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The de-regulation in the European telecommunication markets since the beginning of the 1990s has brought about significa...

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The de-regulation in the European telecommunication markets since the beginning of the 1990s has brought about significant changes in the communications industry. After the demise of the former state monopolies there is now increased competition in the market. New suppliers want to gain customers with new pricing structures. Finland, Sweden, the UK, Denmark and The Netherlands have opened up the market for free competition at an early stage. Other European states have dropped the monopoly system at the latest on 1st January 1998. Owing to the resulting price competition and newly created services the telecommunication industry has become the second largest industry. Growth rates of +25 per cent per year can be observed (EITO, 1998, p. 36ff.). The sector is further stimulated by the liberalisation of telecommunication deals across state boundaries. In a resolution of the 68 countries of the world trade organisation (WTO) on 15 February 1997, it was decided to prepare the ground for global competition gradually. This means that US providers can be equally as active in the European market as European providers in the USA. The provider scenario and charging structures have developed strikingly fast in Europe, so that they are not very different now from the competitive situation in the USA, where deregulation started as long as 14 years ago. We are not far away from a transnational telecommunication market with global players, leading to numerous selection decisions on the subscriber side. Deregulation and liberalisation of the telecommunication markets led to tough international competition which is very sensitive to decisions in pricing policy for innovations in this area. The experience in Europe and the USA has demonstrated that it is possible to gain many private customers on the basis of lower charges and cheaper sets. In spite of continuing drops in prices it is nevertheless still possible to obtain high returns, owing to the rising number of subscribers. For example, through marginally cheaper prices it was possible for the small, private German provider TelDaFax to achieve a growth of 24 per cent of new customers in the German market in January 1999. This provider handles a throughput of 15 million call minutes a day, representing no less than approximately US$32 million of turnover per month. The development towards a price dominated mass market leads to customers having more choice and the opportunity to compare the pricing structures of different providers.

The price/acceptance function: perspectives of a pricing policy in European telecommunication markets Tobias Kollmann

The authors Tobias Kollmann is Senior Consultant, TellSell Consulting, Frankfurt/M, Germany. Keywords Telecommunications, Consumer behaviour, Pricing, Innovation Abstract Success in innovation management of telecommunication products depends not only on sales, but also, and primarily so, on actual call times by subscribers (e.g. on their mobile phones). It is not only the purchase price that plays a major role for this type of service, but also call and rental charges. This study investigates two potential subscribers' decisions, using the graphic device of a price/ acceptance function and a charge/acceptance function. The first decision is to buy telecommunications products (accepting the purchase price), and the second decision is to use these products (accepting the charges for using the product). In particular, an attempt is made to describe the general profile of the price/acceptance function through considerations of plausibility. Based on an empirical experiment, conclusions are drawn for the pricing policy of telecommunication products, which point to abandoning fixed basic charges and to giving away enduser sets (e.g. mobile phones) free of charge.

European Journal of Innovation Management Volume 3 . Number 1 . 2000 . pp. 7±14 # MCB University Press . ISSN 1460-1060

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The price/acceptance function

European Journal of Innovation Management Volume 3 . Number 1 . 2000 . 7±14

Tobias Kollman

sector, where ± even more than with conventional networks ± the choice of provider is often connected with purchasing a new enduser set, i.e. subscribers will consider the fixed purchase price of the end-user set, the fixed connection charges, and the variable call charges. This creates a decision spectrum for subscribers with two types of factors ± fixed costs versus variable costs ± which must be considered for determining a pricing policy. The example of TelDaFax demonstrates that success in the market place for telecommunication systems is primarily determined by the amount of usage. Therefore management must weigh up purchase price against use charges in order to come to grips with success in the marketplace: . At the point in time of purchase the subscriber faces, first of all, the initial financial outlay. This is represented by the purchase price for the set and the fixed charge for the connection to the telephone network. The factor ``price'' is considered here as a function relative to product performance. The `price'' as a variable corresponds to a comparison of the purchaser's willingness to pay with a perceived usefulness of the product and its ramifications (Ryan, 1977; Friedman, 1976). . Another aspect at the time of purchase is the consideration of the use charges, such as the price per call minute. The monetary aspect is here represented in the purchaser having to pay a price for using a telecommunication product. The special significance of the factor ``charge'' reflects the perceived function of this parameter in relation to the user conditions. The ``charge'' as a variable therefore corresponds to a comparison of the subscriber's willingness to pay with a perceived usefulness of the service.

The increasing transparency of offers has made it easier to compare national and international providers. Changes in the charging structure will quite often prompt a subscriber to change provider, a process called the ``churn phenomenon'' (Fincanon, 1990). This development was partially caused by providers positioning themselves solely on price. The situation in Europe ± similar to that in the USA ± is currently characterized by tough price competition. The managers of most private providers have recognised that telecommunications customers, who are willing to swap providers, will make their decision on price first. Innovation management for telecommunication products is a question of pricing! The lower the charges, the more customers will commit themselves to the telephone network, so more call minutes are achieved. Rather than the monthly fixed charge, it is precisely this (variable) income from the number of call minutes which determines basic commercial success for network providers. For the pricing policy this means that particular attention needs to be paid to the significance of variable use charges. Where the success of the telecommunication innovations in the marketplace is dependent on continuing usage, pricing policies need to be considered on several levels. The experience in deregulated telecommunication markets has shown that right from the beginning, i.e. when purchasing the end-user set, the variable charges are of prime importance for the user's decision. On the other hand, it is precisely the variable charges which contribute the lion share of a provider's revenue. This paper intends to demonstrate the correlation between the prices for end-user sets and use-based charges on the one hand and subscribers' considerations leading to acceptance on the other. For this purpose, a general approach based on plausible considerations has been developed, which it was possible subsequently to confirm through empirical investigation. The paper ends with suggestions for the innovation management of telecommunication providers.

This means that, in addition to the willingness to pay for the purchase, the other significant parameter to be considered is that of use charges. It is therefore on the subscriber's part a problem of acceptance since the aspect of usage enters the picture. Research into attitude has often only considered the internal assessment of an object, without any link to a concrete action (Triandis, 1971). Likewise, the approach taken in adoption research focuses on the point of the actual purchase without analysing the phase of the service life of the product (Rogers, 1983). However, both the price and the charges are of significant importance at any time of the

Purchase price and use charges as criteria for acceptance The special significance of the purchase price for the decision to purchase is as undisputed in the telecommunications sector as it is elsewhere. This is particularly true in the mobile phone 8



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process. Therefore ``price'' and ``charges'' as parameters for customer acceptance are analysed in more detail.

It is generally safe to assume that where a telecommunication system is very useful there is a corresponding willingness to pay the purchase price and use charges, so that minor price changes will only have an insignificant effect on the acceptance of purchase. It is therefore possible, starting from a prohibitive price a, to identify an upper area of the price/acceptance function, the so-called ``non-elastic'' band, which is not sensitive to variations in price and charges. it is possible in this part of the function to talk about a high intensity of usage of the telecommunication system which is assessed relatively independently of the costs arising. Lowering or increasing prices and/or charges does not have a significant effect on the acceptance to purchase, due to the principally high usage. This also means that the use limit of the telecommunication system with respect to the technology deployed up to now is significantly high. In this case it is possible to pursue a qualityfocused marketing strategy, e.g. improvement of speech quality, in order to increase the frequency of use (Porter 1985, p. 31ff.). The effect on consumer behaviour is here determined by the necessity of a new purchase. In contrast to this first band of the function one can assume a lower band of the price/ acceptance function, which assumes maximum acceptance and low intensity of usage of the telecommunication system. In addition, variations in price and charges have a relatively low effect on the here rather negative acceptance of purchase in this ``non-elastic'' band. Here too, an increase or decrease of prices and/or charges does not result in significant effects on the acceptance of

The price/acceptance function Generally, in the actual situation of purchasing, the potential subscriber will arrive at a maximum price at which he/she will be prepared to buy into the telecommunication system, in the sense of ``connecting up''. This price represents the value of the telecommunication system, which the potential subscriber hopes to materialise through the purchase and continued use. If the sale price of the provider is equal to or below this price formed by the prospective subscriber, a purchase will take place and vice versa. This can be expressed in a function, see Figure 1, in which the acceptance during the purchasing phase is presented in relation to different price offers [A = f (p)]. The highest conceivable price is the prohibitive price a, at which there is no demand or willingness to accept the conditions for a telecommunication system. Starting from this price, one can assume a more or less steeply declining function as the readiness to purchase increases with lower prices (y axis). In contrast to the traditional price/sales graphs, the price/acceptance function also reflects expectations about the use of the telecommunication system and the future use charges depending on this. This induces a different shape of the graph, which will also lead to different interpretations with respect to price policy, for the purchase, and charging policy, for the use of telecommunication products. Figure 1 The price/acceptance function

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purchase. This means that the use limit of the telecommunication system with respect to the technology used to date is low. In this case neither a quality-focused nor a cost-oriented marketing strategy is indicated, see Figure 1, since one cannot assume that demand responds to a particular benefit of the telecommunication system (exception: gift => p = 0). The behaviour of the consumer in this case is not determined by the necessity of a new purchase. For a pricing and charging policy aimed at increasing acceptance, the area between the two ``non-elastic'' bands at the top and bottom of the price/acceptance function is of particular interest. In this band the amount of usage is not particularly well defined compared to readiness to pay, i.e. even small changes in the price and/ or charge structure will induce a relatively high change in acceptance of purchase. This means that the use limit of the telecommunication system with respect to the technology used to date cannot be assessed unequivocally. Even the comparison between several offers of end-user sets and/or connection charges does not result in an unequivocal decision. On the other hand this central band represents a sensitive area of the price/acceptance function in which the amount of usage depends significantly on the variable use charges. Within this elastic band of the function there is, therefore, the greatest scope for the manipulation of prices and charges, since small changes will result in large changes of the acceptance towards a purchase. In this case a marketing strategy focusing on cost (reducing the call charges of a talking minute) makes sense in order to increase the amount of usage and to impact positively on the decision to purchase (see Figure 1). The behaviour of the consumer is characterized by the possibility of comparing alternative offers of providers in a deregulated telecommunication market. The cost of usage becomes the deciding factor for the decision to purchase. Presented graphically, this function shows two offsets representing the price/acceptance function, with an upper and lower ``nonsensitive'' band and a middle area which is sensitive to a pricing and charging policy (see Figure 1). The shape of the price/acceptance function ± including the important usage phase ± can be predicted prior to the purchase through an enquiry into the readiness/intention to purchase. The double offset shape of the postulated price/acceptance function, which is still to be validated empirically, runs contrary to the classical assumption of the double offset 10

price/sales function. The German marketing researcher Gutenberg assumed that `àcquisition potential'' for a company was available in a central, ``non-sensitive'' band. In this band changes of price would not result in significant changes of demand due to the effects of preferences or customer loyalty (Gutenberg, 1979, p. 238ff.). Gutenberg says further that these preferences and customer loyalty no longer take effect above/below this band, thereby resulting in sensitive areas with respect to pricing policy. In the case of telecommunication products, this approach does not reflect the real situation for telecommunication systems, since it is not generally possible in this case to generate preferences and customer loyalty due to the beginning of deregulation. That means the focus must be solely on actual cost benefit considerations. For this reason, when aiming at acceptance-based purchase decisions one should adopt the double offset price/acceptance function as a basis for a pricing and charging policy.

The charges/acceptance function In parallel to the price/acceptance function during the purchasing phase, one can observe a correlating charges/acceptance function during the use phase, which charts the acceptance in relation to differences in charges [A = f (g)]. However, by contrast to the price/acceptance function it is not the purchase price and expected use charges that matter, but solely the actual variable use charges. Starting from the highest possible charges, a prohibitive charge g, at which a system will not be used, one can again postulate a more or less steeply falling graph for the function. The reason is that it is safe to assume that with reducing charges (y axis) the acceptance (amount of call time) will increase accordingly. However, in contrast to the shape of the double offset price/acceptance function, it is possible to assume preferences and customer loyalty due to the prior decision in favour of the telephone network of a certain provider. These effects introduce a counteractive shape of the charges/acceptance function during the use phase, which corresponds to the original assumptions by traditional price-demand functions. The postulated loyalty effects resulting from a decision to purchase form a middle ``non-sensitive'' band of the charges/


Tobias Kollman


acceptance function in which the user is willing to pay for using the system. The reason for this is the structure of use charges for the system, which the subscriber was prepared ``to accept'' at the point of time of the purchase decision. Also, changing a provider would create additional costs. In this situation small changes of the charges structure will induce only relatively insignificant changes in user acceptance. One can therefore assume that changes in charges within a certain margin will have no effect on the frequency of use. There is thus a middle, ``non-sensitive'' band of the charges/ acceptance function, in which the intensity of use of the telecommunication system is rather independent of small changes in the costs for using it. So, within this ``non-elastic'' area of the function, there is the greatest scope for variations in charges, due to the effects of customer loyalty, since small changes result only in insignificant changes of the acceptance of usage. In this case it makes sense to pursue a strategy focused on costs as well as quality (see Figure 2). The reaction of subscribers tends to express itself in the frequency of the variable usage. In this case consumer behaviour is not characterized by a high churn risk. Assuming a middle ``non-sensitive'' band, we can identify upper and lower limit values in the function, at which changes in the charges will induce more significant changes in individual usage patterns. One can assume for the upper limit that from a certain increase of charges the variable costs no longer correspond to the high intensity of usage of the telecommunication

system. The variable use charges are therefore in excess of the area in which preferences and customer loyalty still justify continued use. The costs of changing providers are seen from the subjective point of view of the subscriber as justified. Starting with a prohibitive charge g, one can identify an upper ``sensitive'' band of the charges/acceptance function, in which changes in charges would have a relatively high effect on the (low) acceptance of usage. This band is also called the `èlastic'' area. This is a case for a strategy focusing on quality only, see Figure 2, since the increased costs resulting from the higher call charges can only be justified through increased quality during information transfer. In this area an increase of charges will substitute the basically high generation of usage. Subscribers will react with a tendency to reduce the variable usage or even cancel their subscription of the system, i.e. consumer behaviour is characterized by a high churn risk. Therefore providers will try to reduce the churn risk through contractual ties, which, however, will often only result in a delay of the cancellation or the change of provider. In contrast to the upper ``sensitive'' area of the function one can, assuming a maximum of acceptance, define a lower ``sensitive'' or `èlastic'' band, in which charge changes have a relatively high effect on acceptance, in this case positive. Assuming that one can define a lower limit value, one can assume that from a certain reduction in charges an increase in usage will result. In this situation, the variable use charges are low enough to open up the potential for further customer loyalty, away from alternative technologies or other providers. Subscribers will

Figure 2 The charges/acceptance function

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Tobias Kollman

purchase of a stationary or mobile telephone set and line connection, and the subsequent use charges represent the call charges. One can therefore assume that the general situation in the telecommunications industry described at the beginning was appropriately simulated. In order to support the objectives of the empirical investigation, an enquiry was carried out with the participants at two different points in time, in order to achieve a comprehensive and reliable assessment of the acceptance process. The first point in time (t1) was prior to using the CD-ROM at the beginning of the teaching event (the purchasing phase); the second point in time (t2) was taken to be at the end of the program or use phase at the end of the event. The students were informed prior to the enquiry about the contents of the CD-ROM and the options for online sessions. As a point of relative qualification of the result, it must be pointed out that the purchase cost and optional variable costs were only charged in ``cyberdollars'', so that the students did not incur real costs. For this reason it was only possible to enquire after the willingness to pay and not investigate actual payment results. At the point in time t1, the beginning of the pilot project prior to using the CDs, it was possible to interview 168 participants about acceptance in the purchase phase. The second interview at the point in time t2, at the end of the pilot project after the use phase, was carried out in the final event, where it was still possible to interview 112 participants within the use phase. This means that for 112 participants, representing two-thirds of the original number, the acceptance process could be monitored over the complete duration, representing purchase and use phases of the CD-ROM. For the purpose of the interviews at t1 and t2, the same questionnaire was used featuring the same type of questions. It was only different in the fact that at t2 the questions were no longer phrased in the form of expectation, but relating to actual experience. An analysis of the questionnaire relating to the willingness to pay revealed at t1 a tendency to be prepared to purchase the CD-ROM and to pay use charges subsequently. As a maximum purchase price it was possible to determine an average result of DM 2.49 at t1 for all participants (US$1 = DM1.75). The values given ranged from a lower limit of DM0.00 to an upper limit of DM 120.00. Then the statements regarding willingness to pay of each individual were entered into a function diagram in order to be able to read off the number of accepting

tend to react in this area to increase the frequency of their variable usage of the system. Therefore lowering the charges will result in a tendency to higher call frequency over and above the already high generation of usage and therefore a positive effect on the acceptance of usage. So it would make sense in this case to pursue a strategy focused on cost (see Figure 2). One problem with cost-focused strategies in the lower ``sensitive'' band of the charges/ acceptance function is the fixed basic charge, which is often applied, and which significantly reduces the scope for changes in the charges policy (see Figure 2). This is due on the one hand to the connection between basic charge and call frequency during the purchase phasebut also due to a connection during the use phase. The basic charge is always a basic fixed cost item which is considered by the subscriber in the decision for using the system. This reduces the scope for lowering the variable use charges, in particular in the lower band of the charges/acceptance function. The above results in a double offset graph for the charges/acceptance function during the use phase for telecommunication systems with an upper and lower ``sensitive'' band and a middle area, which is ``non-sensitive'' with respect to charges policy (see Figure 2). The double offset charges/acceptance function proposed here (which has yet to be validated empirically) therefore contrasts in its phases with the double offset price/acceptance function.

Empirical results Following the general considerations regarding acceptance of telecommunication innovations, an empirical experiment was carried out which investigated the willingness to pay in the purchase as well as the use phases. For the purpose of the empirical experiment, a CD-ROM with learning material was established at the University of Trier, in order to investigate the possibility of studying by ``remote learning''. Purchasing the CD-ROM with the required basic data authorised the user to access the university campus network, through which the content of the CD-ROM was supported via online sessions. However, use was not in any way mandatory. Apart from the costs for purchasing the CD-ROM there were also time related variable usage charges for the online sessions. In this case the purchase of the CD-ROM is equivalent to the 12



Tobias Kollman

students against each purchase price. A determining factor was that the students were asked to consider the subsequent use charges when stating the purchase price. The values stated by the interviewed students ranged from those who would not buy the CD-ROM under those conditions, i.e. DM0.00, to the one student who stated the maximum value at DM 120.00 as purchase price (see Figure 3) The resulting graph shows a curve similar to the postulated double offset price/acceptance function [A = f(p)], with one ``sensitive'' and two rather ``non-sensitive'' bands (see Figure 3). The lower, ``non-sensitive'' band ranges from a price of DM0.00 to a price of DM20.00. The middle ``sensitive'' band of the price/acceptance function ranges from DM20.00 to DM65.00 and shows a corresponding high `èlasticity'' in the pricing, which means there is a relatively high change in acceptance in reaction to relatively small changes in price. The upper, ``non-sensitive'' band ranges from DM65.00 to DM120.00, following on from the middle band of the price/acceptance function. It follows that for a certain purchase price there is a group of students accepting the price, and a group not accepting it. For a price of DM80.00 there were six people accepting and Figure 3 The empirical price/acceptance function

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106 people not accepting. Conversely, at a price of DM20.00 one can expect 101 people accepting and 11 not accepting. One can conclude that further results are primarily linked to pricing. Unfortunately it was not possible to validate the proposed charges/acceptance function within this empirical investigation, since the accounts were settled in ``cyberdollars''. For this reason it was not possible to investigate the effects of ties while use charges are changed. However, it was in particular these tying effects which were responsible for the reasoned shape of the charges/acceptance function.

Implications for innovation management It was possible to confirm the significance of the factor ``price'' in this approach focusing on acceptance of telecommunication systems. The tie-up between purchase price and use charges results in a specific shape of the price/acceptance function compared with the classic price/sales function. Depending on how the potential subscriber can be classified in his/her willingness to pay, different marketing strategies must be considered. Business customers, who are more



Tobias Kollman

likely to be placed in the upper, ``non-sensitive'' band of the price/acceptance function, may respond more to a quality-based strategy. Private customers on the other hand, are most likely located in the middle, ``sensitive'' band, and may tend to respond to a strategy focussing on cost. The general implications for pricing policies in the telecommunication industry can be summarised in the following two points: (1) Winning customers depends on the relationship between purchase price and/or price for connection and variable use charges. Both types of expenses are entered into the equation by the potential subscriber and should therefore be weighed up accordingly. Any reductions in the purchase price and connection price in particular will ease the decision for potential subscribers to sign up. Where subscribers save costs on the purchase and connection price, these will result in an increased volume of calls. (2) Customer loyalty to avoid the churn effect only depends on the structure of the use charges. The reason is that the variable charges for call time will quickly exceed the purchase price for end-user sets. With respect to the tie-in effect resulting from the decision for one provider, care must be taken that call charges are not increased to such an extent that the price structure does not become unattractive compared with other providers. The outcome of these considerations points to a strategy for telecommunication providers, aimed at increasing market share in deregulated markets, which does not make an initial charge for connection. This will attract more customers to use their system and thereby create the all-important turnover. A connection charge as well as purchase price will restrict the sensitive area of the price/acceptance function too severely. One should therefore, in this context, consider giving away end-user sets and secure commercial success solely through call charges, which have the most impact on success. Furthermore, monthly basic charges should be dropped since these restrict the sensitive band of the charges/acceptance function, discouraging the customer from increasing the amount of usage. It follows that the managers of telecommunication providers

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should focus on variable use charges. They will have to drop the idea of creating additional income through the sale of end-user sets, through connection charges, or through a fixed monthly basic charge. With the advent of deregulated markets these practices are truly a thing of the past.

Summary Innovation management success for telecommunication products depends not only on sales, but also, and primarily so, on actual call times by subscribers (e.g. on their mobile phones). It is not only the purchase price that plays a major role for this type of service, but also call and rental charges. This study investigates two potential subscribers' decisions, using the graphic device of a price/acceptance function and a charge/acceptance function. The first decision is to buy telecommunications products (accepting the purchase price), and the second decision is to use these products (accepting the charges for using the product). In particular, an attempt is made to describe the general profile of the price/acceptance function through considerations of plausibility. Based on an empirical experiment, conclusions are drawn for the pricing policy of telecommunication products. The policy emerging is one of abandoning fixed basic charges and of giving away end-user sets (e.g. mobile phones) free of charge.

References EITO (European Information Technology Observatory) (1998), ICT for European Homes: Devices, Service and Applications, EITO, Frankfurt/M. Fincanon, B.W. (1990), `Èffective customer churn control'', Communications, Vol. 5 No. 27, pp. S. 38-46. Friedman, M. (1976), Price Theory, Aldine, Chicago, IL. Gutenberg, E. (1979), Grundlagen der Betriebswirtschaftslehre ± Der Absatz, 16 ed., SpringerBerlin. Porter, M.E. (1985), Competitive Advantage, Free Press, New York, NY. Rogers, E.M. (1983), Diffusion of Innovations, 3 ed., Free Press, New York, NY. Ryan, W.J.L. (1977), Price Theory, St Martin's Press, London. Triandis, H.C. (1971), Attitude and Attitude Change, Wiley, New York, NY.

Introduction

Patterns of technological innovation in subcontracting firms: an empirical study in the food machinery industry

Competition has brought about marked changes in supply management, forcing firms into a close interaction with suppliers. The achievement of high-level performances in terms of cost, quality, and time-to-market appears ever more dependent on the quality and effectiveness of the supply network. This transformation modifies the traditional adversarial model of the buyer-supplier relationship and fosters the reconfiguration and integrated management of the supply chain. At the same time, competitive dynamics and current global competition models encourage the extension of traditional sourcing ideas. The need to enhance intra-company activities has been increasingly recognised and, as a consequence, more manufacturing companies have turned to their suppliers (Lindberg and Trygg, 1991). This relationship between manufacturers and their parts suppliers has been recognised as a key element in the improvement process (Butcher, 1991). Slack (1991) pointed out that, for most industries, the nature of buyersupplier relationships has seen fundamental changes during the last decade. In particular, relationships in important areas such as the automobile and consumer electronics industries have become more collaborative. Partnerships between purchasers and suppliers are usually thought of as being positioned between two extreme `àdversarial'' and ``collaborative'' poles (Cusumano and Takeshi, 1991; Helper, 1991; Imrie and Morris, 1992; Lamming, 1986; 1989; Lyons et al., 1990; Macbeth and Ferguson, 1994; Morris and Imrie, 1992; Sako, 1992). Relationships are considered to be moving towards more collaborative forms, such as the so-called Japanese-style partnership (JSP) (Martin et al., 1995). Lamming (1986; 1989; 1990; 1993) attributed the major increase in collaboration in the automobile industry to economic, technological, and commercial forces. He highlighted increasing competition, and changes in product and production technologies as important factors fuelling the changes. Slack (1991) asserted that Lamming's findings yield important lessons that stretch beyond the automobile industry. Morris and Innie (1992) illustrate this with their conclusion that major UK producers

Alberto Petroni

The author Alberto Petroni is Assistant Professor at the UniversitaÁ degli Studi di Parma, Parma, Italy. Keywords Alliances, Technology, Subcontracting, Food industry, Packaging industry, Italy Abstract This study examines changes in inter-organizational relationships in the specific context of the food packaging machinery industry. The study presented in this paper has a twofold aim. First, to investigate how and to what extent the type of buyer-supplier relationship is associated with specific supplier profiles (in terms of the technological as well as organizational set of competencies and skills). Second, to indicate the attributes of the best-performing suppliers from the different groups identified. The study is based on a survey performed on 111 subcontractor firms located in northern Italy. More specifically, the study aims at evaluating the impact of a set of factors characterizing the competencies which subcontractors must have in order to succeed in this industry.


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Patterns of technology innovation in subcontracting firms


Alberto Petroni

were moving away from adversarial buyersupplier relations as a response to decreasing profits, declining international competitiveness, and over-capacity. Sriram et al. (1992) identified a move towards more collaboration in major US companies (e.g. Xerox, Motorola) as a way of improving their competitive posture. In short, inter-firm relationships have changed greatly over recent decades. Novel organizational configurations have emerged with a rich variety of new terminology: strategic alliances, partnerships and networks of firms. The large variety of interorganizational relationship modes seems to go beyond the simple distinction followed by transactional approaches. Within the context of subcontracting, it is increasingly evident that the range of distinctive competencies possessed by the subcontractor is filtered out by the type of relationship with the buyer. The existence of several key relationships between environmental changes, both competitive and technological, the organizational competencies that the firm generates and enhances as a response to environmental stimuli and the buyer-supplier relationship have been explored in depth in the literature. The specific objective pursued in this study is thus twofold: on the one hand, to investigate the association between the type of buyersupplier relationship and the distinctive profile (both technological and organizational) of these suppliers and, on the other hand, to identify the most explicative dimensions of the best suppliers' performances. The structure used for this study is presented in the research framework outlined in Figure 1. This paper is organized into three main sections. The first section provides a theoretical justification for the variables considered in the study. It first illustrates the aspects under which the buyer-supplier relationship might be investigated, and then discusses the role of the technological factors that are most likely to affect the evolution of the supplier-buyer relationships. The second section introduces the specific research framework that has been followed in this study. It gives a clear view of the context under examination (the food packaging machinery industry), and illustrates the experimental design of the survey conducted. The final section is devoted to the

Figure 1 Inter-firm relationships and industrial structure

presentation and discussion of the empirical findings.

Characteristics of the buyer-supplier relationship Three dimensions depicting the buyersupplier relationship that have been considered for analysis: exclusiveness and dependence; involvement and influence of the supplier; and the level of exigency (in terms of technical specifications) of the supplier. Exclusiveness and dependence The establishment of novel models of subcontracting might be accompanied by an increasing degree of exclusiveness in the buyer-supplier relationship. Thus, despite the risks that are traditionally associated with specific investments, several subcontracting firms tend to establish closer ties with the prime contractors and consequently are granted higher levels of responsibility both in the design and manufacturing processes. This fact may imply significant modifications in the degree of independence to which some subcontractors have been accustomed for a long period of time and may be countered by the fear of subcontractors vis-aÁ-vis the increased power of the customer. It is still debatable whether a greater level of relationship exclusiveness leads to re-shaping 16



Alberto Petroni

and enhancement of the supplier's competence base. Liker et al. (1996) have shown that the suppliers operating in the automobile industry that can be defined as ``more dependent'' do generally adopt a more proactive attitude towards the sound implementation of advanced manufacturing technologies than their `ìndependent'' counterparts. On the other hand, Calderini and Cantamessa (1997), while investigating the innovation patterns of automobile suppliers, have found that suppliers that are granted long-term exclusive contracts have only moderated innovation practices (mainly determined by the prime contractor's directives) relying on the adoption of methodologies rather than technologies. Supplier involvement and influence of prime contractors As a compensation for the greater involvement of subcontractors in the entire design/ manufacturing process, prime contractors may often be induced to stimulate changes in the competence base of their suppliers. In this way suppliers may be required to take charge of the development of new products (starting from the simple functional requirement and in cooperation with the prime contractor's design staff) and innovating their manufacturing process. Suppliers may be supported through consultancy and training services in order to develop the required capabilities. Market pressure and level of exigency In general terms, there are situations where the prime contractor-subcontractor relationships are increasingly based on contractual forms of risksharing that are set up in order to counter both market uncertainty and turbulence (Yun, 1999). The competitive pressure, therefore, becomes a critical element in driving the continuous renewal of the suppliers' competence base, since it requires commitment to technological change and flexibility. The level of customer exigency cannot be examined without taking into consideration such aspects as the large variability of customer expectations and the limited ability of the supplier to foresee these changes.

The role of technology in increasing collaboration with suppliers Although competitive pressure is seen as the major influence in relationship changes, technological forces have an important part to 17

play. The technology issue is addressed in the various models offered to explain the factors leading to closer collaboration between buyers and suppliers. Research based on one widely used model, transaction cost economics (TCE) (Williamson, 1979; 1981; 1991), indicates that close relationships with suppliers emerge in response to the need to safeguard transaction specific investments (TSI) (Frazier et al., 1988; Heide and John, 1990; Heide and Stump, 1995; Sako, 1992). Since TSI are assets that are unique to a particular buyer-seller transaction, the role of technology is not immediately apparent. The interaction model (as developed by the International Marketing and Purchasing IMP-group) is another commonly used approach to explain factors determining the extent of collaboration (Hakaanson, 1982). As regards technology, the interaction model argues that different levels of ability, of both partners, will influence the nature of buyersupplier relationships (Johanson, 1982). Attention, however, has been focused on the supplier's technological capability. For example, Ford (1984) acknowledged that the buyer's assessment of supplier's technical skills is strongly associated with the buyer's commitment. The research by Yun (1999) tries to provide an understanding of how the technological capabilities of small component suppliers affect the nature of contracts and, in turn, are affected by the buyer-supplier relationship. Chen and Small (1995) state that adopting advanced manufacturing technologies (AMTs) requires more complex relationships and greater integration with the organisation's key environmental constituencies (i.e. customers, parts suppliers and technology suppliers). O'Neal (1987) demonstrated the importance of the buyers' manufacturing processes on dealings with suppliers by establishing that buyer-supplier relationships were significantly influenced by adopting one particular type of just-in-time (JIT) technology. Implementing new technologies and methods requires moves away from traditional relationships between companies towards closer relationships with their suppliers (Chen and Small, 1994; 1995; Schonberger, 1982). For the buyer, improving relationships with suppliers is seen to be inextricably linked to the effective implementation of AMTs and to the overall



Alberto Petroni

We can also see the use of innovative technology at every level of the production process. A major part of planning is devoted to developing machines and systems for automatic packaging. Over the years, members of the packaging machinery industry have created a pyramidshaped structure (also called a three-tiered system) dominated by a small group of larger firms referred to as prime contractors (Figure 2). Companies of the top tier typically manufacture products of high complexity (complete lines) and operate in the global market. Their competitive environment is very tough since tender-based competition forces these firms to be evaluated not only on the quality of the final product (which has to be customised to a significant degree), but also on the overall process followed to develop it. Their distinctive competence is mainly related to the ability to undertake large projects and calls for capabilities in the domain of integrated product design, manufacturing development and product support. Second-tier companies have responsibilities which include the provision of proprietary products or complete subsystems. Second-tier firms typically develop moderately complex products or standardised components to be assembled into final packaging lines (i.e. wrappers, blister packers, automatic net loaders, etc). A peculiar feature is that such companies feel a strong pressure to reduce time-to-market, but have low levels of ability when it comes to the management of product development. This is because it is unusual for true development responsibility to be assigned to them. Bottom-tier firms are manufacturers of basic electronic and mechanical (oleodynamic, pneumatic, magnetic) components. Because

competitiveness of the company (Carlisle and Parker, 1991; Lamming, 1986; 1989; 1993; Macbeth and Ferguson, 1994).

The research: the context investigated The themes outlined in the previous sections are at the core of a large empirical research conducted in the food packaging machinery industry. The choice of this specific industry is motivated by the following reasons: . The fact that these manufacturers form the economic backbone of some regions of northern Italy. As an indication of the importance of this sector, it should be pointed out that Italian machines from this sector are in use in over 150 countries, mostly in European markets, the USA, and Japan, as well as in the newly industrialized countries of Asia. In recent years, the Italian trade balance in this field has been positive for all major countries (including Germany and Japan), reaching a record of over US$1,700 million. While about 85 per cent of production is sold abroad, the industry is still able to meet more than 60 per cent of national demand. . this industrial sector is characterised by a low level of vertical integration which has led to the setting up of complex interorganizational relationships. The Italian Packaging and Packing machinery manufacturers have set up production systems capable of designing and producing machinery for every phase of the packaging process through careful specialisation in all facets of manufacturing, whether for complete or semi-finished systems. In recent years, Italian manufacturers have not joined the blind rush for technological innovation, but rather it was the simplification of production processes which led to a renewal of the industry. The move towards research and development studies of new automation techniques to increase the efficiency of the machines and reduce changeover times was decisive. A full 60 per cent of employees in this sector work in the areas of planning and testing, with the remaining 40 per cent being directly involved in production.

Figure 2 The research model

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The third variable captures the extent to which firms are sensitive to their technological environment. Technological scanning measures the extent to which firms are concerned with the search for new ways of making better products at a better price. It specifically refers to the ability of a firm to identify opportunities, to understand and predict the strategies of competitors, and to evaluate emerging technologies. As in the case with the other perceptual measures used in this research, technological scanning was assessed using Likert scales. In a context where specialization gradually becomes the only way of getting business from the prime contractors, subcontracting firms cannot avoid upgrading the skills of their employees while maintaining a stimulating environment for continuous learning. Not only should those skilled employees make it easier to adopt innovation, but they should also stimulate and facilitate the creation of specific know-how and/or new products. Two more variables were therefore considered for the global evaluation of technological capabilities: technical skills of employees and the level of exclusive knowhow related to products.

of the less specialised nature of the work required, the pool of firms capable of providing products and services is usually larger at this level and many companies involved are also active in other industries. For the most part, however, this structure tends to foster specialization among the firms and ensure stronger relationships.

Profile of subcontractors Technological dimensions The first group of dimensions relates to the firm's technological capabilities and includes five variables. Expenditures on research and development as a percentage of annual sales is a common ratio used for estimating a firm's commitment to technological activities. It has therefore been retained as the first variable related to technological capabilities. In order to capture the full variety of a firm's technological efforts, recent research has proposed going beyond strict R&D evaluation and considering other variables such as the penetration of technologies within the firm. The number of AMTs adopted by a firm may reveal its expertise as well as its commitment and ability to meet client requirements better. The number of those technologies was therefore used as a second (factual) measure of a firm's technological capabilities. A complete list of the technologies/methodologies that were considered is shown in Table I.

Organizational dimensions The second group of variables concerns organizational capabilities and characteristics which describe a firm's capability to acquire and manage its resources in order to meet customer expectations.

Table I List of manufacturing and management technologies and methodologies considered Manufacturing and design technologies

Manufacturing and design methodologies

Automated handling Bar code system Computer-assisted design (CAD) Computerized numerical control (CNC) tools Computerized quality inspection and control costing Direct numerical control (DNC) Electronic data interchange (EDI) Employee accounting Integrated CAD/CAM Inventory management Job order costing Just-in-time systems Manufacturing resource planning (MRPII) systems Net needs planning (MRPI) Statistical process control Rapid prototyping technique (RPT)

PERT CPM Product development process modelling Value analysis and engineering Taguchi (design of experiment) Quality function deployment (QFD) Design for assembly/manufacturing Reliability analysis (FTA, FMEA)

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Here, five dimensions are proposed in order to assess organizational capabilities. Managerial capability involves the ability to coordinate several activities both inside and outside the firms' boundaries. Concern for managerial quality in new product development (NPD) processes, in project management practices or in the implementation of novel technologies are areas where the appropriate managerial capabilities can be exercised. The empirical evidence shows and confirms the importance of those organizational mechanisms which enable different functions and processes to be integrated both internally and externally and hence to develop action-producing capabilities. Marketing effort is the second dimension. When investigated either as the drive behind improved distribution effectiveness or for monitoring customers expectations, it is generally acknowledged as a key competence for successful innovations (Dodgson, 1993; Moenaert and Souder, 1990). The percentage of sales created in foreign markets by a particular firm gives an indication of its international experience and its dynamism. Considering the intensity of the competition of today, it is believed that presence in foreign markets may be a valid indication of how much attention is given by firms to maintaining and upgrading specific competencies which are required to enter those markets. In this context, we chose to include the ratio of export sales over total sales, as this is the most common measure of a firm's export performance (Cavusgil and Zou, 1994; Aaby and Slater, 1989). Financial stability is particularly crucial when there is a combination of difficulties. Those firms able to ensure a certain degree of financial stability are viewed as reliable partners by main contractors, which usually consider financial measures among the set of subcontractor assessment criteria. A fifth dimension, the firm's reputation, is an important factor of evaluation both for product and for service quality (Quigley and McNamara, 1992). Finally, numerous studies have underlined the importance of networking and `èxternal linkages'', especially for small and mediumsized firms, which often lack resources (Rothwell and Dodgson, 1991; Rothwell, 1991), thus showing how external relationships can become `ìnstruments to

enlarge the internal know-how potential''. Gemunden et al. (1992) also restated the role of networking in the innovation process. For the purpose of this study, network stability has therefore been included in organizational capabilities and assessed as the degree to which subcontracting firms have a beneficial stable networking relationship with customers and suppliers. Performance dimensions The firm's performance is the dependent variable selected for this research. In the context of selecting subcontractors, prime contractors usually retain firms that produce the highest scores for the following dimensions: . price; . quality; . flexibility of production; . delivery times. In order to approximate this measure, CEOs were asked to evaluate their company's main assets in comparison to those of their closest competitors on these four dimensions. The resulting composite score constitutes our dependent variable. This evaluation method remains fairly common and the four criteria are among the most widely reported in the literature (Tunc and Gupta, 1993; Ferdows and De Meyer, 1990), and its effectiveness and appropriateness were confirmed during extensive preliminary discussions with prime contractors. A list of the adopted performance indicators together with the references for their theoretical justification is provided in Table II. Further cross-validation was also made on specific cases by matching the scores assigned by subcontractors with those provided by the prime contractors. Data collection The results presented in this paper are part of a research project carried out among manufacturing subcontractors in the food packaging industry operating in northern Italy. Questionnaires were sent to the CEOs of all subcontracting firms. As for the measures of the variables, Table II provides specifications and explanations of how the scales were created and measured. Lists of firms were established using the most up-to-date information provided by Chambers of Commerce and the Food Packaging Industries Association of Italy. The 20



Alberto Petroni

Table II Measures of the variables used in the questionnaire Variables

Characteristics of the buyer-supplier relationship Influence of customer Level of exigency of customer Exclusiveness and dependence of the supplier

Technological competencies R&D expense Number of advanced manufacturing technologies adopted Technological scanning Technical skills of employees Level of exclusive know-how related to products

Organizational competencies and characteristics Managerial capability

Measurement Seven-point Likert-type perceptual scale. Four items defined this variable Seven-point Likert-type perceptual scale. Four items defined this variable 30 per cent or more of the turnover with a single customer Ratio of technical cost and investment to sales Normalised values (1-7) Seven-point Likert-type perceptual scale. Three items defined this variable Seven-point Likert-type perceptual scale. Three items defined this variable Seven-point Likert-type perceptual scale. Three items defined this variable

Firm size

Seven-point Likert-type perceptual defined this variable Seven-point Likert-type perceptual defined this variable Ratio of export to total sales Seven-point Likert-type perceptual defined this variable Seven-point Likert-type perceptual defined this variable Seven-point Likert-type perceptual defined this variable Number of employees

Performance Price Product/service quality Delivery reliability (time and quantity) Flexibility

Seven-point Seven-point Seven-point Seven-point

Marketing effort Degree of internationalization Financial stability Reputation Network stability

Likert-type Likert-type Likert-type Likert-type

perceptual perceptual perceptual perceptual

scale. Three items scale. Three items

scale. Three items scale. Three items scale. Three items

scale scale scale scale

aimed at measuring the impact of the variables characterising the inter-firm relationship and acting as control variables. The inter-group comparison was carried out using the t-test and the differences reported are significant at the 0.10 level or below. As shown in Table II, the cut-off was set at a level of sales made with a single contractor equal to 30 per cent of the total turnover. Table III confirms the effect of this factor on the variables considered. This impact is, nonetheless, restricted to a limited number of attributes and seems to show a situation of ``traditional dependence'', where the presence of a large customer might prevent suppliers from expanding their

questionnaire was pre-tested with 11 people including eight CEOs. Data analysis was conducted on the 111 responding manufacturing firms, which are all SMEs (with fewer than 200 employees).

Results (I) A comparison between firms according to the characteristics of the buyer-supplier relationship A first analysis involves the comparison between firms in the sample showing a weak level of dependence with those showing a strong level of dependence on prime contractors. This first step was, therefore, 21



Alberto Petroni

product development and the specific know-how that is embodied in products and technologies. From a different perspective, a possible rationale for the results found is that, for the firms emerging from this evolution, the typical objective is to improve and enforce integration with customer design, manufacturing and logistics operations/processes. Finally, Table V shows the comparison of the suppliers' profile according to the distinction between firms subjected by their main customers to a weak and a strong level of technical and functional specification. The group of firms in the right-hand column of Table V present a significantly higher level of implementation of advanced technologies/methodologies and are generally more concerned with technological scanning. A plausible interpretation of these phenomena could be that these firms are generally characterized by a relative higher degree of specialization. They have started broadening their reference market and are competing on a wider base. This is an attempt to become suppliers to a plurality of manufacturers, since there is a considerable risk that the effort to integrate to a profound level with a single customer could block the ability to search for profitable niches. The competitive environment for these companies is very tough and tender-based competition justifies the outstanding and constant concern for marketing. Specialization and the wider market base have to go hand in hand with flexibility of response to the changing customer specifications. This concept of ``flexible specialization'' is a novelty and deserves a closer look, because it is a measure of the capability of initiating intense but agile customer-supplier relationships.

Table III Comparison of suppliers' profile based on the level of dependence

Variables R&D expense (%) Number of advanced manufacturing technologies adopted Technological scanning Technical skills of employees Marketing effort Degree of internationalization (%)

Week dependence (n = 72)

Strong dependence (n = 39)

4.53

2.19

2.94 5.84 5.52 4.87 37.9

2.56 4.38 4.80 3.27 19.7

competence base and opening up new market opportunities. Suppliers showing a weaker dependence on prime contractors are less inclined to invest in technology and environmental scanning activities. As expected, the dependent firms feel less strongly about marketing concern and show lower degrees of internationalization. These results suggest that the dependency relationship is far from being a form of exclusive and privileged partnership that provides suppliers with opportunities to address higher-level competencies. It is worth noting that no significant difference in these findings is a function of the firm's size. The results shown in Table IV indicate a higher profile for the suppliers whose business decisions are strongly affected and influenced by prime contractors. These companies tend to be evaluated not only for the quality of the final product, which is generally quite complex and customized, but also for the process followed to develop it. For this reason these companies show outstanding performances when it comes to the process of Table IV Comparison of suppliers' profile based on the level of influence and involvement of the customer

Variables Number of advanced manufacturing methodologies adopted Number of advanced manufacturing technologies adopted Level of exclusive know-how elated to products

Table V Comparison of suppliers' profile based on the level of exigency

Weak influence Strong influence and involvement and involvement (n = 55) (n = 56)

1.96

3.12

2.32

3.14

4.80

5.98

Variables Number of advanced manufacturing methodologies adopted Number of advanced manufacturing technologies adopted Marketing effort Technological scanning Networking stability

22

Weak level of Strong level of exigency (n = 59) exigency (n = 52)

3.17

4.01

2.54 2.87 4.67 5.10

3.21 5.32 5.38 4.65



Alberto Petroni

indication that the firms investigated in this study do largely find their competitive base in the individual skills and specialized knowledge of their workforce. This underlines the importance of mobilizing human capital, especially in the form of specialized labour, in subcontracting manufacturing firms. R&D intensity and technological scanning are all positively and significantly related to performance and go hand in hand with the technical skills of employees. This fact indicates the need to carry out technological investment aimed at building and nurturing the `àbsorptive capacity'' (Cohen and Levinthal, 1990), which is crucial for any technical innovation to be effectively implemented by the firm. As far as the characteristics of the organizations are concerned, reputation has proved to be strictly related to the overall performance. This is due to the fact that such an attribute is considered as an indicator of the quality of the work that has been consolidated over time. The negative coefficients for the level of dependence were expected since, in the previous analysis, it was found that the firms with a lower level of dependence have better attributes in terms of both organizational and technological competencies. This finding reinforces the notion that firms operating in `òpen markets'' (not highly dependent on one or a small group of customers) are forced to develop distinctive capabilities which enable them to reach better global performances. In order to confirm this assertion, additional analysis was performed with level of dependence acting as control variable.

(II) The profile of the best performing suppliers A second area of results concerns the identification of the attributes of the best performing suppliers. The next step was, in other words, to investigate the linkages between the technological and organizational dimensions (as identified previously) and the dimensions of performance. Multiple regression analysis was conducted with the technological and organizational attributes as independent variables and the aggregate performance score as the dependent variable. From the results of Table VI it is clear that the model explains 41.3 per cent of the variance in the firms' performances, thus representing a highly satisfactory level. From the competence point of view, the more significant variables are the managerial capabilities, the technical skills of the employees and R&D intensity. As for the managerial capabilities, the relative importance placed on the managerial role indicates the strategic role played by the executives in the acquisition, as well as the deployment and utilization, of the resources that are critical for sustaining the long-term competitive position of the firm. The technical skills of employees at all levels are undoubtedly the second strongest determinants of performance. This is an important finding given that it provides a clear Table VI Results of multiple regression analysis Independent variables

Competence-related dimensions Technological scanning Technical skills of employees Exclusive know-how related to product R&D intensity Managerial competence

a

0.10** 0.22**** 0.08* 0.16*** 0.29****

Organization characteristics Internationalization Reputation Networking stability

0.04**** 0.19**** ±0.07*

Characteristics of buyer-supplier relationship Dependence on customers/contractors Adjusted R2

±0.22**** 41.3****

(III) Performance and level of dependence on prime contractors Table VII shows the results of multiple regression for the sub-populations corresponding to a strong and a weak level of dependence on customers. Those with a strong level of dependence distinguish themselves for the importance placed on managerial capabilities. The beta coefficient is statistically significant and is the highest in absolute terms. The marketing efforts and the stability of the buyer-supplier relationship are also significant but negative in value, thus underlining the low interest of these firms in establishing a sound and effective system of marketing. For the first group, the possibility of survival seems to be

Notes: = Standardized betas reported * p < 0.10; ** p < 0.05; *** p < 0.01; **** p < 0.001 Basic assumptions for conducting regression analysis are met: because of the large sample size, the assumption of multivariate normality is not rejected; the independent variables are not highly correlated. Finally, the analysis of residues indicated no violation of basic assumptions.

a

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specifications. This fact can be interpreted in two different ways. First, these companies typically develop simple, highly standardized products (mainly mechanical components) to be assembled into final products by the prime contractor. In other words, these firms belong to the bottom tier of Figure 2 and do not have true product development responsibilities. They usually receive detailed drawings or even process plans from the customer's designers so that their main and only concern is to manage shopfloor activities. A second possible interpretation is that the relationship between the large prime contractor and the supplier is, in this case, still underdeveloped and represents a stage in the evolution of relationships where a proper partnership is not yet established. This implies that pushing hard on technical requirements and challenging the supplier to develop ad hoc solutions may be counterproductive for the performance of the supplier in question.

Table VII Multiple regression on sub-populations based on the level of dependence Strong Weak dependence dependence a

Variables

Characteristics of the buyer-supplier relationship Level of exigency Technological competencies R&D expense Number of advanced manufacturing technologies adopted Technological scanning Technical skills of employees Level of exclusive know-how related to products Organizational competencies and characteristics Managerial capability Marketing effort Reputation Network stability Firm size

±0.15*** 0.16** ±0.12* ± 0.13*

0.11* 0.21*** 0.22*** 0.16** 0.18*

0.18**

±

0.43**** ±0.18** 0.24** ±0.15 ±

0.11* ± 0.19*** ± ±0.12

Notes: a = Standardized betas reported * p < 0.10; ** p < 0.05; *** p < 0.01; **** p < 0.001

Conclusions

mainly based on the managerial capacity and the reputation gained with major customers. The technological competencies are generally more relevant for the second group of firms (weak level of dependence), thus confirming and sustaining the results established previously. As for the control variables, the only statistically significant correlation is between the level of dependence and the level of exigency. Two comments can be made. First, when the level of dependence is weak, the level of exigency shows a positive correlation with performance. In other words, for the firms operating in the open market, increasing the technical specifications and requirements becomes a challenge for the whole firm which, even under pressure, is able to provide outstanding performances. This effect seems to be felt to a greater extent by smaller firms as indicated by the negative beta for the ``size''. For the first group, the beta coefficient for the level of exigency variable behaves in the opposite fashion. This suggest that the firms that are highly dependent on one or a small number of large customers might be put off by orders containing particular technical

The results of this study reveal a number of interesting aspects of firm performance in the food packaging industry in Italy. Subcontracting firms which are assessed as ``better than their competitors'' on four important dimensions of manufacturing performance; price, quality, delivery and flexibility, also possess distinctive characteristics which are associated with their performance. Our prime explanatory factor associated with performance concerned the acquired technical skills of employees. This is an important finding given that it provides a clear indication that a technical culture, which is clearly associated with the technical scanning abilities of these firms as well as their propensity to carry on R&D activities and their retention of exclusive know-how related to products, is essential for a firm seeking to improve and become a world-class competitor. The fact that technical skills and management skills are the strongest indicators of firm performance points to the crucial role of human resources in achieving, maintaining and improving firm performance. The more stringent competitive pressures imposed on a firm which operates both at 24



Alberto Petroni

home and in international markets may force it to develop more and better capabilities. This study has also revealed an interesting element when considering some contextual aspects characterizing the nature of relationships between prime and sub contractors. What emerges here is that the level of dependence of the supplier on the buyer does not represent, in the specific context investigated, a major impetus for the establishment of distinctive capabilities since it tends to inhibit rather than stimulate skills, knowledge and competencies. Since the search for competencies by prime contractors in the food packaging industry relies partly on the strong productive capabilities provided by a large array of subcontracting firms, individual firms can no longer confine themselves to passively carrying out production tasks. In order to play the full role expected of them, they must acquire world-class capabilities by constantly innovating and upgrading skills and competencies. This is a tall order, but subcontracting firms have no choice but to meet the demands inherent in the business environment of today.

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Alberto Petroni


Operations Production Management, Vol. 11 No. 3, pp. 52-62. Lyons, T.F., Krachenberg, A.R. and Henk, W.S. (1990), ``Mixed motive marriages: What's next for buyersupplier relations'', Sloan Management Review, Spring, pp. 29-36. Macbeth, D. and Ferguson, N. (1994), Partnership Sourcing, An Integrated Supply Chain Management Approach, Financial Times Pitman Publishing, London. Martin, X., Mitchell, W. and Swaminathan, A. (1995), `'Recreating and extending Japanese automobile buyer-supplier links in North America'', Strategic Management Journal, Vol. 16 No. 8, pp. 589-619. Moenaert, R.K. and Souder, W.E. (1990), `Àn information transfer model for integrating marketing and R&D personnel in new product development project'', Journal of Product Innovation Management, Vol. 7, pp. 91-107. Morris, J. and Imrie, R. (1992), Transforming Buyer-Supplier Relations: Japanese Style Industrial Practices in a Western Context, Macmillan, New York, NY. O'Neal, C.R. (1987), ``The buyer-seller linkage in a JIT environment'', Journal of Purchasing and Material Management, Spring, pp. 7-13. Quigley, C. and McNamara, C. (1992), `Èvaluating product quality: an application of the Taguchi quality loss concept'', International Journal of Purchasing and Materials Management, Vol. 6, pp. 19-25. Rothwell, R. (1991), `Èxternal networking and innovation in small and medium-sized manufacturing firms in Europe'', Technovation, Vol. 11 No. 2, pp. 93-112.

Rothwell, R. and Dodgson, M. (1991), `Èxternal linkages and innovation in small and medium-sized entrerprises'', R&D Management, Vol. 21 No. 2, pp. 125-37. Sako, M. (1992), Prices, Quality and Trust, Inter-firm Relations in Britain and Japan, Cambridge University Press, Cambridge. Schonberger, R.J. (1982), Japanese Manufacturing Techniques, Nine Hidden Lessons in Simplicity, The Free Press, New York, NY. Slack, N. (1991), The Manufacturing Advantage: Achieving Competitive Manufacturing Operations, Mercury, London. Sriram, V., Krapfel, R. and Spekman, R. (1992), `Àntecedents to buyer-seller collaboration: an analysis from the buyer's perspective'', Journal of Business Research, Vol. 25, pp. 303-20. Tunc, E.A. and Gupta, J.N.D. (1993), `Ìs time a competitive weapon among manufacturing firms?'', International Journal of Operations & Production Management, Vol. 13 No. 3, pp. 4-12. Williamson, 0. (1979), ``Transaction-cost economics: the governance of contractual relations'', Journal of Law Economics, Vol. 12 No. 2, pp. 233-50. Williamson, 0. (1981), ``The modem cooperation: origins, evolution, and attributes``, Journal of Economic Literature, Vol. 19, pp. 1557-68. Williamson, P. (1991), ``Supplier strategy and customer responsiveness'', Business Strategy Review, Summer, pp. 75-90. Yun, M. (1999), ``Subcontracting relations in the Korean automotive industry: risk sharing and technological capability'', International Journal of Industrial Organization, Vol. 17 No. 1, pp. 81-108.

26

Introduction

Determinants of new product selling performance: an empirical examination in The Netherlands

Research interest into the adoption of new products has increased in the last decade (Atuahene-Gima, 1997; Gatignon and Robertson, 1989; Norton and Bass, 1987; Weiss and Heide, 1993). This increased interest is predicated on the belief that with increasing market uncertainties and the rapid pace of technological change, new product marketing places unique demands on market participants in the adoption process (Achrol and Stern, 1988; Gatignon and Robertson, 1989; Moriarty and Kosnik, 1989; Norton and Bass, 1987). The new product adoption literature has mainly focused on final customers with little attention to other market participants such as the salesforce. This is remarkable because salespeople can be considered the first (internal) customers of a new product, and the salesforce often accounts for the largest portion of marketing personnel and the marketing budget in many firms (Cravens et al., 1993). In addition, Moriarty and Kosnik (1989) note that salespeople are often the most important communication vehicle for launching a new product. The present study, which focuses on the determinants of new product selling performance, includes sales manager and salesforce factors. We first present a conceptual framework with various factors influencing selling performance. Then, we discuss the research method. We conclude with the results, and their implications for the management of the salesforce and for future research.

Erik Jan Hultink Kwaku Atuahene-Gima and Iris Lebbink

The authors Erik Jan Hultink is an Associate Professor of Marketing at the Faculty of Design, Engineering and Production, Delft University of Technology, Delft, The Netherlands. Kwaku Atuahene-Gima is an Associate Professor of Marketing at the City University of Hong Kong, Kowloon, Hong Kong. Iris Lebbink is a Research Assistant at the Faculty of Design, Engineering and Production, Delft University of Technology, Delft The Netherlands. Keywords New product launch, Sales management, Performance, The Netherlands Abstract Although several studies have suggested that the salesforce is a major contributing factor to new product success, few studies have focused on the role of sales managers and salespeople in new product launch, particularly with respect to its relation with performance in new product selling. This article decribes the results of an empirical investigation into the determinants of new product selling performance. The results show that product newness to the firm, market volatility, resource inadequacy and behavior reward are related inversely to new product selling performance, whereas feedback provided by the sales manager, new product complexity, salesforce new product selling experience and output reward are related positively to sales performance.

Conceptual model Figure 1 presents the conceptual model underlying this study. The hypothesized relationships will be discussed below. Customer support refers to the degree to which salespeople need to add extra value to the new product through the performance of pre- and post-sale value adding and support activities such as customer education, customization, installation and technical support (Celly and Frazier, 1996). Customer support activities often enhance the chance of customer adoption of a new product (Atuahene-Gima, 1997). It can be argued that salespeople are more committed to the


27

Determinants of new product selling performance


Erik Jan Hultink, Kwaku Atuahene-Gima and Iris Lebbink

the new product. This makes it difficult for salespeople to adapt their selling techniques and methods to the needs of customers. Achrol and Stern (1988) note that market unpredictability creates adaptation problems for market participants. Salespeople are more likely to engage in dysfunctional behaviors because they may feel that they lose control over the selling process. It is therefore hypothesized that market volatility has a negative impact on new product selling performance: H3: Market volatility is related inversely to new product selling performance.

Figure 1 Conceptual model for studying new product selling performance

New product complexity is defined as the degree of sophistication and technicality inherent in the new product. Product complexity engenders uncertainty and anxiety in the selling process for salespeople (AtuaheneGima, 1997). Complex products may give salespeople the feeling that they loose control over the selling process, and they may be more likely to engage in dysfunctional behaviors. Bello and Gilliland (1997) found that distributors were more likely to engage in opportunistic behaviors when selling complex products. It is therefore hypothesized that new product complexity has a negative impact on new product selling performance: H4: New product complexity is related inversely to new product selling performance.

new product when they have to perform value adding and support activities, and when they are more committed to a new product they are likely to perform better. It is therefore hypothesized that customer support activities positively impact the selling performance of new products: H1: Customer support is related positively to new product selling performance. Product newness to the firm is defined as the level of experience the firm has in manufacturing, selling, marketing and engineering similar products prior to developing this new product. If a product is new to the firm, salespeople need to assess what kind of selling techniques to use, and new skills for selling the new product may be required. The selling process for ``new to the firm'' products may be of a trial-and-error nature. Because salespeople have to adapt their selling techniques and need to establish what is the best way to sell the new product, it has been argued that they are more likely to engage in dysfunctional behaviors. It can therefore be stated that product newness to the firm is negatively related to new product selling performance: H2: Product newness to the firm is related inversely to new product selling performance.

Resource inadequacy is defined as the degree to which sales managers lack human and financial resources for selling the new product. Because changing market environments create turbulence and necessitate continuous improvement in the company's products, the sales job is costly and time consuming. A company usually does not have endless resources in this area. Special resource management is imposed on the company by the market and the nature of the tasks to be performed (Samli et al., 1994). Lack of resources prevents sales people from performing their salesjob properly and this may affect their performance negatively. It is hypothesized that resource inadequacy is related inversely to new product selling performance: H5: Resource inadequacy is related inversely to new product selling performance.

Market volatility pertains to the degree of unpredictability of the new product's market conditions. In a volatile market environment, salespeople are less able to forecast customer preferences, competitors' new product introductions, price changes and other factors that may affect their achievement of results for

Feedback is defined as the degree to which sales managers provide information on the performance of the new product to 28




H7: Salesforce experience is related positively to new product selling performance

salespeople. Providing feedback is an important mechanism by which sales managers clarify roles, reduce the urge for dysfunctional behavior, and in general show support to salespeople (Atuahene-Gima, 1997). Tyagi (1985) found that feedback is instrumental in affecting sales performance in that salespeople use the given feedback to improve their own performance. Jaworski and Kohli (1991) showed that positive feedback serves an informational as well as a motivational role, and that negative feedback primarily serves an informational role in improving sales performance. Feedback reminds salespeople of the results that they are expected to attain. Where sales managers provide effective feedback, salespeople feel less ambivalent about their role, and they will be better armed to experiment and take risks in selling, and refrain from dysfunctional behavior (Atuahene-Gima, 1997). It is hypothesized that the more a sales manager provides the salesforce with feedback, the higher the salesforce's performance in selling the new product: H6: Feedback provided by the sales manager is related positively to new product selling performance.

Reward systems A reward system reflects the set of rules that evaluators use in attaching outcomes to an individual's performance. The evaluation of the individual's performance has been made (objective performance) and the result of this evaluation is in the form of a good-bad judgement along a series of one or more dimensions (Naylor et al., 1980). Rewards are the logical extentions of the control process, following monitoring and evaluation. In this study, two types of rewards were examined, namely output- and behavior-based rewards. Outcome-based reward is defined as the degree to which rewards are tied to the bottom-line profitability of the project (Sarin and Mahajan, 1997). Behavior-based reward is defined as the degree to which rewards are tied to procedures, behaviors, or other means of achieving desired outcomes (Sarin and Mahajan, 1997). Desirable behaviors and outcomes are rewarded, while undesirable actions and results are punished. Rewards are crucial because people recognize actions that lead to positive consequences, repeat those actions and avoid any actions that lead to negative consequences (Challagalla and Shervani, 1996). Furthermore, path-goal theory suggests that commitment to goals is strongly affected by rewards. Goal commitment in turn leads to improved performance. Therefore, we expect rewards to influence salesperson's performance positively: H8a: Output reward is positively related to new product selling performance. H8b: Behavior reward is positively related to new product selling performance.

Salesforce experience with new products refers to the extent of selling knowledge of the salesperson in general and with regard to the current new product in particular. Salesforce experience has been defined as the number of years the salesperson has spent in his or her current job (Atuahene-Gima, 1997). Refined selling skills are necessary for effective new product sales performance (Samli et al., 1994). Through experience salespeople are likely to gain an improved and elaborate understanding of selling situations, customer types, and their potential needs (AtuaheneGima, 1997). It can also be argued that experienced salespeople are more likely to deal succesfully with the job stress and extra demands brought on by the introduction of a new product (Behrmann and Perreault, 1984). These authors found that salesforce experience is positively related to performance. By the same logic, experience should also reduce dysfunctional behaviors in new product selling since the more experienced the salesperson, the greater the understanding that dysfunctional behavior does not pay in the long run (AthuaheneGima, 1997):

Research method Our research findings are based on a survey among sales managers from companies selling technology-intensive products in The Netherlands. The survey was pretested in two rounds. In the first pretest, six academic experts were asked to evaluate the items critically from the standpoint of domain representativeness, item specificity and clarity of construction. Based on the detailed critique received, some items were revised to improve their specificity and precision. Two sales managers were asked to complete the revised questionnaire in the 29




presence of the researchers, and indicate any ambiguity or other difficulties they experienced in responding to the items, as well as to offer any suggestions they deemed appropriate. Interviews with two other sales managers after the second round indicated that the meanings of the questions and answer categories were clear and that the survey could be completed without difficulties. From a total of 237 companies contacted by phone, 165 sales managers agreed to participate in the research and received the mail questionnaire. Five (6.9 per cent) companies had not developed any new products in the last three years, 12 (16.7 per cent) companies only produced but did not sell new products, 23 (31.9 per cent) companies were not interested in participating in the research mainly because of reasons of secrecy, ten (13.9 per cent) companies only developed tailor made products, and 22 (30.6 per cent) companies did not employ a salesforce. Another 36 companies could not be reached by phone and received the questionnaire without pre-notification. In total, 201 questionnaires were sent to sales managers, of which 14 decided not to participate in the research after receiving the questionnaire. The response to the mail survey was 52 (29 per cent of those who agreed to participate). Sample Most companies operate on industrial markets (96 per cent); only 4 per cent of the companies focus on consumers. The nature of business of the respondents is as follows: computer manufacturing (19 per cent); control systems (19 per cent); computer peripherals (17 per cent); electronics (13 per cent); medical (9 per cent); computer software (6 per cent); computer networking (6 per cent) and other (11 per cent). The median annual sales of the firms is $17 million and the average number of people employed is 100. The firms introduced an average of five new products over the last three years. Most respondents (74 per cent) are between 35 and 54 years old, and all respondents are men. Respondents' average selling experience is 14 years, of which ten years with the current firm. In all cases, the key informant, the sales manager, was asked to select and describe the most recent new product that his/her firm had introduced to market as a referent for the study. The new products selected by sales managers were introduced on average 17 30

months ago. This period is long enough to assess its success and not so long that respondents do not remember enough details about it. Of the selected products, 15 per cent are me-too-products, 23 per cent are lineextensions and 60 per cent are product modifications. Only one respondent selected a new-to-the-world product. Measurement scales All constructs in the survey were measured with five-point multi-item scales. Selling performance ( = 0.88) was measured with five items. We asked the sales manager to indicate the degree to which salespeople had been successful in meeting the objectives he had set for the new product such as gaining a good market share, generating a high level of sales volume, quickly generating sales, and identifying major accounts and selling the new product to them. Customer support ( = 0.75) was measured with five items that reflect the degree to which the salesperson conducted pre- and post-sale value adding activities such as customer support, installation and customer education. Product newness to the firm ( = 0.88) was measured with four items. We asked respondents how much experience the firm had in manufacturing, selling, marketing and designing similar products prior to the development of the current new product. Market volatility ( = 0.66) was measured with four items that reflect the sales manager's perception of the degree of predictability of the market conditions for the new product. Product complexity (r = 0.49) was measured with two items describing the degree of complexity and technical sophistication of the new product. Resource inadequacy ( = 0.79) was measured with four items indicating the degree to which the sales manager lacked financial and human resources for selling the new product. Feedback ( = 0.83) was measured with four items capturing the degree to which sales managers provided information to salespeople about their performance. Salesforce experience ( = 0.51) was measured with three items that reflect the sales manager's perception of the experience of his salesforce in terms of overall new product selling experience, experience in selling similar new products, and familiarity with competitor's new products. Output reward ( = 0.80) was measured with three




items. We asked respondents to indicate to what degree pay increases for salespeople depend on their performance compared with goals, and the degree to which salespeople achieve set goals regardless of whether sales procedures were followed. Behavior reward ( = 0.80) was measured with three items. We asked respondents to what degree pay increases for salespeople working on this new product depend on the extent salespeople follow laid down procedures, how much knowledge they have of specific procedures and practices in selling the new product, and the quality of market information they provide. Owing to sample size restictions, we conducted four sets of factor analyses: (1) product/market characteristics; (2) resource inadequacy, feedback and salesforce experience; (3) output reward and behavior reward; and (4) new product selling performance.

a threat to the substantive conclusions drawn from the research. Table II presents the results. Customer support (b = 0.15, p > 0.10) is not significantly related to new product selling performance. However, H2 stating that product newness to the firm is inversely related to new product selling performance is supported (b = ±0.22, p < 0.05). When a product is new to the firm, the salesforce may not have sufficient experience in selling similar products, and this inexperience may impact selling performance negatively. Market volatility is found to be inversely related to new product selling performance, supporting H3 (b = ±0.20, p < 0.05). Market volatility may inhibit salespeople to adapt their selling techniques and methods to the Table II Regression analysis on new product selling performance Variables

The appendix provides a list of measurement items and factor loadings. Table I provides descriptives of the measures and the correlation matrix.

Analysis and results We tested the hypotheses with multiple regression analysis. To assess potential multicollinearity problems, we calculated the variance inflation factors (VIFs) to examine the extent to which nonothogonality among the independent variables inflate standard errors. The VIFs were all well below the recommended cut off point of ten (Neter et al., 1989), suggesting that mulicollinearity is unlikely to be

Customer support Product newness to the firm Market volatility New product complexity Resource inadequacy Feedback Salesforce experience Output reward Behavior reward

0.15 ±0.22** ±0.20** 0.22** ±0.39**** 0.18* 0.34* 0.26*** ±0.34***

R2 Adjusted R2 F N

0.66 0.58 8.21*** 47

Notes: Significance one-tailed * p < 0.10; ** p < 0.05;

***

p < 0.01;

****

p < 0.001

Table I Correlation matrix Mean 1. Selling performance 2. Customer support 3. Product newness to the firm 4. Market volatility 5. New product complexity 6. Resource inadequacy 7. Feedback 8. Salesforce experience 9. Output reward 10. Behavior reward

3.51 0.88 3.27 0.75* 2.54 0.88 2.82 3.96 2.49 4.49 3.51 3.86 2.89

1

2

3 **

0.43

0.66 0.49a 0.79 0.83 0.51 0.80 0.80

4

5

6

8 **

9 **

10 *

±0.10 ±0.19 0.18 ±0.49 0.35 0.48 0.28 ±0.02 0.05 ±0.13 0.22 ±0.26* 0.06 0.40** 0.31* 0.40** 0.09 0.13 0.05 0.10 ±0.05 0.23 ±0.16 0.12

0.04 ±0.22 0.10 ±0.08 ±0.14 0.27* ±0.10 0.09 0.19 0.09 0.37**±0.41** 0.12 0.00 0.20 0.31* 0.40** ±0.08 0.24* 0.19

Notes: Significance: * p < 0.05; ** p < 0.01 = a Correlation coefficient r is reported, because the construct contains two items

31

7 **




needs of customers. Such unpredictability apparently creates adaptation problems (Achrol and Stern, 1988). H4, stating that product complexity is related inversely to new product selling performance is not supported. In contrast, product complexity appears to be positively related to performance (b = 0.22, p < 0.05). An explanation for this finding may be that salespeople relish the challenge in selling complex new products. Supporting H5, resource inadequacy is inversely related to new product selling performance (b = ±0.39, p < 0.001). This finding suggests that a lack of resources prevent salespeople from performing their sales job properly. As proposed in H6, feedback provided by the sales manager is positively related to new product selling performance (b = 0.18, p < 0.10). Apparently, salespeople perform better when their sales manager provides them with feedback on their past performance. As feedback reminds salespeople of the results that they are expected to attain, they may feel less ambivalent about their role, and will be better armed to experiment and take risks in selling the new product. H7, stating that salesforce experience is positively related to performance is supported (b = 0.34, p < 0.10). When salespeople are more experienced, they are more likely to be aware of the transformation processes involved and will have less difficulty in adjusting to selling the firm's latest newest product (Celly and Frazier, 1996). H8a, proposing that output reward is positively related to new product selling performance is supported (b = 0.26, p < 0.01). This finding suggests that if salespeople are rewarded based on their outputs they perform better. However, H8b proposing that behavior reward is positively related to sales performance is not supported. Instead, behavior reward is found to be negatively related to new product selling performance (b = ±0.34, p < 0.01). Apparently, rewards based on behavior do not serve a motivational role for salespeople to improve their performance. An explanation for this finding may be that the use of behavior rewards requires sales managers to closely follow salespeople's behavior. Salespeople in The Netherlands may resent this perceived behavioral regimentation, and the lack of discretion and flexibility associated with such a reward system. 32

Discussion and implications This is an early research effort into the determinants of new product selling performance. The results presented here must be judged on this exploratory nature and on its limitations. The first limitation is the small sample size. Given a larger sample, our findings and conclusions would have been stronger. However, even given the limited size of the sample, the results are remarkable. A second limitation is that we did not cover other reward systems such as differentiated and undifferentiated rewards (Sarin and Mahajan, 1997), but only focused on behavior and output rewards. A limitation for the generalizability of this study is that most respondents operate on industrial markets. A suggestion for future research is to replicate this study in the consumer market. In addition, this study was conducted in The Netherlands. With data collected from other countries, the reported effects could be investigated internationally. Cultural influences are expected to exist and to impact performance differentially in different countries. A final limitation is that the results are based on the viewpoints of sales managers. Salespeople are also important and their viewpoints also need to be considered in future research. The present results show that new product selling performance depends on multiple factors. ``New to the firm'' products have a negative impact on selling performance and before developing such products, managers should ask themselves whether it is necessary to develop such products, or whether it is preferable to develop products with which the firm has more experience. The same argument applies to the marketplace. It may be better to select more stable markets because volatile markets negatively impact sales performance. Resource availability appeared to be one of the most important determinants of sales success; resource inadequacy largely hurts new product selling performance. The results also show that reward structures are preferably based on output rather than on behavior, at least in The Netherlands. Finally, managers may want to select experienced salespeople for selling complex new products while providing them with sufficient feedback in order to increase the chances of sales success of the new product.




Jaworski, B.J. and Kohli, A.K. (1991), ``Supervisory feedback: alternative types and their impact on salespeople's performance and satisfaction'', Journal of Marketing Research, Vol. 28, May, pp. 190-201. Moriarty, R.T. and Kosnik, T.J. (1989), ``High-tech marketing: concepts, continuity and change'', Sloan Management Review, Vol. 30 Summer, pp. 7-17. Naylor, J.C., Pritchard, R.D. and Ilgen, D.R. (1980), The Theory of Behavior in Organizations, Academic Press, New York, NY. Neter, J., Wasserman, W. and Kutner, M.H. (1989), Applied Linear Regression Models, 2nd ed., Richard D. Irwin, Homewood, IL. Norton, J.A. and Bass, F.M. (1987), Diffusion theory model of adoption and substitution for successive generations of high-technology products, Management Science, Vol. 33, September, pp. 1069-86. Samli, A.C., Wirth, G.P. and Wills Jr, J.R. (1994), ``Hightech firms must get more out of their international sales efforts, Industrial Marketing Management, Vol. 23, pp. 333-42. Sarin, S. and Mahajan, V. (1997), ``The effect of reward structures on the performance of cross-functional product development teams'', Working Paper. Tyagi, P.K. (1985), ``Relative importance of key job dimensions and leadership dimensions in motivating salesperson work performance'', Journal of Marketing, Vol. 49, Summer, pp. 76-86. Weiss, A.M. and Heide, J.B. (1993), ``The nature of organizational search in high technology markets'', Journal of Marketing Research, Vol. 30, May, pp. 220-33.

References Achrol, R.S. and Stern, L.W. (1988), `Ènvironmental determinants of decision-making uncertainty in marketing channels'', Journal of Marketing Research, Vol. 15, February, pp. 36-50. Atuahene-Gima, K. (1997), `Àdoption of new products by the sales force: the construct, research propositions, and managerial implications'', Journal of Product Innovation Management, Vol. 14, pp. 498-514. Behrmann, D.N. and Perreault, W.D. (1984), `À role stress model of performance and satisfaction of industrial salespersons'', Journal of Marketing, Fall, Vol. 48, pp. 9-21. Bello, D.C. and Gilliland, D.I. (1997), ``The effects of output controls, process controls , and flexibility on export channel performance'', Journal of Marketing, Vol. 61, January, pp. 22-38. Celly, K.S. and Frazier, G.L. (1996), `Òutcome-based and behavior-based coordination efforts in channel relationships'', Journal of Marketing Research, Vol. 23, May, pp. 200-10. Challagalla, G.N. and Shervani, T.A. (1996), ``Dimensions and types of supervisory control: effects on salesperson performance and satisfaction'', Journal of Marketing, Vol. 60, January, pp. 89-105. Cravens, D.W., Ingram, T.N., LaForge, R.W. and Young, C.E. (1993), ``Behavior-based and outcome-based sales force control systems'', Journal of Marketing, Vol. 57, October pp. 47-59. Gatignon, H. and Robertson, T.S. (1989), ``Technology diffusion: an empirical test of competitive effects'', Journal of Marketing, Vol. 53, January, pp. 35-49.

Appendix Table AI Measurement scales FLa

Performance In your opinion, to what extent were salespeople involved in selling this new product successful in: a. Contributing to gaining a good market share for this new product b. Generating high level of sales volume for this new product c. Quickly generating sales for this new product d. Identifying major accounts and selling this new product to them e. Assisting you in achieving the objectives for this new product

0.82 0.88 0.86 0.75 0.80

Customer support In selling this new product, to what extent were salespeople expected to perform the following functions: a. Customer education/product training b. Technical support/information c. Customization of product d. Delivery and installation e. Customer support activities

0.75 0.76 0.52 0.80 0.67

Product newness to the firm Prior to the development of this new product, how much experience did your firm have with: a. Manufacturing similar products b. Selling and promoting similar products c. Marketing similar products d. Engineering/designing similar products

33

0.85 0.90 0.84 0.85 (continued)




Table AI FLa

Market volatility Please indicate your opinion of the nature of the market environment for this new product at the time it was introduced. The environment was: a. Stable ± unstable b. Certain ± uncertain c. Changing slowly ± changing rapidly d. Predictable ± unpredictable

0.70 0.80 0.52 0.72

New product complexity In the following pairs of descriptions, please circle a number that best reflects your opinion about the product a. Simple ± sophisticated b. Non-technical ± highly technical

0.80 0.84

Resource inadequacy Please indicate your degree of agreement or disagreement with the following statements as they pertain to how you manage salespeople involved in this new product a. My department lacks the financial resources to expand our salesforce b. Salespeople assigned to this new product are insufficient c. Lack of resources limits my ability to manage the salesforce effectively d. For this new product, salespeople are thinly stretched over several territories of accounts

0.63 0.76 0.78 0.81

Feedback Please indicate your degree of agreement or disagreement with the following statements as they pertain to how you manage salespeople involved in this new product: a. I provide information to salespeople on how well they are performing their sales activities b. I provide information to salespeople on their performance c. The results of salespeople's work are clearly evident to them d. Salespeople have opportunities to find out how well they are doing

0.91 0.89 0.70 0.65

Output reward Pay increases depend on: a. How the performance of salespeople compare with the goals for the new product b. The degree to which they achieve the goals set for this new product c. The degree to which salespeople have achieved specified outputs regardless of whether sales procedures were followed or not Behavior reward Pay increases depend on: a. How salespeople follow laid down sales procedures pertaining to this new product b. Salespeople's knowledge of specific procedures and practices in selling this new product c. Quality of market information about the new product that salespeople provide Note: a FL = factor loadings

34

0.84 0.85 0.82

0.86 0.83 0.82

Introduction

Service innovation multi-country launch: causes of delays

Business observers suggest that financial institutions increasingly develop service innovations targeted at several countries, and co-ordinate their launches on a global basis (Business Wire, 1995)[1]. Some businesses manage to launch their service innovation across their intended target markets in a timely manner, many do not (American Banker, 1995). Timeliness is defined, in this respect, as the extent to which the introduction of the service innovation across multiple country markets is completed within the planned schedule (see also Cooper and Kleinschmidt, 1994). Nonetheless, this neither means rapid crossing of national boundaries (Oackley, 1996), nor equates with accomplishing the introduction in the fastest (relative to competitors') time (Kerin et al., 1992), although there may be benefits accruing from a short lead-time (Smith and Reinertsen, 1991). A delay, conversely, occurs when the time taken to launch the service innovation across multiple countries exceeds the planned duration. Why is such timeliness important? Managers operate on the basis of specific perceptual time frameworks (i.e. mindsets) regarding company action and the evolution of competition (e.g. Kessler and Chakrabarti, 1996), and they intrinsically link enhancement of their firmspecific competitive advantage, greater profitability, and higher total sales with various lengths of time to launch their innovations in the marketplace (e.g. Bayus et al., 1997; Datar et al., 1997; Griffin, 1997). Bettis and Hitt (1995) further argue in this respect, that some successful innovations may in fact require long life cycles (p. 14). Strategic management literature supports the above suggesting the existence of multiple strategies that can lead to success (Miles and Snow, 1978). Nonetheless, success can not be achieved if delays from schedule (i.e. the anticipated time frame) occur. Repercussions for the delayed service innovation will include decreased sales, longer break-even times, and minimisation of service lifetime profits (Dumaine, 1989). But, what are the facilitators of on-time service innovation multi-country launches? Conversely, what are the potential causes of delays? There is an increasing need to examine

George M. Chryssochoidis and Veronica Wong

The authors George M. Chryssochoidis is a Lecturer in Marketing and Strategy Cardiff Business School, Cardiff, UK. Veronica Wong is a Professor in Marketing, Loughborough University, Loughborough, Leicester, UK. Keywords Innovations, Cyprus, Service industries, Financial insititutions, International business Abstract Little research has focussed on launch of service innovations across international markets. The determinants of timeliness (conversely, delays) in the launch of service innovations across multiple country markets has equally received little attention in the literature. This paper reports on the findings of an exploratory case-based research investigation into service innovations launched by Cypriot financial institutions across three or more foreign country markets. The analysis shows that on-time introduction of service innovations rely heavily on: service innovation synergies with existing operations; sufficiency of marketing resources; extensive use of ``soft'' integrating organizational mechanisms; and proficiency in the development process. External environmental elements, including market heterogeneity and extensive competition have a lesser impact on the timeliness of such multicountry introductions. Several propositions are forwarded for further investigation.


The authors thank Mrs Natasa Economou for research assistance.

35




the issue of timeliness in multi-country service innovation introductions, at a time when service innovation failures, generally, remain at unacceptably high levels and market winners are invariably rare occurrences (Deal and Edgett, 1997, pp. 489-90). Furthermore, the risks of failure are reported to be greater for product innovations launched across multiple markets (Mascarenhas, 1992).

(1) the companies launched one or more of their new services in three or more foreign countries; (2) the headquarters (HQ) of these companies were located in Cyprus; and (3) the service innovation[2] selected for investigation has been launched, and operating in foreign country markets for 12 months or more prior to the study. The first criterion was necessary for a clearer identification of multi-country service innovation launches. The second criterion was necessary to avoid data contamination from service innovation launches by global companies. If HQ were in other countries, managers might not be fully aware of internal company circumstances that apply to the focus service innovations. The third criterion was necessary for greater managerial judgement accuracy. According to the Directory of Services published by the Cyprus Chamber of Commerce and Industry, the Cypriot financial services sector consists of four major categories, namely: banks, debt collections and credit reporting, finance companies, and insurance companies. Of these four categories, in only one ± banking, companies met all the set criteria. As a result, the sample of the services investigated in this study came from four banks. These four banks launched a total of 16 service innovations overseas in the year preceding the present research study. Nonetheless, only seven service innovations were launched in more than three country markets. These seven projects represent essentially, therefore, the universe of Cypriot financial firms engaged in the activity that is the focus of the present study. In fact, similar small sample size is not uncommon in development research in financial services due to the nature of the activity (e.g. Johne and Pavlidis, 1995). Three of the four banks launched two and the fourth bank launched one such service innovations. Data were collected for all the above service service innovations. The focal services covered deposits, private banking (stock market transactions on behalf of individuals or small firms), home office banking, financial package for repatriation, housing loans for nonresidents (two), and investment banking consulting (see Table I).

Objectives What factors ensure timeliness or lead to delays in service innovation launches across multiple country markets? This is the focus of the present article. Launches of service innovations by Cypriot banking institutions are investigated.

Methodology Case study approach Qualitative exploratory research was required to enrich the understanding of service innovation multi-country launches. Focus was on firms in a single industry to minimise significant sample heterogeneity and unveil context. An extensive series of interviews were conducted, the case research framework, delineating the key dimensions investigated in these interviews, being available in the Appendix. Detailed case studies were employed because: . . .there are identifiable sets of research situations where the qualitative, in-depth approaches are desirable, and particularly useful in complex phenomena, where the existing body of knowledge is insufficient to permit the posing of causal questions, and when a phenomenon cannot be studied outside the context in which it naturally occurs (Bonoma, 1985, p. 207).

The focus of this study meets these requirements and the approach used is consistent with procedures recommended for marketing theory development by several scholars (e.g. Zaltman et al., 1982; Deshpande, 1983) and widely practised in areas such as service quality (Parasuraman et al., 1985; Zeithaml et al., 1988). Sampling The population of the study comprised all the companies in the Cypriot financial service sector that met certain criteria: 36




Table I Focal cases and timeliness/delay in service innovations multi-country launch

Case

Bank Service

Target country markets

Timeliness/delay in multi-country launch Brief description of the new service and circumstances

Case 1

A

Deposits

UK, USA, Timely Australia, S. Africa, Greece

Case 2

A

Housing loans UK, USA, Greece Timely

Same as above

Case 3

B

Repatriation package

UK, S. Africa, Greece

Timely

A well thought package to a small and precise niche: expatriate Cypriots easily identifiable through the local Cypriot communities around the world; bank was a familiar name to these customers. The loan for repatriation was backed up by advice and additional loan availability for someone to set up his/her own company. Service innovation was unique, not many banks offering similar services. Loans were mainstream business for the bank, something that maximised synergies; no additional personnel and training needed

Case 5

C

Private banking

UK, Russia, Greece

Timely

The bank used its existing reputable agents in the stock market. An easy to launch highly synergistic and clear benefits service to existing customer base

Case 4

B

Investment banking consulting

Bulgaria, Greece, Delayed Russia

Case 6

C

Housing loans UK, Greece, Canada, Australia, S. Africa

Delayed

Target overseas consumers wishing to buy property in Cyprus. Unclear target segment and non-identifiable service benefits for the customers. No communication between subsidaries, confusion and lack of feedback. Subsidaries thought the new service was part of the existing loans program. Promotion program and marketing by overseas subsidiaries hindered by lack of people, funds and appropriate distribution. No competition

Case 7

D

Home office banking

Delayed

Home office banking for businessmen who could use their PCs to link with the Bank's network through modem. Perceived to be a complex service innovation, it first took time to train own personnel ± many did not understand the technology involved. It also took time and resources to educate the clients; they needed time-consuming guidance. Several times, personnel was not in position to help customers. Problem with coordination ± ``Finance'' could not see the reason for ``Marketing's'' insistence on the service

Russia, Yugoslavia, Ukraine

A simple and clearly defined service. The decision to launch the service was taken at HQ, but marketing was carried out independently at local country level. Strong and frequent interaction took place between HQ and subsidaries

Investment banking is not a core business for the Bank-limited knowledge was available for the development of the new service. The service targeted the corporate sector in countries for which the Bank had weak market knoweldge, market presence and inappropriate outlets. Personnel needed more training at the target country markets, and it took time to find the knowledgeable people to staff the company's local subsidaries. An internall co-ordination problem within the Cyprus HQ and lack to meetings between HQ and target market subsidaries also occured

were the principal respondents in the present study. The respondents routinely consulted personal files for clarification and line managers for additional information in many instances. In line with Calder's (1977) recommendations, interviewing of the principal respondents took place on the basis of the semi-structured case research protocol (see Appendix) for the selected service innovation launches. The interviewee was initially asked to identify those service innovations that the company had recently launched abroad and met the criteria for inclusion in the study. The service innovation selected was the unit of subsequent discussion

Data collection Data collection for the study followed a twostage process. In the first stage of the research program, the sample banks were pre-screened by telephone against participation criteria, as described above. The willingness of the bank managers to participate in the project was also determined at this stage. As noted earlier, all four banks that qualified for study agreed to participate. In the second stage personal interviews were conducted with the senior executives responsible for international operations and involved in service planning, development, and launch for each one of the investigated cases. These senior executives 37




and analysis. Short notes were taken by hand and extensive transcripts written after each interview allowed a detailed cross-case analysis at a later stage. The semi-structured approach allowed the researchers not only to generate qualitative data on the phenomenon being studied, but also systematically to collect data that could be compared across case units.

and three delayed service innovations launches. For the timely launches, the planned duration for the launch across key (in terms of expected sales) target markets was, on average, 7.5 months, and 34.3 months for all (key + secondary) foreign target country markets. The actual time eventually taken to make the service innovations available was, on average, 4.0 months for key target country markets, and 34.00 months for all (key + secondary) target country markets. The data imply therefore that the sample timely cases actually exceeded expectations by some 47 percent when their key target markets are concerned. By contrast, the delayed projects had an average planned launch duration of 2.3 months for key target country markets, and 38.3 months for all (key + secondary) their foreign target country markets. The actual time eventually taken to make the service innovations available was an average of 4.0 months for key target country markets, and 41.00 months for all (key + secondary) target country markets. The data show therefore a delay of around 42 percent (2.3/ 4.00) for key and 7 percent (38.3/41) for all (key + secondary) markets respectively. Discussion is developed around the following themes: synergies and organisational resources available to the service innovation; internal organisational communication; the service innovation development process; and elements not affecting the timeliness of the service innovation multi-country launch.

Defining and measuring timeliness in multi-country service innovation launch Timeliness in multi-country service innovation launches is defined as the actual availability of the service innovation within ± or faster than ± the planned (scheduled/ anticipated) period for availability of the service innovation across the firm's target country markets. This definition follows from the works of Cooper and Kleinschmidt (1994), Olson et al., (1995) and Chryssochoidis and Wong (1998), regarding timeliness in NPD and commercialisation of new products. Conversely, a delay occurs when the service innovation is actually made available across its multiple target country markets later than the planned time frame for such service availability, reflecting failure to adhere to the planned time schedule. ` ... Timeliness in multi-country service innovation launches is defined as the actual availability of the service innovation within ± or faster than ± the planned (scheduled/anticipated) period for availability of the service innovation across the firm's target country markets... '

Findings: drivers for timely multi-country new service launches

Respondents were requested to indicate the planned and actual launch time across its target country markets for the focal service innovations. The time difference was then taken to give a relative measure. This measure refers to the proportional difference: planned/ actual launch time in months (timeliness = dt 1; delays = dt < 1). For example a 0.80 result means that the company faced a 20 percent delay in the launch schedule. Following this, one of the four banks considered the multi-country launch of both its service innovations to be timely. Two other banks had one timely and one delayed service innovation launches. In the case of the fourth bank, its service innovation launch was labelled as delayed. This yielded four timely

Synergies and organisational resources available to the service innovation Synergies between the service innovation and existing services and operations were found to be important drivers for a timely service innovation launch. Respondents considered that such synergies include the service innovation benefits from the firm's existing technological (IT) infrastructure (that is the service innovation did not request development of new software); or fit with the firm's existing expertise and human resource capabilities (that is the company could tap on its existing personnel for support). The lack of a need for customer training to use the service innovation was also mentioned here. For 38




instance the delay in case seven was partly due to the need to educate customers in Russia and Ukraine on how to remote login in the bank's own computer system. This was timeconsuming and existing personnel was not available to help. Timely cases also focused on an existing rather than new customer base. Sufficient availability of adequate distribution channels, and funds and personnel needed for the preparation of the service innovation launch were also found to be important drivers for timely launches. These include adequate quality sales and promotion capabilities and resources, quality control for the service, and personnel to handle after sales customer support. The above suggest the following propositions: P1: Lack of synergies between the service innovation and existing ones increases the likelihood of delays in service innovation multi-country launches. P2: Insufficiency of marketing resources increases the likelihood of delays in service innovation multi-country launches.

1989). By contrast, the ``harder'' mechanisms for coordination of cross-border activities were not identified to be relevant to timeliness in the service innovation launch. ``Harder'' elements relate to structural and formal mechanisms, namely: the grouping of organisational units, the centralisation or decentralisation of decision making, the formalisation of procedures, the extent of planning, performance appraisal, and behaviour control (Martinez and Jarillo, 1989). These are commonly reflected in formalised procedures, written policies, extensive formal planning, and use of comprehensive management information systems and reporting procedures for project monitoring and controlling performance (e.g. Egelhoff, 1988). On the basis of these observations, we propose that: P3: Extensive use of ``softer'', informal, and subtle mechanisms between HQ and subsidiaries/agents across countries reduces the likelihood of delays in service innovation multi-country launches.

Internal organisational communication The extensiveness of internal organisational communication was also identified to be an important determinant of timeliness in the service innovation launch. Strong and frequent interaction took place, for instance, in case one (a timely launch). In contrast, the infrequent internal organisational communication regarding the launch of another service innovation (case six) resulted in major confusion and misunderstanding. Subsidiary personnel thought that the focus innovation was part of the existing loans program, and no further action to prepare for the launch of the service innovation took place. Extensive internal organisational communication was identified to include five elements: direct contact, meetings, and interaction between subsidiaries and agents; the use of inter-departmental permanent committees between HQ and subsidiaries/ agents; the existence of a matrix system; the creation of interdepartmental temporary task forces between HQ and subsidiaries/agents; and the existence of shared goals. These elements are also considered to be ``softer'', more subtle and less formal mechanisms for coordinating cross-functional, cross-border activities (Ghoshal and Bartlett, 1988; Ghoshal et al., 1994; Martinez and Jarillo,

The service innovation development process Development process elements were also found to be important determinants for timeliness in the service innovation launch. They include an extensive set of activities associated with proficient execution of the service innovation development: . Proficiency in executing predevelopment project planning and activities (market and relevant technical assessment, indepth market studies, and financial analysis). . Proficiency in executing market development activities (testing/early testing of prototype service by customers, trial sales, functional integration, coordination of delivery channels/ intermediaries, advertising and promotion; training of personnel, intermediaries, and formal promotions to customers and intermediaries). . The use of a protocol (clear and early identification of target markets, customer needs, service concept and positioning, service specifications/technical requirements/features/characteristics). . A superior service, as reflected in the presence of unique attributes and clearly visible benefits to the customer, superior 39




quality or performance, value for money, or a consistent image with corporate image. The link between a proficient development process, synergies and organisational resources is noticeable though, since all form together a cluster of organisational abilities and skills, necessary to support the launch of the service innovation project. Interestingly, the respondents did not comment that proficiency in executing technological activities (technical development, in-house technical testing) were important determinants of timeliness in the service innovation launch. The reason may be that the technological content of a service innovation is not as explicit in services as in high tech manufactured products or processes (Sundbo, 1997). The above lead to further propositions: P4: Proficient execution of predevelopment activities in the development process reduces the likelihood of delays in service innovation multi-country launches. P5: Proficient execution of market development activities in the development process reduces the likelihood of delays in ±country service innovation multi-country launches. P6: Proficient execution of technological development activities in the development process may or may not affect the likelihood of delays in service innovation multi-country launches. This will depend upon the technological content of the service innovation. P7: The use of a protocol during the development process reduces the likelihood of delays in service innovation multi-country launches. P8: A superior service innovation reduces the likelihood of delays in service innovation multi-country launches. Elements not affecting timeliness in multi-country service innovation launches Several elements related to marketing homogeneity were found to be less important than expected for the timeliness in the service innovation launch. Interestingly, managers considered the competitive intensity to be higher in the timely than the delayed cases. This suggests that the launch for the investigated timely service innovations was accomplished on time in spite of competition. Managers even explained that firms were 40

determined to ensure timely multi-country launch because of their intensely competitive markets. The above observations suggest that: P9: Marketing heterogeneity across country markets does not have a discernible effect on the timeliness of service innovation multi-country launches. P10: The intensity of competition across country markets does not have a discernible effect on the timeliness of service innovation multi-country launches.

Conclusions, managerial implications and limitations This study explored the reasons for delays in service innovations' multi-country launches in a selected sample of Cypriot banking firms. In doing so, the study is the first attempt to provide empirical evidence on an issue of major importance to firms launching service innovations across multiple country markets. The importance of the subject will increase even further for reasons such as global competition and internationalising customers who will step up the pressure on firms to compete on time. Although the issues raised cannot be generalised to other financial or service firms, the study's findings provide a starting point for investigating the factors that govern timely international launch of those service innovations targeting international markets. ` ... timeliness in multi-country launch will play an increasingly important role as financial institutions attempt to gain competitive advantage, boost profitability, and increase market share via international market expansion... ' We have not investigated the extent of the influence of timeliness in launch on service innovation success. This is a limitation and additional research is needed on this issue. In the case of the financial service innovations that we studied, timeliness in multi-country launch will play an increasingly important role as financial institutions attempt to gain competitive advantage, boost profitability, and increase market share via international market expansion. This article has highlighted some key timeliness factors




(conversely, causes of delays). Although the applicability of these factors across contexts should not be automatically assumed, the current study argues that the identified factors that may also be relevant to other service innovations launched across multiple country markets. To avoid delays in launch, managers should take advantage of potential synergies between the innovation and the firm's existing skills, capabilities, and resources. The data also showed, that delays will also be avoided if they stick to their current customer base and segments familiar to the firm. Furthermore, managers need to consider the adequate availability of delivery channels and marketing personnel and funds (including sufficiency of sales, promotion and after sales support) for the service innovation since these factors play an influential role in timeliness in the service innovation's multi-country launch. ` ... where firms had committed resources to the innovation launch exercise and demonstrated proficiency across a wide spectrum of service innovation development and launch activities, they had managed to accomplish the launch well ahead of the planned schedule... ' Consistent with previous studies into product and service innovation success (see Cooper and Kleinschmidt, 1993; 1994; Hart, 1996; Johne and Snelson, 1988; Moenaert and Souder, 1990; Montoya-Weiss and Calantone, 1994), proficiency in predevelopment planning, and the execution of the development process, including the use of a development protocol, facilitate on-time launch. Importantly, but not surprisingly, delivering a service innovation that offers superior quality, value or benefits to target customers also helps. By implication, offering what the market wants and giving to their end customers better value not only reduces the potential objections by channel/ intermediaries (Cooper, 1979; de Brentani, 1989; Rogers, 1983) but also avoids delays in multi-country launches due to last-minute adjustments and improvements. This study revealed the relative importance of ``softer'', informal and direct mechanisms for communications and for controlling the service innovation project. The reliance on ``harder'' organisational mechanisms (formalisation, 41

centralisation, control of performance) may help, but these factors are not the decisive force for timely launches. Contrary to expectations, extent of market diversity and heterogeneity did not feature as significant problems leading to rollout delays. There are a couple of important implications for international service operators. On-time multi-country launch of service innovations can be achieved by paying particular attention to the internal, firm and project-related determinants of service innovation timeliness. These are considered the ``controllable'' environmental forces. Timeliness in the launch of the innovation can be achieved in spite of adverse market environment forces or demands impacting on the firm's resources, such as diversity of customer and market needs and buying practices. Indeed, our results suggest that, where firms had committed resources to the innovation launch exercise and demonstrated proficiency across a wide spectrum of service innovation development and launch activities, they had managed to accomplish the launch well ahead of the planned schedule. In view of the small and selective sample, the current analysis is strictly exploratory in nature, and results must be interpreted with extreme caution. Nonetheless, the propositions generated by the present study should be further examined, extended, and tested through broader-based empirical studies into global service innovation development and launch. The time is ripe to explore this challenging task more fully in view of both the rising importance of innovation for firms, in general, and the increasing globalisation of businesses and practices within a wide range of service businesses, ranging from financial, communications, and retailing, to leisure and entertainment products.

Notes 1 We equate the term ``service innovation'' with new services in the present endeavour. 2 The actual degree of innovativeness (see for instance Kleinschmidt and Cooper, 1991 for a seven-category classfication scheme) is also likely to vary between services, but the interest of the researchers in the present endeavour was not on examining the link between timeliness in multi-country service innovation launches and the extent of innovativeness of the investigated projects.




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42




features, segments to serve in each country, promotion and advertising, pricing). Integration: direct contact, meetings and interaction between HQ and subsidiaries/ agents and between staff in different international subsidiaries/agents, transfers of managers between HQ-subsidiaries/agents and between subsidiaries/agents; interdepartmental permanent committees set up to allow HQ and subsidiaries/ agents' staff to engage in joint decision making; interdepartmental temporary task forces set up to facilitate HQ and subsidiaries/agents staff collaboration on specific issues; liaison personnel; project managers with responsibilities over total operations across HQ and subsidiaries/agents; a matrix system where HQ personnel within specializations is fully integrated with personnel in subsidiaries/agents; a set of shared goals, values, and beliefs shaping behavior of subsidiaries/agents' staff across international country markets).

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Appendix. Case research protocol and conceptual roots (indicative references) Protocol questions related to the following. Scheduled/anticipated and actual time across international markets Length of planned and actual time for introducing the service innovation across key and all target country markets; adherence of service innovation to multi-country market introduction schedule. Market homogeneity Customer needs/preferences are standardised internationally; service awareness and information exists internationally; competitors market a standardised service internationally; standardised purchasing practices exist internationally.

Service innovation development process (e.g. Cooper and Kleinschmidt, 1993; 1994; de Brentani, 1989; 1991; Hart, 1996; Johne and Snelson, 1988; Moenaert and Souder, 1990; Montoya-Weiss and Calantone, 1994) Integration: Integration between technical; marketing and manufacturing functions; Integration between these functions when located in different countries; technical and marketing personnel contribution of accurate; on time and high quality input; subsidiaries/ agents provided continuous feedback; final customers were strongly involved and provided feedback. Proficiency of execution of the development process: Predevelopment project planning; tests of prototypes by customers/trial sales; coordination of distribution channels and logistics; coordination of advertising and promotion; technical development and sorting out of unexpected ``bugs''; technical testing of the product. Protocol/early known targets: The intended users, target countries, and their needs and preferences; The service concept and market positioning; The final service specifications and technical requirements; The final service features and characteristics.

Pervasiveness and intensity of competitive action (Heil and Walters, 1993) Firm was threatened by competitive action; competitive action was very hostile towards the company; this action was resulting in sales at firm's own expense; firm was threatened in all its key target country markets. Nature and intensity of coordination of company activities across markets (Egelhoff, 1988; Ghoshal and Bartlett, 1988; Ghoshal et al., 1994; Martinez and Jarillo, 1989) Assessment of performance: cost and profit centres for performance assessment; comprehensive management information systems; quality control procedure; standard cost procedures for performance assessment. Formalization: formal performance appraisals; a written marketing strategy; written manuals of procedures and fixed rules; master marketing plans and schedules. Centralization (who decides ± HQ or subsidiaries ± issues on): technology/ specifications for service innovation, time to launch in their markets, product appearance/ 43




delivery systems; advertising spending; promotion to trade and final customers; market research, advertising, promotion, sales force and service; software development technical capabilities and resources (where applicable); change in the way user is informed about service functions; Change in the way user interacts with and controls operation of service (if applicable).

Availability of resources for implementation of marketing and support decisions for the new product (e.g. Cooper and Kleinschmidt, 1993; 1994; de Brentani, 1989; 1991; Hart, 1996; Johne and Snelson, 1988; Moenaert and Souder, 1990; Montoya-Weiss and Calantone, 1994) Marketing personnel/funds to adapt advertising/ promotion; personnel to train sales staff and technicians; after-sales service personnel and equipment; distribution channels.

Product superiority (e.g. Cooper and Kleinschmidt, 1993; 1994; de Brentani, 1989; 1991; Hart, 1996; Johne and Snelson, 1988; Moenaert and Souder, 1990; Montoya-Weiss and Calantone, 1994) Unique attributes and clearly visible benefits to the customer; superior quality, performance, value for money; attributes also perceived as useful by the customers; intended image consistent with corporate image.

Extent of marketing mix changes and synergies with existing operations (e.g. Cooper and Kleinschmidt, 1993, 1994; de Brentani, 1989, 1991; Hart, 1996; Johne and Snelson, 1988; Moenaert and Souder, 1990; Montoya-Weiss and Calantone, 1994) Service innovation features; brand names; service positioning; distribution channels;

44

Introduction

Developing skills in strategic transformation

Did you ever hear the story about the newly appointed CEO who is handed three sealed letters containing advice from the previous incumbent? He is advised to open each of them in turn but only when the organisation faced a strategic crisis. Shortly after his appointment, the first strategic crisis appears and tearing open the first letter he finds the advice, ``Blame your predecessor''. This he does, and the crisis quickly subsides. Some two years later, a second strategic crisis arises and the CEO hurriedly opens the contents of the second letter which suggests that he should `ìmplement a new strategic planning system''. He does this and disaster is again thankfully avoided. About five years go by and he faces yet another strategic crisis. The CEO deliberates for a while about whether he should open the third envelope or try and avert the crisis himself. But the crisis is of such epic proportion that he decides to open the third envelope which advises him to ``prepare three envelopes''. A number of lessons can be learned from this story such as strategic crises and transformation are a recurring part of business life. Furthermore, it may prove wise for organisations to try to transform themselves strategically before rather than after a crisis arrives. What is missing from the tale, however, is how the CEO could have developed his skills in strategic transformation and how they might have been fine-tuned over time. Consequently, this article intends to be of practical use to any manager who must develop these skills. This is achieved through discussing two case studies, Marks & Spencer and Intel, and these provide contrasting examples of how organisations can either be reactive or proactive in managing strategic transformation. Lessons learned from these cases are pulled together in order to come up with a number of questions/statements that interlink and combine to form a strategic transformation framework.

Gary J. Stockport

The author Gary J. Stockport is Allan Gray Professor in Business Administration, University of Cape Town, Cape Town, South Africa. Keywords Strategic planning, Organizational change, Management techniques Abstract This article considers strategic transformation and how organisations can learn to become better at strategically transforming themselves over time. Two case studies are considered, Marks & Spencer and Intel, and these provide two contrasting examples of how organisations can either be reactive or proactive in managing strategic transformation. The article argues that in order for strategic transformation to become an art it must become part of the unconscious competence mindset of the organisation. A number of questions/statements are developed which help managers to fine-tune their strategic transformation skills and these are interlinked and combine to form a strategic transformation framework. Thus, the article intends to be of practical use to managers.

Defining strategic transformation Business history has become a graveyard of former business success stories that have failed. It has been found that in 1991, between 60-70 per cent of the Fortune 100 largest global companies did not exist at all or European Journal of Innovation Management Volume 3 . Number 1 . 2000 . pp. 45±52 # MCB University Press . ISSN 1460-1060

As always, the author is grateful to Elsie Plumb for reproducing the figures.

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in any form similar to what they were like in 1970 (Hamel and Prahalad, 1995). Trying to identify the reason(s) why they failed has become a major preoccupation of many business school academics. Unfortunately, what we are left with is a number of possible hypotheses and a number of lessons learned in hindsight typically after a business has failed. But any manager will tell you that managing is not about managing in hindsight, but rather is about learning from the past, managing the present and preparing for the future. This distinction is key for defining and understanding strategic transformation. Strategic transformation is about the ability of an organisation to transform itself to ensure long-term survival. This suggests a radical change in the markets and customers an organisation serves and the products and/or services it offers. Furthermore, it implies a major change in internal matters such as structure, systems, staffing and perhaps, even culture. The accepted wisdom and way of doing things within an organisation may have to change in order for it to survive.

strategically before it starts to wither. After point (A), strategic transformation will be reactive rather than proactive and the organisation will be forced to change. Hamel and Prahalad (1994) argue that the successful organisations of the future will be foresightful and opportunistic rather than reactive. Grove (1997) defines point (A) as a strategic inflection point and it is at this point an organisation will either grow to new heights or it will decline. Therefore, it is important for managers to agree that their organisational lifecycle is probably S-shaped too and they must make a judgement as to where they are on the curve.

Organisational lifecycle

By point (A) I do not mean a particular point in time but rather a strategic window of time, and opportunity during which strategic transformation can take place. This strategic window of time could be months or years. Grove (1997) makes a telling point when he discusses the changes which took place from the old vertical computer industry structure (around 1980) where organisations such as IBM were vertically integrated from manufacturing chips and computers to having their own operating system, application software and sales and distribution to the new horizontal computer industry structure (about 1995) where organisations specialised on a particular part of the vertical chain e.g. Compaq and Dell in the manufacture of computers. This radically changed the rules of the game within the industry and organisations had to change their strategy away from offering a full range of services for particular clients to one based on market share growth and economies of scale. He says:

` ... From a strategic transformation standpoint, point (A) is the most important point on the curve because it represents the last point possible for an organisation to transform itself strategically before it starts to wither. After point (A), strategic transformation will be reactive rather than proactive and the organisation will be forced to change... '

Figure 1 shows that an organisational lifecycle is typically S-shaped and Handy (1994) calls this type of curve a sigmoid curve. Handy makes the point that this same S-shaped analogy can be made for a product lifecycle or even to a managerial career. Figure 1 shows that an organisation grows up to point (A) but eventually starts to wither and die at point (B). From a strategic transformation standpoint, point (A) is the most important point on the curve because it represents the last point possible for an organisation to transform itself Figure 1 Organisational lifecycle

Even in retrospect, I can't put my finger on exactly where the (strategic) inflection point took place in the computer industry. Was it in the early 80s, when PCs started to emerge? Was it in the second half of the decade, when networks based on PC technology started to grow in number? It's hard to say (pp. 42-3).

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But what happens if an organisation resists the temptation to change and ends up at point (B) in Figure 1. Here, it typically attempts to make short-term operational improvements but Porter (1996) argues there is a productivity frontier that represents the sum of all existing best practices at any given time. For example, there may be a maximum manufacturing output capability using state-of-the-art technology and this technology can be purchased by me-too competitors. Consequently, longer term survival will only be possible through strategic transformation. Furthermore, at point (B), people become far more resistant to change. They distrust the organisation when rumours start to circulate about possible job losses and drag their feet when senior management calls for commitment to any proposed changes. Unfortunately, when this happens, strategy within an organisation becomes political rather than creative and innovation becomes stifled.

transformation to become an art it must become part of the unconscious competence mindset of the organisation. During stage 1, unconscious incompetence, organisations have no strategic transformation skills and are not even aware of their importance. Over time, they become aware of their significance (stage 2, conscious incompetence) although they are still not developed. During stage 3, they develop a conscious competence in strategic transformation that could happen, for example, through introducing a strategic planning system and learning from it. Finally, strategic transformation becomes a natural way of managing the organisation and a part of everyday business life. Strategic transformation becomes part of their unconscious competence, stage 4. The following considers two contrasting examples of how organisations can either be reactive or proactive in managing strategic transformation.

The art of strategic transformation Marks & Spencer± the Grande Dame of British retailing

I label strategic transformation an art because organisations, like people, become better at doing something with continual practice over time. When learning to drive a car all learners move through the four sequential stages: (1) unconscious incompetence; (2) conscious incompetence; (3) conscious competence; and (4) unconscious competence.

It is a little surprising to me that Marks & Spencer now provides an example of an organisation that has been reactive to the need for strategic transformation and this was hardly thinkable a couple of years ago. It had always been known as the Grande Dame of British retailing and had a brand name synonymous with quality mass merchandise clothing and food and value for money. Marks & Spencer shares had always been viewed by the UK financial institutions as safe and steady shares based on their yearly incremental growth in financial performance. But the facts speak for themselves. Pre-tax profit for 1998-99 has fallen by some 40 per cent compared with the previous financial year and the share price has fallen from 660p to around 400p (Cape Times Business Report, 1999). As one employee said (UK Management Today, 1999):

Similarly, I believe that when organisations are developing the art of strategic transformation they too move through these four organisational mindset changes as denoted in Figure 2. An organisation does not suddenly become strategic. These are skills that are learned, developed, fine-tuned and even acquired. In order for strategic Figure 2 The art of strategic transformation

We find ourselves having to redefine who we are and what we stand for.

Since becoming CEO in February 1999, Peter Salisbury, has sacked nearly a quarter of the company's senior managers. Applying the S-shaped sigmoid curve to Marks & Spencer (Figure 3) shows that it has strategically transformed itself in the past. Derek Raynor modernised Marks & Spencer when he took 47



Gary J. Stockport

Figure 3 Marks & Spencer

over in 1983 (point (A)) and turned it from what had been akin to a family company into a plc. Sir Richard Greenbury, on the other hand, professionalised the company from 1988 (point (B)) and made the company far more aware of the need for greater financial and operational controls. One of his first acts was to fire 600 staff. So, where did the company go wrong? Figure 3 also shows a new dotted curve beginning at point (C) and the old curve continuing on until point (D). In reality, Marks & Spencer had missed the opportunity to transform strategically itself at point (C) and found itself having to be reactive at point (D). Looking for clues There are many clues as to why Marks & Spencer did not read the signals for change and did not radically alter its strategy. First, its long track record of financial success probably led to inbred complacency. Second, its brand image had led it to bask in the admiration of the UK financial institutions, its retailing peers and the loyalty of its customers for years. Third, its philosophy that Marks & Spencer was a tribe had encouraged their staff to stick together even outside work. This had resulted in a lack of diversity within the company and a lack of will to challenge the accepted wisdom and way of doing things. Fourth, some of their business principles could be challenged such as the long-term refusal to advertise. Fifth, some of the strategic decisions regarding overseas purchases such as Brooks Brothers in the USA in 1988 or the move into Canadian chain stores were questionable. Sixth, it can be suggested that the Greenbury legacy of implementing controls had resulted in 48

over control from the centre and a lack of decentralisation and empowerment. Seventh, the company had overly ambitious plans for growth from 1998 through massive investment (some US$3 billion over three years) in order to increase selling space by nearly 25 per cent. The company wrongly assumed that trading from its established businesses would be sufficient to underpin the company's financial needs during this period of planned expansion. Eighth, there had been worries that Marks & Spencer had lost its way in buying, and womenswear, in particular, was starting to look drab. Ninth, it had failed to monitor and assess its competitor threats properly and different competitors had been nibbling away at its clothing and food segments for some time and some had now become major competitor threats. ` ... its philosophy that Marks & Spencer was a tribe had encouraged their staff to stick together even outside work. This had resulted in a lack of diversity within the company and a lack of will to challenge the accepted wisdom and way of doing things... ' For example, Gap Inc. (from the USA) had stolen market share in the UK in the upmarket branded fashion segment which appeals more to young and trendy customers who want to wear fashion labels. They also offer a more attractive shopping experience compared with Marks & Spencer. In their food segment, which accounted for around 40 per cent of UK sales, it now faced strong



Gary J. Stockport

competition from UK market leaders Tesco and Sainsbury and Marks & Spencer had also lost their competitive price advantage to deep discounters. Finally, it had long been felt that customer services were lacking within Marks & Spencer and it did not accept credit cards apart from their own. Clearly, many reasons can be put forward for why Marks & Spencer was unable to read the signals for change or could not strategically transform itself. What is perhaps most important, however, is what appears to be a lack of a strategic transformation mindset within Marks & Spencer. The lack of an inner shared belief within the organisation that markets and customers do change and will change and the company needed to change the way it thought about mass merchandising. Starting to challenge accepted wisdom The initial responses to the deterioration in financial performance were primarily operational changes such as curtailing investment, reducing quantities ordered from suppliers and decreasing headcount. Nevertheless, there are hints that the new CEO, Peter Salisbury, is starting to question the accepted wisdom and way of doing things within Marks & Spencer. For example, they introduced a post-Christmas television advertising campaign and he has started to devolve power down the organisational structure through reducing from eight to seven the lines of management from Salisbury to directors to senior managers to staff on the tills. Perhaps, more interesting, is his suggestion that store managers should think of themselves more as franchisees and should have much more input as to which products are put on the shelves. It has also been suggested that they should sell designer brands. All these possibilities are interesting but they fall a long way short of a strategic transformation mindset ± a general strategic thinking mindset within the company that challenging the accepted wisdom and way of doing things is a natural, everyday matter for which everybody should have responsibility. Implementation should be a natural follow-on from this mindset.

S-shaped sigmoid curve the organisation lies and it has had the leadership foresight as well as the courage to change. Figure 4 shows three strategic inflection points in the organisation's history (and present) and Intel is currently approaching point (C). The company has strategically transformed itself at point (A) (manufacturing computer chips) and point (B) (microprocessors) and, at the time, the strategic transformation to microprocessors was seen as being very risky (Corcoran, 1999). Moore's Law From point (B), the pace of growth at Intel has fit with Moore's Law. Gordon Moore, one of Intel's founders, but at the time then head of Fairchild Semiconductor Research and Development Laboratory, proposed a principle concerning the pace of semiconductor advances. This law states that the number of transistors on a semiconductor chip doubles approximately every 18-24 months (Yu, 1998). For microprocessors, the doubling of transistors has typically occurred every 24 months but the speed of growth has begun to peter out. For example, Pentium III has 9.5m transistors and growth has only risen 27 per cent in the last two years. There was also a growing realisation that customers no longer needed to keep upgrading to the latest and most powerful PCs. Strategic leadership Without doubt, Andy Grove has been a foresightful strategic leader since Intel's inception and this has resulted in a continual search into future possibilities and opportunities. No organisation can predict THE future but they can predict A future that is plausible within the boundary of technology advances (using perhaps, Moore's law as a guide) and possible changing customer needs. Intel's new CEO, Craig Barrett, is not strategically transforming the company away from microprocessors (in 1998, they contributed 80 per cent of Intel's US$26 billion sales and all $6 billion profits) but they are developing two more legs on its strategic stool; networking chips for digital communications; and services that will underpin e-commerce (point (C)). In effect, Intel is trying to invent its future rather than having to react to it. In March 1999, Intel acquired Level One Communications, a leader in network-chip technology. About a month later, it announced a deal with Excite to build a Web-based shopping service. It has also put aside some

INTEL ± the foresightful innovator The Intel case provides a contrasting example to Marks & Spencer in that it has been far more proactive in trying to determine where on the 49



Gary J. Stockport

Figure 4 INTEL

US$11 billion for investing stakes in start-ups and some notable examples are a toy retailer, Etoys, and Inktomi, a developer of websearching technology. By pro-actively thinking ahead as to where the next strategic inflection point could be, Intel has had the time to monitor market signals carefully and assess their significance before also acting in time.

Strategic transformation framework What are the lessons learned from the two cases for developing a strategic transformation framework? I think a number of questions/ statements can help managers to fine-tune their strategic transformation skills. Figure 5 Figure 5 Strategic transformation framework

50

shows they are interlinked and combine to form a strategic transformation framework. The figure shows there is no starting or ending point and all parts of the framework are very important. This tool intends to be of practical use to managers. These questions/statements are: . Market and financial data that shows a slowing in the rate of growth in sales provides a signal that your market may be changing. This data needs to be analysed in market segment categories e.g. womenswear at Marks & Spencer. The more up-to-date and quicker the data becomes available to senior managers, the more useful it will be. You should implement information systems that capture data at point-of-sale.



Gary J. Stockport .

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Practice against a logical extrapolation of the data and rely, in part, on anecdotal observations and your instincts. Have the courage to back your gut-feel. Wisdom is priceless and reward wisdom within your organisation. Practice a deliberate process within your organisation of inventing possible futures. Develop scenarios that are plausible within the boundary of existing and future technology and possible changing customer needs. For instance, will there really be a need for Marks & Spencer to have physical buildings for customers to shop in the future? If not, how can their existing strong brand that is associated with quality be used to entice their existing customers as well as new ones to shop via e-commerce? Will you be able to browse through a Marks & Spencer shop on your PC in the future? My answer is yes! At the current time, Marks & Spencer's property portfolio is valued at more than US$7.5 billion. What will be their value if buyer channels change to shopping via e-commerce? Considerably less, I would argue and the timing of the selling of shop properties over time will be a very important strategic decision for Marks & Spencer. Just like it will be for other shop retailers. Continually match each scenario with what is actually happening in the market environment. Is the future starting to mingle with the present? What do you have to change within your organisation in structure, systems, staffing and perhaps, even culture? How fast do you have to change? Do you have to overcome resistance to change? If yes, how will you do this? Continually monitor your environment. Listen to your sales staff. Talk to your customers. Watch your existing competitors. What did you learn from attending the latest trade exhibition? What are the trade journals telling you? Are there any new entrants? If yes, how are these new entrants serving the market differently and perhaps, better than you are? Do they indicate that the rules-ofthe-game are starting to change? Develop a culture within your organisation that strategic transformation will be necessary for your continued survival. This mindset could be initially fostered through researching case histories of former great companies that have subsequently failed. Invest huge time and resources to develop 51

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this mindset and it is part of everybody's responsibility (and daily job) to have this. Over time, this will become part of the unconscious competence of the organisation. Promote your staff on the basis of their strategic transformation skills. Do not lose these staff to competitors as they are key strategic assets. Bring-in new blood into the organisation at all levels. Encourage them to challenge the accepted wisdom and way-of-doing-things. Encourage dissent and constructive conflict. Organisations must have visionary, strategic leaders like Andy Grove at Intel. Visions must also be linked to core values within organisations (Collins and Porras, 1994). Organisations must also have the courage to change. Even if the present is great, the future is just around the corner!

Grove (1997) concludes: Now, nobody will ring a bell to call attention to the fact that you are entering into such a (strategic) transition. It's a gradual process; the forces start to grow and, as they do, the characteristics of the business begin to change. Only the beginning and the end are clear; the transition in between is gradual and puzzling . . . What such a transition does to a business is profound, and how the business manages this transition determines its future (pp. 31-2).

Conclusions This article argues that in order to ensure their longer term survival, organisations must develop skills in strategic transformation. This means more than simply implementing a strategic planning system and it involves a realisation that markets and customers will radically change. It is clear from the two case studies that strategic crises and transformation are a recurring part of business life and organisations can either be reactive or proactive in managing strategic transformation. An organisation's strategic transformation skills must become part of their unconscious competence i.e. a natural way of managing the organisation and a part of everyday business life. Intel provides an example of an organisation that has fine-tuned their strategic transformation skills over time under the strategic leadership of Andy Grove and Craig Bartlett. How well is your organisation doing?


Gary J. Stockport


Cape Times Business Report (1999), ``Marks & Spencer's annual profit slumps 40%'', 19 May, p. 16. Collins, J. and Porras, J. (1994), Built to Last: Successful Habits of Visionary Companies, Century, London. Corcoran, E. (1999), ``Reinventing INTEL'', Forbes, 3 May, pp. 154-9. Grove, A. (1997), Only the Paranoid Survive: How to Exploit the Crisis Points that Challenge Every Company and Career, HarperCollins, London. Hamel, G. and Prahalad, C.K. (1994), Competing for the Future, Harvard Business School Press, Boston, MA.

Hamel, G. and Prahalad, C.K. (1995), Competing for the Future, Harvard Business School Management Productions Video, Boston, MA. Handy, C. (1994), The Empty Raincoat: Making Sense of the Future, Hutchinson, London. Porter, M. (1996), ``What is strategy?'', Harvard Business Review, November-December, pp. 61-78. UK Management Today (1999), ``King Richard: a tragedy in Three Act'', April, pp. 78-85. Yu, A. (1998), Creating the Digital Future: The Secrets of Consistent Innovation at Intel, Free Press, New York, NY.

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