Professional Documents
Culture Documents
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
All rights reserved. No reproduction, copy or transmission of this
publication may be made without written permission.
Any person who does any unauthorized act in relation to this publication
may be liable to criminal prosecution and civil claims for damages.
The authors have asserted their rights to be identified as the authors of this
work in accordance with the Copyright, Designs and Patents Act 1988.
A catalogue record for this book is available from the British Library.
List of Figures xi
Foreword
Thomas S. Robertson xiii
1 Introduction 1
Index 249
List of Tables
viii
List of Tables ix
xi
xii List of Figures
xiii
xiv Foreword
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
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
Chain of Effects
Firm Firm
Innovativeness Value
Market Financial
Position Position
Items*
* Each item is rated on a five-point scale ranging from “not descriptive” to “very descriptive.”
Source: Adapted from Hurley and Hult (1998).
Mean innovativeness
Reference and sample description (standard deviation)*
* 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.
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
Looking ahead to
Predicting new Branding the new Launching the new
new product
product acceptance product product
diffusion
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
References
Augusto, Mário, and Filipe Coelho (2009), “Market Orientation and New-to-
the-World Products: Exploring the Moderating Effects of Innovativeness,
Competitive Strength, and Environmental Forces,” Industrial Marketing Man-
agement, 38(1), 94–108.
Barczak, Gloria, Abbie Griffin, and Kenneth B. Kahn (2009), “PERSPECTIVE:
Trends and Drivers of Success in NPD Practices: Results of the 2003 PDMA Best
Practices Study,” Journal of Product Innovation Management, 26(1), 3–23.
Bowen, Frances E., Mahdi Rostami, and Piers Steel (2010), “Timing Is Everything:
A Meta-Analysis of the Relationships between Organizational Performance and
Innovation,” Journal of Business Research, 63(11), 1179–1185.
Casadesus-Masanell, Ramo, and Feng Zhu (2013), “Business Model Innovation
and Competitive Imitation: The Case of Sponsor-Based Business Models,”
Strategic Management Journal, 34(4), 464–482.
Castellion, George, and Stephen K. Markham (2013), “Perspective: New Product
Failure Rates: Influence of Argumentum ad Populum and Self-Interest,” Journal
of Product Innovation Management, 30(5), 976–979.
Dotzel, Thomas, Venkatesh Shankar, and Leonard L. Berry (2013), “Service
Innovativeness and Firm Value,” Journal of Marketing Research, 50(2), 259–276.
14 Making Innovation Last
19
20 Making Innovation Last
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.
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
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
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
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).
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
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.
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.
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
Note: INNOVATION and SUBSYSTEM correspond to the specific example described by the
respondent.
Source: Adapted from Gatignon et al. (2002).
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
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
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
Time
Note
1 This chapter reflects on and builds upon Gatignon et al. (2002) and Gatignon
(2011).
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Assessing Innovations from the Technology Perspective 51
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.
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
(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
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:
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 3.4 Examples of new products for the currently served market
Currently
served market Current product(s) New product
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
Markets/customers
Old New
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
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
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
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
Factors Items
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.
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
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
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
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.
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.
Complexity – Divisibility
+
–
–
Communicability
–
–
+ +
Relative Advantage
+ + –
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
Experience Voluntariness
Subjective Norm
Image
Job Relevance
Perceived
Ease of Use
Output Quality
Result
Demonstrability
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)
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
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
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
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):
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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92 Making Innovation Last
97
98 Making Innovation Last
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
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
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.
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
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
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:
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
* 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).
Low High
Propensity to Satisfy Future Needs
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
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.
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
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)
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
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
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
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
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
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
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)
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
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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153
154 Making Innovation Last
Absorptive Capacity
Recognition
External
Innovation
Prior Knowledge Assimilation Knowledge
Performance
Absorption
Application
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).
C = f (wP P, wN N ). (5.1)
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
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
Recognize
Exploratory
learning
Assimilate
Maintain
Absorptive Transformative
capacity learning
Reactivate
Transmute
Exploitative
learning
Apply
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
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
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
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
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
Exploration
Exploitation
Technological capability
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
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
External Internal
Focus Focus
Adhocracy culture Clan culture
Information acquisition Information transmission
Conceptual use
Informal processes Recognize Assimilate
Individual locus
Maintain
Market culture
Instrumental use Hierarchy culture
Organizational forms
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
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
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.
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.
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
Marketing Related
+
–
+
Marketing Related +
Technology Related
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?
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
capabilities (Cai and Gopalakrishnan 2014). Alliances for R&D may take
a number of forms including (Borah and Tellis 2014):
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
s "UILD INTERNAL DEVELOPMENT
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 "UILD INTERNAL EXPLORATORY ENVIRONMENT)
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 "ORROW CONTRACT
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 "ORROW ALLIANCE
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.
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.
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.
Internal Uncertainty
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
(continued )
When to Forge Alliances? 217
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.
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
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).
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):
Primary effects on
Governance strategy General purpose Prerequisites opportunism Second-order effects
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
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.
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.
(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).
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)
+ +
Entry Mode:
+ Degree of Control
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
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
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
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