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Introduction

Patents and product development strategies: a model of antecedents and consequences of patent value

Academic researchers, practitioners, and public policy makers have long recognized the role of innovation as an engine for economic growth. Innovation is often cited as crucial to establishing and sustaining competitive advantages of firms, and the importance of innovation for small as well as large companies is well recognized (Cooper and Merrill, 1997). An important element of a firm's innovation management strategy is the acquisition and management of intellectual property (IP) rights in general and patents in particular. Patents tend to cover innovative products (Drucker, 1985), partially due to the fact that they are supposed to be novel and ``non-obvious'' relative to prior knowledge as conditions for issuance. Alpert (1993, p. 5) suggests that protecting IP is an important marketing consideration that `ìnhibits immediate direct competition and thus preserves adequate profit margins''. Proprietary assets may be the most valuable sustainable competitive advantage for incumbents, partly because these advantages are legally protected and not easily inimitable (Aaker, 1991). With the rise of global competition, business changes brought about by the Internet, recent changes in patent laws, and an increasing need for companies to account for and extract full value from intangible assets, companies are leveraging IP such as patents in unprecedented ways (Cooper, 2000). The increased interest among companies in licensing, or sharing, their new products and technologies in exchange for other value (for example, royalty payments or favorable supplier terms) as a viable option in addition to internal development is evidence of these trends. The role of patents has been widely discussed in the economic literature, yet only limited effort has been devoted toward examining the issue in the marketing context. Although a great deal of attention has been devoted to first-mover advantages (or the lack thereof) in product introductions (e.g. Kerin et al. 1992), limited

Debra Malewicki and K. Sivakumar The authors Debra Malewicki is the Director of the Innovation Center, University of Wisconsin-Whitewater, Whitewater, Wisconsin, USA. K. Sivakumar is the Arthur Tauck Professor of International Marketing and Logistics, at the College of Business and Economics, Lehigh University, Bethlehem, Pennsylvania, USA. Keywords Patents, New products, Product development, Licensing, Innovation Abstract Innovation management has been acknowledged as a crucial activity for the growth and survival of firms. An important element of a firm's innovation management strategy is the acquisition and management of patents. Although the role of patents has been widely discussed in the economics literature, only limited effort has been devoted toward examining the issue in the marketing context. To address this important gap in the literature, this article focuses on the factors governing the perceived value of patents and how such perceptions affect the firm's product development strategies. A conceptual model is developed and a number of research propositions based on existing research derived. The research has the potential to make a contribution to the academic literature, to offer insights for managers, and to provide guidelines for public policy makers. Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm

The authors would like to thank the Editor for his guidance. They are also grateful for comments from Preet Aulakh, Mike Kotabe, and Arvind Sahay on previous versions of the article.

European Journal of Innovation Management Volume 7 . Number 1 . 2004 . pp. 5-22 # Emerald Group Publishing Limited . ISSN 1460-1060 DOI 10.1108/14601060410515600

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Patents and product development strategies

Debra Malewicki and K. Sivakumar

European Journal of Innovation Management Volume 7 . Number 1 . 2004 . 5-22

research in marketing has been conducted on patents, which can also create protection for innovative products (Hufker and Alpert, 1994; Robertson et al., 1995). This is a surprising omission because patents can play an important role in organizational marketing strategies and national economic growth. First, market entry strategies and first mover advantages may be contingent on or greatly aided by appropriate patent protection (Alpert, 1993; Kerin et al., 1992). Second, a number of marketing strategy elements (e.g. pricing) are affected by the existence and nature of patent protection (Robertson et al., 1995). Robertson et al. (1995) recognize patents as one of the firm's internal marketing assets, particularly in the context of new markets based on emerging technologies. Third, changes in the prevailing legal environment regarding the protection and enforcement of patent rights have far-reaching implications as to how a firm creates development strategies for patentable products (Kotabe, 1992a). In addition, from a competitive perspective, patent intensity within an industry has been linked to aggressive competitive reaction (involving non-product marketing mix adjustments) to new product signals (Robertson et al., 1995); also, the patent literature has been deemed a powerful competitive intelligence tool (Rivette and Kline, 2000). Finally, rapid changes in the market place shaped by technological advances and globalization call for a fuller understanding of the role of patents in company strategy as well as national economies (Kotabe, 1992a, b). To address this important gap in the literature, we focus on the factors governing the perceived value of patents and how such perceptions affect the firm's product development strategies. Our research has the potential to make a contribution to the academic literature, to offer insights for managers, and to provide guidelines for public policy makers. Our concern in this paper is exploring strategy implications at an early stage of patent life, near the actual time of issue and prior to a firm's commitment to a tangible development decision. In this regard, our model fits into the ``front end analysis'' area of product development. Managing new product development as a ``complete'' process, with particular emphasis on activities conducted in

the front end, is repeatedly noted as a key to improving product success from both program and project perspectives (e.g. Cooper and Kleinschmidt, 1986). Our research attempts to offer a contribution to the innovation management literature by presenting a conceptual model of the antecedents and consequences of patent value and their impact on product development strategy. By highlighting the role of several internal and external factors influencing patent strategies, our article offers a convenient framework for practitioners to visualize and understand potential relationships between patent issues and marketing strategies. Our research is also relevant from a public policy standpoint. Organizations such as the Patent and Trademark Office (PTO) are challenged to encourage and support innovation. By understanding the role of the factors influencing the patent strategies of firms, the PTO will be able to better target its services, differentiate its offerings (e.g. between new companies and established companies), and provide appropriate guidance. Clearly, patents are more common in some industries than others. Recent historical data from the (PTO, 2001) shows patent classes over the past five years to be dominated by pharmaceuticals, chemistry (molecular biology, microbiology), organic compounds, surgical supplies and instruments, semiconductors, and computer hardware. Studies in the area of assessing patent value by industry, as opposed to quantity, tend to be a bit dated. Clearly, relevant to measuring actual, as opposed to perceived, competitive value, large company respondents in Levin et al. (1987) cited the ability of competitors to invent around as the biggest limitation on patent protection. In a broader sense, a recent study by Lev (2001) finds that intangible assets are disproportionately valuable in the drug, computer hardware and software, motor vehicles, telecommunications equipment and services, electronic components, food, chemicals and instruments industries. Clearly, our framework is more useful in these industries than in others, as patents provide important benefits over and above those offered by first-to-the market advantages. 6




(1) industry characteristics (perceived market potential and industry turbulence); (2) firm resources; and (3) patent-related factors (patent scope, patent cost, and legal environment).

The rest of the article is organized as follows. The second section develops a conceptual model of patent strategies followed by the firm and positions the model in the context of the innovation management literature. The third section develops research propositions that focus on the influence of several variables on patent management and product development. The final section explores future research directions and describes the managerial and public policy significance of our research.

Once the firm has an idea about the perceived value of the patent, it must decide on patent development strategies (whether the firm favors internal development or licensing). In many circumstances, this decision is not strictly `èither/or'', but can be a combination of development strategies, since some firms license out patents for specific applications only, or in limited geographic locations, while also employing internal development. We also argue that once the basic development decision has been made, the perceived patent value will impact subsequent decisions within the context of either licensing or internal development. Patent value is expected to affect licensing decisions in regard to number of licensees and diversity of industry. If internal development is pursued, we argue that patent value will affect product design decisions and firm's focus on developing existing capabilities versus new capabilities. Patent-related external factors expected to affect perceived patent value include the

Conceptual framework Our conceptual model of factors influencing the patent strategies of firms is presented in Figure 1. The variables in the model have been chosen because of their repeated occurrence in the literature on innovation management and the role they can potentially play in the product development strategies of firms. Our model consists of three sets of variables: the perceived value of patents, the variables that are antecedents to the perceived value of patents, and the strategy options that arise from and are influenced by the perceived value of patents. Our model proposes that perceived patent value is a function of three distinct variables:

Figure 1 A model of patent value and product development strategies in firms

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perceived cost for acquisition, maintenance, and defense, and the legal environment for patent enforcement. A variety of recent events have influenced the overall legal environment, which is expected to have important implications for patent value. Clearly, a firm's awareness, or lack of it, of these events will affect the company's view of patent value. The focus of this paper is on the perceived value of patents to their holders (the firm), which is affected by a variety of factors, and the consequences of this perception on product development. Consequently, our focus is on the value of product, rather than process, patents. Since our model's proposed consequences are the result of the firm's decisions, it is appropriate to consider the firm's perception of the patent's value as the relevant influence. ``Timing'' of this value assessment is important; many `òbjective'' measures of patent value have been used in the literature, including citation frequency, renewal rates, and effect on stock value. However, these measures are available and usable only a substantive period of time after a patent has been issued (and after the firm has already implemented its subsequent product development strategies). Our concern in this article is at an early stage of patent life, near the actual time of issue and prior to a product development decision. We propose that one way to operationalize perceived patent value is to define it as the perceived difference between the net present value of the product development project with and without patent protection. In our framework, the individual(s) with responsibility for the product development strategy decision(s) offer the ``relevant perception''. The sample would utilize the key informant approach, likely to involve senior level management; rather than rely on the perceptions from a specific functional area, a ``boundary-spanning'' perspective will be required (Calantone and Schatzel, 2000). This is because the perceived value of patents can differ between (for instance) engineers and marketers. In cases of divergence between key decision-making entities, some reconciliation of these assessments must be made to arrive at the firm's perceived value that drives subsequent decisions.

As we discussed previously, our research is the first in the domain of examining the antecedents and consequences of perceived patent value. Therefore, we have used the individual patent as a unit of analysis in our conceptualization. We also want to acknowledge that in some cases, our proposal of considering individual patents as units of analysis must be modified to include a set of related patents. While in some cases (e.g. pharmaceutical research), one key patent may play a predominantly crucial role in the future product development efforts, in other cases, several patents may be equally important or closely connected in a given product development effort (one patent not necessarily dominating all other patents). Although micro-assessment of the value of each patent may be difficult in some cases, we argue that decisions regarding each patent can be conceptualized separately based on the perceived value of each patent on the potential product development effort and subsequent products resulting from the same. That estimating the actual value of each patent is difficult in some cases actually strengthens the need for our research that argues for managerial perception-based measures of individual patents that guide a firm's decisions. If the firm considers a set of patents so inseparable as to make only combined decisions regarding them, then our conceptual framework and the propositions will still be applicable in a straightforward manner, albeit for the group of patents rather than individual patent. Given that no research has addressed these important issues of perceived patent value in the marketing context, we believe that our conceptualization to focus on individual patents functions as a useful starting point for further conceptual development and empirical work in this very important area. Further, we do not claim that patent management strategies (however important they might be) work in isolation. What we do argue is that managerial decisions on what to do with the patents are driven by the perceived value of those patents (however imperfect the current measures are). We believe that our work does make a contribution for the much-needed conceptualization in this research domain. 8




Research propositions

assumption is that it is over and above the role of other variables discussed subsequently. P1. The greater the perceived market potential, the greater a patent's perceived value.

Industry characteristics Market potential Estimated market potential of the products that incorporate the patent is expected to have a positive effect on the perceived value of a patent, since market size and growth in demand play a strong role in determining innovative activity (Schmookler, 1972). Market size can be measured in terms of units or financial terms; growth can be measured in units, dollar volume, or in percentages. In the event of multiple products or combination of products and services involving a given patent, dollar units and percentages will be the most practical measures. As noted previously, according to Drucker (1985), patents tend to cover very ``new'' products. In Cooper's numerous studies (e.g. 1992) of factors affecting new product success, results have consistently identified both market potential and product uniqueness (addressed by the patent's existence) as key factors correlated with success. Researchers have also found that the relationship between product differentiation and relative product performance is strengthened by increases in market potential; given that patents help support a basis for product differentiation, we argue that market potential may influence their perceived value (Song and Parry, 1997). Vanderwerf (1993) suggests with very new products, customer reaction is highly uncertain by definition, and established methods for forecasting sales are unreliable, so judgments may be based largely on intuition in the measure of this variable. Nonetheless, although reliable estimates of actual market size and growth rate may be difficult to establish and this relationship is somewhat intuitive, it is expected that perceived market potential and the tendency to value a patent highly will be positively related. Market potential and patent value represent two distinct constructs, although the former is proposed to drive the latter. As we describe in this paper, perceived patent value is influenced by several factors and market potential is one of these factors. Clearly, consistent with similar research, when we discuss the role of market potential, the

Industry turbulence Industry turbulence refers to the extent and speed with which changes take place in the products, processes, and markets associated with a given industry. Although past turbulence in the industry may guide managers' perception of industry turbulence, the relevant variable to focus on in our context is the turbulence as perceived in the future when the patent will be incorporated in future products or business alliances. Although the level of technological and market change within an industry is expected to affect perceived patent value, our synthesis of evidence shows that the relationship is not a monotonic one. According to Calantone and Schatzel (2000), turbulent industry conditions offer companies market gaps that can be exploited through innovation; their research finds that industry dynamism positively affects the adoption of ``first-mover strategies'', one element of which might be obtaining a patent. Souder and Song (1997) find that ``radicalness'' in product design is strongly correlated with success in markets with perceived high uncertainty. However, research also suggests that the positive relationship between industry turbulence and patent value may not hold when the turbulence is extremely high. According to Cordes et al. (1999), one of the drawbacks of patents is that rapid changes limit protection. In support, Kerin et al. (1992) suggest that the rate of change increases, the efficacy of legal instruments as a source of first mover cost and differentiation advantage becomes lower. Erickson (1999) also supported this view and suggested that when the market is moving too quickly (such as in software and consumer electronics), other competitive advantages become more important. This may support the idea that patents may be less useful in environments where technology is changing extremely rapidly. At the other extreme, where patents may not be perceived as valuable, is a situation in which the turbulence is too low. Such scenarios are 9




later stage than that considered here). The same study finds that patentees are more likely to go to court to protect patents that form the base of a technology trajectory, which is likely to be related to broader scope. According to Nurton (1996), it is difficult to get patent coverage in some areas like chemical compounds, a problem that will increase as information is more rapidly disseminated. According to Persidis (1996), weak patent positions are also a problem in the biotechnology area; there is a great deal of prior work now, and broader concept patents are much more difficult to receive. Recent efforts have also been directed toward reducing the scope of business method patents (Baumann, 2001). However, if a patent with a broader scope could be obtained, firms clearly will value the patent more than otherwise. From a different perspective, Lanjouw and Schankerman (2001) argue that number of claims in a patent is also considered an indicator of value, noting that patents with a greater number of claims tend to be more frequently litigated by the holders. As noted earlier, patent applications usually involve a process of negotiation between patent counsel and the US PTO. The final number of claims allowed is partially a function of the skill of patent counsel in this process of negotiation. Therefore, patent scope from the managerial perspective is also likely to be related to the perceived level of competence of counsel, the selection of which is largely controlled by management. P3. The higher the patent scope, the greater the patent's perceived value.

reflective of a mature or declining market where product innovations may not be valued by the market place and therefore negatively influence a firm's perceived patent value. In addition, the potential product improvements and subsequent consumer response may be so minor as to make the value of patent very limited. The incremental advantage of a new patent may not sufficiently offset the increased returns or the long-term potential of the patent, thereby further reducing the perceived patent value. P2. The relationship between the level of industry turbulence and a patent's perceived value is an inverted U-shape: the more extreme the level of industry turbulence (higher or lower), the lower the perceived value of patents. Patent related factors Patent scope Patent scope represents the degree of coverage offered to the firm by the patent document. To a large extent, the scope of the patent is determined by the patent office and such determination by the patent office clearly will influence the value of the patent as perceived by the firm. e.g. the number of technology classifications given by the patent office is an indicator of the scope of the patent; whether the patent is visualized as a platform patent (rather than a stand-alone patent) also influences the scope of the patent. According to Robertson et al. (1995, p. 7), `ìf a patent holder can achieve a broad patent (i.e. a wide scope of coverage as determined by the patent office that increases how different a competitor's patent must be) with long life, then the high imitation costs might be expected to discourage competitive entry''. This will clearly enhance a firm's perception of patent value. Lerner (1994) demonstrated that the breadth of patent protection (measured by assignments by examiners to different international patent classification categories) significantly affected valuations of biotechnology firms in initial public offerings. However, using a much broader base of patents, Lanjouw and Schankerman (2001) find that narrower patents (i.e. those in fewer technology classifications) tend to be litigated more often (which may be considered an indicator of perceived value at a

Patent costs A variety of patenting costs may be perceived by companies, including application, maintenance and defense. Application costs, which are sunk after a patent issues, and maintenance fees are fairly clearly defined, but defense is much harder to assess. Although patent application and maintenance costs remain fixed at a given time (although they typically change over time, as described subsequently), defense costs can vary over time as well as across firms. Research has suggested different perceptions on the role of application and maintenance costs in the patenting process. 10




Maintenance (or renewal) fees, which must be paid three times during the life of a US patent, increase at each renewal point, so there are three renewal decision points facing the company or inventor. The maintenance fee structure is in the process of being revised with effective October 1, 2002 pending congressional approval (PTO Web site). The existing (proposed) maintenance fees are $880 ($900) after 3.5 years, $2,020 ($2,070) after 7.5 years, and $3,100 ($3,170) after 11.5 years. The fees for smaller entities (less than 500 employees) are 50 percent of the fee for other entities. One study noted that even when patent maintenance fees doubled (for patents applied for after 1982), a larger proportion of patents were maintained at each renewal point despite the increase. The author concluded that the technological impact of patents had a greater influence on renewal decisions than economic concerns. On the other hand, this study also found that US inventors tend to renew patents (and take them to full-term) at higher rates than European inventors, and the author suggests that one reason for this may be the higher maintenance costs of European patents, implying that higher maintenance costs may deter renewals (Thomas, 1999). Companies also evaluate patents based on their ability to be defended; an evaluation heavily influenced by the legal environment, discussed subsequently. The value of the patent has to be high before serious litigation becomes cost-effective. In the Nurton study (1996), given the expense and uncertainty of patent litigation, most respondents said that they now carefully consider alternatives to litigation, including licensing, arbitration, and alternative dispute resolution. However, in a difference of opinion, some attorneys feel that companies tended to use negotiation initially more frequently than they do today; many companies now go to court to seek leverage in the negotiation process (Sandburg, 1999). Although the cost of a technology may ultimately bear little relationship to its price, nevertheless, although somewhat intuitively, we believe that the use of value implies a discussion of costs, and not surprisingly, we suggest that patent costs relate inversely to perceived patent value.

P4. The more the perceived costs of patent maintenance and defense, the lower the patent's perceived value. Supportiveness of the legal environment Managerial perceptions of legal environment have at least two ingredients: the actual existence of the legal procedures to effectively resolve patent-related litigation and the perception of the firm that the laws are seriously and effectively enforced. While the distinction between these two components may not be significant in the context of the USA (the focus of this article), in the global context, implementation of legal processes is an entirely different matter compared to the existence of laws. Perception of the supportiveness of the legal environment may be influenced by a variety of factors, including changes in the structure of the court system and patent defenses, changes in PTO services, and recent legal decisions. Obviously, the firm's awareness and interpretation of these factors will affect the company's view of the legal environment and its impact on patent value. e.g. in 1983, the Court of Appeals for the Federal Circuit (CAFC) was formed in the USA; appeals of district court patent case decisions are now heard only by the CAFC and reviewed (rarely) only by the US Supreme Court. Thus, CAFC decisions have become powerful in the patent field; the fact that these decisions are being made only in one court has enhanced the understanding of patents. As a result, according to Ransley and Gaffney (1997), companies are now incorporating IP issues into their strategy, even as part of their stage-gate product development process, based on the results of a benchmarking study of companies in chemical and high-tech industries. Also, a few years ago, the US PTO instituted a new product called a ``provisional patent application'' (PPA), which covers a period of one year, after which the applicant can decide whether to proceed with a traditional patent. The PPA does not offer the same coverage as a traditional patent, but it preserves the priority date (for foreign filings) and allows the applicant to use ``patent pending''. Since this one-year time period should theoretically be used for further development, including assessing market reaction, the resulting patents 11




resources, legal resources (especially in the context of patent litigation), and so on. Researchers in this research domain have used variables such as firm age (e.g. start-up vs. established firms) and firm size (e.g. small firms vs. large firms) as proxies for what we believe is the more relevant variable: firm resources. Using firm resources as an overarching construct helps us in achieving a parsimonious description of the linkages explored in this article and also offer managerially actionable antecedents of patent management strategies (we thank an anonymous reviewer for this useful suggestion). Although Koen's study (1991) found that IP protection is an important consideration for all firms, some research suggests that patents may be disproportionately valued more highly by younger companies with fewer resources. According to Dorfman (1987), many start-ups (arguably with fewer resources) are organized around product innovations or depend on product innovations to succeed. Lanjouw and Schankerman (2001) argue that IP is commonly the key asset of start-up firms. From another perspective, the perceived value of a patent from third parties outside the company is also expected to affect the level of firm resources, a critical issue for young companies with limited resources. Stuart et al. (1999) describe how young companies use networks to acquire resources for growth. When great uncertainty exists about companies, third parties rely on the prominence of the affiliates of those companies to make quality judgments. Because young, small companies face many hazards and have short track records, they also represent a great deal of uncertainty, particularly for those organizations founded to commercialize new technologies. Also according to Stuart et al. (1999), because of young firms' relative inexperience with sales and customers, potential investors and partners tend to examine other types of firm accomplishments, one of which may be the number and scope of patents held by a company. In this study, patents were deemed important as instruments to help establish relationships with prominent partners (not only investors, but also corporate partners);

may be perceived to be of higher value. For a final example, the US Court of Appeals for the Federal Circuit, in State Street Bank & Trust Co. v. Signature Financial Group, recently upheld the validity of Signature's ``hub and spoke'' patent for managing mutual funds, which spawned a dramatic increase in patent applications with similar claims (the so-called ``business method'' patents noted under industry considerations; Sandburg, 1999). This is considered a relatively new (and controversial) area for patent protection, but it is expected, at least in the short term, to have a positive influence on the value of patents in general. Clearly, both positive and negative factors affect the prevailing legal environment for patent support. As noted previously, the company's ``perception'' of these factors is likely to affect its view of patent value at any particular point in time. Although the legal environment in a given country may be similar for a variety of circumstances, differences in perceptions of the legal environment can occur in several ways. First, the same legal environment in a given industry can be perceived differently by different firms, thereby resulting in heterogeneity (although the variation in this case could arguably be small). In addition, different segments of the same industry (e.g. hardware vs. software; operating system vs. applications; educational software vs. entertainment software; computer games for children vs. those for grown-ups; over-the-counter medication vs. medicine for catastrophic illnesses) can have different legal environments. Yet another scenario is that different industries (e.g. pharmaceutical vs. computer) can have inherently different legal environment. The difference in both these latter cases can be further complicated by heterogeneity in perception of a given legal environment. These scenarios further illustrate the need for examining the role of perceived legal environment and patent value. P5. The greater the perceived supportiveness of the legal environment, the greater a patent's perceived value. Firm resources Firm resources could include several aspects such as financial resources, marketing 12




the prominence of the partners was positively correlated with firm valuations at the initial public offering (IPO) stage. Levin et al. (1987) found that competitive alternatives to patents tended to be more important to larger companies (the sample in their study), but they also note that ``for small, start-up ventures, patents may be a relatively effective means of appropriating R&D returns, in part because some other means, such as investment in complementary sales and service efforts, may not be feasible. The patents held by a small firm may be their most marketable assets'' (Levin et al., 1987, p. 828). In other words, patents may be one of the most cost-effective ways for a young firm to establish a competitive advantage. Lerner (1994) also notes that IP may be a young biotechnology company's greatest asset (but as the company approaches the market with a product, the strength of firm's marketing and distribution become increasingly important.) According to Kortum and Lerner (1999), the share of small companies receiving patents is rising. Koen (1991) notes that small companies seem to be less satisfied than large companies with the current ``time to patent issue'', which may imply that small companies feel a greater sense of urgency, that is, a greater sense of importance, with patents than do larger companies. Much of the literature suggests that entrepreneurial companies tend to develop more significant innovations, but this contention remains under debate (e.g. Acs and Audrestch, 1990; Chandy and Tellis 2000). If innovation is more valuable to young, small companies with fewer resources, then this supports the premise that patents are a more significant competitive advantage for those firms. Nevertheless, the debate in the literature supports the importance of further research in this area, particularly given that public policy decisions are partially based on explicit firm size (and young firms would tend to be small with fewer resources) considerations. P6. There is a negative relationship between a firm's resources and the perceived value of a patent.

Effect of perceived patent value on product development strategies In a highly simplified view, companies choose from two basic strategies on successful development of an invention: (1) they can commercialize it internally; or (2) license the rights to production to other businesses. The decision to adopt internal development vs. licensing is influenced by perceived patent value and several other organizational and environmental factors that are beyond the scope of this article. This section focuses on how decisions to license the product or technology to an existing company or to develop the product internally are affected by the patent value perception. Several researchers discuss the concept of `àppropriability'', which is the ability of a company to directly reap the benefits of its technology. According to Kotabe et al. (1996, p. 79) `Àppropriability can be reduced to two dimensions: one associated with lead time, learning curve advantages, and the ability of other firms to independently and concurrently develop the technology, and the other with the use of patents and the associated legal enforcement systems'' (see also Levin et al., 1987). Internal development of the technology relates to both these mechanisms, but licensing out is largely relevant to the latter. ``Licensing presumes ownership of IP. As such, licensing requires licensable forms of IP protection. Ownership must be demonstrated if someone is going to pay for the right to use intellectual property'' (Rorke and Dwyer, 1996). Thus, internal development can be considered a default option for companies that perceive a higher patent value. As noted previously, if a company cannot choose a licensing strategy (or can get no ``takers'' with a licensing strategy), the alternative is for the company to commercialize the product internally. Although patents may still play an important role in establishing a competitive advantage, the company does have the option of exploiting other advantages separately or in combination with a patent (e.g. utilization of established distribution channels 13




sub-components of the internal development or licensing decisions.

or reputation for quality), thereby enhancing the advantages of patents. Thus, although the relationship between perceived value of patents and the product development strategy can be influenced by several factors, we argue that internal development is a default strategy when the value of the patent is high. This is especially so because it does not preclude licensing arrangements at a later date. On the other hand, when the perceived patent value is very low, there is no incentive for the company to follow internal development and the firm would try its best to license out the technology to get as much royalties as possible. Such a conclusion is also supported by global marketing literature that argues that there is a direct relationship between expected returns (in our case measured by patent's perceived value) and the level of involvement by a firm. Clearly, internal development as an option represents a higher level of involvement than licensing out the patent to other firms. P7. As the perceived value of the patent increases, the propensity to adopt internal development (as opposed to licensing) increases.

Effects of perceived patent value on licensing decisions Licensing in and of itself is of course fraught with risks; sharing technology naturally runs the risk of creating or strengthening potential competitors. As noted previously, based on empirical work (Koen, 1991; Cordes et al., 1999), the ability to `ìnvent around'' some patents causes a reduction in perceived value. It is for this reason that the perceived value, partly a function of patent quality, of the patent is expected to play a role in subsequent decisions in the licensing process once the choice to license has been made. Kotabe et al. (1996), with a focus on multi-product, multi-technology global firms where technology plays an important role in the companies, reviewed possible determinants of licensing and their influence on product strategy; determinants were classified as product-related, industry level, resource-based and end product-market. Their focus was on structural variables (industry structure, product-market externalities) rather than behavior variables such as managerial perceptions. Our approach is distinct in that it focuses on the firm's perception of patent value and the resulting implications for licensing efforts. Assuming the company pursues a licensing strategy, the value of the patent is also likely to have an impact on ensuing marketing decisions surrounding marketing the patent rights to the product or technology. Specifically, we review issues of multiple licensees and industry diversity. Multiple licensing is a straightforward concept defined by the number of companies the firm licenses its patent to. Firms may seek multiple licensees for a number of reasons. One reason, according to Kotabe et al. (1996) is a result of the effect of network externalities; in some cases, the value of a technology rises with an increasing number of users (e.g. communication methods such as electronic mail or fax machines). In these situations, firms have an incentive to help establish their version of the technology quickly as a standard, which may also imply that cooperation with multiple producers of other components and augmentations is needed. John et al. (1999)

As noted previously, this is arguably a simplified view. In many circumstances, this decision is not strictly `èither/or'', but can be a combination of development strategies, since some firms license out only for specific applications or in limited geographic locations, while also employing internal development. Also, many other factors outside of patent value affect the decision to license, including lack of strategic fit, limited capital or resource access, insufficient market size, speed to market issues, core versus secondary technology and/or competitive deterrence (Capon and Glazer, 1987; Gallini, 1984; Kotabe et al., 1996; Rivette and Kline, 2000), to cite a few considerations. Thus, patent value is one factor among many that influences the subsequent development strategies. Once the firm chooses a strategy for how it wants to proceed with its patent (irrespective of the path the firm chooses), the perceived patent value can further influence the downstream decision components. Therefore, we next examine the role of perceived patent value on the 14




payments) with other motives (such as wide dispersal for distribution to help establish standards, which has much longer-term profit implications). However, higher quality patents imply higher codifiability of knowledge, meaning that the transfer process is easier and more feasible than attempting to transfer knowledge that is implicitly tacit. P8. As the perceived value of a patent increases, the greater is the tendency to seek multiple licensees.

conceptualize the ``what to sell'' decisions in technology companies along a vertical positioning continuum; the higher the vertical position, the greater the expenditures needed by the technology buyer before the final user is served. In other words, the direct sale or licensing of know-how would be envisioned at the top of the continuum, with operating a service bureau at the bottom. These authors refer to the demand side-increasing returns issue (more users spurring even more use) as the bandwagon effect, and concur with Kotabe et al. (1996) that high bandwagon effects favor a high vertical position (or licensing). Another reason for multiple licensing is the need for technology in some instances to be a component of a system. As noted previously, if there is a desire to establish their version of technology quickly as a standard, cooperation with multiple other producers of components and augmentations is likely to be needed. John et al.'s (1999) vertical position continuum suggests that a need for compatibility among systems favors a high vertical position. Modular designs assume knowledge can be captured and transferred across firms (i.e. have lower tacitness and higher codifiability), so such designs support an ability to engage in technology transfer or licensing. Higher ``quality'' patents by definition mean that the knowledge contained therein tends to be codifiable, as opposed to tacit, making the knowledge more concrete and transferable. According to Kotabe et al. (1996), licensing is more likely when there is high interdependency among producers in high technology industries that are part of a network (intentionally or not) of producers; creation and support of multiple suppliers of a technology also helps allay potential buyer fears of monopoly supply situations and their inherent risks. If a company believes that its patent position is sufficiently strong, it will be likely to feel more confident about sharing its technology with multiple licensees. At the same time, as noted by John et al. (1999), technology buyers are willing to pay more for a higher degree of rights, at one extreme being complete exclusivity (as opposed to exclusivity in one field of use or geographic area), so the company needs to balance short-term profit motives (directly from the technology sale in the form of royalty

Another area for firms is deciding on the heterogeneity of industries to which a firm licenses its patent. This is a managerial decision by the firm that takes into account the perceived patent value. As discussed previously, the scope of the patent is a determination by the Patent Office; however, the decision to license to diverse industries is a firm's decision. The diversity in licensees can be measured by the number of SIC codes that the firm focuses on. According to several researchers (e.g. Kotabe et al., 1996), lines between industries are becoming increasingly less distinct, as previously unrelated technologies converge in new products. This market condition finds competition in some industries broadening, particularly in high technology areas (Capon and Glazer, 1987). Platform technologies are used in a variety of products, which also tend to spur licensing across a wider range of industries. Kotabe et al. (1996) suggest that firms in industries with greater technology intensity will be more likely to license to firms in other industries. John et al. (1999) concur that positioning on their vertical ``what to sell'' continuum is affected by technology diversity. Diversity of technology means interdisciplinary technologies and integration (for example, materials technology and microelectronics originate with many different types of companies). They suggest that a high diversity of technologies allows specialization (which may support smaller firm activity), and note that a higher vertical position tends to exist if there is higher technology diversity. They also suggest that modularization, discussed earlier, is favored by high technological diversity. As noted previously, however, the ability to license is affected by feasibility of ``tradability'' 15




optimization because of a need to maintain flexibility and adaptability. Also, modularity assumes that knowledge tradability is high; in other words, know-how can be transferred to other companies, and improvements can be developed independently among firms. As noted previously, tradability is enhanced by higher levels of knowledge codifiability, which can manifest itself in the form of a high quality patent. Also, more valued patents can encourage companies to share information to permit the development of compatible components while retaining rights to other aspects of the system. Less valued patents, on the other hand, would tend to support an optimization strategy, which implies a higher level of ``customization'' and service, or in other words, the use of alternate methods rather than a strong patent to establish a competitive advantage. P10. The higher perceived patent value, the greater a firm's propensity to choose a modular product design strategy; conversely, the lower the perceived patent value, the greater a firm's propensity to choose an optimization or integration strategy.

(John et al., 1999); high codifiability supports a high position on their vertical continuum, and higher quality patents imply higher codifiabilty, and therefore higher tradability. Clearer knowledge embodiment would be expected to be even more important as technology exchange among diverse industries increased. In unrelated industries, licensor companies may feel a lack of confidence in monitoring appropriate technology usage. Lanjouw and Schankerman (2001) speculate that it may be more difficult for a patentee to detect infringement when his patented invention is used in diverse technology areas; they base this statement on their finding that narrower patents (i.e. those in fewer technology classifications) tend to be litigated more often. Jap (2001) suggests that moral hazard is a form of post-contractual opportunism that might occur when actions desired under the contract are not easily monitored or observed. Both observation and understanding of the other party's business can reduce moral hazard risks; both also are inhibited by agreements in unfamiliar industries and/or in unfamiliar countries. Understanding another organization suggests that the ability exists to evaluate the degree to which another firm is acting in accordance with the best interests of any joint effort. Conversely, a lack of such understanding may suggest that firms must rely on other ``structural protections'' such as a patent. P9. As the perceived value of a patent increases, the greater is the tendency to seek licensees in diverse industries.

If the firm chooses the internal development option, it is in the firm's best interests to marshal all its resources to achieve superior performance. While the firm will have a certain set of skills, it may lack other skills. Where the firm must focus to achieve superior results will clearly depend on the firm's perception of the value of a patent. If a patent's value is considered to be low and the firm chooses to pursue independent development, then clearly other firm resources will need to compensate to achieve a competitive market advantage. In other words, perceived patent value is likely to influence firm investment in, and attention toward, other firm resources, that support the product or technology, that might become entry barriers. Calantone and Schatzel (2000) suggest that first mover advantage might be achieved through the accumulation of scarce resources, such as patents, and/or through influencing consumer preference formation. They suggest that the latter is affected by competitive equity building (active attempts to build firm

Effects of perceived patent value on internal development decisions A firm may choose to develop the innovation independently, and perceived patent value is also expected to impact marketing strategy decisions in this development arena. John et al. (1999) distinguished between two design strategies in technology-intensive markets: optimization or modularity. Optimization targets high levels of product performance, leading to systems with highly integrated components. Conversely, modular systems by definition tend to be composed of components that can be easily separated from each other. John et al. (1999) suggest that a greater diversity of technologies favors modular designs over 16




reputation among industry constituents) and innovation reputation is viewed by some firms as critical to establishing marketplace credibility and effecting development of favorable industry standards. The implication is that firms that focus on building competitive equity may inherently be less affected by perceived patent value and may pursue the creation of other types of entry barriers. In addition, if a patent quality is relatively low, imitability may be expected to be relatively rapid, so fast commercialization will be of greater importance than in situations where patent value is believed to be higher. If quicker development and introduction is needed, the firm will be allowed less time to develop new marketing and/or technical skills. Also, according to Teece (1988, p. 54):

studies (Cooper, 1992) of success/failure factors in new product development have also consistently tied technical and marketing synergies to innovation success, and have conversely correlated ``newness to firm'' with higher levels of failure. As noted earlier, such synergies are likely to assume greater importance as a basis for creating entry barriers if the patent's value is perceived to be lower. P11. As a patent's perceived value decreases, the stronger the firm's focus in strengthening existing marketing capabilities (versus developing new capabilities).

. . . innovators in weak appropriability regimes need to be intimately connected with the market so that designs are based on user needs.

Empirical testing of propositions As explained previously, empirical research that links patent value and product development strategy has been sparse. This absence, in our opinion, is primarily because when firms arrive at product development decisions based on the perceived value of patents, mangers do not have objective measures of patent value but must invariably rely on perceptions and intuition. Our objective in this section is therefore to suggest some possible measures of the various constructs included in our model to enable empirical testing of the propositions advanced in this article. As described previously, most measures are based on perceptions of key informants, a reasonably common approach in the new product development literature. As noted by Souder and Song (1997), this may be criticized in instances where the developers' perceptions do not match reality, but the real world business approach bases decisions and behaviors on educated perceptions, and in certain instances, perceptual measures may be more pertinent than objective indicators. Especially for our research domain, managers do not have objective measures in the early stages of the product development process when they make their decisions and therefore we believe that perceptual measures advocated by us are not only necessary but also reasonable. Table I presents some guidelines for developing specific measures.

Discussion

This not only supports the tendency toward optimization noted above, it presumes that the innovation will have an existing market synergy within the inventing company. For example, it may be unacceptably time-consuming to establish new distribution channels if imitability is imminent; however, a more valued patent, i.e. a stronger appropriability regime, may suggest that timing is less critical so marketing and technical synergy requirements may be less urgent. A ``synergy'' is created when firm resources and capabilities mesh with technology and market requirements. Teece (1988, p. 57) also suggests that when in-house integration of the required ``complementary assets'' (e.g. marketing and production capabilities) is pursued, ``the assets in question must be acquired by the innovator before their connection with the innovation is public knowledge'' to avoid unnecessary levels of ``revenue extraction'' by the owner of the asset. Olleros (1986) suggests that in the case of incremental innovations (more likely to be narrow in scope) the emergence stage of the technology tends to be short, making established distribution systems important very quickly. Of course, chances for success are enhanced if the needed assets (e.g. distribution channel or manufacturing capability) are already in place at the company. A number of 17




Table I Variables, definitions and operationalizations Propositions and variables

Definition

Illustrative measure items

P1-P11. Perceived value of patent Estimate of expected financial returns Perceived difference between the net attributable to the patent from the present value of the product perspective of the firm development project with and without patent protection P1. Market potential Attractiveness of the target market, Based on the perception of the firm, reflecting market characteristics such using separate items for size (units or as size and growth dollars) and growth (units, dollars, or percentage) P2. Industry turbulence Level of technological and market Beliefs about the rate at which new change within an industry processes, products and marketing practices will be introduced in the industry over the next five years P3. Patent scope Degree of coverage offered by the Technology classifications, scope as patent document defined by the patent office; ``platform'' level, skill of patent counsel P4. Patent costs Expenses associated with the patent; Beliefs about expense ("extremely perceived costs for patent defense high'' to `ìnsignificant") associated with a patent's acquisition, maintenance and defense P5. Legal environment Existence and implementation of laws Scale, anchored by ``very supportive related to patent litigation; perceived environment'' and ``very unsupportive supportiveness of the current legal environment"; managerial perception environment of the adequacy of patent-related laws; the willingness of the government to enforce those laws P6. Firm resources Financial, technical, marketing, and Years in existence; size of the firm, legal expertise size of the legal department, annual legal budget, annual marketing budget P8. Multiple licensees Number of companies with which the Number of companies with which the patent-owning company creates patent-owning company intends to licensing agreements create licensing agreements P9. Industry diversity Heterogeneity among the industries Number of different industries in in which the technology holder which the technology holder intends creates licensing agreements to create licensing agreements P10. Product design strategy Optimization (creating integrated Scaled variable, anchored by high systems) vs. modularity (developing integration vs. high componentization independent components) P11. Focus on marketing Capabilities in the required Scaled variables, measuring intention capabilities ``complementary assets'' in marketing to create compatibility with existing/ areas accessible production, R&D and engineering capabilities; Scaled variables, measuring intention to create compatibility with existing/ accessible distribution channels and current customer base

18

Relevant references Thomas (1999); Levin et al. (1987)

Cooper (1992); Song and Parry (1997)

Calantone and Schatzel (2000); Koen (1991); Thomas (1999); Roy and Dugal (1999) Lerner (1994); Lanjouw and Schankerman (2001)

Koen (1991); Thomas (1999)

Ransley and Gaffney (1997); Sandburg (1999)

Acs and Adrestch (1990); US PTO; US SBA

Kotabe et al. (1996); John et al. (1999) Capon and Glazer (1987); Kotabe et al. (1996); John et al. (1999) John et al. (1999)

Cooper (1992); Teece (1988); Roy and Dugal (1999)




Research implications Perhaps the first direction for future research is to examine the validity of the proposed model and the research propositions. Although the constructs rely on measuring the perspective of a key informant in the company, they do account for the relationship of perceived patent value to a broad range of external and internal factors. As noted previously, radically new products, often covered by patents, do not easily lend themselves to traditional marketing research methods. Cooper (2000) recently proposed an approach to marketing planning for radically new products that emphasizes the importance of considering a broad view of environmental factors (political, technological, and so on) at different levels (company, business ecosystem, infrastructure) as part of an `èconomic web''. He argues that such an approach can stimulate divergent thinking on the part of marketing planners. Although a number of variables impact patent development strategies, it is also likely that some variables will have a greater influence than others. For example, although perceived patent costs are expected to negatively affect a patent's perceived value, it is possible that positive effects of the legal environment overwhelm this relationship. Also, industry practices may dictate that a patent is needed in order to compete or to access funding. Future research must therefore focus on modeling the relative impact of the various factors. The framework outlined in this work suggests a short-term, ``specific point in time'' orientation. An issue still unresolved is whether entry barriers in general, and patents in particular, have a long-term positive or negative impact on the individual firm and society. Although a firm may believe that a patent brings value to the company in the short term, some researchers suggest that firms may ``cling'' to such entry barriers too long, resulting in inertia rather than continued innovation. Han et al. (2001) find that proprietary assets are negatively associated with an incumbent's innovativeness. Further research is needed on the degree to which a more highly valued patent might contribute to the inhibition of innovation in the organization, impacting the patent's actual long-term value to the firm.

The proposed model covers perceptions related to a specific patent, but firms are increasingly concerned about the value of an IP portfolio, which can include a network of patents and trade secrets along with other strategies. The goal of the PTO is to disseminate knowledge on innovation and support innovation development; in exchange for ``full disclosure'', legal protection is offered. Although the PTO attempts to discourage defensive patents (those patents not intended as a basis for commercialization, but sought to prevent other companies from developing a product), companies are now engaging in ``defensive publishing'' as an alternative to investing in patent protection for ``non-essential'' products (Colson, 2001). Information on an innovation published anywhere in the world can be used by examiners to prevent a competitors' application on a related product from issuing; in effect, one defensive publication can potentially defeat patents all over the world. Although the originating company has obviously relinquished patentability rights as well, it can effectively stop competitor protection. Future research may expand the variables discussed here into a view that includes perceived IP portfolio value and its impact on marketing strategy. Managerial implications Given the absence of conceptual frameworks in this important area, we have focused on variables that can be linked to the available literature and those that help us to build a conceptually relevant and managerially useful model. Consequently, managerially actionable items appear as consequences of patent value. Although some of the antecedent variables we consider are not within the direct control of the firm, a number of these variables do have some links with actionable antecedents that are under the influence of the firm. For example, our proposed link between firm's resources and patent value represents one such variable because strengthening the resources is arguably under the control of the firm. Similarly, the variable market potential has direct links with the type of strategies followed by the firm. For example, a firm that follows a mass-market strategy may estimate a higher market potential for a product than a firm that follows a 19




advantage compared to firms that do not understand the role of several factors that impinge on effective patent strategies. From a public policy perspective, the PTO should benefit from such studies by gaining a greater understanding of the factors that contribute to value, or lack thereof, of patent protection. Specific implications for entrepreneurial companies, given their important role in innovation development, are particularly pertinent. As noted in the Stuart et al. (1999) study of the effect of networks on young company growth, when great uncertainty exists about companies, third parties tend to rely on the ``prominence'' of the affiliates (`èndorsers'') of these companies to make quality judgments. This suggests that the evaluative capabilities of the organization doing the `èndorsement'' have an effect on uncertainty reduction. This may mean that the ``credibility'' of PTO review would certainly affect the perceived value of patents, particularly from third parties. Thurow (1997) suggests that it is more important than ever to protect IP and more difficult to do so. He argues that skills and knowledge are the only source of sustainable long-term advantage, and that IP is at the center of success or failure. He believes that less new knowledge will be in the public domain in the future, and that we need better IP protection to avoid secrecy by companies. Alpert (1993) recommends reforming IP law by offering shorter protection times for innovative ideas. Irrespective of how these issues are resolved, the ongoing debates on patents do point out the need for a greater level of scholarly attention than they have received so far, especially in the context of marketing.

niche-market strategy. A firm that considers a geographically wider market (e.g. focus on the entire global market) as a potential will estimate a larger market potential than a firm that wants to limit its geographic reach (e.g. focus only on home country markets). After a holistic analysis of the situation related to patents, firms can make long-term changes to obtain desirable results due to their proactive strategic actions. Similarly, a firm's strategy for entering the market at different product life cycles will have implications for market uncertainty. Clearly, a firm that focuses on being the first mover will estimate market turbulence to be higher than the firm that always focuses on entering mature markets. Similarly, as described subsequently, the patent scope is partly a function of the capabilities of the patent counsel and a firm will be able structure its legal department in such way to influence patent scope. Further, although the cost of defending a patent can be considered to be an exogenous variable in the short run (as assumed in our discussion), it is ultimately a function of a number of firm-related factors such as the legal department (a large in-house department may mean more fixed cost and employing outside consultants may mean a large variable cost; in the former, for example, the cost of patent defense will decrease as the firm focuses on more patents). Thus, a number of antecedents described in our work have direct and/or indirect links with managerial actions. A more detailed analysis of these factors was not attempted in this article in the interests of space and achieving focus. Clearly, patent development strategy must be understood in the context of the broader marketing strategy and positioning of the firm. Integrating patenting and marketing decisions is expected to improve new product performance, much like the effective linking of R&D and marketing has been shown to do (e.g. Griffin and Hauser, 1996). Again, although patent numbers have increased, concerns exist about patent quality; application quality may improve through the integration of marketing expertise into a company's patent application process. Companies that are capable of making use of hard information with appropriate managerial judgment will perhaps be at a competitive

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Introduction

Creating an international market for disruptive innovations

The adaptive capabilities of firms have recently been the subject of lively discussion (e.g. Aragon-Correa, 1998; Barr, 1998). Proactive behaviour, i.e. anticipating coming changes and even influencing the environment, is frequently seen as a way in which firms can survive and actually benefit from the changes in their environment (e.g. Harper, 2000). Firms creating disruptive innovations (i.e. innovations that involve significant new technologies, require considerable change in consumption patterns, and are perceived as offering substantially enhanced benefits) are often cited as examples of proactiveness (e.g. O'Connor, 1998; Johannessen et al., 1999). Nevertheless, the role of marketing in these firms may still be quite conventional and limited to selling the end product to ``the customers who might not even know what they want'' (Workman, 1993). Hence, although the firms seem to be very proactive in their product development, they may still be quite reactive in their marketing efforts. However, innovative products do not guarantee success on the market if the role of marketing is neglected (Nayak and Ketteringham, 1986). Market proactiveness seems to be especially important for highly innovative firms that are facing the challenge of shaping science into a commercially successful product (Johannessen et al., 1999; Kaplan, 1999; Rice et al., 1998). Furthermore, the globalisation of markets seems to put more pressure on global-scale market proactiveness. Competitors can turn up anywhere at any time. However, globalisation also creates opportunities. According to Devinney (1995), since it is increasing the amount and diversity of information, and because management of the innovation process is almost synonymous with the management of information acquisition, it is natural that globalisation is likely to lead to more opportunities for innovation. Furthermore, since it is also causing convergence of market structures worldwide

Birgitta Sandberg and Sten-Olof HanseÂn The authors Birgitta Sandberg is a Senior Research Associate and Sten-Olof HanseÂn is Professor, both at the Department of Marketing, Turku School of Economics and Business Administration, Turku, Finland. Keywords Innovation, International marketing, Marketing planning, New products, Pharmaceuticals industry Abstract Although the significance of international markets is recognised in innovation management, there seems to be a lack of studies on how the international context is actually present in the process of disruptive-innovation development. This paper aims at filling this gap and at analysing the manifestation of the international context in market proactiveness during this process. It begins with a brief discussion of the concepts of market proactiveness and disruptive innovations. The international scope of market proactiveness at the idea-generation, development, and launch stages is then analysed in the light of the ethnocentric, polycentric, regiocentric, geocentric (EPRG) model, and described in the context of the development of three disruptive drugs. The results of this study indicate that both the degree and international scope of market proactiveness differ considerably in demand-related and competition-related comparisons. Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm

The authors would like to thank Dr Tapani VaÈhaÈ-Vahe, Dr Jukka Kuussaari and Kai LaÈhdesmaÈki, MSc, for providing valuable supplementary information.


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Birgitta Sandberg and Sten-Olof HanseÂn

innovations may take 20 years, or even more, the future needs of customers may differ considerably from their current needs (Christensen, 1997; Veryzer, 1998a). Market proactiveness may be regarded as particularly important for highly innovative firms, whose products basically create their own markets (cf. Kaplan, 1999). Consistent with the definition of proactiveness presented by Johannessen et al. (1999), market proactiveness is defined here as either action based on the information gathered about the market before the prevailing circumstances have had a direct effect on the firm, or the deliberate influencing and creation of changes in the market. Even though both anticipating and influencing are proactive behaviours, it is worth emphasising that the firm that attempts to actively influence the market acts more proactively than that which merely anticipates it. Anticipating the coming circumstances implies that the firm can spot the first indicators of new market opportunities and risks, and be the first to exploit or prevent them (Hamel and Prahalad, 1994; Levitt, 1960). As for competition, it entails anticipation of the actions of competitors aimed at shaping market behaviour. The behaviour of players on the market may be influenced either directly, i.e. without regard for the cognitive structures, or indirectly, i.e. causing cognitive change, which then changes the behaviour (Jaworsk et al., 2000). Jaworski et al. (2000) basically only dealt with the influence on demand and competition in their study on market influence. This scope seems adequate enough, since it could be considered that influencing other exogenous market factors, for example government regulations, could be effected by contemplating influences on either competition (building/removing competitor constraints) or demand (building/removing demand constraints). Constraints play an important role when they directly influence customers and competitors. A firm may build customer constraints (real or imagined) that encourage purchasing. On the other hand, it may also try to remove the constraints that prevent customer purchasing. This can be done by shaping the choice sets, criteria and benefit packages that customers buy, for example. Similarly, a firm may also build constraints for competitors that prevent

(Levitt, 1983), it also seems to be creating more possibilities for international market proactiveness. Although the significance of international markets is generally recognised in innovation management, there seems to be a lack of studies on how the international context is actually present in the management of disruptive innovation. This paper aims to explore this issue and analyse the manifestation of the international context in market proactiveness during the disruptive-innovation-development process. The theoretical background of the paper consists of an analysis of previous studies and related concepts[1]. The international context in market proactiveness is also analysed on the basis of a case study.

Disruptive innovations and market proactiveness Innovation could be defined in terms of something that is invented for the first time and is a commercial success (HanseÂn and Wakonen, 1997; Kumar at al., 2000), whereas disruptive innovations are innovations that involve significant new technologies, require considerable change in consumption patterns, and are perceived as offering substantially enhanced benefits (cf. Veryzer, 1998b). O'Connor (1998) has argued that the problems inherent in disruptive-innovation management have been largely disregarded by academics, even though such innovations seem to involve unique challenges in terms of development because of the high level of uncertainty concerning technological feasibility, and in terms of commercialisation, again because of the uncertainty involved (cf. Veryzer, 1998b). The uncertainty requires innovation-development practices that have the potential to reduce risk and manage uncertainty, concurrently enhancing the likelihood of success in the market. However, since it is difficult for potential customers to even articulate the needs that a disruptive innovation may fulfil, it consequently makes it hard to identify market opportunities and to translate technological advancement into products that meet customer needs (Mullins and Sutherland, 1998; Veryzer, 1998b). Furthermore, since the development of these 24




(2) There is also a need to get ideas, information and resources from outside the firm. (3) There is a need for face-to-face contacts, in particular, in order to improve communication in the exchange and creation of new knowledge.

them from entering the market, or it may try to remove the barriers to market entry by lobbying, for instance. The indirect influencing of market behaviour focuses on customer or competitor preferences. A firm may create new customer preferences by giving information about the new benefits of the product or by teaching the customers to use it. It may also reverse existing customer preferences. It may influence competitive behaviour indirectly by influencing the mind-set of competitors in their markets, for example, by publicly stating its own strong commitment to that particular market. Alternatively, it may reverse existing competitor preferences regarding the market to be targeted, for example (Jaworski et al., 2000). Furthermore, it could be concluded from earlier studies (e.g. Mullins and Sutherland, 1998; O'Connor, 1998) that the role of marketing changes during the process in which inventions are developed into commercialised products. Since proactiveness has also been seen as a dynamic phenomenon, changing as firms constantly verify and redefine the manner in which they interact with their environment (Larson et al., 1986; Miles and Snow, 1978), it may be further concluded that market proactiveness also changes during the innovation-development process, (idea generation, development and launch) (Sandberg, 2002).

According to a study by Gerybadze and Reger (1999), distributed research and development activities and globally dispersed innovation processes are driven by the need to secure access to the most critical resources. The previous emphasis on access to science-based resources has lately been supported by the notion of access to knowledge about lead markets. Presence in lead markets and learning from them are becoming increasingly important for innovative firms. It seems that comparative advantage is built on the efficient coupling of lead marketing, R&D and innovation. However, on the international scale, this coupling is rather a demanding task. Golder (2000) studied the innovation-development process in international markets, and came to the conclusion that, although firms recognise the importance of sharing market intelligence, they admit that it is not done sufficiently on the international scale. The results of a study by Lindqvist et al. (2000) indicate that global and local influences on innovation development vary during the process. Global influences seemed to be more common during the idea-generation and launch stages, whereas local influences were emphasised at the actual development stage. However, the international perspective is important, not only in the development but also in the marketing of disruptive innovations. According to Acs et al. (2001), firms that are creating disruptive innovations in particular nearly always require an international perspective. It is extremely difficult for a firm to operate locally and simultaneously to protect itself against intellectual piracy from abroad. Therefore, it is of paramount importance to be able to introduce innovations in many countries simultaneously. However, since the studies presented above did not particularly focus on disruptive innovations or market proactiveness, these findings are of limited use for this paper.

The international scope of market proactiveness Although past research has provided an extensive picture of the innovation-development process, the linkage of that process to geography has received rather limited attention. Nevertheless, existing research has emphasised the role of location and proximity in the innovationdevelopment process (e.g. Gerybadze and Reger, 1999; Porter and SoÈlvell, 1999). Porter and SoÈlvell (1999) identified three different characteristics of innovation development, which accentuate the importance of the geographical dimension. (1) There is a need for the incremental reduction of technical and economic uncertainty, which requires continuous interaction with the firm's environment. 25




various countries individually. Regiocentric orientation accentuates a single orientation towards a regional grouping of countries. Thus, regiocentric market proactiveness is anchored in a certain region. Geocentric orientation implies a global approach. In terms of market proactiveness, this means that the firm is trying to influence and anticipate market circumstances on a global scale (Heenan and Perlmutter, 1979; Gassman and von Zedtwitz, 1999; Shoham et al., 1995). The analysis of market proactiveness should be tied to a certain objective, i.e. to defining ``towards what'' the firm is proactive. This objective seems to vary at different stages of the innovation-development process. Market proactiveness and reactiveness at the idea-creation stage seem to be connected to the potential opportunities in the market, i.e. whether they are reacted to, anticipated or influenced. On the basis of previous studies, it may be concluded that, particularly in disruptive innovations, market proactiveness is usually high at the idea-generation stage. Ideas are generated inside the firm based on perceived needs or, even more often, on basic research (Kaplan, 1999; Rogers, 1983). Thus, the ideas influence and create opportunities on the market. They also create a new competitive situation. Provided that the innovation really is disruptive, these opportunities are likely to be global (Christensen, 1997; Nayak and Ketteringham, 1986). P1. Market proactiveness is high and geocentrically oriented at the idea-generation stage.

Although the dependence of the innovation-development process on external knowledge exchange has been widely acknowledged (e.g. Golder, 2000; von Hippel, 1986), studies on disruptive innovations indicate that their newness may considerably hinder the utilisation of external knowledge (Christensen, 1997; Veryzer, 1998b). Furthermore, proactiveness is expensive. Monitoring customers and competitors, long-range market scanning and extensive lobbying are usually not possible without the significant sacrifice of scarce resources. The costs of market proactiveness are more justifiable if targeted to the appropriate geographical area. According to Heenan and Perlmutter (1979), the international orientation of the firm can be divided into four classes: (1) ethnocentric (E); (2) polycentric (P); (3) regiocentric (R); and (4) geocentric (G). Although the EPRG typology was originally developed and is often used (e.g. Gassmann and von Zedtwitz, 1999; Schuh, 2001) to describe multinational organisational development, it also seems to be suited to contemplating the way a firm perceives international markets in general (e.g. Shoham et al., 1995; Wind et al., 1973). Furthermore, EPRG typology seems to be rather compatible with market-proactiveness analysis, since it has been argued that consideration of both EPRG orientation and the degree of market orientation is needed in order to understand international market strategies (Wind et al., 1973) and, after all, market orientation could be considered to comprise both market proactiveness and market reactiveness (Jaworski et al., 2000; Kohli and Jaworski, 1990). Ethnocentric orientation means that the focus is on the home market. Ethnocentric market proactiveness concentrates on influencing and anticipating the coming market circumstances based on the information gathered only from the home country. Polycentric orientation emphasises the differences between countries. Consequently, polycentric market proactiveness means that future market circumstances are influenced and anticipated in

At the development stage, market proactiveness and reactiveness seem to be connected to the needs of the end market, i.e. whether these needs are reacted to, anticipated or influenced at the product-development stage. Prototype formulation influences the degree of proactiveness. Before the prototype is developed, the needs of the end market are not actively influenced, but rather anticipated, to some extent. Later, when the prototype is developed, prospective customers are usually better capable of expressing their needs regarding the innovation and its features. Therefore, demand-related market reactiveness tends to increase as the development proceeds 26




perspective. These propositions, which are based on previous studies, are further illustrated in Figure 1.

further towards the launch stage. At this stage, the needs of the end market are anticipated and reacted to mainly in the context of the home market. Secrecy concerns and expense often prevent the conducting of market research abroad (Devinney, 1995; Gerybadze and Reger, 1999; O'Connor, 1998; Veryzer, 1998a). P2. Demand-related market proactiveness is ethnocentrically oriented and decreases during the development phase.

The development of disruptive drugs Since innovations require commercial success on the market, they are also challenging research subjects. In fact, longitudinal real-time studies on the innovation-development process are generally not feasible, because it is only at the end of the process that it becomes clear whether or not the invention ever became an innovation. After all, only a fraction of inventions eventually lead to commercial success. Thus, retrospective studies, with all their weaknesses, are often the only realistic option available to the researcher. On the other hand, if the innovation is disruptive, there is often rather a large amount of written material about it, which makes the study of past events more reliable (cf. Sandberg, 2002). The following short case description is mainly based on interviews, although an extensive amount of internally published written material, articles and annual reports was used to enhance the credibility (cf. Lincoln and Guba, 1985). The study describes the international scope of market proactiveness during the development of certain disruptive drugs (Domosedan1, Domitor1, and Antisedan1)[2]. Drugs are a particularly interesting case, because the pharmaceutical industry has traditionally been very international in the marketing of ready-for-use products. However, there seems to be a rather limited amount of information about the extent to which it has anticipated and influenced international market demand during the development of new innovative drugs. Domosedan1, Domitor1, and Antisedan1 are veterinary drugs developed by the Finnish Farmos Group Ltd, which later merged with the Orion Group. Domosedan1 was the first of them, and it had the honour of becoming the first pharmaceutical product developed in Finland from the molecule stage (the detomidine molecule). It is a sedative and painkiller, mainly used in equine veterinary practice, but also given to cattle and their related wildlife species. Domitor1 was developed later and it is based on the invention

The key issue at the launch stage seems to be that the market accepts the new innovation. Compatibility between the innovation and the market may be achieved by making customer-required modifications after the launch, or by anticipating these requirements through market research, for example. Even though both of these strategies seem to be widely used during the launch of disruptive innovations, the literature has emphasised even more the role of active market preparation, i.e. building awareness and educating customers about the innovation to be launched (Easingwood and Koustelos, 2000; Guiltinan, 1999). The market preparation has to be carefully timed in connection with the launch moment. However, the launch of disruptive innovations often depends on external country-related factors, for example, obtaining patent rights and selling permission (especially in the case of drugs). P3. Demand-related market proactiveness is high and polycentrically oriented at the launch stage. Competition is actively monitored and influenced worldwide. Although the protection of patent rights is extremely important, it is not sufficient to protect the firm from competition, as it may happen that, while the innovation is still under development, competitors launch a product that satisfies the same need (Acs et al., 2001; Lieberman and Montgomery, 1988). P4. Competition-related market proactiveness is high and geocentrically oriented during the development and launch phases. In conclusion, it seems that even though market proactiveness oriented towards demand mainly focuses on the home market, competitionoriented proactiveness requires more of a global 27




Figure 1 The nature and scope of market proactiveness, based on previous studies

28




of the medetomidine molecule. It is an analgesic sedative for small pets, mostly dogs and cats. Antisedan1 was the last of these original drugs (atipametsoli molecule). It reverses the effects of Domitor1 and wakes up the pet quickly after the treatment. The development of Domosedan1 began in the mid-1970s, and the drug was launched in Finland in 1983. Domitor1 was launched in 1985 and Antisedan1 in 1988. All these drugs have been widely adopted around the world and have become commercial successes. Thus, they clearly are innovations. Furthermore, they can be defined as disruptive innovations, since all of them have revolutionised the work of veterinarians. Domosedan1 enables large animals to be treated without being tied up or anaesthetised. Thus, clinical examinations and smaller surgical treatments can be carried out when the animal (e.g. a horse) is standing still. This is much safer both for the animal and for the veterinarian. The difference it has made to the work of veterinarians is illustrated by comments such as: ``There was a time before Domosedan and there is a time after Domosedan.'' Domitor1 had superior pharmacological features, and together with Antisedan1 created a clinically revolutionary combination that was unique in the world in that, used in sequence, these drugs gave the veterinarian control of the animal's consciousness (fast sedation and rapid regain). The ideas for these drugs emerged originally through basic research (alpha receptor pharmacology). This led the way to applied research aimed at finding a compound that would lower blood pressure in a human being. However, the molecule discovered seemed to be more suitable for its sedative and analgesic effects on large animals. Since the need for this kind of drug was known, the development process was allowed to continue. Thus, the internal push of new technological advances found the prerequisite for the commercial success, i.e. the external pull of a market need. The result of this process was Domosedan1. Later on, when Domitor1 and Antisedan1 were being invented, applied research was more systematically aimed at finding exactly these kinds of drugs. Since they all, to a great extent, created their own markets as they emerged, they also created new user preferences among

veterinarians. Consequently, this built up competition constraints. Prior to the idea-generation stages, it was emphasised inside the firm that the source of international competitive advantage is in innovative and original products. In all these cases, global demand for the invention was estimated soon after the idea emerged. In fact, the globally recognised opportunities were the preconditions for going ahead with the development process. These opportunities were estimated through preliminary market research that focused on estimating the global market potential. Thus, P1 (market proactiveness is high and geocentrically oriented at the idea-generation stage) seems to be consistent with these cases. The development of these drugs began with pharmacological research and tests inside the firm. This was important in terms of both secrecy and the need to accumulate knowledge internally. During this time, market needs were anticipated based on the knowledge that the firm's own researchers and veterinarians had. Subsequently, preclinical testing and clinical trials were conducted. Both domestic and foreign research institutions were engaged in the preclinical testing, whereas practitioners also participated in the clinical trials. Most of these tests and trials took place in the Nordic countries and Europe, but later some were also conducted in North America. They were allocated to various countries, mostly in order to facilitate the later process of acquiring sales permission there. Furthermore, their role as a pre-marketing tool was also significant. They provided information about the key target markets, since after all, the people involved in the testing were mainly opinion leaders (i.e. university professors and visionary practitioners). Market research focused on estimating the market potential in the most promising areas, i.e. Europe and North America. It was difficult to conduct more specific research, owing to the newness of these drugs. Furthermore, although it was emphasised that they needed to be suitable for export, it was believed in the firm that the needs of the end markets (i.e. veterinarians) are very similar all over the world. The findings of these cases are inconsistent with P2 (demand-related market proactiveness is ethnocentrically oriented and decreases 29




during the development phase). In these cases, it seemed that the market needs were anticipated before the preclinical testing and clinical trials began, but then the firm actually tried to influence these needs by purposefully hiring opinion leaders to conduct the tests. Thus, market proactiveness, in fact, seemed to increase during the development phase. Moreover, it shifted from ethnocentric orientation towards polycentric orientation during the development process. Further studies would be needed in order to find out whether these findings evidence special characteristics that are confined to the pharmaceutical industry, or whether they can also be applied to disruptive innovations in general. The creation of a market for Domosedan1, Domitor1 and Antisedan1 began long before the launch. The market was prepared through awareness raising and education about the new drug. The firm systematically tried to target its market proactiveness at opinion leaders, namely university professors and visionary practitioners. Furthermore, it was considered particularly important to find and contact national opinion leaders in each country in which the product was to be launched. Preclinical trials gave the opinion leaders a chance to try the drug, which increased enthusiasm for and knowledge about it. The results of the tests were presented in scientific conferences well before the product was launched. Thus, awareness of the coming product was built up through veterinary conferences and symposiums. Participation in scientific conferences aroused interest, led to inquiries, and established contacts. Scientific conferences were also good occasions for finding more opinion leaders and learning more about them. It is worth noting that organising symposiums concentrating on a certain scientific theme has been a traditional marketing device among pharmaceutical companies. The benefits of the new drug are disclosed in the context of scientific discussion, even though the company itself stays in the background. Thus, there is nothing new in this tool. However, its systematic and purposeful use indicates demand-related market proactiveness (cf. Sandberg, 2002).

Awareness of the coming drugs was also built up through more general marketing means. They were extensively presented in the firm's own newsletters, which were distributed to the practitioners (Finland) and distributors (abroad). Advertisements in trade papers were also used to raise awareness. Education was extremely important, since the drugs were substantially different from the established ones. Therefore, the proper dosage and use had to be taught to veterinarians step by step. Demonstrations were used to show the opinion leaders who participated in the tests how to use the drugs properly. Detailed written instructions were also drawn up and distributed before the launch. Some veterinarians required modifications to the product, especially after the launch of the first drug, Domosedan1. They argued that the concentration of the drug was too strong. They had been used to giving large injections to large animals, and Domosedan1 required a small dosage, which could be injected with a small syringe. Since these modification requirements were interpreted as stemming from unfamiliarity with the new kind of drug, they were not implemented, and the firm invested in education instead. Only minor post-launch modifications were made in the packages and brand names, mostly owing to the requirements of foreign countries (cf. Sandberg, 2002). Thus, P3 (demand-related market proactiveness is high and polycentrically oriented at the launch stage) seems to be in accordance with these cases. Competition was monitored actively during both the development and the launch stages. Overall, the purpose in the firm was to develop drugs that are clearly superior to those of competitors. Patents were applied for and trademarks were registered in a large number of countries at a very early stage of development (cf. Karjalainen, 1981), which indicates high proactiveness towards competitors. Furthermore, it was considered very important to follow changes in international regulations and recommendations, and to react to them immediately. It was more a case of monitoring and anticipating than of direct influencing, which seemed logical, taking into consideration the fact that the firm was rather small compared with its main competitors, the pharmaceutical 30




market. However, proactiveness in relation to demand requires substantial amounts of both time and resources owing to the newness of the innovation. Thus, realities seem to push the firm to approach demand gradually, with an ethno- or polycentric orientation. This study seems to be among the first to link market proactiveness with the international scope. Since it focuses on disruptive pharmaceutical innovations, further research on various kinds of disruptive innovations stemming from different kinds of firms would certainly be of interest in terms of developing a more thorough understanding of the complex and multifaceted issue of the international scope of market proactiveness. Furthermore, it has to be recognised that Finnish firms are used to looking for international opportunities rather eagerly, owing to the small size of the home market. Therefore, it would be interesting to study firms in larger countries, and to see how the size of the home country influences the international scope of market proactiveness.

giants. Thus, P4 (competition-related market proactiveness is high and geocentrically oriented during the development and launch phases) seems to correspond partially with these cases. Although competition-related market proactiveness was geocentrically oriented, it was not as high as anticipated.

Implications for further research The relevance of this topic is assured on two counts: (1) the lack of studies concentrating specifically on market proactiveness in developing disruptive innovations; and (2) the evident need for innovative firms to develop products that are commercially successful on an international scale. The findings of this paper contain some preliminary evidence of how the international context is present in market proactiveness during the disruptive-innovation-management process. The results suggested that demand-related market proactiveness was rather high from the idea-generation to the launch stage. The firm created market opportunities together with the innovative products, and it actively shaped and influenced the needs of the end market. These needs were influenced first in the home country and later in the various foreign countries, despite the fact that the market opportunities were considered global. Competition-related market proactiveness was very high at the idea-generation phase, since the innovative drugs mainly created their own competitive sphere as they emerged, and relatively high during the development and launch stages. The firm was anticipating and monitoring the changing competitive environment, but it did not try to influence it directly. Nevertheless, its competition-related market proactiveness always had a global perspective. Proactiveness is expensive, and on the global scale demands even more resources. Therefore, it seems natural that the firm very carefully considers how proactive it should be. Global proactiveness in relation to competition seems to be especially important for disruptive innovations, which aim to be the first in the

Notes 1 An earlier version of this study was published in Delener and Chao (2002). 2 Registered trademarks of the Orion Group.

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Introduction

The concept of innovativeness: should we need to focus?

The role of innovation as a crucial driving force of economic development is widely acknowledged. In particular within the business setting, innovation is often considered to be a vital source of strategic change, by which a firm generates positive outcomes including sustained competitive advantage. For these and other reasons, innovation has for many decades been subject to thorough analysis and research. Innovation itself is a broad concept that is conceived in a variety of ways. Prior attempts to capture what really constitutes the term of innovation have resulted in widely varying conceptualisations. Consequently, innovation and innovativeness are either distinguished from each other or used interchangeably (Damanpour, 1991). Nevertheless, innovation seems to incorporate the adoption or/and implementation of ``new'' defined rather in subjective ways, whereas innnovativeness appears to embody some kind of measurement contingent on an organisation's proclivity towards innovation. This article intends to review and critically comment on the extant literature regarding innovativeness. More specifically, the first section will discuss research streams of organisational innovation research. The second section will present conceptualisations and measurements of organisational innovativeness. The third section will critically suggest a shift in emphasis from organisational to product innovativeness. The fourth section will stress the importance of considering product innovativeness as a dependent variable, in order to contribute to further research and theory development, while the final section will provide conclusions.

Helen Salavou

The author Helen Salavou is a Post-doctoral Researcher at the Athens University of Economics and Business, Athens, Greece. Keywords Organizational innovation, Research work, Product innovation, New products Abstract Organisational innovativeness is a broad concept involved in a firm's proclivity to innovate. As such, widely varying conceptualisations and operationalisations of this construct appear to be the main cause of major deficiencies in the research of organisational innovativeness determinants. This article suggests a shift in emphasis from organisational to product innovativeness. After defining this concept, it selectively addresses how the investigation of product innovativeness as a dependent variable could contribute to further research and theory development. The benefits of such an investigation are far from restricted to the recommendations made herein. However, such recommendations are meant to intrigue scholars into conducting similar investigations on product innovativeness, a rather overlooked aspect of organisational innovativeness. Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

Research streams

The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm

Literature on innovation appears to be vast and varied, mainly because scholars in various disciplines do show an ever-increasing interest in examining this phenomenon from every perspective. Nonetheless, a review of the organisational innovation literature (Subramanian and Nilakanta, 1996; Wolfe,


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1994) points out two broader research streams (see Table I). The first stream centres on a firm's external or/and internal processes of innovation, while the second focuses on determinants of innovation or/and its impact on organisational performance. Even though both streams carry out research, the latter appears to be the most attractive, because particular emphasis has been laid on the identification of innovativeness determinants in various disciplines, such as marketing (Robertson and Gatignon, 1986), economics (Mansfield, 1968) and organisational behaviour (Kimberly and Evanisko, 1981). However, this significant body of research fails to track down an overall consistent direction. Part of this incongruity seems to be attributed to the multiplicity of ways innovativeness, as a dependent variable, is both conceptualised and operationalised.

innovativeness may occur along a continuum from a simple willingness to either try something (for example a new product) or experiment with it, to a passionate commitment to master the latest in new products or technological advances. However, despite prior assertions to ascribe a unidimensional sense to organisational innovativeness, this phenomenon seems to be composite. This may plausibly explain why Gauvin and Sinha (1993) underline the existence of substantial obscurity around the definition of innovativeness. Likewise, the existing inconsistency regarding the results of organisational innovativeness determinants is, according to Subramanian and Nilakanta (1996), attributed to the unidimensional conceptualisation of innovativeness. Nonetheless, few researchers have treated organisational innovativeness as a multidimensional phenomenon (Subramanian and Nilakanta, 1996; Wilson et al., 1999). To this direction Bigoness and Perrault (1981) define innovativeness on a three-dimensional basis, namely innovativeness domain, content domain and reference domain. These components evolve rather sequentially and characterise explicitly or implicitly this phenomenon. In particular, the first dimension, innovativeness domain, is most closely related to the traditional characterisations of the level of innovativeness. However, this dimension by itself is underspecified, because an organisation may be innovative in some areas, but not in others. Thus, the second dimension helps to explain why a firm characterised as innovative in one study might logically be characterised as noninnovative in another concurrent study, owing to a different or more general content domain. At the one end of this continuum, attention is drawn to the adoption of specific innovations (i.e. a single new product or technology), while at the other extreme,

Organisational innovativeness: a uni- or multidimensional phenomenon? Conceptual approaches The vast majority of researchers consider organisational innovativeness as a unidimensional phenomenon (Wilson et al., 1999). In this respect, literature offers numerous definitions that refer to different aspects within the organisational setting, such as technology-related, behaviour-related and product-related (see Table II). Lumpkin and Dess (1996) follow a somewhat combined conceptual approach, according to which innovativeness reflects a firm's tendency to engage in and support new ideas, novelty, experimentation, and creative processes that may result in new products, services, or technological processes. Their perspective implies that evidence of firm innovativeness may take several forms. In the broadest sense, Table I Research streams External diffusion processes

First stream Inter-organisational processes

Diffusion of innovation Process theory research research Innovation process research

Innovation determinants

Second stream Impact of innovations on performance

Organisational innovativeness research Innovation variance research

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Table II Conceptual approaches of innovativeness Aspect

Definition

Reference

Technology-related

Innovativeness represents a basic willingness to depart from existing technologies or practices and venture beyond the current state of the art Innovativeness is defined as the company's proclivity towards the adoption of new technologies, thus representing its ability to adapt to different environmental opportunities Innovativeness indicates behavioural change and may refer to the degree to which an individual or other unit of adoption is relatively earlier in adopting new ideas than any other member of the system Innovativeness is considered to be either the ability of generating new ideas and the combination of existing elements for the creation of new sources of value or the receptivity to new ideas Innovativeness reflects the capacity of the company's inclination to buy new products and services

Kimberly (1981)

Behaviour-related

Product-related

attention focuses on general types of innovativeness (i.e. new products or products approached across a broad spectrum of content areas). Moreover, given the major importance of the social system, the third dimension identifies the boundaries that are used in defining the social system, within which a firm's innovativeness will be compared or contrasted. For example, a foreign manufacturer that introduces a product innovation may be viewed as highly innovative as compared to other similar firms in its own country, but not with respect to competing firms in other countries. Avlonitis et al. (1994) developed an alternative conceptualisation of organisational innovativeness, which represents a latent capability of firms composed of two critical parts: (1) a technological part; and (2) a behavioural part.

Kitchell (1995)

Rogers (1983)

Stalk et al. (1992); Hurley and Hult (1998)

Foxall (1984)

organisational innovativeness as an enduring organisational trait that is consistently manifested by truly innovative firms over a period of time. Stated differently, innovative firms display a consistently high level of innovativeness over time. This phenomenon is reflected in three dimensions, namely mean number of innovations over time, mean time of innovations' adoption and consistency of the time of innovations' adoption. Having taken into consideration the previous approach, Wilson et al. (1999), assert that the re-orientation of innovativeness to be treated as a multidimensional phenomenon is a major step in the right direction. However, they still underline the lack of depth and richness needed to both conceptualise and measure this phenomenon. Measurement approaches A variety of measures have been used to capture the organisational innovativeness phenomenon (see Appendix). Some of the most indicative measures refer to: . The elapsed time of adoption. . A dichotomous variable, representing the adoption or non-adoption of an innovation. . The level of R&D expenditures. . The economic value of innovations. . The number of innovations adopted by a firm out of a list of innovations. . Subjective measures.

Both parts denote the capacity and commitment of a firm to innovate by reflecting its activities in terms of its technological and behavioural aspects. In addition, organisational innovativeness treated as a five-dimensional phenomenon is conceived as cumulative, in the sense that it can be built and triggered, while producing a favourable inclination of a firm towards any technological innovation. According to a more recent approach, Subramanian and Nilakanta (1996) conceive 35



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Since no single measure is evident to be the most appropriate, Thompson (1969) suggests that research in organisational innovativeness should realistically make use of any measures that are available in the context of a specific research work. Nonetheless, prior research has predominantly used either the time of innovation adoption (temporal measure) or the number of innovations adopted by a firm (cross-sectional measure) (Cohn, 1980; Daft and Becker, 1978; Damanpour, 1996; Damanpour and Childers, 1985; Damanpour and Evan, 1984; Ettlie and Bridges, 1982; Ettlie et al., 1984; Fritz, 1989; Kimberly and Evanisko, 1981; Kitchell, 1995; Robertson and Wind, 1980; Rogers, 1983). In all these studies, the unit of analysis is organisation, while innovativeness is measured as a holistic, systemic property. A detailed assessment of both measures is explicated next. When innovativeness is measured by the time of innovation (one or few) adoption, results are not generalisable to other innovations. If, for example, a firm adopted an innovation earlier than others, it does not necessarily mean that it will exhibit the same behaviour for all other innovations. Subramanian and Nilakanta (1996) support that the characterisation of an organisation as innovative depends on the way researchers define it. However, it should be taken into account that innovativeness is, by definition, an enduring organisational trait. In other words, truly innovative organisations are those that exhibit innovative behaviour consistently over time. Furthermore, Midgley and Dowling (1978) assert that the terms innovativeness and relative time of adoption (i.e. relative time taken to adopt novelties) are not synonymous, because the former is a hypothetical construct, and the latter a low-level operational variable, whereas between the two lies a system of intervening variables. In a similar direction, Avlonitis et al. (1994) argue against proponents of the temporal measure suggesting that: . The actual time of adoption of an innovation might be determined by its supplier and not by the adopting firm. In this respect, a ``better'' or ``worse'' innovativeness behaviour of a firm may be

.

attributed to other factors, which fall outside its own control. Changes in the rates of innovation adoption might be a result of significant improvements in the innovation being studied and not of changes in the receptivity of prospective adopters.

When innovativeness is assessed based on the number of innovations adopted by a firm (i.e. number of novelties adopted), the time of adoption of each innovation is not taken into consideration. Thus, by excluding the time of adoption important differences in a firm's readiness and propensity to innovate cannot be determined. This may be a significant shortcoming because some researches (Porter, 1980, 1985, 1987; Zangwill, 1993) argue that companies that innovate earlier than others are more likely to acquire real and significant competitive advantages. In addition, Da Rocha et al. (1990) pinpoint two more drawbacks: (1) The degree of innovativeness is not taken into account, although it can vary form totally new products to products that are incremental improvements of existing ones. (2) Other constructs are also involved, such as company size and type of industry. The comparison of the aforementioned measures of organisational innovativeness highlights at least two reasons why the cross-sectional measure is more reliable (Midgley and Dowling, 1978). More specifically, this measure is less influenced by problems of recall whereas it covers a wide range of innovation, being thus less subject to product-related or situation-specific constraints. Further to the measurement issues of organisational innovativeness, some researchers argue that studies which include the adoption of multiple innovations present over time the degree of organisational innovativeness better than those which tackle a single innovation (Damanpour, 1991; Subramanian and Nilakanta, 1996). However, both single and multiple innovation studies have been negatively criticised (Bigoness and Perreault, 1981). In particular, studies based on a single innovation criterion may be idiosyncratic and therefore not representative (i.e. they provide a neither valid nor reliable measure of innovativeness). On the other hand, studies employing traditional composite scores of 36



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innovativeness, product innovativeness is more specific and indicative of companies explicitly involved in product-related innovative activity (see Figure 1). Although it is part of the organisational innovativeness phenomenon, product innovativeness is closer related to the way that new products are described than to the broad-based measurement of a firm's proclivity to innovate (Marquis, 1969; Davidson, 1976).

innovativeness implicitly and inappropriately assume that different innovations are homogenous (Downs and Mohr, 1976). Finally, two interesting points come to light regarding methodological issues of innovativeness: (1) Organisations are nested within industries, a level which, although recognised, has almost been excluded from studies of innovativeness (Avlonitis et al.1994). Indeed, conditions inherent in different industries may well dictate the relevant innovativeness of firms (Robertson and Gatignon, 1986). (2) Almost all research studies assess innovativeness at one point in time, assuming that firms which are characterised as innovative in a specific point in time will actually remain innovative over time. However, because the external and internal environments of an organisation rarely remain unchanged over time, it is rational to assume that innovativeness will also change. Yet, the consistency in innovativeness has been ignored by past research (Subramanian and Nilakanta, 1996).

Conceptual and measurement approaches of product innovativeness Product innovativeness reflects the level of newness in product innovations, which can vary, broadly ranging over a wide spectrum (Balachandra and Friar, 1997). Thus, product innovativeness refers to a phenomenon manifested by companies with product-related innovative activity. Although it can be described along several dimensions (Song and Montoya-Weiss, 1998), most of them appear to reflect the firm's or/and the customer's perspective (Danneels and Kleinschmidt, 2001; De Brentani, 2001). Ansoff's typology (1957) suggests three product innovativeness categories, notably: (1) incrementally new products; (2) moderately innovative products; and (3) really new products.

Shift in emphasis from organisational to product innovativeness

These result from combinations between products (existing and new) and markets (existing and new). This typology has been adapted by many researchers (Cardozo et al., 1993; Meyer and Roberts, 1986,; Pavia, 1990;

The preceding review appears enlightening in indicating the main causes of results' inconsistency within the research stream investigating organisational innovativeness determinants. In fact, these relate to major deficiencies around the concept of organisational innovativeness. In particular, there is lack of converging views concerning the treatment of organisational innovativeness either as a unidimensional or a multidimensional phenomenon, whereas no single measure of organisational innovativeness seems to be widely accepted. Based on the need to cope with these deficiencies, it is suggested that there be a shift in emphasis from organisational to product innovativeness. The purpose of this shift is to shed light on a more focused orientation within this research stream along with its theoretical and practical importance. Unlike organisational

Figure 1 From organisational to product innovativeness

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dimensions based on the firm's or/and the customer perspective, as the case may be. In contrast, this article suggests that the concept of product innovativeness could be better understood by dimensions that reflect both perspectives. Along this line, it should comprise three dimensions, namely: (1) newness to the firm (Booz et al. , 1982; Brouwer and Kleinknecht, 1996; Cooper, 1979; Song and Montoya-Weiss, 1998); (2) newness to the customer (Atuahene-Gima, 1995; Atuahene-Gima and Ko, 2001; Lawton and Parasuraman, 1980); and (3) new product uniqueness (Ali et al., 1995; Cooper, 1979; Danneels and Kleinschmidt, 2001; De Brentani, 2001; Sethi et al., 2001; Song and Parry, 1994).

Roberts, 1991) to be used in various research frames. Cooper (1979) identifies three dimensions that reflect the product innovativeness concept: (1) newness to the firm; (2) product uniqueness; and (3) product superiority. In a similar vein, Lawton and Parasuraman (1980) assert that there are two basic dimensions of product innovativeness. (1) The degree of change in consuming patterns of users, which is required for adopting a new product. This adoption may incorporate a small or no change, a moderate or major change. (2) The degree of difference between new and existing products in the market.

The first component, newness to the firm, captures in general the degree to which an innovation is conceived as compatible with the company's existing systems, resources and capabilities. Moreover, it refers to the degree of similarity between a new product and other products within the company. In this context, a new product can be characterised from incremental (i.e. improvement or modification of an existing product) to radical (i.e. new product line or new product worldwide). Furthermore, the second component, newness to the customers, reflects the extent to which a new product is compatible with the experiences and consumption patterns of existing and potential customers. In other words, it reflects either the degree of change in the customers' behaviour or their required endeavour to adopt the new product. The third dimension, new product uniqueness, represents a new product's superiority in terms of characteristics as compared to competing products. In the new product literature, product innovativeness in terms of the customer's perspective consists of the customer newness and new product uniqueness dimensions (Ali et al., 1995). The recommendation to conceptualise product innovativeness in terms of three dimensions seems to be more comprehensive. In particular, it captures adequately the newness/uniqueness aspects, which should be embodied in the product innovativeness

In this context, a new product may vary from incremental or radical change in existing products to a completely new product line. Booz et al.'s (1982) widely accepted classification scheme relates to product innovativeness and distinguishes six new product categories based on their newness to the firm and to the market. Kleinschmidt and Cooper (1991), as well as Ferrell et al. (1998) have also developed product innovativeness dimensions based on the Booz et al.'s classification scheme. Some researchers slightly differentiate the way they approach the concept of product innovativeness. For example, Brouwer and Kleinknecht (1996) suggest that product innovativeness is reflected in two dimensions based on: (1) product newness to the firm; and (2) product newness to the sector. They further argue that products new to a firm are often based on some degree of imitation of innovations already introduced into the market by competitors, while products new to the sector constitute real innovations, since nobody has introduced them into the market before. Similarly, Song and Montoya-Weiss (1998) adopting prior research approaches, define product innovativeness based on the product's newness to the firm. Despite the evident similarities in the conceptualisations of product innovativeness, it appears that this concept is defined by 38



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periodic (Hurley and Hult, 1998). This implies that innovation takes a prominent place at a strategic level as companies turn to the development of new products for their survival (Dyer and Song, 1998). Nonetheless, the importance of innovative new products is further underlined given the large extent to which companies are based on them to achieve profitability (Ali et al., 1993). A significant number of studies have placed products in the core of firms' strategy, since they are often based on a continuous chase of developing competitive advantages around them. Market growth rates, intensive competition and rapid technological advances turn product innovations into the means of firms' development and propensity (Cooper, 1984). Given the enhanced interest in new products within the contemporary business setting, the new product examination relates in strategic management to the concepts of radical/incremental product innovations based on the firm's perspective, whereas in strategic marketing it involves the concept of product innovativeness that reflects the degree of newness to the firm, together with the degree of newness to the customers and uniqueness in the marketplace. It is however clear-cut that research on firms' product-related innovative activity receives an ever-increasing interest within both disciplines, and is often considered to be one of the top research priorities. In particular, in the extant literature of strategic management, product innovations refer to the introduction of new products (or services) to meet an external market or user need (Damanpour, 1996). In addition, since product innovations vary in their degree of newness to the firm (Hull et al., 1985), they are further classified as radical or incremental based on the degree of change related to them. In this context, it appears that changes related to products recommend innovations, which are characterised as either radical or incremental to the firm. In a somewhat similar direction, considerable attention has been drawn within the strategic marketing field to determining what constitutes a new product (Lawton and Parasuraman, 1980). Researchers, like Cooper (1999), Cooper and Kleinschmidt (1987) and Song and Montoya-Weiss (1998), conceive the terms of

phenomenon. Thus, innovativeness is an attribute accorded to a new product based on firms, who produce it; customers, who either use or consume it; and similar products, with which it is compared in terms of characteristics (see Figure 2). Since all three dimensions are considered to be of equal importance, they should be simultaneously investigated in order to provide a better understanding of this concept. This becomes more evident, as Danneels and Kleinschmidt (2001) have recently suggested that newness may differ from uniqueness in degree. That is, a unique new product does not preclude its degree of newness. Prior studies have operationalised the product innovativeness concept based on perceived assessments (Adams et al., 1998; Ali et al., 1995; Atuahene-Gima, 1995, 1997; Avlonitis et al., 1994; Cooper, 1979; Kleinschmidt and Cooper, 1991; Kusunoki et al., 1998; Lawton and Parasuraman, 1980; Olson et al., 1995; Song and Montoya-Weiss, 1998). Despite the differences in subjective measures adopted, it appears that they have an advantage over objective ones (Da Rocha et al., 1990). Besides, it is often assumed that perceptions of decision makers lead to a more reliable measurement of innovation (Tornatzky and Klein, 1982). Matching concepts in strategic management and marketing fields: product innovations, new products, product innovativeness The dynamic nature of most markets makes it nearly impossible to find a firm that is not engaged in innovations, either continuous or Figure 2 Product innovativeness dimensions

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affect the innovativeness of a new product seems to precede such investigations. Our recommendation of examining product innovativeness determinants could be placed within the organisational innovativeness research stream (see Table I). Existing empirical evidence in this area, although extensive, has led to various though inconclusive results failing to track down an overall consistent direction. This is most often attributed to the way the dependent variable, namely organisational innovativeness, is defined based on a variety of innovation types and adoption stages (Wolfe, 1994). In this respect, the value of considering product innovativeness as a dependent variable becomes even greater. This concept can be clearly defined as it is based on product innovations that have already been implemented, or otherwise new products that have already been introduced into the market. In particular, among the innovation types that have been developed in a vain effort to improve low levels of explanation in innovation results, product innovation appears to provide the most substantiated interpretation. This becomes evident considering the difficulty of setting up explicit boundaries among other innovation types (i.e. process, administrative, technical/ technological). On top of that, a product innovation may even embody other innovation types, such as technological and process. This is rational considering that a product is multidimensional by its nature. That is, every product has many dimensions (for example, quality specifications, characteristics, packaging, technology) and every change in any of them, irrespective of its size, may indicate a product-related innovation (Trott, 1998). In addition, researchers substantially differentiate in terms of the innovation's adoption stage they analyse (i.e. initiation or/and implementation). Thus, contradictory results are mainly due to lack of both clarity and consistency in terms of innovation adoption stages. However, the value of focusing on the implementation stage is greater, and the measurement of innovativeness explains in a more realistic way the concept we intend to measure (Downs and Mohr, 1976; Meyer and Goes, 1988; Tornatzky and Klein, 1982). That is probably because it is more important to

product innovation and new product as identical. Thus, the concept of product innovativeness within this area refers to new products along with the degree of change related to them based on the firm and the customers or the market in general. In this respect, product innovativeness takes also into consideration the customer's perspective. This approach seems to be more cohesive, since product innovations represent a company's outcomes for the benefit of customers (Gopalakrishnan and Damanpour, 1997; Utterback and Abernathy, 1975). Besides, the widely acknowledged taxonomy of Booz et al. (1982) indicates that product innovativeness refers to the categorisation of new products in a way that reflects their degree of newness to the developing firm and the marketplace that consumes or uses them (Olson et al., 1995).

Why should we need to focus on product innovativeness? Product innovativeness has been a key concept and measure in many empirical studies (Danneels and Kleinschmidt, 2001). Despite the progress made by past research, this concept has relatively been less specified as a dependent variable (Gatignon and Xuereb, 1997; Green et al., 1995). Further down, this article stresses the importance of how such a consideration could contribute to further research and theory development, hoping to intrigue scholars into conducting similar investigations. Prior studies have extensively pursued an understanding of several issues concerning new products. Empirical research has investigated the new product development process (Cooper and Kleinschmidt, 1987; Wind and Mahajan, 1988), identified what steps a firm needs to carry out, and assessed the role of models in supporting and improving the new product development process (Mahajan and Wind, 1992). Although it is useful for a firm to know what types of activities it should pursue in developing a new product, it is equally useful to know for what types of new products it should undertake such activities (Ali, 1994). Along this line, analysis of internal and external factors that 40



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equally successful businesses, which have improved existing products. As such, some answers to the research question raised above would help firms to implant meaningful considerations for developing new products that are suitable for their internal and external environment. In addition, firms would be able to verify if there are differences in factors that depend upon the level of product innovativeness. If so, they should seek to differentiate the way they are organised, based on whether they develop more or less innovative products.

know what a company actually does rather than what it has decided to do (Wolfe, 1994). The investigation of product innovativeness determinants also indicates a shift in emphasis within the organisational innovativeness research stream. In particular, it suggests a shift from the general question ``what factors influence a firms' proclivity to innovate'' to a more particular one ``what factors affect the innovativeness of a new product'', for which little is currently known (Ali, 1994; Calantone and Cooper, 1981; Fritz, 1989; Gatignon and Xuereb, 1997; Yoon and Lilien, 1985). This would be in line with the recently articulated need for cross-level research on organisational innovation (Atuahene-Gima and Ko, 2001; Drazin and Schoonhoven, 1996). Future research could, thus, be carried out on identifying and outlining firm-specific factors (inside and outside the company) that determine the degree of product innovativeness. A recent overview of extant empirical research that has used the notion of product innovativeness (Danneels and Klenschmidt, 2001) illustrates that such an investigation has been relatively less subject to empirical scrutiny. Similarly, Sethi et al. (2001) underline the absence of research examining factors that affect product innovativeness. In this respect, the intended focus on product innovativeness determinants triggers further theoretical and empirical foundation. Nonetheless, the findings of such an investigation would also be useful on practical grounds. These would allow practical considerations or even extensions to be made. In particular, they could provide guidelines for innovative companies in terms of the neuralgic points, on which they should focus in order to decide on their new product portfolio. As aforementioned, there are different categories of new products depending upon their degree of newness to the firm and to the market. Because of constraints in resources and high stakes in the new continuously shifting landscapes, it is of vital importance for a firm to know what type of new products it should actively seek and select to produce (Ali, 1994; Calantone and Cooper, 1981). Besides, there are cases of successful businesses, which have developed radical innovative products and cases of

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Helen Salavou


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Appendix. Types of innovativeness measurement Table AI Type of measurement Classification of technological level based on subjective assessments (experienced researchers) Adoption or non-adoption of innovation Number of innovations adopted by a firm Rate of technological changes in products and processes during the last five years Technical and scientific personnel as a percentage of total personnel Number of new products or services introduced into the market during the last three years Distinguish among `ìnnovators'', `èarly adopters'', `èarly majority'', ``late majority'' and ``late adopters'' based on the time of innovation adoption Percentage of sales for developing new products in the last five years Number of new products introduced into the market during the last three years and their degree of innovativeness (new to the market, new to the firm, modifications of existing products) Changes in the mean number of innovations adopted in two periods Number of production technologies based on PCs and used by companies Mean number of innovations adopted over time, mean time of adoption of innovations, consistency in time of adoption of innovations

44

Research field

Research activity

Strategic marketing Strategic marketing Strategic marketing

Carter and Williams (1959) Moch and Morse (1977) Cohn (1980), Robertson and Wind (1980)

Strategic management

Kim (1980)


Hage (1980)


Ettlie and Bridges (1982)

Strategic marketing

Rogers (1983)


Kraft (1989)


Fritz (1989)


Damanpour and Evan (1990)

Strategic marketing

Kitchell (1995)


Subramanian and Nilakanta (1996)

Introduction

Overcoming the innovation-alliance paradox: a case study of an explorative alliance

Technological discontinuities have been a central source of innovation, repeatedly leading to the restructuring of entire industries (Freeman, 1982), During the past decade, information technology (IT) and the Internet have been new technologies by means of which the boundaries between industries have been broken up (e.g. the one between IT and telecommunications) and in the wake of which new business opportunities have been created in the borderland between the established industries (e.g. retail and banking, as reflected in the retail chains' offerings as regards banking services), The opportunities provided by IT in combination with advances in telecommunications and the emerging Internet have created opportunities for major product and service innovations, the application of new technology to new markets, and architectural innovations (Henderson and Clark, 1990) recombining existing technology in order to create new markets (Tushman et al., 1997). The emergence of new technologies, creating what might be called new fields of innovation ± new technology and market combinations that may be explored by organizations in order to create new strategic positions ± provides organizations with a specific challenge. These situations provide great opportunities, but they also entail high risks for established organizations especially (Christensen, 1997). Christensen (1997) argues, for instance, that established firms often fail to recognize the innovative opportunities in disruptive technological advances. Consequently, these opportunities are often explored by small entrepreneurial firms, which are new to the industry. The exploration of these high-risk opportunities, which are often at the limits of a single firm's expertise, may benefit from partnering with organizations that have complementary capabilities and resources (Roberts and Berry, 1985). In spite of this potential, the literature on innovation and new product development (NPD) typically focuses on the operations of a single firm (Millson et al., 1996), In recent years, however, the potential of partnerships in innovation and NPD has

HaÊkan Linnarsson and Andreas Werr The authors HaÊkan Linnarsson is a PhD Candidate and Andreas Werr is Assistant Professor, both at the Stockholm School of Economics, Stocholm, Sweden. Keywords Innovation, Joint ventures, Corporate strategy, Partnership Abstract Alliances are an increasingly common way of organizing the uncertain exploration phase of radical innovation. It may, however, be argued that there is inherent tension between the logic of alliances and the logic of innovation. Whereas innovation is generally argued to require flexibility, political protection and extensive communication, the commonly mentioned key characteristics of alliances are detailed contractual regulation, political struggles and limited information exchange. Based on an in-depth case study of a largely successful alliance for innovation between a European bank and a European telecommunications operator, this paper argues that the tensions between an innovation logic and an alliance logic may be overcome by creating a multilevel governance structure for the alliance, with a learning agenda on both the operational and strategic levels. The different levels of the structure are described and their contribution to the success of the alliance discussed. Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm European Journal of Innovation Management Volume 7 . Number 1 . 2004 . pp. 45-55 # Emerald Group Publishing Limited . ISSN 1460-1060 DOI 10.1108/14601060410515637

45

Overcoming the innovation-alliance paradox: a case study


HaÊkan Linnarsson and Andreas Werr

producing a number of groundbreaking innovations such as one of the first Internet banks in the country and the first application for electronic billing services to consumers in Europe. Special attention is given to the multilevel governance structure of the alliance, as this was found to be an important factor for success. In what follows, we will start of by elaborating on the tension between an innovation logic and the logic of alliances. This is followed by a description of the case. The case is discussed and conclusions are drawn in the two final sections of the paper.

increasingly been identified as a strategic issue (Millson et al., 1996; Kim and Wilemon, 2002). However, conducting the innovation process in collaboration with other organizations poses its own set of challenges (Bidault and Cummings, 1994; Millson et al., 1996; Kim and Wilemon, 2002), As has been argued by Bidault and Cummings (1994), there is fundamental tension between the dynamics of innovation and the logic of alliances. Innovation, especially of a more radical kind, is generally described as demanding freedom and flexibility, a politically sheltered environment and extensive communication. The alliance literature, however, typically presupposes a well-defined situation in which a clear contract can be formulated between the partners of the alliance, and in which suspicion of opportunistic behavior by the partners leads to political struggles and restricted communication (see, for example, Kale et al., 2000). In handling these potential tensions between the fluid logic of radical innovation and the contractual logic of alliances, the design of the alliance structure has been identified as central (Bidault and Cummings, 1994), However, current knowledge is limited regarding how this structure may look and how it may be managed. As pointed out by several authors (Spekman et al., 1998; Barringer and Harrison, 2000; Ireland et al., 2002), there is a general lack of studies concerning the practicable management of alliances. The few studies that exist (e.g. Doz, 1996; ArinÄo and Torre, 1998) do not distinguish between alliances aimed at exploring new, innovative opportunities and alliances aimed at exploiting existing capabilities, even though the management challenges may be very different (Koza and Lewin, 1998). Against the above background, this paper aims to increase our understanding of how to structure and manage alliances with the purpose of exploring the opportunities emerging from technological advances. More specifically, we study the collaborative efforts of a European bank and a European telecommunications operator in order to explore the emerging field of innovation created by the merging of IT and telecommunications and the emerging Internet. This alliance was regarded as successful by both parties,

Innovation in alliances Exploring new fields of innovation emerging at the borders of industries undergoing change provides a considerable challenge to the existing players of the industry (Tushman and O'Reilly III, 1996), In this situation, there is no dominant design to build on (Utterback and Abernathy, 1975) and technology, the market and the competition are difficult to predict. Different innovations compete to become the dominant design, making innovation management an activity dealing with large amounts of uncertainty (see, for instance, Drejer, 2002). In this situation, the innovation process requires a high level of flexibility, as it will go through a number of iterations, as well as political shelter, as it will otherwise be killed in favor of less uncertain endeavors (see, for example, Drejer, 2002), Since innovations of the type discussed here typically involve new technology as well as new links with the market, existing routines and business processes will typically be insufficient, or even counterproductive. To create a flexible and innovative space for these non-incremental innovations, we are often recommended to organize the early, explorative phases as fairly autonomous ventures (Drejer, 2002), As the character and potential of the innovation become increasingly clear, the venture may be reconnected to the host organization, reintroducing more strict controls and procedures (Galbraith, 1982). 46




The uncertain outcomes of innovations also make them highly vulnerable to premature termination (see, for instance, Kim and Wilemon, 2002), Ensuring resource allocation for these uncertain ventures involves ongoing negotiations and power struggles. Besides capital, some important resources that have to be attracted are knowledge of technology and the market, management capabilities, distribution and production skills, etc. In obtaining these resources, the product champion and the product sponsor play important roles (Brown and Eisenhardt, 1995), The product champion is a person or team strongly connected with the innovation, prepared to defend and argue for it in times of tough questions. For support, the product champion needs a product sponsor, a representative of senior management able and willing to back and protect the innovation project. Furthermore, innovations depend on access to knowledge through extensive communication within the project group and with other internal functions, as well as with the external environment (Allen, 1997; Brown and Eisenhardt, 1995). The high-risk character of radical innovations, as well as the need to combine and develop new knowledge, makes alliances a suitable arena for these kinds of projects (Roberts and Berry, 1985), Especially in times when organizations are increasingly specializing in their ``core-competencies'' (Prahalad and Hamel, 1990), the need for, and the potential of, cooperation increases during the innovation process. However, the success factors for radical innovation indicated above may be difficult to create within a traditional alliance logic (see, for example, Bidault and Cummings, 1994). A primary area of conflict involves the innovation logic's focus on flexibility and evolving concretization, as opposed to traditional alliance research which stresses the need for a firm contract, agreed on by all partners before starting the alliance, as a central success factor (Lorange et al., 1992). Within this stream of research, much effort has been directed toward defining the initial conditions (e.g. partner choice, alliance form, etc.) most able to secure successful alliances. This focus on the initial contract has, during recent years,

been supplemented by a ``process perspective'' which views alliances as evolving, thus making their success dependent on the ongoing process, along with the initial conditions (Madhok and Tallman, 1998). In the ``process stream'' of research, the focus turns to the alliance's adaptability. The alliance process is viewed as circular, consisting of consecutive negotiation-execution-assessment loops (Ring and Van de Ven, 1994; Doz, 1996). To make this process work smoothly, good communication and conflict resolution mechanisms are emphasized (ArinÄo and Torre, 1998), as well as the structural conditions enabling these (Doz and Hamel, 1998). Especially in alliances aiming toward radical innovation, the management structure, as well as its ability to handle the ongoing redefinition of the alliance, has been suggested to be important (Koza and Lewin, 1998). Millson et al. (1996) thus propose different kinds of relatively unstructured partnerships that do not involve any equity commitment as the most suitable form for NPD alliances, owing to their flexibility. Little is said, however, in the literature about how these structures may be designed, thus further research is called for (Bidault and Cummings, 1994). A second area of contradiction between the innovation logic and the alliance logic concerns the political dimension of the alliance process. While resource attraction has been identified as a central challenge for internal ventures, the magnitude of this challenge is multiplied in an alliance context in which an innovation must be constantly championed versus two organizational systems and strategic contexts. This makes the work of a product champion considerably more complex and the role of the product sponsor highly ambiguous (Bidault and Cummings, 1994). Finally, open and extensive communication, a third success factor in radical innovation, is not generally a natural trait of alliances. Fear that the company's core competencies may diffuse to the partner and ruin the bargaining position vis-aÁ-vis the alliance partner and the company's competitive edge, create substantial barriers to open and free communication (Hamel, 1991; Kale et al., 2000). A dependency on the partner may further hamper creativity and thereby slowly erode the competitiveness of 47




description then guided the process of choosing eight interviewees, four from each organization, who together represented the steering committee throughout the period. We also interviewed four project managers and concept developers in order to check the stories in respect of the executive level. The interviews were semi-structured and covered the process, the structural design, and the outcome of the overall alliance, as well as the innovation projects carried out within the alliance framework. The interviews ranged between 40 minutes and two hours in duration, and were recorded and transcribed. Some informants were interviewed several times. The interviews were conducted between September 2001 and March 2002. Analysis of the interview data was supported by the software tool N-Vivo, which systematized the structuring of the interview data (Richards and Richards, 1991). The documents produced by the alliance were considered too numerous (more than 700) to be analyzed using N-Vivo. Instead, the conclusions drawn from N-Vivo analysis of the interview protocols were checked against these documents. The final case description and the central findings of the study have been validated by a key informant.

the company entering into the alliance (Anand and Khanna, 2000). Alliances thus provide a large potential for improving the innovation process (Millson et al., 1996), however the realization of these potentials poses some significant managerial challenges based on the differences between the logic of innovation and the logic of alliances, as reflected in much of the classic alliance literature. In overcoming these challenges, the management structure of the alliance has been repeatedly indicated (Bidault and Cummings, 1994), In what follows, we will look more closely at how this was organized in a successful alliance for innovation between a bank and a telecommunications operator.

Research method This paper is based on an in-depth case study of a single alliance between a bank and a telecommunications operator. The alliance was in operation between 1995 and 2001. During this period, alliances were a common tool for banks as regards dealing with uncertainty and acquiring knowledge (Lambe and Spekman, 1997). The choice of alliance studied was based on its relative success and exploratory purpose. The characteristics of non-incremental innovations that have a high degree of context dependency, such as history, experience, corporate cultures, personalities and informal relations (Leifer et al., 2000) limit the generalizations that could be made. However, in line with Eisenhardt's (1989) argument, for instance, we believe that a thorough empirical understanding of a phenomenon may be a suitable starting point for theorizing about it (see also Strauss and Corbin, 1990). The main aim of the case study is thus to provide some ideas as regards how alliances for innovation may be structured and managed in order to provide a supportive environment for radical innovations. In order to obtain a detailed picture of the alliance, both written material and interview data were collected. The written material consisted of protocols from the steering committee, as well as presentations and reports. Based on the written material, a detailed case description was produced. This case

The Eurobank-Eurotel alliance The alliance between Eurobank, a European bank, and Eurotel, a European telecommunications operator, was in operation between 1995 and 2001[1]. The purpose of the alliance was to explore the field of innovation emerging between banking and telecommunications which was being opened up by technological advances linking IT and communications technology. Through the alliance, the partners wanted to develop new capabilities and create innovations. In the letter of understanding, a very general document governing the alliance, the purpose of the alliance was defined as follows: . . . Eurobank shall gain an understanding of new technology and how it best may be applied to business . . . . Eurotel shall learn how to increase its competencies as a solutions provider . . . (letter of understanding).

48




Eurobank expected to learn about new information and communications technology and how this could be applied in order to change the banking industry. Eurotel expected to learn how to get better at providing integrated solutions to the changing banking industry, instead of just being a supplier of basic telephony services. Both parties regarded exploration of the new field of innovation as important due to the challenges they had seen arising from the deregulation of their respective industries which had recently taken place. The two partnering organizations also shared, in many senses, a common history coming from a nonprofit or cooperative tradition and focusing on consumers and small companies. The alliance is judged successful by the participants and has produced a number of radical service innovations, such as one of the first Internet banks in the country and the first demonstration of electronic billing services to consumers in Europe:

secretariat, which was an intermediate level between the operational and strategic levels of the governance structure. The alliance secretariat representing the intermediate level was staffed by one employee of each partner. The intermediate level reported to the strategic level, which included an alliance steering committee consisting of three to four people from each corporation, including at least one member of each company's executive board. The steering committee was chaired by an alliance manager from each organization who reported directly to the CEOs. The alliance managers were in close contact with each other, as well as with the alliance secretariat. The CEOs of both companies met twice a year to discuss the alliance. All activities, except the alliance secretariat and steering committee, were connected to projects financed by equal cost-sharing, unless otherwise agreed. Table I provides a summary of the actors, functions and activities of the different levels of the governance structure.

. . . When the prototype [of the electronic billing service] with 500 users was ready, we prepared an advertisement saying first in the world with electronic billing. Somebody had seen something similar in the US just before, so we changed it to first in Europe (senior executive, Eurotel).

The operational level ± explorative projects The alliance between Eurobank and Eurotel initially comprised five explorative projects with the purpose of learning more about the different emerging technologies and their possible application to the business of Eurobank and Eurotel. Of these projects, two soon became product development oriented: the home-bank that became the Internet bank, and electronic communications for reducing postal costs which developed into a consumer e-billing system. The other three projects were one aimed at improving the bank's customer contacts using new technology, and two embryos of products made obsolescent by the Internet-bank and the e-billing projects. Additional projects came about as the alliance evolved. The projects carried out on the operational level were initiated by the strategic level on the basis of suggestions coming from the intermediate level, which were often based on insights gained in previous alliance projects. Common to all projects was the aim to explore potential future opportunities, while the willingness to explore visionary (and uncertain) ideas was substantial:

During the alliance period, the Internet evolved into the dominant design for communicationbased IT services. At the beginning of the alliance, the Internet had not yet been defined as the one-and-only communications solution. The explorative focus and the focus on radical innovation were at their strongest at the beginning of the alliance period. In what follows, we will describe the operations of the alliance in accordance with the different levels of the governance structure. This comprised three levels: (1) the operational; (2) the intermediate; and (3) the strategic levels. The operational level consisted of a number of joint explorative projects, all clearly focusing on exploring various new business opportunities from a technical and/or marketing perspective. The projects were jointly managed, rather small (less than e300k), short-term (< six months), and staffed by people from both organizations. The project managers reported to the alliance 49




Table I Summary of the functions, actors and activities on each structural level

Function

Actors

Activities

Operational level

Intermediate level

Strategic level

To explore a certain product or a service innovation or a critical subsystem. Limited experiments People from both organizations combining a knowledge of technology and market

Idea generation for innovations; controlling and supporting the operational level. One senior manager from each partner working full time until 1999, then half time. Two vice presidents working as part-time alliance managers Networking inside as well as outside the two partner organizations. Arranging idea generation and learning arenas

To explore the new field of innovation. Sponsoring and creating legitimacy Vice presidents from business areas or functions that had a close connection with market or business development

Developing prototypes and small-scale live experiments in order to test the validity of product/service concepts

Selecting ideas, initiating (and terminating) explorative projects. Participating in learning tours. Developing a common agenda

learning and exploration were explicitly in focus. Potential conflicts of interest and approaching disputes could easily be escalated for resolution to the intermediate and strategic levels, as there was a quick and informal channel of communication between the projects on the operational level and the intermediate level of the alliance. Most conflicts arose when an innovation had proved both its technical and commercial viability and product development was about to start. The terms and conditions of the project then had to be renegotiated by the partners. These renegotiations were seldom problematic in cases where the business concept was clear, in the sense that the planned product and customer relationship could be clearly attributed to one partner. When this could not easily be done, the question was placed on hold but could, in most cases, eventually be resolved.

Many projects were too visionary . . . they never succeeded, they were ahead of their time (project manager).

In cases where exploration revealed a potential for innovation, the future financing and intellectual property rights would be negotiated on the strategic level in order to find a solution reflecting the respective partner's potential gains. Once a commercial concept had been developed and the focus had shifted to more traditional product development, the responsibility of the project was, in most cases, moved outside the alliance and into the traditional hierarchy of the alliance partners. The explorative projects on the operational level of the alliance were typically staffed by project members from both organizations, with each organization carrying the costs of its staff. In Eurotel, an internal consulting unit was often used to staff the projects, which made it easy to switch these projects from cost-sharing to product development paid by the bank, since this only entailed a change of who paid the consultants their fees. Eurobank staffed the projects with resources from its central units for business development and IT, as well as with local bank managers. The work-climate during the explorative projects was described as open and the information flow as rather free between the members of the partnering organizations. Project members were typically located at a single site in order to maximize interaction and communication opportunities. The open climate of the projects was attributed to the open atmosphere on the strategic level, where

The intermediate level ± the alliance secretariat The alliance secretariat, together with two alliance managers linking the operational level of the alliance with the strategic level, represent the intermediate level of the alliance. The alliance secretariat was staffed by one experienced senior manager from each partner, working full time for the alliance during the first four years and half time during the last two. The members of the alliance secretariat worked in close collaboration with the two alliance managers ± one from each partner ± who were part of the corporations' top management. The alliance managers both held the position of vice 50




highly involved in supporting managers of explorative projects when navigating the complex political terrain and ensuring resource allocation for their projects. The individuals on the intermediate level had developed a lot of confidence in each other, as well as an atmosphere of trust in which they could share almost all kinds of information.

president of business development when the alliance commenced and continued as alliance managers even after their positions had changed. They were strongly committed to the alliance personally. The role of the intermediate level of the alliance management structure was to create arenas for the generation of new ideas, which could become new projects, and to oversee and support existing projects. The idea generation arenas could be workshops involving the two partners and workshops involving the partners and important customers of both corporations. Another type of arena was the learning tours that the intermediate level organized for the strategic level (the top management teams of the partners) each year. These learning tours repeatedly headed for the USA, Japan and destinations in Europe. During these tours, the strategic level was confronted by leading thinkers, entrepreneurs and examples of new applications. In overseeing and supporting the explorative projects of the alliance, the intermediate level made extensive use of its profound understanding of the organizational structures of both organizations. Even if there were similarities between the partners as regards size, geographical distribution, target markets and culture, there were great differences in the way they were managed. Eurobank was highly centralized, with all its business and product development resources close at hand, in both organizational and geographical terms. Eurotel, on the other hand, was highly decentralized, with its business and product development resources spread across independent and geographically distributed business units. Both corporations were puzzled by the way in which decisions were made by the other. Here the intermediate level had an important role to play in bridging the different organizational routines of the companies. The intermediate level was also of central importance in creating an understanding, on the operational level, of the content of top management's psychological contract for guiding the alliance. Furthermore, intermediate level managers were involved in convincing people within their own organization to adjust their agendas in favor of alliance projects. In many situations, the intermediate level was

The strategic level ± the top management team The alliance between Eurobank and Eurotel had been initiated at the very top management level. Brought together by a joint management consultant, the CEOs of the two partner organizations realized that their organizations might be facing similar challenges posed by technological advances in IT and telecommunications. The main purpose of the alliance on the strategic level was, consequently, the exploration of these upcoming opportunities, i.e. learning more about what these developments could mean for the two partner organizations. Against this background, top management, represented by the partner organizations' management teams, was highly involved in the alliance, taking part in learning tours and workshops, and actively monitoring the explorative projects. The purpose of the learning tours was to provide the group of senior executives from both companies with an opportunity to learn about new trends. The tours had an intensive program, which included visits to companies at the cutting-edge of IT and financial services. An example of an insight arising from these tours was the early identification of the huge consequences of the Internet for both organizations. These learning tours were highly appreciated by top management as personal development, being important for maintaining top management's attention to the alliance: The most interesting part [of the alliance] was the learning tours we did together, and the work related to them (VP Eurobank).

The explorative projects, together with the learning tours, helped the strategic level to build a shared understanding which facilitated decisions concerning the direction of single projects and the alliance as a whole. The strong 51




between the partners existing at the highest management level (see also Kim and Wilemon, 2002), In the present case, this trustful relationship was linked to a feeling of affinity between the companies which was based on a common history and similar market positions within their respective industries. The trustful relationship between the partnering organizations was further supported by the recurring learning tours for top management. During these tours, a common understanding was developed and trustful personal relationships were formed. The flexibility of the alliance was further supported by the focus on creating relatively limited projects involving two to three representatives from each partner organization in order to explore new product or service ideas. These project teams were located outside the existing organizational structures of the partners, thus freeing them from established, limiting organizational routines (see also Doz, 1996), and were given considerable freedom. However, when concepts started to become clearer, enabling a clear assessment of their economic value, the projects would typically be renegotiated and continued under different contractual forms (e.g. buyer supplier, equity j/v, etc.), The trust mentioned above enabled the typically unproblematic handling of these renegotiations. Rather than putting great efforts into the formulation of a detailed alliance agreement, the Eurobank-Eurotel alliance was thus formed on the basis of ``let's try it and see what happens''. A number of initial projects were defined early on as the core of the alliance. Further projects were formulated along the way. The long-term survival of the alliance was largely made dependent on the joint generation of and agreement upon new alliance projects, thus requiring positive effects to be experienced from earlier efforts. Re-evaluation of the alliance thus took place in each decision to start a new, joint project and gave both parties the continual possibility to adapt their engagement in accordance with their present valuation of the collaboration (see also Ring and Van de Ven, 1994; Kumar and Nti, 1998). It could be argued that the contract in this alliance was still emerging, starting with a loose contract initiating the governance structure and

commitment to the alliance on the strategic level was well known within the organizations and supported the building of trustful relations throughout the alliance, creating a positive innovation climate. The alliance was formally evaluated by the two partners in 1999. The evaluation indicated that the alliance had created large assets for both companies. The main asset for Eurobank was increased IT development expertise, especially in Internet-banking, while Eurotel had significantly increased its sales volume to Eurobank. The alliance had also produced some significant products such as an Internet bank and an e-billing system that would give the partner organizations strategic advantages in these specific areas for several years.

Discussion The above-described explorative alliance between Eurobank and Eurotel was successful, despite the potential difficulties originating in the differences between an innovation logic and an alliance logic discussed earlier in this paper. In what follows, we will discuss how this success may be understood, and how the central challenges facing alliances for innovation were dealt with in the case. We will focus especially on the structural configuration of the alliance, as this has been identified as a way of dissolving the paradox between the logic of innovation and the logic of alliances (see, for example, Bidault and Cummings, 1994; Koza and Lewin, 1998). Enabling flexibility A first challenge identified in relation to innovation in an alliance context concerns the creation of an alliance contract that allows sufficient flexibility. As both costs and outcomes are uncertain, rigorous contractual agreements or equity-based arrangements are seldom possible (see, for example, Millson et al., 1996; Koza and Lewin, 1998; Mauri and McMilland, 1999), Rather more flexible forms of collaboration have to be found. In the above case, the alliance was formally regulated by a very simple ``letter of understanding'' which specified the principle of each party bearing its own costs. However, this kind of agreement was only made possible by the trustful relationship 52




radical innovations. However, it has also been argued that the fulfilment of these important roles is much more challenging in an alliance setting than in a single organization setting (Bidault and Cummings, 1994). In the Eurobank-Eurotel case, the intermediate level (the alliance secretariat and the alliance managers) partly fulfilled the central roles of the product champion and sponsor regarding the explorative projects. With its elaborate organizational networks and direct access to top management, the intermediate level of the alliance structure was essential for generating resources for the projects and protecting them from critical assessment during early phases. By making this role a joint one involving managers from both partner organizations, the problem of the champion's and sponsor's limited understanding of and network in the other organization was overcome. The consistent attention of top management, fueled by the recurrent learning tours organized by the intermediate level, also provided the alliance projects with great legitimacy. The learning tours, together with other learning activities, provided the benefits that top management needed to continually prioritize this activity. It also gave top management a deep enough understanding of the field of innovation they were exploring to make them comfortable with the investments and stabilize the decision-making process at the top management level. This enabled a more predictable sponsoring of the different projects.

different explorative projects. Over time, as some projects moved into commercialization and uncertainty was reduced, firmer contractual forms were chosen for these projects. This emerging nature of the contract could be seen as an extension of the adaptive contract that Doz (1996) and ArinÄo and Torre (1998) describe as important for the success of alliances. The multi-level alliance structure in the bank-telecommunications case thus provides an organizational mechanism for creating a stable basis for explorative alliances, while maintaining flexibility and adaptability. Stability ± in the sense of providing a stable basis for the alliance ± originates from the trust and common understanding that develops among top management during repeated learning tours. Creating a separate learning agenda for top management ensures its commitment to, and its engagement in, the alliance. Flexibility, on the other hand, was achieved on the project level. Limited projects could be started with an explorative intent. Some could then be scaled-up to larger collaborations (e.g. the Internet bank) under different contractual forms, while others were discontinued. This design made it possible to gradually create a stable and, at the same time, flexible foundation for the alliance based on common understanding and commitment at the top management level. However, this layout may not be without risk. As pointed out by Spekman et al. (1998), alliances may be hard to discontinue, even if their economic rationale has disappeared, when they are based on strong interpersonal ties. Although there were no concrete signs of this in this specific alliance, there is a risk that top management's personal learning agenda might keep a commercially inefficient alliance alive.

Enabling open communication The third challenge related to managing innovation in an alliance context concerns the establishment of open communication between the alliance partners. Open communication, being a widely recognized success factor for radical innovation, is often described in the alliance and partnering literature as a challenge since it involves the risk of losing strategic knowledge and capabilities to a partner. In the Eurotel-Eurobank alliance, communication was generally described as very open on all levels ± from the operational level, with its individual projects, to the strategic level, with its recurrent learning tours. The learning tours may be argued to have had a specific impact in this context. The close

Protecting uncertain innovations A second challenge related to managing innovation in an alliance context concerns the protection of the early phases of the innovation process against being called into question and premature termination. The roles of the product champion and product sponsor are identified, in the innovation literature, as of central importance in protecting vulnerable 53




operational level on which explorative projects are carried out, a strategic level, providing legitimacy and support to the alliance, and an intermediate level, supporting the strategic and operational levels as well as linking these, was of central importance to the alliance's success since it allowed flexibility and protection against premature termination and since it managed to overcome the communication barriers that are common in alliances. From a managerial perspective, the study provides an example of how to organize radical innovation in an alliance setting. It highlights the importance of a managerial platform that holds together different collaborative activities between alliance partners and suggests the use of learning tours as a way of creating this platform. Explorative alliances, it is thus argued, will benefit from the creation of a learning agenda, not only on the operational level but also on the strategic level, giving the alliance a raison d'eÃtre beyond single successful or failed alliance projects. Based on our findings regarding the importance of detailed structural arrangements in supporting radical innovations in alliances, we also call for more detailed case studies which may test the generalizability of the Eurobank-Eurotel design, and which may add to our understanding of the management of innovation in alliances by means of further examples of successful (or less successful) structural setups of innovative alliances.

collaboration on the strategic level resulted in a psychological contract that contained many of the factors enabling a good innovation climate, e.g. openness, clear motives and collaboration practice (see, for instance, Wathne et al., 1996). This psychological contract and involvement by top management legitimized the collaboration on all levels. Furthermore, communication was facilitated by the similar background of the organizations in terms of markets and corporate culture. This made it easier to understand each other on all levels. There was a wide range of communication channels between the two organizations, starting at the very top of the organizations and continuing down to the local level where the two corporations were engaged in joint market activities concerning innovations. The interactions between the alliance partners were not only broad but deep. The explorative activities were carried out in collaborative groups where different experience from both organizations was brought together in order to create radically new ideas.

Conclusions and managerial implications Radical innovation provides organizations with great challenges, and it might be argued that some of these challenges could be reduced by engaging in collaborative arrangements such as alliances for innovation. However, the logic of alliances, building on a contractual relationship, is in several ways at odds with the logic of innovation calling for flexibility and trust. Previous discussions about collaboration in radical innovation, or the early (uncertain) phases of new product development, have emphasized the importance of choosing a suitable alliance structure. Often, high-level structural alternatives are identified and discussed ± such as M&A vs. Joint Venture vs. contractual agreements (Millson et al., 1996). More detailed discussions about different structural arrangements are rare however. The description of the Eurobank-Eurotel alliance aimed to contribute to this neglected area. Our examination of the Eurobank-Eurotel case confirms the importance of the structural design of an alliance in creating the prerequisites for radical innovation. The three-level structure, consisting of an

Note 1 Eurobank and Eurotel are pseudonyms.

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Introduction

Innovation management and organizational learning: a discursive approach

This article focuses on the design of innovative organizations. A critical issue facing companies involved in intensive innovation is to overcome the main dilemmas which are common to all dynamic social activities. The first one is, in modern sociological theory, referred to as the dilemma of structure and action (Giddens, 1984; Sztompka, 1991). The issue is mainly how to balance a minimum organizational structure that is vital to meet budgets and schedules, with the flexibility that will ensure the creation of innovative products or services according to the needs of changing markets (Brown and Eisenhardt, 1998). The second dilemma has to do with the opposition of persistence and change, or repetition and novelty (Sztompka, 1991). At the firm's level, this dilemma appears as tensions between different time horizons. The design of an innovative organization appears to be related to a superior capability to overcome these main dilemmas. Although these issues have been increasingly taken into consideration within the strategy and organization science literature, managerial insights to overcome the dilemmas of innovation remain vague. How can managers assess if their organization is over- or understructured ? How can they ensure that there is efficient knowledge transfer from one innovation project to another ? The purpose of this paper is to extend our understanding of the core processes involved in the design of an innovative organization. In this age of virtual reality and other e-processes, our concern is to focus on the simplest and most concrete processes within any social organization: what people collectively do on a day-to-day basis; and particularly what they say to each other. We first propose Giddens' structuration theory (ST) (Giddens, 1984) as a framework for understanding how the innovation activity of a firm contributes to organizational learning and thus to the organization's structure. Two related theoretical contributions are discussed : the communities of practice (CP) approach (Wenger, 1998) and the discursive view of organizations (Giroux and Demers, 1998; Giroux and Taylor, 1994). This theoretical framework results in a model of coordination

ValeÂrie Chanal

The author ValeÂrie Chanal is Professor of Strategic Management at UniversiteÂ Pierre MendeÁs France, Grenoble, France. Keywords Innovation, Communities, Conversation, Organizational design, Organizational innovation Abstract This paper deals with how to design innovative organizations through theoretical and managerial insights. The theoretical framework is based on the structuration theory, with a focus on language and conversations within and across innovation projects. As a setting for the theoretical model, two case studies are presented and discussed: the first analyses an innovation project's structuration through conversations via e-mails. The second is an action research whose purpose is to design a project-oriented organization to improve the innovation capability of an industrial firm. These two field studies lead to a final appraisal of the relevance of a discursive approach to better understand innovation processes and their contribution to organizational learning.

Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm


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particularly relevant to interpret the action/structure and the exploitation/ exploration dilemmas. The organizational structure can actually be considered as both a resource and a constraint to innovation practices. Consistent with this assumption is the view that project teams both draw on the firm's knowledge and contribute to the firm's knowledge (Huber, 1999). Consequently, new knowledge, and thus organizational learning frequently originates in the context and practice of project teams. To study this recursive link between organization and innovation, we chose the project team as the level of analysis. As members of a project team work together on a project for a certain period of time, they are both using existing organizational rules and resources and creating new ones. This process of using and creating rules and resources is mainly based on social interactions and conversations. Thus, we will ground this reflection on two related and complementary theoretical frameworks: (1) the CP approach; and (2) the discursive view of organizations.

and structuration within and between innovation projects and leads to propositions about managerial levers to overcome the main innovation dilemmas. As a setting for this model, we then present, in the second part of the paper, two case studies. The first one analyses a project's structuration process through the interaction between institutional texts and conversations among team members. The second one focuses on a more organizational level within an industrial firm. Its purpose was to implement a project-oriented organization in order to foster learning and innovation. We conclude with an appraisal of the relevance of our theoretical approach to understand the role of innovation in the organizational learning process.

1. Organization and innovation: a structural relationship based on practice and conversations In the last ten years, there has been a growing interest in analyses that could provide a dynamic view of organizational change and innovation. A recent research trend in strategy has developed a dynamic view of strategy, more in tune with the competitive reality of fast-paced change that many firms are facing. This fundamental shift in the rules of competition, described as ``hypercompetition'' (D'Aveni, 1994), requires new strategies and new organizational forms, oriented toward permanent transformation (Eisenhardt, 1989; Brown and Eisenhardt, 1998) and continuous innovation through experimentation (Hamel, 2000). These new approaches are specifically based on the resolution of the main innovation dilemmas (Brown and Eisenhardt, 1998; Sharma, 1999) also referred to as ``creative tensions'' (Senge, 1990). ST has already been used to interpret managerial situations as dualities or tensions (DeSanctis and Poole, 1994; Orlikowsji and Yates, 1994). Indeed, resolving the dichotomy between structure and action is the motivation for Giddens' ST, which is based on the idea that structure, seen as an emergent feature of social interactions, is both input to and output of human actions. In the context of organizational design and innovation it appears

CP and innovation teams CP have been defined by Wenger (1998) as a group of individuals engaged in a common enterprise and sharing a repertoire of resources. For the author, practice is a source of coherence and learning within a social community. This theoretical framework is largely inspired by the structuration approach and postulates that learning in CP emerges from a fundamental duality between participation and reification. For Wenger, the term ``participation'' refers to the social experience of individuals as members of communities, actively involved in a common enterprise. The term ``reification'' means, etymologically, ``making into a thing''. We argue here that it is possible to assimilate innovation teams as CP as they can be described using the three main dimensions that define a CP[1]: (1) The commitment of individuals to a shared project. (2) A joint enterprise, which is the result of a collective process of negotiation. 57



ValeÂrie Chanal

communication (Giroux and Demers, 1998; Giroux and Taylor, 1994; Von Krogh and Roos, 1996). Within this perspective, the organization is seen as a ``community of language'', based on a duality between texts and conversations. The organizational structure is reified into institutional texts (strategic vision, organization charts, management procedures), whereas the day-to-day interactions are based on conversations. There are two processes which ensure the balance between these two facets of organizational life: (1) a reification process, producing texts from practice; and (2) a translation process, enabling conversations; negotiation of meaning from available textual resources.

(3) A shared repertoire, whose elements can be either physical artifacts (prototypes, models, technical specifications) or symbols, like words or stories. The CP theory, applied to innovation situations, leads to a proposition of two levels of learning within the firm: (1) an intra-project level; and (2) an inter-project level (see Figure 1). As a crossroads of different practices (research, marketing, development, manufacturing, etc.), an innovation project is a place of learning through the constitution of a shared repertoire between these different practices. This process can be defined as an intra-project learning process, where created knowledge is mainly used inside the project team. Furthermore, a project uses organizational rules and resources and also creates new rules and resources that regenerate the organization. This process can be viewed as an inter-project learning process. We argue that these two learning processes are primarily based on the management of boundaries. In other words, the main issue is to identify how to connect practices or projects in order to create some organizational coherence and continuity. These connections between practices and between projects are mainly based on social interactions and communication. The discursive view of organizations thus provides a useful complementary grid to analyze the learning processes inside and across innovation projects.

This perspective is, in our opinion, very similar to the CP approach. It stresses the point that many interactions within a project are based on conversations. It thus provides an interesting viewpoint from which to study the learning process inside and across projects : . The intra-project learning process can be observed through the study of the impact of conversations on intermediate texts and conversely through the impact of texts on conversations. . The inter-project learning process can be observed through a study of the organizational resources such as organizational language, used for a particular project and conversely the study of changes in organizational rules or resources induced by a project.

The discursive view of organizations: a duality between texts and conversations The discursive view of organizations argues that organization emerges, first and foremost, through

Research propositions According to this theoretical basis, our main proposition is that, to be innovative, an organization needs to foster two levels of learning: (1) intra-project learning; and (2) inter-project learning.

Figure 1 Two levels of organizational learning: intra-project and inter-project learning

Intra-project learning emerges from the efficient internal dynamics between texts (or other reified resources) and operational conversations through a permanent update of the shared repertoire. At another level, experience gained by the unfolding of different projects should contribute to the organization's regeneration. 58



ValeÂrie Chanal

from research to development and marketing concerns, other competences joined it, either for prototype development (mainly based in the UK) or for market research and business partnership seeking (based in the USA). An informal project team emerged then, which can be considered as a ``global virtual team'' (Maznevski and Chudoba, 2000). In this context, we considered electronic communication among the project team members as ``conversations''. Other more structured written documents were produced, such as the product concept definition, competition analysis reports or a formal presentation of a business model to the CIC. These reports were considered as texts, as opposed to e-mail conversations in our research model. In total, 300 e-mails extracted from the personal file of the laboratory manager, were analyzed. A lexical analysis of these messages was carried out to identify the evolution of the discussion themes during the two years of study. We also compared the content of these messages to two significant texts: (1) The first one was a scientific paper written by the two researchers, presenting the technical concept of the invention at the beginning of the project. (2) The second one was a presentation (of approximately 50 PowerPoint slides) of the project to the CIC.

This inter-project learning process is linked to the capacity of the organization to provide individual projects with useful procedures and conversely to assimilate new resources, especially knowledge. This process requires connections between different projects, that can be facilitated by boundary objects or brokering people. The main issue is then to identify objects or people that can carry out a brokering function. Now two research studies will illustrate these two levels of learning and contribute to identifying some key factors that can enhance the innovation capacity of industrial firms.

2. Learning and innovation activity of the firm At the project level, we can study how conversations between team members are reified in order to provide new resources for further discussion. At the organizational level, the main point is to evaluate what rules and resources are made available by the institution for specific projects and how they are mobilized and also modified over time. An illustration of intra-project dynamics Alpha (a pseudonym) is a high-tech multinational company known for its impressive R&D capability. The firm has two main corporate research laboratories, one based in the USA, and the other in Europe. The purpose of our study was to analyze the dynamics of an innovation project over two years, from the patent stage to the first market tests. This project, at the interface of traditional paper publishing and electronic publishing via the Internet, appeared to be highly innovative, and required developing new technologies as well as finding new market applications. At first, this project involved the two inventors from the European laboratory; internal sponsorship then enabled the project to go on to the development and marketing phases. The funding for the project was obtained after an official presentation of a business model, to the ``corporate innovation committee'' (CIC), which is a board of senior managers assessing all significant projects at the corporate level. As the project progressed

According to the discursive approach presented earlier, our aim was to identify the impact of the original text (the technical concept) on conversations, and then the way conversations could lead to a reification of the project, through its official presentation before a board of decision makers. Main observations Our main hypothesis is that institutional texts provide resources for conversations, and that conversations contribute to creating milestones for the unfolding of the project. The observation of these mutual influences through a lexical analysis can provide some interesting insights into the learning process during an innovation project. Two points will be developed below: the influence of the initial text (concept definition) on conversations, and the 59



ValeÂrie Chanal

identification of traces of the CIC presentation in conversations. (1) Influence of the initial text (concept definition) on conversations. The scientific concept of the project was first described in a scientific paper, presented at a conference by the two researchers working on the project. They suggested a rather inventive and punchy name for the concept, which first became the reference name of the project. We then observed a decreasing influence of this first concept name as the project gathered momentum. Another rival concept gained in popularity during the same time. Interviews with project members pointed out that the second name, although more complicated in our opinion, had received more backing. It seemed to us that what was really at stake behind this ``language battle'' among research and marketing people, was the leadership of the project. This suggests that resources provided by texts are not just available for conversations, but are constantly re-negotiated in conversations. Their use can be determined according to what is at stake in terms of power and leadership among project members. (2) Traces of strategic presentation in conversations. The influence of the official presentation of the project to the CIC was, on the other hand, easier to identify in electronic conversations, either before, or after the event. This formal presentation involved many people, and the board's appreciation was decisive for the future of the project. The influence of the CIC presentation on subsequent conversations can be assessed by measuring the proportion of the presentation vocabulary in the messages exchanged before and after the meeting. This can be done automatically using lexical analysis software, by the construction of a lexical intensity variable, containing all the significant words of the presentation. The results show that the use of words from this presentation is greater in the e-mails exchanged during the two periods just before and just after the event (see Figure 2). On a more qualitative level, it is interesting to identify which words are used to elaborate the presentation, and which new words appear in the conversations after the meeting.

Figure 2 Evolution of the presence of vocabulary used in a strategic presentation in the conversations before and after the event

For example, the words ``costs'', `àpplications'', ``market'', ``development'' have a significantly higher intensity index just before the event. These words are probably those which best meet the management's expectations in terms of strategic argumentation. Team members have integrated these organizational rules and thus use these words more intensively in their exchanges during the period of preparation. The use of the term ``business model'' is particularly representative of this phenomenon. This concept is widely used in the period just before the event whereas its use decreases immediately after. Similarly, there are new words introduced in the conversations after the presentation to the CIC, such as the name of a business unit, ``training'' or `ùser''. Our contacts in the company highlighted the fact that members of the CIC had focused their attention on organizational concerns (which business unit would take charge of this project), and on the user trial phase, in the training sector. Consequently, these terms appeared in the conversations after the presentation. They function, so to say, as new communication rules `ìnjected'' by the committee in the conversations. We now turn to the presentation of another case-study focusing on the organizational level. 60



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An illustration of inter-project dynamics Gamma (a pseudonym), is a leading multinational firm, manufacturing products for the building industry. This action research lasted two years, in collaboration with the R&D department and was aimed at designing a project-oriented organization in order to improve the innovation capability of the firm. Our main contribution was to design an internal document explaining the innovation policy, a new project-oriented organization, and various rules to manage innovation projects, and then to evaluate the impact of this text on conversations and innovation practices. According to the discursive view of organizational change, three distinct phases were identified: (1) A phase of language study. Through the content and lexical analysis of in-depth interviews with ten managers of a pilot business unit, we identified the main dilemmas that could impede innovation, and stressed the most important language issues. (2) A phase of text reification. This consisted in the design and the discussion of a new organization, presented in a reference document. (3) A phase of observation of the change obtained both in language, and innovation practices, after one year during which the new organization was set up.

.

.

.

Main observations Our main hypothesis is that the organization can contribute to the emergence and the development of innovation initiatives, by providing rules and resources, which are reified in institutional texts. Observations about the design of this document and its use in current practice will illustrate the role and the limits of the reification of language and practice to enhance organizational learning. Significant results concerning the three phases of this action research will be developed below. (1) Initial language study. Ten managers of a pilot business unit were interviewed around the theme of the innovation policy in their division. The interviews were recorded and transcribed, in order to be analyzed on two levels: (1) a content analysis (what is said); and (2) a lexical analysis (how it is said).

The content analysis highlighted three main dilemmas that all ten managers faced with varying degrees of intensity: The exploration/exploitation dilemma. Technicians consider that they have still too many problems of quality on existing lines to be able to devote enough time to new developments. This creates tension and even some discouragement among marketing people, who see their new product propositions relegated to the bottom of the list of priorities. The control/autonomy dilemma. People express sincere expectations for an improved organization to carry out innovation projects. At the same time, they fear that additional organizational procedures might lead to a bureaucratic and constraining structure. Project management, it is a good, a very good idea. But, it should not become a stereotype. If everything is a project, we will have 350 projects and everyone will have his project. That is the limit. The time dilemma. There is a notable tension between the perceived need to accelerate development delays, and the wish to follow clearly identified phases in the development process: In the lab., it worked well, but on the building site, it didn't work. Because we went too fast, that is clear. We realize that we cannot move too fast. We have to follow phases. That's the ambiguity. Because if we go too fast, we run a big risk. So we must take our time, but not too much.

The content analysis also underlined that there was a fundamental ambiguity among the managers concerning the innovation orientation of the firm. For instance, the sales manager considered that the firm did not need to be highly innovative to be competitive and could succeed with a follower strategy. On the other hand, the product manager and the head of the laboratory both thought that their business unit should launch one or two new products each year. The lexical analysis of the interviews subsequently contributed to identifying significant language differences that could hinder collective action. A study of the lexical 61



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returned to the company to assess concrete and noticeable changes. We carried out new interviews with the same ten managers and were invited to attend a monthly ``marketing and development committee''. Although the reference text deals with strategic considerations, little progress had been made by the group in the ability to relate innovation projects to the firm's strategy. Furthermore, the role of marketing in the product specifications and product launching strategy still appeared to be limited. On the other hand, the main dilemmas of innovation and the resulting tensions had disappeared from the managers' statements. It seems that clarifying these dilemmas in the document and focusing on organizational solutions that could help to overcome them had proved efficient. People seemed to be less torn between contradictory objectives (present and future, rapid and slow, structured and flexible). The creation of a common language was assessed by comparing the evolution of language between the two periods. This showed that language zones had become closer. We noticed the emergence of a central zone of language, representing the four to five individuals regularly working together on innovation projects. This could be an illustration of the emergence of a community of practice and thus a community of language. Finally, the influence of the text vocabulary on the actors' language was assessed by comparing the proportion of words from the document appearing in the interviews in the two periods. We observed that there was no significant increase between the two periods: 24.42 percent in period 1 versus 26.37 percent in period 2. This means that, contrary to our expectations, the text had no influence on day-to-day vocabulary. Moreover, we observed an inverse relationship between the involvement of people in collective practices and their use of institutional language.

environment of ``marketing'' for instance, showed that this term was often qualified by exclusive adjectives (i.e. pronounced by only one person), such as ``transversal'', ``functional'', `òperational'', ``technical''. The specific use of the concept of marketing in this firm may contribute to the belief that project members do not share the same vision of what the marketing mission should be. This is confirmed by the vague understanding of the marketing function, especially among technical people: Marketing, it's packaging, technical documentation, they deal with all this kind of stuff. It's important. I do not do any marketing, or what I do is re-read technical files. He also has a marketing job, press relations and things like that.

(2) Design of a reference text. On the basis of this language analysis we drafted an internal communication document outlining the management procedures for new product development. The content and form of this document were designed with the corporate R&D manager. It consisted of two parts: (1) The why (why innovate = strategic considerations); and (2) the how (how to innovate = organizational considerations). We decided to enact the main dilemmas that had been identified and to put forward some concrete solutions to these dilemmas such as strategic meetings to define development priorities, or improved communication about product specifications. The previous language analysis also helped to choose the vocabulary carefully. For instance, the language study had revealed that such concepts as ``value'' and ``value chain'' were not clearly understood. Consequently we agreed that the document should explain and exemplify the concept of value. The role of marketing in the innovation process was also explained and discussed with the managers. (3) Analysis of change in practices and language. After one year of a new organization with regular meetings to discuss development projects, a large diffusion of the text within the entire organization and incentives to build project teams for product development, we

Conclusion Knowledge transfer between project teams and the overall organization has been the focus of many research studies. In this paper, we tried to better define the organizational learning process 62



ValeÂrie Chanal

name. In this case, a lot of energy is invested in this language battle to the detriment of the overall project efficiency. In addition, in the second case, we noticed that the text defining new procedures for innovation management did not bring about any changes in vocabulary. Project practices evolved only under the impact of concrete organizational operations such as regular innovation meetings. Although this process of structuration appears to be far more complicated than just the articulation between participation and reification, or conversations and texts, these results lead to the formulation of four propositions, that could be discussed and analyzed in greater depth in future research: (1) The management of change is mainly based on boundaries management. If resources such as institutional texts are not actively relayed by brokering activities, nothing will happen within practices. This brokering function may be the result either of the strategy of individuals, acting to impose their point of view, or of organizational arrangements, designed to enhance communication. (2) The design of new organizational resources to foster change, should be based on a study of existing language and communicational rules. This requires both a systemic and a cognitive approach to organizational diagnosis. The systemic perspective leads to an assessment of how people can work and communicate together, through an evaluation of existing boundaries. The cognitive perspective can analyze in greater depth representation frames through, for instance, a study of common language. (3) An assessment of the articulation between texts and conversations before and after a change program can help to evaluate which changes really occurred. A concrete way to do this could be to collectively discuss the change proposition reified in a text, and then after a period of time come back to this initial text to see what has been achieved and then how to adapt the rules. This simple assessment of change appears to be rarely done in firms. (4) If this process of creating texts and then adapting them to practices is fast enough,

occurring through innovation practice. A focus on the main dilemmas facing innovative firms led us to suggest a theoretical framework based on ST, and more precisely on a discursive approach of organizational regeneration. According to this framework, the innovation projects appear to be at the very heart of organizational learning, through two complementary learning processes: (1) intra-project; and (2) inter-project learning. A multidisciplinary project team builds an interface between different work practices. The social interactions inside a project, mainly based on conversations, constantly create and modify a shared repertoire of rules and resources. Conversely, these resources contribute to enrich work practices, such as for instance the creation of a team-work culture. At the organizational level, an innovation project needs some organizational rules and resources and contributes to renewing them. The participation/reification duality is in our opinion more meaningful than the traditional tacit/explicit knowledge distinction to which it should not be assimilated. Actually, there is tacit and explicit knowledge mobilized in participation, and reification concerns both explicit aspects (texts) and tacit aspects (symbolic signification of words for instance). Understanding the learning processes in greater depth thus implies studying the articulation between participation and reification, which is the approach we chose for this research. However, the articulation between social participation in project teams and reification of organizational rules and resources does not occur spontaneously. Our work led to the observation that some available resources are mobilized to improve practice, and some are not. We address here the very core of the organizational structuration process, as structure is, according to Giddens, a recursive use of rules and resources. Consequently, resources that are not recursively used in practice do not contribute to organizational structure. If we consider, for instance, the scientific paper presented in the first case study, we can observe that a concept name is introduced at the beginning of the process and then becomes challenged by another concept 63



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then the adaptation capacity and the organizational learning of the firm will be increased. Ambiguity around rules and terms, although sometimes useful, as it provides some organizational ``slack'', also takes up a lot of communication time, which is then not devoted to essential issues. It is the reason why it would be useful to define, for each firm and each project, a set of fundamental questions or words around which a debate could take place.

Giddens, A. (1984), The Constitution of Society, University of California Press, Berkeley, CA. Giroux, N. and Demers, C. (1998), ``Communication organisationnelle et strateÂgie'', Management International, Vol. 2 No. 2, pp 17-32. Giroux, N. and Taylor J. (1994), ``Le changement par la conversation strateÂgique'', Actes de la 3ieÁme ConfeÂrence Internationale de Management StrateÂgique, Lyon. Hamel, G. (2000), Leading the Revolution, Harvard Business School Press, Boston MA. Huber, G. (1999), ``Facilitating project team learning and contributions for organizational knowledge'', Creativity and Innovation Management, Vol. 8 No. 2, pp. 70-6. Maznevski, M. and Chudoba, K. (2000), ``Bridging space over time: global virtual team dynamics and effectiveness'', Organization Science, Vol. 11 No. 5, pp. 473-92. Orlikowsji, W. and Yates, J. (1994), ``Genre repertoire: the structuring of communicative practices in organizations'', Administrative Science Quarterly, Vol. 39 No. 4, pp. 541-74. Sawhney, M. and Prandelli, E. (2000), ``Communities of creation, managing distributed innovation in turbulent markets'', California Management Review, Vol. 42 No. 4, pp. 24-54. Senge, P. (1990), ``The leader's new work: building learning organizations'', Sloan Management Review, Vol. 32 No. 1, pp. 7-23. Sharma, A. (1999), ``Central dilemmas in managing innovation in large firms'', California Management Review, Vol. 41 No. 3, pp. 146-64. Sztompka, P. (1991), Society in Action. The Theory of Social Becoming, The University of Chicago Press, Chicago, IL. Von Krogh, G. and Roos, J. (1996), ``Conversation management for knowledge development'', in Roos J. and Von Krogh G. (Eds), Managing Knowledge: Perspectives on Cooperation and Competition, Sage Publications, London, ch. 11. Wenger, E. (1998), Communities of Practice, Learning, Meaning and Identity, Cambridge University Press, New York, NY.

Note 1 A similar concept was developed by Sawhney and Prandelli (2000): the ``community of creation''. For the authors a community of creation requires a common interest, a sense of belonging, a shared language and ground rules for participation. However, the structuration and learning process appear to be more central in the communities of practice approach than in other related perspectives.

References Brown, S. and Eisenhardt, K. (1998), Competing on the Edge, Strategy as Structured Chaos, Harvard Business School Press, Boston MA. D'Aveni, R. (1994), Hypercompetition: Managing the Dynamics of Strategic Maneuvering, The Free Press, New York, NY. DeSanctis, G. and Poole, M.S. (1994), ``Capturing the complexity in advanced technology use: adaptive structuration theory'', Organization Science, Vol. 5 No. 2, pp. 121-47. Eisenhardt, K. (1989), ``Making fast strategic decisions in high velocity environments'', Academy of Management Journal, Vol. 32 No. 3, pp. 543-77.

64

Introduction

Success factors in transition countries

A common characteristic of the transition countries is that the value added is stagnating at a level which is only a fraction of that in the EU, return on capital is low and does not allow investment in new technologies. Competitiveness is mostly attained by low prices and less by new designs, product innovation or new manufacturing methods. One of the reasons for low value added is the technological gap between the transition countries and their counterparts in the EU. The lag behind the EU has been increasing since the growth rate in countries in transition is too small to catch up with the EU (Kos, 1999). Slovenia is one of the transition countries. In its history, it was a part of the Austro-Hungarian monarchy and after the Second World War the country was a part of the Socialist Republic of Yugoslavia whose economic system was based on socialist self-management and on the social ownership of production factors. After Slovenia gained independence in 1991, its transition into a market-driven economy has led to considerable structural changes. These have been characterized by the shift from social to private ownership, from industrial to service economy, from large to small companies, the redirection from mostly Yugoslav markets to the more developed European markets, as well as by the shift from a supply-driven economy into a demand-led one. In the 1980s, Slovenia invested more than 1.3 percent of GDP in research and development (R&D). At the beginning of the 1990s, the situation in Slovenian manufacturing worsened substantially. In 1995, only 6 percent of enterprises had R&D departments and invested systematically in production innovation (Potocnik et al., 1995). Investment in R&D lagged behind those in the OECD countries. This lag was the biggest (i.e. over three times) in the sectors of middle and low level of technology, while it was two to three times in the high technology sectors. Some industries, such as rubber, non-ferrous metals, leather products and metal products show only a small gap. The concentration of R&D was also found in the manufacturing of electrical equipment, machine building and

Majda BasticÆ

The author Majda BasticÆ is Full Professor for Management Science at the Faculty of Economics and Business, The University of Maribor, Maribor, Slovenia. Keywords Competitive analysis, Innovation, Transition management, Economic development, Countries, Slovenia Abstract The competitiveness of the transition countries depends on the ability of their companies to develop successful new products. Using 14 success factors proposed by Cooper and Kleinschmidt, their impact on the success of Slovenian new products was analysed, in order to obtain information needed to facilitate the development of new products in the transition countries. The comparison of the results obtained by Slovenian study with the results of other similar studies showed significant difference. It can be explained by the lack of the companies' ability to innovate.

Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm


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Majda BasticÆ

Strategic factors and hypotheses

metal production. Slovenia's goal is to reach a 2 percent share of GDP for R&D. Consequently, the export of Slovenian products consists of medium (30 percent) and low (50 percent) technological intensity products, and only 20 percent can be categorized as technologically high intensity products (Potocnik et al., 1995). The transfer of technology, dispersion of innovations and assimilation of novelties into domestic economy tend to remain a problem. Considering the different circumstances in which the transition countries developed, it could be useful for their further development to know the success factors of their new products in comparison with those determining success in the developed countries. Taking into account similar economic circumstances, we believe that the findings revealed for Slovenian new products are true for other transition countries as well. In most of them, the situation might be even more difficult than in Slovenia.

We examined three strategic factors influencing new product success: (1) product advantage; (2) marketing synergy; and (3) technical synergy. Product advantage refers to a product's perceived superiority relative to competitive products. Marketing and technical synergy refer to a product's fit with a firm's existing marketing and technical skills and resources. Cooper and Kleinschmidt (1987) found product advantage to be the most important success factor for different industry categories in Canada. This finding was also confirmed in Cooper and Kleinschmidt's (1993) study of success factors in chemical industry as well as in the studies of factors determining the success of Japanese new products (Song and Parry, 1996) and Korean new products (Mishra et al., 1996). Synergy is the common thread that binds the new business to the old. For this reason, it was assumed that building on existing firm's strengths, skills, and experience was more important for the success of new products than seeking new opportunities far from its experience and resource base. This assumption was confirmed in different studies (Mishra et al., 1996). Considering the findings of the previously mentioned studies, the following hypotheses were examined for Slovenian new products: H1. The level of new product success is positively correlated with the level of product advantage. H2. The level of new product success is positively correlated with the level of marketing synergy. H3. The level of new product success is positively correlated with the level of technical synergy.

Theoretical framework The success factors study of Slovenian new products presented in this paper was based on the model developed by Cooper and Kleinschmidt (1993). In this model, new product outcome (success or failure) is the result of the interaction of the new product strategy with both the new product market and the competition. The new product strategy includes the new product itself (i.e. its features, benefits, advantages) as well as the components of the product launch (e.g. salesforce, advertising, etc.). This strategy results in the new product process, which is a set of activities, actions, tasks and evaluations carried out by individuals (e.g. a project leader and a team) that move the project from the idea stage to the launch. Finally, this process takes place within a corporate environment consisting of resources, skills and experience in marketing, production, technology and management, which may provide synergy and/or familiarity. In order to ensure the comparison with similar studies (Cooper and Kleinschmidt, 1993; Song and Parry, 1996; Mishra et al., 1996), we decided to apply the above mentioned model in our study, too.

Market environment factors In the studies regarding success factors of new products, two market environment factors, i.e. market potential and market competitiveness, were most frequently mentioned. 66



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The protocol was significantly linked to eight out of 11 performance measures, and in hypothesized positive direction for Canadian new products (Cooper and Kleinschmidt, 1993, p. 173). Similar results were obtained in the study of Japanese new products (Song and Parry, 1996, p. 424) and in the study of Chinese new products (Parry and Song, 1994, p. 23). Given these findings, we hypothesized that in Slovenian firms: H6. New product success is positively correlated with protocol, i.e. with the level of marketing understanding, and technical understanding. H7. The level of new product success is positively correlated with proficiency of the up-front or pre-development activities, i.e. development process planning, concept development and evaluation. H8. The level of new product success is positively correlated with the proficiency of the market related activities, i.e. market research, market pre-testing, and market launch. H9. The level of new product success is positively correlated with the proficiency of technical activities. H10. The level of new product success is positively correlated with the level of top management and financial support.

In studying Canadian new products (Cooper and Kleinschmidt, 1987, p. 178) and the Japanese ones (Song and Parry, 1996), the authors concluded that market potential was a positive success factor. In the study of Korean new products, it was found that the presence of a mass market and a high market growth was related to successful products; however, a market in which the users' needs changed quickly led to unsuccessful products (Mishra et al., 1996). No relationship between market competitiveness and new product success was found in the study of Canadian new products (Cooper and Kleinschmidt, 1987, p. 178) as well as in the study of Japanese new products (Song and Parry, 1996). The results obtained by Mishra et al., in contrast, suggested that market descriptors were important success factors in Korea (Mishra et al., 1996, p. 534). The analysis of variables describing the market in China also showed that measures of competitive activity were significantly correlated with new product success in the domestic market (Parry and Song, 1994, p. 19). Taking into account all these findings, we decided to test the following hypotheses for Slovenian new products: H4. The level of new product success is positively correlated with market potential. H6. The level of new product success is negatively correlated with the level of market competitiveness.

Research methodology Sample The sampling frame was a list of companies obtained from the Agency of the Republic of Slovenia for Payments. All non-service Slovenian companies were identified and 250 companies with 50 or more employees were randomly selected. Table I contains a profile of respondent firms. In order to test the ten hypotheses and reveal the most important success factors in new product development process (NPD) in Slovenia, we applied a questionnaire consisting of 75 statements mainly developed by Cooper (1979), and Song and Parry (1996). The companies which were selected randomly in the sample were contacted by researchers through phone calls to identify key contacts and to make sure that they were

Development process factors and hypotheses Cooper and Kleinschmidt examined five development process factors: (1) protocol; (2) the degree of top management support; (3) the level of proficiency in pre-development; (4) marketing; and (5) technological activities. According to them, the protocol variable measures the firm's understanding of both the marketing and technical aspects of a potential new product (Cooper and Kleinschmidt, 1993, p. 173). 67



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Table I Industry representation Industry Food Chemicals Textiles Plastic and metal equipment Machinery Electronics and optical instruments Components for vehicles Furniture Pharmaceuticals Others

Table II Data about constructs Percentage of sample

Construct

H1 H2 H3 H4 H5 H6 H6a H6b H7

11.9 8.3 6.0 11.9 25.0 7.1 8.3 9.5 3.6 8.4

H7a

actively involved in developing new products. In total, 177 companies out of 250 met this criterion. The mailing package which consisted of a personalized letter to the contact person at the company and two identical questionnaires were sent immediately after the phone call, at the end of the year 2000. Managers were asked to select two typical new products introduced by their companies in the last five years. One new product was a clear commercial success and the other a clear commercial failure. Each respondent indicated on an 11-point scale (0 = strongly disagree, 10 = strongly agree) how well each statement described the products selected. The data collection phase was concluded in February 2001. We received 155 applicable questionnaires from 82 companies, 82 for successful products and 73 for failures (the response rate was 46 percent). Information requested in the questionnaires was mainly obtained from the marketing, sales or R&D department managers. Non-response bias was tested by analysing the mean revenues and mean number of employees for responding and non-responding companies. Since both differences were not significant, we concluded that non-response bias did not present a major problem.

H7b H8 H8a H8b H8c H9 H10

Product advantage Marketing synergy Technical synergy Market potential Market competitiveness Protocol Marketing information Technological information Proficiency of the pre-development activities Proficiency of the pre-development planning process Concept development and evaluation proficiency Proficiency of market-related activities Market research proficiency Market pre-test proficiency Market launch proficiency Proficiency of technical activities Management and financial support

Number of items

Cronbach's

8 6 8 3 7

0.90 0.93 0.79 0.66 0.85

4 6

0.88 0.90

6

0.90

5

0.94

6

0.89

3 6 5 5 2

0.89 0.92 0.92 0.86 0.81

composition of constructs and item-total correlations are given in Appendix 1. All items are measured on a 0 to 10-point scale. The constructs were found to be internally consistent and statistically reliable since the construct reliabilities exceeded the minimum acceptable level of 0.5 and many were not smaller than 0.85. Griffin and Page (1996, p. 485) found that different project strategies (i.e. new-to-the world projects, new-to-the company projects, line extensions, and cost reduction projects) require different measures of success. The fact that the majority of Slovenian new products belonged to the last three groups was decisive to opt for measuring the success of new products with the following performance measures: . Profitability, three items, Cronbach's 0.94. . Sales, three items, Cronbach's 0.92. . Market share, three items, Cronbach's 0.93. . Window of opportunity, two items, Cronbach's 0.91.

Analysis and results Success factors and performance measures To test the ten hypotheses 14 variables (constructs) were developed . All the constructs were based on multi-item measures. Data about the constructs are presented in Table II. The

The composition of measures and item-total correlations is given in Appendix 2. Items explaining the first three performance measures 68



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were measured on a ±5 to +5 scale, items explaining the window of opportunity on a 0 to 10 scale.

significant correlations were positive, we concluded that all factors except market competitiveness influenced the success of Slovenian new products. Yet, market research proficiency, marketing information, launch proficiency and product advantage were ranked among the most important according to their correlation coefficients. The correlation matrix indicates high correlations between 14 success factors. Given the multicollinearity in the predictor variables, there was no guarantee that unambiguous measure of relative importance of the factors discriminating between successful and unsuccessful Slovenian products would be obtained. For this reason, we applied a factor analysis with all 75 variables in order to find the appropriate number of uncorrelated factors. We based the decision on six factors on the analysis of the factors' eigenvalues and their structure presented in Table IV.

Discussion of results In Table III, the average ratings as well as correlations between each success factor and a dichotomous success-failure variable (1 = success, 0 = failure) are presented. A correlation is, namely, more intuitive than t-tests. It is bound between ±1 and 1 and its high positive value suggests that the success factor is highly correlated with a successful product whereas its negative value close to ±1 suggests that the success factor is highly correlated with an unsuccessful product. All mean differences except those referring to market competitiveness were significant. Thus, all hypotheses were confirmed by data. The new product process in Slovenian firms had a relatively strong management and financial support and it was supported more by a technical synergy, technological information and proficiency of technical activities than by pre-test proficiency, marketing synergy and research proficiency. This statement was based on the average ratings obtained for all new products. Considering the fact that all

Table IV The structure of factors Factor Constructs

Name

H8c, H2, H8a, H6a, H10, H4 H9 (three variables), H3, H6b H7a, H7b, H9 (two variables) H1 H5 H8b

F1 F2 F3 F4 F5 F6

Marketing activities Technical factor Development New product advantages Marketing competitiveness Marketing pre-text proficiency

Table III Group means and correlations between success factors and dichotomous variable success-failure Construct

H1 H2 H3 H4 H5 H6a H6b H7a H7b H8a H8b H8c H9 H10

Product advantage Marketing synergy Technical synergy Market potential Market competitiveness Marketing information Technological information Proficiency of pre-development planning process Concept development and evaluation proficiency Marketing research proficiency Pre-test proficiency Launch proficiency Proficiency of technical activities Management and financial support

All

Means Successful

Failure

Correlationa

Rankb

6.264 5.805 7.283 4.498 5.845 6.464 6.850 6.142 6.504 5.785 5.144 6.003 6.829 7.569

7.038 6.819 7.953 5.728 5.723 7.629 7.549 6.778 7.390 7.170 6.322 7.189 7.654 8.152

5.382 4.635 6.509 3.113 5.981 5.170 6.052 5.418 5.481 4.208 3.801 4.636 5.875 6.894

0.503* 0.456* 0.371* 0.378* ±0.044 ns 0.544* 0.385* 0.299* 0.355* 0.574* 0.453* 0.532* 0.453* 0.303*

4 5 10 9 14 2 8 13 11 1 6 3 6 12

Notes: p = < 0.01; acorrelations between the success factor and dichotomous variable success-failure; brank was determined by values of correlations

69



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The results from entering all six factors in discriminant analysis simultaneously are presented in Table V. The canonical correlation (R = 0.679) was significant. The rank order of importance, determined by the relative magnitude of the standardized coefficients and canonical loadings, is presented in the first column of Table V. New product advantages and marketing activities were ranked among the two most important discriminators. The results of discriminant analysis with six factors also confirmed the conclusions on the most important success factors based on information presented in Table III. We shall describe the most important success factors in more detail. . Market research proficiency. In this study, market research comprised three activities. As correlation coefficients between the activity and success-failure variable showed all three activities, i.e. determining characteristics and trends of target market (r = 0.553), assessing competitors and their existing and potential products (r = 0.553) as well as conducting a detailed study of market potential, customer preferences, purchase process, etc. (r = 0.465), had very important impact on the success of Slovenian new products. This finding was also confirmed by the highest correlations between this factor and three success measures (i.e. relative sales, relative market share and window of opportunity), as shown in Table VI. They ranged between 0.523 and 0.603. . Marketing information. It had a great impact on a clear definition of the project prior to its development in terms of target market, product positioning and product benefits. This factor was described by four items: the understanding of our potential customers'

.

.

Table V Some results of discriminant analysis Factor New product advantages Marketing activities Development Technical factor Marketing pre-test proficiency Marketing competitiveness

Standardized Canonical coefficient loading 0.837 0.775 0.317 0.279

0.581 0.511 0.175 0.153

0.188 ±0.010

0.102 ±0.005

needs (r = 0.530), the size of potential market for the new product (r = 0.471), the knowledge of price sensitivity of new product (r = 0.462), and the knowledge of competitors (r = 0.403). Correlation coefficients between this factor and success measures given in Table VI ranged between 0.518 and 0.577 and took the second place in three success measures (i.e. relative market share, relative profitability, and window of opportunity). Launch proficiency. It defined the proficiency of market-related activities together with market research and pre-test proficiency. It was measured by five items: new product launch was supported by strong sales force and/or distribution efforts (r = 0.533), sales force and/or distribution effort was well targeted regarding new product and customers (r = 0.487), the new product launch was supported by extensive advertising, promotion and marketing communications effort (r = 0.468), advertising, promotion and communication effort was well targeted regarding the new product and customers (r = 0.419), the launch of the new product started at the right time (r = 0.417). The correlation coefficients between this factor and success measures ranged between 0.46 and 0.571 and took the second place (relative sales) and the third place (relative market share and relative profitability). Product advantage. To measure the product's superiority eight items were applied. They were benefit to cost ratio (r = 0.520), meeting the customers' needs (r = 0.471), reducing the customers' cost (r = 0.455), technical performance (0.386), unique features for the customers (r = 0.371), higher quality (0.362), environmental responsibility (0.291) and permitting the customers to carry out new jobs (r = 0.274). Among all correlations referring to relative profitability in Table VI, the highest one was achieved with the product advantage.

Taking into consideration the mean correlations in Table VI and the fact that the mean correlations of relative sales and relative market share were significantly different from those belonging to relative profit and window of 70



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Table VI Correlations between success factors and success measures Success factor

H1 H2 H3 H4 H5 H6a H6b H7a

Product advantage Marketing synergy Technical synergy Market potential Market competitiveness Marketing information Technological information Proficiency of pre-development planning process H7b Concept development and evaluation proficiency H8a Marketing research proficiency H8b Pre-test proficiency H8c Launch proficiency H9 Proficiency of technical activities H10 Management and financial support Mean correlations

Relative sales

Relative market share

Relative profit

Window of opportunity

0.560* 0.486* 0.378* 0.331* ±0.116 ns 0.557* 0.456*

0.558* 0.502* 0.379* 0.336* ±0.117 ns 0.557* 0.421*

0.541* 0.480* 0.369* 0.298* ±0.169 ns 0.533* 0.467*

0.411* 0.462* 0.255* 0.356* ±0.048 ns 0.518* 0.291*

0.341*

0.350*

0.328*

0.366*

0.361* 0.603* 0.516* 0.561* 0.486* 0.300* 0.416

0.359* 0.590* 0.534* 0.571* 0.486* 0.320* 0.419

0.338* 0.505* 0.471* 0.531* 0.452* 0.272* 0.387

0.369* 0.523* 0.499* 0.460* 0.466* 0.286* 0.372

Note: *p = < 0.001

projects had similar top management commitment and involvement as did the successful ones. Many factors influenced the realization of the product advantage. The impact measured by bi-variate correlations which 13 success factors had on product advantage is presented in Table VII. Their values show that the advantage of Slovenian new products was achieved by technical synergy, pre-test proficiency,

opportunity, we came to conclusion that the success of Slovenian new products was determined more by market share and sales than by profit, and especially, by new opportunities. The proficiency of market-related activities as a very important success factor for Slovenian new products was not ranked among the most important ones, neither for Canadian nor for Japanese new products. Our findings were, however, similar to those obtained by Sanchez and Elola for Spanish new products, where they revealed that the ones ``with greatest need of improvement are preliminary market assessment, product development, market research, and the market launch, all of which are connected with the market and product design'' (Sanchez and Elola, 1996, p. 54). Market competitiveness was found as the least important success factor. This result was consistent with the Cooper and Kleinschmidt (1987) study of Canadian new products , and with the results obtained by Parry and Song (1994) for Japanese new products. The next similarity between Slovenian, Canadian and Japanese studies referred to the importance of top management support. This support was also revealed as a weakly related success factor, which implies that the unsuccessful Slovenian

Table VII Correlations between success factors and product advantage Success factor

H1 H2 H3 H4 H5 H6a H6b H7a H7b H8a H8b H8c H9 H10

Product advantage Marketing synergy Technical synergy Market potential Market competitiveness Marketing information Technological information Proficiency of the pre-development planning process Concept development and evaluation proficiency Market research proficiency Pre-test proficiency Launch proficiency Proficiency of technical activities Management and financial support

Notes: *p < 0.01;

71

Correlations

**

p < 0.05

1.000 0.276* 0.423* 0.166** ±0.220** 0.335* 0.399* 0.199** 0.273** 0.331* 0.410* 0.274* 0.409* 0.331*


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technical proficiency and technological information. As we can see in Table IV, the previously mentioned success factors were included in the second factor, i.e. technical factor. According to the results of discriminant analysis, this factor did not have an important impact on differentiating between the successful and the unsuccessful Slovenian products. These results are similar to those obtained for Japanese new products except that in the study of Slovenian new products the factor top management support was not ranked as high as in the study of Japanese new products (Song and Parry, 1996). Results available in Mishra et al. (1996, p. 540) enabled us to compare the impact that NPD activities measured by the correlation between an activity and dichotomous success-failure variable had on the success of new products manufactured in Slovenia, Canada, Korea and China. In Table VIII, these correlation coefficients and inter-country correlations are presented. Correlation coefficients for Canada, Korea and China were taken in Mishra et al. (1996. p. 540). In spite of inter-country correlation coefficients not being statistically significant at the 0.05 level, we concluded that there was some similarity between Slovenia and China and no similarity between Slovenia and two other countries in terms of the impact of proficiency of the NPD activities on new product success.

In all the previously mentioned studies, the product advantage was found as the most important success factor, which can be achieved in different ways. We investigated which kind of advantage had the greatest impact on the success of Slovenian new products and what the similarities with other countries were. The data for this comparison were obtained in Mishra et al. (1996, p. 542), the results are presented in Table IX. As all inter-country correlation coefficients were not statistically significant, we concluded that Slovenian companies applied quite different ways to achieve product advantage than companies in the other three countries. As data in Table IX shows, the superior benefit to cost ratio was the main source of the product advantage of Slovenian new products. The lack of market information was probably one of the reasons why other possibilities, which were successfully applied in the other three countries, were not used to achieve the advantage of Slovenian new products. This finding was also consistent with our previously mentioned conclusion that Slovenian companies did not use enough detailed market studies and researches. Slovenian firms tried to meet customers' requirements by offering them more than their competitors within a competitive price of a new product. This finding could also be used to explain the mean correlations in Table IV, i.e. that the success of Slovenian new products could be measured more by sales and

Table VIII Impact of proficiency of the NPD activities on new product success Slovenia Initial screening Preliminary technical assessment Preliminary marketing assessment Detailed marketing study and marketing research Prototype testing in-house Prototype testing with customers Test marketing and trial selling Market launch

0.450 0.358 0.469 0.574 0.397 0.408 0.367 0.532

0.370 0.282 0.328 0.342 0.325 0.415 0.407 0.517

r p

Slovenia

Correlation coefficientsa Canada China 0.693 0.506 0.711 0.719 0.324 0.543 0.543 0.656

0.637 0.545 0.520 0.654 0.622 0.556 0.534 0.570

Intercountry correlationsb 0.340 0.698 0.411 0.054

Notes: a all correlations between an activity and the success-failure variable are significant at the 0.01 level; correlations of the absolute values of correlation coefficients between Slovenia and the other three countries

72

Korea

0.472 0.232 b

bi-variate



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Table IX Impact of the product advantage on new product success Correlation coefficientsa Canada China

Slovenia Product had unique features Product met customer needs better than competitors Product reduced customers' costs Product permitted customer to perform unique tasks Product was of a higher quality Product was priced lower ± superior cost benefit ratio Slovenia

0.371 0.471 0.455 0.274 0.362 0.520

0.300 0.492 0.378 0.238 0.416 0.053

Korea

0.683 0.780 0.635 0.768 0.788 0.105

0.614 0.616 0.640 0.499 0.569 0.365

Intercountry correlationsb ±0.129 ±0.653 0.807 0.160

r p

Notes: a all correlations between an activity and the success-failure variable are significant at the 0.01 level; correlations of the absolute values of correlation coefficients between Slovenia and the other three countries

±0.188 0.721 b

bi-variate

customers was expected. The reasons why Slovenian companies did not apply the detailed market studies and market researches to prevent failures were not dealt with in our study. If we speculated, we would rank the reasons such as the lack of relevant resources and companies' intensive involvement in the privatisation process and in the adoption of Slovenian firms to new legislation very high. In our study, we also investigated the importance of 20 different screening criteria and their impact on the success of new products. Slovenian managers were asked to estimate the importance of each screening criterion for their decisions to develop new products on a 0 to 10-point scale. In Table XI, mean ratings with standard deviation between screening criterion and

market share than by profit and new opportunities. In Table X, the first three correlations given for Slovenian new products belonged to variables pertaining to intelligence about customer needs, wants and specification for the product, then on market size and on production costs. The data for the comparison of inter-country correlations were obtained in Mishra et al. (1996, p. 543). The fact that only one inter-country correlation was statistically significant led to the conclusion that there was a great similarity regarding impact of the information about the market place on the new product success only between Slovenia and Canada. Since the large portion of Slovenian products was exported to the developed markets, the crucial role of understanding

Table X The impact of the intelligence acquired about the marketplace on new product success Slovenia We knew customer needs, wants and specifications for products We knew customer price sensitivity We knew competitors products, strategies, etc. We knew market size We understood product's technology We understood product design well We knew production costs We knew productin process-equipment

0.530 0.462 0.403 0.471 0.273 0.303 0.464 0.317

r p

Slovenia

Correlation coefficientsa Canada China 0.362 0.394 0.331 0.284 0.203 0.270 0.291 0.250

Intercountry correlationsb 0.776 0.510 0.023 0.197

Notes: a all correlations between an activity and the success-failure variable are significant at the 0.01 level; the absolute values of correlation coefficients between Slovenia and the other three countries

73

0.609 0.512 0.478 0.600 0.491 0.537 0.449 0.416

b

Korea 0.710 0.666 0.675 0.654 0.645 0.614 0.486 0.647 0.075 0.859

bi-variate correlations of



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Table XI The impact of screening criteria on the success of new products Means ± all Correlation projects coefficienta This product would attract new customers This product would broaden our product line This product would be attractive to certain large or significant current customers This product would be attractive to a wide variety of current customers This product would permit us access to foreign markets This product would meet needs unsatisfied by current products This product would permit us to enter new markets This product would meet a desired level of sales within three years This product would utilize idle machinery, by-products, excess materials, etc. This product would meet a desired level of market share within three years Notes:

a

7.45 (2.43) 7.31 (2.62) 6.81 (2.68) 6.72 (2.88) 6.57 (3.32) 6.29 (2.76) 5.92 (3.02) 5.77 (3.14) 5.74 (3.18) 5.65 (2.95)

0.114 ns 0.110 ns 0.259* 0.311* 0.453* 0.243* 0.389* 0.474* 0.272* 0.517*

Correlation coefficient between screening criterion and dichotomous success-failure variable; * p 0.01

mentioned finding that the lack of market information forced Slovenian companies to apply cost instead differentiation strategy also in developing new products.

dichotomous success-failure variable are presented. Taking into account the mean ratings only, the highly rated screening criteria referred to the product's ability to attract new customers or expand their product line. From statistical viewpoint (non-significant correlation coefficients with dichotomous success-failure variable), these two criteria did not differentiate between successful and unsuccessful new products and, therefore, their use did not guarantee the success of new products. The criteria referring to product's attractiveness to certain large or significant current customers, or its attractiveness to a wide variety of current customers, were found by decision makers as less important, yet they have a significant differentiation power. The criteria applied more for successful than unsuccessful new products were the product's ability to meet a desired level of market share within three years, and to meet a desired level of sale within three years. Criteria such as the potential customers of a new product being dissatisfied with current products, and the new product that could be protected by a patent were found the least important. They confirmed our previously

Managerial implications Taking into account the findings of this study, the Slovenian firms applied the cost-leadership and technology-push strategy in developing new products. Therefore, the product advantage was mainly achieved by superior benefit to cost ratio. This was a consequence of a relatively good technological synergy and proficiency on the one hand and a lack of market knowledge and information on the other. This finding can be explained by the phase model proposed by Bolwijn and Kumpe (1990). They found out that the evolution of large companies and the industrial performance criteria were mainly the consequence of changed market factors, technological developments and intensified competition. Their model, which is presented in Table XII, 74



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Table XII Evolution process of large firms in the period 1960-2000 Market requirements

Performance criteria

Ideal type of firm

1960 1970 1980 1990

Efficiency Efficienty + quality Efficiency + quality + flexibility Efficiency + quality + flexibility + innovative ability

The The The The

Price Price, quality Price, quality, product line price, quality, product line, uniqueness

efficient firm quality firm flexible firm innovative firm

Source: Bolwijn and Kumpe (1990)

shows the phases of this evolution process of large firms from 1960 until 2000 in relation to changes in the environment. During each period, firms are chiefly occupied with the most recently emerged market requirement in a particular period. The periods can be seen as different phases over time. Successful firms grow mainly by quickly and adequately responding to the most recently appeared market requirement. As results showed, Slovenian companies try to create competitive advantage with price and quality. According to the phase model presented in Table XII, the majority of them can be classified as quality firms which have not yet developed flexibility and innovative ability. The lack of these abilities forced them to apply short-term orientation in developing new products, which leads to the introduction of incremental improvements. According to Samli and Weber (2000), such orientation in developing new products is attractive for product managers because: . They are routinely developed. . They do not require new production facilities or capabilities. . They can be introduced to the market with greater speed. . They give the impression of lesser risk to the management. . They require limited resources and know-how. . They present a short planning and reward horizon. . They are simple and may generate, however temporary, volume and sales.

(1997). They found out that the environmental uncertainty affects innovativeness through the firm's strategic posture. Before the 1990s, Slovenian companies mainly sold their products on the then Yugoslav market. One of its important characteristics was high protection of domestic manufacturers against foreign competitors, small degree of uncertainty associated with the market where demand exceeded supply. In such market environment, there were no economic incentives for firms to develop the abilities such as flexibility and innovativeness. Additional important information obtained by this study is that market research proficiency and market information had very important impact on the success of Slovenian new products. Bolwijn and Kumpe (1990) defined a flexible firm as one which offers a wide and varied assortment of products. Flexibility, the ability needed to produce wide ranges of up-to-date products, can only be achieved if and when efficiency and particular quality are properly under control. On the other hand, flexibility calls for market information which enables the firms to look for new opportunities. In the 1990s, Slovenian companies were forced to enter international markets thus exchanging a sellers' market for buyers' ones. To be successful on these markets, they had to start developing new products to comply with these markets' requirements. The new circumstances called for external market information. They were primarily focused on likely demand. Taking into account all that, we concluded that the importance Slovenian companies attached to market information signifies their transition to flexible firms. This conclusion was additionally confirmed by the significant similarity regarding the impact of the intelligence acquired about the marketplace on new product success found between Slovenian firms in the year 2001 and the Canadian firms

Another interesting question was why Slovenian firms did not develop innovative ability. Bolwijn and Kumpe (1990) established that the appearance of new market demands calls for certain characteristics related to these demands. È zsomer et al. Similar results were obtained by O 75



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in the year 1977 (Table X). Bolwijn and Kumpe revealed that skipping a phase is not possible. Therefore, the principal task of Slovenian managers is to support activities which develop the abilities required for flexible firms and create conditions for their further transition to innovative firms. The success of this transition process depends above all on the funds available to carry out the market research and on the knowledge of personnel who will carry out the market research and product development activities. During the flexible phase, firms from transition countries should develop market knowledge competence, i.e. the ability to generate and integrate market knowledge, and should come close to the vision and commitment to developing new products with unique attributes. Last, but not least, the decision makers will have to be ready to take risks associated with such new products.

product development success and failure'', Journal of Product Innovation Management, Vol. 13, pp. 478-96. Kos, M. (1999), ``Speculations on research for low added value in post-Communist countries'', in Rupnik, L., Zadnik, S. and Drobne, S. (Eds), Proceedings of the 5th International Symposium on Operational Research, Preddvor, pp. 71-6. Mishra S., Kim, D. and Lee, D.H (1996), ``Factors affecting new product success: cross-country comparisons'', Journal of Product Innovation Management, Vol. 13 No. 6, pp. 530-50. OÈzsomer, A., Calantone, R.J. and Di Benedetto, A. (1997), ``What makes firms more innovative? A look at organizational and environmental factors'', Journal of Business & Industrial Marketing, Vol. 12 No. 6, pp. 400-16. Parry, M.E. and Song, X.M. (1994), `Ìdentifying new product success in China'', Journal of Product Innovation Management, Vol. 11 No. 1, pp. 15-30. PotocÆnik, J., Senjur, M. and SÆtiblar, F. (1995), The Strategy for the Economic Development of Slovenia. Approaching Europe ± Growth, Competitiveness and Integration, Institute of Macroeconomic Analysis and Development, Ljubljana. Samli, A.C. and Weber, J.A.E. (2000), `À theory of successful product breakthrough management: learning from success'', Journal of Product & Brand Management, Vol. 9 No. 1, pp. 35-55. Sanchez, A.M. and Elola, L.N. (1996), ``Product innovation management in Spain'', Journal of Product Innovation Management, 8, pp. 49-56. Song, X.M. and Parry, M.E. (1996), ``What separates Japanese new product winners from losers'', Journal of Product Innovation Management, Vol. 13 No. 5, pp. 422-39.

References Bolwijn, P.T. and Kumpe, T. (1990), ``Manufacturing in the 1990s ± productivity, flexibility and innovation'', Long Range Planning, Vol. 23 No. 4, pp. 44-57. Cooper, R.G. (1979), ``The dimensions of industrial new product success and failure'', Journal of Marketing, Vol. 43, Summer, pp. 93-103. Cooper, R.G. and Kleinschmidt, E.J. (1987), ``New products: what separates winners from losers?'', Journal of Product Innovation Management, Vol. 4 No. 3, pp. 169-184. Cooper, R.G. and Kleinschmidt, E.J. (1993), ``Major new products: what distinguishes the winners in the chemical industry?'', Journal of Product Innovation Management, 10, pp. 90-111. Griffin, A. and Page, A.L. (1996), ``PDMA success measurement project: recommended measures for

Further reading Bastic, M., (2002), `Ànticipation of market opportunities'', International Journal of Computing Anticipatory Systems, Vol. 13, pp. 157-69.

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Appendix 1 Table AI Composition of success factors Item-total correlation

Success factors

Product Product Product Product Product Product Product Product Product

advantage had unique features met customer's needs better than competitors permitted the customer to reduce their costs permitted customer to perform a unique task was of higher quality provided a superior benefit to cost ratio had superior technical performance was superior in environmental responsibility

0.69 0.80 0.63 0.54 0.73 0.75 0.80 0.60

Marketing synergy Our firm employed enough resources for this project in each of the following areas: Marketing research Marketing communications Distribution

0.75 0.80 0.79

Resources employed for this project had more than adequate skills in each of the following areas: Marketing research Marketing communications Distribution

0.78 0.82 0.80

Technical synergy Our firm employed enough resources for this project in each of the following areas: R&D Engineering Manufacturing

0.71 0.35 0.70

Resources employed for this project had more than adequate skills in each of the following areas: R&D Engineering Manufacturing Appropriate equipment was available in R&D department Manufacturing process fitted the requirements of new product

0.67 0.77 0.74 0.69 0.65

Market potential for this product There were many potential customers Potential customers needed this class of product in quantities exceeding the firm's capacity The market for this product was growing very quickly

0.41 0.46 0.55

Market competitiveness Competing products were very similar to each other Non-price competition in the market was very intensive Price competition in the market was very intensive There were many competitors in the market There was a strong, dominant competitor on the market Potential customers of this product were very loyal competitors products in this market Potential customers of this product were very satisfied with competitors' products

0.53 0.59 0.65 0.58 0.55 0.63 0.73

Market information about this product We understood our potential customers' needs, wants and specifications We knew the price the potential customers would pay We knew our competitors well ± their products, strategies, pricing, and strengths We knew well the size of our potential market

77

0.78 0.80 0.65 0.77 (continued)



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Table AI Item-total correlation

Success factors

Technological Information This product's specifications were very clear from the beginning of the project The technical aspects were very clear from the beginning of the project We knew well technology behind this product We were sure of all the new product design from a technical viewpoint We had a good knowledge of the manufacturing costs of this product We knew well the production process technology and equipment required for this product

0.61 0.76 0.78 0.83 0.67 0.79

Proficiency of the predevelopment planning process How well was each of the following activities executed? Planning of the product development process Defining of the team member responsibilities Defining timetable for the succeeding product development stages Defining the milestones for measuring the performance and progress Cross-function integration in establishing milestones for measuring the performance and progress

0.80 0.82 0.81 0.89 0.86

Proficiency of concept development andevaluation proficiency How well was each of the following activities executed? Initial screening of the product idea Expanding the idea into a full product concept Determining the product features Assessment of the product concept with business terms (market share, profit, etc.) Evaluating the feasibility of developing and manufacturing a product with these features Concept development and evaluation phase was executed on time

0.77 0.82 0.67 0.64 0.71 0.61

Marketing research proficiency How well were each of the following activities executed? Determining market characteristics and trends Market study or research of market potential, customers' preferences, purchase process, etc. Appraising of competitors and their existing as well as potential new products

0.86 0.84 0.71

Market pretest proficiency How well were each of the following activities executed? Selecting customers for testing market acceptance Testing of new products by potential customers Executing marketing programs regarding the plans of commercialization Surveying of trade reactions to the product and its commercialization programme Analysis of test findings Incorporating the findings into product design and commercialization plans

0.82 0.79 0.67 0.65 0.66 0.70

Market launch proficiency We had a strong salesforce and/or distribution effort for this product Our salesforce and distribution effort was directed at right target customers We had a strong advertising, promotion and marketing communications effort behind the launch of this product The start of launch was well chosen

0.79 0.79 0.81 0.81

Proficiency of technical activities How well were each of the following activities executed? Conducting preliminary engineering, technical and manufacturing assessments Building the product according to designated or revised specifications Evaluating laboratory test to determine basic performance against specifications Sample product testing "in house" Designing and testing manufacturing facilities and capabilities Management and Financial Support The new product had strong management support The new product had strong financial support

0.76 0.67 0.77 0.63 0.74 0.58 0.69 0.69

78



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Appendix 2 Table AII Composition of performance measures Performance measures

Item-total correlations

Profitability Product profit relative to our other new products Product profit relative to competitive products Product profit relative to your expectations

0.88 0.88 0.86

Sales Product sales relative to our other new products Product sales relative to other our new products Product sales relative to your expectations

0.86 0.84 0.84

Market share Product market share relative to our other new products Product market share relative to our other new products Product market share relative to your expectations

0.87 0.85 0.85

Window of opportunity Window of opportunity in terms of new product category for our firm Window of opportunity in terms of new market opportunity for our firm

0.84 0.84

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