilities are all
satisfactory. In particular, the check of discriminant validity indicates
that, even if the constructs are related, they represent different attributes
of the innovation.

3.5 The relationships among innovation characteristics

As discussed above, perceptions on this variety of attributes are not inde-


pendent of each other and may reflect overlaps in a structural network
of relationships. Holak and Lehmann (1990) attempt to find a structure
that may be latent among these various attributes (Rogers’s five attrib-
utes plus perceived risk). Figure 3.1 represents their hypothesized struc-
ture for which they find support using data across 19 consumer durable
innovation categories, either kitchen appliances or entertainment or
amusement items. The ultimate variable they are trying to explain is the
purchase intention measured on a single five-point scale item.
Table 3.14 Multi-item scales of innovation characteristics
76

Factors Items (PWS = Personal Work Station)

Voluntariness s My superiors expect me to use a PWS


s My use of a PWS is voluntary (as opposed to required by my superiors or job description)
s My boss does not require me to use a PWS*
s Although it might be helpful, using a PWS is certainly not compulsory in my job*
Relative advantage s Using a PWS enables me to accomplish tasks more quickly*
s Using a PWS improves the quality of work I do*
Making Innovation Last

s Using a PWS makes it easier to do my job*


s The disadvantages of using a PWS far outweigh the advantagesa
s Using a PWS improves my job performance
s Overall, I find using a PWS to be advantageous in my job
s Using a PWS enhances my effectiveness on the job*
s Using a PWS gives me greater control over my work*
s Using a PWS increases my productivity
Compatibility s Using a PWS is compatible with all aspects of my work*
s Using a PWS is completely compatible with my current situation
s I think that using a PWS fits well with the way I like to work*
s Using a PWS fits into my work style*
Image s Using a PWS improves my image with the organization
s Because of my use of a PWS, others in my organization see me as a more valuable employeea
s People in my organization who use a PWS have more prestige than those who do not*
s People in my organization who use a PWS have a high profile*
s Having a PWS is a status symbol in my organization*
Ease of use s I believe that a PWS is cumbersome to use
s It is easy for me to remember how to perform tasks using a PWSa
s My using a PWS requires a lot of mental effort
s Using a PWS is often frustrating
s My interaction with a PWS is clear and understandable*a
s I believe that it is easy to get a PWS to do what I want it to do*
s Overall, I believe that a PWS is easy to use*
s Learning to operate a PWS is easy for me*
Result demonstrability s I would have no difficulty telling others about the results of using a PWS*
s I believe I could communicate to others the consequences of using a PWS*
s The results of using a PWS are apparent to me*
s I would have difficulty explaining why using a PWS may or may not be beneficial*
Visibility s I have seen what others do using their PWS
s In my organization, one sees PWS on many desks*
s I have seen a PWS in use outside my firma
s PWS are not very visible in my organization*
s It is easy for me to observe others using PWS in my firm
s I have had plenty of opportunity to see the PWS being usedb
s I have not seen many others using a PWS in my departmentb
Trialability s I have had a great deal of opportunity to try various PWS application
s I know where I can go to satisfactorily try various uses of a PWS
s I am able to experiment with the PWS as necessaryb
s I can have PWS applications for long enough periods to try them outb
s I did not have to expend very much effort to try out the PWSc
s I do not really have adequate opportunities to try out different things on the PWSc
s A proper on-the-job tryout of the various use of the PWS is not possiblec
s There are enough people in my organization to help me try the various uses of the PWSc

Notes: * Items suggested for inclusion in any “short” scale.


a
Items not in final scale because they were deleted as a result of first factor analysis.
b
Items deleted after initial test but candidates for an expanded scale.
c
Items not in the final instrument but suggested as secondary candidates for lengthening the scale.
Assessing Innovations from the Market Point of View

Source: Adapted from Moore and Benbasat (1991).


77
78 Making Innovation Last

Key Determinants Mediators Outcome

Complexity – Divisibility

+


Communicability

– – + Perceived Risk – Purchase Intention


+ +
Relative Advantage

+ + –

Compatibility

Figure 3.1 A structural path among perceived innovation characteristics


Source: Adapted from Holak and Lehmann (1990).

The structure represented in Figure 3.1 is consistent with the matrix


of correlation pattern and no additional link would be significant. Two
conclusions can be drawn:

1. Only relative advantage, compatibility, and perceived risk are direct


causes of intention to adopt, and the other attributes have an indi-
rect impact through the influence they have on these three factors.
Therefore, these appear to be more central to explaining behavior
intention.
2. In this recursive system, only two attributes are exogenous: com-
plexity and compatibility. This means that from a managerial point
of view, these will be driving the entire system and, especially, that
all other attributes identified in the literature may be important in
understanding the process but are the consequence of product deci-
sions affecting complexity and compatibility.

While the primary role of complexity and compatibility does not raise
any questions, it would be surprising if relative advantage is entirely
Assessing Innovations from the Market Point of View 79

endogenously determined by the complexity and the compatibility of


the innovation. Is it possible to imagine innovations that are simple
and compatible with the consumer’s behavior patterns, lifestyles, and
values, but that create major advantages for the consumer? The list of
innovations proposed by Holak and Lehmann (1990) may not contain
sufficient variance on these three dimensions to conclude definitively
on the pure endogeneity of relative advantage. This would be consist-
ent with the main result of the meta-analysis by Tornatsky and Klein
(1982) which shows that the three innovation characteristics that are
consistently significant in predicting behavior are relative advantage,
perceived complexity, and perceived compatibility. Nevertheless, Holak
and Lehmann’s structural model is very useful in identifying a hierarchy
among these obviously interrelated perceived attributes of innovations.
The simplified version of this model applied to the acceptance of
technology innovations also considers these attributes to be related (see
Figure 3.2). The perceived ease of use should be related to Rogers’s attrib-
utes of complexity and/or compatibility. Indeed, innovations that are
perceived as easier to use are also perceived as more useful (i.e., to have a

Experience Voluntariness

Subjective Norm

Basic Technology Acceptance Model

Image

Perceived Usefulness Intention to Use Usage Behavior

Job Relevance

Perceived
Ease of Use
Output Quality

Result
Demonstrability

Extended Technology Acceptance Model

Figure 3.2 The extended technology acceptance model


Source: Adapted from Venkatesh (2000).
80 Making Innovation Last

greater relative advantage). This relationship appears stable across stud-


ies (Gong, Xu and Yu 2004, King and He 2006).
In addition, innovations where the result is more easily demonstra-
ble (possibly related to communicability) are perceived as more useful
(i.e., to have a greater relative advantage) but not as easy to use. This
link is not found in the study of consumer durable goods by Holak and
Lehmann (1990). This is perhaps due to somewhat different definitions,
albeit with significant overlaps, which makes it difficult to draw conclu-
sions on the similarities and differences. It could also be due to the dif-
ferences in the nature of the innovations.

3.6 Serving the needs of existing customers


versus new customers

There is a somewhat different perspective that is still based on the mar-


ket but that takes the point of view of the organization. Even though
an established firm may search for new markets to develop, it may still
target essentially its existing customers rather than searching for totally
new markets. This distinction is why in Table 3.7, presenting Ansoff’s
diversification matrix, we indicate in the columns that each would corre-
spond to the notion of old versus new markets or old versus new custom-
ers. Firms selling new/different products and services to old customers
will invest in technologies that will improve the way in which they can
serve the needs of their customer base. These technologies tend to be
incremental (Arrow 1962, Gilbert and Newberry 1982, Reinganum 1983,
Tripsas 1997). This is explained by the fact that these firms avoid invest-
ing in radical technologies that would replace their existing products,
which would consequently decrease their monopolistic price. This is also
explained by another company resource allocation mechanism: existing
customer needs bias the research efforts toward marginal improvements
to satisfy these existing needs (Christensen and Bower 1996). According
to this stream of research, incumbent firms invest in technologies that
are improving the ways in which they satisfy the needs of their custom-
ers and these tend to be incremental technological innovations. Radical
innovations are thus more likely to be introduced by new entrants.
Therefore, at the aggregate market level, it is important to distinguish
innovations that are serving a firm’s existing customers versus different
customers altogether. There are clear implications in terms of learning
requirements for the organization, which we discuss in the following
chapters, especially as it concerns the strategic orientation of the firm
(Chapter 4) and how the firm manages its capabilities (Chapter 5).
Assessing Innovations from the Market Point of View 81

3.7 Bringing together technology and


marketing perspectives

If we are to assess the potential of an innovation for a firm, we must


understand both the technology-based dimensions considered in the
previous chapter and the market-based dimensions of an innovation
presented above because of the impact these dimensions have on the
market, the organization itself, and the industry structure. These dimen-
sions are fundamental to the determination of strategies for firms that
must innovate to survive. While research has remained compartmen-
talized for the most part, with either a technological or a marketing
point of view, a complete picture requires bringing together these two
dimensions.

3.7.1 Combining dimensions


Focusing on the competitive competencies useful for understanding
the competitive dynamics in an industry, Abernathy and Clark (1985)
bring together the technology/production dimension and the market-
ing competencies dimension. Innovations are rated on a number of
subdimensions from a conservative end of the scale (corresponding to
competence-enhancing innovations) to a radical end (corresponding to
competence-destroying innovations). Technology/production compe-
tence is one of the technology-based dimensions discussed in Chapter 2.
The marketing competence dimension evaluates the extent to which the
innovation strengthens the marketing competencies of the firm in terms
of the linkages with its customers. This is precisely the notion discussed
in the section above. The components of these dimensions are shown in
Table 3.15. A composite scale can then be developed (unweighted sum-
mation) for the technology/production dimension and another scale for
the marketing dimension.
Based on splitting these two dimensions in low and high levels, four
quadrants are identified, wherein the impact of the innovation depends
on the quadrant in which it falls. Figure 3.3 reproduces the analysis for
innovations in the automotive industry. The authors named this analy-
sis a transilience map to reflect the fact that the framework is based on
this notion of transilience, which concerns the capacity of the inno-
vation to influence production and marketing competencies. The four
quadrants determine the four basic categories of innovations: archi-
tectural (high/high), regular (low/low), niche creation (low/high), and
revolutionary (high/low).
Table 3.15 Competencies in Technology/Production and Marketing

Range of impact of innovation

Innovation domain From To

Technology/production
Design/embodiment of Improves/perfects established design Offers new design/radical departure from past
technology embodiment
Production systems/ Strengthens existing structure Makes existing structures obsolete
Organizations Demands new system, procedures, organization
Skills (labor, managerial, technical) Extends viability of existing skills Destroys value of existing expertise
Material/supplier relations Reinforces application of current Extensive material substitution; opening new
materials/suppliers relations with new vendors
Capital equipment Extends existing capital Extensive replacement of existing capital with
new types of equipment
Knowledge and experience base Builds on and reinforces applicability Establishes links to whole new scientific
of existing knowledge discipline/destroys value of existing
knowledge base
Market/customer
Relationship with customer base Strengthens ties with established customers Attracts extensive new customer group/creates
new market
Customer applications Improves service in established applications Creates new set of applications/new set of
customer needs
Channels of distribution Builds on and enhances the effectiveness of Requires new channels of distribution/new
and service established distribution network/service organization service, after market support
Customer knowledge Uses and extends customer knowledge Intensive new knowledge demand of customer;
and experience in established product destroys value of customer experience
Models of customer Reinforce existing modes/methods Totally new modes of communication required
communications of communication (e.g., field sales engineers)

Source: Adapted from Abernathy and Clark (1985).


Assessing Innovations from the Market Point of View 83

Disrupt existing/create
new linkages

Markets/Customer Linkage
Ford Model T
(1908)

Ford Model A
(1927)
Disrupt
Conserve/entrench
obsolete/existing
existing competence Technology/Production competence

Ford V-8 Engine


Electric Starter (1932)
(1912)

Lacquer Painting Closed Steel Body


System (1923)
(1923)
Conserve/entrench
existing linkages

Figure 3.3 Transilience map for innovations in the automotive industry


Source: Adapted from Abernathy and Clark (1985).

Table 3.16 provides examples from the automotive industry of each of


the four types of innovations according to these four quadrants.
The label architectural innovation is used for innovations that dis-
rupt existing competencies for both marketing and technology. Earlier
we defined architectural innovations in terms of changes in linkages of
subsystems without changes in the subsystems themselves. The notion
of architecture we are considering now does not refer to the modularity
of the technology, but rather to the architecture of the industry. Even
though these terms may be related, they should not be confused. Ford’s
Model T is shown as an architectural innovation in Figure 3.3 because it
had a dominance of the transilience on the marketing dimension with
an adaptation of existing technologies. No one before Ford had used and
applied these technologies for that market use.
Regular innovations involve changes that build on established techni-
cal and production competence but that are applied to existing markets
and customers (Abernathy and Clark 1985). Because these regular inno-
vations do not require the building of new competencies, they do not
present any new challenges for the competitors. This does not mean
that they cannot have significant effects, but such success would likely
84 Making Innovation Last

Table 3.16 Selected innovations in automotive industry according to the transil-


ience map

Innovation Year Company

Architectural innovations
Left-hand steering 1990 G and J Jeffrey
Front mounted engine 1900 Most producers
Planetary transmission 1902 Northern
Unitary engine and transmission 1902 Northern
Magmeto integrated into flywheel 1908 Ford
Removable cylinder heads 1908 Ford
Vanadism crankshaft 1908 Ford
Market niche innovation
Safety glass 1926 Rickenbacker, Stutz
Streamlined bodies 1934 Chrysler
Station wagon 1923 Star
Hardtop convertible 1946 Chrysler
Bucket seats 1959 GM
Wide-track chassis 1959 GM
Low-priced sports car (Mustang) 1965 Ford
Regular innovation
Electric starter 1912 GM
Moving assembly line 1913 Ford
Lacquer finish (DUCO-pyroxolin) 1924 GM
Rubber engine mounts 1922 Nash
Constant temp, inspection room 1924 Ford
Automatic welding 1925 Budd
Thin wall gray cast iron engine 1959 Ford
Revolutionary innovation
Closed steel body 1922 Hudson
V-8 engine cast en bloc 1934 Ford
Automatic transmission 1940 GM
Cast steel earn and crank shaft 1934 Ford
Independent suspension 1934 GM
Unit body construction 1936 Ford

Source: Adapted from Abernathy and Clark (1985).

involve multiple regular innovations over time. It is more likely that the
effects on an industry are only cumulative in the long term with a whole
series of innovations. This requires a strategy of an even greater constant
innovation effort.
The niche innovation is exemplified by Timex. The Timex company
used existing technologies that they had enhanced. These improvements
rendered obsolete some of the after-sales servicing of the product, which
Assessing Innovations from the Market Point of View 85

was an important element of the marketing for the traditional watch


industry. On the technology side, the subsystems remained unchanged
relative to the traditional industry; they used hard alloy bearings to
replace jewels at a much lower cost. This provided for a reliable prod-
uct that did not require servicing. This is also what enabled Timex to
use a mass distribution channel such as drug stores and discount stores.
This change destroyed the existing marketing competencies required
previously to market and service watches. Based on their analysis of
the automotive industry, Abernathy and Clark (1985) suggest that mar-
keting-based competencies are easily imitated, at least more easily than
technology-based competencies. Companies have trouble appropriat-
ing their marketing competencies and obtaining long-term rents from
them. They indicate that the advantages are likely to be temporary and
that a long-term success requires the introduction of a sequence of inno-
vations. This sequence should be implemented relatively quickly before
the competition can build competencies from the same base and catch
up. It is true that many technologies require levels of resources that act
as barriers to entry while this is less the case for marketing competen-
cies. However, this assumption may be arguable, as there are a number
of existing marketing innovations that have made and maintained the
success of a number of companies. The focus should perhaps be more on
the appropriability of the competencies, regardless of whether they are
based on technology or marketing. However, there can indeed be signifi-
cant barriers to entry that are based on marketing rather than technol-
ogy. Among the marketing mix, a distribution channel is the strongest
marketing barrier to entry because of the relationships built over time by
a manufacturer with its distributors that have become loyal.
Finally, the fourth quadrant concerns the revolutionary innovation
that renders the technology and the marketing sides obsolete. Examples
given in Abernathy and Clark (1985) are as follows:

1. reciprocating engines in aircraft


2. vacuum tubes
3. mechanical calculators
4. closed steel bodies in cars (that replaced open wooden bodies, with
no solid top or side)

However, as Abernathy and Clark (1985) point out, it is not because an


innovation makes both technology and marketing obsolete that it will
be successful and change the competitive field. They describe the exam-
ple of the introduction of the V-8 engine by Ford in 1932, at a time
86 Making Innovation Last

during the Great Depression when customers had other priorities.


This is an example where the innovation was technological but did
not correspond to the needs of the market at that time (i.e., no per-
ceived advantage). They also caution that problems in production espe-
cially could be a critical source of failure.

3.7.2 Industry evolution and dominant designs


As discussed in the previous section, it is critical to analyze in depth the
locus, the type, and the characteristics of innovations at the subunit
level in order to understand how an industry evolves. One important
aspect of industry evolution is the development of a dominant design
in a particular industry. Dominant designs have been found in a broad
range of industries (Tushman and Murmann 1998):

1. Typewriters (Suárez and Utterback 1995)


2. TVs (Suárez and Utterback 1995)
3. Electronic calculators (Suárez and Utterback 1995)
4. Automobiles (Abernathy 1978)
5. VCRs (Cusumano, Mylonadis and Rosenbloom, 1992)
6. Flight simulators (Miller et al. 1995, Rosenkopf and Tushman 1998)
7. Cochlear implants (van de Ven and Garud 1993)
8. Fax transmission services (Baum, Kom and Kotha 1995)
9. Mainframe computers (Iansiti and Khanna 1995)
10. Photolithography (Henderson 1995)
11. Personal mobile stereos (Sanderson and Uzumeri 1995)
12. Microprocessors (Wade 1995, 1996)
13. Disk drives (Christensen, Suárez and Utterback 1998)
14. Glass (Anderson and Tushman 1990)
15. Cement (Anderson and Tushman 1990)
16. Minicomputer (Anderson and Tushman 1990)
17. Cardiac pacemakers (Hidefjall 1997)

The concept of dominant design is the result of cycles of periods of fer-


ment when multiple technologies compete at the subunit level or at
the level of the linkages between the subunits (Anderson and Tushman
1990, Tushman and Murmann 1998). At the end of each of these periods
of ferment, a dominant design will emerge for the subunit or linkage to
determine a period of transition with a dominant design at the subu-
nit level. Dominant design at the product level occurs when the indus-
try undergoes such a transition period for all its subunits and linkages
(Tushman and Murmann 1998).
Assessing Innovations from the Market Point of View 87

Periods of ferment are periods of incremental innovations. They corre-


spond to periods of technological progress where improvements follow a
“natural trajectory” exploiting latent economies of scale and the poten-
tial for greater mechanization of operations (Nelson and Winter 1982).
Although these periods have been identified by the type of innovations
based on technology, such as process innovations or architectural inno-
vations, this may not correspond to the market-based characteristics. For
example, the iPhone is technologically perhaps an incremental innova-
tion, but from a user’s perspective, given the iPhone’s unique design and
features, Apple Inc. changed considerably the telephone manufacturer
industry when the company entered the industry in 2007. This market
entry led to the highest capitalization value to date for the company in
August 2011. It also established a new standard (dominant design) in
the category of “smart phones” with applications to be added on the
phone. The design of the competing Androïd OS imitates the iPhone OS.
These dominant designs cannot be predicted a priori as they are the
result of institutional (sociopolitical) dynamics constrained by economic
and technical conditions. Tushman and Murmann (1998) illustrate this by
using the example of the standard 100-degree angle mandatory for flush
riveting in commercial airplanes; this resulted from negotiations between
rival parties that were settled by an aeronautic board. Another example
can be found with the Pitot probe (the wind-measuring system), strongly
criticized after the crash of the Rio–Paris Air France flight 447 on June 1,
2009. The official statement by Air France, reproduced in Table 3.17,
shows how challenging it can be to establish policies on subsystems that
may appear to be peripheral but whose proper functioning is essential.
It is also because of the nature of the sociopolitical process that the
dominant design is not necessarily the superior design from a technical
or economic sense. An example of nonoptimal dominant design is the
victory of numerical control machine tools over record–playback, driven
in large part by a political coalition between the Massachusetts Institute
of Technology (MIT) and the US Air Force (Noble 1984). Another exam-
ple often cited is the dominance of the video home system (VHS) tapes
of Victor Company of Japan (JVC) over the superior quality Betamax
of Sony. In this case, it was the industry’s political process of alliances
which determined the outcome, combined with, perhaps, the relative
superiority of VHS for what would become the major usage by consum-
ers, that is, movie recording. “JVC followed a strategy aimed at forming
as large a group as possible, aggressively pursuing both licensing and
OEM agreements, including exports” (Cusumano et al. 1992, p. 72). At
the same time, however, Sony persisted in a strategy to develop a pioneer
88 Making Innovation Last

Table 3.17 Air France statement on Pitot probes after the AF 447 crash

Air France’s clarification statement following the many questions which have appeared
in the media on the issue of the pilot probes in its fleet (note: the pilot probe is an
instrument which measures the air speed of the aircraft):

Point #1: Point #2:


“Malfunctions in the pilot “Starting in May 2008 Air France
probes on the A320 led the experienced incidents involving a loss of
manufacturer to issue a airspeed data in flight, in cruise phase
recommendation in September on A340s and A330s. These incidents
2007 to change the probes. were analyzed with Airbus as resulting
This recommendation also from pilot probe icing for a few minutes,
applies to long-haul aircraft after which the phenomenon
using the same probes and on disappeared. Discussions subsequently
which a very few incidents of a took place with the manufacturer. Air
similar nature had occurred. It France was asked for a solution which
should be noted that a would reduce or eliminate the
recommendation from the occurrence of these incidents. In
manufacturer gives the operator response to these requests, the
total freedom to apply the manufacturer indicated that the probe
corresponding guidelines fully, model recommended for the A320 was
partially or not at all. Should not designed to prevent such incidents,
flight safety be concerned, which took place at cruise levels and
the manufacturer, together reiterated the operational procedures
with the authorities, issues a well known to the crews. In the first
mandatory service bulletin quarter of 2009 laboratory tests
followed by an airworthiness suggested, however, that the new probe
directive (AD). The could represent a valuable improvement
recommendation to change to reduce the incidence of high altitude
the probes was implemented by airspeed discrepancy resulting from pilot
Air France on its A320 fleet probe icing, and an in-service evaluation
where the type of incident in real flight conditions was proposed by
involving water ingress has Airbus. Without waiting for the service
been observed. It was not evaluation, Air France decided to replace
implemented on the A340/330s all its probes and the program was
as no incidents had been noted.” launched on 27 April 2009.”

Source: Adapted from Wall (2009).

advantage associated with a global strategy of not being defined as an


original equipment manufacturer (OEM). The alliances with the vari-
ous partners allowed JVC and its parent company Matsushita Electric
to take advantage of the network externalities in the consumer market
where it becomes critical to mass-produce. Sony was limited by its own
manufacturing capacity and ceded its advantage quickly after only three
years from the introduction of its own pioneer Betamax format. Another
example of coalitions by competitors is the battle between different OSs
Assessing Innovations from the Market Point of View 89

for UNIX-based computers where rivals formed two coalitions to push


their preferred UNIX version (Saloner 1990, Tushman and Murmann
1998). Yet another example is found in the flight simulator industry
where the alliances included suppliers, users, and governmental agen-
cies (Miller et al. 1995). Chapter 6 discusses in detail the issue of when
to forge alliances for purposes of innovation.
Not only is it difficult to predict what design will become dominant, it is
not even easy post hoc to identify when a design has actually become dom-
inant. One indicator that has been used is when a single-variant accounts
for at least 50 percent of new product sales or installations (Anderson and
Tushman 1990). However, this is only an approximate guide because these
dominant design periods can be interrupted by new technological para-
digms that come from two possible sources that are equally unpredictable
(Dosi 1984). The first case occurs when designers cannot improve on the
“natural trajectory” any longer and must “engage in extraordinary prob-
lem solving to find a radically new solution” (Tushman and Murmann
1998, p. 241). The second reason advanced by Dosi (1984) is a scientific
breakthrough in any discipline that can perform the technological task
required for the product. Such added difficulties are also impossible to
predict but require a broad scouting of new discoveries in varied scientific
areas in which the firm needs to have sufficient expertise.
In general, these complexities and difficulties to anticipate have direct
implications for the strategic orientation of the firm and the manage-
ment of its capabilities. In particular, it is critical to have data-scanning
capabilities and competencies for translating the data into informa-
tion that will help the firm anticipate better and react more quickly to
changes in technological and industrial environments. More generally,
this chapter in combination with Chapter 2 identifies the dimensions
of innovations that would allow management to assess both the nature
of its past innovative activities and the potential of new innovative pro-
jects. Both chapters are also useful for researchers interested in measur-
ing the constructs these chapters present and in expanding theories.

Notes
1 Danneels and Kleinschmidt (2001) also talk of familiarity but their defini-
tions take the point of view of the firm, although in their literature review
they do recognize the importance of the customer point of view. Therefore,
in their context, they focus on the familiarity of the firm with the market or
the technology.
2 This selection was intended to control for adopter characteristics and environ-
mental factors so as to focus on the variance explained by innovation char-
acteristics alone.
90 Making Innovation Last

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Part II
Organizational Context
for Innovations
4
Strategic and Market
Orientations

The ability of an organization to systematically deliver successful


innovations is not the result of luck but, rather, of providing a strong
impetus for strategic directions that lead the organization to produce
high-performing innovations, even given that some uncertainty does
remain inherent in the innovation process. This means that the culture
of an organization must reflect the values that will foster innovativeness
throughout the organization. The second part of this book examines the
nature of a culture of innovation and how to establish it throughout
an organization in order to build the capacity for sustained delivery of
high-performance innovations.
In this chapter, we focus on the importance of creating a culture
within the organization that pushes clear strategic directions that
must be emphasized at all levels of the organization. We discuss how
the choice of a strategic orientation by a firm impacts its innovation-
producing effectiveness. A firm’s strategic orientation is defined as “the
strategic directions implemented by a firm to create the proper behaviors
for the continuous superior performance of the business” (Gatignon and
Xuereb 1997, p. 78). The choice of strategic orientation determines the
firm’s ability to innovate, to achieve radical product ideas, and to bring
successful innovations to market. The strategic orientation of a firm is
a dimension of the firm’s organizational culture, as reflected by the fol-
lowing definitions:

1. “The guiding principles that influence a firm’s marketing and strategy-


making activities [and that] represent the elements of the organiza-
tion’s culture that guide interactions with the marketplace” (Noble,
Sinha and Kumar 2002, p. 25).

97
98 Making Innovation Last

2. “Strategic orientation reflects the firm’s philosophy of how to con-


duct business through a deeply rooted set of values and beliefs that
guides the firm’s attempt to achieve superior performance” (Zhou,
Yim and Tse 2005, p. 44).

These views are consistent with the widely accepted definition of organ-
izational culture of Deshpandé and Webster (1989), whose extensive
literature review of more than 100 studies across organizational behav-
ior, sociology, and anthropology research led them to define organi-
zational culture as “the pattern of shared values and beliefs that help
individuals understand organizational functioning and thus provide
them norms for behaviors in the organization” (p. 4). Strategic orienta-
tions thus frame firm activities, as does organizational culture.
If strategic orientations are part of the organizational culture, then the
choice of these orientations can constitute a source of long-term com-
petitive advantage. Day (1994) distinguishes two sources of competi-
tive advantage: assets, that is, “the resource endowments the business
has accumulated” and capabilities, which refer to “complex bundles of
skills and accumulated knowledge, exercised through organizational
processes, that enable firms to coordinate activities and make use of
their assets” (p. 38). Through such capabilities, organizational culture
provides members with values and norms that help them define the
information to be collected, levels of access to that information, and its
uses for specific organizational activities, such as new product or service
development. The firm’s strategic orientation, as part of its culture, thus
provides a key capability that enhances its long-term competitive advan-
tage (Zhou et al. 2005). One source of this sort of long-term competi-
tive advantage derives from the framing of new product development
activities as a function of strategic orientation choices (Zahra and Covin
1993, Frambach, Prabhu and Verhallen 2003). It is therefore critical to
consider the effects of a firm’s strategic orientation, as it defines the fun-
damental, key capabilities that provide members with values and norms
to frame their organizational activities, including innovation. Empirical
evidence also shows that proper strategic orientations can enhance a
firm’s ability to innovate radically and to be successful.
Although we discuss a number of alternative strategic orientations
that have been suggested in the literature, we pay particular attention
in this chapter to three prominent strategic orientations which have
been shown to influence the ability of firms to innovate, to be radical,
and to succeed with their innovations: customer orientation, competi-
tor orientation, and technology orientation. Market orientation (with
its two major components of customer and competition orientation)
Strategic and Market Orientations 99

has received considerable interest, and its effects on innovation have


been studied widely. We concentrate on its effects on innovation, rather
than review its potential general impact on firm performance (Kirca,
Jayachandran and Bearden 2005, Saboo and Grewal 2013), although
it is in large part the ability to develop and market innovations more
effectively that leads to greater overall firm performance. In that sense,
innovation capabilities and outcomes help explain the impact of a firm’s
orientation on performance. This issue has been addressed in Chapter 1
of this book and is not developed again here. Market orientation relates
intrinsically to the notion of entrepreneurial orientation (Slater and
Narver 1995). However, in our analysis of entrepreneurial orientation,
we make a distinction between its effects on innovation and those stem-
ming from a market orientation.
Our main objective in this chapter is to explain the mechanisms
through which market orientation affects innovation and the extent to
which market orientation affects innovation performance. Therefore,
we also naturally address the issue of how environmental and organi-
zational conditions alter these effects. Figure 4.1 presents the general
framework of the role of market orientation on innovation performance.

Innovation
consequences

Firm’s
ability to innovate
Market Explanatory
orientation mechanisms

Innovation process
Innovation
Organizational Organization (organizational
characteristics (product
culture behaviors information processes
radicalness)
and team creativity)

Innovation success

Contingencies

Environmental Organizational
conditions characteristics

Figure 4.1 General framework


100 Making Innovation Last

We integrate comprehensive prior research to explain whether, how,


and when strategic orientations affect innovation consequences. This
goes beyond published meta-analyses, as we also include studies that
may not have been used in these quantitative analyses but that pro-
vide insightful explanations that are promising directions for further
investigations. We also identify unresolved issues and priorities for new
research directions. Finally, we address a key managerial issue for firms:
how to develop a particular strategic orientation and, in particular, how
firms can become more market oriented?
In the next section, we describe alternative strategic orientation
choices and their effects on innovation performance. Following a dis-
cussion of general effects, we present the evidence for conditions that
moderate these effects. Finally, in the last section of this chapter, we
address the question of how a firm can become market oriented.

4.1 What are the key strategic orientation choices


and their effects on innovation?

What are the possible strategic orientations that firms can choose? Some
of these orientations are complementary and could occur simultane-
ously to some degree. Others may be inconsistent with each other. We
devote the majority of this section to the notion of market orientation,
since it reflects the strongest links that have been established to innova-
tion performance. First, we define the notion of market orientation with
its major components. Then, we identify which of these components
have the most impact on innovation effectiveness. Finally, we develop
other orientation choices that have received recent attention in the
management literature.

4.1.1 Market orientation


Market orientation has its origin in the marketing concept itself.
Therefore, we discuss the foundations of the concept before proceeding
with an in-depth definition of its components. This is what is reflected
by the left-most box of “market orientation” in Figure 4.1.

4.1.1.1 The implementation of the marketing concept


A market-oriented organization exhibits a culture and behaviors that
are consistent with the marketing concept. In that sense, market ori-
entation reflects the implementation of the marketing concept within
an organization (Kohli and Jaworski 1990). The marketing concept puts
the customer at center stage of the organization, such that “the whole
Strategic and Market Orientations 101

business [is] seen from the point of view of its final result, that is, from
the customer’s point of view” (Drucker 1954, p. 39). The same idea was
expressed by Converse back in 1930: “success in business is based on
giving the consumers what they want, when they want it, and at the
price they can afford to pay” (quoted in Wensley 1995, p. 76). Just as
with the marketing concept, the notion of market orientation extends
beyond the marketing function to the entire organization through its
culture (Webster 1988). Consequently, market orientation is “a distinct
organizational culture, a fundamental shared set of beliefs and values
that put the customer in the center of the firm’s thinking about strategy
and operations” (Deshpandé and Webster 1989, p. 3).
From a cultural standpoint, then, market orientation designates “the
organizational culture that most effectively and efficiently creates the
necessary behaviors for the creation of superior value for buyers and,
thus, continuous superior performance for the business” (Narver and
Slater 1990, p. 21). The ultimate benefit should be the long-term value
for customers, which then leads to a sustainable competitive advantage
for the organization (Narver and Slater 1990). This is consistent with
the resource-based view (RBV) of the firm. According to the RBV, a firm’s
capabilities determine its performance, and inimitable and nonsubsti-
tutable capabilities ensure its sustained competitive advantage (Barney
1991). Market orientation as a culture offers an inimitable, nonsubsti-
tutable capability that should lead to a superior understanding of cus-
tomers’ needs, competitors’ actions, and market trends (Day 1994, Zhou
et al. 2005), and thus a sustained competitive advantage.
At issue, however, is not whether market orientation is a source of
sustained competitive advantage, but rather whether the nature of a mar-
ket orientation is a capability or an asset. Indeed, Morgan, Vorhies and
Mason (2009) argue that a market-based asset should be distinguished
from marketing capabilities. A market orientation has a positive impact
on business sales and profits in both the short and long terms. More
specifically, Kumar et al. (2011) find that market orientation remains
a source of sustainable competitive advantage in terms of its effects on
business performance over a nine-year period (1997–2005). Such advan-
tages correspond to clear assets for the firm. However, market orienta-
tion can be viewed also as a capability depending on its definition. For
example, in Morgan, Vorhies, and Mason’s view, market orientation is
not defined as a cultural trait but rather as a set of market informa-
tion processes. This definition brings us close to the behavioral view of
market orientation. Such a view leads us to consider market orientation
more as a capability.
102 Making Innovation Last

The behavioral approach (an alternative conceptualization to the


cultural definition advocated earlier) assumes that market orientation is
a set of organizational behaviors. Therefore, this approach makes refer-
ences to “the generation of market intelligence pertaining to current
and future needs, dissemination of the intelligence across departments,
and organization-wide responsiveness to it” (Kohli and Jaworski 1990,
p. 6). In today’s market, big data are everywhere. Big data refer to the
number of observations that are available and to the number of variables
that characterize each observation. Big data are transforming how com-
panies generate market intelligence. Big data make all effects likely to
be significant, which raises the risk of getting false correlations between
variables. Therefore, beyond applying specialized techniques, the next
challenge for generating market intelligence from big data is to “move
beyond identifying correlational patterns to exploring causality,” which
makes theory essential for analyzing big data accurately (George, Haas
and Pentland 2014, p. 323).
In a broader conceptual development, Jaworski and Kohli (1993) ana-
lyze market orientation together with its antecedents and consequences.
Table 4.1 lists the 20-item operational scale published by Kohli, Jaworski
and Kumar (1993), which corresponds to their conceptualization of
market orientation. As can be seen, the focus is fundamentally on infor-
mation about customers and competitors.
Day (1994) reconciles these two perspectives (cultural and behavioral)
by proposing that an organizational culture provides members with the
values and norms they need to define what information they should
collect (i.e., information generation from Kohli and Jaworski 1990),
who may have access to it (i.e., information dissemination) and how to
use that information to support specific organizational activities (i.e.,
responsiveness). Thus, the cultural and behavioral approaches appear
closely interconnected, and a market-oriented culture is an antecedent
of the behaviors that characterize a market-oriented firm (Kohli and
Jaworski 1990, Homburg and Pflesser 2000, Gebhardt, Carpenter and
Sherry 2006). The two approaches can then be viewed as complements
that encourage superior performance expressed in terms of return on
investments, return on assets, and return on equity (Hult, Ketchen and
Slater 2005).
Inasmuch as firms that are market oriented exhibit specific behav-
iors, the extent of market orientation can be measured by behaviors
observed in the organization: these behaviors reflect the extent to which
a market-oriented culture characterizes the organization. This perspec-
tive is appropriate for measurement purposes. However, the links that
Strategic and Market Orientations 103

Table 4.1 Market orientation scale – behavioral approach

Intelligence generation*
s In this business unit, we meet with customers at least once a year to find
out what products or services they will need in the future
s In this business unit, we do a lot of in-house market research
s We are slow to detect changes in our customers’ product preferences
(reverse coded)
s We poll end users at least once a year to assess the quality of our products
and services
s We are slow to detect fundamental shifts in our industry (e.g., competition,
technology, regulation) (reverse coded)
s We periodically review the likely effect of changes in our business
environment (e.g., regulation) on customers
Intelligence dissemination
s We have interdepartmental meetings at least once a quarter to discuss
market trends and developments
s Marketing personnel in our business unit spend time discussing customers’
future needs with other functional departments
s When something important happens to a major customer or market, the
whole business unit knows about it within a short period
s Data on customer satisfaction are disseminated at all levels in this business
unit on a regular basis
s When one department finds out something important about competitors, it
is slow to alert other departments (reverse coded)
Responsiveness
s It takes us forever to decide how to respond to our competitor’s price
changes (reverse coded)
s For one reason or another, we tend to ignore changes in our customer’s
product or service needs (reverse coded)
s We periodically review our product development efforts to ensure that they
are in line with what customers want
s Several departments get together periodically to plan a response to changes
taking place in our business environment
s If a major competitor were to launch an intensive campaign targeted at our
customers, we would implement a response immediately
s The activities of the different departments in this business unit are well
coordinated
s Customer complaints fall on deaf ears in this business unit (reverse coded)
s Even if we came up with a great marketing plan, we probably would not be
able to implement it in a timely fashion (reverse coded)
s When we find that customers would like us to modify a product or service,
the departments involved make concerted efforts to do so

* Each item is rated on a Likert scale.


Source: Adapted from Kohli et al. (1993).
104 Making Innovation Last

correspond to these reflections indicate more specific, causal, structural


relationships, from which directional relationships are difficult to dis-
entangle. Consequently, from a managerial perspective, it is by chang-
ing the values and norms of the organization that the firm’s practices
would change and not vice versa. This means that failing to consider
the cultural antecedents of market orientation could make it difficult to
change behaviors.

4.1.1.2 A complex multidimensional concept


Customers constitute the core of any definition of market orienta-
tion, whether cultural or behavioral. Narver and Slater (1990) specify
that the desire to create superior value for customers leads the firm to
attempt to understand both customers’ needs and the way competitors
respond to those needs. Thus, the first two components of a market
orientation culture are: (1) a customer orientation, defined as “the suf-
ficient understanding of one’s target buyers to be able to create superior
value for them continuously,” and (2) a competitor orientation, or an
understanding of “the short-term strengths and weaknesses and long-
term capabilities and strategies of both the key current and key potential
competitors” (Narver and Slater 1990, pp. 21–22).
Delivering continuous superior value to customers is impossible if the
organization cannot satisfy new needs, such that it must use its techni-
cal knowledge to develop new solutions. This “ability and will to acquire
a substantial technological background and use it in the development
of new products” refers to a complementary culture to a market ori-
entation that is technology orientation (Gatignon and Xuereb 1997,
p. 78). Voss and Voss (2000, p. 67) define this notion as “an organization’s
commitment to integrate innovation into the product development and
marketing process,” but they refer to it as a product orientation, perhaps
because their study focuses on an artistic environment. Customer and
competitor orientations are considered next in detail. Technology ori-
entation is examined in Section 4.1.3, which focuses on the alternative
strategic orientations that may complement a market orientation.

4.1.1.2.1 Customer orientation. A customer-oriented culture refers to a


set of shared values and beliefs that puts the customers’ interest first
(Narver and Slater 1990). It often implies a natural predisposition to
look for customer information (Slater and Narver 1995). However, being
customer oriented does not imply that customers are always right, that
a firm should listen to their customers at all times, or that an organiza-
tion should always walk the customers’ talk. Customers are the ultimate
Strategic and Market Orientations 105

arbiters, but in many cases, they lack foresight (Hamel and Prahalad
1994). Consequently, a customer competence requires the company to
see “past the short-sighted and superficial inputs of customers” (Day
1998, p. 5); customer competencies are a shared understanding of exist-
ing and potential customers in every market segment in which the firm
might compete. Understanding market segments also entails far more
than being able to list customer needs. It means an ability to answer
complex questions: Why do those needs exist? Why are such needs not
currently being met? How might customers’ various needs relate to each
other? In fact, customer competencies require understanding the fol-
lowing 12 key aspects of customers’ needs:

1. The problems faced by the customer and changes in requirements


2. The ways in which the customer does things
3. The values and beliefs that drive customer behavior
4. The (latent) needs of each individual customer
5. The new opportunities for delivering superior customer value
6. The identities of potential customers
7. Why some people are not customers
8. How actions can create or destroy customers’ perceptions of value
9. How to attract and retain valuable customers
10. How to reach and access customers
11. Which customers are profitable to pursue
12. The root causes of customer dissatisfaction with current products
and services

Customer competencies thus can allow a firm to articulate needs, even


if customers have not yet expressed them. With such competencies, the
firm becomes more like its customers and can better understand their
future needs. In the end, customer orientation comprises both a cus-
tomer-oriented culture and clear customer competencies. The degree of
customer orientation characterizing a firm can then be assessed using
the measure proposed by Narver and Slater (1990) whose scale is repro-
duced in Table 4.2.

4.1.1.2.2 Competitor orientation. A competitor-oriented culture refers to


a set of shared values and beliefs designed to stay ahead of competitors
by facing the dual challenge of competition and collaboration (with
rivals). A traditional model of competition, in which the firm beats, out-
flanks, or defeats its competitors, is being supplanted by the dual chal-
lenge of competition and collaboration. Yet any firm that lacks the
106 Making Innovation Last

Table 4.2 Customer orientation scale

s We closely monitor and assess our level of commitment in serving customers’


needs*
s Business strategies are driven by the goal of increasing customer value
s Our competitive advantage is based on understanding customers’ needs
s Objectives are driven by customer satisfaction
s We frequently measure customer satisfaction
s We pay close attention to after-sales service

* Each item is rated on a Likert scale.


Source: Adapted from Narver and Slater (1990).

competitive intelligence to provide early warning of threats eventually


will lag behind. The competitive dynamic also allows more than one
winner, so copying or beating all others at any cost likely represents
limited, unsatisfying philosophies (Day 1998). By calling into question
the deep-seated belief “the competitor is always my enemy,” a whole
new horizon of collaboration possibilities arises (Hamel, Doz and
Prahalad 1989). On the one hand, competition is critical; any firm that
loses vital resources is likely to lose its very raison d’être. On the other
hand, collaboration is essential in fast-moving environments as a mech-
anism for rapid configuration and deployment. It generates wealth
much faster and at less cost than traditional deployments. In both com-
petitive and collaborative endeavors, the need for competitive intelli-
gence is essential: a firm whose subculture promotes staying ahead of
competition (Day 1994), whether by competing and/or by collaborating
with its rivals, nurtures competitive competencies.
Competitive competencies constitute a shared understanding of
existing and potential competitors (and competitor-partners) in every
market segment in which the firm might compete. This understanding
again is more complex than simply being able to list existing and poten-
tial competitors. To know potential rivals, a firm must be able to answer
key questions: What resources do competitors possess that we lack (and
vice versa)? Could our competitors become potential partners? What
strategic choices do our competitors make? More specifically, firms
knowledgeable about the dynamics of competition must understand the
following seven prominent aspects of competitors:

1. Competitors’ moves and actions


2. How and where competitors acquire and develop their knowledge
3. Which new players could emerge
Strategic and Market Orientations 107

4. Which competencies the competition is unlikely to be able to emu-


late quickly (Day 1998)
5. Competitors’ cost structure and value chain (Porter 1985)
6. Competitors’ partnership structure
7. Competitors’ value proposition to customers

The degree of competitor orientation of a firm can be assessed simply with


the scale developed by Narver and Slater (1990). The items of the scale
(shown in Table 4.3) clearly pick up on a number of these seven aspects.

4.1.1.2.3 From market orientation to stakeholder orientation. The mar-


keting concept (and market orientation, conceived as the implementa-
tion of this concept) should focus not just on satisfying customer needs,
but also on understanding the entire task environment of the firm
(Zeithaml and Zeithaml 1984). This means that the marketing concept
should be extended to include all agents relevant to goal setting and
goal achievement. Yet most market orientation literature tends to adopt
two particular points of view. In the first, market orientation focuses on
customers and competitors, and other stakeholders fall outside this
consideration. In the second, other stakeholders get integrated in a
more broadly conceived notion of market orientation. This second
viewpoint corresponds to the broadened marketing concept (Kotler and
Levy 1969).
For example, in their conceptual development, Kohli and Jaworski
(1990) specify that a market-oriented organization might include an
analysis of external factors such as “government regulation, technology,
competitors, and other environmental forces” (p. 4). They consider cus-
tomers and competitors the two significant stakeholders, but they warn
that firms should combine their demands with the needs of all relevant
stakeholders. Nevertheless, in their views, the additional stakeholders
fall outside the notion of market orientation, even if they are relevant.

Table 4.3 Competitor orientation scale

s In our organization, salespeople share information about competitors*


s We rapidly respond to competitive actions
s Top managers regularly discuss competitors’ strengths and weaknesses
s Customers are targeted when the organization has an opportunity for
competitive advantage

* Each item is rated on a Likert scale.


Source: Adapted from Narver and Slater (1990).
108 Making Innovation Last

In contrast, Slater and Narver (1995) exemplify the second point of view
and extend the concept of the market to the whole task environment.
In the process of creating superior customer value, they recommend
acknowledging all stakeholders, including those that represent threats
to the firm’s competitive advantage.
Maignan and Ferrell (2004) propose a stakeholder orientation, as an
extension of a market orientation, which includes all stakeholders that
affect organizational processes and performance. For instance, environ-
mental orientation is recognized as providing firms with an image of
environmental commitment to stakeholders (Gabler, Rapp and Richey
2014). A stakeholder orientation features three organizational behav-
iors: “the organization-wide generation of intelligence pertaining to the
nature of stakeholder communities, norms, and issues, along with the
evaluation of the firm’s impacts on these issues; the dissemination of
this intelligence throughout the organization; and the organization-
wide responsiveness to this intelligence” (Maignan and Ferrell 2004,
p. 10). This definition is consistent with a behavioral approach to mar-
ket orientation proposed by Kohli and Jaworski (1990).
However, the notion of stakeholders is necessarily broad, so a typology
can help clarify the different natures and roles of each kind. Henriques
and Sadorsky (1999) propose four types of stakeholders: regulatory,
organizational, community, and media. Regulatory stakeholders include
governments, as well as trade associations and informal networks.
Organizational stakeholders are those with direct relationships with the
organization, which gives them direct influence over its performance.
This group includes customers, suppliers, employees, and shareholders.
Community stakeholders might be environmental organizations that
exert pressure and provide information, the community, or lobbying
groups. Finally, media refer to information providers, such as newspa-
pers, television, or radio.
Using a battery of questions that are shown in Table 4.4, Henriques
and Sadorsky (1999) evaluate the degree to which a firm is committed
(oriented) to its stakeholders.
These questions clearly reflect the stakeholder orientations discussed
above. However, even if Maignan and Ferrell (2004) give examples of
activities that imply a stakeholder orientation, to date there is no validated
scale that measures the degree of orientation of a firm toward its various
stakeholders. For example, for information generation, significant activi-
ties that should be considered might include the selection of relevant
stakeholder communities, inquiry into the nature of stakeholder issues,
evaluation of the firm’s impact on stakeholder issues, and evaluation of
Strategic and Market Orientations 109

Table 4.4 Questions to assess stakeholder orientation

s Does your company have a committee dedicated to dealing with


environmental issues? (Yes/No)
s Has your company formulated a plan for dealing with environmental issues?
(Yes/No)
s Insofar as your environmental plan is concerned have you:
(a) A formal document describing your plan? (Yes/No)
(b) Presented the plan to shareholders and/or stakeholders? (Yes/No)
(c) Presented the plan to your employees? (Yes/No)
(d) Created an environmental, health and safety unit whose job is to deal
with environmental issues? (Yes/No)
s Please rate the importance of the following sources of information to your
company insofar as environmental issues are concerned:*
(a) Newspapers
(b) Television/radio
(c) Customers
(d) Competitors
(e) Government
(f) Trade associations
(g) Environmental organizations
(h) Employees
(i) Informal networks with other firms doing similar work
s Please rate the importance of the following sources of pressure on your
company to consider environmental issues:*
(a) Customers
(b) Suppliers
(c) Shareholders
(d) Government regulations
(e) Employees
(f) Environmental organizations
(g) Neighborhood/community
(h) Other lobby groups (church, native peoples, political groups, etc.)

* Using a number from 1 to 7 (1 for not at all important and 7 for very important).
Source: Adapted from Henriques and Sadorsky (1999).

the firm’s corporate reputation among stakeholders. Maignan and Ferrell


(2004) also cite several significant information dissemination activities:
regular interdepartmental meetings about trends, circulation of docu-
ments about the impact of corporate activities on stakeholders, and
contacts by all departments with stakeholders. Finally, the firm’s respon-
siveness is reflected by programs that address stakeholders’ issues.
Although conceptually related to the strategic orientation notions that
have been linked to the innovation productivity of firms, the effects of
stakeholder orientation on innovation have been poorly documented.
110 Making Innovation Last

As depicted in the framework developed by the OECD (OECD/Eurostat


2005), these various stakeholders play a significant role in the innova-
tion process and the success of a firm. Accordingly, various stakeholders
could influence the firm’s activities, including new product develop-
ment (Freeman 1984, Kirby 1988). For instance, a firm’s orientation
toward regulatory stakeholders reinforces the relationship between that
firm’s product innovation and its performance (Su et al. 2012). Indeed,
being oriented toward regulatory stakeholders stimulates a firm’s ability
to defend against potential imitators by protecting intellectual property,
which is critical to take advantage of product innovation. Innovation
success also depends on the environmental conditions the firm faces
(Calantone, Harmancioglu and Droge 2010), so a greater stakeholder
orientation should improve the firm’s ability to understand the nature
of stakeholder issues, as well as its evaluation of its own impact on these
issues. These are likely, however, to have different degrees of relevance
depending on the industry. For example, the focus on regulations is
obviously critical in the pharmaceutical industry (Verniers, Stremersch
and Croux 2011) yet may be more negligible in the apparel industry.
Prior research on the role of stakeholders on a firm’s innovation has
considered essentially external stakeholders. This approach may be par-
tial, because certain stakeholders within the firm (internal stakeholders)
can enhance the success of the new product (Kuester, Homburg and Hess
2012). For instance, salespeople can facilitate the market launch because
they are at the interface between a firm and the market (Wotruba and
Rochford 1995, Di Benedetto 1999). We address the question of how
a firm can manage salespeople effectively in Chapter 14. Nevertheless,
future research would likely benefit from a broader perspective of stake-
holder orientation, including both external and internal stakeholders.

4.1.2 Market orientation and innovation


After having defined market orientation and its various components, we
now move to the right-side boxes of Figure 4.1 concerned with the con-
sequences of a market orientation on innovation. Previous research on
the links between market orientation and innovation has focused mainly
on the effects of market orientation on innovation success (bottom box
of the right column in Figure 4.1), consistent with the early interest of
marketing scholars in the drivers of new product performance (Cooper
1979). The importance of that relationship is reflected by the publica-
tion of three meta-analyses (Kirca et al. 2005, Grinstein 2008, Calantone
et al. 2010). The focus on this dependent variable of innovation success
is consistent with the importance of new product performance to firm
Strategic and Market Orientations 111

success (Griffin and Page 1996). However, it is critical to understand


why these effects occur. The effects of market orientation on innovation
success are partly explained by the role that market orientation plays on
two key intermediary outcomes: the firm’s ability to innovate and prod-
uct radicalness (Henard and Szymanski 2001). These drivers are shown
in Figure 4.1 in two boxes just above the box representing the ultimate
dependent variable of “innovation success.”
We propose to decompose the effects of market orientation. While
there is general agreement in the existing literature that market orienta-
tion (regardless of the market orientation dimension being considered)
leads to greater innovation success, the question of the effects of market
orientation on the firm’s ability to innovate or on product radicalness is
more controversial. The specific effects of customer orientation, which
represents the core of any definition of market orientation – whether
cultural or behavioral, have been especially questioned.

4.1.2.1 Does customer orientation improve the firm’s


ability to innovate?
Two series of arguments contest that a customer orientation improves
a firm’s ability to innovate. Christensen and Bower (1996) argue that
when faced with disruptive technological changes, firms might lose their
leadership positions if they remain too close to their most powerful cus-
tomers, that is, if they are too customer oriented. Their case studies of six
firms reveal that when allocating their scarce resources across develop-
ment programs, established firms tend to underfund or halt disruptive
projects, because emerging markets are usually small and their needs are
not well defined. Yet because technical progress often exceeds perfor-
mance demands in the market, disruptive technologies could become
market leaders. Firms that incorporate disruptive technologies into their
new products then should outperform established firms. In addition to
this argument, ideas obtained from current customers rarely are radi-
cal (Lilien et al. 2002); current customers lack the expertise to provide
relevant data about very innovative products (von Hippel 1986). The
danger is to ignore emerging markets and/or competitors (Slater and
Narver 1995). These arguments have produced a theoretical debate about
the distinction between reactive and proactive market orientations.
As underlined by Slater and Narver (1998) in their response to Chris-
tensen and Bower (1996), the conclusion that being customer oriented
leads to failure in the face of technological discontinuities contradicts
previous research that indicates a positive and significant effect of mar-
ket orientation on new product performance (Slater and Narver 1994).
112 Making Innovation Last

To account for these seemingly contradictory conclusions, Slater and


Narver (1998) highlight the problematic confusion between being cus-
tomer led or market oriented. Being customer led implies a short-term
philosophy in which organizations address current customers’ expressed
needs. Being market oriented instead is a long-term commitment to
satisfy expressed and latent needs. Thus, a market-oriented firm likely
understands the needs of lead users, who may be less important to cur-
rent firm success but who express advanced needs compared with other
customers (von Hippel 1986). During disruptive technological changes,
a market-oriented organization can avoid the risk of hewing too closely
to the needs of current customers.
In this sense, market orientation often seems restrictive, as an orienta-
tion that is solely responsive or a business philosophy guided only by
the principle of market-driven management (Jaworski, Kohli and Sahay
2000). Narver, Slater and MacLachlan (2004) differentiate reactive from
proactive market orientation by noting that the latter is the organiza-
tion’s attempt “to discover, to understand, and to satisfy the latent needs
of customers” rather than their expressed needs (p. 355). Because cus-
tomers tend to be unaware of their latent needs, current market research
methods may be inappropriate for discovering them, which implies the
need for alternative methods, such as the lead user approach (discussed
in Chapter 8). Proactive market orientation can be assessed using Narver
et al.’s (2004) scale (as shown in Table 4.5).

Table 4.5 Proactive market orientation scale

s We help our customers anticipate developments in their markets*


s We continuously try to discover additional needs of our customers of which
they are unaware
s We incorporate solutions to unarticulated customer needs in our new
products and services
s We brainstorm on how customers use our products and services
s We innovate even at the risk of making our own products obsolete
s We search for opportunities in areas where customers have a difficult time
expressing their needs
s We work closely with lead users who try to recognize customer needs months
or even years before the majority of the market may recognize them
s We extrapolate key trends to gain insight into what users in a current market
will need in the future

* Each item is rated on a Likert scale.


Source: Adapted from Narver et al. (2004).
Strategic and Market Orientations 113

The distinction between a proactive and reactive market orientation is


in line with the marketing concept advocated by Zeithaml and Zeithaml
(1984), who argue that marketing theory should adopt an explicitly pro-
active perspective because organizations can frame their environment.
This is also the recent view of a market-driving organization (Jaworski
et al. 2000, Kumar, Scheer and Kotler 2000, Hills and Sarin 2003,
Tuominen, Rajala and Mo 2004). A market-driving organization has the
ability to modify the structure of the market and the behaviors of the
players in the market (Jaworski et al. 2000). In contrast, a firm that is
market driven responds to the behaviors of the market players. A market-
driving organization is also proactively oriented toward its market,
while a market-driven firm is guided by a reactive business philosophy
(Tuominen et al. 2004). An organization with a proactive orientation
typically adopts a prospector strategy, creates new environmental con-
ditions to which competitors must adapt, and continuously works to
develop innovative new products and exploit new market opportunities.
Ketchen, Hult and Slater (2007) then contrast this notion with a reac-
tive market orientation to distinguish four possible approaches to the
market, depending on the firm’s propensity to satisfy current and/or
future needs. These four possible approaches correspond to the four
quadrants in Figure 4.2.
Propensity to Satisfy Current Needs
High

Customer Orientation Market Orientation


Low

Reactive Orientation Disruptive Orientation

Low High
Propensity to Satisfy Future Needs

Figure 4.2 Propensity to satisfy current versus future needs


Source: Adapted from Ketchen et al. (2007).
114 Making Innovation Last

Firms with a reactive orientation can hardly satisfy current and future
customers’ needs; those with a customer orientation only aim to sat-
isfy current customers’ needs and ignore future needs when developing
new products; firms with a disruptive orientation focus solely on future
needs. Finally, truly market-oriented organizations can satisfy both cur-
rent and future customers’ needs. This parallels the notion of ambidex-
trous organizations leading to both incremental and radical innovations
to be successful (Tushman and O’Reilly 1996).
Market orientation appears to be ideally both a responsive and a pro-
active strategic orientation, yet each might have different effects on
innovation consequences. Narver et al. (2004) and Lamore, Berkowitz
and Farrington (2013) show that a proactive market orientation indeed
encourages new product success, while having a responsive market
orientation has no impact on innovation. Although supported empiri-
cally, the effects of proactive market orientation is more complex than
it first appears (Yannopoulos, Auh and Menguc 2012). Atuahene-Gima,
Slater and Olson (2005) argue that being excessively proactively market
oriented reduces the firm’s focus on developing new products for cur-
rent markets. This is consistent with their finding that the relationship
of proactive market orientation with new product performance (e.g.,
degree to which the firm has achieved its profitability, sales volume, and
revenue objectives) has an inverted U-shape. Focusing on exploratory
projects also could reduce the firm’s opportunities to develop expertise
in a specific area.
Despite ongoing theoretical debate about the effects of customer ori-
entation on the firm’s ability to innovate, previous empirical studies
provide strong support for a significant and positive effect of customer
orientation on the firm’s ability to innovate. Han, Kim and Srivastava
(1998) demonstrate a positive effect of customer orientation on the
absolute number of technical and administrative innovations imple-
mented by service firms (e.g., banks). Frambach et al. (2003) confirm
this result for firms in the manufacturing sector; customer orientation
positively affects new product development activity (e.g., number of
new products under development, number of new products launched
by the firm in the year prior).1 Ngo and O’Cass (2012), on a sample of
services and manufacturing firms, also show that market orientation has
a positive impact on the number of new products and new services that
a firm develops and launches.
Calantone et al. (2010) integrate results from existing empirical stud-
ies and report on 29 correlations that estimate the effects of customer
orientation on the firm’s ability to innovate, which they define as “the
Strategic and Market Orientations 115

development, production, and market commercialization of an inven-


tion as well as product diffusion and adoption by customers” (p. 1066).
They confirm a global positive impact, in support of the argument that a
customer orientation helps the firm improve its innovativeness, as sug-
gested by Narver et al. (2004).2

4.1.2.2 Does market orientation improve product radicalness?


The effects of market orientation on the firm’s ability to innovate have
been assessed on several measures corresponding to particular character-
istics of innovations but especially on the radicalness of the new prod-
ucts developed. Market orientation might enable firms to generate new
products that are more radical because, as Narver et al. (2004) argue,
a market orientation requires a proactive approach to discover latent
customer needs. These latent needs often get discovered through lead
users (von Hippel 1986) who tend to anticipate the future needs in the
market. Therefore, a firm working with lead users is able to produce
more radical new products.
Yet results from prior research are mixed, including empirical evidence
of insignificant relationships, significant and negative relationships, and
significant but positive relationships. Lawton and Parasuraman (1980)
report an insignificant relationship between marketing concept adop-
tion (market orientation) and product innovativeness. In their study,
innovativeness is measured in two ways: (1) the degree of change in the
user’s consumption patterns necessitated by the adoption of the new
product and (2) the degree of difference between a new product and
those already on the market. Im and Workman (2004, p. 115) instead
find a significant negative relationship between customer orientation
and product novelty, which they assess as “the degree to which new
products are perceived as representing unique differences from competi-
tors.” In spite of these negative results, several studies report positive
effects of market orientation on new product radicalness. Gatignon and
Xuereb (1997) find that the more firms are oriented toward customers,
competitors, and technology, the greater the relative advantage of their
innovations. Similarly, Sandvik and Sandvik (2003) demonstrate that a
market orientation has a positive influence on the development of new-
to-the-market products.
Contradictory results often stimulate research to find contingency
(moderating) effects, but research on such moderating factors remains
scarce. One explanation for this scarcity is perhaps that marketing
researchers are somewhat biased toward the proof of the existence of
an unconditional effect of market orientation (Sandvik and Sandvik
116 Making Innovation Last

2003, Im and Workman 2004). But there is some evidence that these
effects can be more or less exacerbated. Gatignon and Xuereb (1997)
demonstrate that the degree of interfunctional coordination reinforces
the impact of market orientation on product radicalness, by favoring
synergies among customer, competitor, and technology orientations.
Nevertheless, some explanations for these contradictory results might
be inferred from the characteristics of prior studies. First, the economic
sectors and geographical areas (i.e., environmental conditions) dif-
fer from one study to another. Lawton and Parasuraman (1980) and
Gatignon and Xuereb (1997) collect data from various US industries,
Sandvik and Sandvik (2003) focus on the Norwegian hotel industry, and
Im and Workman (2004) consider US high-tech manufacturing. There
is ample evidence that the effects of market orientation on the firm’s
ability to innovate depend on environmental conditions (this subject is
developed in Section 4.2). Also, the ability to innovate is closely related
to product radicalness, and there is no doubt that the ability to inno-
vate differs by industry. The same reasoning goes for geographic areas
that have different levels of economic development and comparative
advantages. Consequently, differences in economic sectors and geo-
graphical areas, which correspond to varied environmental conditions,
likely explain differences in the effects of market orientation on product
radicalness. Second, approaches to market orientation vary. Gatignon
and Xuereb (1997) and Im and Workman (2004) build on the cultural
approach, whereas Sandvik and Sandvik (2003) adopt a behavioral
approach. Published before the pioneering works of Narver and Slater
(1990) and Kohli and Jaworski (1990), Lawton and Parasuraman (1980)
state that a market orientation means the adoption of the marketing
concept. Because the effects of market orientation on innovation likely
depend on the theoretical approach used (Hult et al. 2005), it is not
surprising that the effects of market orientation on product radicalness
depend upon how we define market orientation. In spite of these differ-
ences, we are drawn to conclude, based on the most recent evidence that
makes use of the more thorough theory development and measures,
that firms with a market orientation are able to generally develop more
radical innovations.

4.1.2.3 Does market orientation lead to greater


innovation success?
In addition to understanding the effects on innovation radicalness of
being market oriented, managers should also be interested in under-
standing whether being market oriented is beneficial for innovation
Strategic and Market Orientations 117

success. Market orientation should improve innovation performance:


new product performance reflects whether the product meets custom-
ers’ needs (Henard and Szymanski 2001), and it should be more likely
to do so if the firm is oriented toward its customers. New product per-
formance also is linked to product advantages (Henard and Szymanski
2001, p. 364, Evanschitzky et al. 2012), or “the superiority and/or dif-
ferentiation of the product over competitive offerings,” which require
the integration of new technologies that differentiate the product from
competitive or existing products. This demand implies the need for a
strong competitor orientation. Because customer and competitor orien-
tations constitute two dimensions of market orientation, the common
assumption is that a higher market orientation improves innovation
performance. Yet existing studies produce mixed results. For example,
Subramanian and Gopalakrishna (2001) demonstrate a positive and sig-
nificant effect of market orientation on new product success, whereas
Langerak, Hultink and Robben (2004) report no effect.
These contradictory results have stimulated a series of meta-analyses
that confirm the overall positive impact of customer and competitor
orientation on innovation success. In a review of 30 effects from
previous studies, Kirca et al. (2005, p. 25) demonstrate a globally
significant, positive effect of market orientation on new product perfor-
mance, defined as “the success of new products in terms of market share,
sales, return on investment, and profitability.” However, they consider
market orientation as a whole and do not differentiate the effects of
its various dimensions. Grinstein (2008) and Calantone et al. (2010)
distinguish and evaluate the effects of customer and competitor ori-
entations on new product performance. Using 26 effects of customer
orientation from 18 studies (with a total sample size of 5,747 observa-
tions) and 15 effects of competitor orientation from 10 studies (with
a total sample size of 3,797 observations), Grinstein (2008) confirms
that both orientations relate positively to innovation consequences but
does not go into the details of which aspects of the innovation are
exactly impacted. Calantone et al. (2010) are more precise for their new
product performance definition, using measures based on market out-
comes (e.g., satisfaction, meeting revenue and sales goals) and product-
level measures (e.g., meeting quality goals, costs, timelines). They
analyze 23 correlations to estimate the effect of customer orientation
(using a total sample size of 4,615 observations) and nine correlations
of the impact of competitor orientation (with a large total sample of
1,895 observations) on new product performance and confirm positive
impacts of both.
118 Making Innovation Last

These meta-analyses establish the existence of a global positive


effect of market orientation on innovation performance, yet they still
acknowledge the significant role of moderating factors, which may
account for the heterogeneity of the prior results. Regarding moderating
factors, research has mainly focused on (1) environmental conditions,
which the firm cannot control, and (2) organizational characteristics.
We discuss these moderating factors further in Section 4.2. However,
before doing so, other kinds of strategic orientations have been studied,
and we describe those in the next section to provide a comprehensive
review of strategic orientation choices.

4.1.3 Alternative strategic orientations


Although researchers have focused most of their attention on market
orientation, it is not the only strategic orientation a firm can choose.
Four alternative strategic orientations appear in the marketing and man-
agement literature: technology, production, selling, and entrepreneurial
orientations. Production and selling orientations, similar to a market
orientation, represent subdimensions of the firm’s organizational cul-
ture (Noble et al. 2002) and thus might frame the firm’s behaviors. Yet
their effects on innovation have received little attention. One excep-
tion is the study by Noble et al. (2002, p. 30) that finds weak effects.
Interestingly, they use a different definition of innovativeness: “tech-
nological and administrative advances by the organization,” which
include “new systems, new selling methods and channels and internal
organizational changes designed to enhance the value to the customer
or operational effectiveness.” While this definition fits some of the
content recommended in the Oslo manual (OECD/Eurostat 2005), this
study clearly eliminates the bulk of new products and services sold to
customers. Nevertheless, these innovations can be very relevant for the
performance of the firm.

4.1.3.1 Technology orientation


As discussed above, the effects of customer orientation and competi-
tor orientation on innovation have received much more attention than
has technology orientation. This is surprising; the proficiency of a firm’s
use of technology in new product development, which is linked to its
degree of orientation toward technology, is usually a key antecedent
of innovation success (Henard and Szymansky 2001). The gap might
occur because, in the pioneering research of Narver and Slater (1990)
and Kohli and Jaworski (1990), technology orientation was not defined
as a market orientation dimension; instead, it was suggested only later
Strategic and Market Orientations 119

by Gatignon and Xuereb (1997) as an alternative strategic orientation to


market orientation. Yet firms cannot deliver continuous superior value
to customers if they cannot use their technical knowledge to develop
new solutions to customer needs.
A technology-oriented culture is a set of shared values and beliefs that
indicate that strong scientific programs are necessary to provide innova-
tive products, processes, and services that customers often cannot even
imagine – even though those offerings could be immensely valuable to
them. A technology-oriented culture promotes and places a high value
on people with technical skills and background. However, it should not
be confused with a misguided, futile pursuit of technological progress
for its own sake (Leonard-Barton 1992) or the inaccurate belief that an
“innovation will sell itself on the basis of its intrinsic scientific elegance”
(Johnsrud 1994). The customer is the ultimate arbiter who decides if
there is value added. But there are also dangers in naively focusing just
on customers (Hamel and Prahalad 1994). Thus, a technology supplier
often must rely on its own judgment to decide a course of action and
predict (from a technological perspective) what customers will value.
It then follows that technological competencies are a shared under-
standing of existing and potential technologies in every market segment
in which the firm might compete. They require knowledge about all
application markets in which a specific technological expertise could
play a role. Technological competencies often include an “understand-
ing of the technology involved, the engineering tools and techniques
employed, product applications, technological trends and evolution, and
the relationship among supporting technologies” (Grant, Baumgardner
and Shane 1997). Firms that pursue performance superiority by estab-
lishing a foundation in the best science available (Day 1998) also partici-
pate actively in understanding:

1. The impact of technological discontinuities on existing competen-


cies (Anderson and Tushman 1990)
2. The technical feasibility and trade-offs involved in a solution
3. Emerging technological possibilities
4. When it is proper to start rendering its own technological knowledge
obsolete
5. The right time to cannibalize its own product lines (Tushman and
O’Reilly 1996)
6. Which emerging technologies should become standard (e.g., domi-
nant designs)
7. New related technologies, processes, and systems from other industries
120 Making Innovation Last

Table 4.6 Technology orientation scale

s We use the latest technologies in new product development*


s Our products are on the leading edge of the industry standard
s We systematically scan for new technologies inside and outside the industry
s Technological innovation based on R&D results is readily accepted in our
organization

* Each item is rated on a Likert scale.


Source: Adapted from Gatignon and Xuereb (1997).

Thus, in addition to knowing about the technology in its own industry,


a company needs to be aware to a certain degree of what is going on out-
side its field of expertise. It is a false premise to assert that technologies
outside a focal industry have minimal impact on it. A more accurate basic
assumption would predict that the technological competencies likely to
have the greatest impact on a firm are those outside its own area of
expertise. For example, pharmaceutical companies depend increasingly
on genetics, microbiology, molecular biology, and medical electronics –
all technological competencies traditionally external to their own field.
In the automobile industry, there is a clear trend toward developing
noncombustible engine technology (e.g., fuel cells), so the challenge
is to manage that evolution. Such new technological applications are
arriving with great speed and with potentially far-reaching effects. In
brief, a technological orientation involves a technology-oriented culture
coupled with technological competencies. Gatignon and Xuereb (1997),
followed by Han, Kim and Kim (2001), propose an operational scale to
assess a firm’s degree of technology orientation (see Table 4.6).

4.1.3.2 Production orientation


A production orientation reflects “the belief that production efficien-
cies, cost minimization, and mass distribution can be used effectively to
deliver quality goods and services to the consumer at attractive prices”
(Noble et al. 2002, p. 25). Fritz (1996) offers an operational scale, which
we reproduce in Table 4.7. A production orientation might interact posi-
tively with a technology orientation, resulting in two main benefits at two
different stages of new product development. Given that a technology
orientation is “the ability and will to acquire a substantial technological
background and use it in the development of new products” (Gatignon
and Xuereb 1997, p. 78), a production orientation that implies a focus
on cost reduction could help the firm develop new products that offer
Strategic and Market Orientations 121

Table 4.7 Production orientation scale

s The degree to which the orientation toward monetary results reflects


corporate philosophy*
s The degree to which optimization thinking reflects corporate philosophy
s The importance of return on investment as a goal of corporate decisions
s The importance of productivity enhancement as a goal of corporate decisions
s The importance of cost reduction as a goal of corporate decisions

* Each item is rated on a Likert scale.


Source: Adapted from Fritz (1996).

higher perceived price–performance congruency, leading to new product


success (Henard and Szymanski 2001). However, if the firm cannot effec-
tively and efficiently produce and launch differentiated products, the
technological superiority over competitive offerings will not lead in itself
to higher new product performance. A production orientation might
help in that respect. This is consistent with an integrated view of the
drivers of new product success, through team cross-functionality (Troy,
Hirunyawipada and Paswan 2008) and more specifically with research
on the benefits of integrating operations and marketing in new product
development (Tatikonda and Montoya-Weiss 2001). To this date, how-
ever, there is no empirical evidence to support these conjectures.

4.1.3.3 Selling orientation


A selling orientation “is based on the view that consumers will purchase
more goods and services if aggressive sales and advertising methods are
employed” (Noble et al. 2002, p. 25). We expect that salespeople in a
selling-oriented firm remain in close contact with customers, which
might help the firm discover unsatisfied needs. It should be noted, how-
ever, that the existing definition and scale do not reflect a sales force’s
ability to interact with customers. Nevertheless, sales people, in order to
be responsive to their customers, must be customer oriented (Saxe and
Weitz 1982). Thus, the effects of a selling orientation on innovation
might be the same as those of a customer orientation, and we anticipate
that a selling orientation correlates positively with a customer orienta-
tion. However, just as with a customer orientation, a selling orienta-
tion may not help the firm discover the latent needs of its customers
or increase the radicalness of its new products. It may be critical also to
make a distinction between reactive and proactive selling orientation. A
proactive selling orientation would be more geared toward finding new
solutions for the customer.
122 Making Innovation Last

Table 4.8 Selling orientation scale

s We put a lot of effort into pushing our products to customers*


s Our business unit’s performance in the last fiscal year included impressive
results due to our first-rate sales organization
s We are evaluating ways to drive the organization’s revenue growth faster
through innovations in sales force and selling activity
s We use a lot of promotional activities to create wide exposure to our products

* Each item is rated on a Likert scale.


Source: Adapted from Noble et al. (2002).

Selling orientation is often measured at the level of the salespeople


(e.g., Saxe and Weitz 1982, Periatt, LeMay and Chakrabarty 2004). A
firm can hardly generalize these measures to estimate its global level of
selling orientation. However, an initial sample of items can be generated
from Noble et al. (2002). This is what we present in Table 4.8.

4.1.3.4 Entrepreneurial orientation


Management researchers have developed a strong interest in the
effects of entrepreneurial orientation on innovation consequences.
Slater and Narver (1995) viewed market-oriented firms as being inher-
ently entrepreneurial and this may be what established a link between
entrepreneurial orientation and market orientation. Despite various
investigations of the impact of market orientation on a firm’s ability
to innovate, product radicalness, and innovation success, studies of
the effects of entrepreneurial orientation do not consider these three
variables but rather concentrate solely on the firm’s ability to innovate,
ignoring the influence the orientation may have on the innovation
characteristics or on the performance of the innovations. This is par-
ticularly surprising because, out of the five dimensions that define an
entrepreneurial orientation, two relate directly to product radicalness:
firm innovativeness and proactiveness. As defined by Rauch et al. (2009,
p. 763), innovativeness is “the predisposition to engage in creativity and
experimentation through the introduction of new products/services as
well as technological leadership via R&D in new processes,” whereas
proactiveness is “an opportunity-seeking, forward-looking perspective
characterized by the introduction of new products and services ahead
of the competition and acting in anticipation of future demand.” Thus,
almost by definition, innovativeness and proactiveness should enhance
the radicalness of new products. Consequently, we infer that an entre-
preneurial orientation should lead to higher product radicalness. This
Strategic and Market Orientations 123

also suggests a positive correlation between entrepreneurial orientation


and market orientation.
More interestingly, entrepreneurial orientation further entails risk-
taking, aggressive, and autonomous dimensions. Lumpkin and Dess
(1996) define risk taking as “taking bold actions by venturing into the
unknown, borrowing heavily, and/or committing significant resources
to ventures in uncertain environments,” competitive aggressiveness as
“the intensity of a firm’s effort to outperform rivals . . . characterized
by a strong offensive posture or aggressive responses to competitive
threats,” and autonomy as “independent action undertaken by entre-
preneurial leaders or teams directed at bringing about a new venture
and seeing it to fruition” (pp. 763–764). Competitive aggressiveness
may also implicitly relate to competitor orientation, which also requires
“the ability and the will to identify, analyze and respond to competitors’
actions” (Gatignon and Xuereb 1997, p. 78), although perhaps with a
more proactive (offensive) approach.
The appropriate measure of entrepreneurial orientation remains a
topic of some debate. A survey in seven countries (Australia, Greece,
Indonesia, Mexico, the Netherlands, Sweden, and the US) produced
a three-dimensional, eight-item scale with cross-national invariance
(Hansen et al. 2011). These items are shown in Table 4.9.
The innovativeness, proactiveness, and risk-taking dimensions sug-
gest that an entrepreneurial orientation might lead to an innovative
culture that increases the firm’s ability to innovate. Zhou et al. (2005)
empirically demonstrate the positive effect of entrepreneurial orienta-
tion on both technology- and market-based innovations: technology-
based innovations “adopt new and advanced technologies and improve
customer benefits relative to existing products for customers in existing
markets,” whereas market-based innovations “involve new and different
technologies and create a set of fringe, and usually new, customer val-
ues for emerging markets” (p. 43). Hult, Hurley and Knight (2004) also
confirm that entrepreneurial orientation relates positively to the firm’s
ability to innovate, but they define the firm’s ability to innovate more
broadly, as the introduction of new processes, products, or ideas in the
organization. The benefits of an entrepreneurial spirit are also apparent
in the strategy literature (e.g., Ahuja and Morris Lampert 2001).
Entrepreneurial orientation thus might offer, similar to market ori-
entation, a valuable strategic orientation that can improve the firm’s
ability to innovate and achieve innovation success. The two strategic
orientations also can combine effectively. Slater and Narver (1995) state
unambiguously that “a market oriented culture can achieve maximum
124 Making Innovation Last

Table 4.9 Entrepreneurial orientation scale

Innovativeness dimension
s In general, the top managers of my company favor a strong emphasis on the
marketing of tried-and-true products or services/a strong emphasis on R&D
technology leadership and innovations*
s How many new lines of products or services has your company marketed
during the past 3 years? No new lines or products or services/very many new
lines of products and service
s Changes in product or service lines have been mostly of a minor nature/quite
dramatic
Proactiveness dimension
s In dealing with its competition, my company typically responds to actions
which competitors initiate/typically initiates actions to which competition
then must respond
s In dealing with its competition, my company is very seldom the first business
to introduce new products or services, administrative techniques, operating
technologies, etc./is very often the first business to introduce new products or
services, administrative techniques, operating technologies, etc.
s In dealing with its competition, my company typically seeks to avoid
competitive clashes, preferring a “live-and-let-live” posture/typically adopts a
very competitive, “undo-the-competition” posture
Risk-taking dimension
s In general, the top managers of my company have a strong proclivity for
low-risk projects (with normal and certain rates of return)/a strong proclivity
for high-risk projects (with chances of very high returns)
s In general, the top managers of my company believe that owing to the nature
of the environment, it is best to explore it gradually via cautious, incremental
behavior/owing to the nature of the environment, bold, wide-ranging acts are
necessary to achieve the firm’s objectives

* Each item is rated on a Likert scale.


Source: Adapted from Hansen et al. (2011).

effectiveness only if it is complemented by a spirit of entrepreneurship”


(p. 63). As we detailed in Section 4.1.3.1, a reactive market orientation
that focuses only on current customers’ needs may prevent the firm
from developing innovative new products. Although a proactive focus
on latent customers’ needs instead should lead to innovative new prod-
ucts (Narver et al. 2004), Slater and Narver (1995, p. 68) maintain that
“entrepreneurial values must be made explicit” for breakthrough inno-
vations to emerge. With high market and entrepreneurial orientations,
the firm can increase its ability to introduce new products that are char-
acterized by pioneering advantages and that satisfy customers’ needs,
and that thus ensure greater innovation success. Atuahene-Gima and
Strategic and Market Orientations 125

Ko (2001) confirm on a sample of Australian manufacturing and service


firms the benefits of high market and high entrepreneurial orientations:
such firms demonstrate better new product performance (i.e., achieve-
ment of market share, customer use, sales growth, and profit objectives)
than firms that are solely entrepreneurial or market oriented, as well as
enjoy faster market entry than market-oriented firms and higher prod-
uct quality than solely entrepreneurial or market-oriented firms. Hong,
Song and Yoo (2013) find consistent results on a sample of Korean firms.
Finally, at the level of behavioral tendencies, six dimensions charac-
terize a firm’s strategic orientation: level of aggressiveness, extent of sup-
porting analysis, defensiveness, future orientation, proactiveness, and
risk taking (Venkatraman 1989). Table 4.10 lists these dimensions, along
with operational indicators for each. The indicators offer some insight
into what determines each strategic orientation. For example, aggres-
siveness pertains mostly to decisions to keep pricing below competitors’
levels, at the expense of profitability and cash flow. Taken together, the
levels of each of these six dimensions lead to a typology of strategic
orientations. Furthermore, among the dimensions, entrepreneurial ori-
entation reflects a combination of proactiveness and risk taking (Hansen
et al. 2011); market orientation then is a reactive and proactive strate-
gic orientation (Narver et al. 2004). Establishing the links between each
strategic orientation and its organizational behavioral consequences
reveals the impact of strategic orientations on innovation. For exam-
ple, analysis and proactiveness should have positive impacts on innova-
tion success (Henard and Szymanski 2001), while futurity (Venkatraman
1989) might be a driver of product radicalness, and the firm’s ability
to innovate could be reinforced by proactive, risky, and future-oriented
organizational behavioral tendencies.
The above review of various strategic orientations highlights the need
to examine the specific role that each plays in the innovation process. In
fact, many of these different orientations share similar characteristics, at
least in terms of the role they play in innovation. In spite of some com-
monalities that create difficulties for identifying effects specific to each
type of orientation, the identification of complementarities among the
various orientations is critical for examining their synergies. Such syner-
gies presume, however, that they can be deployed in parallel. While this
is clearly the case for customer and competition orientation, for exam-
ple, the difficulty of implementing more than one orientation cannot be
minimized. For example, even if some aspects of selling orientation and
customer orientation are quite compatible, as discussed above, some
behaviors corresponding to a selling orientation are not compatible
126 Making Innovation Last

Table 4.10 Strategic orientation dimensions and related items

Aggressiveness*
s Sacrificing profitability to gain market share
s Cutting prices to increase market share
s Setting prices below competitors
s Seeking market share position at the expense of cash flow and profitability
Analysis
s Emphasize effective coordination among different functional areas
s Information systems provide support for decision making
s When confronted with a major decision, we usually try to develop thorough
analysis
s Use of planning techniques
s Use of the outputs of management information and control systems
s Manpower planning and performance appraisal of senior managers
Defensiveness
s Significant modifications to the manufacturing technology
s Use of cost-control systems for monitoring performance
s Use of production management techniques
s Emphasis on product quality through the use of quality circles
Futurity
s Our criteria for resource allocation generally reflect short-term considerations
(reverse coded)
s We emphasize basic research to provide us with future competitive edge
s Forecasting key indicators of operations
s Formal tracking of significant general trends
s “What–if” analysis of critical issues
Proactiveness
s Constantly seeking new opportunities related to the present operations
s Usually the first ones to introduce new brands or products in the market
s Constantly on the lookout for businesses that can be acquired
s Competitors generally preempt us by expanding capacity ahead of us (reverse
coded)
s Operations in larger stages of life cycle are strategically eliminated
Riskiness
s Our operations can be generally characterized as high risk
s We seem to adopt a rather conservative view when making major decisions
(reverse coded)
s New projects are approved on a “stage-by-stage” basis rather than with
“blanket” approval (reverse coded)
s A tendency to support projects where the expected returns are certain (reverse
coded)
s Operations have generally followed the “tried-and-true” paths (reverse coded)

* Each item is rated on a Likert scale.


Source: Adapted from Venkatraman (1989).
Strategic and Market Orientations 127

with customer orientation because they emphasize short-term maximi-


zation of sales as opposed to continuous creation of superior value (e.g.,
aggressively pushing the products to customers).

4.2 Market orientation and innovation: contingencies


and explanatory mechanisms

In spite of the general conclusion from the previous sections that mar-
ket, technology and entrepreneurial orientations have globally positive
impacts on innovation, these effects of strategic orientation on innova-
tion are complex in part because the constructs defined at the organi-
zation level are themselves complex and their magnitude depends on
the context. Indeed, these effects are not unconditional (Kirca et al.
2005, Grinstein 2008, Calantone et al. 2010), but rather depend on
several contextual factors. This is reflected in Figure 4.1 by the bot-
tom boxes labeled “contingencies.” As discussed below, both environ-
mental conditions and characteristics of the organization define these
contingencies.
In addition, while the wholistic effect of market orientation on inno-
vation is intuitive, understanding the contingencies that modify these
effects requires that we define the explanatory mechanisms through
which market orientation influences innovation (the middle box in
Figure 4.1). Organizational information processes play a crucial role, as
both mediating (Moorman 1995, Gotteland and Boulé 2006) and mod-
erating (Gatignon and Xuereb 1997, Atuahene-Gima 2005, De Luca,
Verona and Vicari 2010) factors; they also moderate the effects of mar-
ket orientation on several dimensions of innovation, that is, the ability
to innovate, product radicalness, and innovation success. This expan-
sive influence is not surprising, in that organizational information pro-
cesses constitute core elements of behavioral and cultural approaches to
market orientation. With the behavioral approach, for example, market
orientation refers to “the generation of market intelligence pertaining
to current and future needs, dissemination of the intelligence across
departments, and organization-wide responsiveness to it” (Kohli and
Jaworski 1990, p. 6). The tenants of the cultural approach also establish
a strong link between market orientation and market information pro-
cessing (Homburg and Pflesser 2000), which creates a unique strategic
marketing resource that leads to superior performance (Hult et al. 2005,
Ketchen et al. 2007). We therefore address both moderating and mediat-
ing influences.
128 Making Innovation Last

4.2.1 Environmental and organizational contingencies


Research on market orientation initially focused on its effects on a firm’s
performance. The impact of a market orientation on firm performance
depends on moderating factors that describe environmental conditions
and organizational characteristics. This is also the case for some con-
sequences of market orientation such as the firm’s ability to innovate,
innovation radicalness, and innovation success. The evidence for mod-
erating effects on these three dimensions varies. Whereas the modera-
tors of the market orientation–innovation radicalness relationship have
received very little attention, there is ample evidence that the impact of
market orientation on a firm’s ability to innovate and on its innovation
success depends on environmental and organizational contingencies.
The positive effects of market orientation can be improved if the firm
can manage some of the contingencies under its control (although it
may not be possible for all contingencies).

4.2.1.1 Contextual effects of market orientation on the


firm’s ability to innovate
Factors that moderate the effect of market orientation on a firm’s ability
to innovate may not always increase the strength of that effect. Under
some conditions, market orientation may have no effect at all on a firm’s
ability to innovate, or it can even have a negative effect. This is the case
when comparing different environmental conditions. Calantone et al.
(2010) focus on the role of the firm’s cultural context. In Western com-
panies, having a strong customer orientation increases a firm’s ability to
innovate, but this is not the case in Asian firms, possibly because success
in these firms is more closely linked to having a competitive advan-
tage in technology. In contrast, Western firms tend to value product and
market differentiation, so that firms invest in tactics to identify unmet
customer needs. The technological context in which the firm evolves
plays a less crucial moderating role. It only influences the strength of the
effect of market orientation on the firm’s ability to innovate. According
to Han et al. (1998), customer and competitor orientations have stronger
effects on technical and administrative breakthrough innovations when
technological turbulence is higher. Technical innovations “pertain to
products, services, and production process technology; they are related
to basic work activities and can concern either product or process,”
whereas administrative innovations “involve organizational structure
and administrative process; they are indirectly related to the basic work
activities of an organization” (Han et al. 1998, p. 32). When the techno-
logical context features turbulence, the firm must be even more oriented
Strategic and Market Orientations 129

toward the market. In such a context, firms with greater market orienta-
tion use more available information (Gotteland and Boulé 2006), which
improves their responsiveness to turbulence in the environment.
Even when firms face similar environmental conditions, differences
in organizational characteristics can explain differences in the effects of
market orientation on each firm’s ability to innovate. This is particularly
relevant for management when these firm characteristics are under the
control of the firm. There is empirical evidence that such factors can
influence the strength of the relationship, the direction, or the signifi-
cance of the effects. Innovation type affects both the direction and the
significance of the effect. For example, Han et al. (1998) analyze tech-
nical and administrative innovations. They report a positive effect of
customer orientation on the absolute number of technical and admin-
istrative innovations implemented, whereas the effect of a competitor
orientation is less general and does not apply equally to technical and
administrative innovations. Their study shows specifically that a com-
petitor orientation has no impact on administrative innovations but a
significant one on technical innovations. Zhou et al. (2005) also indi-
cate that the effect of market orientation on a firm’s ability to innovate
depends on the type of innovation. However, they go beyond a sim-
ple dichotomy and define the type of innovation in a way that enables
them to explain the lack of generalized support for an effect of competi-
tive orientation. In distinguishing technology-based and market-based
innovations, they demonstrate that a market orientation has a positive
effect on technology-based innovations but a negative effect on market-
based ones.
Not all organizational factors can so dramatically reverse the effect of
market orientation on a firm’s ability to innovate, but rather they may
only moderate the strength of that effect. Gatignon and Xuereb (1997)
show that interfunctional coordination strengthens the impact of mar-
ket orientation on product radicalness, through synergies in the various
orientations. The same effect emerges with regard to a firm’s ability to
innovate. According to De Luca et al. (2010), customer orientation has a
stronger influence on R&D effectiveness when knowledge integration is
higher. They define knowledge integration as the use of “formal mecha-
nisms that ensure the capture, analysis, interpretation, and integration
of different types of knowledge within the firm” (De Luca et al. 2010,
p. 309), similar to interfunctional coordination. In this case, R&D effec-
tiveness is defined as “the degree to which the firm’s objectives related
to desired R&D outcomes (e.g., generation of new innovation projects
and new patents, production of relevant scientific knowledge, the
130 Making Innovation Last

acquisition of a reputation for scientific results, and the ability to attract


and recruit outstanding human capital) are met” (De Luca et al. 2010,
p. 300). When a firm uses formal mechanisms that favor knowledge inte-
gration, being customer oriented leads to even more benefits, because
high knowledge integration implies connections between market and
scientific knowledge. If the scientific knowledge is framed by market
knowledge, R&D activity can focus on more valuable projects. Several
formal mechanisms thus particularly support knowledge integration:

1. Internal committees to select the best innovation opportunities


2. Formal meetings among different subunits to screen and evaluate
innovation projects
3. The use of internal experts or consultants to synthesize project
information
4. Formal analysis and discussion of past successful innovation projects
5. Formal analysis and discussion of past failures

These organizational characteristics become key factors to rely on when


building a market-oriented company. This will be the focus of Section
4.3 of this chapter.

4.2.1.2 Contextual effects of market orientation on


innovation success
We now turn to the contextual factors that moderate the effect of mar-
ket orientation on innovation success. As we found for a firm’s ability to
innovate, the strength of the impact depends on the technological tur-
bulence of the environment and a firm’s cultural context. However, the
moderating effect of technological turbulence in this case is the opposite
of the effect found on the ability to innovate. Grinstein (2008) dem-
onstrates that the effect of market orientation on new product perfor-
mance is lower at high levels of technological turbulence. This is likely
because innovations are not driven by customers’ needs but rather by a
firm’s R&D. Consequently, a market orientation no longer represents a
key driver of innovation success. In contrast, competitive intensity posi-
tively affects the impact of market orientation, such that at high levels of
competition, a market orientation allows a firm to identify the strengths
and weaknesses of existing products, which leads to better differentia-
tion of a firm’s products and therefore to better performance of the new
product (Henard and Szymanski 2001, Evanschitzky et al. 2012).
The effect of market orientation depends also on a firm’s location.
Grinstein (2008) shows that the impact of market orientation on new
Strategic and Market Orientations 131

product performance is greater for firms in countries with (1) high indi-
vidualism, that is, “the degree to which people in a country prefer to act
as individuals rather than as members of a group” (Steenkamp, Hofstede
and Wedel 1999, p. 59), and (2) high power distance, that is, “the degree
to which social inequalities such as wealth, status, and power are accept-
able in a society” (Grinstein 2008, p. 168). One possible explanation
is that in individualistic cultures people tend to have lower conform-
ity and higher inventiveness. In a work context, they are likely to be
more comfortable with and more efficient in organizations that support
innovation such as those that are market oriented. In cultures with high
power distance, differences in social status are acceptable. People may
also innovate to differentiate themselves in the organization. Finally,
the effect of market orientation on new product performance is greater
for large firms and service firms (Grinstein 2008). Small firms may be
naturally closer to customers and may not need to put in place formal
and deliberate processes to know the market. Similarly, service firms are
by definition close to the customers as the product is intertwined in the
interaction between the service provider and the customer.
Three objective dimensions characterize the environment a firm faces
(Dess and Beard 1984). Environmental dynamism refers to the degree
of variation in the environment’s constitutive elements; complexity is
the degree of heterogeneity in those constitutive elements; and capac-
ity is the degree to which the environment maintains sustained growth
(Dess and Beard 1984). Gotteland and Boulé (2006) focus on custom-
ers and competitors as key actors in a firm’s environment. They find
that the more objectively dynamic and complex the environment is,
and the greater the capacity of the environment, the greater is the effect
of customer orientation on new product performance (market share,
sales, return on investments).3 This is because in such environments
the teams in charge of the development of new products have stronger
market information instrumental utilization. Even though objective
and subjective environmental conditions are not identical, research fails
to distinguish objective environmental conditions from their subjec-
tive counterparts. In fact, objective environmental conditions are often
measured according to managers’ perceptions. Research provides results
that are ambiguous and somewhat inconsistent with the moderating
effects of objective environmental conditions (Grewal et al. 2013). Slater
and Narver (1994) find no moderating effect of market turbulence (dyna-
mism) while Gatignon and Xuereb (1997) confirm a positive interaction.
These moderating factors rarely fall within the short-term control of
the firm, nor can managers use them easily to increase the positive effects
132 Making Innovation Last

of market orientation on innovation performance. Wei and Atuahene-


Gima (2009) instead identify moderating factors under the direct con-
trol of the firm. For example, the effects of market orientation on new
product performance (measured as the percentage of sales, profits, and
market share) depend on reward systems. On the one hand, perhaps
surprisingly, the positive effect of market orientation on new product
success is stronger when there are few risk-taking rewards. Indeed, lack
of rewards for risk taking can actually encourage employees to consider
new and riskier opportunities for delivering higher value in the market.
This is because in this case their pay does not depend on the degree of
their risk taking, and they are also shielded from having to worry about
potential negative financial consequences of such risk taking. On the
other hand, a market orientation has stronger effects when long-term
rewards are higher. With long-term-oriented rewards, employees are led
to adopt a long-term perspective when developing new products (Lynn
et al. 1999). They are also then more committed to building long-term
relationships with customers.
With regard to a firm’s ability to innovate (De Luca et al. 2010) and
product radicalness (Gatignon and Xuereb 1997), knowledge exchanges
within the firm reinforce the impact of market orientation. Customer and
competitor orientations lead to higher levels of radical innovation per-
formance through increased competence exploration (Atuahene-Gima
2005). Marketing exploration strategies “primarily involve challenging
prior approaches to interfacing with the market, such as a new segmenta-
tion, new positioning, new products, new channels, and other marketing
mix strategies” (Kyriakopoulos and Moorman 2004, p. 221). This implies
the need to develop new knowledge and skills. The positive effect of cus-
tomer and competitor orientations on competence exploration (which
improves radical innovation performance) is stronger with greater inter-
functional coordination within the firm (Atuahene-Gima 2005). This
interfunctional coordination favors knowledge exchange, which height-
ens the reinterpretation rate for each functional perspective and encour-
ages the cross-fertilization of ideas. Therefore, a firm that hopes to exploit
the advantages of being market oriented to ensure the performance of
its radical innovations should increase the level of its interfunctional
coordination. This can be achieved by facilitating the interaction, the
communication, and the coordination between functional units for col-
lecting and using market information (Atuahene-Gima 2005).
Interfunctional coordination thus appears to be a key factor in
strengthening all the effects of market orientation on innovation. This
particular type of cross-functional integration refers mainly to “the
Strategic and Market Orientations 133

degree of interaction, communication, information sharing, or coordina-


tion across functions” (Troy et al., 2008, p. 132). However cross-functional
integration can have multiple forms, thus leading to an important ques-
tion: which forms of integration are the most effective for reinforcing
the impact of market orientation on innovation? Furthermore, func-
tional diversity might result in a less collaborative climate (Ancona and
Caldwell 1992). This can lead to discomfort among team members and
thus interfunctional conflict (Xie, Song and Stringfellow 1998). It would
then follow a preference to consider only a limited number of view-
points in the team (Janis 1972). Consequently, there may be a degree or
forms of cross-functional integration where its benefits on the effects of
market orientation on innovation may decrease.

4.2.2 Explanatory mechanisms: market orientation improves


the new product development process
According to Moorman (1995), market orientation positively influ-
ences innovation by improving the new product development process.
Strategic orientations represent cultural dimensions of the firm, and
Moorman (1995) argues that organizational culture frames organiza-
tional information processes, such as information acquisition, infor-
mation transmission, and the use of conceptual and instrumental
information. Strategic orientations typically are defined according to an
external orientation, because their primary concern is improving a firm’s
competitive position in its external environment. Accordingly, strategic
orientations might emphasize two information processes: information
acquisition and instrumental use of information. The former aims to
bring information about the external environment into the firm, then
use this information to adapt marketing strategies to environmental
conditions (Moorman 1995).
In addition, there are three types of information uses: instrumental,
conceptual, and symbolic (Deshpandé and Zaltman 1982). Instrumental
use is “the direct application of information to solve a specific problem
or to make a particular decision” (Menon and Varadarajan 1992, p. 54).
Conceptual use refers to “the indirect application of information, in a
sense that information is used to broaden the managerial knowledge
base without serving any one particular problem” (p. 56). Symbolic use
occurs when “information is distorted in order to support the decision
maker’s opinion in the eyes of his/her subordinates, colleagues, and
superiors” (p. 56).
The fact that information acquisition and instrumental use of informa-
tion drive new product performance (Moorman 1995) can also explain
134 Making Innovation Last

why strategic orientations positively affect innovation success. Greater


customer and technology orientations lead to superior new product per-
formance because they stimulate greater use of available information
about customers and technology by the new product development team
(Gotteland and Boulé 2006). It is not clear, however, that this finding
generalizes to all strategic orientations. There is no evidence so far about
the mediation of information acquisition and instrumental use of infor-
mation on the effects of alternative strategic orientations. Nevertheless,
Moorman’s (1995) theoretical framework encompasses all strategic ori-
entations and can therefore serve to address the issue of the extent of
the generalizability to other strategic orientations.
Market orientation not only leads to higher innovation success by
facilitating information acquisition and information use, but also favors
(1) a faster innovation process and (2) creativity among the new prod-
uct development. On the one hand, market orientation accelerates the
innovation process because it facilitates communication and coop-
eration among the new product development team (Rodríguez-Pinto,
Carbonell and Rodríguez-Escudero 2011). On the other hand, because a
customer-oriented firm listens carefully to customers’ needs, it can find
new and relevant solutions to satisfy those needs. A competitor orien-
tation should also support the discovery of opportunities to develop
differentiated products. Greater customer orientation leads to higher
innovation success (relative market share, sales, return on investment,
profitability, objective attainment) by stimulating marketing program
creativity, or “the degree to which new products and their associated
marketing programs are perceived as representing unique differences
from competitors’ products and programs in ways that are meaningful
to target customers” (Im and Workman 2004, p. 115). Langerak et al.
(2004, p. 298) confirm the explanation through greater idea generation,
which they define as “the generation and elaboration of potential solu-
tions to strategic market opportunities.” However, there is no support for
the mediation of team creativity in the competitor orientation–innovation
success relationship. The link between market orientation and team crea-
tivity thus seems more complex than expected.
The explanatory mechanisms of the effects of market orientation on a
firm’s ability to innovate and on product radicalness have received less
attention. That is, our understanding of how higher degrees of market
orientation might lead to greater product radicalness remains disturb-
ingly scarce, as is our knowledge of its moderating factors. Regarding a
firm’s ability to innovate, Zhou et al. (2005) suggest that organizational
learning, which encompasses information acquisition and information
Strategic and Market Orientations 135

dissemination, intervenes between market orientation and a firm’s abil-


ity to innovate. Their empirical support is however mixed. The media-
tion appears to depend on the type of innovation under consideration,
such that it arises for technology-based innovations but not for market-
based innovations. Organizational learning also does not appear to
affect market-based innovations, which “create a set of fringe, and usu-
ally new, customer values for emerging markets” (Zhou et al. 2005,
p. 43). The reasons, however, remain unclear.

4.3 How can a firm become more market oriented?

If market orientation enhances a firm’s ability to innovate, product radi-


calness, and innovation success, then a double question arises: (1) How
do I know if my firm is market oriented and (2) how can my firm become
more market oriented? Despite the widely acknowledged links between
market orientation and innovation, few studies are devoted to these
questions and especially to the second one. We first present ways to
measure initial versus final degrees of market orientation for a firm that
undergoes the process. Then, we address the question of how a firm can
transform its organizational culture to be more market oriented.

4.3.1 Metrics of progress in implementing a


market-oriented culture
As we mentioned previously, a market orientation is fundamentally a
subdimension of the organizational culture. Thus, the final objective
in creating a market-oriented culture should be universal acceptance of
the importance of “creating superior value for buyers and, thus, con-
tinuous superior performance for the business” (Narver and Slater 1990,
p. 21). When implementing a market-oriented culture, the firm should
be able to evaluate its progress. We have presented several scales avail-
able to assess a firm’s degree of customer orientation, competitor orien-
tation, and technology orientation, which is a complementary culture
to a market orientation, from a cultural approach, as well as some guide-
lines for evaluating the level of stakeholder orientation. These scales
exhibit good psychometric properties in various industrial and cultural
contexts. They thus can be used to establish a base-line level of market
orientation within a strategic business unit (SBU) (Kohli et al. 1993).
Comparative measures across SBUs also provide the firm with insights
on where to concentrate its intervention efforts. Narver and Slater (1990)
report market orientation means of 113 business units in the forest prod-
ucts division of a major Western corporation: 36 commodity businesses
136 Making Innovation Last

(e.g., plywood, wood chips, and logs), 23 specialty products businesses


(e.g., hardwood cabinets, laminated doors, and particle board), 51 dis-
tribution businesses, and three export businesses. Table 4.11 shows the
results of their report. These results suggest a limited variation across
businesses of different types, perhaps in large part due to the multibusi-
ness nature of the firms in the sample. This may imply that the strategic
orientation is defined at the firm level rather than at the business unit
level. However, the ranges on the scales and the mean values can serve
as a benchmark.
Similar information is shown in Table 4.12 that compiles from the
literature the means of customer and competitor orientation found in
a broader variety of industries. Again, these values can serve as bench-
marks, especially that they do not vary very much across industries.
Some industries appear to have a more homogeneous group of firms as
the variance within the sample is tighter, for example, in the manufac-
turing industry (with standard deviations in the range of 0.6 for compet-
itor and customer orientation), compared to the biotechnology industry
(with standard deviations around 1.1). We also provide the means for
entrepreneurial and technology orientation that can be used by firms
who may be interested in assessing and promoting such orientations
due to their positive effect on a firm’s innovation (see Sections 4.1.3.1
and 4.1.3.4).
But the implementation of a market-oriented culture will remain
ineffective if it never establishes the organizational behaviors that
characterize a market-oriented firm (Kohli and Jaworski 1990). We have
reported in Section 4.1.1.1 the scale for such behaviors developed by
Kohli et al. (1993).
Even with the existence of such scales, in practice, the question of
who should evaluate the degree of market orientation is still not clear.

Table 4.11 Market orientation means

Commodity Specialty products Distribution


businesses businesses businesses

Market orientation 4.28 (2.7, 5.4) 4.77 (3.4, 5.7) 4.76 (3.4, 6.0)
Customer 4.53 (2.8, 5.8) 5.05 (3.7, 6.0) 4.99 (3.4, 6.1)
orientation
Competitor 4.06 (2.8, 5.3) 5.71 (3.3, 5.8) 4.92 (3.4, 6.6)
orientation

1–7 scale; ranges in parentheses


Source: Adapted from Narver and Slater (1990).
Table 4.12 Strategic orientation means

Competitor Customer Entrepreneurial Technology


orientation orientation orientation orientation

Auh and Menguc (2005) 3.97 (0.61) 3.89 (0.69) 3.62 (0.62) 3.15 (0.81)
242 manufacturing industries
De Luca et al. (2010) 3.37 (1.10) 3.48 (1.07)
50 biotechnology industries
Gotteland and Boulé (2006) 3.71 (0.73) 3.82 (0.71) 3.78 (0.93)
142 manufacturing and services industries
Hult et al. (2005) 3.61 (0.96) 3.71 (0.86)
217
Hult, Snow and Kandemir (2003) 3.66 (0.84) 3.67 (0.83) 3.10 (0.94)
764 business-to-consumer industries
Menguc and Auh (2008) 3.78 (0.70) 3.64 (0.65)
260 manufacturing industries
Olson, Slater and Hult (2005) 3.56 (0.75) 3.22 (0.84)
228 manufacturing and services industries
Subramanian and Gopalakrishna (2001) 3.64 (1.06) 4.16 (0.82)
162
Voss and Voss (2000) 3.52 (0.97) 2.35 (0.98) 4.16 (1.16)
101 nonprofit theater industries

1–5 scale; standard deviations in parentheses.


Strategic and Market Orientations
137
138 Making Innovation Last

Within a firm, differences in perception of the extent of the organiza-


tion’s market orientation emerge between marketing and nonmarketing
managers (Kohli et al. 1993). Because market orientation is externally
oriented (Moorman 1995), it also seems relevant to ask customers to
evaluate a firm’s degree of customer orientation. However, it is disturb-
ing that Deshpandé, Farley and Webster (1993) find an insignificant
correlation between customers’ and marketers’ perceptions of the level
of customer orientation. This result is further confirmed by Steinman,
Deshpandé and Farley (2000). So whom should we interview to measure
a firm’s progress in implementing a customer-oriented culture or, more
generally, a market-oriented culture? In a business-to-business setting,
Deshpandé et al. (1993) propose asking a quadrad of two marketing
managers from the selling company and two buyers from the buying
company; the two marketing managers elect the two buyers, and the
average of their responses provides the measure of the marketer’s cus-
tomer orientation. This approach might be generalized for nonindus-
trial firms that want to measure the customer orientation perceived by
both customers and managers. Differences in perceptions can also pro-
vide rich input for the firm trying to become more market oriented and
especially more customer oriented.

4.3.2 How can a firm transform its organizational


culture to be more market oriented?
Various authors (Webster 1988, Lichtenthal and Wilson 1992, Ruekert
1992, Jaworski and Kohli 1993, Day 1994) suggest factors that drive
market orientation. These antecedents can be classified into three cat-
egories: top management, interdepartmental, and organizational factors
(Jaworski and Kohli 1993, Kirca et al. 2005). Drawing upon numerous
studies, Kirca et al. (2005) demonstrate that each category contains one
key driver: top management emphasis for top management factors,
interdepartmental connectedness for interdepartmental factors, and
market-based reward systems for organizational factors.
Yet because a market orientation is a subdimension of the organiza-
tional culture, it interacts with other cultural values in the firm. These
interactions are likely to influence the efficiency of the implementa-
tion process in a market-oriented culture. Moorman’s (1995) theoreti-
cal framework can help address this question. Based on an information
processing view, which is relevant because it is an essential view of
market orientation (Kohli and Jaworski 1990), Moorman (1995) adopts
the competing values model of culture (Quinn and Rohrbaugh 1983).
She distinguishes two dimensions along which cultural values vary
Strategic and Market Orientations 139

and affect information processing. The informal–formal dimension


“describes the continuum from organic to mechanistic processes, that
is, whether the organizational emphasis is more on flexibility, spontane-
ity, and individuality or on control, stability, and order.” The internal–
external dimension refers to “the relative organizational emphasis
on internal maintenance (i.e., smoothing activities, integration) or on
external positioning (i.e., competition, environmental differentiation)”
(Deshpandé et al. 1993, p. 26). If all the values of the firm align to sup-
port the organizational processes that define market orientation, the
processes should be more effective than if cultural values are not congru-
ent. The implementation of market orientation within the firm there-
fore should depend on the congruence of market-oriented values with
other values in the organization. Gebhardt et al. (2006) identify the six
cultural values shared by market-oriented organizations. These are listed
in Table 4.13.

4.3.2.1 A process of organizational change


Firms can become more market oriented through a process of organiza-
tional change. Gebhardt et al. (2006) build on Day’s (1999) approach,
according to which a company becomes more market driven through
formal management actions, focused on structure and incentives. They
analyze longitudinally several transformed firms with ethnological
methodologies. Their resultant theory about which factors lead to suc-
cessful cultural change in the organization identifies four stages, each
with several success factors: (1) initiation of a change plan, (2) imple-
mentation of the plan, (3) institutionalization of changes, and (4) main-
tenance of a market-oriented culture. These four stages are represented
in Figure 4.3. The direct actions required for each stage of the process are
detailed by Gebhardt et al. (2006).
Briefly, interpersonal and intraorganizational power drives the change
process, especially in the first stage, in which a guiding coalition is
needed to move to the next stages. Change also is driven by a financial
threat that pushes senior leaders to plan and implement organizational
change efforts. The latter stages involve organizational learning capa-
bilities, derived from the creation of shared market and process sche-
mas. Some schemas reflect the capacity of the organization to create new
values and characteristics that lead to a more market-oriented culture.
Because organizational cultures may evolve over time, creating a market
orientation is a continuous process. This is why in the final mainte-
nance stage leaders implement processes to reinforce, in the long term,
a market-oriented culture in the organization.
140

Table 4.13 Market orientation values

Value Assumption Behavioral norms

Market as the raison d’être We come together as an organization to Every decision and action must consider how it
serve the market and make a living affects the market
Making Innovation Last

Collaboration Working together, we can achieve more, Work is done collaboratively by teams
faster, and better, than apart Teams are jointly responsible for outcomes
Respect/empathy/ People are basically good and have reasons Consider the perspectives, needs, training,
perspective taking for their actions expertise, and experiences of others when
Keep promises To succeed, everyone must do his or her reacting to or interpreting their actions
part Each employee is responsible for the following
Openness Honestly sharing information, assumptions, through on commitments to others
and motives allows others to understand Proactively and honestly share information,
and effectively collaborate with us assumptions, and motives with others
Trust Everyone is committed to the same goal. Trust that your fellow employees are telling the
Therefore, we can have positive truth and will follow through on commitments
expectations about their intentions and
behaviors

Source: Adapted from Gebhardt et al. (2006).


Strategic and Market Orientations 141

Initiation Reconstitution Institutionalization Maintenance

Figure 4.3 Creating a market orientation


Source: Adapted from Gebhardt et al. (2006).

4.3.2.2 The role of management


We now consider how management needs to support the implementa-
tion of a market-oriented culture and, more generally, how managers
can help the firm to develop its ability to innovate.

4.3.2.2.1 Implementing a market-oriented culture. Gebhardt et al. (2006)


reveal the critical role of management in the process of creating a
market-oriented culture. This is consistent with findings by Kennedy,
Goolsby and Arnould (2003): in an ethnographic study of a public
school district, they stress the preeminent role of senior and local lead-
ers. Senior leaders drive organizational changes, but their commitment
cannot produce effective changes if the authentic commitment of local
leaders is lacking or there is no shared leadership. The emphasis on top
management also appears in Jaworski and Kohli’s (1993) and Kirca,
Bearden and Roth’s (2011) findings and is highlighted in Narver, Slater
and Tietje (1998), who posit that without appropriate leadership imple-
menting a market orientation culture may be impossible.
Furthermore, Slater and Narver (1994) suggest that top management’s
responsibility is to place people in roles consistent with a market-
oriented culture and then provide them with the necessary resources
and support to achieve their tasks. Management and employees should
be able to learn to play these new roles and thus adapt the change pro-
cess. Firms that aim to increase their degree of market orientation ben-
efit from a learning orientation, which is a firm’s propensity to value the
importance of learning in the organization. This is because a learning
orientation enhances the development of knowledge within the firm
and strengthens its ability to learn from its efforts to create superior
value for buyers. A meta-analysis by Grinstein (2008) brings strong
empirical support to the positive links between a market and a firm’s
learning orientation.
Although Lam, Kraus and Ahearne (2010) agree about the importance
of top managers, they focus more on how each manager’s individual
level of market orientation transfers to middle managers or expert peers
and then finally to frontline employees. The idea they test is that expert
142 Making Innovation Last

peers might exert more influence on frontline employees than middle


managers because of their expertise and proximity, which middle man-
agers might lack. Market orientation is assessed at the individual level
with a three-dimensional scale (the 15 items of this original scale are
shown in Table 4.14) on a sample of 43 sales directors (top managers),
285 sales managers (middle managers), and 1,528 sales representatives
(frontline employees) from US firms. The data show that the individ-
ual market orientation of top managers enhances the individual mar-
ket orientation of sales representatives through two routes: a formal
route through the individual market orientation of middle managers
and an informal route that positively influences the individual market

Table 4.14 Individual level of market orientation scale

Product orientation*
s I am always looking for new products and services
s I always reconsider and develop the product and service offerings of our
company
s I consider innovative new products and services as a key component of
success
Competitor orientation
s I pay close attention to competitors’ (competitors’ salespeople’s) activities
s I keep a close eye on our competitors’ (competitors’ salespeople’s) customer
retention tactics
s I monitor exactly what special actions our competitors are doing
Customer orientation
s I think customer preferences are a key factor to the success of (name of the
company)
s I frequently survey customers to find out the products and services they
would like to see in the future
s The goals I set for my (subordinates) are mainly aiming at customer
satisfaction (only asked at manager level)
s I try to figure out what a customer’s needs are
s I have the customer’s best interests in mind
s I try to help customers achieve their goals (only asked at sales representative
level)
s I take a problem-solving approach in selling products or services to customers
(sales representative level)
s I offer the product of mine that is best suited to the customer’s problem (sales
representatives’ level)
s I try to find out which kinds of products or services would be most helpful to
customers (sales representative level)

* Each item is rated on a Likert scale.


Source: Adapted from Lam et al. (2010).
Strategic and Market Orientations 143

orientation of expert peers. Overall, top managers should look to middle


managers and expert peers as models who encourage higher degrees of
market orientation throughout their firms.

4.3.2.2.2 Developing the ability to innovate. Beyond its role in implement-


ing a market-oriented culture within the organization, management has
a role to play in developing a firm’s ability to innovate. Although a few
chief executive officers (CEOs) are widely recognized for their work as
innovators (e.g., Steve Jobs at Apple, Inc.), most research has focused on
what prevents the large majority of executives and other managers from
exerting a strong influence on innovation. For example, Yadav, Prabhu
and Chandy (2007) identify five reasons: (1) CEOs fail to recognize that
the technological environment has evolved, (2) they do not have time to
think and be creative due to extremely intense job demands and stress,
(3) they are so wedded to existing technologies that they resist or actively
fight new ones, (4) the locus of innovation lies in the middle of the firm
in the actions taken and procedures used by its middle managers, and (5)
CEOs have an effect on innovation but it occurs at the project level
through their support of individuals and teams working on individual
projects. These findings appear driven by a focus on single innovations,
whereas CEOs may influence numerous innovations over a long period
of time. By assessing how CEOs influence innovation in terms of their
temporal (future focused) and spatial (external vs. internal) attention,
Yadav et al. (2007) reach conclusions at odds with the mainstream
research: they show that CEOs can indeed encourage their firms’ innova-
tion, that is, an external focus on the future represents a critical task of a
CEO and should lead to faster detection, faster development, and greater
breadth of the deployment of new technologies.
Top managers are not the only ones to influence a firm’s ability to
innovate. Instead of focusing on the CEO, Verhoef and Leeflang (2009)
study the role of the marketing department, which should drive the
company toward a market orientation and innovativeness. It is indeed
the primary responsibility of the marketing department to identify the
unmet needs of customers. Verhoef and Leeflang find that the market-
ing department helps establish a firm’s market orientation, but it does
not seem to explain a firm’s performance beyond this role. Two factors
determine the extent of the marketing department’s role: (1) account-
ability (i.e., the ability to link marketing strategies and actions to finan-
cial performance) and (2) innovativeness of the marketing department.
Although the CEO may have power, most modern organizations are
led by a leadership team, so that the role of management in a firm’s
144 Making Innovation Last

ability to innovate is not limited to that of the CEO. Auh and Menguc
(2005) thus investigate the role that functional diversity within the top
management team plays on a firm’s strategic orientation. They consider
four distinct strategic orientations – customer, competitor, technology,
and entrepreneurial – and get consistent results. They find that in highly
uncertain environments (high turbulence), the negative effect of func-
tional diversity in the top management team can be compensated for by
interfunctional coordination mechanisms that support improved per-
formance. In less turbulent environments, functional diversity has posi-
tive effects on competitor orientation but negative effects on customer
orientation. The effect becomes positive when there is good interfunc-
tional coordination within the organization. This is explained by the
fact that interfunctional coordination stimulates information sharing.
Another possible explanation for this conditional effect is that higher
interfunctional coordination favors the emergence of a common view of
the firm’s strategic orientations within a diverse top management team.
In this case, top management is likely to agree on the opportunity to
establish a customer-oriented culture. Therefore, the optimal composi-
tion of the leadership team may depend on the environment the firm
faces, on the strategic orientation that dominates its strategy, and also
on the degree of interfunctional coordination within the firm.
Leaders who need to change the organization are bound to face
conflict, both within each function and, even more critically, across
functions (Menguc and Auh 2008). Transformational leaders can take
advantage of such conflict to bring about change and align the values
and goals of other members with the objective of the organization,
because they exert influence and thus might change others’ beliefs and
attitudes. Leaders can adopt five styles to address such conflicts: accom-
modating, avoiding, compromising, integrating/collaborating, or com-
peting. Menguc and Auh also note that interfunctional conflict features
(1) task conflict, which entails disagreements about the content of tasks
that members must perform, and (2) relational conflict, that is, interper-
sonal incompatibilities among group members. A leader who does not
try to change the organization may face fewer conflicts, but task con-
flicts are virtually unavoidable with even a moderate transformation.
Task conflicts should help the implementation of a market orientation
culture when they are neither too minimal nor too large. The transfor-
mational leader then can use his or her skills to resolve the conflict with
the goal of having the firm become a more market-oriented organiza-
tion. This is not the case for relationship conflicts. Research suggests
that for relationship conflicts, instead of a transformational leadership
Strategic and Market Orientations 145

style, a transactional leadership style is needed for those conflicts may


help the creation of a market orientation culture (Menguc and Auh
2008). Transactional leaders reward performance outcomes to attain
goals. Transformational leaders instead use inspiration, stimulation,
and coaching and also have a more emotional leadership style, which
may be ineffective (or even counterproductive) in solving relationship
conflicts that typically generate negative emotions such as animosity or
annoyance in a group.
The different studies outlined above clearly indicate the complexity
of the role that management must play to bring about change in the
organizational culture. This remains a critical issue, and this section
offers a review of our current knowledge of these questions. The discus-
sion also speculates on extensions of our theories that can contribute to
understanding how to bring about change in an organization in order
to foster innovation and innovation success.
In this chapter, we have reviewed how the firm could establish a cul-
ture that is favorable to innovation in the long term. Establishing such
a culture requires that the firm choose from among different strategic
orientations, some being more effective for innovation, such as a market
orientation or an entrepreneurial orientation. However, having estab-
lished an appropriate culture is not sufficient for innovation to prosper.
Information-processing capabilities must also be developed. This is the
subject of Chapter 5.

Notes
1 Note that they also find a negative effect of competitor orientation on new
product development activity.
2 They also report a positive effect of competitor orientation on the firm’s abil-
ity to innovate.
3 This is not the case for competitor orientation.

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5
Managing Capabilities

Establishing an appropriate culture in which market-oriented behaviors


can prosper is not sufficient (Gebhardt, Carpenter and Sherry 2006), and
the creation of a market orientation is only the beginning. “The criti-
cal challenge for any business is to create the combination of culture
and climate that maximizes organizational learning on how to create
superior customer value in dynamic and turbulent markets, because
the ability to learn faster than competitors may be the only source of
sustainable competitive advantage” (Slater and Narver 1995, p. 63).
The capabilities to be achieved should enable the organization to learn
from information obtained and disseminated, including the ability to
interpret acquired and distributed information (Huber 1991), in a “pro-
cess through which information is given meaning and actions are chosen”
(Daft and Weick 1984, p. 286). This prerequisite capability allows a firm
to take advantage of its knowledge base to develop successful new prod-
ucts and services.
In this chapter, we discuss the processes by which firms can efficiently
learn from available external knowledge and use it in their innovation
activities. Absorptive capacity literature provides a well-documented
theoretical background for this topic (Section 5.1). We also review
the effects of absorptive capacity on firms’ innovation activities and
on the development of functional capabilities (Section 5.2). After we
assess how firms might manage their absorptive capacity by outlining
its organizational antecedents (Section 5.3), we synthesize the known
interactions of absorptive capacity and environmental turbulence
(Section 5.4).

153
154 Making Innovation Last

5.1 About learning from outside knowledge

Externally available knowledge is consistently regarded as a critical


resource for innovation (von Hippel 1988, Rosenkopf and Nerkar 2001,
Ireland, Hitt and Vaidyanath 2008). The number and the complexity of
fields from which firms must draw in order to innovate make it impos-
sible to undertake all the necessary research on their own. Instead, firms
must look outside their boundaries (Narasimhan, Rajiv and Dutta 2006).
In line with the frequent observation that the ability to exploit external
knowledge varies across firms (Cassiman and Veugelers 2006), and build-
ing on organizational learning literature (Fiol and Lyles 1985, Levitt and
March 1988), Cohen and Levinthal (1990) prioritize the capacity to rec-
ognize valuable external information, assimilate it, and then use the
information to define their concept of absorptive capacity. They pre-
viously had used the terms absorptive and learning interchangeably
to refer to learning from outside sources (Cohen and Levinthal 1989).
Absorptive capacity thus had related to organizational learning from
its very origin, and this relationship remains implied in most of the
subsequent works (Lane, Koka and Pathak 2006). In addition, a learn-
ing organization is “skilled in creating, acquiring, and transferring
knowledge, and at modifying its behavior to reflect new knowledge and
insights” (Garvin 1993, p. 80). Hence, in their integrative article, Sun and
Anderson (2010) argue that “absorptive capacity should be considered a
specific type of organizational learning that concerns an organization’s
relationship with external knowledge” (p. 135).
In this section, we review the definitions of absorptive capacity as
they have evolved over time. We then focus on the operationalization of
absorptive capacity, which is necessary so that managers and researchers
can assess firms regarding this capability.

5.1.1 Defining absorptive capacity


Cohen and Levinthal (1990) define absorptive capacity as the “ability
of a firm to recognize the value of a new, external information, assimi-
late it, and apply it to commercial ends” (p. 128). They further argue
that these abilities (1) require prior related knowledge and (2) influence
innovative activities.
Prior related knowledge consists of shared language and symbols,
shared awareness, and understanding of the market and technological
development. Although Cohen and Levinthal (1990) focus exclusively
on technology, the concept can be generalized to include other market
factors. They rely on research on memory and associative learning to
Managing Capabilities 155

justify prior knowledge as critical to the storage and retrieval of new


knowledge. Because memory development is self-reinforcing (Bower and
Hilgard 1981), “the more objects, patterns and concepts that are stored
in memory, the more readily is new information about these constructs
acquired and the more facile is the individual in using them in new set-
tings” (Cohen and Levinthal 1990, p. 129). At the firm level, this idea
connects to research that indicates investing in R&D makes firms more
capable of using external knowledge (Mowery 1983). Knowledge and
absorptive capacity thus enter a self-reinforcing relationship: absorptive
capacity in time t, which is a function of knowledge in t, fosters the
absorption of new knowledge and increases knowledge and absorptive
capacity in time t + 1 (Figure 5.1). The more a firm knows, the more it
can learn, and so on (Stiglitz 1987). The self-reinforcing process of indi-
vidual memory development has a counterpart at the firm level. R&D
investments in a specific knowledge domain improve the firm’s ability
to recognize and absorb valuable information in that domain. External
knowledge absorption is thus path dependent and reflects past knowl-
edge development activities. As is true of any resource, “appropriate
time paths . . . must be chosen to build required asset stocks” (Dierickx
and Cool 1989, p. 1507). Inadequate initial R&D investments in a field
can subsequently hinder the firm from accessing the related knowledge,
even if it is available. Taken to extremes, the absence of R&D investment
can prevent the firm from accessing external knowledge, which Cohen
and Levinthal (1994) call a lockout.
On the outcome side, absorptive capacity contributes positively to the
firm’s stock of knowledge, through the absorption of external knowledge,

Absorptive Capacity

Recognition

External
Innovation
Prior Knowledge Assimilation Knowledge
Performance
Absorption

Application

Figure 5.1 Model of absorptive capacity


Source: Adapted from Cohen and Levinthal (1989, 1990).
156 Making Innovation Last

whether it consists of intra-industry spillovers or extra-industry knowl-


edge (Cohen and Levinthal 1990). Because it makes learning easier,
absorptive capacity increases the firm’s returns on innovative activities,
such as investments in R&D and basic research, adoption of innova-
tions, and participation in R&D ventures (Cohen and Levinthal 1990,
Helfat 1997). The increased returns then improve innovative perfor-
mance. This view of absorptive capacity and organizational learning as
self-reinforcing forces dominates prior literature (Cohen and Levinthal
1990, Veugelers 1997, Barkema and Vermeulen 1998, Kim 1998, Lane
and Lubatkin 1998, Autio, Sapienza and Almeida 2000, Rugman and
Verbeke 2001, Tsai 2001, Sun and Anderson 2010).
Cohen and Levinthal (1990) introduce a three-stage process view of
absorptive capacity, which has been used and complemented by sub-
sequent research. The absorptive capacity stages are recognition and
acquisition, sustained assimilation, and application to commercial ends
of valuable external knowledge. Lane et al. (2006) link each dimen-
sion to a specific learning process, to create an explicit bridge between
absorptive capacity and organizational learning. The first stage requires
exploratory learning processes aimed at identifying and procuring
interesting pieces of knowledge. The second stage relies on transforma-
tive learning processes to ensure the internalization of newly acquired
knowledge, to keep it alive over time and available for future use.
Finally, a third stage entails exploitative learning processes to combine
acquired and existing knowledge into relevant market offers (Lane et al.
2006, Lichtenthaler 2009).

5.1.1.1 Recognition and acquisition of valuable new knowledge


Recognizing the value of external knowledge is the first component of
absorptive capacity. Firms that fail to recognize the potential of new
external knowledge will not process it, and therefore they will not absorb
it. At this point, the path dependency of external knowledge absorp-
tion has its most visible consequences. For example, Henderson and
Clark (1990) show that a dominant design (Abernathy and Utterback
1978, Anderson and Tushman 1990) can lead a firm to overlook new
architectural knowledge, or “knowledge about the ways in which the
components [of a product] are integrated and linked together into a
coherent whole” (p. 11; see the discussion on architectural innovations
in Chapter 2). This inability in turn prevents the firm from anticipating
drastic changes in the industry, and it frequently leads to shifts in market
leadership. Although essential for absorptive capacity, the firm’s knowl-
edge base can also be a foundation for core rigidities (Leonard-Barton
Managing Capabilities 157

1992). It then becomes even more critical for the firm to recognize the
value of external knowledge that does not necessarily reinforce its exist-
ing knowledge.
Zahra and George (2002) extend this first component and associate
knowledge acquisition with its recognition. Consequently, they pro-
pose that the process begins with an acquisition stage, which “refers to
a firm’s capability to identify and acquire externally generated knowl-
edge that is critical to its operations” (Zahra and George 2002, p. 189).
Because they take up knowledge value recognition less explicitly, their
approach prompts criticism from Todorova and Durisin (2007), who
propose reintroducing recognition as a separate component, occurring
before acquisition. Keeping them separate also seems redundant, in that
both contribute to knowledge acquisition through exploratory learning
processes (Lane et al. 2006).

5.1.1.2 Sustained assimilation of new knowledge


The assimilation of external new knowledge – previously recognized as val-
uable – is the second step in the absorption process. Information obtained
from external sources gets analyzed, processed, interpreted, and under-
stood (Zahra and George 2002). Because the use of newly acquired knowl-
edge in new product development is usually remote in time (March 1991),
firms must be able to maintain newly acquired knowledge over time and
reactivate it when needed (Garud and Nayyar 1994). This stage is essen-
tial to link the acquisition to the utilization of knowledge, almost like a
buffer. Dierickx and Cool (1989) use a bathtub analogy instead, but the
idea remains the same: incoming knowledge can be reserved for later use.
Because the context may change between storage and retrieval, it is critical
for knowledge to be updated during this period to remain valuable until
such time as the firm needs to use it (Carlile and Rebentisch 2003).
A firm’s ability to achieve and sustain assimilation improves if the
newly acquired knowledge relates to prior knowledge. In agreement with
dominant research on cognitive structure development (Piaget 1952),
Cohen and Levinthal (1990) view this process as automatic: “if external
information is closely related to ongoing activity, then external informa-
tion is readily assimilated” (p. 132). Some degree of overlap facilitates the
integration of different knowledge bases (Kogut and Zander 1992, Grant
1996). In contrast, external knowledge can be difficult to assimilate if it is
not spoken in the firm’s language (Cohen and Levinthal 1990), in which
case some translation is required. Gatekeepers, especially if they special-
ize in relevant information domains (Tushman 1977), can translate exter-
nal knowledge into a form to be assimilated by other members of the
158 Making Innovation Last

firm. External knowledge also can be difficult to assimilate because it is


incongruent, and thus in conflict with prior knowledge. If this incongru-
ence is moderate, new knowledge can shift to fit existing cognitive struc-
tures. However, when the gap is too large, completing the learning process
demands that knowledge be accommodated through transformation.
In this case, existing cognitive structures are transformed to adapt to
new knowledge (Todorova and Durisin 2007) and support the combi-
nation of prior and newly acquired knowledge. Transformation relies
on knowledge addition, deletion, and/or reinterpretation (Zahra and
George 2002) and entails the combination of two seemingly incompat-
ible sets of information, or bisociation (Koestler 1966).
Zahra and George (2002) propose introducing transformation as another
step in the process of absorptive capacity, after assimilation. Although they
recognize that these processes are distinct, Todorova and Durisin (2007)
argue that transformation is an alternative to assimilation, rather than
its consequence. Because of the diversity of knowledge types that a firm
must absorb during any learning process (Gatignon et al. 2002), they pro-
pose that “pieces of knowledge that an organization tries to absorb may
move backward and forward between assimilation and transformation
processes before they are successfully incorporated into the organiza-
tional knowledge structures” (Todorova and Durisin 2007, p. 779).
Alternatively, Lane et al. (2006) and Lichtenthaler (2009) retain trans-
formation to describe the second stage of the absorptive capacity pro-
cess and implicitly consider assimilation as a special case for which the
degree of required transformation is low. To synthesize these options,
we might consider that any updating involves a weighted (wP and wN)
combination (C) of prior (P) and new (N) knowledge, as in Eq. (5.1).
The difference between assimilation and transformation thus lies in the
respective weights of prior and new knowledge. In the case of assimila-
tion, prior knowledge dominates in the combination (wP > wN); transfor-
mation involves a greater influence of new knowledge (wP < wN):

C = f (wP P, wN N ). (5.1)

5.1.1.3 Application of new knowledge


The final step of the process, the application of absorbed knowledge
to commercial ends (Cohen and Levinthal 1990), is also referred to as
exploitation (Cohen and Levinthal 1989, Zahra and George 2002). The
emphasis on knowledge application is typical of absorptive capacity liter-
ature and differentiates it from a cultural approach to market orientation.
Managing Capabilities 159

Zahra and George (2002) make an explicit distinction between potential


and realized absorptive capacity, such that the latter “reflects the firm’s
capacity to leverage the knowledge that has been absorbed” (p. 190).
They refer to the ratio of potential to realized absorptive capacity as
the efficiency factor. Although the idea of using ratios of available and
applied knowledge to measure efficiency is an interesting start for iden-
tifying differences across firms – despite the need to introduce two new
constructs (Todorova and Durisin 2007) – firms focusing on absorptive
capacity efficiency may become biased toward the short term, and mort-
gage their growth if they overlook the acquisition of new knowledge
with no obvious potential applications (Lane et al. 2006).
The emphasis on knowledge application also highlights that the rec-
ognition, acquisition, and sustained assimilation of valuable new knowl-
edge is not sufficient to transform it into new products. Some firms can
understand and assimilate complex knowledge but struggle to apply
it in new offers. Whenever such an application is attempted, retrieved
knowledge must be combined with other, existing pieces of technical
and market knowledge. The latter is critical to discovering opportuni-
ties for exploiting (Shane 2000). This combination of new and existing
knowledge, or transmutation (Lichtenthaler 2009), is required for the
firm to apply its acquired knowledge in new product development pro-
jects (Smith, Collins and Clark 2005).

5.1.2 Measuring absorptive capacity


In their review, Lane et al. (2006) identify two approaches to operation-
alizing absorptive capacity: proxies and direct measures. Proxies are
common, especially for R&D intensity, although direct measures of
absorptive capacity are also available. In this section, we distinguish uni-
dimensional from multidimensional measures of absorptive capacity.

5.1.2.1 Proxy utilization


A firm’s absorptive capacity is closely linked to its knowledge base, so
Cohen and Levinthal (1989, 1990) use proxies for the extent of the firm’s
prior knowledge. Because a firm’s knowledge base is a byproduct of its
R&D activity, they use R&D intensity – or the ratio of R&D expenditures
to sales – as a proxy for the extent of the knowledge base. This oper-
ationalization appears in several subsequent articles as well (Mowery,
Oxley and Silverman 1996, Meeus, Oerlemans and Hage 2001, Tsai
2001), although alternative proxies also appear. Ahuja and Katila (2001)
propose using patent data to measure a firm’s knowledge base. Meeus
et al. (2001) complement R&D intensity by measuring the percentage
160 Making Innovation Last

of more highly educated people in the workforce and the number of


problems firms encounter during innovation projects (reversed) as
indicators. In a human resource management setting, Minbaeva et al.
(2003) divide absorptive capacity into employees’ ability (using three
items) and employees’ motivation (using five items) to capture the firm’s
prior knowledge base, as well as the intensity of innovation effort (Kim
2001). Cockburn and Henderson (1998) focus on investments in basic
science, which they measure as total publications per research dollar per
year. Veugelers (1997) employs a dummy variable for whether a firm
has its own R&D department and personnel. Building on the argument
that older and larger firms should have accumulated more knowledge
and possess established information-processing routines (Tushman
and Anderson 1986), the firm’s age (Sørensen and Stuart 2000, Rao and
Drazin 2002) and size (Mowery et al. 1996) have also served as proxies.
All these measures, however, produce inconsistent results. Their low
explanatory power, relative to more specific measures, has been docu-
mented by Lane and Lubatkin (1998) and Lichtenthaler (2009). Their
content validity also is questionable, which provides a likely source of
estimation bias. These proxies for the extent of a firm’s knowledge base,
which is itself a proxy for absorptive capacity, and therefore are proxies
for a proxy. In the end, proxies create significant confusion when we
try to consolidate results from prior literature. For example, Nieto and
Quevedo (2005) use R&D intensity, the common proxy for absorptive
capacity, to measure innovative effort, which they consider an outcome
of absorptive capacity. Thus, these proxies clearly may include a com-
ponent that reflects absorptive capacity, but they also involve specific
factors that become confounded, hence a lower measurement validity.
For these reasons, more specific measures of absorptive capacity are
preferable.

5.1.2.2 Unidimensional scales


This approach aims to tackle content validity concerns by operationaliz-
ing absorptive capacity directly. Szulanski (1996) was the first to develop
a nine-item scale of absorptive capacity to investigate intrafirm best
practice transfers (with reliability coefficient a = 0.83). The items of the
scale, shown in Table 5.1, use <recipient> to refer to a unit receiving a
<practice>.
Although Szulanski (1996) notes the three-stage definition of absorp-
tive capacity, he considers his scale unidimensional and adds the stand-
ardized item scores to form it. Therefore, the scale is treated as formative,
which would be appropriate if the nine items were independent and
Managing Capabilities 161

Table 5.1 Szulanski’s scale of absorptive capacity

s Members of <recipient> have a common language to deal with the <practice>


s <recipient> had a vision of what it was trying to achieve through the transfer
s <recipient> had information on the state-of-the-art of the <practice>
s <recipient> had a clear division of roles and responsibilities to implement the
<practice>
s <recipient> had the necessary skills to implement the <practice>
s <recipient> had the technical competence to absorb the <practice>
s <recipient> had the managerial competence to absorb the <practice>
s It is well known who can best exploit new information about the <practice>
within
s <recipient>
s It is well known who can help solve problems associated with the <practice>

Source: Adapted from Szulanski (1996).

compensatory components of absorptive capacity. However, it has not


been established theoretically that some aspects of absorptive capacity
compensate for others. More common is the prediction that a sequence
of stages is conditional on prior stages.

5.1.2.3 Multidimensional scales


Lane and Lubatkin (1998), Jansen, Van den Bosch and Volberda (2005),
and Lichtenthaler (2009) instead break absorptive capacity down into
different components. Lane and Lubatkin’s (1998) measure of absorptive
capacity in an interorganizational learning setting appears reproduced in
Table 5.2. They measure absorptive capacity at the dyad level, with one
firm (student firm) learning from another (teacher firm), such that they
use the term “relative absorptive capacity,” which builds on “the similar-
ity of both firms’ (1) knowledge bases, (2) organizational structures and
compensation policies, and (3) dominant logics” (Lane and Lubatkin
1998, p. 461). Two items to measure the relevance of knowledge bases
pertaining to basic and specialized knowledge stem from bibliometric
data in scientific and technical publications. They aim to capture the
extent of shared prior knowledge, which in turn should affect the stu-
dent firm’s ability to recognize and value knowledge available from the
teacher firm. Scales of formalization and centralization of management
and R&D, as well as a compensation practice scale, then describe and
compare firms’ organizational structures. Overall, the five scales capture
knowledge-processing systems that influence firms’ knowledge assimila-
tion, which the authors measure with a survey. The more experience
both firms have in solving the same kind of problems, the more the
162 Making Innovation Last

Table 5.2 Lane and Lubatkin’s measure of absorptive capacity

Valuing new knowledge


s Relevance of basic knowledge (1 item)
s Relevance of specialized knowledge (1 item)
Assimilating new knowledge
s Similarity of upper management formalization (5 items, a = 0.74)
s Similarity of lower management formalization (5 items, a = 0.77)
s Similarity of management centralization (3 items, a = 0.65)
s Similarity of R&D centralization (4 items, a = 0.76)
s Similarity of compensation practices (13 items, a = 0.62)
Commercializing new knowledge
s Number of shared research communities (1 item)

Source: Adapted from Lane and Lubatkin (1998).

student firm should be able to find applications of newly assimilated


knowledge from the teacher firm. Therefore, Lane and Lubatkin use the
number of shared research communities, which they also obtain from
bibliometric data, to assess the likelihood that assimilated knowledge
gets implemented in new products.
Unlike Szulanski’s (1996) scale, these measures capture three dimen-
sions of absorptive capacity. However, they can assess relative absorp-
tive capacity only in a specific interorganizational learning setting.
Additionally, the items appear more like a set of potential proximal
antecedents of absorptive capacity, rather than measures of absorptive
capacity per se. Moreover, Lane and Lubatkin (1998) report reliabil-
ity issues that prevent them from aggregating the five subscales of the
assimilation of new knowledge. Furthermore, content issues plague this
approach, because of the strong hypothesis that the similarity of organi-
zational structures can measure the capacity to assimilate new knowl-
edge. Such issues may be the cause of the low predictive validity of the
five subscales: only two reveal the expected significant positive effect
on interorganizational learning, two have a significant negative effect,
and one has no significant effect. In the end, extreme caution must be
exercised when using this 33-item scale for assessing absorptive capac-
ity. Another proposition involving 11 submeasures with 32 items suffers
similar limitations (Lane, Salk and Lyles 2001).
By instead building on Zahra and George’s (2002) theoretical prop-
osition of a four-dimensional approach to absorptive capacity (two
potential absorptive capacity, two realized absorptive capacity), Jansen
et al. (2005) have developed a 21-item measure of the acquisition,
Managing Capabilities 163

assimilation, transformation, and exploitation of external knowledge


(see Table 5.3).
This first multidimensional measure with consistent subscales pro-
duces five significantly positive interdimension correlations (out of six),

Table 5.3 Jansen et al.’s measure of absorptive capacity

Potential absorptive capacity


Acquisition (a = 0.79)
s Our unit has frequent interactions with corporate headquarters to acquire
new knowledge
s Employees of our unit regularly visit other branches
s We collect industry information through informal means (e.g., lunch with
industry friends, talks with trade partners)
s Other divisions of our company are hardly visited (reverse coded)
s Our unit periodically organizes special meetings with customers or third
parties to acquire new knowledge
s Employees regularly approach third parties such as accountants, consultants,
or tax consultants
Assimilation (a = 0.76)
s We are slow to recognize shifts in our market (e.g., competition, regulation,
demography; reverse coded)
s New opportunities to serve our clients are quickly understood
s We quickly analyze and interpret changing market demands

Realized absorptive capacity


Transformation (a = 0.72)
s Our unit regularly considers the consequences of changing market demands
in terms of new products and services
s Employees record and store newly acquired knowledge for future reference
s Our unit quickly recognizes the usefulness of new external knowledge to
existing knowledge
s Employees hardly share practical experiences (reverse coded)
s We laboriously grasp the opportunities for our unit from new external
knowledge (reverse coded)
s Our unit periodically meets to discuss consequences of market trends and
new product development
Exploitation (a = 0.71)
s It is clearly known how activities within our unit should be performed
s Client complaints fall on deaf ears in our unit (reverse coded)
s Our unit has a clear division of roles and responsibilities
s We constantly consider how to better exploit knowledge
s Our unit has difficulty implementing new products and services (reverse coded)
s Employees have a common language regarding our products and services

Source: Adapted from Jansen et al. (2005).


164 Making Innovation Last

with the sixth being positive but not significant. Jansen et al. (2005) use
confirmatory factor analysis to compare different solutions and empiri-
cally confirm the superiority of a four-dimension structure. When items
are forced to relate to a single factor, which provides a test of whether
they converge into a global measure of absorptive capacity, the model
adjustment significantly decreases. A two-factor structure (with acquisi-
tion and assimilation items joined into potential absorptive capacity, and
transformation and exploitation into realized absorptive capacity) also
results in a poorer fit than the four-factor solution. All four dimensions
are thus consistent and distinct at the same time. However, because
they are modeled as dependent variables, their predictive validity can
be assessed only on the basis of significantly positive correlations with a
given performance measure.
Lichtenthaler’s (2009) proposed measure shares multiple items with
Jansen et al.’s (2005) scale, but it also builds on Lane et al.’s (2006)
process-based definition of absorptive capacity by emphasizing explora-
tory, transformative, and exploitative learning processes (see Table 5.4).
Lichtenthaler (2009) establishes the dimensionality and convergent
and discriminant validity of the scale through exploratory and confirm-
atory factor analyses of data gathered from 175 industrial firms. He tests
the hierarchical structure of the scale by comparing the fit of the dif-
ferent confirmatory factor analytical models. The best fit comes from a
model in which absorptive capacity is a third-order factor. Exploratory,
transformative, and exploitative learning are the second-order factors,
and recognize, assimilate, maintain, reactivate, transmute, and apply
make up the first-order factors. This model corresponds to the structure
that can be predicted based on the theory (Figure 5.2). All paths from
the items to the first-order factors, as well as the second- and third-order
factor loadings, are strongly significant.
Unlike Jansen et al. (2005), Lichtenthaler (2009) models absorptive
capacity as an independent variable. The positive and significant effects
on both innovation and performance indicate that the measure has
good predictive validity. In the end, this scale captures the three dimen-
sions of absorptive capacity through their related learning processes and
offers satisfactory psychometric properties. It thus seems to be the most
advanced measurement tool for absorptive capacity, covering all stages
of absorptive capacity through corresponding learning processes.
Therefore, it is possible to consider absorptive capacity at different lev-
els of detail: a global measure of absorptive capacity, a three-component
measure, or a six-component measure. Although replicated use is still
needed to test the scale’s stability across varying conditions, this scale
Managing Capabilities 165

Table 5.4 Lichtenthaler’s measure of absorptive capacity

Exploratory learning
Recognize (a = 0.96)
s We frequently scan the environment for new technologies
s We thoroughly observe technological trends
s We observe in detail external sources of new technologies
s We thoroughly collect industry information
s We have information on the state-of-the-art of external technologies
Assimilate (a = 0.81)
s We frequently acquire technologies from external sources
s We periodically organize special meetings with external partners to acquire
new technologies
s Employees regularly approach external institutions to acquire technological
knowledge
s We often transfer technological knowledge to our firm in response to
technology acquisition opportunities

Transformative learning
Maintain (a = 0.87)
s We thoroughly maintain relevant knowledge over time
s Employees store technological knowledge for future reference
s We communicate relevant knowledge across the units of our firm
s Knowledge management is functioning well in our company
Reactivate (a = 0.89)
s When recognizing a business opportunity, we can quickly rely on our existing
knowledge
s We are proficient in reactivating existing knowledge for new uses
s We quickly analyze and interpret changing market demands for our technologies
s New opportunities to serve our customers with existing technologies are
quickly understood

Exploitative learning
Transmute (a = 0.86)
s We are proficient in transforming technological knowledge into new products
s We regularly match new technologies with ideas for new products
s We quickly recognize the usefulness of new technological knowledge for
existing knowledge
s Our employees are capable of sharing their expertise to develop new products
Apply (a = 0.86)
s We regularly apply technologies in new products
s We constantly consider how to better exploit technologies
s We easily implement technologies in new products
s It is well known who can best exploit new technologies inside our firm

Source: Adapted from Lichtenhaler (2009).


166 Making Innovation Last

Recognize

Exploratory
learning

Assimilate

Maintain

Absorptive Transformative
capacity learning

Reactivate

Transmute

Exploitative
learning

Apply

Figure 5.2 Lichtenthaler’s third-order measure of absorptive capacity


Source: Adapted from Lichtenthaler (2009).

appears to be the most effective to measure absorptive processes as


reflections of absorptive capacity.

5.2 Absorptive capacity and innovation

From when it was first introduced, the concept of absorptive capac-


ity has consistently been viewed as a critical antecedent of innovative
performance. It is therefore natural to find some research that investi-
gates the strength of the relationship between absorptive capacity and
innovative performance. Yet Zahra and George’s (2002) “reconceptu-
alization of absorptive capacity as a dynamic capability pertaining to
knowledge creation and utilization” (p. 185) suggests that the returns on
performance might not be direct. Dynamic capabilities are “the firm’s
ability to integrate, build, and reconfigure internal and external com-
petencies to address rapidly changing environments” (Teece, Pisano
and Shuen 1997, p. 516). Eisenhardt and Martin (2000) refine this defi-
nition to consider dynamic capabilities as processes, such as product
Managing Capabilities 167

development, knowledge transfer, and replication routines. In this view,


absorptive capacity supports the ongoing adaptation of a firm’s resource
base through its absorption of external knowledge. Absorptive capac-
ity refers to the ability to build or adapt capabilities, which constitute
resources (Helfat 2007), to affect various aspects of performance.
In this section, we integrate empirical results pertaining to the rela-
tionship between absorptive capacity and innovation before focusing
on the capabilities that are likely related to absorptive capacity and
should have an effect on innovation. Following the existing literature,
we deal especially with technological and market capabilities, as well as
how they might interact.

5.2.1 Absorptive capacity and new products


Perhaps due to the central assumption that absorptive capacity relates
to a firms’ capacity to innovate, few studies actually measure this rela-
tionship. Of the relatively few articles that contain some empirical con-
sideration of the effects of absorptive capacity, a small subset of studies
measures both absorptive capacity and some innovative outcome.
Consistent with our review of measurements in Section 5.1.2, most stud-
ies also use one or more proxies to measure absorptive capacity. In fact,
only Lichtenthaler (2009) uses a specific measure and relates it to inno-
vative outcomes. Most dependent variables capture the performance of
either the new product development process or the new product itself.

5.2.1.1 Impact on development process performance


The first and most remote proxy for absorptive capacity is R&D inten-
sity, defined as the ratio of R&D expenditures to sales. McMillan, Mauri
and Hamilton (2003) use this measure to capture the absorptive capac-
ity of 12 large US pharmaceutical firms over 13 years and find that R&D
intensity has a significantly positive effect on the number of approved
new molecular entities. However, although it is expected that firms’
R&D investments increase their new product development outcomes,
absorptive capacity is not necessarily involved in the explanation of the
observed effect.
Tsai (2001) also uses the R&D intensity of 60 business units to explain
new product development process performance, measured as an innova-
tion achieved rate (i.e., the number of new products introduced in a par-
ticular year, divided by the target number of introductions). The positive
effect of R&D intensity on the innovation achieved rate is confirmed.
However, as with the study by McMillan et al. (2003), it is impossible to
credit absorptive capacity for this observed effect of R&D intensity, in
168 Making Innovation Last

spite of the care taken to include controls for business unit size and net-
work position. The latter variable was operationalized with an in-degree
centrality measure, equal to the number of other units from which a
focal unit receives new product development knowledge. As expected,
the more external knowledge sources a unit has,1 the more likely it is to
reach its new product introduction objectives. But more important, the
interaction of the unit’s centrality and R&D intensity is significant and
positive, in support of Tsai’s (2001) hypothesis that absorptive capac-
ity positively moderates the effect of network position on innovation.
Therefore, the effect of access to knowledge about new product develop-
ment processes appears to depend on the recipient’s absorptive capacity.
The knowledge base, or stock of prior knowledge, is another commonly
used proxy. Although it is not a measure of absorptive capacity per se,
it is closer to absorptive capacity than R&D intensity (Section 5.1.2.1).
McMillan et al. (2003) use publication and patenting activities to appraise
the knowledge base of pharmaceutical firms in their sample and find
that the number of scientific publications and stock of patents has a
significant and positive effect on the number of new molecular entities
issued. Self-citation (i.e., a firm’s references to its own prior patents)
has a negative effect on this outcome. Although the authors expect a
positive effect, we find it consistent and typical of a competence trap
that stems from a core rigidity (Leonard-Barton 1992): the more a firm
relies on its prior knowledge, the more likely it is to overlook new exter-
nal knowledge and thus miss new product development opportunities.
Their use of longitudinal data favors the observation of such a negative
effect, because the damage from exploiting existing knowledge appears
only in the long run (March 1991).
Ahuja and Katila (2001) use longitudinal data as well, including 598
acquisition observations over five years from 72 leading firms in the
global chemicals industry. They consider either (1) the impact of knowl-
edge base acquisition, as a corollary of firm acquisition, on new product
development performance or (2) the number of successful patent appli-
cations. First, they find a positive, significant effect of the size of the
acquired knowledge base, measured as the number of patents obtained
by acquired firms in the five years prior to their acquisition. Although
significant, this effect is very small. In addition, acquiring external
knowledge is only one step in the absorption process (Section 5.1.1),
and the capacity that acquiring firms have to absorb the acquired firms’
knowledge is not fully captured in this study, which hinders the obser-
vation of potentially larger effects. Second, they estimate the relation-
ship between the relatedness of acquired knowledge and new product
Managing Capabilities 169

development performance. As an antecedent of absorptive capacity


(Section 5.1.1.2), relatedness of knowledge, or the patent overlap in the
knowledge bases of firms prior to acquisition, should enhance external
knowledge absorption. But if the acquired knowledge is too similar to
prior knowledge, its benefits might be limited. Ahuja and Katila (2001)
hypothesize that a moderate degree of relatedness should provide the
most significant positive impact on new product development perfor-
mance, and they observe as expected an inverted U-shaped relationship.
Using his specifically dedicated scale (described in Section 5.1.2.3),
Lichtenthaler (2009) also estimates the effect of absorptive capacity on
new product development performance. The measure of the dependent
variable uses a three-item scale to capture perceptions of the degree to
which objectives have been met, profitability, and success, relative to
competitors. Data come from a survey of German medium-sized and
large industrial firms, with a final sample of 175 firms spread across a
range of industries. Their absorptive capacity and new product develop-
ment performance correlate significantly. In addition, their structural
model estimation, which includes the effect of absorptive capacity on
new product performance, confirms the relationship. This effect also
shows significance in a regression model that controls for other poten-
tial antecedents of new product development such as firm size, R&D
intensity, and interactions of absorptive capacity with technological and
market turbulence.
Ultimately, only one study specifically measures absorptive capacity
and relates it to new product development performance (Lichtenthaler
2009), indicating a significant, positive effect. Other studies that use
proxies for absorptive capacity exhibit consistent results, although
approximations of the measurement of absorptive capacity weaken
their conclusions. These studies also report additional results of interest.
First, absorptive capacity moderates the effect of access to knowledge on
the new product development process (Tsai 2001). Second, the more a
firm relies on its own knowledge base, the lower its development per-
formance (McMillan et al. 2003). Finally, the relatedness of the acquired
knowledge has an inverted U-shaped relationship with the firm’s new
product development performance (Ahuja and Katila 2001).

5.2.1.2 Impact on new product performance


Stock, Greis and Fischer (2001) approximate absorptive capacity on the
basis of R&D intensity and estimate its effect on the technical perfor-
mance of new products in a computer modem industry. The performance
level is the yearly average transmission rate of modems introduced by a
170 Making Innovation Last

firm. Using 131 observations over 24 years, they find a quadratic effect
of R&D intensity: typical of an inverted U-shaped pattern, R&D inten-
sity has a significant, positive effect, but its quadratic term exhibits a
significantly negative coefficient. The authors suggest some potential
causes of this finding. First, they consider whether the result is evidence
of decreasing returns from learning. Although such an explanation is
possible, it should be tested using the logarithm of R&D intensity, which
is more specific to learning rates. Second, they mention the potential for
moderating variables. Third, the authors speculate that firms investing
most in R&D might be able to offer a wider product range, from lower to
higher technical performance, that might decrease average product per-
formance. It remains to examine the relationship between R&D inten-
sity and the dispersion of the transmission rates of introduced modems,
as a test of such alternative explanation.
Liao, Fei and Chen (2007) use Minbaeva et al.’s (2003) human resources-
centric measure of absorptive capacity, which relies on employees’ ability
and motivation (Section 5.1.2.1). Their measure of product innovation
capability captures both new product performance (with three items)
and new product development process performance (also with three
items). The data come from a survey of employees of 17 Taiwanese firms
(n = 355). They report significant, positive correlations between prod-
uct innovation and employees’ learning ability and motivation. These
results suggest the knowledge base is an antecedent of innovation.
Although absorptive capacity measurement is unusual, which makes
comparisons or replications difficult to perform, this evidence neverthe-
less indicates an effect on new product development and performance.
Moorman and Miner (1997) do not explicitly seek to measure
absorptive capacity, but they study organizational learning, defined
as “the amount of stored information an organization has” (p. 93)
about a particular product category. This concept is very close to the
notion of knowledge base. They measure it with four items pertain-
ing to knowledge, experience, familiarity, and R&D investment, using
data obtained from a survey of large, US-based firms (although with a
relatively small sample n = 92). Organizational learning correlates sig-
nificantly with the short-term financial performance of new products,
but the authors find no significant relationship with the creativity of
new products. In a regression model, controlling for technological and
market turbulence, as well as other variables and interactions (none of
which were significant), they confirm that the size of the knowledge
base has a positive effect on the short-term financial performance of
new products.
Managing Capabilities 171

Moorman and Miner (1997) also study another characteristic of


organizational memory: memory dispersion, that is, the degree to which
memory can be shared throughout the organization. We interpret it as
a reflection of the firm’s ability to disseminate knowledge, related to
the maintenance subdimension of absorptive capacity’s transformative
learning feature (Lichtenthaler 2009). They measure it with a scale that
captures the degree of consensus among people working on a new prod-
uct development project, although in different areas (product design,
brand name, etc.). Thus, it offers only a remote proxy of knowledge dis-
semination. This characteristic of the knowledge base exhibits a positive
relationship with both new product creativity and new product short-
term financial performance. Furthermore, the size of the coefficients
indicates that the dispersion of memory may be more important than
the size of the knowledge base for leveraging creativity and financial
returns. The importance of this characteristic is also consistent with
an expected cross-fertilization effect of capacity (Cohen and Levinthal
1990): when more people are exposed to newly acquired knowledge, it
becomes more likely that this knowledge combines with prior knowl-
edge, so more people become endowed with increased absorptive
capacity (Ahuja and Katila 2001). This reasoning echoes Tsai’s (2001)
conclusion, as confirmed by Soo, Devinney and Midgley (2007), that the
mere availability of knowledge has limited impact, compared with the
combination of availability and absorptive capacity.
Finally, Rothaermel and Alexandre (2009) focus on a different, indirect
effect of absorptive capacity. A firm’s absorptive capacity positively interacts
with its ambidexterity, in the form of technology exploration, to influence
innovativeness. Ambidexterity is “the ability of a firm to simultaneously
explore and exploit” (O’Reilly and Tushman 2008, p. 185). Rothaermel
and Alexandre (2009) operationalize firm ambidexterity as the ratio of
the firm’s external sourcing of new technologies to its total sourcing
of new technologies, bound between 0 (no external sourcing) and 1
(all new technologies are externally sourced). They initially indicate an
inverted U-shaped effect of this ratio on innovativeness (measured by a
count of patents), such that it is better to have a mix of internally and
externally sourced new technologies. But they also reveal that absorptive
capacity enhances the benefits of ambidexterity. As Figure 5.3 depicts, a
higher degree of absorptive capacity implies steeper slopes in the curve.
These studies all report a direct or indirect positive effect of hetero-
geneous measures of absorptive capacity on new product performance,
whether technical (Stock et al. 2001), financial (Moorman and Miner
1997), or more global (Moorman and Miner 1997, Liao et al. 2007,
172 Making Innovation Last

3.0

2.5
Financial performance

2.0

1.5

1.0

0.5

1.0
0.9
0.8
0.7
0.0

0.6
0.5
al)
0.4
1 3
/tot rcing
0.3

5
Absorptiv7 l
0.2

9 a
e capacity11 tern ou
0.1

13 0
(Ex logy s
o
techn

Figure 5.3 Moderating effect of absorptive capacity on the relationship between


technology exploration and firm innovativeness
Source: Rothaermel and Alexandre (2009).

Lichtenthaler 2009). The only partly dissonant result is Stock et al.’s


(2001) inverted U-shaped relationship, which remains to be interpreted.
These results overall indicate that absorptive capacity is beneficial to
innovation, but none can really offer detailed insights into the mecha-
nisms that are involved. A dynamic capability approach to absorptive
capacity (Zahra and George 2002) can help explain how the develop-
ment of other capabilities (e.g., functional) might mediate the effect of a
firm’s absorptive capacity on its innovative performance.

5.2.2 Absorptive capacity and firm capabilities


Absorptive capacity being a firm’s capacity to learn from external knowl-
edge, it is akin to a second-order competence or the “competence to
build new competences” (Danneels 2008, p. 519). Of the various
competencies that firms can develop from external knowledge, two
Managing Capabilities 173

categories of functional capabilities are consistently recognized as essen-


tial for new product development: technological and market capabili-
ties (Dutta, Narasimhan and Rajiv 1999, Moorman and Slotegraaf 1999,
Danneels 2002, 2008). The first grants the firm mastery over technology
to be included in innovative new products, while the latter enables the
firm to analyze its market and find the best opportunities.
Because new product development is a spanning process, it requires
the integration of inside-out and outside-in capabilities (Day 1994).
Although inside-out technological and market capabilities might be
involved (e.g., technology development, customer relationship man-
agement [CRM] implementation), absorptive capacity relates primarily
to outside-in processes, because it pertains to the absorption of exter-
nal knowledge. Market sensing, customer linking, channel bounding,
and technology monitoring are examples of market and technological
outside-in capabilities, all of which depend on the firm’s absorptive
capacity. However, some authors explicitly consider absorptive capac-
ity an outcome of market and technological capabilities (Danneels
2002, Narasimhan et al. 2006). The perception of absorptive capacity
as either an antecedent or a consequence of functional capabilities
may reflect the dynamics at work, because “when a firm builds its . . .
capabilities, its absorptive capacity increases, which, in turn encour-
ages receptivity to external information” (Zhou and Wu 2010, p. 547).
Alternatively, perhaps absorptive capacity and functional capabili-
ties overlap to such an extent that it is difficult to differentiate them.
A closer examination of the definition of functional capabilities is thus
necessary.

5.2.2.1 Technological capability and innovation


The technological capability of a firm refers to its ability to use its techno-
logical knowledge and competence to formulate, develop, and manufac-
ture new products with certain features (Moorman and Slotegraaf 1999,
Danneels 2002). It comprises the ability “to combine/recombine compo-
nents, linkages between the components, methods, processes and tech-
niques, and the underpinning core concepts” (Afuah 2002, p. 172) and
then to achieve success through these abilities, relative to competitors
(Coombs and Bierly 2006). Existing literature thus frequently emphasizes
the role of technological capability for the development of successful new
products (Anderson and Tushman 1990, Gatignon and Xuereb 1997).
A review of these elements highlights the connections between tech-
nological capability and the absorptive capacity of technological knowl-
edge, especially in the assimilation/transformation and exploitation
174 Making Innovation Last

stages (Section 5.1.1.2 and Section 5.1.1.3). This parallel is further rein-
forced by an examination of the objective measures of technological
capability in prior literature. For example, R&D activity measures, like
R&D intensity, are common. However, as we note in Section 5.1.2.1,
it is also commonly used as a proxy for absorptive capacity. Outcome
measures based on firms’ patenting activity are also used (Moorman and
Slotegraaf 1999). In this case, the confusion involves innovative perfor-
mance measures (Section 5.2.1.1) and creates serious content validity
problems (Coombs and Bierly 2006).
Dutta et al. (1999) propose an alternative method. They measure a
firm’s R&D capability as the inverse of the firm’s functional inefficiency.
Efficiency derives from building an R&D frontier/transformation func-
tion. The maximum possible technological output can be estimated from
the resources the firm deploys (inputs). The realized output then reflects
patent counts, weighted by citation. Finally, R&D capacity is estimated
as an inverse function of the difference between this maximum possible
output and the realized output. This input–output combination method
also has been documented and implemented in subsequent research,
which indicates a positive, significant effect of R&D capability on high-
tech firms’ profitability (Dutta, Narasimhan and Rajiv 2005) and absorp-
tive capacity (Narasimhan et al. 2006).
Pleading for more specific measures, Zhou and Wu (2010) suggest a
perceptual measure of technological capability (see Table 5.5). The con-
tent of the items confirms our conclusion that technological capability is
a special case of absorptive capacity applied to technological knowledge.
Zhou and Wu (2010) report satisfactory properties for their scale in
terms of both reliability and validity. To establish that the measure is
consistent with the R&D intensity tradition – despite being different
and more specific – they show that the measures relate significantly to
each other. They also test the effect of technological capability on the
exploitation and exploration of knowledge and technologies, defined
respectively as the extent to which a firm uses existing or explores new
knowledge and technologies in its product development. Their main
hypotheses state that technological capability increasingly fosters
exploitation but has an inverted U-shaped relationship with exploration
(Figure 5.4). Both hypotheses are supported by data the authors collected
from 192 firms operating in high-technology sectors in China, and
their predicted effects are theoretically supported by various rationales.
On the one hand, the increasing effect of technological capability on
exploitation may be a consequence of the self-reinforcing nature of
learning (Section 5.1.1): greater capability in a field leads firms to take
Managing Capabilities 175

Table 5.5 Zhou and Wu’s measure of technological capability

Compared to your major competitors, how would you evaluate your firm’s
capabilities in the following areas (1: much worse; 7: much better)
s Acquiring important technology information
s Identifying new technology opportunities
s Responding to technology changes
s Mastering the state-of-art technologies
s Developing a series of innovations constantly

Source: Adapted from Zhou and Wu (2010).

Exploration

Exploitation

Technological capability

Figure 5.4 Effects of technological capability on exploration and exploitation of


knowledge in new product development

advantage of their knowledge base and avoid the costs of exploration.


On the other hand, firms rarely can rely exclusively on their own knowl-
edge creation capacity. Instead, they need exploration in order to build
more technological capability. Once their technological capacity reaches
a given threshold, exploration decreases, and exploitation becomes
dominant. From this point forward, the firm faces the threat of rigidities
and inertia. Ambidexterity is critical as a tactic to avoid such a trap.
Beyond the significant and positive effects of technological capabil-
ity on both exploration and exploitation, it is necessary to model the
curvilinear effects to understand how technological capability influ-
ences knowledge utilization. The observed relationships help explain
176 Making Innovation Last

the seemingly conflicting effects of capabilities (Levinthal and March


1993), as well as why technology-leading firms sometimes fail to adapt
(Christensen 1997). They also are consistent with Franco et al.’s (2009)
observation that technological capabilities aid survival “only when a
firm creates or adapts to changes in the industry and enters – either late
or early – new market segments” (p. 1856). In the long run, technology
capability should ensure the firm’s competitive edge through the explo-
ration of new knowledge and technology.

5.2.2.2 Marketing capability and innovation


A firm’s marketing capability refers to its ability to identify customers’
needs, understand the factors that influence consumer choice behavior
(Dutta et al. 1999), serve certain customers (Danneels 2002), and man-
age relationships with end users and channel members (Moorman and
Slotegraaf 1999). Many of the resources a firm owns contribute to its
marketing capability, including “knowledge of customer needs, prefer-
ences and purchasing procedures, distribution and sales access to cus-
tomers, customer goodwill or franchise reflected in the reputation of
the firms and its brands, and communications channels for exchange
of information” (Danneels 2002, pp. 1102–1103). Firms with superior
marketing capability should be able to achieve better targeting and posi-
tioning relative to their competitors, and thus superior performance
(Jaworski and Kohli 1993, Day 1994).
The definition of marketing capabilities is similar to that of market
orientation, emphasizing the generation and use of market intelligence
(Jaworski and Kohli 1993), especially about customers and competi-
tors. Day (1994) relates this behavioral view of market orientation to a
market-sensing capability that builds on market information process-
ing activities, or “the active acquisition and distribution of information
about the needs and responses of the market, how it is segmented, how
relationships are sustained, the intentions and capabilities of competi-
tors, and the evolving role of channel partners” (p. 43). Morgan, Vorhies
and Mason (2009) clearly distinguish marketing capabilities from mar-
ket orientation by noting that the former refer to the set of abilities a
firm can deploy to take advantage of the stock of knowledge it draws
from its market orientation.
Traditionally, market capability has been measured according to its
main hypothesized outcome, namely market performance. For exam-
ple, Moorman and Slotegraaf (1999) use the share of category volume,
arguing that this indicator of market performance should correlate with
marketing capability. Although this approach seems justified, mar-
ket share also has a wide range of antecedents, some of which are not
Managing Capabilities 177

related to marketing capability per se. Moreover, performance measures


cannot provide proxies for capabilities when the dependent variable is
some sort of performance, at the risk of being tautological. Narasimhan
et al. (2006) avoid this issue with their input–output approach (see also
Dutta et al. 1999 and the discussion in Section 5.2.2.1), in which they
estimate marketing capability as the inverse of the difference between
the maximum sales a firm could expect from its involved resources and
assets (e.g., cumulative advertising and marketing expenditures, invest-
ment in customer relationships, existing customer base) and the sales
it actually achieves. More directly, Vorhies and Morgan’s scale (Vorhies
and Morgan 2005, Morgan et al. 2009) measures eight market-related
capabilities (see Table 5.6). They test the scale proprieties with survey
data from 230 top US marketing executives in various industries (prod-
ucts and services, durables and nondurables, consumer and business).
Market-related capabilities relate to various processes, ranging from mar-
keting operational tasks (e.g., communications) to more strategic pro-
cesses (e.g., marketing planning).
Vorhies and Morgan (2005) and Morgan et al. (2009) are interested
in the effect of these capabilities on business performance in general,
not on innovation. Yet three of their reported empirical results are rel-
evant to the issues discussed in this section. First, product capabilities,
which pertain to new product development activities, relate positively
to all the other marketing capabilities. The average correlation coef-
ficient is moderate. Although no correlational model can firmly estab-
lish the causal nature of a structural relationship, marketing capabilities
appear to be linked and can help determine new product development
performance. Second, the average correlation coefficient between mar-
ket-related capabilities and market effectiveness (composite of market
share, sales, and customer base) is small, which may be consistent with
the inefficiency of market performance measures as proxies for mar-
keting capabilities. Third, Morgan et al. (2009) measure market ori-
entation to provide correlations between marketing capabilities and
Jaworski and Kohli’s (1993) behavioral measure of market orientation.
The average correlations are small with intelligence generation and dis-
semination and moderate with responsiveness. Although related (i.e.,
all correlation coefficients are positive and at least marginally signifi-
cant), marketing capabilities are still distinct from market orientation
behaviors.

5.2.2.3 Complementarity of marketing and technological capabilities


Several articles suggest that the effects of technological or marketing
capabilities are not independent. Consistent with the synergistic effect
178 Making Innovation Last

Table 5.6 Vorhies and Morgan’s scale of marketing capabilities

Rate your business unit relative to your major competitors in terms of its marketing
capabilities in the following areas (−3: “much worse than competitors”; +3: “much
better than competitors”)
Pricing capabilities (a = 0.83)
s Using pricing skills and systems to respond quickly to market changes
s Knowledge of competitors’ pricing tactics
s Doing an effective job of pricing products/services
s Monitoring competitors’ prices and price changes
Product capabilities (a = 0.80)
s Ability to develop new products/services
s Developing new products/services to exploit R&D investment
s Successfully launching new products/services
s Insuring that product/service development efforts are responsive to customer needs
Distribution capabilities (a = 0.90)
s Strength of relationships with distributors
s Attracting and retaining the best distributors
s Adding value to our distributors’ businesses
s Providing high levels of service support to distributors
Marketing communication capabilities (a = 0.84)
s Developing and executing advertising programs
s Advertising management and creative skills
s Public relations skills
s Brand image management skills and processes
s Managing corporate image and reputation
Selling capabilities (a = 0.90)
s Giving salespeople the training they need to be effective
s Sales management planning and control systems
s Selling skills of salespeople
s Sales management skills
s Providing effective sales support to the sales force
Market information management capabilities (a = 0.86)
s Gathering information about customers and competitors
s Using market research skills to develop effective marketing programs
s Tracking customer wants and needs
s Making full use of marketing research information
s Analyzing our market information
Marketing planning capabilities (a = 0.91)
s Marketing planning skills
s Ability to effectively segment and target market
s Marketing management skills and processes
s Thoroughness of marketing planning processes
Marketing implementation capabilities (a = 0.91)
s Allocating marketing resources effectively
s Organizing to deliver marketing programs effectively
s Translating marketing strategies into action
s Executing marketing strategies quickly

Source: Adapted from Vorhies and Morgan (2005).


Managing Capabilities 179

modeled by the multiplicative response function in Gatignon and


Xuereb (1997), technology and marketing complement each other.
Dougherty (1992) argues that “a product constitutes the integration
of markets and technologies, and cannot be understood as one or the
other separately” (p. 78), which implies that new product development
is a process of linking technology and customers (Danneels 2002). The
transformation of external knowledge into new products requires the
identification of potential market opportunities for applications, with
knowledge embedded in new products. These processes relate to the
transmutation and application of external knowledge, both parts of the
exploitative learning processes discussed in Section 5.1.1.3.
Consider a firm seeking new knowledge outside its boundaries. Its tech-
nological capability helps this firm identify and judge the relative merits
of various technologies (Narasimhan et al. 2006), as well as reach a deep
understanding of assimilated knowledge (Cassiman and Veugelers 2006).
In addition, its marketing capabilities provide a better sense of what
the market will value, now and in the future, which should guide the
selection of external knowledge to acquire. Now imagine a firm with
existing technological knowledge. Its superior technological capability
enables it to transmute its knowledge base into more potential applica-
tions and derive greater benefit from its technological assets. Regarding
its marketing capabilities, it attains demand-side (increased demand
for new products) and supply-side (more targeted development efforts,
reduced costs) advantages (Narasimhan et al. 2006).
Dutta et al. (1999) demonstrate that the interaction of technological
and marketing capabilities is in fact the most important determinant of
a firm’s performance in high-technology markets. They interpret this
complementarity as indicating an ability to use marketing capabili-
ties to enhance the firm’s “ability to generate innovative technologies
that have applications across a range of industries” (Dutta et al. 1999,
p. 547). Although this interaction is not the most important source of
performance in their sample, Song et al. (2005) empirically support its
existence, at least in technologically turbulent environments (Section
5.4). Moorman and Slotegraaf (1999) also expect conditional effects,
such that complementarity should operate only if the environment
provides information to justify a response that requires the deployment
of these capabilities. As empirical evidence, they compare relationships
between capabilities and firm performance (level and speed of brand
quality improvement) before and after the passage of the Nutrition
Labeling and Education Act. After passage of the Act, the interaction
term became significant for both the level and speed of brand quality
improvement.
180 Making Innovation Last

5.3 Organizational antecedents of absorptive capacity

This discussion of the organizational antecedents of absorptive capac-


ity consists of three parts: (1) organizational culture as a framework for
learning processes and behaviors, (2) the effects of organizational struc-
ture on absorptive capacity, and (3) the relationships between absorp-
tive capacity and relevant organizational processes.

5.3.1 Organizational culture


As the previous sections reveal, absorptive capacity relates theoretically
to organizational learning, both implicitly (Cohen and Levinthal 1989)
and explicitly (Lane et al. 2006), and can be operationalized by measur-
ing selected learning processes (Lichtenthaler 2009). Absorptive capacity
thus depends on how a firm considers new knowledge in general, and
how its culture influences the way it deals with that knowledge.

5.3.1.1 Preparedness for the consequences of new knowledge absorption


Readiness to absorb new knowledge requires a firm to accept the poten-
tial that the new knowledge will partly invalidate its existing knowledge.
The lack of familiarity and of prior experience inherent in new knowledge
makes its outcomes less predictable than those from existing knowledge.
When a firm perceives the associated risk as too great, whether due to
some sort of myopia or anticipated costs, it likely refuses to jeopardize
its current situation. Then, maintaining its knowledge base becomes its
objective, and the firm is no longer open to external knowledge.
This proposition relates to Danneels’s (2008) study of the antecedents
of firms’ marketing and technology capacities, including the effect of
willingness to cannibalize, that is, “the extent to which a firm is pre-
pared to reduce the actual or potential value of its investments” (Chandy
and Tellis 1998, p. 475) to make new, different investments. A firm’s
willingness to cannibalize enhances its capacity to explore new markets
and technological domains. Tolerance for failure also has a significant
and beneficial effect on new technology exploration. This finding cor-
roborates the idea that firms that are ready to risk invalidating some
knowledge – and thus depreciating part of their assets – are more likely
to explore external knowledge.

5.3.1.2 Culture and informational behaviors


To describe informational behaviors and their cultural antecedents,
Moorman (1995) theoretically links organizations’ cultural traits to
market information processes. Market information “refers to external
Managing Capabilities 181

information that cuts across all functional areas of the firm” (Moorman
1995, p. 319). Organizational culture is “the pattern of shared values
and beliefs that help individuals understand organizational func-
tioning and that provide norms for behavior in the organization”
(Deshpandé and Webster 1989, p. 4). Four key information processes
might thrive on the different types of culture outlined by Deshpandé,
Farley and Webster (1993).
First, information acquisition processes bring “information about the
external environment into the boundary of the organization” (Moorman
1995, p. 320), whether through intelligence generation (Kohli and
Jaworski 1990) or through information search (Weiss and Heide 1993).
Because it implies seizing pieces of external knowledge and bringing
them inside the firm, this process refers to the recognition and assimila-
tion stages defined by Lichtenthaler (2009) as the two subdimensions
of exploratory learning. Because it values an external focus and flexibil-
ity, an adhocracy culture should foster individual scouting of the envi-
ronment and the collection of potentially valuable information, which
then enters the firm’s boundaries. Employees’ empowerment (Leonard-
Barton 1992) is critical at this stage.
Second, information transmission processes entail the dissemination
of information within the organization, whether informal and through
interpersonal interactions or formal and proactively organized through
meetings, presentations, memos, training, and so on. Although knowl-
edge transfer procedures are necessary to channel individual effort
toward corporate aims, people’s initiative and creativity still must be
preserved (Leonard-Barton 1992). Through such processes, the locus of
knowledge moves from individuals to the organization: individually
held knowledge gets transferred to the organization, which stores and
shares it. It also becomes more institutional and more widely available
within the firm, in line with the maintenance subdimension of trans-
formative learning (Lichtenthaler 2009). These transmission processes
should thrive in a clan culture, which combines an internal focus with
formal governance.
Third, conceptual utilization implies the use of information that
contributes to the development of the firm’s knowledge base, inde-
pendent of its immediate applicability (Menon and Varadarajan 1992).
As information is processed, it gains meaning, and then it can be inter-
preted and stored at the firm level, in combination with prior knowledge,
such that it changes the shared mental model and indirectly influences
future decision making. Similar to information transmission processes,
conceptual use processes pertain to Lichtenthaler’s (2009) maintenance
182 Making Innovation Last

subdimension, which explicitly encompasses the management and stor-


age of relevant knowledge, whether directly applicable or not. Thus, a
clan culture should foster the conceptual use of information, in addition
to information transmission processes.
Fourth and finally, instrumental use of information is the direct appli-
cation of knowledge to solve problems (Menon and Varadarajan 1992).
It involves recognizing market opportunities that (1) are available to
be seized with existing knowledge (reactivation), (2) relate knowledge
with new product ideas (transmutation), and (3) implement transmuted
knowledge in the development of actual market offers (application)
(Lichtenthaler 2009). An external focus is needed for the instrumen-
tal use of information, although an efficient connection with the firm’s
knowledge base is also required. Therefore, a market culture should
promote the instrumental use of information to solve market problems
(Moorman 1995).
Figure 5.5 puts Moorman’s (1995) propositions into perspective accord-
ing to the learning processes view of absorptive capacity (Lichtenthaler
2009). The figure depicts the transition from an individual to an organi-
zational locus of knowledge, concomitant with increasingly formal
processes, and the cycle through which knowledge gets absorbed and
exploited on markets. As a corollary, different cultures foster different
stages of absorptive capacity. Although “most businesses will be some
mixture” of cultures (Deshpandé et al. 1993, p. 34), these cultures are
defined by competing values (Moorman 1995), which makes coexist-
ence within a firm difficult. As Lichtenthaler (2009) observes, “most
firms do not have a uniform level of all learning processes” (p. 837).

External Internal
Focus Focus
Adhocracy culture Clan culture
Information acquisition Information transmission
Conceptual use
Informal processes Recognize Assimilate
Individual locus
Maintain

Formal processes Apply Transmute Reactivate


Organizational locus

Market culture
Instrumental use Hierarchy culture

Figure 5.5 Organization culture and absorptive capacity learning processes


Managing Capabilities 183

Empirically, Moorman (1995) supports a positive influence of clan cul-


ture on information transmission and conceptual use; market culture is
correlated with instrumental utilization of information, but the influ-
ence of clan culture is greater. Finally, adhocracy does not significantly
influence information acquisition, nor do the other types of culture.
The generalization of acquisition processes among firms thus might not
make culture as predictive of their presence as the potential effects of
environmental conditions (e.g., market turbulence).

5.3.2 Organizational structure


Organizational structure shapes the firm’s processes and routines, which
then frame the “transfer of knowledge across and within subunits that
might be quite removed from the original point of entry” (Cohen and
Levinthal 1990, p. 131).
At the organizational structure level, Van den Bosch, Volberda and de
Boer (1999) use longitudinal case studies from the publishing industry
to compare functional, divisional, and matrix organizational forms, and
their effects on the efficiency, scope, and flexibility of absorption. From
this discussion, they deduce differential impacts of these organizational
forms on absorptive capacity (Table 5.7). Their main conclusion states
that the more the organizational structure implies rigidity, the more
impeded is the firm’s capacity to absorb external new knowledge.
Instead of a general form, organizational structure also can be studied
according to its dimensions,2 including centralization and formalization
(Dewar and Werbel 1979, Menon and Varadarajan 1992). We add routi-
nization, the effects of which differ notably from those of formalization.

Table 5.7 Basic organizational forms and absorptive capacity

Organizational forms

Functional form Divisional form Matrix form

Dimensions of knowledge
absorption
Efficiency of absorption High Low Low
Scope of absorption Low Low High
Flexibility of absorption Low High High
ÆImpact of absorptive Negative Moderate Positive
capacity

Source: Adapted from Van den Bosch et al. (1999).


184 Making Innovation Last

5.3.2.1 Centralization
Centralization refers to “the concentration of decisions specifying meth-
ods and procedures to be used at work” at higher levels in an organiza-
tion (Dewar and Werbel 1979, p. 428). It should have generally deleterious
effects on absorptive capacity. In particular, Menon et al. (1999) argue that
senior managers try to get the most from existing resources and empha-
size solutions that historically have proven their efficacy, so these man-
agers pursue strategic persistence and the preservation of the status quo.
Accordingly, centralization tends to lead to a greater emphasis on exist-
ing marketing assets and capabilities when designing the marketing
strategy. These authors find empirical support for their hypothesis.
Centralization also has negative effects on absorptive capacity through
its influence on organizational processes. When departments lack their
own control, their task and organization-related satisfaction levels
decline, which increases frustration and interdepartmental conflicts
(Barclay 1991). Centralization also narrows channels of communication
(Cardinal 2001) and limits participation in the search for new solutions
(Damanpour 1991). Thus, centralization is expected to impede explora-
tory innovation built on distant searches for new capabilities (Benner
and Tushman 2002). Jansen, Van den Bosch and Volberda’s (2006)
results even demonstrate a significantly negative effect of centralized
decision making on the level of exploratory innovation.

5.3.2.2 Formalization
Formalization refers to “the extent to which rules, instructions, and
communications are written” (Pugh et al. 1968, p. 75). By clarifying roles
and linkages within the organization, formalization should facilitate
coordination. Menon et al. (1999) thus indicate a positive effect of
formalization on cross-functional integration and communication quality.
Although formalization and cross-functionality are not significantly cor-
related in Jansen et al.’s (2005) research, they report significantly posi-
tive effects of formalization on external knowledge transformation and
exploitation.
These stages of absorptive capacity rely most importantly on informa-
tion dissemination within the firm, so it seems reasonable to conclude
that some level of formalization benefits the exploitation of externally
acquired new knowledge. Consistent with this interpretation, Jansen et al.
(2006) find that formalization has a positive impact on an organiza-
tion’s level of exploitative innovation. Jansen et al. (2005) also propose
complementary rationales for the benefits of formalization in the down-
stream stages of absorptive capacity: more explicit knowledge, due to
Managing Capabilities 185

articulation and codification (Zollo and Winter 2002), should be easier to


retrieve (Lyles and Schwenk 1992), exchange, and recombine (Galunic and
Rodan 1998).

5.3.2.3 Routinization
Routinization refers to development rules that apply invariably and in
all circumstances. Pugh et al. (1968) refer to the same concept but prefer
the term standardization. Routines allow firms to execute tasks with lit-
tle attention and provide them with an accurate prediction of outcomes.
Quality-related initiatives (e.g., Total Quality Management, ISO 9000)
emphasize routines, so firms pursuing such certification adopt process
management practices that rely heavily on rationalization, coordina-
tion, and control. Benner and Tushman (2002) also show that process
management practices underlying quality-related initiatives exert nega-
tive effects on exploratory innovation. It is thus reasonable to conclude
that routinization involved in process management and the importance
devoted to variance reduction are both detrimental to the search for
valuable new knowledge beyond the firm’s boundaries. This finding
challenges the validity of process management policies in technologi-
cally turbulent times, when firms must focus on exploratory innovation
(Benner and Tushman 2002).
Jansen et al. (2005) test the potentially negative impact of routiniza-
tion on absorptive capacity directly. They argue that routinization sup-
ports the search for new solutions to exceptions, that is, problems that
cannot be solved by the application of an existing routine. They find sig-
nificant support for a negative effect of routinization on the acquisition
and assimilation of external knowledge. Contrary to their expectation,
but consistent with the importance of interactions in the downstream
stages of absorptive capacity, they also find that routinization impedes
the transformation of external knowledge.

5.3.3 Organizational processes


Ultimately, organizational culture and structure are reflected in how
a firm operates. Building on the evolution from individual to more
collective processes discussed in Section 5.3.1, we address in the next
paragraphs the role of individuals, followed by details about the collabo-
ration among people from different units of a firm.

5.3.3.1 Employees’ empowerment


The empowerment of employees offers a way for them to increase their
contribution because they can propose “multiple potential futures for
186 Making Innovation Last

the firm” (Leonard-Barton 1992, p. 117) and thereby increase the num-
ber of options available to managers. To generate original options, they
might bring external knowledge inside the firm’s boundaries. Therefore,
the participation of subordinates in decision-making processes should
widen the range of potential receptors to external new knowledge
(Cohen and Levinthal 1990) and then increase the firm’s capacity to
obtain valuable knowledge from its environment. Jansen et al. (2005)
test this hypothesis empirically and observe a significant, positive effect
of participation in decision making on the acquisition and transforma-
tion of external knowledge.
Firms also use socialization tactics that increase the commitment of
their employees, which may lead these employees overestimate the impor-
tance of established norms, past policies, and procedures (Randall 1987).
Jansen et al. (2005) expect socialization tactics to have a negative effect
on external new knowledge acquisition and assimilation (i.e., upstream
absorption stages), although they fail to observe such a detrimental
effect. They also expect a convergence of values among employees
through socialization tactics, which should enhance new knowledge
transformation and exploitation through easier communication and
increased compliance with exploitation processes. Their study provides
empirical support for these beneficial effects of socialization tactics on
downstream absorption stages.

5.3.3.2 Interfunctional coordination


Following Thompson (1967), Gatignon and Xuereb (1997) define inter-
functional coordination as “the specific aspects of the structure of an
organization that facilitate the communication among the organization’s
different functions” (p. 78). Interfunctional coordination enhances
the impact of strategic orientations on innovation success, and com-
munication across functions is critical for integrating new knowledge
(see Chapter 7 on new product teams). Differential degrees of inter-
functional coordination explain why different firms may take more or
less advantage of external new knowledge. Atuahene-Gima (2005) also
shows that the effect of competence exploration on radical innovation
performance is positive and significant only at sufficient levels of inter-
functional coordination.
Interfunctional coordination demands that people be ready to discuss
new, potentially challenging pieces of knowledge introduced by employ-
ees from other functions. This discussion might include debates that
require tolerance for constructive conflict. Conflicts are constructive if
they focus on issues and ideas, rather than on people or the proponents
Managing Capabilities 187

of the ideas, which then supports an open discussion of opposing views


(Tjosvold 1985). Danneels (2008) further shows that tolerance for con-
structive conflicts enhances a firm’s capacity to explore new markets and
technological domains.
More formally, some firms try to foster interfunctional coordination
by creating cross-functional interfaces through, for example, liaison per-
sonnel, task forces, or teams (Gupta and Govindarajan 2000). Jansen
et al. (2005) test the effect of these cross-functional interfaces and find
significantly positive outcomes in terms of external knowledge acquisi-
tion, assimilation, and transformation. Consistently, Jansen et al. (2006)
report a positive effect of functional diversity on exploratory innovation.
Another way to help employees take into account different perspec-
tives is by developing the diversity of their backgrounds. For example,
job rotations, or “lateral transfers of employees between jobs in an
organization” (Campion, Cheraskin and Stevens 1994, p. 1518), have
positive effects on the acquisition, assimilation, and transformation of
external knowledge (Jansen et al. 2005). From a human resource man-
agement perspective, employee training and the appraisal of employee
competencies should exert a significantly beneficial effect on the ability
of employees to absorb external knowledge, because it improves their
individual prior knowledge. The individual motivation to absorb exter-
nal new knowledge is also influenced by performance-based compensa-
tion and internal communication (Minbaeva et al. 2003).

5.3.3.3 Informal social processes


In addition to the formal processes and channels that firms develop to
enhance their coordination, much information gets exchanged through
informal hall talk. Such communications benefit from the density of
interpersonal networks and enhance formal communications to increase
overall connectedness (Jaworski and Kohli 1993). The more employees
are linked, the lower their exchange cost (e.g., more direct contacts,
fewer conflicts), and then the more likely they are to gather and use
knowledge from different sources (Galunic and Rodan 1998).
Jaworski and Kohli (1993) expect a positive effect of connectedness on
the dissemination of market intelligence across firm departments, and
they observe such an effect, although only in one of their two samples.
In absorptive capacity literature, Jansen et al. (2005) hypothesize and
empirically show that connectedness enhances the transformation and
exploitation of knowledge. But contrary to their hypothesis, connected-
ness also enhances the assimilation of new knowledge, which is consist-
ent with Zahra and George’s (2002) proposition that social integration
188 Making Innovation Last

mechanisms foster both assimilation and the transformation of external


new knowledge. Connectedness thus seems to benefit most stages of
absorptive capacity.

5.4 Environmental turbulence and absorptive capacity

The value of a firm’s knowledge base depends on how consistent it is with


the knowledge that is required to be successful in the given industry: the
less a firm’s knowledge base matches with the required knowledge, the
less that firm is able to perform well. The value of a firm’s knowledge
base thus is contingent on its environment (Levitt and March 1988).
Environmental turbulence refers to the degree of turnover in the ele-
ments that constitute the firm’s environment, equivalent to Aldrich’s
(1979) notion of environmental stability–instability or Dess and Beard’s
(1984) environmental dynamism. Environmental turbulence determines
the adequacy of the knowledge base: when the environment changes, the
value of prior knowledge is likely to deteriorate (Glazer 1991). Firms in
turbulent environments thus have a greater need to adapt their knowl-
edge bases, because they must catch up more frequently, if not continu-
ously, to preserve the value of their knowledge and remain competitive.
Absorptive capacity is an essential dynamic capability that allows firms
to adapt their knowledge bases and preserve the value of this knowledge
in a changing environment.
In turn, firms should emphasize the exploration of external new
knowledge in turbulent times, but they can rely on the exploitation of
existing knowledge in stable conditions. These general propositions are
consistent with Van den Bosch et al.’s (1999) conclusions. In two case
studies, they argue that turbulent environments require firms to explore
a broader scope of external knowledge and to emphasize flexibility
rather than efficiency. Jansen et al. (2006) test these propositions for-
mally and confirm them in a financial services context, where explora-
tory innovation and environmental dynamism have significant positive
interaction effects on the financial performance of firms, whereas the
interaction of exploitative innovation and environmental dynamism is
significantly negative (Figure 5.6).
More detailed results in prior literature document the interactions
between absorptive capacity and environmental turbulence. In this
chapter, the final sections in turn deal with the interaction between
absorptive capacity and environmental turbulence and the effects on
firms’ innovative performance, according to the two dimensions of
environmental turbulence: technological and market.
Managing Capabilities 189

High environmental dynamism


Low environmental dynamism

110 114
108 112
Firm Performance

Firm Performance
106
110
104
108
102
106
100
98 104

96 102

94 100
Low High Low High
Exploratory innovation Exploitative innovation

Figure 5.6 Moderating effects of environmental dynamism

5.4.1 Technological turbulence


Technological turbulence refers to the rate of technological change in the
environment (Jaworski and Kohli 1993). A rapid pace of technological
renewal implies a faster obsolescence of the firm’s technical knowledge
base, which means that the firm needs exposure and openness to exter-
nal new knowledge. Moorman and Miner (1997) argue that although
some degree of knowledge commonality is beneficial, internal knowl-
edge heterogeneity, such as when employees possess marginal ideas
and competencies, offers an important source of creativity in turbulent
times. They hypothesize in turn that the degree of memory dispersion
(i.e., homogeneity of knowledge) becomes less and less beneficial to new
product creativity as the degree of technological turbulence increases.
As expected, they report a significant negative interaction of techno-
logical turbulence and memory dispersion for new product creativity.
In conditions of high technological turbulence, memory dispersion and
new product creativity exhibit a negative relationship, which becomes
positive with moderate technological turbulence and strongly positive
with low technological turbulence. Because the heterogeneity of knowl-
edge held by employees is a source of external knowledge exploration
capacity, these findings offer some support for the proposition that the
impact of absorptive capacity on new product creativity is moderated by
the technological turbulence of the environment.
From a different angle, Song et al. (2005) focus on marketing and
technology-related capabilities in joint ventures and study their effects on
190 Making Innovation Last

performance (both perceptual and relative to financial objectives). They


also consider a potential moderating effect of technological turbulence.
Technological turbulence negatively moderates the relationship between
marketing-related capabilities and performance, such that higher tech-
nological turbulence means a lower impact of marketing capabilities
on performance. When an industry is greatly affected by rapid techno-
logical change, market sensing becomes less important, because firms
cannot find sources of innovation in the market. Technology-related
capabilities then become critical. However, Song et al. (2005) also fail
to observe the benefits of technology-related capabilities. Instead, tech-
nological turbulence positively moderates the effect of the interaction
between marketing and technology-related capabilities on performance.
The complementary effect is significant and positive in technologically
turbulent times, but it has no impact in stable periods, as Figure 5.7
illustrates.
Finally, Lichtenthaler (2009) provides the most direct test of the inter-
action of absorptive capacity and technological turbulence. There is no
effect when the dependent variable is performance of the new product
development program (labeled innovation), which means the positive
effect of absorptive capacity is stable and independent of the degree of

Marketing Related

+

Technological Turbulence Performance

+
Marketing Related +

Technology Related

Figure 5.7 Moderating effects of technological turbulence


Source: Adapted from Song et al. (2005).
Managing Capabilities 191

technological turbulence. Conversely, absorptive capacity and tech-


nological turbulence have a moderately positive interaction effect on
the overall performance of firms relative to their competitors. That is,
the performance benefits of absorptive capacity are greater in times of
technological turbulence. Regarding absorptive capacity subdimensions
(Section 5.1.2.3), exploratory learning positively interacts with tech-
nological turbulence, whereas transformative and exploitative learn-
ing have only moderately significant, positive interaction effects with
technological turbulence.3 It is thus possible to conclude that absorp-
tive capacity in general benefits the performance of firms, but explora-
tive learning becomes especially important in times of technological
turbulence.

5.4.2 Market turbulence


Another dimension of environmental turbulence is market turbulence,
which refers to “the rate of change in the composition of customers and
their preferences” (Jaworski and Kohli 1993, p. 57). In stable markets,
firms can develop routines to deal with customers. Their market capa-
bilities then should increase over time, and organizational age offers a
competitive advantage (Aldrich 1979). In turbulent markets, however,
firms must be alert to evolutions in demand. Thus, the absorptive capac-
ity of market knowledge is more important in turbulent markets than
in stable ones.
In a study of the effects of organizational memory and its interactions
with environmental conditions, Moorman and Miner (1997) report a
significant negative interaction of memory dispersion and market tur-
bulence on a new product’s short-term financial performance. Their
follow-up slope analysis indicates that memory dispersion has no signifi-
cant effect on new product financial performance in conditions of high
market turbulence, a positive effect with moderate market turbulence,
and an even stronger effect with low market turbulence. These results
emphasize the benefits of knowledge homogeneity among organiza-
tion members (i.e., memory dispersion) in times of market stability.
However, neither homogeneity nor heterogeneity seems preferable in
turbulent markets. Marginal ideas and competencies, which seemingly
should be a source of exploration capability and thus absorptive capac-
ity (Section 5.4.1), do not offer any recognizable advantage. Moorman
and Miner (1997) also report an insignificant interaction of memory
dispersion and market turbulence on new product creativity.
Again, Lichtenthaler (2009) offers the most direct and conclusive
test that indicates a positive interaction of absorptive capacity and
192 Making Innovation Last

market turbulence on overall firm performance relative to competitors.


The effect of absorptive capacity, which is positive in any market condi-
tion, increases as market turbulence grows. Unlike the impact of the
interaction between absorptive capacity and technological turbulence
reported in Section 5.4.1, this effect is significant and offers a higher
degree of confidence, which is also the case for the interaction effects
at the subdimensional level for absorptive capacity. Exploratory, trans-
formative, and exploitative learning interact significantly and positively
with market turbulence.4
Globally, these results converge and support the idea that the effects
of absorptive capacity on performance depend on environmental tur-
bulence. Because absorptive capacity provides firms with a capacity to
understand how demand is changing (marketing capacity) and to iden-
tify and take advantage of external new technological knowledge to
build and maintain their competitive advantage (technological capabil-
ity), absorptive capacity is particularly beneficial in turbulent environ-
mental conditions.
In this chapter, we have reviewed how a firm can use relevant knowl-
edge coming from outside its boundaries. This absorptive capacity
requires the ability to recognize and to capture relevant knowledge in
the firm’s environment, to assimilate and maintain it so it is available
when needed, and to apply it in the development of new products
and services. A firm’s degree of absorptive capacity partly originates in
its organization. Organizational formalization positively contributes
to the development of absorptive capacity, contrary to centralization
and routinization that both have a detrimental effect. Interfunctional
coordination, employees’ empowerment, and performance-based com-
pensation are other identified factors of absorptive capacity. Overall,
absorptive capacity has been shown to positively affect both the devel-
opment process and outcome. This effect is reinforced in turbulent
conditions.

Notes
1 The study refers to the business unit level. Other units constitute external
knowledge sources, although the network analysis focuses on other units
within the same firm.
2 Pugh et al. (1968) propose five primary dimensions of organizational
structure: specialization, standardization, formalization, centralization, and
configuration.
3 The interaction effects are not estimated simultaneously. Instead, each inter-
action term enters the model in turn.
4 Again, these interaction effects are not estimated simultaneously but in turn.
Managing Capabilities 193

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6
When to Forge Alliances?

The traditional approach to the development of new products and ser-


vices is to perform research and development (R&D) internally to the
firm (Doz and Hamel 1998, Chesbrough 2003). However, in the face of
rapid evolution of consumers’ needs as well as the uncertainty of tech-
nological change, R&D activities are an area where alliances have been
increasingly sought and have even played a dominant role (Shan 1990,
Kogut 1991, Hagedoorn and Schakenraad 1994, Raassens, Wuyts and
Geyskens 2012). According to Capron and Mitchell (2012), firms choose
from among three alternatives, based on the firm’s existing capabilities
and partnership characteristics: build, borrow, or buy.1 Indeed, firms do
not always have or cannot necessarily acquire the competencies and
know-how required for new product development (NPD) (see the dis-
cussion on innovation characteristics in Chapter 2). Such competencies
may include (Capron and Mitchell 2012):

1. Skills
2. Know-how
3. Technologies
4. Methods
5. Broad competencies
6. Other assets

Firms often acquire these competencies when they have the required
financial resources. Examples abound of big firms acquiring smaller
firms that have the complementary skills deemed necessary. These
include Apple’s acquisitions of start-ups such as WiFiSLAM, HopStop,

201
202 Making Innovation Last

Locationary, and Embark in order to build up their competencies for


the development of Apple Maps (McCracken 2013). McCraken (2013)
also reports that when Walmart wanted to compete in e-commerce,
they acquired Tasty Labs, OneOps, Inkiru, and Torbit. But beyond the
costs of acquisitions, the transfer of competencies is not automatic
and the management of integration of organizations can be com-
plicated (Haspeslagh and Jemison 1991, Teece 1996, Capron 1999).
Anderson and Gatignon (2005) caution that merely purchasing the
rights to innovations developed elsewhere “is fraught with transac-
tion cost perils” (p. 415). The primary reason for this is that the buyer
needs to evaluate that innovation but the seller may not share all that
he or she knows. Such dangers are indeed picked up on by the stock
market. The stock market tends to react negatively to the announce-
ment of such acquisitions with negative returns of US$42 million on
average. This is confirmed in a study of the stock market reaction to
NPD outsourcing announcements by Raassens, Wuyts and Geyskens
(2012). Comparing firms that acquire a minority participation with
those that do not, they find that having a minority position is better
received by the stock market. These negative effects can be minimized,
however, if the acquirer is experienced, if the target is related, and if
it offers high customer benefit (Borah and Tellis 2014). In this chap-
ter, we do not focus on acquisitions per se, but instead we discuss the
choice of developing the required skills internally or in collaboration
with other firms. Therefore, we consider acquisition as an option if the
firm has reasons to justify doing its R&D internally and needs assets it
does not have.
Even if a company has the competencies, internal development
may not always be the most effective organization, given that R&D
is expensive, the outcome uncertain, and an internal focus may limit
creativity. Costs and risks have been estimated to decrease by as much
as 60 percent to 90 percent when using alliances (based on interviews
by Quinn 2000). Forging alliances can also accelerate the develop-
ment process to access the market faster (Quinn 2000, Deck, Strom and
Schwartz 2001). Although a firm may have a strong innovative image,
such as Xerox, the benefits of partnering with other firms are well rec-
ognized: Xerox was able to use its partners’ installations and researchers
on specific projects (Calixte 2007).
It should be noted that the choice of forming an alliance does not
preclude the firm from continuing its R&D efforts internally on its own.
In fact, there are many cases in which this appears to be an optimal
solution, even if partnering with a competitor that has weaker R&D
When to Forge Alliances? 203

capabilities (Cai and Gopalakrishnan 2014). Alliances for R&D may take
a number of forms including (Borah and Tellis 2014):

1. Creating a joint venture with other companies to develop new products


2. Codeveloping products with other firms
3. Licensing of technology
4. Hiring an expert on a contract basis to address a research problem
5. Collaborating with universities or research institutes
6. Participating in networks to develop innovations

In the last two decades, outsourcing has been a strong trend, even for
functions that were considered sensitive and central to the core busi-
ness of the firm. Summarizing the literature (Powell 1987, Terpstra and
Simonin 1993), a list of potential benefits of moving away from pure solo
R&D (internal development) is given in Table 6.1, based on Robertson
and Gatignon (1998). These benefits all fall in the category of expanding
strategic capabilities (Burgers, Hill and Kim 1993).
More succinctly, the benefits listed in Table 6.1 are of three types
(Hagedoorn 1993): (1) technology complementarity, (2) speed of devel-
opment of innovation, and (3) market access.
Alliances are general arrangements among organizations that do not
necessarily involve innovations. However, in this chapter, we are only
interested in alliances that intend to codevelop new products or services
through R&D and in alliances whose objective is to bring innovations
to market. As evidenced by the list of possible forms presented above,
alliances can range from formal organizations (e.g., a joint venture) to
informal, even noncontractual agreements. Alliances differ from con-
tracts in that they “typically enable highly collaborative combinations of
resources and activities by multiple parties” (Capron and Mitchell 2012,
p. 93). Alliances can then be contrasted with contracts where the transfer

Table 6.1 Benefits of partnerships

s Faster access to new technologies


s Faster access to markets
s R&D scale advantage
s Access technological expertise located beyond the boundaries of the firm
s Leverage the comparative advantage of each partner
s Increase the firm’s openness to its environment and stimulate internal
innovativeness
s Share the risks of R&D beyond the resources of any one firm

Source: Adapted from Robertson and Gatignon (1998).


204 Making Innovation Last

of resources goes in a single direction from the provider to the recipient


(Capron and Mitchell 2012). Therefore, innovation alliances typically
concern codevelopment, which means that some form of collaboration
among firms is involved in the development process of new products or
services. However, not all alliances involve codevelopment (as it may
concern an activity that does not lead to a new product or service devel-
opment stage), and not all codevelopments are alliances (as a contract
could allow for two firms to collaborate for the codevelopment of a new
product or service). Therefore, alliances can be more general but code-
velopment implies an R&D process designed to develop new products
or services. As such, codevelopment involves some sort of R&D alliance.
In this chapter, we first propose a typology of forms of organization
and governance to develop innovations. We distinguish among internal
development and other forms of organization, such as outsourcing from
codevelopment, and whether or not these arrangements involve equity.
In Section 6.2, we discuss the conditions that lead to explaining when
some forms of alliances are more effective than internal development,
which allow us to answer questions about when alliances should be
formed and when it is advisable to develop new products and services
internally. Assuming that a partnership is a good option, Section 6.3
presents the literature that considers the most appropriate types
of partners. Finally, in Section 6.4, we discuss the option of creating
alliances in order to reach foreign markets, both to exploit foreign
capabilities in the development process of new products and services
and to commercialize innovations in these foreign markets.

6.1 A typology of R&D organization and governance

Firms have many options to choose from on a continuum from internal


R&D to complete externalization. Robertson and Gatignon (1998) iden-
tify three modes of R&D organization based on extending the transac-
tion cost approach of market and hierarchies (Williamson 1975). These
are represented in Figure 6.1
Traditionally, the R&D process has been a core component of firms
(internal R&D development, i.e., option 1 in Figure 6.1). The firm under-
took the development of new products and services often with much
secrecy in order to protect the intellectual property developed in-house.
However, a shift occurred in the US around the mid-1980s (Friar and
Horwitz 1985, Graham 1985). The US Congress’s adoption of the National
Cooperative Research Act in 1984 may have played a significant role in
this evolution since it reduced restrictions on firms that wished to col-
laborate on research (Powell 1990). Japanese firms dedicate an even
When to Forge Alliances? 205

Lower Degree of Control Higher Degree of Control

Market contracting Alliances to Internal R&D


of an R&D project mutually develop development
or licensing a technology
technology

Figure 6.1 Technology development governance modes


Source: Adapted from Robertson and Gatignon (1998).

larger proportion of their R&D budgets to external sources of innova-


tion (between 40 percent and 60 percent in Japan vs. 12 percent and 35
percent in the US) (Houlder 1995). These include the two other modes
in Figure 6.1: alliances to mutually develop technology (option 2) and
external market contracting of an R&D project, including the licensing
of a technology developed by another firm (option 3). However, while
internal R&D development is clearly defined, there can be multiple forms
of alliances. In their study, Robertson and Gatignon (1998) consider only
the dichotomy of internal R&D development versus all forms of alliances
and external contracting. Similarly, Capron and Mitchell (2009) assess the
extent to which management prefers internal sourcing versus external
sourcing. This dichotomy may be particularly useful in identifying the
conditions under which it is appropriate to perform R&D within the firm
as opposed to finding an alternative collaborative arrangement. Indeed,
the transaction cost explanation may be better able to identify factors that
justify this distinction but may be less capable of discriminating between
hybrid options (Gatignon and Anderson 1988). Nevertheless, the use of
alternate forms of partnerships and external sourcing is increasing rap-
idly, and these forms are somewhat complex and thus difficult to describe
and to differentiate. “Hybrids are organizational arrangements that use
resources and/or governance structures from more than one existing
organization” (Borys and Jemison 1989, p. 235). The major types are joint
ventures, licensing agreements, and supplier arrangements. But joint ven-
tures alone cover a full range of options (e.g., majority equity, balanced
equity, and minority equity). Borys and Jemison (1989) make an interest-
ing distinction that has important consequences for the challenges that
each option poses. This distinction is based on the type of interdepend-
ence among the partners. They identify three types of interdependence:

1. Pooled interdependence: the alliance “provides a common pool of


resources from which each of the partners can draw.”
2. Sequential interdependence: “one partner ‘hands off’ to another
(e.g., a supplier arrangement).”
206 Making Innovation Last

3. Reciprocal interdependence: “partners exchange outputs between


each other and need to learn from each other (e.g., an acquisition in
which tacit skills are expected to be transferred)” (Borys and Jemison
1989, p. 241).

Going further, Capron and Mitchell (2012) make a distinction between


two types of internal development (fully internalized R&D vs. inter-
nal exploratory environment). They also consider two forms of bor-
rowing capabilities and distinguish between contracting and alliances,
although other authors consider all hybrid forms of governance as
alliances. The definitions and descriptions of the four forms used by
Capron and Mitchel (2012) are summarized in Figure 6.2.
In the context of international business, Anderson and Gatignon (1986)
present a list of modes of entry ordered according to the level of control the
entrant has. These modes of entry are discussed in the context of interna-
tional business in Section 6.4. Nevertheless, while most modes of govern-
ance can be grouped into one of the broader modes shown in Figure 6.1,
the recent literature has focused on some of the less formal forms of mar-
ket contracting, using basic contracts, or even more or less formalized net-
works (Gulati 1998). As there is a certain amount of overlap and confusion
due to different terminology, it is useful to clarify the distinction made in
the recent literature among a number of these forms of alliances.

s"UILDINTERNALDEVELOPMENT
Changes that a firm undertakes on its own to create value by recombining existing capabilities or developing
new ones. Such efforts may involve training internal staff, executing internal product development, hiring
new staff, or building new plants. Internal development is the alternative to the three forms of external
sourcing: borrowing via contracts, borrowing via alliances, and buying (acquisition).
s"UILDINTERNALEXPLORATORYENVIRONMENT)
An independent space where teams–working either as Skunk Works or as formally chartered, independent
units–can experiment with new ideas, resources, and business models. An exploratory approach can be
valuable as a way of buying time to learn about uncertain opportunities.
s"ORROWCONTRACT
Arm’s length agreements to buy existing products or services from third parties. Such arrangements include
purchasing outright off-the-shelf technologies and services; in-or out-licensing the use of specialized
knowledge sources, software, and services; basic market agreements; and consulting contracts.
s"ORROWALLIANCE
Ongoing collaborative partnerships with other firm or institutions (e.g., a university). In an alliance, two or
more partners agree to commit resources to work together for a period while retaining strategic autonomy.
Examples include equity and non equity joint ventures, R&D and marketing alliances, corporate venture
capital investments, multiparty consortia, franchises, and detailed outsourcing agreements. Alliances may
involve relatively simple agreements or far more complex relationships, including multistage contracts,
cross-investments, and complicated rights agreements. All forms of alliances involve ongoing interactions
between independent actors that commit money and effort to sustain work over the duration of the
agreement. The partners’ independence means that they each have strategic autonomy; one firm cannot
force its partners to do something. Alliances typically are guided by formal contracts, but all contracts are
inevitably incomplete in the sense that they cannot fully specify all possible future events.

Figure 6.2 Capron and Mitchell’s modes of organization and governance


Source: Adapted from Capron and Mitchell (2012).
When to Forge Alliances? 207

6.1.1 Outsourcing versus innovation alliances


Performing R&D in-house or internal development could be contrasted
with outsourcing. When a function is outsourced to another firm, the
partner works for the firm that contracted out. Such market contracting
is represented by the most extreme option (option 3) on the right side
of Figure 6.1 or by the borrow–contract option in Figure 6.2. These arm’s
length contracts do not allow much control for the firm interested in
NPD. However, the major difference with an alliance is that the parties
involved do not share a common project with aligned objectives.

6.1.2 Horizontal versus vertical alliances


Competitors in the same industry have goals that are more similar than
competitors in different industries, and their organizations tend to have
commonalities due to the fact that they are adapted to their market and
environment. Therefore, firms that associate in horizontal alliances are
typically more compatible in terms of strategy. Such partnerships can
operate with less effort and lower costs than when partners are more
heterogeneous (Koh and Venkatraman 1991). However, these similari-
ties may mean a loss of the diversity of assets and know-how.

6.1.3 Codevelopment alliances


As noted earlier, the concept of codevelopment alliances is relatively
general and does not limit the form of the partnership. However, the
sole purpose of the alliance is for two or more firms to achieve the goal
of creating innovations (Chesbrough and Schwartz 2007). All partners
take risks in working together, even if the only objective is to develop
new products and services. Therefore, for all practical purposes, code-
velopment is considered as an innovation alliance. A specific form of
codevelopment is discussed in Chapter 8 on customer involvement.
In that chapter, the partnership is with customers. Customers indeed
have a number of characteristics that distinguish them from other part-
ners, such as other organizations, whether business, government, or
not-for-profit. Typically, customers are not concerned with profit mak-
ing but rather with ensuring that the product or service meets the needs
of users. They are very knowledgeable about the product or service and
about user requirements, even though they may not be able to easily
express the changes that would be desirable. As suggested by the market-
ing concept itself, customers remain the major source for need definition
(as discussed in Chapter 4). However, Un, Cuervo-Cazurra and Asakawa
(2010) find that R&D collaborations with customers do not impact the
innovation capacity of the firms in their sample. Other types of partners
208 Making Innovation Last

are typically complementary to the firm’s knowledge (Teece 1986).


This complementarity can be in terms of technology knowledge, finan-
cial resources, production capabilities, or distribution of the product or
service to serve particular markets. An alliance between partners that
have complementary assets in terms of technology knowledge can bring
together the co-specialized assets required for reaching the market.
This could also lead to collective learning and internalization (Doz and
Hamel 1998).

6.1.4 Equity versus nonequity partnerships


Here, we are concerned only with joint ventures for innovation devel-
opment. However, the ownership of an entity with equity in the capi-
tal allows firms to have formal control of the major strategic decisions.
Majority ownership gives absolute control at the board level of the com-
pany. However, it is nevertheless possible for a firm without majority own-
ership to obtain the same amount of control over the company. This can
be achieved through additional formal agreements. For example, a minor-
ity partner could also have a formal management agreement for running
some of the company’s operations. The control may be less formal with
particular relationships with distributors, contractors, or employees. Unlike
international joint ventures (IJV) where the majority of cases involve 100
percent ownership and majority equity (Gatignon and Anderson 1988),
the majority of codevelopment ventures are typically based on a fifty-fifty
profit-sharing agreement (Cvitanić, Radas and Šikić 2011).

6.1.5 Open and closed innovation alliances


In an open innovation alliance, new partners are allowed to join, and
then they can benefit from the capabilities developed by the alliance
partners (Han et al. 2012). Firms are also free to leave the partnership.
But this may not be sufficient to define an open innovation alliance.
While this basic principle appears dichotomous, that is, one is able to
enter or not, openness is a matter of degree that arises from the extent
to which the partners are given decision authority (Han et al. 2012).
In closed alliances, while the second issue of decision authority is usu-
ally agreed upon from the beginning, the alliance is open only to the
members, and new partners can only enter with the agreement of all
alliance partners.

6.1.6 The networked firm for innovation


creation and marketing
Thus far in this chapter, we have considered the partnership between
two or more entities for single or multiple innovations, although most
When to Forge Alliances? 209

of the time a partnership is formed with the objective to develop either a


single innovation or several innovations that share the same know-how.
Pushing the concept further, the notion of the networked firm considers
that a firm cannot survive in isolation but must be embedded within
a network of organizations that interact, including in developing new
products and services. The notion of network implies ties that are recur-
ring among the network members (Fombrun 1982). Ties can be formal,
for example, joint ventures or alliances, or simply ongoing social rela-
tionships (Granovetter 1983). Teece argues that “to be successful, inno-
vating organizations must form linkages, upstream and downstream,
lateral and horizontal” (1992, p. 22). It is possible that this phenomenon
starts in the manufacturing function where customization leads to the
“build-to-demand” supply chain model (Chung, Yam and Chan 2004).
As each industry becomes increasingly complex and sophisticated
(e.g., the pharmaceutical industry or the information industries), no sin-
gle firm, however, large, can master all the knowledge and skills required
to anticipate market needs and evolution. Furthermore, different firms
cannot acquire different resources using the same mode (Capron and
Mitchell 2012). Therefore, firms cannot combine with a single partner
but must instead integrate within a network of collaborating firms.
Such a network is not composed only of firms providing technological
know-how but also many other kinds of resources and skills including
knowledge about access to top talent and simple contacts to access the
multiplicity of resources needed in fast changing industries. Traitler and
Saguy (2009), for example, describe the multiple partnerships that Nestlé
is involved with for the development of new food products: “Nestlé
applies OI by tapping into technologies and expertise of more than a
million researchers worldwide, including science universities, venture
capital, strategic suppliers, and government laboratories” (p. 24). Greve,
Rowley and Shipilov (2014) compare two generic forms of networks.
The first form is the generic “hub-and-spoke” alliance portfolio where a
firm has alliances with multiple partners through a series of separate alli-
ances where the partners are not connected. The second form is an inte-
grated configuration where all partners are interlinked. The researchers
give the example of Continental Airlines, in particular, its partnership
with United Airlines, which worked so well that it led to the merger of
the two companies. They also identify the hybrid configuration that is
a combination of the two generic ones, which they illustrate with the
example of Lufthansa AG.
However, managing a multiplicity of partnerships is not a trivial
matter. On the one hand, diversity is the source of a variety of skills and
knowledge. On the other hand, the greater the heterogeneity, the more
210 Making Innovation Last

difficult it is to manage. Cui and O’Connor (2012) distinguish between


two sources of diversity: functional diversity and national dispersion.
Functional heterogeneity is akin to the diversity found in an NPD team
(see Chapter 7), such as manufacturing, marketing, and R&D. National
dispersion reflects the extent to which a firm is engaged in partnerships
across a large number of countries and therefore corresponds to the
extent to which the firm has a global vision of its business. For compa-
nies to benefit from the varied resources available through multiple part-
nerships, information must be shared across organizations. Networks
in supply chain functions have led to a switch from global sourcing,
where the task was purely to source input, to one that “coordinates and
manages the entire supply chain” (Chung et al. 2004, p. 268). This role
mainly involves managing the information flow about product require-
ments, and in this context the use of information technology is critical
to support the linkage among the network members (Chung et al. 2004).
However, “the costs and difficulty of managing highly diverse resources
may exceed the benefits when high resource diversity is combined
with high heterogeneity of functional activities” (Cui and O’Connor
2012, p. 36), although it can be compensated for by experience in alli-
ances. Similarly, the costs outweigh the benefits of diversity when alli-
ances encompass too many countries, due to the inability to transfer
knowledge across different national environments (legal, political, or
cultural), and due to the difficulty in communicating across cultures
and countries.
Another complication comes from the dual objective of innovation
creation and its implementation (Harryson, Dudkowski and Stern 2008).
This ambidextrous capability of exploration and exploitation (Tushman
and O’Reilly 1996) appears to require networks characterized by different
structures. Exploration is concerned with the generation of new knowl-
edge, products, and services while exploitation means the application of
knowledge and technologies to develop and expand product markets.
Illustrating their argument with Volvo’s experience, Harryson et al.
(2008) argue that closed networks are required for exploitation while
open networks with many structural holes (Burt 1995) lead to greater
innovation output (Ahuja 2000). In open networks, a firm has direct links
to a number of partners who do not have contacts among themselves.
In closed networks, all partners are closely linked to each other. Sources
of innovation often come from weak ties (Granovetter 1973), which are
more likely to occur in open networks. Indeed, the creative process of
innovation requires strong involvement of the partners, to ensure not
When to Forge Alliances? 211

only that information sharing occurs, but also that this information
is assimilated and disseminated within the partner organizations. The
inability to transfer knowledge from one type of network to another
implies that the firm should develop stronger ties among its partners
over time.
Open innovations require some sort of network, even if the ties among
the members in the network are only informal and loose. Open innova-
tions occur when a firm can search freely among the resources of other
organizations to identify external knowledge that it can then incorpo-
rate into its own knowledge base to develop new products or services.
It can also happen when searching for markets for their innovative
products and services. A typical example of open innovation alliance is
the Open Handset Alliance where firms such as Google, T-Mobile, Intel,
Qualcomm, and Samsung form an alliance that led to the development
of the Android platform (Han et al. 2012). These firms include leaders in
different, even if related, industries such as software developers, mobile
telephony, and handset manufacturers. The complementarity of these
industries makes technological innovations subject to network exter-
nalities that serve as a competitive advantage over competitors who are
not members of the alliance.

6.2 Factors leading to R&D alliance choice

Robertson and Gatignon (1998) report that significant portions of


R&D budgets go to external organizations. In fact, R&D alliances are
quite common especially in high-technology industries (Kalaignanam,
Shankar and Varadarajan 2007). However, R&D partnerships do not
always exhibit the benefits listed in Table 6.1. Many alliances fail
in meeting their objectives and are dissolved (Achrol, Scheer and
Stern 1989). Some failures can clearly be explained by the poor imple-
mentation of the strategy. Whether alliances, joint ventures, contracting
arrangements, or acquisitions, it is critical for a firm to have developed the
skills necessary to implement and manage such activities (Capron and
Mitchell 2009). It should be noted that even for internal development
mode, particular skills are also required for innovations involving
recombination capabilities (Szulanski 1996, Galunic and Rodan 1998,
Katila and Ahuja 2002). The control of information sharing among part-
ners is an important element of the management of partnerships, espe-
cially when they are multiplied and diverse (Cui and O’Connor 2012).
Nevertheless, Capron and Mitchell (2009, 2012) demonstrate that the
212 Making Innovation Last

ability to successfully select among modes of sourcing is a critical qual-


ity that gives a firm the impetus it needs to make full, dynamic use of its
resource capabilities. The issue, then, is to understand when it is appro-
priate to develop new products and services internally and when it is
better to form alliances. More generally, what form of organization and
governance is best to develop new products and services for a specific
firm in a particular context?
The question arises when the firm does not have the capabilities
required to serve the market as this market and its competitive and tech-
nological environment change. This is why Capron and Mitchell (2009,
2012) recommend that firms first identify the underlying capability or
resource gap. They cite Amit and Schoemaker’s (1993) definition that
resources are “stocks of factors that a firm controls and capabilities [are]
the firm’s capacity to deploy resources for a desired end result” (Capron
and Mitchell 2009, p. 295). “A capability gap is the set of resources that
a firm would need to obtain and deploy to compete in a particular com-
petitive setting (Helfat and Lieberman 2002)” (Capron and Mitchell
2009, p. 295). It reflects how far the needed capabilities are from the
firm’s existing capability base (i.e., the distance between the existing
and the needed capabilities). Such resource gap analysis is typically part
of the firm’s strategic planning process. More specifically, Capron and
Mitchell (2009) identify two dimensions of a capability gap: closeness
and strength. Closeness refers to how similar the needed capabilities
are to the existing ones, while strength relates to the competitive posi-
tion of a firm vis-à-vis that capability. Furthermore, Capron and Mitchell
(2009) distinguish between the gap in technological capabilities versus
the gap in marketing capabilities.
However, this resource-based analysis (RBA) is not sufficient to deter-
mine the most appropriate R&D mode (Wu 2014). Robertson and
Gatignon (1998) develop a model based on transaction cost economics
to explain when firms should develop their new product activities inter-
nally versus when they should ally with an outside partner. Transaction
costs are usually high in the domain of the development of innovations
because it demands a large quantity of information that is not readily
available, uncertain, and typically tacit (Anderson and Gatignon 2005).
Even physical proximity of R&D teams does not necessarily lead to
effective sharing of information (Van den Bulte and Moenaert 1998).
Transaction theory’s explanations are based on the notion that trans-
actions that are subject to uncertainty and that require substantial
transaction-specific investments that cannot easily be redeployed should
take place within the firm to avoid potential opportunism. When these
When to Forge Alliances? 213

conditions are not met, that is, when there is low uncertainty or few
transaction-specific investments, the market mechanism through mar-
ket contracting is more efficient (Williamson 1975, 1985). The market
mechanism as the most effective choice by default (unless specific con-
ditions arise) is also inherent in the recommendations developed by
Capron and Mitchell (2012). Figure 6.3 gives a graphical representation
of the theory where the underlying explanation is the level of control
needed to avoid the dangers of opportunism inherent with the modes
that provide less control.
Following these principles, Robertson and Gatignon (1998) develop
a conceptual framework that identifies specific factors leading to R&D
governance choices. The specific factors are listed for each of the trans-
action concepts in Table 6.2. We now discuss how each one affects the
R&D choice.

Transaction Specific Assets

External Uncertainty R&D Mode

Internal Uncertainty

Figure 6.3 Fundamental transaction cost analysis conceptual framework

Table 6.2 Transaction cost theory determinants of


governance mode

Product category-specific assets


External uncertainty
s Demand uncertainty
s Technology uncertainty
Internal (behavioral) uncertainty
s Ability to measure innovation performance
s Firm’s experience in alliances
Other factors
s Market growth
s Size of firm

Source: Adapted from Robertson and Gatignon (1998).


214 Making Innovation Last

6.2.1 Product category-specific assets


One of the key explanations for why firms should perform tasks them-
selves rather than using market mechanisms is the need to control
transaction-specific assets that are valuable to the firm and that could be
subject to opportunism on the part of the partner. The costs of establishing
safeguards against such behavior in contractual arrangements would out-
weigh any potential benefit if feasible at all. These assets are often found in
the core capabilities of the firm (Robertson and Gatignon 1998). An exam-
ple of a case where codevelopment was a poor choice is the International
Business Machines (IBM) partnering with Microsoft to develop the
operating system of their future personal computers (Chesbrough and
Schartz 2007). Indeed, Cvitanić et al. (2011) report that partnerships
involving a partner with more experience than the others tend to keep
equity and compensate the less experience partners with royalties.
Chesbrough and Schwartz (2007) define three types of capabilities that
lead to different partnership strategies. Core capabilities are defined as
“a set of differentiated skills, complementary assets, and routines that pro-
vide the basis for a firm’s competitive capacities and sustainable advantage
in a particular business” (Teece, Pisano and Shuen 1997, p. 28). These core
capabilities are extensively discussed by Leonard-Barton (1992) who
cautions that they are also likely to be associated with rigidities in the
organization. More particularly, Chesbrough and Schwartz (2007) dis-
tinguish capabilities that are critical to the success of a new product
or service but that are not core from those that are needed for the new
product or service development but that provide no differentiation or
value added (called contextual capabilities). These assets can be invest-
ments in human and physical capital that are not redeployable, at least not
without losing productive value. Such assets are inherent to R&D activities
that require heavy investments and know-how (tacit or proprietary) that
are core to the firm.
Robertson and Gatignon (1998) consider the importance of the prod-
uct category that concerns an R&D project as a determinant of the level
of transaction-specific investments, which in turn determines the pref-
erence for internal development. Their empirical analysis confirms that
the greater the specificity of existing assets, the less likely the firm is to
use an alliance to develop the technology in that product category.
The items used to measure product category-specific assets are pro-
vided in Table 6.3.
However, the study by Robertson and Gatignon (1998) only considers
a particular form of assets that can be transaction specific. More general
When to Forge Alliances? 215

Table 6.3 Measure of product category-specific assets

s My firm has a high degree of collective learning in this product category


s My firm has significant plant and equipment dedicated to this product
category
s My firm has a major financial investment in this product category
s My firm’s technology in this product represents a core competence for us
s My firm has a major marketing commitment to this product category

Source: Adapted from Robertson and Gatignon (1998).

assets could be considered, as has been the case in the transaction cost
literature in marketing, especially for channel of distribution choices.
At a broad level, these factors involve not only the nature of the com-
pany or the nature of its products, but also more specific aspects of the
business such as the confidentiality of the information that employees
have access to, the extent of the knowledge that the personnel need
concerning the business and the parties involved, and the nature of the
relationships with the customers, that is, the complexity of their needs
and behaviors, their loyalty to the employees with whom they inter-
face, and their importance to the firm. Table 6.4 shows the measures
that the transaction cost literature has developed to assess the extent
of the specificity of these assets. Although most of the prior work has
developed these measures in the context of sales agents, such measures
can easily be adapted to any partnership arrangement by changing the
“agent” terminology to “partner.”
There is another form of investment that is perhaps even more spe-
cific to a transaction and that is directly relevant to the partnerships
among organizations. These are the investments that are made specifi-
cally for the benefit of the partnership and of the relationship among
the partners. Table 6.5 lists the items composing the measure used by
Anderson and Weitz (1992) in the area of channels of distribution but
that applies to investments in any organizational relationship and that
could be applied in particular to R&D partnerships.
The danger of opportunism from transaction-specific assets arises
because it is assumed that knowledge is transferred from one partner to
another in the course of interactions in an alliance. While this is observed
in a study of the evolution of patents by Mowery, Oxley and Silverman
(1996), this does not necessarily occur in all alliances. Alliances may
indeed foster the specialization of the partners, which reinforces the
strength of the partnership where each partner is hostage to the other.
216 Making Innovation Last

Table 6.4 Transaction-specific asset measures

Nature of From Anderson (1988)


company (7-point Likert scale)
s Here, it is hard for a new agent to get something done for
an account – expediting shipments, arranging credits,
getting damaged merchandise replaced, and so on
s In our company, it helps an agent tremendously to have been
around awhile to know who to see to get something done
s It is vital that an agent build strong working relationships
within our company
s Our ways of doing things are rather complicated from the
agent’s point of view
s It is difficult to learn all the ins and outs of our company
that an agent needs to know to be effective
s A newcomer to our firm has to learn our language, our
own words for various things
Consider those operating methods of our company that affect the
agent (e.g., procedures for getting a quotation, getting approval
of a sale, arranging for delivery). How would you describe your
company’s procedures relative to the industry? (7-point
differential scale)
s Complex-------Simple (reverse coded)
s Fast-------Slow
s Common-------Unusual
s Streamlined-------Bureaucratic
Nature of From Anderson (1988)
products On each scale below, please circle the most appropriate rating for
your product line taken as a whole. (7-point semantic
differential scale)
s Technical-------Nontechnical (reverse coded)
s Low engineering content-------High engineering content
s Fast changing-------Slowly changing (reverse coded)
s Unsophisticated-------Sophisticated
s Commodity-------Customized
s Unique-------Common (reverse coded)
s Complex-------Simple (reverse coded)
s How long would it take for the new agent to learn your
product line thoroughly?___weeks
s What percentage of your dollar volume is of the
customized products?___percent
s A new agent coming to us with experience in our product
class still needs a lot of training (7-point Likert scale)
s Our customers and prospects view our product line as
similar to the competition’s (7-point Likert scale)
s It takes very little time for most agents to learn our
product line (7-point Likert scale) (reverse coded)

(continued )
When to Forge Alliances? 217

Table 6.4 (Continued)

Confidential From Anderson (1988)


information s When an agent quits, how extensive are the security
procedures your firm institutes (e.g., limiting the agent’s
access to his/her office until he/she leaves)? (7-point
semantic differential scale) Minimal-------Extensive; 0 = no
security problem
s An experienced agent’s inside information could do us a
lot of damage if it got out (7-point Likert scale)
s Our agents are not in a position to learn much
information of a confidential nature (7-point Likert scale)
(reverse coded)
Need to know From Anderson (1988)
accounts (7-point Likert scale)
s To be effective, the agent has to take a lot of time to know
our accounts
s Our accounts have unusual needs
s Our agents cannot make the grade unless they invest a lot
of time and effort to build a relationship with an account
Customer From Anderson (1988)
complexity How would you describe a typical customer or prospect in your
territory? (7-point semantic differential scale)
s Unsophisticated-------Sophisticated
s Complex-------Simple (reverse coded)
Customer From Anderson (1988)
loyalty to (7-point Likert scale)
agent s In our business, the accounts do not care if I replace our
agents as long as the new ones are capable
s If our agents quit, they would take our best customers
with them
s Personal relationships between our agents and our
customers have little influence on sales of our product line
(reverse coded)
How would you describe a typical customer or prospect in your
territory? (7-point semantic differential scale)
s Impersonal-------Personal
Importance of From Anderson (1988)
key accounts s One average, how many different accounts does your
typical agent handle per year in this territory?____
accounts (reverse coded)
s What percentage of your accounts regularly receive special
attention (expediting shipments, giving special
consideration to requests, developing special arrangements
or procedures for the account, etc.)?___percent
s What percentage of your accounts do you consider to be
priority accounts, that is, accounts to which you give
special attention?___percent

Source: Adapted from Gatignon and Gatignon (2010).


218 Making Innovation Last

Table 6.5 Other transaction-specific asset measures

Own (agent/ From Anderson and Weitz (1992)


principal) s If we switched to a competitive line (agent), we would lose
idiosyncratic a lot of investment we have made in this principal’s line
investments (agent) (7-point Likert scale)
in the s If would be difficult for us to recoup investments made in
relationship this principal’s line (agent) if we switched to a competitive
line (agent) (7-point Likert scale)
s If we decided to stop representing this principal (using this
agent), we would be wasting a lot of product knowledge
that is tailored to their brands (methods of operation)
(7-point Likert scale)
s If we decided to stop representing this principal (using this
agent), we would be wasting a lot of product knowledge
that is tailored to their brands (methods of operation)
(7-point Likert scale)
s We have made a substantial investment in personnel
dedicated to this principal’s product line (agent) (7-point
Likert scale)
s We give extensive training to our customers on how to use
this principal’s product (7-point Likert scale)
s We have gone out of our way to align ourselves with this
principal (agent) in the customer’s mind (7-point Likert scale)
s We have invested a great deal in building up this principal’s
(agent’s) business (7-point Likert scale)
s We have made a substantial investment in facilities
dedicated to this principal’s product line (agent) (7-point
Likert scale)
s We have made a substantial investment to create a
reporting system that is similar to this principal’s (agent’s)
(7-point Likert scale)
s We have a significant advantage from being located near
this principal’s (agent’s) facility (7-point
Likert scale)
Perceptions of From Anderson and Weitz (1992)
partner’s s This principal (agent) has gone out of its way to link us
(principal/ with their product line (business)
agent) s This principal (agent) has made significant investments in
idiosyncratic training our people (customers)
investments s It would be difficult for this principal (agent) to recoup its
in the investment in us if they switched to a new agent (principal)
relationship s This principal (agent) does a lot to help us become a more
effective agent (principal), such as providing management
training (customer training and service)
s This principal (agent) puts on helpful programs that are
designed to enhance our overall business

Source: Adapted from Gatignon and Gatignon (2010).


When to Forge Alliances? 219

6.2.2 Internal (behavioral) uncertainty


Behavioral uncertainty is the difficulty in observing and measuring if
the partner adheres to the arrangements agreed to in a contract between
the parties. The underlying fear is that the partner takes advantage of the
relationship to its own benefit. This danger of opportunistic behavior is
at the heart of Williamson’s transaction cost theory. With high uncer-
tainty, the firm needs to control the transactions, which is done through
internal organization and governance. R&D requires tacit knowledge
implicit in complex and subjective analysis that involves combining
multiple sources and types of information that need to be weighted and
interpreted (Krishnan and Ulrich 2001). Robertson and Gatignon (1998)
consider two aspects of behavioral uncertainty. The first aspect concerns
the uncertainty surrounding a particular R&D project. The second con-
cerns the learning that a firm experiences through a history of partner-
ships. That experience should also affect the uncertainty of any new
partnership.

6.2.2.1 Ability to measure innovation performance


The ability to measure innovative performance varies across projects and
potential partners. The measure proposed by Robertson and Gatignon
(1998) to assess this component of behavioral uncertainty is shown in
Table 6.6.
Again, the transaction cost literature offers more detailed items that
reflect such internal uncertainty. For example, Table 6.7 lists items vali-
dated by Anderson (1988) in the context of sales forces. The items can
be easily adapted to the R&D partnership context.
The performance of partners in an alliance is especially difficult to
establish both because of the nature of the involvement of the partners
and because of the complex multidimensional characteristics of R&D
output. Behavioral control measures are complicated to put in place
when activities occur in multiple locations in one of the partners’ facili-
ties with personnel from these partners. In addition, it is not clear how

Table 6.6 A measure of internal uncertainty for assessing R&D partnership

s The goals for the innovation were clearly defined in advance


s We knew, based on tracking reports, exactly how well the innovation was
doing
s We specified precise measures for evaluating the success of the innovation in
advance

Source: Adapted from Robertson and Gatignon (1998).


220 Making Innovation Last

Table 6.7 Internal uncertainty measures

Difficulty of From Anderson (1988)


evaluating s What percentage of your dollar volume comes from team
performance sales (sales jointly made by two or more agents)?___percent
s We can get a very accurate measure of each agent’s sales
(7-point Likert scale) (reverse coded)
s It is very difficult to measure equitably the results of
individual agents (7-point Likert scale)
s Our sales and cost figures for each agent have no serious
accuracy problems (7-point Likert scale) (reverse coded)
s No one really knows who is responsible for many of our
sales (7-point Likert scale)
s A territory sales agent supervisor will do a poor job of
evaluating an agent’s performance using only cost and
sales figures (7-point Likert scale)
s We can fairly evaluate our agents just on sales and cost
measures (7-point Likert scale)

Source: Adapted from Gatignon and Gatignon (2010).

to measure the performance of R&D itself, which creates added potential


conflicts among the partners. For example, the performance of product
development team projects typically involves time taken (lead time to
market), manufacturing cost, quality, or market attractiveness of output
(Krishnan and Ulrich 2001). This complexity is augmented by the fact
that the output of R&D is not typically one product or service but multi-
ple research results that may find applications in multiple products and
services. Consequently, R&D output is typically measured on multiple
criteria (Cooper 1983).
There have been a number of studies that provide empirical evidence
supporting the transaction cost explanation for the role of behavioral
uncertainty on sales force integration (e.g., Anderson and Schmittlein
1984, Anderson 1985) or the use of direct versus indirect channels of dis-
tribution (John and Weitz 1988). Similarly for R&D, the potential oppor-
tunistic behavior from the partners when these behaviors cannot easily
be observed and when the outcome is difficult to assess leads firms to
choose internal development of new products and processes (Robertson
and Gatignon 1998).

6.2.2.2 Firm’s experience in alliances


Experience is a critical source of information that reduces uncertainty.
It can be expected that the more experience a firm has in managing
When to Forge Alliances? 221

partnerships, the more it learns how to anticipate and deal with prob-
lems that arise. Indeed, although not in the domain of R&D, Gatignon
and Anderson (1988) find that the larger the number of foreign markets
a firm has entered, the more likely that firm is to establish a wholly
owned subsidiary rather than a partnership when entering yet another
country. Similarly but this time in the context of R&D, Powell, Koput
and Smith-Doerr (1996) find that the more partnerships a firm has had,
the more likely it is to create new R&D partnerships. Following from
these results, Robertson and Gatignon (1998) hypothesize and confirm
that this is indeed the case but only if the past experience has been
positive. Although one can learn from negative experience (and reduce
behavioral uncertainty), a firm would think twice about a new partner-
ship and may prefer internal development.

6.2.3 External uncertainty


The role of external uncertainty could appear similar to the role of inter-
nal uncertainty in that an alliance would require a larger number of
contingencies that cannot all be defined. However, some peculiarities
characterize the context of the R&D mode: (1) two types of uncertainty
with opposite effects must be distinguished and (2) external uncertainty
does not work totally independently from asset specificity. Indeed, while
the sales force literature has considered mostly demand uncertainty and
the international entry mode literature has focused on the more general
notion of country risk, in the context of new product and service devel-
opment, two components are separately considered for R&D modes:
demand volatility and technology uncertainty (Robertson and Gatignon
1998). We discuss these two types of external uncertainty in the next
two sections, and we then develop the issue of the interaction between
external uncertainty and asset specificity, as theorized by the transaction
cost literature (Williamson 1975, Anderson and Schmittlein 1984).

6.2.3.1 Demand volatility


The volatility of demand comes from two sources: the fluctuation of
demand and the inability to predict demand (Walker and Weber 1984).
The development of new products and services requires acquiring
information from many sources and this information must be sifted,
weighted, interpreted, and combined in complex and subjective man-
ners (Krishnan and Ulrich 2001). In spite of the market research tech-
niques that have been developed to infer consumer needs and to assess
consumer demand (Kaul and Rao 1995), many of the characteristics of
innovations considered by consumers and reviewed in Chapter 3 are
222 Making Innovation Last

subjective and uncertain. This is particularly true for radical innovations


for which consumers are not easily able to imagine the benefits of the
products. For example, Sony developed the Betamax tape based on the
conviction from their market analysis that consumers would record only
short television programs for later viewing (Nayak and Ketteringham
1986). Victor Company of Japan (JVC) did not make such assumptions
and bet on flexibility, which led to JVC’s video home system (VHS) tapes
becoming the standard.
Table 6.8 lists the two items used by Robertson and Gatignon (1998)
to assess demand volatility.
A more elaborate scale is proposed by Anderson (1988) with the nine
items listed in Table 6.9. Although this scale is a more general measure
of environmental uncertainty, the items reflect for the most part aspects
of the demand.
There is ample evidence that the uncertainty of the volume of demand
increases the likelihood of vertical integration (Mahoney 1992), even if
this is not always the case (e.g., Harrigan 1985). Difficult renegotiations
would be required depending on the market evolution (Gatignon and
Anderson 1988, John and Weitz 1988). This favors a sequential, adap-
tive decision-making process, which is easier to perform in an integrated
organization where renegotiation is not needed (Heide and John 1990).
Kogut (1991) finds support for joint ventures as an option to acquisition
when facing demand uncertainty. Kogut and Kulatilaka (2001) refine
this option theory to deal with the uncertainty facing the valuation
of core capabilities when demand is difficult to predict. However, in
Robertson and Gatignon’s (1998) study, demand volatility is not signifi-
cant in explaining the choice of using an alliance versus internal modes
of development. However, as discussed next, the effect of technology
uncertainty is different.

6.2.3.2 Technology uncertainty


“Technology uncertainty refers to the probability of improvements in
technology, i.e., to new generations of technology which might render
obsolete the current technology development effort” (Robertson and
Gatignon 1998, p. 519). Table 6.10 lists items proposed by Robertson
and Gatignon (1998) to assess technology uncertainty.
Technological uncertainty appears more powerful in explaining the
use of an alliance, perhaps because it is more directly relevant to the
innovation process. Its impact is indeed significant in a number of stud-
ies (e.g., Balakrishnan and Welnerfelt 1986, Harrigan 1986, Robertson
and Gatignon 1998). This is found to be particularly the case when there
When to Forge Alliances? 223

Table 6.8 Measure of demand volatility

s Demand is difficult to forecast


s Markets are uncertain

Source: Adapted from Robertson and Gatignon (1998).

Table 6.9 Measure of environmental uncertainty

Environmental From Anderson (1988)


unpredictability How would you describe the market for your product line?
s Complex-------Simple (7-point semantic differential
scale)
s Stable--------Volatile (7-point semantic differential scale)
s Easy to monitor--------Difficult to monitor (7-point
semantic differential scale)
s Certain--------Uncertain (7-point semantic differential
scale)
s Consider the best forecast you feel could be made
(by any means) of next year’s sales in your territory.
When the forecast is compared to actual sales,
how close would you expect to be? Within
(plus or minus) ___percent of actual sales
s What is the relative emphasis your firm places on
growth in new product sales in your territory?
(maximum 100 points allocated among 6 goals)
s What is the relative emphasis your firm places on
entering new markets in your territory? (maximum
100 points allocated among 6 goals)
s New products are a minor part of our company sales
effort (7-point Likert scale) (reverse coded)
s It is important to us that agents emphasize new
products to the customer (7-point Likert scale)

Source: Adapted from Gatignon and Gatignon (2010).

Table 6.10 Measure of technology uncertainty

s The technology is stable (reverse coded)


s Life cycles are short
s The technology is moving very fast
s Technology is on a constant plateau (reverse coded)
s Technological pressure is intense
s The technology moves rapidly from generation to generation

Source: Adapted from Robertson and Gatignon (1998).


224 Making Innovation Last

is a shift in the technology paradigm, that is, when breaks in technol-


ogy occur that destroy existing competencies (Pisano 1990, Shan 1990,
Teece 1992). We discuss these paradigm changes in Chapter 2.
Contrary to demand uncertainty, however, technology uncertainty
necessitates flexibility on the part of organizations so that they can
respond quickly to changes in their environment. In fact, two additional
dimensions must be considered when analyzing NPD: timeliness and
learning by doing (Williamson 1991). This is especially the case with
technologies that have longer cycles (Klein, Frazier and Roth 1990).
Integrated organizations are insulated from their environment and take
time to react (Lawrence and Lorsch 1967, Pfeffer and Salancik 1978,
2003). Alliances allow the sharing of knowledge and of the risks inher-
ent in the R&D process. In fact, it is unlikely that in industries where
technology changes rapidly a single firm possesses all the knowledge
required to adapt to the environment (Pisano, Russo and Teece 1988).
Therefore, in the case of technological uncertainty, these benefits will
dominate the transaction costs inherent to alliances, whether it is the
cost of information, renegotiation, or adaptation. This is indeed con-
firmed by the empirical study of Robertson and Gatignon (1998). The
role of technology uncertainty is also an important aspect of option
theory applied to alliances. Folta (1998) investigates the biotechnology
industry and tests the hypothesis that firms take minority positions in
joint ventures as options when faced with uncertainty. The results indi-
cate that “in the presence of uncertainty, firms tend to make limited
equity purchases and that the likelihood of JV formation increases rela-
tive to acquisition” (Reuer and Tong 2005, p. 406). However, Folta and
Miller (2002) find that, in the same biotechnology industries among
minority investment participations, the threat of competition reinforces
participation: greater uncertainty leads to greater commitment when
the underlying growth option is at risk of preemption by rivals.

6.2.3.3 External uncertainty and asset specificity interaction


Generally, uncertainty also raises the possibility of opportunism.
Opportunism is defined as self-interest seeking with guile (Williamson
1975, 1985). However, for opportunism to exist, there must be opportuni-
ties for such self-interest seeking with guile. Therefore, uncertainty inher-
ent in a given context may offer opportunities for opportunism but this
opportunism becomes particularly dangerous to the firm if there is value
to be derived from the firm assets, that is, in the presence of transaction-
specific assets. This interaction has not been easy to demonstrate
When to Forge Alliances? 225

in the empirical literature but is theoretically meaningful: “The transac-


tion costs to specify, monitor, and enforce a workable contract are higher
in high-volatility markets than in low-volatility markets (Balakrishnan
and Wernerfelt 1986, Teece 1988)” (Robertson and Gatignon 1998,
p. 519).
In summary, the empirical evidence concerning the various kinds
of uncertainty tends to be consistent with the theory. Technology alli-
ances should be pursued when the firm has less commitment to product
category-specific assets, when it faces higher technological uncertainty,
when it is capable of measuring innovation performance, when it has
successful experience with prior technology alliances, and when it is
competing in lower growth product categories.

6.2.4 Soft tools to fight opportunism


In an alliance, the management and control of the relationship is pri-
mordial. Deck et al. (2001) identify three levels of control in the man-
agement of the relationships from their study of companies such as
Cisco, Flextronics, and Millennium Pharmaceuticals:

1. A joint executive sponsorship with a representative from each part-


ner responsible for the success of the relationship.
2. A relationship management committee with director-level cross-
functional representatives from each company; this committee over-
sees the project teams and monitors key metrics.
3. Project managers and core teams that execute the codevelopment
projects at the project level.

But such organization is not enough. Since its earliest development, the
transaction cost economic literature (Williamson 1975) has focused on
intermediary options between market and hierarchies and on soft means
of preventing opportunism. Indeed, Anderson and Gatignon (2005)
argue that “the move to outsourcing NPD will fail unless firms dramati-
cally increase their capacity to ally by such means as the exchange of
credible commitments” (p. 412).
Opportunism can be prevented with the following soft factors
(Gatignon and Gatignon 2010): thrust, goal congruence, mutuality,
and interdependence. For example, in the automobile industry, manu-
facturers rely to a large extent on their upstream suppliers for innova-
tions. However, suppliers would not commit to investments that are
specific to a manufacturer unless that manufacturer makes idiosyncratic
226 Making Innovation Last

investments in that relationship. In fact, the more challenging the inno-


vation is technically, the larger the idiosyncratic investments, especially
when there is fast technological change (Bensaou and Anderson 1999).
Such idiosyncratic investments in the partner relationships lead to better
performance relative to competitors in terms of product quality, shorter
development times, and market advantages (Dyer 1996, Jap 1999).
Close relationships are also needed with downstream vertical part-
nerships. A particularly interesting form of partnership is franchising
(Coughlan et al. 2006). While franchisees can generate innovative ideas,
these ideas do not tend to spread broadly even though the franchisor
would be well placed since its role is to generate, collect, refine, and
transmit information through the network of franchisees. The key to
the successful spread of innovative ideas is plural governance, that is,
the frequent, structured interaction between company-owned and inde-
pendently owned outlets (Bradach 1997).
Another way to achieve interdependence consists in developing com-
plementary products where the imbalance in investments is recipro-
cated across products. Each firm then exchanges hostages. This occurs,
for example, in the pharmaceutical industry where firms cooperate in
marketing the products of competitors. In this situation, the risk of
opportunism through reverse engineering or misleading information
about the market is particularly high. By making these carrier–rider rela-
tionships (piggybacking) reciprocal, especially across multiple markets,
opportunism can be minimized (Terpstra and Yu 1990). These kinds of
pledges are in fact quite common for reciprocal, territorial exclusive dis-
tribution rights (Fein and Anderson 1997).
The reason that interdependence prevents opportunism is that the
presence of hostages leads to trust in the economic sense that views
trust as the outcome of a calculative process. This is why even bal-
anced investments that are not idiosyncratic can be effective in reduc-
ing opportunism (Galunic and Anderson 2000). However, trust is also a
matter of perceptions (Anderson and Weitz 1992, Vosgerau, Anderson
and Ross 2008). Several factors can contribute to perceived trust in
partner relationships. Feelings of mutuality are the commitment level
or concern for the partner’s welfare (Vosgerau et al. 2008). Mutuality
feelings are built from the history of the relationship (Dwyer, Schurr
and Oh 1987, Blau 2013) and from the level of communications among
the partners (Dwyer et al. 1987, Anderson and Weitz 1989, Mohr and
Nevin 1990). However, perceptions are not always accurate. In addition
to the uncertainty associated with perceptions, these perceptions tend
to be biased downwards, that is, the partner perceives less commitment
When to Forge Alliances? 227

from the other partners (Vosgerau et al. 2008). More specifically, it is the
asymmetries in the partners’ commitment that determine the extent
to which a partner perceives benefits from the partnership. Therefore,
firms that perceive that they are more (less) committed than their part-
ners perceive that they benefit more (less) (Anderson and Weitz 1992).
However, perceptions of overcommitment to a relationship are detri-
mental to the performance of that relationship. Managing these percep-
tions is therefore critical, although it is not straightforward, especially if
the perceptions of overcommitment are not genuine.
Wathne and Heide (2000) distinguish between incentive-based and
socialization mechanisms. These governance strategies are listed in
Table 6.11.
Trust can safeguard against opportunism but this effect and trust itself
can erode rapidly if abused (Jap and Anderson 2003).

6.3 Who to partner with?

Getting the right partner is not an easy task. Given the dangers of oppor-
tunism, the choice needs to be carefully analyzed and, in particular, the
management of the relationship should be carefully thought out ahead
of time. Cisco uses four criteria that must be validated at each occasion
when picking a partner (Deck et al. 2001):

1. Short-term returns for both companies


2. Clearly defined long-term potential for both companies
3. Shared vision of technology and market developments
4. Shared destiny of cooperation, not competition

A number of characteristics of the partners have been studied to deter-


mine if any particular combination of characteristics works best. Several
characteristics concern how diverse the partners should be, such as
horizontal versus vertical alliances, the relational embeddedness and
the knowledge redundancy of the partners, the similarity in size of the
partners, the nature of the partners, or the scope of the alliance (narrow
vs. strategic). Other characteristics concern the governance of the two
organizations, in particular, the general fit of how the firms are organized
and the compatibility of their goals. We discuss each of these in turn.

6.3.1 Horizontal versus vertical alliances


Rindfleisch (2000) considers two types of alliances depending on whether
they are vertical (within the supplier/manufacturer/distributor chain) or
Table 6.11 Governance mechanisms to manage perceptions of commitment
228

Primary effects on
Governance strategy General purpose Prerequisites opportunism Second-order effects

Monitoring Reducing information Identification of relevant Limited to Selection effects


asymmetry criteria information-based
Facilitating the Implicit or explicit opportunism
deployment of contract that Most effective under
incentives legitimizes monitoring exiting
Making Innovation Last

circumstances
Incentives Reducing payoffs Ex ante bargaining Effectiveness under Hostages as
from opportunism power (hostages) new circumstances is productive assets
Aligning interests Direct costs (price limited by the range Quality signal
premiums) of self-enforcing
Information availability contract
Selection Reducing information Relevance of criteria Effectiveness depends Customer signal
asymmetry Imposing selection costs on the relevance of
Allowing for on partner selection criteria
self-selection Risk of self-selection
biases
Information availability
(reputation)
Socialization Promoting goal Completeness of Effectiveness depends Customer signal
convergence socialization efforts on the applicability Selection effects
of role across
situations

Source: Adapted from Wathne and Heide (2000).


When to Forge Alliances? 229

horizontal (between competitors in the same market). Vertical relation-


ships have received much attention in the literature, especially using
transaction cost economics theory. Within that literature, trust between
organizations has been a central mechanism that prevents opportun-
istic behaviors without enforcing centralized control mechanisms that
require ownership. In the context of R&D alliances, Rindfleisch (2000)
finds that vertical alliances foster greater cooperation than horizontal
alliances. This appears to be due to a higher level of trust between part-
ners in a vertical alliance. This is confirmed by Un et al. (2010) who
find in a large study of R&D collaborations that alliances with suppliers
are the most productive in terms of innovation development and that
these alliances have long-term effects. In contrast, collaborations with
competitors (horizontal alliances) have negative effects on innovation
productivity, even if these negative effects last only in the short term.

6.3.2 Relational embeddedness and knowledge redundancy


Research on partner selection for alliances has been dominated by the
social capital paradigm. The notion of social capital recognizes that the
quality and quantity of interactions among individuals and groups,
especially as they form social networks, are a source of economic value.
The knowledge built and shared through the network is at the heart of
the paradigm. In particular, the role played by knowledge complemen-
tarity and knowledge dynamics is a critical factor that should impact
partner selection. In fact, building a model based on only these last
factors, Baum, Cowan and Jonard (2010) demonstrate that the model
leads to patterns of partner selection that are similar to those found
in alliance networks. Rindfleisch and Moorman (2001) study US firms
that have recently been involved in R&D alliances and examine the
role of the characteristics of the social ties among the partners, more
particularly the extent of knowledge redundancy (which is higher in
horizontal alliances than in other types of alliances) and the strength
of the ties. The strength of the ties concerns the extent of the exchange
in terms of opportunity and motivation to transmit information to
the partners and corresponds to the embeddedness of the relationship.
While both relational embeddedness and knowledge redundancy lead
to greater new product creativity and faster speed of NPD, it is relational
embeddedness that enables greater acquisition of product information,
while knowledge redundancy has a negative effect on the acquisition
of process information. This complements the findings from Keil et al.
(2008), who find that venture relatedness as measured by the Standard
Industrial Classification (SIC) code match between the venture and the
230 Making Innovation Last

focal firm (a concept related to knowledge redundancy) turned out to be


different for different types of governance. More specifically, joint ven-
tures benefit in terms of innovative performance (i.e., number of pat-
ents) from relatedness. While joint venture benefits are insignificant for
corporate venture capital investments and alliances, the effect is actually
negative for acquisitions (Keil et al. 2008). This negative effect is consist-
ent with Wuyts, Dutta and Stremersch’s (2004) findings that technologi-
cal diversity in alliance portfolios of interfirm agreements has a positive
influence on both radical innovation and incremental innovation.
The diversity of the portfolio appears to strengthen a firm’s basis for
learning. However, learning follows from information sharing, which
requires that partners are both able and motivated to share the informa-
tion. Sampson (2007) finds that moderate levels of partner technology
diversity lead to the most innovative alliances that then combine both
the ability and the incentives to share information. Also, the strength of
ties effect may not be equally effective for all innovations. It is radical
innovation and not incremental innovation that should be considered
when analyzing the extent to which a partnership is repeated in a port-
folio because it then leads to greater embeddedness. This supports the
facilitator communication role of strong ties for radical innovations that
require complex knowledge transfer (Wuyts et al. 2004).

6.3.3 Size asymmetry


Another important aspect of the alliance concerns the size of the firms
involved. Chesbrough and Schartz (2007) cite the example of Cisco that
tends to ally with smaller partners when it involves core competencies.
Even then, however, they typically obtain control through equity
investment to prevent the issues due to opportunism in the presence
of transaction-specific assets. Kalaignanam, Shankar and Varadarajan
(2007) analyze the impact of size differences between partners on the
financial gains that can be attributed to the announcement of an R&D
alliance for NPD. They also consider the role played by the characteris-
tics of the alliance. One such characteristic is its scope. A broad alliance
involves other functional activities than R&D, such as marketing and
manufacturing, while a narrow alliance is limited to R&D. Furthermore,
they distinguish between two other types of alliances, depending on
whether resources are pooled (a scale alliance) or exchanged (a link alliance)
(Hennart 1988). While the larger firm tends to benefit more from a broad
scope, a scale R&D alliance brings greater gains to the small partner.
Capron and Mitchell (2012) emphasize the importance of the bal-
ance in the resources contributed by each partner. An imbalance in
When to Forge Alliances? 231

organization size may lead the larger partner to undertake activities that
compete with a smaller partner that depends on these activities. Capron
and Mitchell (2012) cite the example of Amylin Pharmaceuticals that
sued its partner Eli Lilly with whom it had codeveloped a medicine that
they co-marketed, because Eli Lilly had later allied with another drug-
maker to codevelop a drug that competed with theirs.
Taken together, these results provide important guidelines for firms
considering whether to form such alliances. These studies also investi-
gate explanatory mechanisms at work in such alliances, which can serve
as a basis for further exploration of the strategic benefits from such inter-
organizational linkages. The small firm’s sense of exploitation is often
due to the inability of the smaller firm to learn from the larger partners
(Capron and Mitchell 2012). This is especially the case with small tech-
nology firms. Such start-up organizations can easily be absorbed by a
larger partner but the smaller firm does not have the resources to learn
from the marketing skills of their partner.

6.3.4 Nature of partners


Different types of partners may provide the complementary assets
required for the development of new products and services. Apart from
the typical private companies that may have a technology or the know-
how required, we have already discussed partnerships with competitors,
that is, horizontal alliances, in Section 6.3.1. Recently, public–private
partnerships (PPPs) have received more attention (De Pinho Camposa,
Normana and Jadad 2011). Such alliances provide access to resources
(subsidies) for projects in industries where R&D costs would be difficult
to recover from the market while societal benefits are substantial. This is
the case for many medical and drug innovations. These product devel-
opment PPPs (PD-PPPs) are also common for projects that are based
on fundamental research developed in universities and public research
institutions. These often lead to radical innovations and require comple-
mentary skills, high uncertainty levels, and delays that are not aligned
with the financial returns of private organizations (Ziedonis 2007).
Indeed, research in public institutions often requires different goals for
the institutions and the individual researchers, based on time frames
that can be characterized by a longer horizon.
Research universities and government research institutions are provid-
ing tremendous knowledge, especially in the areas of technology, biol-
ogy, and medicine (Sorescu, Chandy and Prabhu 2003, Balconi, Breschi
and Lissoni 2004, Un et al. 2010, Garcia, Araujo and Mascarini 2013).
They supply a large number of patents from which they try to maximize
232 Making Innovation Last

the economic value. Governments support such efforts to help contrib-


ute to the country’s economic growth and employment. Therefore, these
institutions are natural sources of innovation. However, depending on
the country, the mission of public universities may not allow them to
take part in profit-sharing activities. Nevertheless, such R&D programs
contribute to the development of government–academia–business net-
works (Hayashi 2003).
The military has been a strong partner in the development of innova-
tions, as the continuous search for superior military power requires con-
tinuous improvements in equipment and communication capabilities.
The large military budgets allow the scale necessary for research and, at
the same time, can be a source of economic growth if the innovation has
spillovers into the commercial sector.
Another type of partnership involves government agencies and not-
for-profit organizations. In addition to recognizing the conditions for
success common to all alliances, De Pinho Camposa et al. (2011) high-
light how critical it is for all PD-PPPs (whether with government insti-
tutions, agencies, and not-for-profit organizations) to discuss in depth
their values and shared goals in order to agree on the mutual interests of
the project. They also note the importance of establishing the equality
of power in such relationships, in spite of the difficulty in comparing
power between a government and a private firm (including multination-
als) or between a private firm and a not-for-profit organization.

6.3.5 Strategic innovation alliances


R&D alliances very often continue for the duration of a project, that is,
until the new product is developed or the new technology is established.
Some innovation alliances involve a narrowly focused collaboration on
limited activities. Strategic innovation alliances are ongoing and coexist
with each individual entity in a cooperative and competing situation.
The objectives of such strategic alliances are similar to those discussed
thus far but with a long-term perspective and a scope that is usually
broader than a single project. Strategic innovation alliances are setup in
recognition of the fact that very often individual organizations cannot
compete effectively alone but rather need to work in partnership with
other organizations on common projects. Such projects may require the
pooling of financial or human resources in order to achieve economies
of scale or to benefit from combining complementary capabilities across
the organizations. Savings can also be realized by avoiding the dupli-
cation of services across the organizations and by taking advantage of
economies of scale, for example, in purchasing. Many of these benefits
When to Forge Alliances? 233

are similar to those that we have discussed earlier. However, the long-
term commitment here is probably a unique characteristic of strategic
alliances as opposed to other types of innovation alliances. The sustain-
ability of the partnership in the long term requires stable relationships
that are more likely among established organizations than perhaps with
start-ups.

6.3.6 Organizational fit
Alliances involve a large amount of coordination, as discussed in Section
6.2.4 on soft skills. Capron and Mitchell (2012) mention the need for a
company choosing the buy option to often “have to change the culture,
values, or working habits of the incumbent organization on the ground
floor and integrate the new work styles of recently hired employees”
(p. 51). Even in the borrow mode of an alliance, organizations must share
fundamental elements of the culture of the organization and essential
values (Greve et al. 2014). This is important not only for the function-
ing of the alliance, but also for the image that the companies project to
the outside, whether customers, suppliers, distributors, or investors. In
addition to this general cultural fit, two more specific aspects must be
in sync: fit of organizational processes or systems and fit of incentives.
Although Capron and Mitchell (2012) are more concerned about the
fit of the organization with the new resources and skills that the firm
must acquire, if the information systems, processes, and procedures
diverge too much, the coordination of the alliance activities is likely to
be seriously handicapped. However, some differences may be beneficial
for the mutual learning of both organizations. The compatibility of the
incentives across the organizations is also critical because of the need to
balance the benefits of the partnership across the partners. If the incen-
tives diverge, it is likely that the firms will benefit in an unbalanced way
that will damage trust in the long term.

6.3.7 Compatibility of goals


Capron and Mitchell (2012) and Greve et al. (2014) insist on the likely
failure of any alliance where the partners do not have aligned goals.
They provide a list of determinants of goal compatibility: “goals tend to
be aligned when there is limited competitive overlap and when the part-
ners each contribute meaningful resources, enjoy symmetric opportuni-
ties, and have the skills needed to manage an alliance throughout its life
cycle” (p. 101). Competitive overlap means that the partners compete
on some domains of their activities. Although the costs to operate such
alliances may be lower because of their similar goals and organizations
234 Making Innovation Last

(Koh and Venkatraman 1991, Han et al. 2012), too much overlap will
lead to opportunistic behavior and lack of trust. The contributions of
each partner must be balanced and preferably on differentiated and
complementary resources. This describes situations of mutual interde-
pendence where each partner is hostage for the resources of the other
(Sivadas and Dwyer 2000). In cases of asymmetrical learning opportuni-
ties, the firm with fewer opportunities is likely to feel exploited, leading
to a lack of trust that is vital to any kind of partnership.
Even with shared goals, the execution of an alliance project requires
high execution skills and diplomacy. Those involved in the management
of the alliance must be perceived as being honest and trusted “negotia-
tors.” More specific skills include the ability to maintain “effective over-
sight; build strong business plans; build strong relationships; manage
conflicts; [and] maintain clarity about the main goal of the relationship
as it evolves over time” (Capron and Mitchell 2012, p. 107).

6.3.8 Regional clusters


Networks within a geographical area provide opportunities for ties that
are necessary for the acquisition of complementary knowledge and as a
source of creativity. The Silicon Valley example has been used extensively
to illustrate the benefits of such clusters for innovation and new venture
development. The benefits are due in part not only to the availability
of venture capital that attracts companies, but also to the networking
that follows. Indeed, entrepreneurs and firms in such regional clusters
located around major research universities (as described by Garcia et al.
2013) are often characterized by informal ties where open innovation
can prosper. Many countries have attempted to develop regional clusters
to reproduce the Silicon Valley model, often under the initiative of the
government. It then becomes particularly attractive to search for part-
ners among these regional clusters. However, while proximity provides
opportunities for close ties, the strength of ties does not require such
proximity. In fact, Ganesan, Malter and Rindfleisch (2005) show that,
using data from the US optics industry, proximity allows increased face-
to-face communication but does not enhance creativity or the speed of
NPD. This suggests that face-to-face communication does not necessar-
ily allow for the exchange of the kind of information useful for NPD.
E-mail communication, on the other hand, appears to be a more appro-
priate means of communication in the context of NPD collaboration, as
it leads to more creativity and faster development. However, the role of
the strength of ties is still critical, since the stronger the ties, the more
effective this mode of communication.
When to Forge Alliances? 235

6.4 International alliances

The literature on foreign modes of entry is extensive and rather eclec-


tic, as exemplified by Dunning’s (1980) “eclectic theory of international
production.” It should be noted, however, that most of that literature
concerns manufacturing and commercial functions. Nevertheless, this
research serves as a basis for our R&D partnership discussion in Section
6.4.2. Alliances are one of the many possible modes of entry, that is,
“institutional arrangements (e.g., minority joint venture) that firms use
to govern their activities when launching operations in foreign markets”
(Anderson and Gatignon 2005, p. 425).
Anderson and Gatignon (1986) unify the multiple factors covered by
this literature within transaction cost economics. First, they identify
the different modes of entry according to the level of control that each
mode affords. These are represented in Figure 6.4.
At the high end of the control continuum is the wholly owned sub-
sidiary form of entry where the firm has a priori full control over the

High-Control Modes: Dominant Equity Interests


s Wholly-owned subsidiary
s Dominant shareholder (many partners)
s Dominant shareholder (few partners)
s Dominant shareholder (one partner)

Medium-Control Modes: Balanced Interests

s Plurality shareholder (many partners) s 2estrictive exclusive contract (e.g.,


s Plurality shareholder (few partners) distribution agreement, license)
s Equal partner (50/50) s Franchise
s Contractual joint venture s .onexclusive restrictive contract
s Contract management s Exclusive nonrestrictive contract

Low-Control Modes: Diffused Interests


s .ONEXCLUSIVE NONRESTRICTIVECONTRACTSEG INTENSIVEDISTRIBUTION SOMELICENSES)
s Small shareholder (many partners)
s Small shareholder (few partners)
s Small shareholder (one partners)

Figure 6.4 Entry mode classified by level of control of entrant


Source: Adapted from Anderson and Gatignon (1986).
236 Making Innovation Last

entity in the foreign country. Very high on that continuum are sub-
sidiaries where the majority of the capital is owned by the firm itself.
Presumably, ownership of the majority of the shares gives power to the
firm to access the necessary information that would prevent opportun-
istic behavior on the part of the foreign partner. The fewer the partners
holding a minority stake, the more control the firm has. At the low end
of the continuum, nonexclusive contracts or licensing is mixed with
minority participation in a foreign subsidiary. However, control is not
only exerted through capital ownership. Some types of management
contracts can provide the control functions on the activities in the for-
eign country.
Given this classification along the control-level continuum, several
studies have used transaction cost economics to empirically explain
choices among the different modes of entry shown in Figure 6.4. A list
of such studies is given in Figure 6.5, with the levels of control compared
in each study.
Gatignon and Anderson (1988) use a large data set on entry from the
Harvard Multinational Enterprise database. Based on the theoretical
framework developed in Anderson and Gatignon (1986) and reproduced
in Figure 6.6, their empirical results tend to confirm the transaction cost
explanation. These results are summarized in Figure 6.7.
Transaction-specific assets are indeed a strong indicator of the control
mode (wholly owned subsidiary), as indicated by the significance of the
two sources of asset specificity: R&D and advertising intensity. The role
of internal uncertainty is more complex as discussed in Anderson and
Gatignon (1986). The empirical results of Gatignon and Anderson (1988)

Studies High Control Medium Control Low Control

Anderson and Gatignon (1986) Balanced equity Diffused


Dominant equity interests
Gatignon and Anderson (1988) interests interests
Root (1987) Contractual
Wholly owned operations Joint venture
Erramilli and Rao (1993) transfer
Kogut and Singh (1990) Greenfield/acquisitions Joint venture
Licensing/
Hill, Hwang and Kim (1990) Wholly owned subsidiary Joint venture
franchising
Exporting/
Kumar and Subramaniam (1997) Greenfield investments/ Equity/non equity
contractual
Pan and Tse (2000) acquisitions Joint venture
agreements

Figure 6.5 Foreign entry mode classifications along a control continuum


Source: Adapted from Gatignon and Gatignon (2010).
When to Forge Alliances? 237

Transaction-Specific Assets Internal Uncertainty

+ +

Entry Mode:
+ Degree of Control

External Uncertainty + Free-Riding Potential

Long-Term Efficiency

Figure 6.6 A transaction cost framework for analyzing the efficiency of entry
modes
Source: Adapted from Anderson and Gatignon (1986).

Empirical
Finding
Effects of Transaction Specific Assets Factors

R&D/Sales >0

Advertising/Sales >0

Effects of External Uncertainty Factors


Country Risk <0

TSA x External Uncertainty >0

Effects of Internal Uncertainty Factor


International Experience >0
Socio-cultural Distance <0

Figure 6.7 Modes of entry: summary of empirical findings


Source: Adapted from Gatignon and Gatignon (2010).

support the view that uncertainty due to the difficulty of understand-


ing the host culture does not mean that the way of doing business in
the home country is best adapted to the host environment. In fact, the
entering firm will find that a lower control mode partnering with a local
238 Making Innovation Last

firm will enable the entering firm to learn about the local culture. This
is why the greater the sociocultural distance between the home and the
host country, the more likely the entrant will choose a model affording
less control. Reuer and Tong (2005) use similar arguments for explaining
the greater use of call options more frequently in culturally distant coun-
tries. However, as the firm gains experience, it faces less uncertainty in
doing business abroad and is then more likely to revert back to the default
of wanting control. Indeed, without experience, firms do a poor job of
assessing partnership performance, be it input or output. Exercising con-
trol without having the expertise adapted to foreign cultures would have
negative consequences. Therefore, firms without foreign experience are
better off with low-control modes of entry through partnerships.
In very uncertain environments and in the absence of transaction-
specific assets, the firm needs flexibility, and a low-control mode, for
example, through a partnership, will provide such flexibility. However,
the significant interaction of transaction-specific assets with external
uncertainty indicates that the dangers of opportunism then become
critical and the firm must have control over the foreign operations to
avoid such opportunism.
The Transaction Cost Economics (TCE) view of foreign entry is still
at the heart of the study of the multinational enterprise (Hennart
2009, 2010), although this original framework has been expanded.
In particular, the resource-based view (RBV) focuses on the increased
benefits rather than on the ratio of output to input that character-
izes transaction cost analysis. The value creation that results from
the transfer of key-specific assets is due to the learning that comes
from that transfer that could not occur without asset transfer (Meyer,
Wright and Pruthi 2009). Some of these assets can be found locally in
the host country (Hennart 2009).
A meta-analysis of 38 studies (involving 106 effects) by Zhao, Luo and
Suh (2004) confirms the power of the TCE explanation: “the combined
overall effects of transaction cost-based determinants are consistent with
the predictions of transaction cost economics” (p. 524), even if some of
these effects are moderated by contextual factors and methodological
artifacts of the various studies.
While the mode of entry literature has focused on manufacturing
firms interested in expanding their markets internationally, the risks of
opportunism arguments apply especially to market mechanisms when
intellectual property rights are at stake, as is the case with R&D partner-
ships. Indeed, Oxley (1999) analyzes collaborations by US firms with
firms in 110 countries in this particular context. She finds that firms
When to Forge Alliances? 239

prefer to use governance modes that give them more control, that is,
equity joint ventures versus market contracts, when idiosyncratic assets
are at stake.
In the same vein, in a study of international R&D alliances of electron-
ics and telecommunications equipment companies, Oxley and Sampson
(2004) find that even equity joint ventures are often insufficient to pro-
tect the firm’s assets. Firms then tend to minimize the scope of the alli-
ance activities to avoid sharing valuable knowledge. It is interesting that
alliances with local partners remain beneficial to the point that firms still
prefer to maintain a partnership rather than integrate totally. This scope
minimizing phenomenon is also observed in a study of US–Japanese
alliances: knowledge transfer is limited to activities directly related to
the alliance activity, and firms devise administrative structures to reduce
technology leakage that is not central to the alliance activities (Oxley
and Wada 2009).
Transaction costs are not the only factors that explain the formation
of alliances. More recently, the mode of international entry literature
has expanded the explanation to include social network characteristics.
In a study of IJV, Goerzen and Beamish (2005) demonstrate that while
geographic diversity has a positive effect on the IJV performance, net-
work diversity (in terms of the number of unique partners in the home
and in the local countries) is a source of problems that leads to negative
effects on performance.
Although Laursen, Reichstein and Maskell (2008) do not focus on
the mode of control, they compare partnerships of Danish firms with
foreign partners and find that these partnerships are more successful
when the foreign partners are involved in the NPD. Surprisingly, such
contracts should not be long term as the benefits become negative if the
relationships last too long, perhaps due to the opportunism that can
then take place on the part of the foreign partner.
The question addressed in this chapter concerns the mode of organi-
zation to develop new products and services that require know-how
and resources that are outside the firm. Many options are available
from internal development to outsourcing contracting. The answer
to the best approach and governance that provide the right amount
of control without the burden of the costs associated with such con-
trols is best analyzed through the lens of transaction cost economics
with additional contributions from RBV and from network theory.
These theories have been shown to explain practice, both in national
and international contexts, but the management of all kinds of alli-
ances implies careful use of soft tools to minimize the possibilities of
240 Making Innovation Last

opportunism that pervade R&D alliances that involve highly valued


proprietary knowledge. In this chapter, we have taken the perspective
that the new technologies, products, or services developed by an alli-
ance are used by the alliance partners in the context of the alliance
itself or by the partners individually. However, an additional question
that arises often concerns broader additional marketing options for the
accrued property rights developed by the alliance. Boyd and Spekman
(2010) specifically address the question of how restrictive the distribu-
tion strategy should be when licensing such rights developed by an
alliance.

Note
1 Doz and Hamel (1998) also consider alliances as a way to turn potential com-
petitors into allies. We do not focus the discussion in this chapter on this pure
competitive motivation; however, such motivation should not be ignored.

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Index

Absorption process, 157, 168 Business model, 2, 206


Absorptive capacity, 153–156, Business performance, 101, 177
158–180, 182–185, 188–192 Business-to-business, 72, 138
Acquisition of competencies, 41, 47, 48 Buy, 64, 66, 67, 69, 201, 206, 223
Administrative innovations, 114,
128, 129 Cannibalization, 58
Adoption of innovation, 64, 68, 156 Capabilities, xiv, 3, 12, 19, 30, 34, 40,
Aesthetics, 54, 55 44, 46–48, 80, 89, 98, 99, 101, 104,
Airline industry, 37 139, 145, 153–192, 201, 203, 204,
Aligned goals, 233 206, 208, 211, 212, 214, 222, 232
Alliance experience, 233 Capability gap, 212
Alliances, 12, 17, 87–89, 201–240 Cement industry, 37
Ambidexterity, 171, 176 Centrality, 168
Analogy, 157 Centralization, 161, 162, 183, 184, 192
Apparel industry, 40, 110 Closed alliances, 208
Architectural innovation, xiii, 20, 26, Co-development, 204, 207–208,
30–36, 46, 47, 83, 84, 87, 156 214, 225
Architectural knowledge, 31–34, 156 Cognitive structure development, 157
Assets, 3, 38–40, 98, 101, 102, 155, Collaborative climate, 133
177, 179, 184, 201, 202, 207, Commitment, xiii, 8, 72, 104, 106, 112,
208, 213–216, 218, 221, 224, 140, 141, 186, 215, 224–228, 233
225, 228, 230, 231, 236–239 Communicability, 68, 73, 80
Associate knowledge, 157 Compatibility, 62, 68, 69, 71, 76, 78,
Associative learning, 154 79, 227, 233–234
Attitude, 53, 144 Competence
destroying, 20, 35, 37, 38, 40, 42,
Barriers to entry, 29, 40, 43, 85 46, 47, 81
Behavioral uncertainty, 213, 219–221 enhancing, 20, 37–40, 42, 43,
Beliefs, 53, 54, 60, 98, 101, 104–106, 46–48, 81
119, 120, 144, 181 trap, 168
Bibliometric data, 161, 162 Competitive advantage, 2, 3, 98, 101,
Big data, 102 106–108, 128, 153, 191, 192, 211
Borrow, 201, 206, 207, 233 Competitive dynamics, 81, 106
Brand Competitive environment, 19, 26, 37
dominance, 55 Competitive intensity, 130
name, 171 Competitive overlap, 233
personality, 55 Competitor orientation, xiv, 12, 98,
Branding, 13 104, 105, 107, 117, 118, 123, 128,
Build, 2, 3, 7, 20, 21, 33, 37, 46–48, 129, 132, 134–137, 142, 144, 145
62, 66, 82, 83, 85, 97, 116, 130, Complementary of assets, 38
132, 139, 154, 155, 160–162, 164, Complementary technologies, 38
166, 167, 172–176, 185, 201, 202, Complexity, xvi, 7, 19, 20, 68, 69, 73,
206, 209, 216–218, 229, 234 78, 79, 131, 145, 154, 215, 217, 220

249
250 Index

Confirmatory factor analysis, 164 Dominant design, xiii, 23, 42, 44,
Congruence, 62, 63, 68, 71, 72, 86–89, 119, 156
139, 225 Dominant logics, 161
Consistency, 5 Drivers of new product success, 6,
Constructive conflicts, 186, 187 8, 121
Consumer innovativeness, 63, 64, 67 Durable goods, 80
Consumer learning, 62 Dyad level, 161
Content validity, 160, 174 Dynamically continuous
Continuous innovation, 7, 62 innovation, 62
Coordination, 9, 116, 126, 129, 132, Dynamic capabilities, 166, 172, 188
133, 144, 184–187, 192, 233
Core capabilities, 214, 222 E-commerce, 202
Coreness, 22, 24 Economies of scale, 87, 232
Core subsystems, 20, 24–26, 47 Employee learning orientation, 141
Co-specialized assets, 38, 208 Entrepreneurial orientation, 12, 99,
Creativity, xiv, 13, 21, 34, 61, 122, 118, 122–127, 137, 145
134, 170, 171, 181, 189, 191, 202, Environmental munificence, 37
229, 234 Environmental organizations, 108, 109
Cross-functional interfaces, 187 Environmental turbulence, 153,
Cross-functionality, 121, 184 188–192
Customer acceptance, 12 Environmental uncertainty, 8, 222, 223
Customer involvement, 207 Equity partnerships, 208
Customer needs, 7, 80, 82, 105, 107, Estimation bias, 160
112, 115, 119, 128, 176, 178 Expectancy disconfirmation, 62
Customer orientation, 12, 98, 104–106, Expertise, 6, 38, 82, 89, 111, 114, 119,
111–115, 117, 118, 121, 125, 120, 140, 142, 165, 203, 209, 238
127–129, 131, 134–138, 142, 144 Exploitation, 47, 158, 163, 164,
173–175, 184, 186–188, 210, 231
Degree of innovativeness, 5, 20, 60, 64 Exploitative learning process(es), 156,
Demand uncertainty, 213, 221, 222, 224 164, 165, 179, 191, 192
Demand volatility, 221–223 Exploration, 47, 132, 171, 172,
Different functional areas, 126 174–176, 180, 186, 188, 189, 191,
Differentiation, 9, 117, 128, 130, 210, 231
139, 214 Exploratory Acquisition of Products, 65
Diffusion of innovation, 54 Exploratory innovation, 184, 185,
Diffusion theory, 53 187, 188
Digital imaging, 37 External competencies, 166
Discontinuous innovation, 62 External knowledge, xiv, 153–158,
Discriminant validity, 46, 60, 61, 65, 163, 167–169, 172, 173, 179–181,
72, 75, 164 184–189, 192, 211
Disk-drive industry, 31, 40 External knowledge sources, 168, 192
Dispositional innovativeness, 64 External sourcing, 171, 205, 206
Disruptive orientation, 114 External uncertainty, 213, 221–225, 238
Disruptive technologies, 111, 112
Diversity, xiv, 133, 144, 158, 187, 207, Firm innovativeness scale, 5
209, 210, 230, 239 Foreign market, 204, 221, 235
Domain specific innovativeness, 66 Formal communications, 31, 187
Domain specific innovativeness Formalization, 9, 161, 162,
scale, 66 183–185, 192
Index 251

Functional capabilities, 153, 173 Innovativeness, 3, 5, 6, 12, 20, 54, 60,


Functional diversity, 133, 144, 187, 210 61, 63–68, 97, 115, 118, 122–124,
Functional inefficiency, 174 143, 171, 172, 203
Innovative performance, 156, 166,
Generational consolidation 172, 174, 188, 219, 230
innovation, 30 Innovators, 10, 65, 71, 143
Generational expansion innovation, 30 Intellectual property, 1, 110, 204, 238
Generational innovation, 26, 29–31 Interdepartmental communication, 34
Generic assets, 38 Interdependence, 19, 205, 206, 225,
Global innovativeness, 66 226, 234
Goal compatibility, 233 Inter-dimension correlations, 163
Goal congruence, 225 Interfunctional coordination, 116,
129, 132, 144, 186, 187, 192
Heterogeneity, 118, 131, 189, 191, Internal development, 202–204, 206,
209, 210 207, 211, 214, 220, 221, 239
Horizontal alliances, 207, 229, 231 Internal sourcing, 205
Human resource management, 160, 187 Internal stakeholders, 110
Internal uncertainty, 219–221, 236
Idea generation, xiv, 9, 134 International alliances, 235–240
Incremental innovation(s), 29, 32, 33, Internet, 55, 66, 68
35, 36, 45, 46, 87, 230 Internet-based services, 55
Incremental knowledge, 34 Internet shopping, 19
Incumbent firms, 33, 38, 45, 80 Inter-organizational learning,
Industry shake-out, 43 161, 162
Industry standard, 42, 43, 74, 120 Interpersonal networks, 187
Informal Social Processes, 187 Involvement, 65, 207, 210, 219
Information
cost, 224 Joint venture, xiv, 189, 203, 205,
dissemination, 102, 109, 184 206, 208, 209, 211, 222, 224,
distribution, 176 230, 235, 239
generation, 102, 108
sharing, 133, 144, 211, 230 Knowledge, xiv, xv, xvi, xvii, 1, 2,
use, 133, 134 7, 8, 10, 12, 13, 19, 20, 27, 29,
Informational behaviors, 180 31–34, 38, 41, 45, 62, 64, 66, 71,
Initial cost, 69 74, 82, 98, 104, 106, 118, 119,
Initial price, 71 129, 130, 132–134, 141, 145,
Innate innovativeness, 64, 65, 67 153–192, 206–211, 215, 218, 219,
Innovation 224, 227, 229–231, 234, 239, 240
achieved rate, 167 absorption, xiv, 155, 156, 169, 180
activities, 153 acquisition, xiv, 157, 186, 187
alliances, 204, 207, 211, 232, 233 assimilation, 161
characteristics, 20, 34–41, 68–80, availability, 171
89, 122, 201 base, 10, 41, 82, 133, 153, 156, 157,
process, xiv, 1, 6, 12, 13, 97, 110, 159–161, 168–171, 175, 179–182,
125, 134, 222 188, 189, 211
radicalness, 32, 47, 116, 128 commonality, 189
success, xiii, 110, 111, 116–118, creation, 166, 175
122–125, 127, 128, 130–135, dissemination, 171
145, 186 exchange, 132
252 Index

Knowledge – continued Marketing capability, 176–177


integration, 129, 130 Marketing concept, 100, 101, 107,
redundancy, 227, 229, 230 113, 115, 116, 207
stock, 176 Marketing mix, 85, 132
transfer, 167, 181, 230, 239 Marketing strategy, xvi, 55, 184
transmission, 182 Measurement validity, 160
Knowledge-processing systems, 161 Media, 88, 108
Memory dispersion, 171, 189, 191
Laser imagesetting, 39 Meta-analysis, 79, 141, 238
Late adopters, 68, 70, 74 Minicomputer industry, 37
Latent needs, 105, 112, 115, 121 Modular innovation, 26–29, 32
Leadership style, 145 Monitoring, 42, 126, 173, 178, 228
Lead user, xv, 45, 112, 115 Monte Carlo simulation, 29
Learning requirement, 62, 80 Motivation, 45, 64, 66, 160, 170, 187,
Legitimation, 228 229, 240
Licensing, xiv, 87, 203, 205, 206, Multidimensional measures, 159
236, 240 Multidimensional scales, 161–166
Linkage mechanisms, 19, 21, 22, 26 Mutuality, 225, 226
Locus of innovation, 20, 24–26, 143
Locus of knowledge, 181, 182 National culture, 204, 210
Longitudinal data, 168 National dispersion, 210
Networked firm, 208–211
Major innovation, 29, 54, 58, 59 Network externalities, xv, 43,
Manufacturing capability, 38, 39 88, 211
Market Network position, 168
acceptance, xiii, xiv, 68 New competence acquisition, 40–41,
access, 203 47–48
capabilities, 167, 173, 191 New entrants, 38, 43, 80
conditions, 192 New knowledge, 1, 32, 82, 132,
driven management, 112 154–159, 162, 163, 174, 176, 179,
driving management, 113 180, 183–189, 210
entry, 87, 125 New product(s)
information, 101, 127, 131, 132, creativity, 61, 171, 189, 191, 229
176, 178, 180 development, xv, 7, 8, 13, 43,
intelligence, 102, 127, 176, 187 59, 98, 110, 114, 118, 120,
introduction, 19 121, 133, 134, 145, 157, 159,
leadership, 156 163, 167–171, 173, 175, 177,
needs, xv, 209 179, 190, 201
orientation, 8, 9, 97–145, 153, 158, development performance, 168,
176, 177 169, 177
orientation implementation, failure, 6, 7
100, 101 ideas, 6, 182
performance, 2, 3, 176, 177 introduction, 3, 8, 168
potential, xiv, 6, 8, 10 performance, 110, 111, 114, 117,
segmentation, 132 121, 125, 130–134, 169–172
share, xiii, 3, 117, 125, 126, 131, teams, xiv, 186
132, 134, 176, 177 Niche innovation, 84
turbulence, 8, 131, 169, 170, 183, Non-equity partnerships, 206
191–192 Novelty, 55, 61, 63, 64, 115
Index 253

Observability, 68, 72–73 Process innovation, 1, 20, 41–45, 87


Online shopping, 62 Product
Open innovation, 208, 211, 234 advantage, 9, 70, 117
Opportunism, 212–215, 224–228, 230, category, 64, 65, 170, 214, 215, 225
238–240 category specific assets, 213–218,
Organizational antecedents, 153, 225
180–183 design, 22, 23, 59, 70, 171
Organizational capabilities, 19, 30, 34 design architecture, 22, 23
Organizational creativity, xiv improvement, 54–56
Organizational culture, 97, 98, 101, innovativeness, 60, 61, 64, 115
102, 118, 133, 135, 138–145, line extension, 54, 56, 57
180–183, 185 novelty, 115
Organizational fit, 233 quality, 70, 125, 126, 226
Organizational knowledge structure, 158 range, 170
Organizational learning, 134, 135, strategy, 55
139, 153, 154, 156, 161, 170, 180 Production costs, 43
Organizational memory, 171, 191 Production orientation, 120–121
Organizational processes, 12, 98, 108, Property rights, 238, 240
139, 180, 184–188, 233 Proxy utilization, 159
Organizational radicalness, 45–46 Psychometric properties, 65, 135, 164
Organizational structure(s), 34, 128, Public–private partnerships, 231
161, 162, 180, 183–185
Originality, 61 Radical innovation(s), 4, 20, 29, 32,
Outsourcing, 202–204, 206, 207, 239 35–37, 45–47, 80, 114, 116, 132,
Outsourcing announcements, 202 186, 222, 230, 231
Radicalness, 32, 35–37, 43, 45, 47, 60,
Packaging, 42, 55 111, 115, 116, 121, 122, 125,
Patenting, 91, 168, 174 127–129, 132, 134, 135
Path dependency, 156 R&D. See Research and development
Peer group, 65 (R&D)
Perceived ease of use, 53, 79 Reactive market orientation, 113, 124
Perceived risk, 72–75, 78 Reciprocal interdependence, 206
Perceived usefulness, 53, 69, 70 Regional clusters, 234
Periods of ferment, 44, 86, 87 Regular innovations, 83, 84
Peripheral innovations, 24–27 Regulatory environment, 8
Photolithography industry, 34 Regulatory stakeholders, 108, 110
Phototypesetting technology, 38 Related knowledge, 108, 110
Physical proximity, 212 Relational conflict, 144
Pooled interdependence, 205 Relational embeddedness, 227, 229–230
Predictive validity, 162, 164 Relative absorptive capacity, 161, 162
Price elasticity, 35 Relative advantage, 60, 68–71, 75, 76,
Price level, 6 78–80, 115
Price/performance frontier, 20, 35 Research and development (R&D), 58,
Pricing, xv, 125, 178 120, 122, 124, 129, 130, 155, 156,
Prior knowledge, 155, 157–161, 168, 159–162, 167–170, 174, 178,
169, 171, 181, 187, 188 201–207, 211–215, 219–221, 224,
Proactive market orientation, 111, 229–232, 235–240
112, 114 effectiveness, 129
Proactiveness, 122–126 expenditures, 159, 167
254 Index

Research and development – continued Startups, 233


intensity, 159, 160, 167–170, 174 Stepper technology, 34
investment, 155, 167, 170, 178 Stock market, 2, 3, 202
Resource-based analysis, 212 Strategic decision making, 208
Resource-based view, xiv, 101, 238 Strategic innovation alliances,
Resource gap, 212 232–233
Revolutionary innovation, 84, 85 Strategic orientations, 8, 12, 44, 80,
Rewards, xiv, 9, 69, 73, 132, 138, 145 89, 97, 98, 100, 104, 109, 114,
Reward system, 132, 138 118, 119, 123, 125–127, 133, 134,
Risk, xv, 5, 7, 10, 29, 36, 58, 64, 68, 136, 137, 144, 145, 186
72–75, 78, 102, 112, 123–126, Strength of ties, 230, 234
132, 177, 180, 202, 203, 207, Style change, 54, 55
221, 224, 226, 228, 237, 238 Substitutability, 35, 37
Routinization, 183, 185, 192 Subsystems, 19–26, 28, 30–35, 37, 40,
47, 83, 85, 87
Salespeople, 107, 110, 121, 122, Synergistic specificity, 28
142, 178 System modularity, 28
Sales support, 178
Satisfaction, 25, 103, 105, 106, 117, Tacit knowledge, 219
142, 184 Task conflict, 144
Schema discrepancy, 63 Team diversity, 144, 210
Screening, 9 Technical feasibility, 119
Second-order competence, 172 Technical innovations, 128, 129
Self-reinforcement process, 155 Technological capability, 173–175,
Selling orientation, 118, 121–122, 125 179, 192
Semantic, 61, 216, 217, 223 Technological change(s), 19, 47, 111,
Sensory innovation, 66 112, 145, 189, 190, 201, 226
Sequential interdependence, 205 Technological development, 154
Service innovations, 1, 10, 41, 54 Technological discontinuities, 111,
Services, 1, 2, 6–8, 10, 12, 13, 19, 21, 119, 145
23–26, 28, 29, 32, 35, 38–41, 43, Technological innovations, 19, 58,
44, 54–57, 59, 62–64, 67, 69, 71, 80, 211
80, 82, 85, 86, 88, 98, 103, 105, Technological knowledge, 20, 38, 119,
106, 112, 114, 118–121, 124, 125, 165, 173, 174, 179, 192
128, 131, 137, 142, 153, 163, 177, Technological turbulence, 128, 130,
178, 192, 201, 203, 204, 206–212, 189–192
214, 218, 220, 221, 231, 232, Technology adoption model, 53
239, 240 Technology-based innovations,
Size asymmetry, 230–231 129, 135
Social group, 131 Technology complementarity, 203
Social networks, 239 Technology cycles, 23
Social status, 70, 74, 131 Technology orientation, 12, 98, 104,
Specific know-how, 45 116, 118, 120, 134–137
Speed of development, 203 Technology uncertainty, 8, 213,
Speed of innovation process, 203 221–224
Stakeholder orientation, Theory of reasoned action, 53
107–110, 135 Thrust, 225
Stakeholders, 2, 107–110, 135 Top management, 138, 141, 144
Index 255

Top management team, 144 Unidimensional scales, 160–161


Transactional leaders, 145 Uniqueness, 61
Transactional leadership, 145 Use innovativeness, 61
Transaction cost, xiv, 202, 204, 205,
212, 213, 215, 219–221, 224, 225, Value network, 40, 41
229, 235–239 Values, xiii, xiv, xv, 1–5, 9, 10, 39–41,
Transformational leaders, 144, 145 63, 71, 79, 82, 87, 97, 98, 101,
Transformational leadership, 144 102, 104–108, 118, 119, 124, 127,
Transformative learning, 156, 165, 128, 132, 135, 136, 138–141, 153,
171, 181 154, 156, 157, 161, 178–181, 188,
Transilience map, 81, 83, 84 206, 214, 224, 229, 232, 233,
Transmutation, 159, 179, 182 238, 240
Trialability, 68, 72, 77 Vertical alliances, 207, 227, 229
Trust, xvii, 65, 140, 226, 227, 229, Vicarious innovativeness, 64
233, 234
Turbulent markets, 153, 191 Weak ties, 210
Turnover, 188 Web-based services, 19
Types of innovation, xv, 2, 10, 20, 24, Width of adoption, 64
26, 32, 45, 46, 83, 233 Word-of-mouth, xv, 91