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It is a truism that large, established companies must continually evolve by engaging in various forms of innovation. Particularly in light of the advent of the knowledge society, businesses are faced with a large transition from focusing solely on developing products and services, to also strategically innovating to improve their business processes. In particular, for various large, leading-edge businesses whose core competencies are in the software, semiconductor, and networking technology that form the foundation of multimedia and computer networks, as well as for numerous venture companies, the past several years have brought increasingly intense competition to leverage such new business styles as strategic partnerships, mergers and acquisitions, outsourcing, and virtual corporations, for the purposes of developing strategic enterprises, expanding the market shares of their products and services, and creating new businesses. The article would like to propose strategic community management as a new management style and innovation technique for large, established companies, implemented through the creation of various strategic business communities (hereafter, strategic community creation). The key to strategic community creation is an exceptional leader within the company (referred to in this article as a community leader) with the heart of an in-house enterprise intrapreneuring promoter (e.g. Bechard et al., 1996), who uses his innovative leadership to create strategic communities, both within and outside the company, and to promote strategic businesses. The community leader creates strategic communities, applying such methods as forming in-house business communities, entering strategic partnerships with other businesses, and outsourcing strategically; last, but not least, he forges interactive business communities, sometimes with customers. The community leader sees to it that this collection of strategic communities works together organically, manages it comprehensively, and in so doing, gives rise to business innovations that are well-suited to large companies. These techniques will become increasingly important for creative businesses in the coming society of knowledge-based networks.

Strategic innovation at large companies through strategic community management ± an NTT multimedia revolution case study Mitsuru Kodama The author Mitsuru Kodama is Executive Director, Community Laboratory, Tokyo, Japan. Keywords Innovation, Strategy, Multimedia, Partnering Abstract The article will propose strategic community management as a new management style and innovation technique for large, established companies, that is implemented through the creation of a variety of strategic business communities. The article will take up, as a new model case of the use of strategic community management in business, the expansion of Japan's multimedia communication market achieved by Nippon Telegraph and Telephone, Inc. (hereafter, NTT), Japan's largest telecommunications carrier, over roughly the past four years. The article will explain how NTT cultivated this new multimedia market, which was spawned from its creation of business communities (both internal and external, and including communities with customers) using strategic outsourcing and various strategic partnerships with businesses in other industries.

European Journal of Innovation Management Volume 2 . Number 3 . 1999 . pp. 95±108 # MCB University Press . ISSN 1460-1060

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A framework for strategic community management Innovation is a process that can occur in the course of carrying out various business activities, such as product and service development, marketing, manufacturing, sales, distribution, and after-sales services. It occurs not only in the course of improving and expanding existing ventures, but also while creating new businesses and ventures (Kanter et al., 1997). Various organizational methods have received attention for allowing large companies to somehow achieve significant strategic innovations (Markides, 1998). Their common essence is the idea of a strategically-minded innovator in a large company constructing an organization distinct from the main company's, in order to support strategic innovation. This can be done by building an organization contained within, but separate from, the main organization (Figure 1, Pattern 1), or by establishing a separate subsidiary (Figure 1, Pattern 2), to give two examples. However, while these organizational patterns are extremely effective for strategic innovation, there are always problems. This is due to issues related to joining and achieving long-term harmony between the cultures of the old and new organizations. Overcoming these problems requires vigorous leadership from top management, and a revolution in corporate culture. The question I raise in this article is, ``What elements of organizational management are needed in large, established companies to Figure 1 Forms of strategic innovation in large companies

support strategic innovation characterized by speed and excellence?'' In other words, what kind of organizational management should a large company adopt to support rapid, highquality strategic innovation, and at the same time allow for joining and achieving harmony between the cultures of the old and new organizations? Systematically creating strategic communities To promote the kind of strategic business innovation that leads to the long-term development of such phenomena as continuous organizational invigoration and new business creation, the important issue is not how to engage in strategic business practices and operations using only the company's internal resources (knowledge and talent). Rather, the important question is how to create strategic communities based on the collaboration (including virtual collaboration through ITbased networks) of various external (human) resources, including customers, so as to develop innovative businesses. The article will propose five new points that comprise the important elements of strategic community management. They differ markedly from the processes of strategic innovation-based management shown in Figure 1, Patterns 1 and 2. Point 1 is, rather than investing new resources in various separate organizations that will promote strategic businesses in a selfsufficient manner, as per Patterns 1 and 2,

Strategic innovation at large companies

European Journal of Innovation Management Volume 2 . Number 3 . 1999 . 95±108

Mitsuru Kodama

department demonstrated innovative leadership in utilizing the relationship of empathy and resonance he had built with other leaders (including customers), both within and outside the company, to create various business communities. He managed these several business community groups simultaneously, and worked to promote video multimedia through the creation of new businesses. (See Figure 2.)

platform, and offered customers various application services based on this platform. NTT promoted the popularization of ISDN-based videoconferencing systems and videophones, i.e. video communication terminals[3], the most typical application. At the NTT of that time, the establishment of a new business in video applications, which were almost unheard of in the Japanese market, was a large issue. At first, three employees, including a manager, set to work drafting a plan for establishing a market for ISDN-based video communication. Their vision was the construction in Japan of a new, videocommunication based video culture, from the country's telephone-based communication of the past. They were presented with innumerable business problems, a sampling of which follows: . The development of a low-cost, highquality desktop video conferencing system for the business market. . The development of a low-cost, highquality, next-generation video phone aimed at the general consumer market. . In promoting the video terminals that NTT was to develop, what sort of business formation would facilitate sales, maintenance, and after-sales service? . How could the sales and technical skills of the company's employees be heightened to facilitate marketing, sales, installation, maintenance, and after-sales service for these new video terminals that NTT had never before handled? . How was NTT to go about popularizing the video terminals it would produce? . How was the company to go about bringing into existence and offering to customers these new, video terminalbased, video-network services?

The creation of a strategic community with PictureTel Corporation of America and Mitsubishi Electric Corporation ± developing a core engine for multimedia services Joint development of the ``Phoenix'' Multimedia Conferencing System, a first in Japan and the world In February 1995, NTT agreed to form a strategic partnership with PictureTel Corporation (headquartered in Boston, the USA), which had a record of achievement in the core multimedia field of video communications. The partnership's purpose was the joint development of a next-generation desktop videoconferencing system to be called Phoenix (Nihon Keizai Shimbun, 1995). Many manufacturers in Japan and abroad were already selling ISDN-based videoconferencing systems, but even for the time, product prices were high, on the level of one million yen for a desktop model, and several million yen for a room-type videoconferencing system. Not only the unfamiliarity of videoconferencing systems' operation methods, but also these prices themselves, could be counted as reasons videoconferencing had yet to take off. For NTT, the objective of the strategic partnership with PictureTel was to ignite the Japanese video terminal market in a single stroke, and at the same time launch the new videoconferencing system as a figurative tractor to pull Now-ISDN. In March 1996, NTT began selling Phoenix, the world's first Windows 95- and PCI local bus-compatible, desktop-type multimedia conferencing system, with the hope that it would be the killer app to make ``Multimedia for today (Now-ISDN)'' a reality (Nihon Keizai Shimbun, 1996). Phoenix was truly a world first and a first in Japan among multimedia products, in terms of both its cost and functionality. Its amazingly low cost of 198,000 yen redefined multimedia

At the time, moving forward with these products was a nearly impossible task for just a few employees. But the motive force behind these video-based businesses turned out to be community management based on the creation of strategic communities within and outside the company, including communities formed with NTT's customers, that related to each individual business process, including development, marketing, sales, maintenance, and after-sales service. In other words, a community leader in NTT headquarters' multimedia promotion 98



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Figure 2 Strategic community creation at NTT

and established a videoconferencing market in Japan in a single stroke. The Phoenix's sales for 1997 amounted to a 70 percent share of the Japanese market for desktop videoconferencing systems (Fuji Chimera Reserch Institute, 1998) (see Figure 3).

The joint development of the Phoenix mini, a next-generation videophone that was a first in Japan and the world To popularize further videoconferencing systems and various other video terminal-based video applications, NTT entered a broad, strategic partnership with Mitsubishi Electric

Figure 3 Phoenix vitalizes the Japanese videoconferencing market

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Corporation in the core multimedia field of video communications; the partnership included everything from development to sales. The two companies released the ISDNcompatible videophone Phoenix mini in September of 1997, as an ISDN-based video application (Yomiuri Shimbun, 1997). In the past, foreign companies such as AT&T and the GEC group's Marconi Communications, and Japanese companies such as Casio Computer Co., Ltd, have entered the videophone market, only to withdraw after one or two years. The reason is that past videophones utilized analog telephone lines, lacked high quality imaging, were priced at between 400,000 and 700,000 yen, and as a result, were not well received in the consumer market. The Phoenix mini, on the other hand, as the world's first small, light-weight, low-cost, and high-quality videophone, had the major feature of being easy to use because its operation is just like dialing an ordinary telephone. Accordingly, it could be used across a wide cross section of society, by everyone from homemakers, senior citizens, and children, to businesspeople. NTT adopted the slogan `Àny time, anywhere, and with anybody'' for the Phoenix mini, which it saw as a videophone for the next generation, and its new culture of video-based communication. The Phoenix mini drew international attention as the first high-quality, ISDN-compatible videophone to be offered at such a low price (198,000 yen for a set of two). Housing both a color liquid-crystal monitor and a transceiver in its main body, it allowed both video and voice transmission, with the feel of a telephone, and what's more, it was capable of twoway transmission with videophones made by other manufacturers. The Phoenix mini achieved sales of 5,000 units within a mere three months of its release, capturing 85 percent share of the Japanese videophone market in 1997 (Fuji Chimera Research Institute, 1998) (see Figure 4). What is more, NTT expects sales to reach 15,000 units by the end of 1998. This kind of innovation-based sales results, represented by the Phoenix and Phoenix mini (to be referred to hereafter as the Phoenix series) were made possible by the promotion of businesses on the basis of the strategic formation of various communities that include companies within and outside of NTT, companies in other industries, and customers.

The creation of strategic communities within and outside of NTT ± establishing an organization for business promotion Strategic community creation within the company establishing an in-house sales organization The task confronting the community leaders of the multimedia promotion department, which at that time had no sales organization, was creating a business community to include the sales departments of NTT branch offices and branches throughout Japan, for the purpose of outsourcing the marketing of the Phoenix series. It was necessary to foster a deep understanding of and feelings of empathy toward the Phoenix series in the many NTT employees who had never before handled video terminals. A group of community members, mostly made up of community leaders, used product explanation meetings, training meetings, and other educational activities throughout the approximately six months leading up to release, to bring about a revolution of employee consciousness as it related to popularizing multimedia terminals. (NTT had trained approximately 1,000 employees in sales and technology by the time the Phoenix series went to market.) Using straightforward instructional activities, a group of community members, chiefly community leaders, cultivated personnel in offices throughout Japan who would act as key people. And so, through activities to motivate employees to promote the sales of these new products, a virtual business community was formed among NTT headquarters' Multimedia Promotion Department, NTT's branch offices, and NTT branches. The new corporate culture possessed by this new business community gave rise to a new, innovative mind-set in other employees who were immersed in the old corporate culture. As a result, this virtual business community has now expanded greatly, and the Phoenix series is positioned as the video multimedia product that represents NTT. The creation of strategic communities outside the company Enlarging extra-corporate sales channels and establishing a maintenance organization To expand marketing channels outside those of the sales departments of NTT branches and branch offices, NTT entered marketing partnerships with large, general supermarket companies, beginning with The Daiei, Inc. (Nihon Keizai Shimbun, 1997c), and also with

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Figure 4 The Phoenix mini vitalizes the Japanese videophone market

systems integration companies, volume PC and consumer electronics retailers, and NTT group companies. Daiei was particularly successful in increasing sales; it offered a packaged set, consisting of the Phoenix mini and a DSU (digital service unit) needed to use ISDN, at a special discount price. NTT entered partnerships with companies in its group to strategically outsource maintenance and after-sales service. This was an example of strategic outsourcing within the NTT group for the purpose of sharing and accumulating within it knowledge and expertise related to the Phoenix series. NTT utilized this outsourcing arrangement to offer its video terminal customers a high-quality service package that included maintenance and after-sales service. Through business community formation by means of extra-corporate sales-, mantenance-, and after-sales service-related strategic partnerships and outsourcing, NTT built the foundation for a firm Phoenix series business formation. The creation of strategic communities between businesses in different industry types Joint ventures through strategic partnerships between businesses in different industry types The basic function of the videoconferencing systems and videophones was one-on-one

communication, and for conversations among many participants, an extremely expensive server known as a multi-point connection apparatus was needed. For businesses to utilize such applications as holding nationwide meetings, engaging in distance research, or relaying events, they had to connect multiple videoconferencing terminals to this server. There were cases in which a company that used multi-point videoconferencing with a high degree of frequency installed a main server, but in most cases a single business used this application once or twice a week. However, circumstances were such that many business users both within and outside Japan desired the use of a low-cost multipoint connection service, so a business scenario in which many users shared a multipoint connection apparatus was conceived. In Europe and North America, several telecommunications carriers and other businesses had already developed multi-point connection services under a shared use model, but these ventures were small in scale, had high usage fees and costs, and had not become particularly popular. At NTT, so as to allow a large number of videoconferencing users to utilize a multipoint connection system at an extremely low cost, NTT Phoenix Network Communication Inc. was established as a joint-venture

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company specializing in multi-point connectivity videoconferencing systems (Nihon Keizai Shimbun, 1997b) NTT's partners included the specialized videoconferencing system manufacturer PictureTel; the large Japanese systems integration (SI) and sales company Otsuka Shokai Co., Ltd; Canon Sales Co., Inc.; the large language school company NOVA, Inc.; and 12 companies in the NTT group. Multi-point connection services are needed when a user wishes to place international standard-based videoconferencing systems in multiple locations and use them simultaneously. At NTT, in order to examine the feasibility of such a venture, the Phoenix Network Communication service was put to use for nationwide conferences and various types of seminars aimed at each of the company's existing branch offices and branches, its functionality was confirmed, and such characteristics as its operability and operation method were examined. Furthermore, various customers who had introduced the Phoenix series into their operations were asked to participate in a service trial, and they were surveyed for their opinions and wishes regarding its implementation (i.e. an interactive customer community was created). As a result of these efforts, NTT realized that this service could be utilized in a wide variety of fields, including business, education, social services, and entertainment, and the decision was made to develop it into a business. Today, access points have been established in 52 locations nationwide, and a maximum of 1,000 locations can be linked for a videoconference. Furthermore, NTT established an internationally peerless, epochmaking pricing system that includes a uniform, nationwide per-subscriber cost of 40 yen for three minutes (see Figure 5). Today, the system already has more than 1,000 corporate users, and not only has this multipoint connectivity service hastened the growth of videoconferencing, it has also contributed greatly to increased ISDN traffic. This multi-point connectivity service is in use by various institutional customers such as businesses and educational institutions; of particular note is its use in the Ministry of Education project dubbed Konetto Plan (the Children's Network Plan), which is being implemented to facilitate exchange among schools through the simultaneous connection of multiple video terminals. Through this

Figure 5 World's largest multipoint connection service

plan, the new, video-based communication culture continues to take root[4]. On the basis of its Phoenix series and the multi-point connectivity service offered by NTT Phoenix Network Communication Inc., NTT has pioneered applications in various fields such as medicine, education, social services, and business, and it has achieved increased popularity for its Now-ISDN-based multimedia services. The creation of strategic communities with customers ± a chain of spiraling, strategic community creation Promoting the popularization of distance learning-related video applications NTT, in the course of increasing the diffusion of the Phoenix series into various educational institutions, representative among which are universities, has moved forward with a business strategy of successively winning over educational institutions throughout Japan through a chain of spiraling, strategic community creation. NTT's task was to utilize multimedia and information communications networks to realize an environment in Japan that would allow large numbers of businesspeople to overcome the limitations of space and time, and enjoy adult education and lifelong learning, anywhere, any time, and without inconvenience. The key to achieving this goal lay in achieving popularity among educational institution customers for the Phoenix series. For this purpose, it was important to first create a strategic partnership-based business community with an educational institution, and succeed with a Phoenix series-based

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virtual education business, as part of a onepoint penetration strategy. It would also be important for NTT to take the knowledge, expertise, and new ideas (community competencies) gained in creating this first community, and put them to work in the business it would create with its second strategic partner. These, along with innovative leadership on the part of community leaders to further popularize the Phoenix series, were important community competencies for the company. The chain of spiraling, strategic community creation NTT promoted in the field of education can be seen in the business expansion the company achieved through a series of consecutive, strategic partnerships with universities and large educational institutions, such as the following: . March-October 1996: launched a ``study abroad in your living room'' service in partnership with a large language school (Yomiuri Shimbun, 1996a; 1996b; Sankei Shimbun, 1996). . June 1997: launched a multimedia lifelong learning course service in partnership with Kooriyama Women's University (Fukushima Minpo Shinbun, 1997). . August 1997: launched a multimedia, distance language learning service for businesses in partnership with Overseas Broadcast Center, Inc. (Nikkei Sangyo Shimbun, 1997b). . August 1997-January 1998: launched a trial of an interactive distance education system service in partnership with Keio University Business School (Nikkei Sangyo Shimbun, 1997a; 1997c; Nihon Keizai Shimbun, 1998a). . September 1997-March 1998: launched a multimedia lifelong learning course service in partnership with the Ministry of Education's Media Education Development Center and five universities located throughout Japan (Kyoiku Shimbun, 1997). . September 1997: Opened a Cyber College in partnership with Shukutoku University (Mainichi Shimbun, 1997; Nihon Kogyo Shimbun, 1997; Nihon Keizai Shimbun, 1998b). . March 1998: launched, in partnership with the Society and Economics Institute's Productivity Headquarters, a joint US-Japan MBA program under the

.

auspices of Case Western Reserve University, located in the USA (Nihon Keizai Shimbun, 1998c). November 1998: put into effect lifelong learning programs and other educational programs at universities in Aichi Prefecture (Nikkei Sangyo Shimbun, 1998b).

As these examples illustrate, NTT successively launched and succeeded with numerous Phoenix-series based virtual education businesses as part of strategic partnerships with numerous educational institutions. These kinds of virtual services that combine multimedia technology and educational contents can be said to be a new form of knowledge-based service (Davis and Botkin, 1994). Hastening the popularization of video applications in such areas as home medicine and remote treatment In tangent with its previously described strategy of expanding video applications in educational fields, NTT, in the course of working to increase the use of the Phoenix series among various medical institutions, such as universities and hospitals, has moved forward with a business strategy of successively winning over university hospitals and medical institutions located throughout Japan, through a chain of spiraling, strategic community creation. The chains promoted by NTT that serve to create these spiraling strategic communities in the medical field are reflected in the expansion of businesses encouraged by these successive strategic partnerships with the medical departments of universities and companies, typified by those listed below (Nikkei Medical Kaihatsu, 1998): . December 1996. Partnership in the emergency medical field with Tokyo Women's Medical University using a video-conferencing system[5]. . February 1997. Partnership with Tokyobased T-PEC Corporation in videophone-based health care consulting (Nihon Keizai Shimbun, 1997a; Nikkei Sangyo Shimbun, 1997d; Nikkan Kogyo Shimbun, 1998a). . December 1997. Partnership in the home medical field with Tokyo-based Otsuka Clinic using videophones (Nikkei Sangyo Shimbun, 1997e; Nikkei Business, 1998). (Use of similar videophones in the home medical field have expanded to Fujita

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.

.

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Clinic of Internal Medicine in Hokkaido, Kumano Health Care Center in Mie prefecture, Kinan Hospital, and others.) December 1997. Partnership in the videophone-based remote surgical procedure area with the Medical Department of Osaka University (Sankei Shimbun, 1997). February 1998. Partnership with Chukai Industries Inc. in Kobe. Using videophones, remote diagnoses with a famous Chinese physician were carried out based on Western and Eastern medicine (Nikkan Kogyo Shimbun, 1998b). April 1998. Partnership in the herbal medicine consulting field with the regional herbal medicine chain store Kusurinihondo (Nikkei Sangyo Shimbun, 1998a).

In this manner, in project after project, NTT has created and succeeded with a series of Phoenix series-based video applications in the home medical and remote medical fields. As with the virtual education services described earlier, the new virtual medical services that combine these types of multimedia technologies and services in the medical and public welfare fields can be viewed as a new form of knowledge-based service. A chain of spiraling strategic business-customer community creation A chain of spiraling, strategic businesscustomer community creation is a mechanism for forming, one after the other, new business communities with customer organizations that operate in various types of industries and under various business conditions; and in so doing, continually creating new markets and businesses such as education and medical sectors, nurturing them to success, and then expanding them. This mechanism, through which customers become partners, is especially important from the standpoint of creating and expanding new markets (see Figure 6). It is a style that, for strategic partnerships in multimedia fields in particular, permits organizations that have different core competencies and members accustomed to different organizational climates, to form communities, interlink, and collaborate to operate new businesses. This style always requires community leaders capable of innovative, strategic thought and action. The key to continually making successes of businesses formed in partnership with

customers in other industry types is for the community leader to apply his (or her) superior, innovative leadership abilities and capacity for strategic cooperation to give rise to a spiraling chain of strategic community creation with various customers in other industries. It is also important to apply the diversity of knowledge, expertise, and ideas (community competencies) generated in the first strategic partnership to later businesses formed in partnership with customers in other industry types. To achieve this, the community leader must work to achieve harmony of philosophy and vision with community leaders who belong to different types of organizations both within and outside the company. Then, as the community leader continues to demonstrate innovative leadership, he must accumulate new community competencies, share them with other community members, and work with those community members to further develop and renew these community competencies (i.e. the sharing, creation, and renewal of community competencies). In other words, what is required is the mutual interconnection and innovation of the bi-directional elements of innovative leadership and community competence to propagate a spiraling chain of strategic partnerships with organizations in other industries, and continuously create and expand businesses. That is to say, it is important to build into the business organization a strategic framework that creates a cycle of gradually increasing yields, in which each success gives rise to new successes.

Discussion Creation of strategic communities through innovative leadership by community leaders The key factor in NTT's multimedia strategy to establish a video communication-based multimedia market is business innovation through the creation of a wide variety of strategic communities. The key points in successfully creating strategic communities are achieving empathy and a harmony of values among all leaders (the community leaders forming the core of the strategic partnership-based community) in both of the community's constituent organizations. In these business cases, the organization leaders educated in a framework of fixed

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Figure 6 Chains of spiral-shaped strategic community arrangements

decision-making and organizational behavior within the existing and disparate organizational cultures were dependent on the harmonization of their value systems, based on the vision of `ùniversally providing an environment and opportunity for multimediabased video communications to a multitude of individuals''. This harmonization of value systems was a new motivational force for inspiring community leaders to establish video-based businesses. The grounding of community leaders must include innovative leadership elements based on strategic thinking and the ability to act. In other words, this refers to the strategic thinking and action of the community leaders (seen in this business case) who will build a new video culture based on multimedia network-based video communications, from a strategic viewpoint founded on long-term trends with a keen eye on long-term prospects. For business strategies in today's bewildering business environment and technologically revolutionary fields at the leading edge, such as multimedia, especially important is for community leaders themselves to think, and to possess a dynamism and subtlety in their strategic actions, as well as an enhanced business sense. Sharing, creation, and renewal of community competence The sharing, creation, and renewal of the information, knowledge, innovation and concepts comprising the various resources within the community (community competence) also are crucial factors for the formation of new ideas and innovations in multimedia business.

Table I is a compilation of the sharing, creation and renewal of community competencies associated with creation of the various strategic communities seen in the business cases associated with NTT's multimedia business strategy. Sharing of community competencies is the step that gives birth to new core competencies within the community through the act of leaders on both sides deepening their mutual understanding of and fusing together the core competencies of both organizations. An example of this is the deep understanding assembled by engineers on both sides of the network technology possessed by NTT, and of the video technology held by PictureTel and Mitsubishi Electric. In addition, it signifies that each player in joint ventures brought about by partnerships between different business models has sufficient understanding of the core competencies of the other players, and that each amalgamate and share the specialized fields that each player possesses. Creation of community competencies is the step for creating products and services of new core competencies, that are based on the shared core competencies. Phoenix and Phoenix mini, which were created through such joint development, are the fruits of creating community competencies, as are the new virtual knowledge-based services created through strategic partnerships with customers such as virtual education services and virtual medical services. Renewal of community competencies is the step for giving birth to the creation of customer value of ever-higher quality while, at the same time, further popularizing the newly created products and services and bringing forth great breakthroughs. In particular,

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Table I The sharing, creation and renewal of community competencies Community competencies Strategic community creation Strategic partnerships with PictureTel and Mitsubishi Sales partnerships with large, volume retailers such as The Daiei, Inc.

Strategic outsourcing of maintenance and aftersales services to group companies Strategic partnerships across different industry types (creating joint ventures)

Strategic partnerships with customers to expand video applications

Sharing

Creation

Renewal

NTT networking technology Joint development of video Upgrading video terminals to The video technology of terminals (creating new satisfy customer needs PictureTel and Mitsubishi technical expertise) Planning and developing new terminals NTT's brand recognition Marketing competitive Improving customer service Daiei's retail power and product packages (low cost/ Expanding sales partnerships distribution channels value-added products) to other large, volume retail Expanding sales and distribution NTT technology transfers Offering a package plan Improving customer service Group companies offering that includes maintenance Reliable after-sales services strategic resources and after-sales service NTT networking technology The video technology of PictureTel and Mitsubishi The expertise of sales companies Content offered by educational institutions NTT offering a platform (video terminals) Educational institutions offering content Medical institutions offering examinations and medical care services

creation of customer value based on the upgrading of versions to reflect customer needs, and popularization and expansion toward the virtual knowledge-based services of the education and medical fields. Throughout this process of sharing, creating and renewing community competencies, the fostering of superior human resources (community members) within the strategic community is of critical importance as well. This enables the strategic community to continually create and renew novel business concepts.

Conclusion Critical to all of this is the active incorporation of such new business styles as strategic partnerships, mergers and acquisitions, out-

Creating from marketing terminals to creating new video network services (expanding the enterprise's scope from terminal sales to network sales)

Creating new, video-based network communities (e.g. projects among schools) Equitable deployment of video network-based applications

Creating new knowledgebased services Virtual education services Virtual medical treatment and virtualservices (Expanding the breadth of the enterprise to include everything from selling terminals to marketing content)

Creating new, spiral-shaped communities Developing virtual, knowledge-based services throughout Japan

sourcing, and virtual corporations, into corporate management; and the application of strategic community management to create a diversity of new businesses typified by the field of multimedia. As such, it is extremely important that community leaders in corporate organizations apply their superior, innovative leadership and capacity for strategic cooperation to form strategic communities, both within and outside their corporate organizations, and go on to form spiraling patterns of customer-business communities. To achieve this, community leaders must work to achieve a harmony of philosophy and vision with heterogeneous organizations outside their companies. They must demonstrate innovative leadership, while at the same time accumulating superior community competencies through advanced organizational 106



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learning within the strategic community, and facilitating the sharing, creation, and renewal of these community competencies among community members. This is the essence of community management. A new, unprecedented image of leadership will be demanded of community leaders, from both within and outside the corporate organization. In light of the advent of a society based on multimedia and cyberspace, the techniques of fostering superior community leaders who can shoulder the burden of business innovation for the twenty-first century, leveraging the power of strategic partnerships to create business communities, and in the process promoting new businesses, will be critical elements of business organization.

Notes 1 This case study relates to the video multimedia strategy NTT has pursued for the past four years. It was created on the basis of an interview with NTT's Mr A, who played a central role, and on materials prepared for use outside the company. 2 A digital network service (Integrated Services Digital Network) established by the telecommunications standardization sector of the International Telecommunications Union (ITU-T). Additional information on ISDN is available at , and ITU-T recommendations are also available at . 3 Video terminals based on videoconferencing systems and/or video phones standardized by the ITU-T (see Rosen, 1996 and Trowt-Bayard and Wilcox, 1997). 4 The project has been christened ``Konetto Plan'', and is intended to bring Japanese school teachers and students together using both videoconferencing and the Internet. The project is supported by Japan's Ministry of Education, which helped choose the schools to be involved and establish the network needed for the project. English information on Japan-Education Videoconferencing Network is available at 5 Remote Medical Treatment via Videoconferencing System (broadcast by the Japan Broadcasting Corporation (NHK) as part of its 7 pm news program News Seven), 12 December 1996.

References Bechard, R., Goldsmith, M. and Fesselbein, F.(1996), The Leader of the Future, Jossey-Bass, San Francisco, CA, pp. 3-9, 25-39, 121-4.

Davis, S. and Botkin, J.(1994), ``The coming of knowledgebased business'', Harvard Business Review, Vol. 72, September-October, pp.170-8. Davis, S. and Botkin, J. (1994), The Monster under the Bed, Simon & Schuster, New York, NY. Fuji Chimera Research Institute, Inc. (1998), Communications and Broadcast Network Multimedia Marketing Survey Overview-98. Fukushima Minpo Shimbun (1997), ``Kooriyama Women's University offers distance/lifelong learning courses featuring university lectures over television monitors'', 11 June, p. 3. Kanter, R., Kao, J. and Wiersema, F.(1997), Breakthrough Thinking at 3M, Dupont, GE, Pfizer, and Rubbermaid, Harper Collins, London. Kyoiku Shimbun (1997), ``Remote lifelong learning courses debut NTT also offers learning opportunities to isolated areas via videoconferencing'', 15 September, p. 1. Markides, C. (1998), ``Strategic innovation in established companies'', Sloan Management Review, Vol. 39 No. 3, pp. 31-42. Mainichi Shimbun (1997), `Òpening of cyber college campus with a video conferencing system'', 21 August, p. 11. Nihon Keizai Shimbun (1995), ``Joint development between NTT and a US firm (low-cost videoconferencing)'', 9 May, p. 10. Nihon Keizai Shimbun (1996), ``NTT, US firm in joint development (a PC-based conferencing system that breaks the ¥200,000 barrier)'', 5 February, p. 10. Related information is available in English at . Nihon Keizai Shimbun (1997a),``Health consultation for business ± a videophone application (NTT and T-PEC)'', 16 February, p. 12. Nihon Keizai Shimbun (1997b), ``NTT creates a new company (remote videoconferencing ± in partnership with 16 other companies)'', 16 April, p. 8. English information on the joint venture is available at Nihon Keizai Shimbun (1997c), ``NTT videophone sales (a trial using Daiei and shop fronts)'', 12 December, p. 8. Nihon Keizai Shimbun (1998a), `Ìnteractive distance learning system using PCs NTT and Keio University'', 12 January, p. 8. Nihon Keizai Shimbun (1998b), ``NTT and Shukutoku University remote courses utilize video conferencing'', 22 March, p. 8. Nihon Keizai Shimbun (1998c), ``NTT and productivity headquarters launch video conference ± using MBA course'', 7 April, p. 8. Nihon Kogyo Shimbun (1997), ``NTT offers cyber college in partnership with Shukutoku'', 27 August, p. 8. Nikkan Kogyo Shimbun (1998a), ``Presenting a doctor you can rely on [Misawa Membership-system Home Medical Treatment] ± in partnership with T-PEC'', 13 January, p. 10. Nikkan Kogyo Shimbun (1998b), ``Diagnosis by a noted Chinese doctor using videophone (Chukai Jitsugyo and NTT)'', 25 February, p. 9. Nikkei Business (1998), ``Medical treatment and information technology'', 10 March, pp. 79-82.

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Nikkei Medical Kaihatsu (Multimedia and Remote Medical Treatment, Remote Care Research Group) (1998), Remote Medical Treatment and Remote Care (Multimedia Supporting Medical Treatment), Nikkei Business Publications, Tokyo. Nikkei Sangyo Shimbun (1997a), ``NTT and Keio U. trial video conference-based distance'', 9 February, p. 13. Nikkei Sangyo Shimbun (1997b), ``Video conference-based linguistic research'', 1 July, p. 2. Nikkei Sangyo Shimbun (1997c), ``Tele-classes link remote sites Keio and NTT'', 18 August, p. 2. Nikkei Sangyo Shimbun (1997d), ``Health consultation for condominium and apartment dwellers (a videophone application) T-PEC'', 25 August. Nikkei Sangyo Shimbun (1997e), ``Home medical treatment via videophone (Otsuka Clinic and NTT)'', 10 December, p. 14. Nikkei Sangyo Shimbun (1998a), ``Chinese medicine consultation via videophone (Kusurinihondo and NTT)'', 3 April, p. 19. Nikkei Sangyo Shimbun (1998b), ``Videophone-based distance lecture systems ± Aichi Prefecture

Universities implement lifelong learning and other program'', 13 November, p. 3. Rosen, E. (1996), Personal Videoconferencing, Manning Publications, Greenwich, CT, p. 132. Sankei Shimbun (1996), `Òverseas studying of Ocha-noma via video conferencing'', 25 March, p. 6. Sankei Shimbun (1997), `Òperating remotely via highspeed communications network (linking Osaka University and two other institutions)'', 12 December, p. 12. Trowt-Bayard, T. and Wilcox, J. (1997), Videoconferencing and Interactive Multimedia.:The Whole Picture, Flatriron Publishing, New York, NY. Yomiuri Shimbun (1996a), ``PC-communications based English class trial'', 22 March, p. 5. Yomiuri Shimbun (1996b), `Ènglish conversation lessons at home (using videoconferencing systems)'', 30 October, p. 7. Yomiuri Shimbun (1997), `À video transmission-based business partnership (NTT and Mitsubishi Electric)'', 12 September, p. 8.

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Recent changes in the information technology (IT) market

From direct to hybrid marketing: a new IBM go-to-market model Alessandro Gandolfo and Franco Padelletti

The authors Alessandro Gandolfo is Senior Researcher, Dipartimento di Economia Aziendale, FacoltaÁ di Economia di Pisa, Pisa, Italy. Franco Padelletti is Public Sector Marketing Consultant, Local Government Segment EMEA - IBM Italia SpA, Rome, Italy. Keywords Distribution channel, Marketing, Innovation, Information technology Abstract In the 1980s, a profound change in the information technology (IT) market forced IBM to modify the organisation and management of its selling structure. There was only an internal sales channel at first and IBM had interactive relationships with individual customers. The process of change began when the number of customers increased and their average size decreased. IBM began to support its internal channel of sales representatives with an external channel of business partners for the distribution of high volume products. Having to face new problems, like business partner loyalty and the loss of market control, IBM has decided to adopt, as a general strategy, a new go-to-market model called the hybrid model. By mixing and coordinating direct activities, such as mailings, phone calls and tele-coverage, with commercial business partner actions and operations, IBM now has a new competitive advantage.


In the 1970s, IBM's business targets were medium and large-sized firms, while the 1980s saw small businesses develop progressively up to the 1990s. In the 1990s, due to the introduction of CMOS technologies and personal computers, prices fell and the computer users market grew from small service and commercial distribution firms to offices and single nonprofessional users (home computing). The transformation of the target market thus forced IBM to change the organisation and management of its selling structure. At first there was only an internal selling channel and IBM had interactive relationships with individual customers. The increase in the number of customers and the decrease of their average size gave rise to this change. IBM began to support its internal channel with external channels for the distribution of high volume products. The kind of distribution agreement (agents or resellers) was determined by the technical characteristics of the products, price levels and customer requirements. At present, IBM sells four computer lines on the IT market: (1) The Enterprise Server S/390. The heir of the /360 and /370 mainframes, designed to carry out an important link between the new frontiers of information technology, represented by the Internet and e-business, and the traditional information systems, thereby protecting the considerable investments made by IBM customers on data and on software. This model satisfies the requirements of major organisations which need high security standards, absolute reliability and compatibility with the old systems, in order to protect previous investments. (2) The AS/400 series. The world's most popular minicomputers. Nowadays, this product line is based on the Posix standard (this is a de jure international standard developed to assure ``software portability'' among different computers) and can be considered an easy-to-use and low TCO (total cost of ownership) open system. These are marketed ± thanks to the new hardware and software devices ± as Internet and intranet servers. (3) The RS/6000 series. RISC (reduced instruction set computer) technology open

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From direct to hybrid marketing: a new IBM go-to-market model


Alessandro Gandolfo and Franco Padelletti

systems equipped with a UNIX operating system. (4) The PC series. PC-server, desktop and laptop. The relatively high-priced ES/390s were sold through the IBM internal channel until 1997. The last models, named Multiprise 2000, are much cheaper than the previous ones and are distributed by qualified resellers. The selling approach for these products is complex and needs strong investments in commercial and technical support from IBM and its partners. At first, the AS/400 series was commercialised by an IBM internal channel and an external agents channel, where the partner played the double role of solution provider and selling intermediary for hardware and base software. Today the resellers channel is increasingly involved in the commercialisation of this product line. Dealers are the main distribution channel for RS/6000s and PCs. Large quantities of these computers are directly bought from IBM, and since 1996 they have been bought from qualified first-layer resellers. Therefore, a strong financial situation is an important aspect in judging partner reliability. In the 1970s, the only authorised sellers of IBM computers were IBM SRs (sales representatives) or IBM agents. This very simple sales model correctly executed IBM's strategies and guaranteed customer satisfaction thanks to highly professional operators. The need to lower costs and cover a larger market required new solutions and the introduction of alternative sales channels. In Italy (the following considerations regard IBM Italy SpA) the first external selling channels were the agents (the agents channel is made up of external collaborators paid on commission) who distributed AS/400 products. The agents had to identify new customers, assist the old ones, start the negotiations and close the deal. Hence the control of the formal aspects of the negotiations was complete. The situation was different regarding other very important elements. The agent provided complex solutions (HD, SW and services) and the software and the complementary hardware could be made of non-IBM products. At this point, control of the negotiations with regard to business profitability was dramatically reduced for IBM.

This channel is made of lean sales units which are quickly activated and deployed on the market. Thanks to these advantages, the channel of agents was very important for the distribution of AS/400 computers, one of the most successful IBM products. A channel of resellers was set up to distribute PC products and RS/6000 computers. At first, this channel was made up of a single layer of dealers, but afterwards it assumed the following more articulated shape: . first-layer qualified resellers (who buy directly from IBM); . dealers; . points of sale. Because of its external sales channel implementation, IBM had to face the difficult issue of seller loyalty. This problem was present from the beginning with IBM's agents, who offered complex solutions based on the AS/ 400 systems. They often provided complementary hardware and software from IBM competitors (even when IBM had similar products). Stronger channel loyalty problems were present with PC and RS/6000 resellers. Resellers are independent companies who have higher structure and management costs than agents. They sell different brands and tend to privilege products with higher margins. They set up interactive customer relationships, which can strongly influence customer decisions. For a long time IBM accepted the risks of reseller loyalty because it could rely on the strength of its brand, the quality and reliability of its product and its own after-sale assistance. Another important advantage was the switching costs faced by old customers whenever they tried to change provider. In recent years, price competition has become more aggressive, while differences in product performance has decreased. IBM has not been able to efficiently compete in this new distribution scenario. Other aspects of market control loss and sales channels are related to product complexity and understanding and meeting customer needs. In the past, loyalty in the traditional internal channels was absolute and customer needs were fully understood. The introduction of external channels caused problems which had to be faced. The only exception were top IBM

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customers because the direct SR channel was continuously present and its coverage also improved at the end. Recently, owing to the growth of the computer market and the simultaneous pulverisation of its users, IT providers have realised that direct communication and advertising are the only direct way to influence the consumer market. All other forms of contact with end-users are through a reseller, who has an increasingly important role in a product's success.

The introduction of direct marketing The idea of complementing an external channels network with a direct marketing structure was born around the middle of the 1990s. The progressive loss of market control forced IBM to implement fidelity actions compatible with cost reductions on the sales network. This new distribution structure caused a dramatic change in IBM's marketing approach. At first, the new channel was perceived as a threat by external channels because direct marketing was confused with direct selling. Direct marketing could sell IBM products directly on the consumer market, a segment traditionally targeted by the external channels. This situation would have decreased market share, or reduced margins. Actually, direct selling has always only represented one of the elements of the IBM direct marketing formula. In fact, as the characteristics of this new channel were better defined, the ``direct selling components'' were limited to a few specific products while IBM's support sales-channel was notably strengthened. This new scenario in IBM's network of distributors caused many important changes in the relationship between the mothercompany and the business partners. To underline their autonomy and the importance of their contribution, IBM recognised the role of solutions provider and sometimes the role of systems integrator for the outside channels. Direct marketing focused on the telecoverage of old clients and the identification and qualification of new clients while leaving aside the area of direct selling. This new channel structure offers an important scenario to Italian customers. A freephone

offers a no-cost access to IBM and grants immediate assistance by qualified operators. Like IBM business partners, these operators are experts in customer needs. Depending on the type of need, the primary technical or commercial IBM structure or a selected business partner is alerted. When a business opportunity is identified, a lead is opened and the contact is redirected to a suitable business partner. (IBM customers have to call the freephone instead of sellers for technical assistance. The telephone operator then calls up the most qualified business partner). This type of tele-coverage is operated by IBM Direct Marketing and it offers important advantages both to IBM and IBM customers. Direct marketing gives a high-added-value service by quickly contacting a professional who can satisfy the customer's needs. Second, direct marketing allows IBM to verify customer needs by following up on customer satisfaction and preferences. In the third place, direct marketing can control distribution channel loyalty and performance. Finally, direct marketing establishes interactive relationships with the end customer. Indeed, indirect channels are the main players in every commercial negotiation. The potential conflict arising from centralised management of telephone contacts is reduced in two ways. First, direct marketing produces for IBM business partners a demand that is much higher than the volumes generated by direct sales. Second, each business partner can afford the direct marketing resources needed to improve the effectiveness of its sales drive. IBM's direct marketing may be a suitable instrument for finding new sales opportunities for all traditional channels. The role of the new structure reduces the risks of vertical competition between IBM and the business partner network (this type of competition can be a considerable source of conflict in other sectors, such as that of insurance ± here the agencies feel like a direct competitor of the channel where it is possible to sign an agreement directly by telephone) and of horizontal competition among the different channels.

IBM's direct marketing organisation This program first started in 1995 with limited resources. At present, direct marketing is a well-structured tool with an important

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strategic role. It provides four main tools (Figure 1): (1) tele-coverage; (2) campaigning (or tele-marketing) for generation demand; (3) tele-sales; (4) customer-care. The aim of tele-coverage is to keep a profitable relationship with the end customers. This department is made up of groups of specialised operators called internal sales representatives (ISRs) who represent each industry or each product line. It is the single most important tool for interactive relationships with business partners and for identifying single business opportunities. ISRs develop customer relationships like any other IBM sales representatives except that they operate exclusively by phone. The telephone calls generally refer to letters and promotional material sent during periodic communications to target users. These mailings, planned quarterly, form the message plan. This plan is usually based on a publication of IT market proposals and evolution, trial offers, new products and innovative solutions information. Tele-coverage covers a customer segment in which the prospects are excluded. The final purpose is to increase IBM customer sales over time, consolidate customer loyalty and verify customer satisfaction. In a value/loyalty diagram (Figure 2) telecoverage action is represented by the two arrows converging towards the first quadrant. The second component, which concerns marketing more than sales, is campaigning (or demand generation) by means of spot campaigns (mailings and/or telephone calls) to discover specific business opportunities. Their main purpose is to identify real business opportunities among the prospects. These prospects are assigned to tele-coverage Figure 1 IBM's direct marketing tools

Figure 2 The value/loyalty matrix showing the tele-coverage action

operators (this activity is called prospect's qualification). Spot campaigning phone operators are not experts in any specific industrial sector but they deal with new services or product offers. Tele-sales, the third component, aims to sell single products at a lower selling cost. The principal concern is to avoid conflicts with business partners, a fact that could undermine their loyalty. Finally the fourth element, named customer-care, develops the following important strategic functions: . it contacts IBM and the technical and commercial assistance services as quickly as possible; . it controls the satisfaction level and the rating of products and services offered; . it provides quick solutions to customer complaints.

The hybrid go-to-market model The previous scenario describes IBM Italy's most radical marketing innovations today. It is a new way to approach the market, which can be applied to all of IBM's customers except the biggest ones. It seems to be a hybrid type of go-to-market model where the marketing, the direct marketing, the SRs, the business partners, and the technical-commercial supports do not act in the marketing/sale process from end-to-end, but they simultaneously and consistently participate at the same sale negotiations. Let us give an example. IBM wants to promote a solution provided by Star Ltd (a small software house with very limited territory coverage) which uses IBM hardware and base software (Figure 3 represents the activities flow).

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Stage 7 IBM direct marketing: . verifies customer satisfaction; . if required, co-ordinates corrective actions by BP and IBM; . periodically contacts the customers to verify their satisfaction and new needs.

Figure 3 The hybrid go-to-market model

Stage 1 IBM Marketing in collaboration with Star srl: . defines the market solution and designs the promotional material for mailing; . arranges agreement terms and conditions with other IBM business partners involved in the delivery of the solution and the training plan for their sellers and fitters. Stage 2 IBM direct marketing: . sets up promotional material and references to the customer and the text used as a trace for the telephone calls by the telemarketing operators; . handles mailing; . makes telephone calls and gives priority to mail or fax requests for information; . sends information to the customers; . selects the most interesting opportunities and assigns them to the appropriate business partner. Stages 3 and 4 The business partner: . visits the prospect and sets up the negotiations; . concludes the negotiations and signs the contract; . co-ordinates the supply of the single components which are part of the solution. Stage 5 IBM and the business partner: supply hardware and software, installation services and perform relative testing. Stage 6 The business partner: . implements the solution and provides the necessary services; . tests the whole solution.

This way, market coverage is more capillary and business opportunities with real benefits for all the members of the network are more easily grasped. Today, every IBM industry division has already implemented its own hybrid go-tomarket model and is tuning the process.

Implementing the hybrid go-to-market model in Italian government offices The relationship between IBM and Italian government offices dates back to when IBM's first customer on the Italian market was FF.SS. ± the Italian state-owned railway company. Since then, IBM's involvement with Italian government bodies has often produced partnerships rather than traditional customer-provider relationships. This important goal has been achieved by means of a direct sales channel, although it was not immediately accepted by small-sized government offices because they wanted a privileged relationship, compared to private firms. Government departments are, by definition, big ones. When a department has a small IT budget it means that it does not carry out IT projects, but this does not mean that it does not have any needs. For this reason, government departments have always been considered highly potential customers. To delegate these customers to a business partner only because of their small IT annual budget has always been considered a mistake because it can mean losing a customer who can suddenly set up important projects. Today, the scenario has changed and the urgent need to reduce sales costs has forced many firms, including IBM, to use outside channels whenever possible. With the activation of a direct marketing structure, IBM management in the Government ISU (Government Industry Solution Unit) recognised the potential of this new marketing tool. It is an important tactical sales instrument and a strategic way to control the market. Through direct marketing it is possible

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to deploy knowledge of new products and solutions, and to improve IBM brand image, which can generate additional demand. The idea of centrally supporting IBM business partner activities by means of a super partes structure ± like direct marketing ± has been a winning idea. In fact, because of customer geographic dispersion and customer sizes, the right channel has been the business partner channel. On the contrary, the need to study, develop and promote ad hoc solutions in the emergent area of network-computing and e-business led to a centralised strategy with direct marketing channels. The activities carried out in 1996 on Italian municipalities were very successful in terms of business and customer/business partner satisfaction. This model was applied in Italy on a large scale in 1998 and it is also valid for some central government bodies. As from 1998, a face-to-face approach with IBM SR will be reserved to the very few highly potential customers, while all the other public customers will be covered using the ``hybrid'' approach. This model will also be set up for specific central and peripheral departments of top customers. This last segment is very difficult to reach. These organisations usually require simple solutions and fast implementations. The contacts must be established with public managers who, very often, have no specific IT competence. They are more interested in the effectiveness of the proposed solution than in the technological aspects. In this segment the main issues in the coverage plan are: . the set up and management of a marketing database which distinguishes IT professionals (IT managers) from highlevel managers (non-IT managers); . the set up and activation of two yearly message plans checked every four months by IT managers and non-IT managers; . the selection of reliable business partners capable of operating with the government offices; . the management of the agreements between IBM and business partners as well as the contracts among complementary business partners (in these cases IBM operates as a warrantor). Secondary, but not less important, issues are: . ISR training.

.

.

.

Co-ordination of the campaigning activities. These spot activities can reduce the effectiveness of the tele-coverage message plan by overloading the customer with mailings and telephone calls. Management and tracking of the business partner negotiations to ensure market control and to keep direct relationships between IBM and IBM customers. Creation and management of the marketing database. Tele-coverage will be more successful if this tool has more detailed information.

The acquisition of contacts to be included in the marketing database will be carried out by sales representatives who had the responsibility of the customers in 1997. But most of them ± about 60 per cent ± will be provided by qualification campaigns conducted by trained phone operators. Data mining software tools are largely employed and they allow full use of the data base information potential and an accurate targeting of the various campaigns. Another issue is related to current Italian legislation. Hybrid model operations are performed by external channels and this requires information-sharing among the contacts interested in the various initiatives. In this case, authorisation is required by Italian law, thus the amount of available information is drastically reduced if permission to use the data is not given. There will be two different message plans: one for the IT professionals and another one for the high and medium-level managers without specific IT skills. The first one will be based on technical information on hardware and software products and on technical services and platforms. The second one will focus on government problems that can be solved through IT instruments. Telephone conversations will be different and they will require specific ISR training on government matters. The message plan is usually based on periodic publications integrated with different spot messages such as announcements of new products/solutions, invitations to IBM/BP events, etc. The aim of these messages is to attract market attention to the IBM brand, IBM solutions, new products and new opportunities. Figures 4 and 5 show a summary of 1996 telephone calls to small Italian municipalities.

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Figure 4 The summary of 1996 telephone calls to small Italian municipalities

Figure 5 The redemption between all phone calls and leads

In Figure 4 we can see the growing trend of the contacts (tele-in and tele-out) during the first tele-coverage on this market. Figure 4 shows two peaks in the months of February and October thanks to the INFOCOMUNI newsletter sent to Italian municipalities during January and September. Figure 5 represents the ratio (redemption) between all phone calls and the successful ones (leads). Activation outside channels is difficult to implement but government management and business partners will greatly help out. Involvement of outside channels is a crucial task in order to transform direct marketing communication activities into real business. According to its size, financial ability and technical knowledge, the business partner mainly operates in market niches and its work in the hybrid model may be decisive in satisfying complex needs. IBM takes care of customer management relationship through ISRs, sometimes in collaboration with the ISU marketing consultants, while the business partner conducts operational activities. A correct balance in the market is a crucial point to be analysed with care. The number of

business partners involved, their technical preparation (AS/400 agents, RS/6000 resellers, PC resellers, solution providers or system integrators), their geographic location and their experience are characteristics of the ``map'' article. But they cannot ensure that the ``mechanism'' will work correctly. It can be useful for a customer to identify a reference business partner but it might not be enough. Sometimes there are some particular situations concerning specific customer needs that make the interaction among different and complementary business partners necessary. (It could be necessary to identify a business partner capable of selling the solutions of other business partners to geographic areas outside of their reach or capable of integrating hardware, software and services distributed by different business partners.) For this approach to be successful, IBM must ensure that the mutual responsibilities of the parties are carried out properly. The correct development of the sales network and allocation of more than 500 government office customers to outside business partners will be very difficult to fulfil and the most important phases will be developed in 1998. The wrong allocation of contacts may support a group of business partners at the expense of others, and could cause dangerous and conflicting behaviour because of mistrust in IBM and in direct marketing.

Conclusions IBM direct marketing, which is a compromise between sales cost reduction, market coverage improvement and regaining control of external channels, has evolved from its traditional role as a pure selling channel to an innovative marketing tool capable of activating and coordinating business partner activities. The hybrid model, which combines direct marketing and business partners, is a very promising way of approaching the market. What we are experiencing today in Italy and in other foreign countries shows very positive results in terms of business and user satisfaction. This IBM challenge will considerably change traditional market coverage for important customers. We are at the start of a very complex operation but very encouraging signals can already be seen.

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Introduction

Managing and organizing innovation in the knowledge economy Jon-Arild Johannessen Johan Olaisen and Bjùrn Olsen

The authors Jon-Arild Johannessen and Johan Olaisen are both Professors at the Norwegian School of Management, Norway. Bjùrn Olsen is Associate Professor at the Bodù Graduate School of Business, Norway. Keywords Innovation, Vision, Process management, Knowledge workers Abstract In the knowledge economy, where the business environment is characterised by turbulence and complexity, knowledge is the main source of creating both innovation and sustainable competitive advantage. This paper describes a conceptual model and an associated set of managerial and organising implications for the innovation-led company. The question we are trying to answer is: which management and organising characteristics are necessary to manage innovation in the knowledge economy? The paper is based on in-depth interviews of 32 CEOs and top executives in leading European organisations, 40 people known internationally for their ability to achieve and maintain a position among the top performers in their fields, and a ``best practice study'' of five leading international companies.


Companies of today are facing increased turbulence and complexity in the business environment. D'Aveni (1994) categorizes the situation in its extreme form as hypercompetition. To meet these challenges, both the popular and the academic press are advising companies to focus their attention toward innovation in order to create and sustain competitive advantage. We have lately seen an increased attention toward knowledge as the principal source of economic rent (Nelson and Winter, 1982; Nonaka and Takeuchi, 1995; Leonard-Barton, 1995; Grant, 1996a; 1996b); The conventional Western approach to acquiring knowledge is through identifying hard, quantifiable data and universal procedures. Western companies generally prefer cookbook solutions to problems of increased efficiency, lower costs, and improved return on investment, focusing on explicit knowledge (Nonaka and Takeuchi, 1995). By contrast, a handful of companies of the leading edge are beginning to unearth a more promising solution by tapping into the tacit, often subjective experiences, insights, and intuitions of individuals; especially those individuals who are high achievers. A sevenyear study of ``knowledge workers'' at Bell Labs, for example, found that when identifying the work strategies of an organisation's top performers and then sharing them with other employees, there will be productivity gains 100 percent greater than would occur otherwise. Our study aims at tapping into the wisdom of world-class performers to unravel what we characterise as innovation-led companies. In this article, innovation is linked to four entities at the organising level: processes, relationships, commitment and belonging. At the management level innovation is linked to: focus, mastery, intensity and integrity. This is shown in Figure 1. Managers and organisations can develop these characteristics, critically assessing their competency in each of the elements above, and then correcting their disabilities. This is also the contribution in this paper. When the visions of world-class performers becomes reality, new jobs are created, existing jobs become more secure, and the wealth of the individual, the company, and society is increased. Or with one of the participants in the study:

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Managing and organizing innovation in the knowledge economy


Jon-Arild Johannessen, Johan Olaisen and Bjùrn Olsen

Figure 1 A model for managing and organising innovation in the knowledge economy: the innovation-led company

First we report the four elements of worldclass performers in the model, which is linked to question one above. Then we discuss how to organise to make use of these lessons, which is linked to question two above.

research question in this paper. The paper is a synthesis of the main findings from these studies. The projects were conducted by the Performance Group in 1992, 1993 and 1994. All projects were based on in-depth interviews. The first study[1] focused on 32 top managers[2] in leading European organisations. The purpose was to investigate how the CEOs and top executives in these organisations look on the years to come concerning productivity and innovation. The study was conducted by the Performance Group in 1992. The second study[3] was conducted on 40 people[4] known internationally (Japan, USA, Brazil, Europe) for their ability to achieve and maintain a position among the top performers in their fields. This study was conducted by The Performance Group in 1993. The third study[5] was part of the Performance Group research on `Àccelerating change in multi-cultural environment'', an extensive ``best practices'' study on five leading international companies: 3M, Allied Signal, General Electric, Rover Group, and ICL. The respondents in our study will be labelled ``world-class performers'' throughout the paper.

Methodology

The management level

This paper is based on and grounded in three projects which focused primarily on the

This part of the paper reports the main findings linked to the question: which

One of the most fascinating things to see is how much people can contribute if you create the sort of atmosphere where people feel absolutely free to come up with ideas. Creating such an atmosphere is an enormous job that needs to be done because there is so much inside every human being (Marti Ahtisaari, President, Finland).

People can become more effective by trying to make them understand the importance of the processes in which they are involved. And this is what the model is all about, to understand the activities and processes each of us are involved in during our working hours. These activities and processes have to be managed and designed differently from today, to become successful in the new economy, or with Drucker (1993, p. 53): `Èvery organisation of today has to build into its very structure the management of change''. The questions we are trying to answer are: (1) Which management characteristics are necessary to manage innovation in the knowledge economy? (2) Which organising characteristics are necessary to manage innovation in the knowledge economy?

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management characteristics are necessary to manage innovation in the knowledge economy? We shall consider four entities: focus, mastery, intensity and integrity

Focus The ability to focus on the mission is the first of four performance processes typical of world-class performers. In order to maintain focus on innovation, it is necessary to be proactive, willing to take risks and set personal goals. They have to be able to formulate visions about future opportunities, and must have an active, dynamic attitude towards taking and keeping the initiative. It is also essential for leaders to ensure that visions are articulated and communicated, and to show that they have faith in their own visions.

in the future by asking the question: how did I manage to solve the problems? In this way, as with a the great sportsman, one builds up a cognitive energy which can be drawn on when the real situation comes along. This means more than merely taking the initiative. It means that we are responsible for our own lives and the welfare of others, and that we have to create the future or others will create it for us. It is so easy: plan or be planned for. Willingness to take risks World-class performers are risk takers. Of the performers, 75 per cent stated that risk taking applies to them. It appears that the quality of risk taking is more pertinent in their role as individuals than applied to their leadership role. The attitude of the world-class performers is: you must analyse and minimise the risk, but without risk there is no progress.

The difference between the possible and the impossible lies in the person's determination. How badly you want something? How much of a price you are willing to pay? (respondent Tommy Lasorda, manager, Los Angeles Dodgers).

Proactiveness Proactiveness is the ability to create opportunities or the ability to recognise or anticipate and act on opportunities (or dangers) when they present themselves. This implies the ability to visualise or identify pictures of future opportunities and turn them into reality, as well as a sense of optimism and faith in the future. Lumpkin and Dess (1996, p. 146) argue that ``. . . a proactive firm is a leader rather than a follower, because it has the will and the foresight to seize new opportunities''. They make a distinction between competitive aggressiveness and proactiveness, where proactiveness has to do with meeting demand, whereas competitive aggressiveness is about competing for demand. I don't think a person can really rise to the top position of a large company without that [proactive] element. That's because you've got to seize the opportunity; you can't wait for things to happen (respondent Cheong Choong Kong, CEO of Singapore Airlines).

People who are proactive have a strong belief in the future because that is where the opportunities are. This can be linked to Weick's (1979) concept of future perfect thinking and Ackoff's (1981; 1984) creating the future concept. It is like projecting oneself

An awful lot of business people are basically statisticians. They want to avoid risk, no matter what. If I had done that in my life, I don't know where I would be, but I wouldn't be here (respondent Michael Walsh, CEO of Tenneco. He successfully turned around Union Pacific Railroad).

Forming personal goals To apply resources productively, it is necessary to know where they should be used and how they will yield the highest return. Thus, goal setting is an essential component of maximum performance. Once goals are developed, the actions needed to reach them are more easily identified. In planning for reaching the goals we decide where to add value and how to get the needed resources. Deciding which are the most urgent and important things to do is a major part of the goal setting process because it forces us to set priorities for the actions. It concentrates the focus on what is truly important to accomplish a goal. To succeed, short-term goals must be linked to a sense of urgency with clear criteria for implementation. Having a clear concise goal is important. It has to be meaningful. It has to really matter to you because otherwise you will not be able to make the personal sacrifices to get there (respondent Dennis Conner, US yachtsman. Skipper of America's Cup winning team).

World-class performers choose to invest their energy and talents not simply in the most urgent and important project but also in those that add most value to them personally or to their organisations.

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Even a normal thing can be successful if you add value to it (respondent Luiciano Benetton, vice president and managing director of Benetton SpA.).

The most value added strategy for world-class performers is to keep their general competence up to the mark. They maintain a high level of knowledge in order to be able to create the most value added. Most of the world-class performers use intuitive processes to create goals (see Figure 2 for a visual representation of the elements relating to focus).

Mastery The second performance process is called mastery. A world-class performer must be in command of the strategic and technical aspects of his craft, know how people think and act, and have at his disposal a powerful set of personal and management ``tools''. The discussion below covers tools and processes that have been divided into three different tool-categories: creating commitment, the ability to initiate change and managing time. World-class performers are masters of managing processes. They know how things work, they understand how people think and are able to use this knowledge to induce ``follower-ship'', because they are confident in their mission and possess the skills needed to free resources and get the job done. Creating commitment A world-class performer is able to create a vision of the future that embodies the collective values and aspirations of the individuals and provide them with a shared mental picture of things not as they are, but as how they should be. A world-class leader understands that the key to energising an organisation is to create a vision of the future that embodies the collective values and Figure 2 Focus

aspiration of its individuals as a shared mental picture of the future. The great leader is the leader who thinks, feels the direction, the movement and the direction of history and reality and then follows, transforming (respondent Paulo Freire, Brazilian educator).

World-class performers recognise that organisational performance and deep personal fulfilment go hand in hand. The leader may be the individual who articulates the vision, fires the imagination with a compelling image of the future, and empowers people to perform. However, the ultimate success depends upon each individual in the organisation ``claiming'' that vision to be his own. The main thing is to motivate, to try to release the energies and passion in different individuals in order to make them feel free to create an illusion that they are actually doing what they are doing out of their own desires and not being led by somebody. In the best possible case the illusion of freedom becomes reality. All of a sudden the structure of one being the leader and others being the staff ceases to exist. The structure is not important anymore, but the spirit and desire to achieve are. World-class performers strive to create an atmosphere where individuals are not afraid to take risks, try new ideas, fail and try again. They are sensitive to the needs of their people and interact with them openly and honestly. They are both people-oriented and result-oriented. In too many organisations, workers do not trust managers and managers do not trust workers. The mark of a worldclass performer is that he respects and has faith in his followers. Initiating change In today's global economy, no organisation can exist for a long period of time if it does not have the capacity to change and adapt to new circumstances. Managing in the age of turbulence and complexity requires the ability to control risks, react quickly to emerging circumstances, and control the direction and speed of the organisation to match the external pace of events. It is risky to not innovate. The dilemma is, however, that innovation has its risks. When asked how to identify the various negative and positive forces, hindering or encouraging innovation, the world-class performers emphasised information gathering, analysis and communication. Through the analysis they check the

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information gathered against their own picture of the situation. This information is used to create strategies for innovation. Organisation and productivity experts differ in opinion when considering the possibilities of gradual change (Hammer and Champy, 1993). Several world-class performers report that gradual change in an organisation rarely works, according to their experience. In a gradual change situation we never build up the sort of evidence of significant emotional events which causes the paradigm shift to occur. What is it that sustains and reinforces the creative processes in a company ? Three types of innovation processes can be categorised within a company: (1) Innovation in the first degree. These are changes within the framework of existing production methods and management philosophy. (2) Innovation in the second degree. These are changes from one production method and management philosophy to a qualitative new type. (3) Innovation in the third degree. These are changes within the framework of the new production and management philosophy. According to this view of innovation, it is innovation in the second and third degree which reinforce and sustain the creative processes initiating change. Steinbrunner's (1974), Lindblom's (1959) and Granoveter's (1983) contentions that organised action is dependent on a history of events does not coincide with our observations in this study. On the contrary, routines and innovation in the second degree are found to be more based on the future than an interpretation of the past. What hinders innovation in the second and third degree can be categorised in three types of problem-solving behaviour: (1) The action is necessary, but does not take place. (2) The action is executed, but should not have been. (3) The action is executed but at the wrong level. Large teams embody a certain conservativeness (Janis, 1982), so to enhance innovation, these teams should be to divided into smaller multifunctional teams doing multidimentional works. Change is a fundamental issue but I think it has to come from the bottom. It has to come from

the soul of the organisation that feels that there is a necessity for change (respondent Richardo Semler, Brazilian businessman and author).

The first element of all change and innovation is to know what we want to achieve, the objectives and goals. The second element is to know why we want to achieve the target. The third is to know what we want to get out of the objective when it is achieved. The third element is qualitatively different from element two. The fourth element in the change-and innovation-strategy is to know how we shall achieve the objective and goals. This is the leadership tool which the world-class performers to a great extent use when initiating change and innovation. Managing time A common feature among managers is a tendency to expand their working hours to accomplish their job. Senior managers typically work longer hours than lower-level managers, but on fewer activities. However, managing time is a question of channelling personal resources to tasks which add the most value. I am a great believer that if you can't get something done in fifty hours a week, you probably can't do it in a hundred and fifty (respondent Robert Shaw, CEO of Shaw Industries. Nominated as one of the five most admired leaders in the USA Fortune, February 1993).

Managing time does not relate to how much time you have available, but what you do with it. Three strategies are used by world-class performers. These are: reducing waiting time, eliminating unnecessary work and delegating tasks. All the strategies are used for planning the daily performance. In the moment of planning they use all of the above mentioned principles of freeing resources. They screen activities and tasks and eliminate waiting time, deciding the best performance for each task. In conclusion, they allocate time for the most important goals in short, medium and long term. Reducing waiting time Waiting time is the time we spend waiting for someone else to finish their tasks before we can begin ours, or waiting for things or situations to be cleared. If we are unable to do what we believe to be most important, that is also a type of waiting. The strategies of overcoming waiting times can be divided into active and passive ones. A passive strategy is to keep busy with other things. This is passive

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in the sense that always doing something else could prevent us from doing the right thing. Active strategies to overcome waiting time which were mentioned most often were: meeting and communicating with people, trying to change people, by involving people, making a plan for everyone's improvement, creating interesting work. Eliminating unnecessary work This principle of freeing resources is widely used among the world-class performers. Much of what we do is a result of a paper dictatorship, we do whatever is on our desk. Worldclass performers are extremely time-focused. They are adept at selecting and concentrating their time and attention, both personal and organisational, upon those projects that are likely to yield the highest return. Tenneco CEO Michael Walsh (respondent) is always saying to his people: why are you bringing this to me? Why do I need to do this? Why don't you make the decision on it? Delegating tasks Strategies for delegation within our sample include the following: give responsibility and freedom, develop and stimulate people, give authority. Delegation means to trust in people, but it does not mean abdication. World-class performers build on a foundation of lifelong learning. Whether highly educated in a formal sense or not, they develop the ability to absorb vast quantities of information and to turn that information into practical knowledge that they can use in their work for managing their personal time (see Figure 3 for a visual representation of the elements relating to mastery).

or will, although it contains elements of all these. It is that little bit extra, the competitive edge, that consistent winners in all fields seem to possess. It is impossible to be successful at anything doing it part-time. If you spend 100 percent of time to make 100 dollars, you can't say I'll spend 90 percent of my time and make 90 dollars. The money is made on the last 10 percent. It is like climbing Everest; the success of the expedition lies in the last 10 percent, the last bit of extra you give (respondent Arne Nñss, shipping magnate and mountain climber).

World-class performers are in command of their intensity levels. They are passionate about what they do and are able to raise their energy levels at precisely the moment an `èxtra'' degree of drive is required. However, they are equally adept at conserving energy by ``detaching'' from a project until the energy is needed, much like a cat can go from fast asleep to full alert instantly at the approach of a mouse. It does not make any difference how much time is spent at the desk. What makes the difference that makes the difference is the level of intensity that one brings to the task. Confidence in mission, discipline and detachment are important ingredients when creating necessary intensity in performance to enter the world-class performers level, as found in our study. Confidence in mission The world-class performers possess a profound love for their work. They often expressed: you cannot be truly outstanding at anything unless you are committed to that pursuit emotionally, or: There is a difference between a serious commitment and a total commitment. To make a total commitment you have to cut away all your excuses and all of the things to fall back on and you have no excuses (respondent Robert de Castella, former Olympian, director, Australian Institute of Sports).

Intensity Intensity is the mysterious quality related to drive or energy. Intensity goes beyond motivation, focus, self-confidence, determination Figure 3 Mastery

People who believe strongly in what they do are obviously more involved and intense than those who do not. It means to have a vision and to believe strongly that you can fulfil it. The time it takes to achieve that goal is irrelevant. It is the confidence in the mission which make the difference, and has nothing to do with speed. The point is not when the mission is reached or the goal is fulfilled, the important thing is that one is on the way. This is the link between proactiveness and 121




confidence in mission, between focus and intensity. Confidence in mission is one of the qualities necessary for transforming failures into persistency. It is hard to be a winner if you do not really think of yourself as being a winner. You find a way to lose. You just set your goal and it has to be important enough for you to make the sacrifices to get there (respondent Dennis Conner, skipper of Americas Cup winning team, USA).

The participants expressing themselves as action oriented reveal a strong belief in their own confidence in mission as a foundation for successful performance. Guided by very strong persistence, world-class performers believe their ideas, visions and goals can be realised. The mission must be communicated to those carrying it out. However, this is pointless if you do not have confidence in them. So confidence involves not only having confidence in oneself, which is basic, but also in the mission and in the people assisting to reach that mission. Discipline Another important aspect of intensity is discipline. Discipline means having character to develop and stick to the mission or the vision. It means being in control of all your resources and having the mind-set to see projects through until completion. It means being able to resist going for the short-term gain at the expense of greater rewards in the long term. Most world-class performers in our sample set their own goals and use discipline to fulfil them. But as leaders, they are also concerned with the goal setting for their people. This gives them a need to transfer discipline in a motivational manner. Applying discipline with action orientation means creating conducive conditions. People who have control over their work are likely to be more productive than people who do not. A key factor in the success of worldclass performers may be that they have control over their lives and themselves to a very high degree. This is also an element of controlling stress, which can be a function of controlling the reaction to a situation. The world-class performers rate high in the management of stress. They do this primarily by managing their time in a positive way. The most common way of dealing with stress for world-class performers is to ensure that it occurs in combination with satisfaction. This

leads to excitement and represents a positive force for intensity. Detachment In order to balance the intensity of peak performance, the world-class performers interviewed displayed an interesting ability in detaching themselves from their work when off duty. Intensity is the key to a market driven and competitive business. One has to have intensity to succeed. Results are a key to the world-class performers' performance. But it is also important to show detachment to succeed because one should never concentrate all the energy on the job. Living a balanced life seemsto be very important to world-class performers. They are able to quickly shift their focus; for example from planning long term goals to handling the details of immediate challenges. This creates the dynamism which fills their lives with meaning. The combination of intensity and detachment obviously contributes to the good life for world-class performers (see Figure 4 for a visual representation of the elements relating to intensity).

Integrity The study shows that world-class performers have integrity, which is derived from the ability to create trust, personal values and guiding ethical rules. They are true to their own dreams, and refuse to compromise on matters of value and standards. They are also honest in dealings with people, which creates an atmosphere of trust. As the three elements are so closely connected we report them together. Trust is at the core of effective leadership. Quite simply put, people do not follow those whom they do not trust. Building trust, in one's subordinates and within oneself, is largely a matter of personal integrity. World-class Figure 4 Intensity

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performers show evidence of a highly developed sense of integrity as reflected in their commitment to their personal values and principles, as well as their courage in living their lives according to them. They also show integrity in their commitment to constantly raise and refine their levels of competence, and in their ability to honestly assess the performance of other people and themselves. It is, perhaps, this quality of self-assessment that reflects the gap between world-class performers and ordinary performers. All human beings are influenced by beliefs and values. The beliefs and values that relate to action and are needed for handling performance include achievement, and this leads to superior behaviour. The belief in meeting qualifications and criteria for a given task and in the quality of work done, all add up as success factors for an improved performance. Other values believed to have a strong influence on individual performance were: patience to wait for results, the courage to seize opportunities, intellectual curiosity and imagination. Beliefs and values directed towards the performers' relation to other human beings were: the importance of showing and nurturing care and respect for others, developing authentic true friendships, expressing respect for differences among people, developing and showing belief in others and practising honesty with oneself and others. The values and beliefs that world-class performers consider important in their lives and careers are primarily action oriented and interpersonal in character, while the main values they want everyone in their organisations to practice are ethical in orientation. Perhaps the world-class performers appreciate the ethical values of honesty, integrity and ethical standards more than action-oriented values because it makes it possible for them to trust others in the organisation. Honesty and integrity open up the possibilities for open communication and a better information flow within the organisation. It could be that this is more beneficial to performance for the organisation as a whole than action oriented values on an individual level. It could be argued that the transaction costs of communication and information flow are reduced when there is more openness and trust. Possibly the target and monitoring system, the innovation culture and the developing of vision and linking the vision to the

organisational units also will benefit from a basic trust and a helping attitude in the organisation (see Figure 5 for a visual representation of the elements relating to integrity).

The organising level This part of the paper reports the main findings linked to the question: which organising characteristics are necessary to manage innovation in the knowledge economy? It seems to be a paradigm shift from vertical and functional organising and management, to horizontal and process organising and management. The task of vertical management is completed in different departments, while the task of the horizontal management is handed out in process-teams using a ``hands-on'' approach during the whole process. Process organising as a new paradigm of cross-function management must ``be treated as a strategic corporate priority'' (Diamancescu, 1992, p. 8). Both TQM and business process re-engineering are promising and powerful methodologies or mental models for the new paradigm. In the new paradigm, traditional ways of competing have reached a level of parity in which businesses can no longer easily distinguish themselves solely on the basis of technology, product, or price. The ability of an organisation to conceptualise and manage innovation, to compete from the inside out by increasing the learning capacity of its knowledge workers, has become a competitive advantage itself. For organisations, the rise to primacy of knowledge workers creates both extraordinary opportunities and challenges, especially in the management of people. The ideas and knowledge needed to create new products and services or add value to old ones resides in the minds of individuals. The role Figure 5 Integrity

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of the manager in the knowledge-based economy will be to manage the environment or context in which work is done, rather than controlling the workers themselves. The manager will serve as a coach and facilitator, a boundary-buster and head cheerleader. His or her role will be to eliminate the barriers that keep individuals from performing at their best. Success in the new economy requires a new form of innovation-based leadership. Leaders must be involved in defining the mission and vision of the organisation and developing and implementing plans to achieve the desired results. Cross-functional teams or process-teams will be the norm in enterprises with innovation-based leadership, with team members educated, trained, counselled, and supported in transforming to the new way of doing business. The successful organisations of the new economy will be the innovative ones. Vision-based leaders will find ways to leverage the collective brain power of their organisations; empowering people and creating a climate of co-operation and `ìnnovation-ship''. The winning companies of this decade will be those which provide their people with the best weapons with which to compete, that is knowledge and service (Quinn, 1992). For most international competitors, the challenge is no longer simply quality. Quality has become a given. You cannot compete globally without it. The challenge of the 1990s is productivity for the service and knowledge workers (Drucker, 1993). There is a growing awareness that productivity, quality, innovation and, hence, sustainable competitive advantage are directly linked to the ability for organisations to learn, because the one sure source of sustainable competitive advantage is knowledge. One of the main tasks for organisations is to improve communication of visions, goals and objectives. This is extremely important, since all employees need a vision, or even better, a purpose for their work, a mission. To implement a common vision through the whole organisation is essential for most of the organisations, because vision is the unfolding of creativity. `Àt the very top, creating and driving a consistent vision of the company's or group's purpose is the primary skill that provides the glue for all its highly disaggregated units'' (Quinn, 1992, p. 375).

There are four areas that will be discussed with the purpose of linking innovation to the operational units of the organisation: (1) Process: where we will look at the relation between local initiative versus central synthesis. (2) Relationship: where the emphasis will be on the establishment of relationship where mutual trust and a supportive attitude prevails. (3) Commitment: this is the classic way of rooting visions, by active committal participation by the employees. (4) Belonging: which is to become part of a purpose extending beyond the daily work. These elements taken together build up what is named as process teams: `À process team, . . ., is a unit that naturally falls together to complete a whole piece of work ± a process'' (Hammer and Champy, 1993, p. 66). It is the tension between the actual performance of the organisation and the desired future expressed through a clear and unambiguous vision, which can be referred to as ``the innovation led Ccompany''. It is this tension between actuality and potentiality which Senge (1990, p. 150) refers to as ``creative tension''. The purpose of the vision is to generate the necessary change in the organisation to achieve the desired future goals. Therefore, the communication of the vision becomes a central point in organisational innovation processes. At a personal level the vision is to provide guidance to the individual in relation to the questions: how can I be instrumental in realising the vision? What is lacking in the company which prevents the vision from being realised? What can I do to provide what is lacking? Mission and vision are thus closely interrelated. Vision is here seen as a visualisation of a metaphor, or a symbol of the vision. Through a direct connection between mission and vision, a more active participation from the employees could be achieved. Consequently, the mission is closely related to the purpose of our life and work. It is what we have to do, why we are doing it, and what we seek to achieve when performing actions connecting vision and mission. The purpose of linking vision and mission is to make the employees part of something which will motivate them to view their daily

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work in a larger context, so that the purpose of their work encourages them both during and after the working hours. Mission and vision operate at the abstract level, whereas goals, strategy, planning, and concrete actions operate at a substantial level. It is, among other factors, through abstract actions that the leader is able to create realities for others. In order to link a mission and a vision to concrete strategies and plans, the leaders are required to have a staff operating in accordance with the purpose of the vision at a realistic level. If this is not the case, counterproductive forces of the organisation will easily hamper the realisation of the vision (Senge, 1990; Kanter (1983, p. 306). According to the basic conception of the vision, we can create our own future (Kanter, 1986). Kanter et al. (1992, p. 383) express that the ``vision is an attempt to articulate what a desired future for a company would be''. Vision, understood this way, is to realise a dream. A leader who doesn't know how to dream with the people is not a leader. He has to be able to dream with the people. To dream and to project the image of the future (respondent Cardinal Paulo Evaristo Arns, Archbishop, Sao Paulo).

Rules and routines have a tendency to be preferred to vision (Kanter, 1983). To make the vision influential on routines and rules, the whole pattern of connections, which the routines and rules are part of, must be levelled. This implies that the visionary leader must `òperate at levels of patterns of change as well as events'' (Senge, 1990, p. 355). When the vision has been generated, the remaining part is to link this to organisational actions. The logic of vision is here defined as: a network of ideas included in close relations to one another and expressed in a concept, able to be visualised in order to generate synergetic effects in the organisation. One way of doing this is by means of the following process steps in the logic of vision: (1) To ascertain what behaviour generated by the new environment created by the vision is desirable/undesirable. (2) To identify which persons, teams, or alliances are exponents of the undesired behaviour. (3) To emphasise that the undesirable behaviour is positive, but in a different context (or under different conditions).

(4) To establish contact with persons, teams and alliances that are willing to behave in the desired manner. (5) To show by means of communicative, symbolic, and substantial actions the pattern of the undesirable behaviour. (6) To investigate once more how strongly the undesirable behaviour is entrained in a person, team, or alliance level in the organisation. For innovation processes to be implemented our findings indicate that less control, less central planning, and less concentration of power must be introduced in the system. This is due to the fact that the large quantity of information and complexity generated by such processes imply self-controlling subsystems (in contrast to self-regulating subsystems). A complementary relationship refers to relationships between persons based on a common supportive attitude, in addition to the mutual trust that already exists among these persons. A symmetric relationship refers to a relationship between persons that is of such a character that competition and mutual distrust constitute the prevailing sentiment in the relationship between the persons involved. Teams based on symmetrical relationships will bring in a competitive element, where one person, profession etc. will try to gain ground at the expense of the other. This could easily lead to a win/lose mentality in the organisation, and thus slow down the organisational innovation process. To be a functional team requires that the team members are mutually dependent of each other with complementary skills, who agree that the best way to achieve the common goal is to work together, and they hold themselves mutually accountable for the results, otherwise it is a group of people working together. Teams based on complementary relationships composed from different departments, professions etc. will have structural integrity while they will benefit from the associative mass of ideas reflected by their multifunctional composition. The process teams will have a synergy potential capable of releasing the creative tension in the organisation and translate vision into continuous innovations.

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You must make people understand the importance of what they are doing. You cannot necessarily make them perform better by offering more rewards. You can make them more




effective by trying to make them understand the importance of the process in which they are involved (respondent Hector Babenco, filmmaker).

When the process teams have developed: personal knowledge of the process, experience and closeness to the work-processes and sensitivity towards the problem, context familiarity and genuine communication, our findings indicate that companies speed up their continuous innovation process.

Conclusion I Managerial implications We have argued that creating the innovationled company may represent a viable solution for coping with the turbulence and complexity of the knowledge economy. In doing so, we need to focus both on the level of management and on the level of organising. The following normative managerial implications are created from the paper. The management level Managers need to focus their attention on innovation. This imply a high degree of proactiveness, a willingness to take calculated risk, and the forming of strong personal goals. Managers also need to master. This involves being able to create commitment, having the capacity to initiate change and manage time by reducing waiting time, eliminating unnecessary work and delegating tasks. A high level of intensity is also required. This implies confidence in mission and the discipline to see the mission through. It also involves the managers' ability to detach themselves from work when off duty, to create a more balanced life. To enhance innovation managers also need a high level of integrity. This means the ability to create trust, and having a high level of commitment to their personal values and principles. The organising level At the organising level, innovation is enhanced by organising the work in process teams. This involves the development of business processes at all level of the organisation. To guide these process teams, and to create the necessary level of commitment, the development and communication of a clear vision becomes paramount. The building of complementary relationships in process teams, with a focus on mutual trust and a

supportive attitude, also becomes important. Further, creating a sense of belonging within such teams, which is extending beyond the daily work, is also essential.

Conclusion II Theoretical implications Thinking in terms of system interactions to organisational innovation processes can be described as a type of systemic innovation philosophy, where innovations must continuously be understood as processes and patterns. Systemic thinking is also emphasised by, among others, Kochan and Usseem (1992), Nadler (1977) and Nadler and Tushman (1988). This angle of incidence to the organisational innovation processes is asking the first questions the manager. These are: which assumptions and beliefs influence you as manager in relation to the people involved in the innovation process? The answer says something about the mental models and leadership style operating in the innovation process. Knowledge is not objective facts, but a way of organising our experience. This, among other things, makes it so important for us to make our assumptions and deeply held beliefs visible. If the management of an innovation process only focuses on one or just a few control variables, changes will tend to reverse the original starting point, because what characterises complex systems is in fact this extensive interaction between the components. To absorb this complexity, the variation of the control mechanisms must also be complex, in analogy with Ashby's (1961) law of ``requisite variety'', and this variety is maintained by process teams. Organising works around processes and process teams breaks up bureaucratic routines and organisational departments, while we at the same time are controlling the innovation project by grounding the innovation in front line workers and process teams.

Notes

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1 See Bjellard et al. (1992). 2 Participants in the study: Fredrik Arp, managing director; Trelleborg Industry AB, Sweden. Anders Backman, vice president, The Esab Group, Sweden. Herbert Bammer, chief executive, The Esab Group,




Sweden. Cris Byron, senior general manager, Manpower, British Airways, UK. Dr F.P. Carruba, executive vice president, Phillips, The Netherlands. Richard Cross, quality consultant, Rank Xerox. N.P.D. Eadie, president, ICL Europe, UK. Eddie Fitzsimons, quality manager, Railfreight Distribution, British Railways Board, UK. Knut W. Francke, manager, UNI Storebrand, Norway. Malcolm Franks, group commercial manager, ICI Group Headquarters, UK. Alan Galley, director TQM, Railfreight Distribution, British Railways Board, UK. Mike Gidlow, director of quality, Ford of Europe, UK. Tony Hagstrùm, director general and CEO, Svenska Televerket, Sweden. Michael G. Heron, personnel director, Unilever, UK. Ole Jackobsen, president TAMROCK, Finland. Asbjùrn Larsen, managing director, SAGA Petroleum, Norway. Stig Larson, CEO, Swedish Rail (SJ), Sweden. Juhani Linnoinen, president and CEO, Leiras Oy, Finland. Tuomo Lahdesmaki, CEO, Leiras Oy, Finland. Terje Mikalsen, managing director, Mosvold Farsund A/S, Norway. Carl-Erik Nyquist, president and CEO, Vattenfall AB, Sweden. Jorma Ollila, CEO and group chairman, NOKIA Oy, Finland. Jim F.H. Park, managing director, ICI Films, UK. Anti Potila, president, Finnair, Finnland. Jan Rasmussen, managing director, ISS Quality Institute, Denmark. Lars Rudstrùm, executive vice president, Stora Papyrus AB, Sweden. Ursula Schùrcher, general manager quality management, Lufthansa, Germany. Antonio Sevillano Linares, corporate vice president, Iberia Airlines of Spain. Lauri Turner, quality consultant, Rank Xerox, UK. Alan Underwood, head of group quality, British Telecom, UK. Mads évlisen, president, Novo Nordisk, Denmark. Bengt ésterborg, deputy CEO, Swedish Mail, Sweden. 3 See Bjellad et al. (1993). 4 Marti Ahtisaari, president, Finland. Akito Arima, president of Riken, Japan. Paulo Evaristo Arns, Cardinal Archbishop, Brazil. Rafidah, Aziz, Minister of Trade and Industry, Malaysia. Hector Babenco, film director, Brazil. Susan Caroline Bambrick, professor, Australia. Eugenio Barba, theatre director, Denmark. Luciano Benetton, president of Benetton SpA, Italy. Georges Blanc, chef and owner of a Michelin three-star restaurant, France. Oriol Bohigas, architect, Spain. Jan Carlzon, former president of SAS, Sweden. Robert de Castella, world record holder 1981-1984 marathon, Australia. Dennis Conner, skipper of Americas Cup winning team, USA. Ivo CrameÂr, choreographer, Sweden. Lindsay E, Fox, entrepreneur, Australia. Kjell Fredheim, senior vice president for Corporate Development, Scandinavian Airline Systems, Sweden. Paulo Freire, educator and author, Brazil. Valery Gergiev, artist director and principal conductor of the Kirov Theatre, Russia. Michael Guerad, founder of nouvelle cusine, France. William E. Heineccke, entrepreneur, USA. Masanari Iketani, CEO of Tokyo Steel, Japan. Mariss Jansons, conductor of the Oslo and St Petersburg Philharmonic Orchestra, Latvia. Cheong Choong Kong, CEO of Singapore Airlines, Singapore. Tom Lasorda, manager of the Los Angeles Dodgers baseball team, USA. Lars Lùfgren, managing and artistic director of the Royal Swedish Dramatic Theatre, Sweden.

Fumihiko Maki, architect, Japan. Wilma Mankiller, principal in chief of the American Indian Cherokee Nation, USA. M.P. Narayanan, former chairman of Coal India, India. Curt Nicolin, former chairman of Asea Brown Boveri, Sweden. Arne Nñss, shipowner, Norway. Jorma Ollila, president and CEO Nokia Oy, Finland. William G. Pagonis, commanding general, USA. Anand Panyarachun, former prime minister of Thailand. J.M. Pei, architect, USA. EsaPekka Salonen, conductor, Finland. Ricardo Semler, businessman and author, Brazil. Robert Shaw, CEO of Shaw Industries, USA. Dick Smith, entrepreneur, Australia. Bert-Olof Svanholm, president and CEO of Asea Brown Boveri, Sweden. Michael H. Walsh, CEO of Tenneco, USA. 5 See Bjelland et al. (1995).

References Ackoff, R.L.(1981), Creating the Corporate Future, John Wiley & Son, New York, NY. Ackoff, R.L. (1984), A Guide to Controlling your Corporate Future, John Wiley & Son, New York, NY. Ashby, W.R. (1961), An Introduction to Cybernetics, Chapman & Hall, New York, NY. Bjelland, Dahl & Partners (1992), The Challenge of Innovation and Productivity: Shaping the Future in Permanent White Water, Meltzers, Oslo. Bjelland, Dahl & Partners (1993), The Gateway to High Performance, Meltzers, Oslo. Bjelland, Dahl & Partners (1995), The Performance Agenda, Meltzers, Oslo. D'Aveni, R. (1994), Hypercompetition: The Dynamics of Strategic Maneuvering, Basic Books, New York, NY. Diamancescu, D. (1992), The Seamless Enterprise: Managing Cross Functional Management Work, Harper & Row, New York, NY. Drucker, P.F. (1993), Post-capitalist Society, Butterworth Heineman, New York, NY. Ettlie, J., Bridges, W.P. and O'Keefe, R.D. (1984), `Òrganizational strategy and structural differences for radical versus incremental innovation'', Management Science, Vol. 30 No. 6, June, pp. 682-95. Granovetter, M.S. (1983), ``The strength of weak ties: a network theory revisited'', in Collins,R. (Ed.), Social Theory, Jossey-Bass, New York, NY. Grant, R.M. (1996a), ``Prospering in dynamically-competitive environments: organizational capability as knowledge integration'', Organizational Science, Vol. 7 No. 4, pp. 375-87. Grant, R.M. (1996b), ``Toward a knowledge-based theory of the firm'', Strategic Management Journal, Vol. 17, Special Issue, Winter, pp. 109-22. Hammer, M. and Champy, J. (1993), Reengineering the Corporation, Harper Business, New York, NY. Janis, I.L. (1982), Groupthink, Houghton, Mifflin, Boston, MA. Kanter, R.M. (1983), The Change Masters, Unwin Hyman, London. Kanter, R.M. (1986), ``Creating the creative environment'', Management Review, Vol. 75, pp. 11-12.

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Kanter, R.M., Stein, B.A. and Jock, T.D. (1992), The Challenge of Organizational Change: How Companies Experience It and Leaders Guide It, Free Press, New York, NY. Kochan, T.A. and Useem, M. (1992), Transforming Organizations, Oxford University Press, Oxford. Leonard-Barton, D. (1995), Wellsprings of Knowledge: Building and Sustaining the Sources of Innovation, Harvard Business School Press, Boston, MA. Lindblom, C.E. (1959), ``The science of muddling through'', Public Administration Review, Vol. 19, pp. 79-88. Lumpkin, G.T. and Dess, G.G. (1996), ``Clarifying the entrepreneurial orientation construct and linking it to performance'', Academy of Management Review, Vol. 21 No. 1, pp. 135-72. Nadler, D.A. (1977), ``Concepts for the management of organizational change'', in Hackman, R., Lawler, E. and Porter, L. (Eds), Perspectives on Behavior in Organizations, McGraw-Hill, New York, NY.

Nadler, D.A. and Tushman, M.L. (1988), Strategic Organization Design, Scott Foresman, Glenview, IL. Nelson, R.R. and Winter, S.G. (1982), An Evolutionary Theory of Economic Change, Belknap Press, Cambridge, MA. Nonaka, I. and Takeuchi, H. (1995), The Knowledge Creating Company, Oxford University Press, Oxford. Quinn, J.B. (1992), Intelligent Enterprise, The Free Press, New York, NY. Senge, P.M. (1990), ``The Fifth Dicipline''. The Art and Practice of the Learning Organization, Doubleday/ Currency, New York, NY. Steinbruner, J.D. (1974), The Cybernetic Theory of Decision, Princeton University Press, Princeton, NJ. Weick, K.E. (1979), ``Management of organizational change among loosely coupled elements'', in Goodman, P.S. et al. (Eds), Change in Organizations, Jossey-Bass Publishers, London.

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Measuring the dimensions of market knowledge competence in new product development Tiger Li and S. Tamer Cavusgil

The authors Tiger Li is Assistant Professor, Department of Marketing and Business Environment, Florida International University, Miami, Florida, USA. S. Tamer Cavusgil is The John W. Byington Endowed Chair in Global Marketing, and Executive Director, Center for International Business Education and Research, The Eli Broad Graduate School of Management, Michigan State University, East Lansing, Michigan, USA. Keywords Product management, Market intelligence, Marketing, R&D, Measurement Abstract The dimensions of market knowledge competence (MKC) in new product development are still not sufficiently understood. This research presents a conceptual framework of MKC that is multidimensional. It further develops items that assess the distinct dimensions of MKC. The measures of the three dimensions are validated through data collected from the software industry. The findings also show that a multidimensional model of MKC provides a more adequate explanation of new product outcomes than a unidimensional model. Suggests potential aims for future research such as the conduct of a comparative study involving multiple categories of products.


Market knowledge competence (MKC) consists of learning activities in the market that have the potential to influence a firm's new product performance. MKC can be beneficial for companies in developing new products because it allows them to gain insight into market characteristics conducive to new product acceptance. Owing to its important role, MKC has emerged as a significant topic in product innovation research. In a study of market knowledge and its strategic implications, Glazer (1991) views MKC as one of the most valuable assets in an organization. Sinkula (1994), in an examination of market information processing, considers MKC an organizational core competence. Further, in an analysis of the capabilities of market-driven organizations, Day (1994, p. 41) contends that MKC is one of ``the outside-in capabilities'' that connects new product development to the external market environment. While these studies have enriched our understanding, a major aspect remains largely unaddressed. Until recently, few scholars have examined the psychometric features of MKC, particularly, the dimensions involved in new product development. Because of this gap, it is unclear whether MKC is a unidimensional or multidimensional concept and whether its effects on new product development can be investigated empirically. Examination of dimensionality is essential in concept development and testing (Anderson and Gerbing, 1988). In recent years, advances in measurement theories and analytical procedures have enabled a better investigation. It involves two stages: conceptual and empirical. In the first stage, the researcher defines the concept under investigation and determines whether it is multidimensional (comprising multiple constructs) or unidimensional (comprising a single construct) based on theoretical underpinnings. Accordingly, hypotheses are proposed as a priori for a subsequent empirical inquiry. In the second stage, data are collected and statistically validated to confirm or disconfirm the hypotheses. Particularly, the use of structural modeling and confirmatory factor analysis overcomes shortcomings of previous validation approaches (Babin and Griffin, 1998; Bagozzi et al., 1991). Because of its rigor and systematicity, this approach has been increasingly adopted in management, marketing, and psychology research (Byrne, 1994; Gerbing and Anderson, 1988; Lee and Ashforth, 1990; Shimp and Sharma, 1987).

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Measuring the dimensions of market knowledge competence


Tiger Li and S. Tamer Cavusgil

This study intends to achieve three objectives pertaining to the dimensionality of MKC. The first is the identification of MKC as a multidimensional concept. Based on a growing body of literature in new product innovation and management, we conceive MKC as comprising three components: learning about customers; learning about competitors; and the marketing-R&D interface. This conceptualization contributes to the literature through its formal treatment of the MKC components as three distinct constructs. Our conception contrasts to those in previous research. Although Narver and Slater (1990, p. 22) use three comparable components to describe market orientation, they ``hypothesize a one-dimension construct'' for the three components. Similarly, Kohli et al. (1993) do not differentiate market learning activities. The second objective is to develop items that assess the distinct dimensions of MKC. This addresses measure ambivalence in previous research. In Narver and Slater (1990), indicators of cultural norms were mingled with behavioral activities in measuring market orientation. In Kohli et al. (1993), items of customer interaction and competitor intelligence were mixed as the indicators of one construct. The third objective is to validate empirically the three dimensions of MKC by using structural equations modeling and confirmatory factor analysis. Using rigorous analytical procedures in measure validation is an advancement in research on market knowledge. These procedures were not present in Narver and Slater (1990) and did not validate clearly construct dimensions in Kohli et al. (1993). The article is organized into five parts. First, we develop a conceptual framework for the study of MKC as a multidimensional concept. Next, we describe the three dimensions of MKC and its outcomes. Third, we explain the methods used in the empirical investigation. Fourth, we present the test results. Finally, we discuss implications and future research directions.

The conceptual framework Market knowledge competence as a series of processes We define market knowledge competence in new product development as a multidimensional structure comprising three processes

that generate and integrate market knowledge: (1) learning about customers; (2) learning about competitors; and (3) the marketing-R&D interface. This view of competence as a series of processes stems from several studies. In his research on organizational capabilities, Day (1994, p. 38) sees a competence as ``complex bundles of skills and collective learning, exercised through organizational processes''. Prahalad and Hamel (1990) identify market interaction and functional integration as a core competence. Furthermore, in an analysis of key issues in product innovation, Druker (1985) traces a firm's competence in new product development to its processes for generating knowledge about customers and competitors and integrating such knowledge with technology. The literature on new product development furnishes persuasive arguments for the importance of all three components of MKC. Learning about customers generates knowledge that allows a firm to explore innovation opportunities arising from emerging market demand and reduces potential risks of misfitting customer needs (Cooper, 1992; Griffin and Hauser, 1993; Hauser and Clausing, 1988; Li and Calantone 1998; Von Hippel, 1986). Learning about competitors, on the other hand, enables a firm to understand weaknesses and strengths of rivals, and to create benchmarks for new product development (Day and Wensley, 1988; Lawless and Fisher, 1990). From an information perspective (Dickson, 1992), market knowledge generated from the two processes creates an information asymmetry in favor of firms that are more intensive in customer and competitor learning. The importance of the marketing-R&D interface is addressed by functional integration theory (Griffin and Hauser, 1992; Gupta et al., 1986; Li, 1999; Song and Dyer, 1995). According to the theory, the marketing-R&D interface is the process in which marketing and R&D functions communicate and cooperate with each other. This process is critical because it integrates knowledge about market needs with knowledge about how to create a product to meet the needs. While the first is the province of the market function, due to its interaction with endusers, the second is the province of the R&D

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function because of its specialization. If the two functions do not communicate and cooperate, however, the market needs and product creation will be segregated, resulting in a mismatch between what is produced and what is needed. The rationale for distinct dimensions Concept multidimensionality requests both more than one component and differentiation between or among them (Byrne, 1994; Lee and Ashforth, 1990).There are two major reasons for treating each aspect of MKC as distinct. First, learning about customers requires a different set of cognitive activities than about competitors (Day and Wensley, 1988; Griffin and Hauser, 1993; Li and Calantone, 1998). Furthermore, both of these processes are differentiable from the marketing-R&D interface. The former involves market interaction, whereas the latter pertains to internalization of market knowledge (Gupta et al., 1986). Second, from the perspective of organizational environment (Lawrence and Lorsch, 1967), a firm confronts different customer and competitor characteristics. For example, in a new product market where competition is not yet intensified, a firm may place considerable emphasis on learning about customers. Likewise, a firm may engage in each learning process with varying intensity because management perceives each as more or less important. This is consistent with Day and Wensley (1988) and Dickson (1992) who observe variations in organizational focus depending on environmental conditions. Similarly, a firm may devote more or less efforts to the marketing-R&D interface, as compared to the other two processes, because of management's emphasis (Workman, 1993). In the proceeding discussions, arguments are made for dimension inclusion and distinction. Because each process plays a vital role in generating and integrating market knowledge for new product development, the three are necessary components of MKC. From a management perspective, one does not expect to see that an organization engaging in one process would be exclusive of the other two processes (Day and Wensley, 1988). Statistically, a covariation among the three distinct dimensions can be expected and accounted for a general MKC structure. In summary, we anticipate three

correlated but distinct dimensions of MKC. Therefore, we propose the following two-part hypothesis: H1a: Market knowledge competence in new product development is best conceived as a multidimensional structure with three correlated but distinct constructs: customer learning process, competitor learning process, and the marketingR&D interface. H1b: A model based on the multidimensionality of market knowledge competence provides a more adequate explanation of new product outcomes than does a unidimensional model. A comparison Our approach is distinguishable from research on market orientation in several aspects. First, our conceptualization is distinct from the culture view of market orientation. Based on Day's (1994, p. 47) suggestion of using ``the relevant process'' to diagnose organizational competence, we view MKC as a series of organizational processes. In contrast, market orientation is commonly perceived as a culture (Deshpande and Webster, 1989; Deshpande et al., 1993; Narver and Slater, 1990). The distinction is notable: one is a set of behavioral processes and the other is a value system. The distinction is consistent with a recent study by Slater and Narver (1995, p. 72) that distinguishes organizational learning processes from market orientation and indicates that ``[a]n important area for further research is to understand how features of the organization's culture and climate facilitate those processes, as well as whether they lead to superior learning outcomes''. The adoption of the MKC notion avoids a concept ambiguity. The ambiguity arises, as Slater and Narver (1995, p. 67) suggest, when ``[w]hether orientation means a specific set of organizational values or specific set of behaviors has not been clearly resolved (Day, 1994). For example, Deshapande and Webster (1989), Day (1994), and Deshpande et al. (1993) describe market orientation as a form of culture. In contrast, Kohli and Jaworski (1990, p. 1) describe it as `the implementation of the marketing concept', which is a behavioral definition''. Second, our measures will be distinct. In this study, we will develop measures that focus on behavioral activities of learning about customers and competitors. In

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contrast, most of Narver and Slater's (1990) measures of market orientation were more reflective of cultural norms or customer satisfaction. For example, among the six items of customer orientation, five (customer commitment, create customer value, customer satisfaction objectives, measure customer satisfaction, and after-sales service) are value and satisfaction indicators which are devoid of a concentration on learning activities. On the other hand, although Kohli et al. (1993) considered learning activities, their measures were restricted. For example, only one item (``We are slow to detect fundamental shifts in our industry, e.g. competition, technology, regulation'') was retained for competitor intelligence and it did not assess competitor learning directly. Furthermore, their measures examined only one aspect of customer learning: information acquisition (e.g. We meet customers at least once a year). Other aspects, such as information processing, were not evaluated. In addition, their indicator of competitor intelligence was not differentiated from customer learning activities. Third, the measure validation in this study will involve rigorous procedures. In Narver and Slater's (1990) study, traditional procedures, such as Cronbach alpha and item-total correlations were adopted for measure validation. Because confirmatory factor analysis and structural equations modeling were not used, the dimension remains an unsolved issue. For example, although the authors view market orientation as a unidimensional construct, they did not attempt to use confirmatory factor analysis to discriminate it from other constructs. In Kohli et al. (1993), confirmatory factor analyses were conducted, but the measures and dimensions were not clearly validated[1].

Three dimensions of market knowledge competence Learning about customers This process refers to the set of behavioral activities that generate knowledge pertaining to customer current and potential needs for new products. The process has three aspects: customer information acquisition, interpretation, and integration, as proposed by organizational learning theory (Huber, 1991; Sinkula, 1994). Each plays an integral role in generating knowledge about customers.

Information acquisition provides data input concerning customers for analysis. Interpretation is the procedure in which the data are processed and analyzed. Next, the processed information is integrated into new product design. The three aspects adequately capture the full domain of customer learning process and improve on Kohli et al.'s (1993) measures that rivet on information acquisition. While information acquisition allows researchers to possess raw data, interpretation and integration enable them to organize and structure the acquired information. From the information processing perspective (Glazer, 1991), organized and structured information is considered as knowledge. Customer learning process is critical to new product development because it allows a firm to: . identify idiosyncratic characteristics of customer segments in order to design product attributes (Griffin and Hauser, 1993); . uncover emerging markets needs, which often underpin new product functions (Von Hippel, 1986); or . package customer knowledge itself as part of a new product offering (Glazer, 1991). Wernerfelt (1994) offers an efficiency argument for the importance of customer learning in product development. According to him, such learning is interactive, involving both the producer and the customer, and leads to efficient product design since both parties have a stake in maximizing joint payoffs. In the decade-long NewProd project involving firms in the USA, Candada, and Europe, Cooper (1992, p. 124) identifies learning about customers a major contributor to a firm's new product advantage; these activities ``determine product performance requirements and confirm or refute that proposed features were indeed customer benefits and of value to customers''. Further, Sanchez and Elola (1991) believe that customer learning may improve new product performance since it is the most frequent method of finding out whether or not there is a suitable market for the new product. Moreover, Griffin et al. (1995) posit that firms more intense in customer learning should generally surpass the average firm in such market performance measures as profits.

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Learning about competitors This process refers to the set of behavioral activities that generate knowledge about competitors' products and strategies. Similar to customer learning, it involves information acquisition, interpretation, and integration. The three aspects capture the domain of competitor learning process and provide a full view of how data about competitors are obtained and transformed into organized and structure information. The adoption of the three aspects also sets the domain of competitor learning apart from that of competitor orientation (Narver and Slater, 1990) that is devoid of a concentration on a learning process. The latter primarily focuses on strategic responses of a corporation (e.g. ``Respond rapidly to competitors' actions'' and ``Target opportunities for competitor advantage''). According to competition intelligence literature (Day and Wensley, 1988; Dickson, 1992), competitor learning plays two significant roles in product competition: position diagnostic benchmarking and position advantage building. In a given product market, firms generally can be classified into one of three positions: inferiority, parity, and superiority. In the first instance, a firm is inferior to its major competitors on key dimensions of product innovation, such as technology ownership, resource control, and product characteristics (functions, forms, performance). In the second case, a firm gains comparable footing on these dimensions. In the third case, a firm is superior to its major competitors. Learning about competitors is strategically important since it enables a firm to benchmark its positions. ``Without a proper diagnosis, managers cannot choose the best moves to defend or enhance the current position'' (Day and Wensley, 1988, p. 1). Competitor learning affects new product advantage because it creates information asymmetry among companies that are more or less intensive in this regard. A firm with more competitor information can turn its knowledge to product advantage in a number of ways. These include pitting its strengths against the rival's weakness, internalizing the competitor's strengths by first imitating and then improving on them, or nullifying the strengths of others by differentiating its own products. Furthermore, competitor learning may exert a positive impact on new product market performance. When a firm is more

knowledgeable about its competitors' products, it will be able to design products that have better chances of winning market acceptance. Marketing-R&D interface This refers to the process in which marketing and R&D functions communicate and cooperate. As proposed by functional integration theory (Griffin and Hauser, 1992; Gupta et al., 1986; Li, 1999; Song and Dyer, 1995), close interfacing improves the prospect of new product acceptance in the market, whereas lack of integration increases the degree of mismatch between market needs and what is developed. Specifically, a close marketing-R&D interface allows a firm to realize its technological capability more efficiently than the competition through identifying innovative product features desired by the market, leading to new product advantage. Interfacing also affects product market performance because it enables a firm to increase its acceptance rates for new products by reducing the customer's cognitive and behavioral resistance to product introduction (Ram, 1989). Given its importance for new product development, the marketingR&D interface has received considerable attention in the literature (Calantone et al., 1995; Griffin and Hauser, 1992, Gupta et al., 1986; Song and Dyer, 1995; Souder, 1988). The findings are either consistent with or supportive of the proposition that the marketing-R&D interface enhances new product outcomes. New product outcomes Product competitive advantage and market performance are the most relevant outcomes from the MKC processes. Previous research (Calantone and Cooper, 1981; Cooper, 1985, 1992; Crawford, 1987; Edgett et al., 1992) in new product development suggests that the presence of product attributes such as newness, reliability, productivity, and uniqueness provides a concrete measure of product competitiveness and differences among products on these attributes offer a direct evidence of advantage. Product competitive advantage exerts an impact on market performance which is assessed by financial indicators such as profit and return on investment, because of the close relationships between product attributes and buyers' preferences. It is traditionally assumed in

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marketing that customers' preference formation is based on product attributes. When comparing products, buyers generally form favorable perceptions of new products with superior attribute features. They prefer such products both in terms of purchase preferences and actual behavior when the benefits of these features outweigh the costs (Alpert and Kamins, 1995).

Research methods Context and sample The computer software industry is selected for our empirical examination for several reasons. The first is the likelihood of observing the three MKC processes. Interviews with executives in software companies suggested that software firms engage in the three types of processes to different degrees. Second, a focus on software allowed us to develop uniform measures for some of the new product outcomes that are idiosyncratic to the industry; this reduces degrees of random error which could be serious in surveys of multiple product categories due to informants' diverse industry background. Third, the software industry is characterized by a high degree of product innovation and frequent product introductions, offering a relevant research setting. A firm's new product development program[2] was selected to assess the three components of MKC because the program activities directly affect the new product outcomes (Ettlie, 1995; Moorman, 1995). The latter were assessed at the product level. Consistent with Green et al. (1995) and Moorman (1995), a new product is defined as one in which there is a major functional change[3]. Three types of new products were identified in past research: inventive, innovative, and incremental. An inventive product refers to a product created for the inception of a product category, such as power steering (1930), television (1935), and computer (1946). An innovative product is a product with a major functional change. For example, each generation of floppy disks (e.g. 8in., 5in., 3in.) was innovative since each involved substantial difference in access speed, storage capacity, and ease of use. Another example is Lotus Notes. Although network software products existed before its introduction, Lotus Notes allowed everyone

on the network to share information and build common data bases, an important function other products did not offer. An incremental product refers to a product with some modifications such as Kellogg's Eggo NutriGrain Waffles, the only ``newness'' being the addition of more wheat grain. In this research, inventive products were not chosen because of their limited number and long adaptive cycle, which makes assessment difficult except by case study methods. We obtained a national database of the software industry from CorpTech, Inc., which specializes in information on hightechnology companies. A total of 1,074 firms were profiled in terms of sales, size, corporate age, products, and address and phone number of executives. We used a three-stage procedure to enhance the response rate. First, we sent a personalized letter to the president/ CEO of the company, along with the research questionnaire and a prepaid envelope. Second, a postcard reminder was followed by another wave of survey questionnaires. Finally, a telephone follow-up was conducted among nonrespondents. Aside from 16 questionnaires returned undeliverable, 23 companies wrote or called to express regret that their policies prevented them from answering the questionnaire. During the telephone follow-up, we learned that another 82 firms did not participate because they were contractors or consultants and did not develop their own new software products. From the pool of 953 firms remaining, 236 usable questionnaires were received, resulting in a 24.8 percent response rate, which compares favorably with rates of previous surveys among top executives (Gatignon and Robertson, 1989). We conducted two tests to examine the possibility of nonresponse bias. First, we compared the respondents in the sample and the potential respondents in the sampling frame on three dimensions, firm size, annual sales, and corporate age. A chisquare test revealed a lack of significant difference between the sample and the sampling. Second, we compared early with late respondents (Armstrong and Overton, 1977).The first 75 percent of returned questionnaires were defined as early response[4]. The last 25 percent, which were received after the telephone follow-up, were considered late responses and were deemed representative of firms that did not respond. When the means of the 18 indicators of MKC constructs for

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early and late questionnaires were compared, no significant differences were found. Furthermore, a comparison between the first 25 percent and the last 25 percent did not show significant differences. Accordingly, we assume that nonresponse bias does not appear to be a significant problem. Following Calantone et al. (1995), we chose the president/CEO of the software firm as the key informant owing to position and knowledge, two established criteria. The first criterion pertains to whether the informant is in a position to generalize `àbout patterns of behavior [related to the content of inquiry], after summarizing either observed or expected organizational relations'' (Seidler, 1974, p. 817). Presidents/CEOs of software firms are recognized organizers of software development events and can generalize about their firm's behavior in software development. Their leadership role is well documented in the business press (Ichbiah and Knepper, 1991; Karlgaard, 1993; Taft, 1994; William and Hart, 1994). They are impelled to play such a role because software development is the ``pivotal event'' of their firm (Schulmeyer and McManus, 1992), and in this industry more than any other, a firm's future hinges on the success or failure of a new product. The second criterion pertains to whether the informant is knowledgeable about the content of inquiry. In our pretest of nine software companies, we adopted a self-assessment recommended by Kumar et al. (1993), using a seven-point Likert scale ranging from not knowledgeable to very knowledgeable. The mean response was 6.44 (s = 0.53), which exceeded 5.0, the threshold suggested by the authors. Measure development Scale items were developed to measure the dimensions of MKC in four stages as suggested by Kim and Frazier (1997) and Spector (1992). First, a review of the literature in marketing and new product development resulted in a pool of tentative measures. Second, content validation was conducted by submitting a questionnaire of the defined constructs and measures to a panel of five academicians in marketing, computer science, and engineering who are recognized as authorities on product development in their fields. They were asked to assign each measure to the construct they considered appropriate and to add other

measures they thought could represent the constructs. Third, items were refined through interviews with executives from three software companies, who were requested to comment on the clarity and the relevance of the measures. Finally, a pretest was conducted among presidents/CEOs of nine software firms using the refined questionnaire. Learning about customers Six items on a seven-point semantic differential scale were used. Five were adapted from previous research (Edgett et al., 1992; Griffin and Hauser, 1993; Sanchez and Elola, 1991) to assess information acquisition, interpretation, and integration. For example, information acquisition was assessed by: ``We rarely/regularly meet customers to learn their current and potential needs for new products''. The item ``We casually/systematically process and analyze customer information'' gauged modes of information interpretation. Integration was measured by: ``Customer information is barely/fully integrated in new product software design''. Following Spector's (1992) suggestion, a set of verbal anchors of frequency scales (ranging from rarely to regularly) and intensity scales (ranging from barely to fully) was used to tap these behavioral activities. Finally, one item that directly measured depth of customer knowledge was used as a check (Spector, 1992) on behavioral activities (see the Appendix for all the measures). Learning about competitors A five-item scale adapted from Day and Wensley (1988), Dickson (1992), and Lawless and Fisher (1990) assessed the three aspects of this process: competitor information acquisition, interpretation, and integration. For example, the item ``We rarely/regularly search and collect information about competitors' products and strategies'' assessed the intensity of competitor information acquisition. The interpretation mode was measured by: ``We casually/systematically analyze information about competitors''. Integration was assessed by: `Ìnformation about competitors' products is scarcely/fully integrated as a benchmark in our new product design''. The marketing-R&D interface A seven-item scale was adapted from prior research in new product development (Dougherty, 1987; Gupta et al., 1986; Griffin and Hauser, 1992; Souder, 1988). The focus

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was marketing-R&D communication and cooperation. Three items using verbal anchors of frequency (ranging from rarely to regularly) measured communication activities. For example, intensity was assessed by: ``Marketing and R&D rarely/regularly communicate for new product development''. Three items assessed the extent of cooperation in establishing product development goals, generating and screening new product ideas, and evaluating and refining new products. For example, cooperation in setting goals was gauged by: ``Marketing and R&D seldom/fully cooperate in establishing new product development goals and priorities''. One item ``Technological knowledge and market knowledge are never/ fully integrated in our new product development'' was used to check directly the extent of marketing-R&D interface. New product competitive advantage Four product attribute measures (newness, uniqueness, productivity, functionality) were borrowed from Calantone and Cooper (1981), Cooper (1985; 1992), and Crawford (1987), who identified these as valid indicators of new product competitiveness. Constructed in a definitional statement (e.g. in terms of newness, i.e. the extent to which a product is new to the market), each item asked respondents to assess their firm's product competitiveness vis-aÁ-vis its largest competitor's with respect to the stated product attributes, using verbal anchors of superiority scale (ranging from not superior at all to extremely superior). New product market performance Three items, both judgmental and objective measures, were adopted. The judgmental items were relative intraindustry measures borrowed from Dess and Davis (1984), Robinson and Pearce (1988), and Samiee and Roth (1992). They allowed the informant to assess the company's software market performance on before-tax profit and return on investment relative to the competition using a five-point scale. Each scale point reflected company performance in the served market at intervals of 20 percent. The objective measure was pre-tax profit margin.

Results After the data were collected, measures were subjected to purification (Anderson and

Gerbing, 1988). We examined the item-tototal correlations for the statements in each of the proposed scales and deleted those with low correlations that did not represent an additional domain of interest[5]. Cronbach's alpha for each construct is shown in the Appendix. The alpha coefficients for the five constructs range from 0.81 to 0.95, indicating satisfactory reliability. To check for informant esteem bias, the distribution of the five constructs was examined. Esteem bias refers to an informant's subconscious attempt to maintain self-esteem or to impress investigators (Kumar et al., 1993). Serious bias may cause systematic error (for example, respondents all choose an extremely high level of performance) and produce confounding results. Data analysis did not reveal a serious problem. As shown in the Appendix, on a five-point scale, the mean for the new product performance construct (F4) is 3.43 and there is a substantial spread, indicating that various levels of product performance were reported. In addition, on a seven-point scale, the mean for customer learning (F1) is 4.93, with a standard deviation of 1.23, indicating substantial amount of variation. Dimensionality A principal components factor analysis was conducted as a preliminary step to assess dimensions of the three constructs of MKC. The first four eigenvalues extracted were 10.64, 2.39, 1.35, and 0.57. Three eigenvalues were larger than 1.0, suggesting a threefactor solution. Accordingly, three principalaxis factors were extracted by iterating for communalities. As reported in Table I, the orthogonal rotation of the resulting three factors further shows a clear three-factor solution. To assess the construct discriminant validity, we adopted a procedure recommended by Bagozzi et al. (1991). A series of two-factor models were estimated in which the individual factor correlations, one at a time, were restricted to unity. Subsequently, the fit of the restricted model was compared with that of the original model. As shown in Table II, the relevant chi-square difference tests were all significant. For example, the comparison between customer learning and competitor learning provided a chi-square difference of 591.46 (p < 0.001), suggesting that these constructs are distinct.

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Table I Discriminant validity of construct measures factor rotation Constructs Learning about customers (F1)

Learning about competitors (F2)

Marketing-R&D interface (F3)

Items

F1

F2

F3

V11 V12 V13 V14 V15 V16 V21 V22 V23 V24 V25 V31 V32 V33 V34 V35 V36 V37

0.75 0.67 0.82 0.70 0.69 0.78 0.34 0.27 0.17 0.28 0.15 0.29 0.28 0.22 0.22 0.28 0.20 0.40

0.23 0.33 0.26 0.40 0.18 0.19 0.84 0.88 0.87 0.83 0.88 0.16 0.15 0.29 0.30 0.23 0.16 0.15

0.42 0.42 0.15 0.30 0.50 0.31 0.24 0.19 0.25 0.24 0.15 0.79 0.83 0.68 0.83 0.84 0.85 0.79

Table II Discriminant analysis of the construct measures 2

Constructs

Customer learning (F1) vs competitor learning (F2) Unconstrained 182.94 Constrained 774.40 Customer learning (F1) vs marketingR&D interface (F3) Unconstained 285.49 Constrained 687.79 Competitor learning (F2) vs marketing-R&D interface (F3) Unconstrained 234.61 Constrained 1,258.77

df

2a

43 44

591.46

64 65

402.30

53 54

1,024.16

Note: a The 2 were all significant (p < 0.001)

Multidimensional structure To assess the multidimensional structure of MKC, we estimated the goodness of fit of six models by using confirmatory factor analysis. The results are shown in Table III. The first

was a null model, which served as a baseline and assumed independence of all variables. The second was a competing one-factor model which loaded the 18 indicators of the three constructs into one factor. The next three were a series of models comprising two factors. The last was a three-factor model representing the multidimensional structure of MKC. In that model, the three sets of submeasures had a target loading on their respective factors and a nontarget loading on the other factors. In addition, the three factors were correlated, since they shared a common structure of MKC. Errors associated with each measure were uncorrelated. The chisquare difference between the one-factor model and the null model is 2,873.53 (p < 0.001), suggesting an improvement, but its comparative fit index (CFI) was 0.621, which indicates a poor fit to the data. The CFIs of the three two-factor models were 0.770, 0.823, and 0.688 respectively, suggesting a further improvement over the null model. Finally, compared to the null model, the three-factor model offered a chi-square difference of 4,226.16 (p < 0.001), a significant improvement. Compared to the one-factor model, it resulted in a chi-square difference of 1,352.63 (p < 0.001). Compared to the three two-factor models, it provided chi-square differences of 665.61 (p < 0.001), 423.35 (p < 0.001), and 1,042.62 (p < 0.001) respectively. Further, its CFI was 0.915, indicating an acceptable fit (Bentler, 1992). The correlations among the three constructs from the three-factor model were estimated. As shown in Table IV, the correlations among the three constructs of MKC are significant, suggesting three correlated but distinct dimensions. Overall, the fit indices point to the threefactor model as the most appropriate solution, which supports H1a in regard to the multidimensional structure of MKC.

Table III Fit indices for the multidimensional structure of market knowledge competence and competing models Models Null One factor Two factors (a) F1 and F2 combined Two factors (b) F1 and F3 combined Two factors (c) F2 and F3 combined Three factors

2

df

2/df

NFI

NNFI

CFI

4,750.1 1,876.64 1,189.62 947.36 1,566.63 524.01

153 135 134 134 134 132

31.04 13.90 8.88 7.07 11.69 3.97

± 0.605 0.750 0.801 0.670 0.890

± 0.571 0.738 0.798 0.644 0.901

± 0.621 0.770 0.823 0.688 0.915

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Table IV Correlation estimates of the three-factor model Constructs

F1

Customer learning (F1) Competitor learning (F2) Marketing-R&D interface (F3)

F2

1 0.66 (3.88)a 0.77 (5.92)

F3

1 0.54 (3.60)

1

Notes: Numbers in parentheses denote t-value

a

Nomological validity and structural model As the first step in assessing nomological validity, we estimated the measurement model using the covariance matrix of the indicators (see Table V) of both the exogenous and endogenous constructs as input. The chi-square statistic is significant (2264 = 747.97, p < 0.001), as might be expected given the size of the sample and the number of indicators estimated (Bagozzi et al., 1991; Bentler, 1990). Yet, the CFI (0.916) and the average off-diagonal standardized residual (AOSR, 0.039) suggest that the model represents an adequate fit to the data. The

complete results are shown in Table VI. Each of the relevant factor loadings is large and significant at the level of 0.01. Overall, the measurement model provides satisfactory evidence of unidimensionality for the measures (Gerbing and Anderson, 1988). The validation procedure involved computing reliability for each set of measures. As shown in the Appendix, the coefficient alpha for each set indicates satisfactory reliability. Next, the full structural model was estimated using the ML method in EQS. Nomological validity of the MKC measures was assessed by linking the three constructs of MKC with new product advantage and market performance. As shown in Figure 1 and Table VII, the chi-square value is significant (2264 = 745.83, p < 0.001), but CFI is 0.916 and AOSR is 0.039, providing evidence of an adequate model fit. Following Anderson and Gerbing (1988), our hypothesized structural model was evaluated against the previously estimated measurement model. As expected, the CFI and AOSR values of the two models are identical. Discrepancies in these indices

Table V Variance-covariance matrix Items V11 V12 V13 V14 V15 V16 V21 V22 V23 V24 V25 V31 V32 V33 V34 V35 V36 V37 V41 V42 V43

V51 V52 V53 V54

V11 V12 V13 V14 V15 V16 V21 V22 V23 V24 V25 V31 V32 V33 V34 V35 V36 V37 V41 V42 V43 V51 V52 V53 V54

1.95 1.28 1.14 1.17 4.84

1.98 1.41 1.64 1.38 1.34 1.49 1.38 1.16 1.03 1.19 0.94 1.12 1.35 1.22 1.16 1.18 1.09 1.25 0.78 0.84 0.76 0.92 1.21 0.99 1.10 5.23

1.69 1.34 1.21 1.27 1.27 1.43 1.18 1.04 1.24 1.07 1.02 1.12 1.08 1.17 1.08 1.00 1.11 0.82 0.77 0.81 0.94 1.24 0.96 1.03 5.34

2.62 1.75 1.35 1.51 1.55 1.36 1.03 1.24 1.14 0.95 1.02 1.01 0.97 1.04 0.84 1.03 0.75 0.83 0.75 0.86 1.13 0.85 1.08 4.60

2.17 1.35 1.42 1.64 1.60 1.22 1.42 1.27 1.09 1.08 0.98 1.14 1.19 1.06 1.13 0.85 0.76 0.67 0.91 1.08 0.91 0.91 4.55

1.70 1.25 1.17 1.01 0.88 0.93 0.82 1.04 1.17 1.08 1.17 1.20 1.11 1.28 0.82 0.79 0.86 1.01 1.13 1.01 1.04 5.13

2.04 1.23 1.12 0.89 1.10 0.91 1.01 1.14 1.09 0.95 0.96 0.95 1.19 0.74 0.78 0.68 0.91 1.16 0.99 1.03 4.74

3.06 2.72 2.27 2.41 2.40 0.88 1.14 1.37 1.32 1.26 1.07 1.12 1.03 0.95 0.90 0.87 1.44 0.97 1.18 4.68

2.99 2.33 2.30 2.46 0.90 1.01 1.17 1.22 1.06 0.92 0.90 1.00 0.76 0.77 0.81 1.24 0.80 0.92 4.36

2.46 2.03 2.23 0.89 0.92 1.08 1.10 1.00 0.85 0.89 0.80 0.72 0.76 0.66 1.05 0.73 0.81 4.15

2.64 2.27 0.96 0.99 1.13 1.19 1.03 0.95 0.97 0.96 0.96 0.89 0.68 1.14 0.76 0.96 4.44

3.10 0.79 0.77 1.16 1.06 0.92 0.78 0.78 0.85 0.90 0.88 0.71 1.12 0.76 0.84 3.94

1.87 1.51 1.22 1.54 1.45 1.34 1.39 0.76 0.74 0.64 0.92 1.03 0.93 0.97 5.42

2.25 1.75 1.60 1.58 1.69 1.47 0.78 0.72 0.80 1.02 1.23 1.06 1.14 5.12

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2.43 1.45 1.30 1.40 1.28 0.87 0.77 0.86 0.87 1.25 1.02 1.09 4.68

2.02 1.69 1.54 1.49 0.86 0.78 0.77 0.98 1.20 1.04 1.08 5.08

1.91 1.59 1.57 0.81 0.78 0.86 0.98 1.14 1.12 1.19 4.89

2.05 1.50 0.79 0.73 0.81 0.99 1.12 1.00 1.19 4.88

1.82 0.83 0.79 0.98 1.11 1.26 1.25 1.36 5.09

1.33 0.96 0.88 0.60 0.81 0.73 0.73 3.41

1.39 0.91 0.51 0.76 0.77 0.74 3.31

2.00 0.57 0.84 0.88 0.98 3.55

2.03 1.15 2.07 1.43 1.22 2.23 4.96 5.04 5.09




Table VI EQS measurement model results Constructs

Item

Customer learning (F1)

V11 V12 V13 V14 V15 V16 V21 V22 V23 V24 V25 V31 V32 V33 V34 V35 V36 V37 V41 V42 V43 V51 V52 V53 V54

Competitor learning (F2)

Marketing-R&D interface (F3)

New product performance (F4)

New product advantage (F4)

Standardized itemconstruct loading

t-value

0.87 0.86 0.78 0.80 0.85 0.81 0.94 0.94 0.89 0.89 0.85 0.84 0.85 0.71 0.90 0.92 0.86 0.89 0.85 0.82 0.65 0.73 0.83 0.72 0.78

± 18.20 15.43 16.14 17.88 16.25 ± 29.33 24.53 24.00 21.39 ± 16.85 12.86 18.74 19.60 17.15 18.23 ± 13.51 10.40 ± 12.42 10.77 11.74

Note: 2(264) = 747.97; NFI = 0.876; NNFI = 0.904; CFI = 0.916; AOSR = 0.039; and largest standardized residual = 0.149 (94 percent of all standardized residuals between ±0.1 and 0.1) Figure 1 An estimated multidimensional model of market knowledge competence and new product outcomes

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Table VII Fit indices for the multidimensional and unidimensional models Models

Unidimensional Multidimensional

2

df

2,130.86 273 745.83 264

2

/df

NFI

NNFI

CFI

AOSR

7.81 0.647 0.644 0.676 0.070 2.83 0.876 0.905 0.916 0.039

would signal a problem, since our hypothesized framework was a saturated model in which all paths relating the constructs to one another were estimated. To assess H1b, the hypothesized multidimensional model was compared with a competing unidimensional model. As shown in Table VII, the unidimensional model yielded a chi-square of 2,130.86 while the multidimensional model resulted in a chisquare of 745.83, suggesting a significant improvement. Furthermore, the improvement in the NFI, NNFI, and CFI (0.876 vs 0.647, 0.905 vs 0.644 vs 0.905, and 0.916 vs 0.676) and the AOSR (0.039 vs 0.070) for the multidimensional compared to the unidimensional model is substantial, indicating that the former presents a better fit to the data. In sum, the multidimensional framework offers a more adequate explanation of new product outcomes and, thus, provides evidence in support of H1b. The standardized parameter estimates and t-values are shown in Figure 1. The model centers on the relationships between the three constructs of MKC and new product outcomes. As expected, customer learning process, competitor learning process, and marketing-R&D interface exert a positive impact on new product advantage and market performance. Also, new product advantage appears to have a significant positive effect on new product market performance. Overall, the largely supportive pattern of results indicates evidence of nomological validity.

Discussion Emerging interest in market knowledge competence calls for measurement of its dimensions in new product development. The conceptual and measurement models presented in this study make progress in several areas. First, based on Day's (1994, p. 47) suggestion of using ``the relevant process'' to measure organizational competence, we develop a conceptual framework viewing MKC as a series of behavioral processes in new product development. This framework sets it apart from the

notion of market orientation, which is generally perceived as a culture or value system (Deshpande and Webster, 1989; Deshpande et al., 1993; Narver and Slater, 1990) and enables future studies to investigate organizational processes without concept ambiguity. Second, this study proposes three correlated but distinct dimensions of MKC. Particularly, making distinction between customer and competitor learning processes is important because they play different functional roles and can have different effects on new product outcomes. The purpose of learning about customers is to explore innovation opportunities arising from emerging market demand and reduce potential risks of misfitting customer needs. Learning about competitors, on the other hand, allows a firm to discern weaknesses and strengths of rivals, and to create benchmarks for new product development. The process delineation is a unique departure from previous research on market information, which generally treats customer and competitor information activities as unidimensional. Third, measures of the three dimensions of MKC were developed and validated. We assessed the dimensions of MKC by comparing a three-factor confirmatory model with a series of one-factor and two-factor models. The threefactor model achieved high overall fit. Consequently, we can conclude that the model comprising three correlated but distinct dimensions of MKC offers an optimal solution. Most important, the model validates our measures that differentiate behavioral activities of learning about customers and competitors. This is a significant improvement over previous research (Kohli et al., 1993) that mingled measures of these activities. Furthermore, because our measures focused on behavioral processes of market learning instead of organizational culture norms, as described in works on market orientation (Deshpande and Webster, 1989; Deshpande et al., 1993; Narver and Slater, 1990), our study represents a necessary first step towards distinguishing organizational processes from organizational value systems. Finally, we used a full structural model to substantiate the nomological validity of the MKC measures. The fit indexes of the multidimensional model were adequate and better than those of the unidimensional model. In particular, the estimated parameters of the multidimensional model show that each process of MKC has a significant positive effect on new product outcomes and

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these effects are differentiable. The results of our substantiation compare favorably with previous studies (Narver and Slater, 1990; Kohli et al., 1993). It is possible that one can attribute the absence of nomological validity in previous research to using both cultural norms and behavioral activities in measuring market orientation. Limitations and future research directions Several limitations of this research suggest potential directions for future work. First, our study was confined to software products. Although these were suitable for testing our framework, the use of one product category also restricts the generalizability of the findings. It is not clear whether certain industry characteristics may have contributed to the differentiation we found and whether similar results can be achieved in industries devoid of these features. A comparative study involving multiple categories of products would be useful to test the framework with both information-based and less information-based products and elaborate the relationships between MKC and various industry settings. Second, although we posited several external and internal factors as possible explanations for the differentiation and multidimensionality we found, we did not empirically substantiate our theoretical reasoning. For example, we argue that management perception of customer and competitor characteristics may be an internal factor that contributes to the differentiation between learning about customers and learning about competitors, but this is only a conjecture. Future research may identify relevant internal and external factors and investigate their relationships to the components of MKC. Specifically, to what extent do such internal factors as managerial philosophy, organizational structure, and entry strategies affect the construct differentiation of MKC, and to what extent do such external factors as market product competition, technology change, and customer demand influence the structural dimensions of MKC? Third, the unit of analysis for the product outcomes in the current study is an individual new product. While this presents a certain degree of measurement uniformity, the assessment of the impact of MKC may be partial, particularly for those firms that develop multiple products. Future research

should examine performances of multiple products. However, investigation of multiple products also poses a challenge. For example, multiple products serving different markets may yield divergent results. Integrated measures need to be developed to account for performance discrepancies. Further, companies often do not develop the same number of products. Statistical procedures need to be adapted to compare companies with a different number of products. Finally, the dimensions of MKC in this research are confined to the three learning processes in new product development. Future research should investigate the possibility of adding additional dimensions to MKC. One prospect is the outcome of learning. As the result of learning processes, the outcome is the organized and structured information about the market (Glazer, 1991). In theory, such information can be differentiated by both quantity and quality. In practice, measures need to be developed to assess these aspects of the market information construct. The development of these measures is important since it will contribute to the research agenda of another perspective of MKC, which suggests using the outcome of learning to measure competence. A second prospect is information on functional areas of marketing. While knowledge about customers and competitors is critical to new product development, information about channels, intermediaries, prices, and promotion is crucial to new product distribution. The examination of these functional areas will reveal a more complete picture of MKC dimensions.

Notes

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1 In Kohli et al.'s (1993) study, the best results were 2(223.55) = 147 and GFI = 0.875 from a model (MOD4 , p. 470) with 20 single-informant items. The best multi-informant model (MOD25, p. 472) yielded 2(659) = 955.21 and GFI = 0.681. With regard to construct dimensions, the authors (p. 471) conclude there was a ``lack of discriminant validity between the intelligence dissemination and responsiveness''. Further, although a structural model was calculated for nomological validity, the chi-square estimates and fit indexes were not reported. Therefore, it is not clear if the nomological validity was established. 2 Market knowledge competence was assessed at the level of a new product development program in an organization. We chose the program level for two reasons. First, core competence development is the task of the whole development program and should not be delegated to a technical team (Hamel and Prahalad, 1994). Second, attributes of a firm's




product development program directly affect its new product outcomes (Moorman, 1995). A recent study by Ettlie (1995) finds a close link between the practices of the development program and product performance. The measures of the processes of market knowledge competence were indicated as at the program level in the questionnaire. 3 We followed several procedures to select the defined new product. At the beginning of the questionnaire we instructed the respondent that a new software product was a product with a major functional change. Then, the respondent was instructed to describe in a paragraph the new software selected. Subsequently, we used an industry expert to check the product descriptions to verify the product type. 4 The 75 percent and 25 percent split was suggested by Weiss and Heide (1993). These proportions approximated the actual way in which the questionnaires were returned in their study. The split was adopted here because surveys in this study were returned in a similar manner: that is, approximately 75 percent were returned well before the last 25 percent. 5 On the basis of either the low item-total correlations or evidence of an item potentially cross-loading on the three learning constructs, several items were dropped. These items include customer involvement in testing new products, understanding of customer business, cost of customer information collection, cost of competitor information collection, marketing and R&D representation on new product development team. These items are listed in the Appendix under their respective constructs.

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Appendix. Construct measures Learning about customers In our new product development program

(F1: = 4.94, s = 1.23, = 0.93)

1.

We rarely meet customers to learn their current and potential needs for new products

1

2

3

4

5

6

7 We regularly meet customers to learn their current and potential needs for new products

2.

Our knowledge of customer needs is scant

1

2

3

4

5

6

7 Our knowledge of customer needs is thorough

3.

We rarely use research procedures, 1 e.g. personal interviews, focus groups, and surveys, to gather customer information

2

3

4

5

6

7 We regularly use research procedures, e.g. personal interviews,focus groups and surveys to gather customer information

4.

We casually process and analyze customer information

1

2

3

4

5

6

7 We systematically process and analyze customer information

5.

Customer information is barely integrated in new software design

1

2

3

4

5

6

7 Customer information is fully integrated in new software design

6.

We rarely study customers' operations for new product development

1

2

3

4

5

6

7 We regularly study customers' operations for new product development

7.

We seldom use customers to test and evaluate new products

1

2

3

4

5

6

7 We regularly use customers to test and evaluate new productsa

8.

We barely understand our customer's business

1

2

3

4

5

6

7 We fully understand our customer's businessa

9.

Our spending on learning 1 customer needs as a percentage of product development cost is minimal

2

3

4

5

6

7 Our spending on learning customer needs as a percentage of product development cost is substantiala

Learning about competitors In our new product development program

(F1: = 4.32, s = 1.56, = 0.95)

1.

We rarely search and collect information about our competitors' products and strategies

1

2

3

4

5

6

7 We regularly search and collect information about our competitors' products and strategies

2.

We casually analyze information about competitors

1

2

3

4

5

6

7 We systematically analyze information about competitors

3.

Information about competitors' 1 products is scarcely integrated as a benchmark in our product design

2

3

4

5

6

7 Information about competitors' products is fully integrated as a benchmark in our product design

4.

Our knowledge of our competitors' 1 strengths and weakness is scant

2

3

4

5

6

7 Our knowledge of competitors' strengths and weakness is thorough

5.

We rarely study our competitors' software

1

2

3

4

5

6

7 We regularly study our competitors' software

6.

Our expense in competitor intelligence as a percentage of product development cost is minimal

1

2

3

4

5

6

7 Our expense in competitor intelligence as a percentage of product development cost is substantiala

(Continued)

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Marketing-R&D interface In our new product development program, 1. Rarely communicate for new product development 2. Rarely share information on customers 3. Regularly share information about competitors' products and strategies (reverse coding) 4. Seldom cooperate in establishing new product development goals and priorities 5. Seldom cooperate in generating and screening new product ideas, and testing concepts 6. Seldom cooperate in evaluating and refining new software 7. Technological knowledge and market knowledge are never integrated in our new product development 8. R&D and marketing are inadequately represented on our product development team

marketing and R&D (F3: = 5.03, s = 1.26, = 0.95 1 2 3 4 5 6 7 Regularly communicate for new product development 1 2 3 4 5 6 7 Regularly share information on customers 1 2 3 4 5 6 7 Rarely share information about competitors' products and strategies 1 2 3 4 5 6 7 Fully cooperate in establishing new product development goals and priorities 1 2 3 4 5 6 7 Fully cooperate in generating and screening new product ideas, and testing concepts 1 2 3 4 5 6 7 Fully cooperate in evaluating and refining new software 1 2 3 4 5 6 7 Technological knowledge and market knowledge are fully integrated in our new product development 1 2 3 4 5 6 7 R&D and marketing are fully represented on our product development teama

New product market performance (F4: = 3.43, s = 1.07, = 0.81) What is your best estimate of the performance of this software product compared with similar products of other firms in the same market? Lower Upper Lowest middle Middle middle Top 20% 20% 20% 20% 20% 1. Before-tax profit 1 2 3 4 5 2. Return on investment 1 2 3 4 5 3. Pretax profit margin on this product (percentage converted into five-point scale 6 percent 20 percent) New product competitive advantage (F5: = 4.99, s = 1.20, = 0.85 Compared with our largest competitor's product in the same market,our software is Not superior at all 1. In terms of newness, i.e. the extent to 1 2 3 4 5 which a product is new to the market 2. In terms of productivity, i.e. the extent 1 2 3 4 5 to which a software increases a customer's work efficiency 3. In terms of uniqueness, i.e. the extent 1 2 3 4 5 to which a software has unique features 4. In terms of functionality, i.e. the extent 1 2 3 4 5 to which a product meets customers' functional needs

Extremely superior 6

7

6

7

6

7

6

7

Notes: These items were deleted after exploratory factor analysis was excluded from the calculation of the descriptive statistics

a

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