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This is to certify that the

dissertation entitled

The Impact of Market-Oriented Strategy oni
Competitiveness in Product Innovation in
the U.S. Software Industry

presented by

Xiaohu Li (Tiger Li)

has been accepted towards fulfillment
of the requirements for

Doctor of Philosophy Marketing“

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MSU IoAnAl'flnnotlvo AetloNEcpol Opportunity trunnion
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THE IMPACT OF MARKET-ORIENTED STRATEGY ON COMPETITIVENESS
IN PRODUCT INNOVATION

IN THE U.S. SOFTWARE INDUSTRY

BY

Xiaohu Li

(1799r U)

A DISSERTATION

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of Marketing and Logistics
Eli Broad Graduate School of Management

1 994

ABSTRACT
THE IMPACT OF MARKET -ORIENTED STRATEGY ON COMPETITIVENESS
IN PRODUCT INNOVATION
IN THE U.S. SOFTWARE INDUSTRY
BY

Xiaohu u
(figer Li)

In today's marketplace where customers are ever more demanding and
competition more intense, market orientation becomes increasingly important for
firms to succeed in product innovation. Yet most traditional research embraces an
inward-oriented paradigm that neglects market demand and needs in the
innovation process.

Based on Drucker's theory of knowledge-based innovation, this dissertation
develops and tests a model of a market-oriented strategy and a firm’s
competitiveness in product innovation. In the model, a market-oriented strategy is
composed of four components: customer knowledge focus, integrai knowledge
focus, competitor knowledge focus, and R&D strength. Competitiveness in product
innovation refers to a firm’s ability to develop new products that create customer
value more effectively and efficiently then competitors.

The data used to test the model were collected from the U.S. software
industry. The selection of the software industry is consistent with the need for

research on high technology products since, traditionally, the marketing literature

was biased toward mature consumer goods. In addition, the software industry is
prolific in innovative products, thus providing an ideal environment for research on
product innovation.

The model was tested using EQS general least squares (GLS) method. The
results indicate that all four components of a market-oriented strategy exert a
significant impact on competitiveness in product innovation. In turn,
competitiveness in product innovation leads to superior market performance.
Further, the research finds significant relationships between external and internal

factors and a market-oriented strategy.

Copyright by
XIAOHU Ll

1994

Dedicated to Feifei and Gen
it 9%

SEHEIFHIE

ACKNOWLEDGEMENTS

I wish to express my sincere thanks to the members of my dissertation
committee - Dr. Roger J. Calantone, Chairman, Dr. S. Tamer Cavusgil, Dr. Robert
W. Nason, and Dr. Bixby M. Cooper - for their outstanding direction and assistance
in my dissertation.

To Dr. Calantone I express my special gratitude for guiding me into product
innovation research and for helping me meet challenges during every stage of the
research, from the idea incubation to the final defense. The benefits I have
received from his mentoring will extend well beyond this research to my future
career endeavors.

I am most grateful to Dr. Cavusgil for his constant encouragement and help
in both this research and my entire five years in the doctoral program. He opened
up my horizons in international marketing five years ago and since that time has
continuously had an influential and positive impact on my career.

lam greatly indebted to Dr. Nason for providing his thoughtful suggestions
and criticisms. His commitment to academic integrity and excellence in the
department was instrumental in shaping my career objectives.

To Dr. Cooper I express special thanks for his thorough and valuable
comments on every dissertation draft. I also cherish the days when I worked as

vi

a teaching assistant for him. His teaching was always enlightening and
entertaining.

In addition, I wish to acknowledge the generous grant from the MSU Center
for International Business and Education Research; This financial support was
essential in conducting the survey for this research.

Finally, I wish to thank my wife, Feifei, who supported me throughout my
academic pursuit over the last eight years. Without her love, friendship,
encouragement, and understanding, this pursuit would not have come to a

successful conclusion. I also extend my thanks and love to my son, Gen.

vii

TABLE OF CONTENTS

LIST OF TABLES

LIST OF FIGURES

4.544.;
UlchCDN-t

2.1 .
2.2.
2.3.
2.4.
2.5.
2.6.
2.7.
2.8.

3.1.
3.2.

3.3.
3.4.

3.5.

INTRODUCTION

. Importance of Product Innovation

. Motivation for the Research

. Purpose of the Research and the Conceptual Model
. Choice of the Software Industry

. Expected Constributions of the Research

LITERATURE REVIEW AND THEORY CONSTRUCTION

Traditional Perspective of Innovation

The Need for a New Theoretical Structure
Market-Oriented Strategy

Outcome Measures of Market-Oriented Strategy
Environmental Factors: A Contingency Perspective
Environmental Factors and Market-Oriented Strategy
Top Management Perception of Market Knowledge
Summary

HYPOTHESES AND RESEARCH MEASUREMENT

Market-Oriented Strategy and Competitiveness in Product
Innovation

Competitiveness in Product Innovation and Market
Performance

Environmental Factors and Market-Oriented Strategy

Top Management Perception of Market Knowledge and
Market-Oriented Strategy

Construct Measurement

viii

xi

_L

acumen-s

12
15
16
31
41

45

47
51

52

.55

56

4.1.
4.2.
4.3.

5.1.
5.2.
5.3.
5.4.
5.5.
5.6.
5.7.

VI.

6.1 .
6.2.
6.3.
6.4.
6.5.

VII.

THE SOFTWARE INDUSTRY

The Dominance of the Mainframe Producers in the 705
The Rise of the Independent Software Companies in the 803
The Software - Industry Segmentation

RESEARCH METHODOLOGY

Measure Development

Sampling Frame

Key Informant

Mail Survey and Sample

Unit of Analysis

Measure Purification and Reliability
Hypothesis-Testing Approach

RESEARCH FINDINGS AND IMPLICATIONS

Test of the Model

Research Findings

Significance of the Research Findings
Managerial Implications

Future Research Directions

LIST OF REFERENCES

61

62

75
75
76
76
78

82

91
91
102
104

107

2.1.
2.2.
2.3.
2.4.
3.1.
4.1 .
4.2.
4.3.
4.4.
4.5.
4.6.
4.7.
4.8.
5.1.
5.2.

5.3.

5.4.
5.5.
5.6.
6.1.

6.2.

LIST OF TABLES

Overview of Studies on Customer Knowledge Generation
Overview of Studies on Marketing-R80 Knowledge Integration
Overview of Studies on Competitor Knowledge Focus
Competitiveness in Product Innovation

Construct Measurement

Software Product and Service Revenues, 1979-1980
Revenues of Independent Software Vendors in 1979
Revenues and Employment of Independent Vendors in 1990
Microsoft Corp. Financial Statistics

Novell Inc. Financial Statistics

Lotus Development Financial Statistics

Borland International Financial Statistics

Office Automation Software

Profile of Software Firms in the Sampling Frame

Profile of Surveyed Software Firms

Goodness-of-fit Test on Distributions of the Sample and the
Sampling Frame

Types of Software Products Represented in the Sample

Major Industries Served by the Sampled Software Companies
Measurement Model and Confirmatory Factor Analysis by EDS
Assessment of Path Model by EDS

Assessment of Research Hypotheses by EDS
x

21

26

30

57

63

65

8

71

77

79

81

83

'84

85
93

93

1.1.

6.1.

LIST OF FIGURES

Market-Oriented Strategy in Product Innovation

Market-Oriented Strategy in Product Innovation, Results

xi

92

CHAPTER ONE

INTRODUCTION
1.1. Importance of Product Innovation

In today’s marketplace, product innovation is a major driving force behind
corporate growth and competitiveness. In 3M, thirty percent of the sales (over
$13.5 billion) comes from new products that didn’t exist five years ago (McCarthy
and Perreault 1993). Microsoft, through focusing on product innovation, developed
from a tiny company in 1981 to the largest software producer in the world. In 1993,
its market value exceeded General Motor’s. In the United States as a whole, new
products account for 75 percent of the national sales growth (Gruenwald 1992).
Increasingly, product innovation is viewed as a major factor for creating national
competitiveness (Porter 1990) in the global market.

The importance of product innovation has been long recognized by scholars
in economics. More than half a century ago, Schumpeter in his historic works,
Business Cycle (1939) and Capitalism, Socialism and Democracy (1942),
impressively uncovered the nature of product innovation. He considered product
innovation essential to economic progress. Product innovation fostered economic
progress through replacing existing products with new innovative products, a
process Schumpeter called “creative destruction“. While Schumpeter’s. works
examined the general relationship between product innovation and economic

progress, other economists explored the specific conditions that contributed to

2
product innovation. In particular, Galbraith (1952) viewed firm size as a key factor

in innovation success since large firms generally invested more in R&D than small
firms. Since then the study of the impact of firm size and R&D investment on
product innovation has been of interest to many economists (Adams 1970; Fisher
and Temin 1973; Horowitz 1962; Scherer 1965).

While economists pioneered the study of product innovation, their views on
the effect of firm size and R&D investment are often conflicting with phenomena in
business practice. In one case after another, one observes small companies excel
in product innovation whereas their resource-rich counterparts blunder in bringing
new products into the market. This raises the question: "Why do some companies
move quickly and efficiently to bring to market outstanding new products, while
others expend tremendous resources to develop products that are late and poorly
designed?“ (Wheelwright and Clark 1992).

In search of more effective ways for product innovation, researchers in
marketing shifted their attention to a different perspective: a market-oriented
approach. Attempts to establish the market-oriented perspective include studies
on the impact of customer knowledge focus on new product development (Cooper
1979, 1985, 1992; Griffin and Hauser 1991; Kohli and Jaworski 1990; Von Hippel
1977, 1978, 1986), the effect of marketing-R80 integration (Calantone and di
Benedetto 1988; Calantone and COOper 1977; Griffin and Hauser 1991 ; Gupta, Raj,
and VWlemon 1986; and Souder 1987, 1988), and the influence of competitor
knowledge focus (Day and Wensley 1988; Lawless and Fisher 1990; Narver and

Slater 1990; and Rothchild 1979). Further contributions to the market-oriented

3
perspective have been made by studies (Gupta, Raj, and Vlfilemon 1986;

Wheelwright and Clark 1992) that investigate the relationships between the market-
oriented approach and the drivers of environmental factors.

Taken as a whole, these studies have made important contributions to our
understanding of product innovation. 0n the one hand, economists have laid
foundation for innovation research by highlighting the important function of product
innovation in achieving economic progress. On the other hand, researchers in
marketing have spearheaded a new direction for the research, a direction which
may guide practitioners in their quest of competitive advantage in today’s market

place.

1.2. Motivation For the Research

The proposed - study is motivated by both the accomplishments and
weaknesses of previous research on product innovation. Over the past five
decades, economists have analyzed and sifted through numerous economic
forces, and eventually established product innovation as a major factor in social
and economic evolution and progress (Pavitt 1980; Mansfield 1968; Schumpeter
1939, 1942, 1961). The achievements of the previous economics studies can also
be found in the abundant empirical works that provided evidence supporting the
role of product innovation in economy. However, when attempting to offer specific
means to achieve success in product innovation, their contributions have been
limited by their own analytical model which treats R&D investment and firm size as

the sole factor in innovation success while neglecting the impact of market factors,

4

such as market demand and customer needs, on product innovation. These
limitations are reviewed and analyzed in detail in the next chapter.

To overcome the limitations of economics studies, researchers in marketing
have cultivated a new approach through establishing the market-oriented
perspective. Specifically, studies in marketing have created a conceptual
framework for analyzing the relationship between market orientation and
competitiveness in innovation. Some empirical studies have provided evidence
indicating the adoption of market orientation may lead to success in product
innovation. However, most of these studies focus on a single aspect of market
orientation. For example, empirical research on competitor knowledge focus
seldom considers customer knowledge focus (Note 1), while investigation on
marketing-R80 integration does not bring in competitor analysis. In general,
research on market orientation still remains fragmented.

Previous studies (Day and Wensley 1988, Kohli and Jaworski 1990, Slater
and Newer 1994, Wheelwright and Clark 1992) have also attempted to establish
a relationship between market orientation and environmental factors by assuming
that environmental factors, such as market growth, competition intensity, and
technology turbulence, are the driving forces that provide impetus for organizations
to take a market-oriented approach. However, this contingency perspective has
become controversial lately. More empirical studies are needed to resolve the
issue.

The unfinished work from previous studies provides a unique opportunity

for the author in this research to integrate the past fragmented findings into a more

comprehensive framework.

1.3. Purpose of the Research and the Conceptual Model

The purpose of this research is to present and test a model of a market-
oriented strategy in product innovation. Through an integration of the market-
oriented approach in product innovation and the environmental contingency
perspective, the model will address the following three fundamental research
questions: (1) Does a market-oriented strategy lead to firm’s competitiveness in
product innovation? (2) Is competitiveness in product innovation correlated with
market performance? (3) Do market environmental factors exert an impact on a
market-oriented strategy?

The conceptual model in Figure 1.1. consists of three levels of constructs:
(1) constructs of external and internal factors, (2) strategy constructs, and (3)
outcome constructs. The inclusion of each construct in the model is supported by
multiple studies. While a detailed literature review of these studies is provided in the
next chapter, the following paragraphs briefly describe each construct in the
model.

A marketed-oriented strategy is composed of four constructs (VS-V8):
customer knowledge focus, integral knowledge focus, competitor knowledge focus,
and 8&0 strength. Customer knowledge focus (V5) refers to the generation of
knowledge pertaining to customer needs of new products through customer
information acquisition and interpretation. Customer knowledge focus is

hypothesized to have a positive impact on firm’s competitiveness in product

innovation.

Integral knowledge focus (V6), the second strategy construct that is
proposed to be positively related to competitiveness in innovation, is the generation
of integral knowledge pertaining to solution to customer needs through marketing-
R&D communication, information sharing, and cooperation in the process of new
product development.

Competitor knowledge focus (V7), the third strategy construct, refers to the
generation of competitor knowledge on the weakness and strengths of
competitors’ products through competitor information acquisition and
interpretation. It is hypothesized that the level of competitor knowledge focus is
positively correlated to competitiveness in product innovation.

FI&D strength (V8), the fourth strategy construct, is measured by the level
of firm’s R&D investment. R&D strength is proposed to have a positive impact on
competitiveness in product innovation.

Two outcome constructs (V9-V10) are included in the model.
Competitiveness in product innovation (V9), the first outcome construct, refers to
firm’s ability to develop new products that create customer value more effectively
and efficiently than competitors. While the level of competitiveness in product
innovation is determined by the four strategy constructs, the other outcome
construct, new product market performance (V10), is suggested to be influenced
by competitiveness in product innovation.

Constructs of external environmental factors (V1-V3) include customer

demandingness, competition intensity, and technology change. Customer

 

 

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8

demandingness (V1) refers to the level of buyers’ requirement for product
performance and knowledge about technical specifications. As customers become
more demanding, it is more imperative for firms to pursue customer knowledge
and integral knowledge focuses, as well as to strengthen their R&D program.

Competition intensity (V2) refers to the level of competition in a product
market including market concentration, volatility, and predictability. This external
factor puts enormous pressure on firms to strive for competitor knowledge focus.

The last environmental factor is technology change (V3). Technology
change is measured by two leading indicators: technology obsolescence rate and
new product introduction rate. As technology in a product market changes rapidly,
firms arecompelled to further pursue both customer and competitor knowledge
focuses, as well as to increase their R&D investment level.

The perceived importance of market knowledge (V4) is an internal factor
that is proposed to have an impact on all four constructs of a market-oriented

strategy.

1.4. Choice of the Software Industry

The U.S. software industry is selected for this research. The selection is
based on several factors. First, the choice is consistent with the need for research
on high technology products. According to Gatignon and Robertson (1989,p.35),
until recently, the marketing literature has been biased toward mature consumer
goods. Therefore, there is a need to develop a perspective on products with "high

technology innovations, more compatible with the more general focus on

9

technology now emerging within the marketing field.“

Second, there has been an interest in research on information intensive
industries in the marketing literature. An industry is information intensive to the
degree that its products are based on the information collected and processed as
part of exchanges along the value-added chain (Glazer 1991). The software
industry fits such a profile. In the software industry, information is the major
component of a software product. For example, the programming of a computer-
aided design software requires not only knowledge about technological
programming, but also information about plant operations, and quality and
productivity specifications.

Third, investigation on product innovation should be conducted in an
"innovation-rich" environment. The software industry is prolific in innovative
products, ranging from improved software to breakthrough software. The annual
sales growth in the software industry has been at 25% over the last ten years, a
rate higher than that of any other industries. The phenomenal growth is mainly
fueled by new software introductions.

Based on a combination of these factors, it is worthwhile to use the software
industry as a vehicle to study the impact of a market-oriented strategy on
competitiveness in product innovation. The principles uncovered from this research
may improve our understanding of both the software industry and other related

information intensive industries.

10
1.5. Expected Contributions of the Research

The research is expected to contribute to the study of product innovation
in several ways. First, a comprehensive model of a market-oriented strategy in
product innovation is constructed to take into account of all four major
components of market orientation: customer knowledge focus, integral knowledge
focus, competitor knowledge focus, and R&D strength. This model will be the first
of its kind in product innovation research.

Second, the effect of a market-oriented strategy on competitiveness in
product innovation and market performance will be investigated empirically. The
results from such a study will be particularly useful to practitioners since their major
interest in product innovation is to improve their organizational performance and
competitiveness in the market place. Further, for those practitioners who have
already pursued a market orientation in their work, positive results will further
reinforce their own experience and commitment.

Third, the contingency perspective will be integrated into the model to
investigate the relationship between the drivers of environmental factors and a
market-oriented strategy. Findings on the impact of these environmental factors will
shed light on the controversial issue of the contingency perspective and the market
oriented approach.

Finally, the industry selected for this research is the U.S. computer software
industry, an industry characterized by high rate of growth and innovativeness.
Although the computer software industry is one of the few industries that the U.S.

still holds a competitive advantage over its competitors, the nature of product

11
innovation in this industry is not well understood. Findings about product

innovation in the computer software industry will not only help practitioners in the
industry understand and realize their own potential but also offer insights on

competitiveness for managers in other fields.

Note 1: While some researchers (Day and Wensley 1988; Dickson 1992)
conceptualize a twin-orientation, e.g. pursuing both competitor focus
and customer focus, we have not come across any empirical studies
on the adoption of the twin-orientation in product innovation
literature. Narver and Slater’s (1990) study can be considered an
exception but their research is mainly on general business
orientation, not on product innovation.

CHAPTER TWO

LITERATURE REVIEW AND THEORY CONSTRUCTION

2.1. Traditional Perspective of Innovation

The traditional research on product innovation was dominated by the
"Schumpeterian theory“, a theory customarily attributed to Schumpeter in the
literature but actually developed and crystallized by Galbraith (1952) and several
other economists (Adams 1970; Fisher and Temin 1973; Horowitz 1962; Scherer
1965). This theory is generally recognized as consisting of two interrelated sub-
models: the input effect model and the size effect model (Kamien, Schwartz 1982).

The input effect model is R&0-centered with product innovation considered
as the sole domain of the R&D engineers and scientists. The innovation success,
according to the model, depends on the scale of investment on R&D. The higher
the level of R&D investment, the more likely a firm will achieve innovation success.
The production function schedule, which is commonly used in microeconomics to
associate physical rate of input in production with physical output, is applied in
describing mathematically the relationship between investment in R&D and
innovation successes. Two measures of R&D input are often adopted: the number
of scientists and engineers specifically assigned to 8&0, and the amount of
expenditure designated for R80. A number of surrogates are used to measure
innovation outcomes including number of patents obtained, number of new

products developed, or rate of return on investment achieved.

12

13

In the size effect model, the firm size is viewed as the causal variable that
exerts a positive impact on a firm's innovativeness. Therefore, the larger the firm
size, the more innovative the firm will be. Further, large firms, according to the
Schumpeterian economists, are more than proportionately more innovative than
small firms. The large firm’s innovativeness is attributed to a number of factors
including the large firms’ ability to finance a larger research and development staff,
their possession of economies of scale in research and development, and their
access to more opportunities to diversify their research and development projects.

In addition to the input and size effect models, the philosophical foundation
of the traditional approach is the product concept which holds that customers will
always favor those new products that are most technologically advanced. The
product concept is also commonly referred to as the "technology sells” concept
(Penn,Jr. and Mougel 1978) or ”technology-push“ hypothesis (Phillips 1966).
2.1.1. Crlthue of the Tradltlonal Approach

While the traditional approach to innovation has been useful in highlighting
the importance of innovation and the role of R80, the perspective suffers from
several critical weaknesses. First, the traditional approach is inward-oriented
because it treats R&D as the only source of innovation and overlooks the impact
of market demand and customer needs on firm’s innovation activities. Such an
orientation may lead to two pitfalls. On the one hand, firms with an inward
orientation may miss innovation opportunities offered by emerging customer
demand and needs. On the other hand, new innovative products introduced by

those firms may not be accepted by the market since information about customer

14

needs is not integrated into the innovation process. Long recognizing the
drawbacks of the traditional approach, Utterback (1971 ,p.81) argues that the main
limitation of such an inward-orientation "appears to be its ability and perhaps
aggressiveness in recognizing needs and demands in its external environment".

A second limitation of the traditional view is that it largely ignores the impact
of competitors on the firm’s innovation activities. In the real world, the firm
formulates its innovation strategy in response to its external competitive
environment. When the competitor has already developed a superior product, the
firm may not want to compete head-on with the competitor but adopt a
differentiation strategy to nullify the competitor’s advantage. When the rival
company is financially stronger, the firm may not want to outspend its competitor
in innovation but adopt a immediate follower’s approach with an imitated product.
It is hard to imagine that a firm can succeed in innovation by focusing exclusively
on the scale of R80 investment without considering its external environment as
suggested by the traditional perspective.

A third deficiency of the traditional view is that it treats R80 as the only
source of innovation and neglects other sources within the firm. Researches
(Gupta, Raj, and Wilemon 1986) on innovation have demonstrated that product
innovation is a multidisciplinary process and it is essential to recognize efforts from
other departments and to systematically integrate them with those of . R80.
Excluding contributions from other functional areas is not only conceptually
deficient but also practically unacceptable since it severely limits a firm’s chances

of success in innovation.

15

A fourth weakness of the traditional view is that it overlooks the effect of
innovation on firm size and performance. In the traditional model, firm size is
hypothesized as the causal factor and the larger the firm size, the more innovative
the firm will be. However in practice, the direction of causality may be reversible
since firm size can be the consequence of innovation rather than a cause. This
appears to be the case in the PC software industry where small firms such as
Microsoft Corporation and Lotus Development Corporation have grown into large
firms through offering innovative products while the traditional large firms such as
IBM and Texas Instrument have failed to catch major share in this market.

Finally, the traditional model has not provided professionals in small and
medium size firms with much managerial guidance in their quest for
competitiveness in innovation. The two major factors that the traditional approach
focuses on are the scale of R80 investment and firm size for which small and
medium size firms normally are limited in their ability to control in their competition
with large firms. On the contrary, the traditional model has offered little on the
factors that are within the firm’s ability to manage such as the interaction with

customers and the response to competitors.

2.2. The Need for a New Theoretlcal Structure

The deficiencies of the traditional view highlight the need for a theoretical
structure which:

(1) overcomes the inward orientation of the traditional model and assumes

a market-oriented strategy which takes consideration of customers, competitors,

16
marketing-R80 integration, and R80 strength.

(2) identifies the likely impact of a market orientation on firm’s
competitiveness in innovation and market performance.

(3) examines a set of contingent environmental factors such as customers,
competitors, and technology which moderates the effects of a marketpriented

strategy on performance.

2.3. Market-Orlented Strategy

A market-oriented strategy in product innovation is defined as a behavioral
approach aiming at creating superior value for buyers through new product
development. This strategy consists of two unique characteristics: a customer-
oriented objective and three behavioral components. While the strategy
emphasizes the three behavioral components, the importance of R80 investment
is not neglected. In this section, these two features are elaborated through an
integration of writings from various researchers who have contributed to the
development of this approach .over the last two decades.
2.3.1. Customer-Oriented Objective

First, a market-oriented strategy has an unequivocally customer-oriented
objective. In his classical research on product innovation, COOper (1979, p.98)
identifies the ”winners" as those market-oriented firms with an aim at developing
superior products that "met customer needs better than competing products;
allowed the customer to reduce costs or to do something previously impossible;

and were of higher quality than competing products.“ On a similar line of research,

17

Penn,Jr. and Mougel (1978, p.135) demonstrate that market oriented firms are
those that devote a concerted effort to “match the product to a customer need in
such a way that the customer perceived the benefits of using it.” Recently, this
customer-oriented objective is further reinforced by Newer and Slater (1990, p.21)
who define market orientation as "the organization culture that most effectively and
efficiently creates the necessary behaviors for the creation of superior value for
buyers and, thus, continuous superior performance for the business.“

The significance of customer-oriented objective lies in its resurrection of the
customer interest. In the traditional economic model of innovation, the customer
is normally neglected or at most treated as a passive adopter of new product.
Now, customer-orientation specifies without ambiguity that innovation must
accommodate customer interest. Further more, by an emphasis on the customer
interest, an unbiased criterion is created for evaluating innovation success, that is,
the creation of value for the customer and eventual market acceptance.

2.3.2. Three Behavioral Components

The second characteristic of a market-oriented strategy is its three
behavioral components. Among the limited number of models of market orientation
that exist in the literature, the conceptual model by Narver and Slater (1990) has
received particular attention. The model assumes that a market orientation is
composed of three behavioral components: customer focus, competitor focus, and
interfunctional coordination. While the authors define ”customer focus” as the
sufficient understanding of one’s target buyers, and "competitor focus" as the

sufficient understanding of the short-term strengths and weaknesses of key

18

competitors, they consider "interfunctional coordination" as the coordinated
utilization of company resources in creating superior value for target customers.
Narver and Slater’s three-component model is also consistent with the perspective
of an earlier model by Kohli and Jaworski (1990) who propose that a market
orientation consists of two fundamental pillars, customer focus and coordinated
marketing. Kohli and Jaworski (1990, p.6) define market orientation as "the
organizationwide generation of market intelligence pertaining to current and future
customer needs, dissemination of the intelligence across departments, and
organizationwide responsiveness to it." Although competitor intelligence is not
expressed as a component in the model, the authors implicitly include competitor
information as part of general market intelligence the firm must acquire.

In this research, while I adopt the perspective of the three-component
model, my operationalization of a market-oriented strategy is distinctive on several
aspects. First, I consider knowledge generation the essence of all three behavioral
components. Thus I reconceptualize the three components as customer
knowledge focus, integral knowledge focus, and competitor knowledge focus. My
reconceptualization is based on Drucker's theory of knowledge-based innovation.
In his book Innovation and Entrepreneurship (1985), Drucker raises several
propositions on product innovation which are summarized in the following:

- Product innovation is knowledge-based.

- Success of product innovation requires market knowledge,

technological knowledge, and an integration of market knowledge

and technological knowledge.

19

- Knowledge-based innovation should be market-focused and market-
driven.

Second, I treat the three behavioral components as three individual constructs
whereas in Newer and Slater’s model the three components were combined
together (the weighted average scores were used) to represent one construct,
market orientation. This treatment is in line with several works on the subject. For
example, Day and Wensley (1988) consider customer focus distinguishable from
competitor focus and conclude an effective marketing strategy requires a balanced
mix of the two. Similarly, Dickson (1992, p.78) argues "a competitive focus is not
an alternative to a customer focus; the greater the competition, the greater the
firm’s need to focus on and sewe the customer better than the competition.”
Furthermore, other researchers (Griffin 1989; Gupta, Raj, and Wilemon 1986) treat
functional coordination as an independent construct in their research on product
innovation strategy. Third, my conceptual development of the three behavioral
components in the next section will be primarily based on contributions from
researchers on product innovation since these contributions are most relevant to
the subject of this study.
2.3.2A. Customer Knowledge Focus

Customer knowledge focus is defined as the generation of knowledge
pertaining to customer needs of new products. Specifically, customer knowledge
focus consists of two aspects: customer information acquisition and interpretation.
These two aspects of customer knowledge focus provide an understanding of two

key questions in regard to the generation of customer information:

20

1. How customer information can be acquired?

2. How customer information can be interpreted?

Information acquisition. In order to understand customer needs for new
products, information about their needs must be acquired first. Interaction with
customers is the most efficient way to acquire such information since customer
needs and preferences are normally complex and sophisticated and can only be
understood by direct communication. Several researchers have cited complexity
of customer needs as the main reason for customer interaction. For example,
Griffin and Hauser (1991) classify buyer’s needs into basic needs, articulated
needs, and surprise needs and propose focus group and one-on-one intewiew as
an effective means to tap such needs. Kohli and Jaworski (1990), on the other
hand, use the dichotomy of current needs and future needs and propose such
interaction mechanism as discussions, meetings, and information exchange as a
way to understand them. Further, von Hippel (1977, 1978, 1986) introduces the
concept of lead user’s needs, the needs that face a small group of users months
or years before the bulk of that marketplace encounters them. The author
recommends the use of personal intewiews and problem solving sessions to
uncover such needs. The importance of customer interaction in generating
customer information is empirically supported by Cooper (1979, 1992), and
Rothwell and Robertson (1975) who demonstrate that customer interaction. is a
major factor contributing to innovation success and lack of such interaction is a
main reason behind innovation failure. Table 2.1. is an ovewiew of selected

literature on customer information acquisition.

 

//

21

TABLE 2.1.

Overview of Studies on Customer Knowledge Generation

 

 

Information Acquisition
Selected literature Means of acquisition Reasons for acquisition
Utterback (1977) informal, formal, oral obtaining information about
communication needs, technical possibilities,
generating and developing new
product ideas
Kohli and Jaworski (1990) meetings, discussions, obtaining information about current
information exchange and future needs and preferences
Rothwell and Robertson personal contact interaction leads to success
(1975)
Ram (1989) face to face, printmedia reducing perceived risk, behavioral
resistance, modifying products
Von Hippel(1977,1978, personal interviews, obtaining information about
1986); Urban, and von problem solving sessions needs of lead users, benefits
Hippel(1988) expected from lead users
Grifl'm and Hauser (1991) focus groups, one-on- acquiring information about
one interview basic needs, articulated needs
surprise needs

 

 

Selected Literature Means of interpretation Reasons for interpretation

Grimn and Hauser identifying,struauring making customer needs manageable,

(1991) prioritizing customer finding gaps between needs and

Griffin (1992) needs (bottom up) product offered, matching needs
with product attributes

Meyers and Athaide knowledge sharing, finding a match between

(1991) infusion, generation known/ emerging needs with
stable/ evolving technology

Holak and Lehmann examination and finding a match between new

(1990) evaluation of attn'butcs: product design and customer

relative advantage, preference, increasing acceptability

compatibility complexity, and reducing risk
divisibility (top down)

 

 

 

 

 

22

Information interpretation. Once information is acquired, it needs to be
processed and interpreted because the initial information is normally unorganized
and unstructured and thus inappropriate to be used as an input in innovation
process. The necessity of information interpretation has been the research focus
of several authors. Griffin and Hauser (1991) argue that in order to make
information about customer needs manageable and close the gap between
unprocessed customer needs and product attributes offered by innovation, the
company should employ well structured methods in information interpretation.
Accordingly, the authors introduce an approach in which various customer needs
are (1) identified through focus groups; then (2) structured into a hierarchy of
primary needs (also called strategic needs which set the strategic direction for the
new product), secondary needs (also known as tactical needs which indicate more
specifically what can be done to fulfill the corresponding primary needs), and
tertiary needs (also called operational needs which provide detailed requirements
to R80); and eventually (3) prioritized into ranked groups that can help the firm
make decisions which balance the cost of fulfilling a need and the benefit to the
customer. In another study, Meyers and Athaide (1991) suggest that information
interpretation is the key in finding a match between customer needs and
technology. They classify customer needs into two kinds: those that are known to
the market and those that are still emerging; and technology into two categories:
stable technology and evolving technology. To find a fit between needs and
technology, according to the authors, the firm should initiate an information

interpretation process called mutual learning in which the firm and the customer

23

share and infuse their respective knowledge and generate new integrated
knowledge. While many authors concentrate on a bottom-up approach in which
customer needs are processed first, and then product attributes are designed to
meet these needs, Holak and Lehmann (1990) introduce atop down approach in
which the firm presents its new product design to buyers and let buyers examine
and evaluate attributes of the product design on several dimensions of needs
including relative advantage, compatibility, complexity, and divisibility. Such a
method is helpful in increasing the customer acceptability of a new product and
reducing the customer perceived risk. Table 2.1 presents a brief literature review
on information interpretation.

2.3.28. Integral Knowledge Focus

Integral knowledge focus is defined as the generation of integrated
knowledge of solution to customer needs through marketing-R80 communication
and cooperation.

Integral knowledge is critical to product innovation because of the nature of
new product development. According to Griffin and Hauser (1991) new product
development is a process of synthesizing the knowledge of what is needed in the
market and the knowledge of how to create a product to meet the need. While the
knowledge of what is needed is normally best possessed by the marketing function
because of its close ties with the market, the knowledge of how to produce is best
manifested by the R80 function because of its technological specialization.
However, if the two functions are secluded from each other, the knowledge of what

is needed in the market and the knowledge of how to produce will be isolated,

24

resulting in a mismatch between what is produced and what is needed. On the
other hand, when the two functions communicate and cooperate with each other,
their abilities to produce successful products will increase. In a similar line of
argument, Moenaert and Souder (1990) propose that product innovation is a
process of reducing innovative uncertainty. The innovative uncertainty exists
because there is normally a gap between unrealized user requirements and
knowledge about technological solutions. When marketing and R80 functions are
integrated, such a gap will be narrowed or closed thus reducing the innovative
uncertainty. However, if the two functions are insulated from each other, the gap
will stay untouched and the innovative uncertainty will remain.

Because of its impact on product innovation success, knowledge integration
has been the focus of a number of conceptual and empirical studies (Cooper
1983, 1984; COOper and de Brentani 1991; Griffin and Hauser 1991; Gupta, Raj,
and \Mlemon 1986; Pinto and Pinto 1990; Souder 1978, 1988). In each study, the
researchers either support or are consistent with the hypothesis that knowledge
integration enhances success. Summarizing the findings of these studies, Griffin
and Hauser (1991, p.5) conclude that the evidence of knowledge integration
leading to success is ”strong, consistent, common to a variety of methodologies,
and seemingly applicable in both sewices and products and in both consumer and
industrial markets. Few, if any, management principles are based on such univocal
evidence"

Marketing-R80 Communication. Communication plays a key role since the

two functions integrate their knowledge through communication and the intensity

25

of their communication has a direct impact on success of new product
development. The importance of communication is demonstrated by several
studies on product innovation. Utterback (1971) suggests that communication is
the key in matching market needs and technical possibilities and developing new
product ideas. Pinto and Pinto (1990) uncover a strong positive relationship
between cross-functional communication and success of new product development
project. Dougherty (1987), in a comprehensive research on innovation and
communication, studied pairs of successful and unsuccessful new-product projects
and revealed that the intensity of communication between functions on all relevant
topics separated successful projects from unsuccessful projects. Further, Gupta,
Raj, and Wilemon (1985) find that lack of communication is the number one barrier
to achieving knowledge integration. Table 2.2. offers an ovewiew of selected
literature that demonstrates the importance of communication in achieving
marketing-R80 knowledge integration.
Marketing-R80 cooperation. Marketing and R80 functions can cooperate
in a number of ways. The first is task specification. Griffin and Hauser (1991)
classify functional responsibilities into three categories: 1) marketing dominant
responsibilities, 2) R80 dominant responsibilities, and 3) shared responsibilities.
The shared responsibilities are those core tasks, such as setting new-product
goals and establishing the core benefit proposition for new product, that require
cooperation and combined expertise of both functional groups throughout the
period of the task and upon which the success of the enterprise rests. In task

specification, those responsibilities and activities that are needed to be shared are

26

TABLE 2.2.

Overview of Studies on Marketing-R&D Knowledge Integration

 

Marketing-R&D Communication

Selected literature

Evidence

 

 

Doushcl’ty (1937)

de Brentani (1989)

Gupta,Raj,and Wilemon
(1985)

Pinto, Mary Beth and
Jeffrey K. Pinto (1990)

The intensity of communication on all relevant
topics separated successful projects from
unsuccessful projects.

Communication between functions in the process of
product innovation had a positive impact on sales and
market share.

Lack of communication was found to be the number one
barrier to achieving integration among marketing and
R&D.

Strong positive relationship existed between cross-
functional communication and success of the new project.

 

 

 

Rothwell and Robertson Poor communication between functions contributed to

(1975) innovation failure.

Utterback (1971) Communication is the key in developing new product
ideas and matching market needs and technical
possrhilities.

Marketing-R&D Cooperation

Selected literature

Mechanism suggested

Reasons for cooperation

 

 

Moenaert and Souder (1990)

Griffin and Hauser (1992)

Souder (1987, 1988)

Wheelwright, and Ciark(1992)

 

task specification,
organizational structural
design, organizational
climate

organizational structure,
shared responsibilities,
organizational culture

specification of core
benefits and shared
responsibilities

joint decision making
process

 

interdependence of R&D and
marketing, synergy effect,
integration leads to success, reduce
information uncertainty

interdependence of market
opportunities & technological
feasibility, integration

leads to success

matching market needs with product
benefits

reducing barriers to cooperation

 

 

27
explicitly specified and planned, thus providing a direction for functional

cooperation (Cooper 1983; Griffin and Hauser 1991; Moenaet and Souder 1990).
The second mechanism for cooperation is the design of organizational structure.
In a study of 80 technology intensive companies, Gupta and Wilemon (1988) found
organization structures that facilitate cooperation normally possess a number of
distinctive characteristics such as harmonious operation, decentralization,
innovativeness, c00peration, and joint reward system. Organizational structures
that demonstrate these characteristiCs have been proposed and explored,
including multidisciplinary groups (Moenaert and Souder 1990), coordinating
groups (Lorsch and Lawrence 1965; Griffin and Hauser 1991), project or program
teams (Marguis and Straight 1965; Griffin and Hauser 1991), the new product
committee (Souder 1987, 1988), and matrix organization (Babcock 1991 ). The third
mechanism for cooperation is the promotion of an organizational culture that
nourishes functional cooperation. Although a short-term marketing and R80
cooperation may be achieved through administrative means, this cooperation
cannot sustain without a supportive organizational culture. As proposed by
Moenaert and Souder (1990, p.96), “promoting an ingrained cultural sense of
coordination and integration among its members may be the most effective
mechanism" for cooperation. Table 2.2 provides a short summary of the studies
that propose the three mechanisms for cooperation.
2.3.26. Competitor Knowledge Focus

Competitor knowledge focus is the third component of a market-oriented

strategy. According to Day and Wensley (1983, 1988) and Kctler (1988), the

28

adoption of a competitor knowledge focus is a recent phenomenon resulting from
the intensified competition in the market. Since the late 705 and the early 805,
competition is characterized by the increasing number of foreign firms entering the
U.S. market (Ohmae 1986), the shortening of product life cycle and new product
development time (Edgett, Shipley, and Forbes 1992), and rapid diffusion of new
technology (Gatignon and Robertson 1989). With competition ever sharpening,
”having an understanding of customers is not enough today“ (Kctler 1988, p.234)
since competitors may (1) develop a superior new product that can better satisfy
customer needs, (2) launch a similar product ahead of your firm, or (3) produce
an imitated version of your product with better functions. Consequently, “today’s
companies are starting to pay as much attention to tracking their competitors as
to understanding their target customers." (Kctler 1988, p.234)

Specifically, competitor knowledge focus means the generation of
competitor knowledge on the weakness and strengths of competitors’ products
through competitor information acquisition and interpretation. 1

Competitor information acquisition. It is important to acquire competitor
information because such information provides diagnostic value in the analysis of
competitive positioning (Day and Wensley 1988). In product innovation, firms can
be generally classified into any of the three positions: positional inferiority,
positional parity, and positional superiority. In positional inferiority, the firm. is
inferior to its major competitors on key dimensions of product innovation such as
technology ownership, resource control, and product characteristics (functions,

forms, performance). In positional parity, the firm gains identical footing on these

29

dimensions with its rivalry. In positional superiority, the firm is superior to its
competitors on these dimensions. However, without competitor information
acquisition it will be impossible to diagnose the firm’s position since there is no
framework of comparison. As stated by Day and Wensley (1988), competitor
information provides the standard of comparison in assessing advantage. To fully
realize the diagnostic value of competitor intelligence, several studies examine what
types of competitor information are needed for acquisition. Table 2.3. presents a
brief view of these studies.

Competitor information interpretation. Once competitor information is
acquired, it should be interpreted and utilized to create competitive advantage. The
value chain analysis proposed by Day and Wensley (1988) provides a proper
conceptual framework to interpret and utilize competitor information. The value
chain can be classified into two types: the internal chain and the external chain.
The internal value chain is linked by value-added activities within a functional area
whereas the external value chain is joined by value-added activities of different
functional areas. Lawless and Fisher (1990) propose that along the internal chain
in product innovation, three links are essential. They identify these links as design
of product function (physical attributes relating to a new product’s instrumental
performance), design of product form (physical attributes relating to a new
product’s aesthetic design), and design of product intangibles (nonphysical
product characteristics). To create competitive advantage, the firm needs to
compare its capabilities with those of its competitors in creating customer value

along these links. Then, the firm should concentrate its efforts on those activities

30

TABLE 2.3.

Overview of Studies on Competitor Knowledge Focus

Selected literature

 

Competitor Information Acquisition

Information required

 

Narver and Slater (1990)

Day and Wensley (1988)

Maidique and Patch (1978)

Rothschfld (1979)

 

Selected literature

Competitor Information Interpretation

short-term strengths and weaknesses, and long-term
capabilities and strategies of the key competitors

strengths and weaknesses, technological skills,
relative size of resources, cost structure, attribute ratings of
products

product development strategy, technology selection or
specialization, level of competence, sources of
capabilities, R&D investment level, competitive
timing: initiate versus respond, customer perceptions

technical resources: concepts, patents and copyrights,
technological sophistication; human resources: key people and
skills, use of external groups; funding: total, percentage of
sales, internally generated, market response

 

 

Creating advantage

 

Lawless and Fisher (1990)

Cooper (1979, 1992)

Edgctt. Shipley,
and Forbes (1992)

 

creating strategic non-imitability in product form,
product function, and product intangibles

4

creating unique and superior product (unique features, higher
quality, better customer perception)

superior quality, superior reliability, superior
design

 

31

that (1) can result in product attributes valued by customers, (2) can produce
those product characteristics that are not easily imitated by competitors, and (3)
the firm is capable of doing. In addition, the external chain, which consists of
production, packaging, promotion, pricing, and distribution, can be analyzed in a
similar manner to determine how to facilitate the success of new product. However,
in product innovation, the analysis of the internal chain is of primary importance
since the major task here is to create a competitive new product.
2.320. nan Strength

While this study criticizes the economics view on R&D investment, it is not
my intention to underestimate the role of R&D investment in product innovation. On
the contrary, I do consider R80 strength is an important factor in product
innovation. Together with the other three behavioral components of a market-
oriented strategy, it will exert an positive impact on competitiveness in product

innovation.

2.4. Outcome Measures of Market-Oriented Strategy

The outcome measures of a market-oriented strategy can be classified into
two types: those embodied in the product characteristics such as product quality,
reliability and uniqueness, and those reflected in the firm’s market achievements
such as profitability and sales revenue. While those embodied in the product
characteristics can be summarized as competitiveness in product innovation, those
reflected in the firm’s market achievements can be generalized as market

performance. Further, competitiveness in product innovation is considered as the

32

direct measure of a market oriented strategy and market performance is the
indirect measure that is moderated upon by the direct measure.
2.4.1. Competitiveness In Product Innovation

Competitiveness in product innovation refers to a firm’s ability to develop
new products that create customer value more effectively and efficiently than
competitors (Kctler 1988). However, such competitiveness can not be gauged by
a single measure since a single measure reflects only one facet of the construct.
A synthesis of the previous studies suggests competitiveness can be measured in
two dimensions: customer attributes dimension, and efficiency and effectiveness
dimension. Table 2.4. presents an ovewiew of the two dimensions used in the
literature.

Customer attributes. Customer attributes dimension measures the firm’s
ability to meet customer needs on major product attributes such as new product
quality, reliability, design, newness, and uniqueness. In recent years, customer
attributes dimension has been adopted widely by researchers (Crawford 1987;
. Cooper 1979, 1983, 1985, 1992; Edgett, Shipley, and Forbes 1992; Griffin and
Hauser 1991; Wheelwright and Clark 1992) in product innovation because it
provides a more concrete picture of the firm’s competitiveness in product
innovation. Further, such measures can be adapted minutely to different product
categories as has been done by Wheelwright and Clark (1992, p.230) who offer
an example of using accuracy, smoothness, weight, quietness, compactness,
reliability etc. to measure competitiveness in gear products.

Efficiency and effectiveness. Efficiency and effectiveness in product

33

TABLE 2.4.

Competitiveness in Product Innovation

 

Customer Attribute Dimension

Selected literature

Description

 

 

Cooper (1983)

Cooper (1992)

Edgett, Shipley
and Forbes (1990)

Wheelwright and Clark
(1992)

Products offer unique features to customers

Products have better quality than competing products ‘
Products allow the customer to reduce costs

Products allow the customer to increase work efficiency

Product superiority/ quality
Economic advantage

Products superior to competition in quality, design,

reliability, value for money,

Products superior to competitor in reliability, accuracy,
smoothness, cost, weight, sound, wait time, etc.

 

 

Efficiency and Effectiveness Dimension

Selected literature

Description

 

 

Cooper and
Kleinschmidt (1991)

Millson, Raj, and
Wilemon (1992)

Wheelwright and Clark
(1992)

Firm’s ability to develop product faster than competition
Firm’s ability to develop product on target

Firm’s ability to accelerating new product development

Speed: firm’s ability to design and bring new products
quickly in response to competition

Productivity: firm’s ability to exploit product variety,
to utilize resources more efficiently per project

 

 

 

34

innovation refer to the firm’s ability to develop new products more quickly and
productively than competitors (Wheelwright and Clark, 1992). The importance of
speed as a competitiveness measure has been long recognized by researchers
in product innovation (Cooper 1979; Millson, Raj and Wilemon 1992). In recent
years, with the shortening of product life cycle and rapid diffusion of technology,
bringing new products faster to the market becomes even more critical. In addition
to speed, Wheelwright and Clark (1992) propose using innovation productivity as
another measure of competitiveness. They (1992, p.5) argue “because the number
of new products and new process technologies has increased while model lives
and life cycles have shrunk, firms must mount more development projects than has
traditionally been the case utilizing substantially fewer resources per project.“
2.4.2. Market Performance

The literature suggests that profitability is the major performance measure
for a market orientation since profitability is the overriding objective for businesses
(Kohli and Jaworski 1990; Nawer and Slater 1990). However, for organizational
innovativeness, other financial measures such as return on investment and sales
growth are also found to be valid measures (Deshpande, Farley, and Webster
1993). In this study, I take a compromise position and adopt an integrated
measure of performance which includes profitability, return on investment, and

sales growth.

35
2.5. Environmental Factors: A Contingency Perspective

In the previous section, I deveIOp a framework for a market-oriented
strategy. This section presents a contingency theory which integrates
environmental factors with a market-oriented strategy. Specifically, this theory
proposes that the extent to which a firm adopts a market-oriented strategy is
influenced by three drivers of environmental factors: customer demandingness,
competition intensity, and technology change.

This section is divided into three portions. First, I conduct a literature review
on environmental perspective so that a better understanding of the historic
background of the contingency theory can be achieved. Second, the contribution
from management science is examined since the development of contingency
theory was mainly attributed to professionals in this discipline. Third, I review how
marketing discipline contributed to environmental perspective through
conceptualization of three major market factors. Finally, the three environmental
factors that exert an impact on a market-oriented strategy are introduced and
discussed.

2.5.1. Ecology and Environmental Perspective

The study of the impact of environmental factors was not only initiated
historically by ecologists but also has been their research focus ever since.
According to ecological theories (Farb 1963), environment, which is defined as the
surrounding of an individual organism or a community of organisms that is able to
sustain life, has a direct impact on the way of living adopted by different species.

The environmental impact can be obsewed in several ways: (1) Each species has

36

to adapt its way of living to environment; (2) A particular way of living may be
associated with a specific type of environment; (3) A species that adapts well will
suwive; and (4) A species that can not adapt will perish (Farb 1963; Emlen 1973).

Human ecology extended the theory of environmental impact to the
relationship between human beings and their natural and physical environment,
and found many cases where different ways of life were associated with different
habitats of environment (Hawley 1950). For example, in his classical case study,
Barth (1956) discovered that in a mountainous area in Pakistan, three ethnics
groups, the Kohistanis, the Pathans, and the Gujars, lived in three different habitats
- the valley, the mountain, and the marginal area in between. As a result of their
heterogeneous habitats of environment, each ethnic group adopted a different way
of life.

The ecological view was pivotal in our understanding of environment and
human behavior. For the first time, human behavior was no longer seen as a
isolated phenomenon, but a function of its surroundings. Most importantly, the
concepts created by ecologists, such as environment, environmental impact, and
adaptation, have laid theoretical ground work for study of the relationship between
environment and human behavior by other disciplines.

2.5.2. Management and Environmental Perspective

Applying the ecological approach to the study of organizational behavior,
researchers in management tend to ”view the environment as a deterministic
influence to which organizations adapt their strategies, structures, and processes"

(Zeithaml and Zeithaml 1984). This transformation of the ecological view to the

37
organizational contingency perspective was reflected particularly in landmark

research such as Duncan (1972), Lawrence and Lorsch (1967), and Neghandiand
Reimann (1973). As a group, these authors posit that (1) a firm’s external
environment changes over time; (2) the changing environment influences firm’s
strategic choice and economic performance; and (3) firms that do not respond to
changes in external environment cannot compete effectively. Guided by the
contingency approach, a stream of literature was formed in organizational behavior
to explore what environmental factors may affect a firm (Downey, Hellriegial, and
Slocum 1975); what strategies may be formulated to respond to changes in
environment (Bourgeois 1980; l-lofer 1975); and what conditions may result in a
fit between a firm’s strategy and changing environment (Stoner 1982).

In summary, the contingency perspective conceptualizes the environment
as a causal variable: organizational performance is dependent upon the efficient
and effective adaptation of organizational strategies to environmental contingencies
(Zeithaml and Zeithaml 1984).

The emergence of contingency perspective is a landmark in research on
organization and strategy. Prior to the contingency approach, the study of
organization was dominated by the classical and quantitative schools of
management thought which focused solely on the internal operations of a firm
such as job design, specialization, productivity, and structure. However, in their
concern with the internal environment, they underplayed the importance of the
external environment. In contrast to the classical approaches, the contingency

theory emphasizes the interaction between a firm and its external environment and

38

uncovers the dependent relationship between a firm’s strategy and its external
market factors. Most significantly, the contingency theory views external
environment as dynamic rather than static and establishes the analysis of the
changing environment as a prerequisite in a firm’s formulation of strategy.

2.5.3. Marketing and. Environmental Perspective

Influenced by the ecological view and the organizational contingency theory,
marketing literature also emphasizes the importance of the environmental impact.
Further more, through integrating the ideas from the allied disciplines with
marketing experience, researchers in marketing have contributed uniquely to the
development of the environmental perspective.
2.5.3A. Customer as an Environmental Factor

First, marketing discipline, through the marketing concept, established
customer needs and wants as the primary environmental factor that impacts the
firm’s strategy and goal achievement. This view of customer priority is reflected in
Kotler’s interpretation of the marketing concept (1988, p.17):

“The marketing concept holds that the key to achieving organizational goals
consists in determining the needs and wants of target markets and delivering the
desired satisfactions more effectively and efficiently than competitors.“

Therefore, the organization should first determine what the customer’s
needs and wants are, analyze opportunities offered by the market demand,
structure organizational goals, then design marketing strategies to satisfy such
needs and wants better than competitors.

The view that customer needs and wants are primary and the company

39
must adapt its strategy to meet these needs and wants is considered a break-

through in managerial thinking (Sheth, Gardner, and Garrett 1988, p.97). Prior to
the marketing concept, managerial principles, such as the product concept and the
production concept, took the position that the company was the center of the
business universe and the company should be skillful in making the customer do
what suits the interests of the business. With the adoption of the marketing
concept, this position is reversed as indicated by one of the pioneers of the
concept, McKitterick (1957):

“So the principal task of the marketing function in a management concept
is not so much to be skillful in making the customer do what suits the interests of
the business as to be skillful in conceiving and then making the business do what
suits the interests of the customer.“

2.5.38. Competitor as an Environmental Factor

The second contribution of marketing discipline to the environmental
perspective is the identification of the competitor as a main factOr influencing a
firm’s strategy. The emphasis on competitor can be found in several writings. For
examme, Lehmann and Winer (1988, p.8) point out:"Monitoring competitors’
strategies and anticipating their future moves is a key to the development of
successful marketing strategy.“

Similarly, Kctler argues (1988, p.234):"The fact is that knowing one’s
competitors is critical to effective marketing planning. The company should
constantly compare its products, prices, channels, and promotion with those of its

close competitors. In this way, it can discern areas of potential competitive

advantage and disadvantage.“

Hence, the design of an effective strategy depends on sufficient
understanding of the competitor. On the one hand, the organization must learn
major characteristics of its competitors such as their capabilities, objectives,
strategies, strengths and weakness in order to design a strategy to gain differential
advantages over competitors. On the other hand, the firm must constantly monitor
moves from its competitors and adjust its strategy accordingly to maintain its
competitive advantage.

The explicit recognition of competitive forces as a major environmental
factor is no coincidence but reflects the reality of today’s competitive market.
Among the U.S. firms, competitive pressures are so intense that gains in sales
volume and market share by one company are often derived from the losses by
other firms. Further, foreign companies have made much erosion into many of the
product markets such as automobile, airplane, and electronics which were
traditionally dominated by the U.S. organizations. Under such competitive

conditions, firms that neglect competitors are doomed to failure.

2.5.30. Technology as an Environmental Factor

In addition to competitive impact, the effect of technology on business
strategy also receives great attention in marketing. Technology is defined as
"technical skills and equipment that affect the way an economy’s resources are
converted to output,” (McCarthy and Perreault 1993, p.121). In the last two

decades, technological change has been accelerated and become a major factor

41
of instability, as stated by Capon and Glazer (1987, p.1) that “it is by now apparent
that a major engine of the unprecedented instability is technology or, more
precisely, the emergence of rapidly changing technologies into the environment.“
The accelerating pace of technological change exerts a major impact on firm’s
strategic formulation since such change can shorten product life cycle, create

market segment instability, and shift product market boundaries.

2.6. Environmental Factors and Market-Oriented Strategy

The three major environmental factors, customer, competitor, and
technology, are the major drivers for the adoption of a market-oriented strategy.
In this section, the characteristics of these drivers are examined.
2.6.1. Customer Demandingness

Customer demandingness refers to the level of buyers’ requirement for
product performance such as quality and reliability, and their knowledge about
technical standards and specifications. These customer features have a profound
impact on innovation strategy and performance. Porter (1990) obsewes in his
book, Competitive Advantage of Nations, that sophisticated and demanding
customers are a major‘demand factor that drives firms to update innovation and
achieve superior performance.

In recent years, this demand factor has become more significant as there
has been a steady increase in customer s0phistication and demandingness for the
products they want to buy. This characteristic of demand factor is emphasized by

Wheelwright and Clark (1992, p.2) who argue in their book, Revolutionizing

42
Product Development, that “Customers have grown more sophisticated and

demanding. Previously unheard of levels of performance and reliability are today
the expected standard. Increasing sophistication means that customers are more
sensitive to nuances and differences in a product, and are attracted to products
that provide solutions to their particular problems and needs.“

As customers become more demanding, firms are prompted to focus more
intensely on their needs and wants in order to develop needs-satisfying products
with superior value, thus highlighting the importance of customer focus in product
innovation.

2.6.2. Competltlon Intensity

The second environmental factor that provides a stimulus for a market
orientation is competition which has become more intensified over the last two
decades. This can be obsewed in two aspects. First, the entry barriers many firms
used in the past to protect themselves have become less protective. According to
Capon and Glazer (1987, p.3), because of rapid dispersion of technology and
corresponding decrease in technology proprietorship, "markets and products are
less proprietary and entry barriers that firms have relied on to protect their
positions are coming down.“ Second, more and more firms have entered the global
market and posed serious threats to companies with a traditional domestic
approach, as noted by Wheelwright and Clark (1992, p.2) that "in businessafter
business, the number of competitors capable of competing at a world-class level
has grown at the same time that those competitors have become more

aggressive,“ resulting in a more competitive environment in which "the list of one’s

43

toughest competitors now includes firms that may have grown up in very different
environments in North America, Europe, and Asia."

The reduced protection from entry barriers and the growth of global
competition have exerted enormous pressure on firms to obsewe more closely
their competitors and continuously improve their competitive advantage through
product innovation thus signifying the imperativeness of adopting competitor focus.
2.6.3. Technology Change

The third environmental factor that impacts on product innovation is
technology. In today’s competitive market, technology is characterized by diversity
and rapid change. Diversity refers to the breadth and depth of technological
knowledge and equipment that are available in new product development. In the
last two decades, both the breadth and depth of technology have increased
resulting in a growth in ”the variety of possible solutions available to engineers and
marketers in their search for new products." (Wheelwright and Clark 1992, p.2) For
example, in automobile industry alone, the engine-drive train technology had grown
from 5 in 1970 to 33 in early 1980s.

Another feature of technology is its rapid dispersion and change. Ohmae
obsewes (1989, p.145), in industry after industry, technology has become more
diverse and firms, whose end products are used as input of technical skills and
components by other producers, are eager to "sell their products as wide a range
of customers as possible“. According to the author, "the inevitable result is the
rapid dispersion of technology“ and "no one can truly keep all critical technologies

out the hands of competitors around the globe."

44
In Section 2.6., through a synthesis of studies on environmental impact, I

develop a contingency perspective and identify three environmental factors that
may provide impetus for firms to pursue a market-oriented strategy in product
innovation. These factors are customer demandingness, competition intensity, and

technology change.

2.7. Top Management Perception of Market Knowledge

In addition to the external environmental factors, several authors suggest
that top management plays a key role in shaping an organization’s orientation and
values (Deshpande, Farley, Webster 1993; Felton 1959; Hambrick and Mason
1984, Kohli and Jaworski 1990). Summarizing the theme of these writers, Jaworski
and Kohli (1993, 55) note: "Unless an organization gets clear signals from top
managers about the importance of being responsive to customer needs, the
organization is not likely to be market-oriented. Top management reinforcement of
the importance of a market orientation is likely to encourage individuals in the
organization to track changing markets, share market intelligence with others in the
organization, and be responsive to market needs."

In a similar manner, when top management is more appreciative of the value
of market knowledge in product innovation, the organization is more likely to
pursue customer, competitor, and integral knowledge focuses. By contrast, iftop
management disregards the importance of market knowledge, the organization is
more likely to follow an inward orientation and be unresponsive to the market.

Therefore, I propose a positive relationship between the top management’s

45
perceived importance of market knowledge and the organization pursuit of market

orientation in product innovation.

2.8. Summary
In this Chapter, through a review and integration of literature in marketing
and product innovation I develop a model of a market-oriented strategy in product
innovation. Three levels of constructs are delineated: (1) market-oriented strategy
constructs, (2) outcome constructs, and (3) constructs of external and internal
factors. The development of the model leads to the following research questions:
1. Does the adoption of a market-oriented strategy have a postive impact on
competitiveness in product innovation?
2. Does competitiveness in product innovation lead to superior market
performance?

3. Do the external and internal factors influence a market-oriented strategy?

CHAPTER THREE

HYPOTHESES AND RESEARCH MEASUREMENT

In the previous chapter, through an integration of the market-oriented
approach and the contingency perspective I develop a model of a market-oriented
strategy in product innovation. In the model, three levels of constructs are identified
and delineated: constructs of a market-oriented strategy, constructs of innovation
outcomes, and constructs of external and internal factors. The development of the ,
model raises three key research questions: (1) Does each construct of a market-
oriented strategy exert an impact on firm’s competitiveness in product innovation?
(2) Does competitiveness in product innovation lead to superior market
performance? and (3) Does each construct of external and internal factors
influence a firm’s implementation. of a market-oriented strategy?

In this chapter I propose and develop a series of hypotheses to address
these research issues. In the first section, the relationship between each construct
of a market-oriented strategy and competitiveness in product innovation is
discussed and hypothesized. Next, the relationship between competitiveness in
product innovation and market performance is analyzed and postulated. Finally,
the relationship between each construct of external and internal factors and a

market-oriented strategy is examined and proposed.

46

47
3.1. Market-Oriented Strategy and Competitlveness In Product Innovation

3.1.1. Customer Knowledge Focus and Competitiveness In Product

Innovatlon

Several insights obtained from the literature pertain to the implementation
of customer knowledge focus and the consequence of such implementation. In a
study of 56 industrial firms in Europe, Sanchez and Elola (1991, p.51) provided
evidence supporting the view that customer knowledge focus is an industry-wide
practice. They noted: "Direct, permanent contact with customers is the most
frequent method of finding out whether or not there is a suitable market for the
new product, which correlates with the preponderance of market as a source of
new ideas." Further more, the authors found that customer knowledge focus
provides "the greatest stimulus to innovation in the industrial firms analyzed."

Similarly, COOper (1992, p.124) argued that customer knowledge focus
enhances product innovation success through an evaluation of true benefits and
value offered to customers by new products. The author explained that a customer
knowledge focus approach "which entailed discussion with key potential customers
would determine product performance requirements and confirm or refute that
proposed features were indeed customer benefits and of value to customers.“
Most importantly, in his decade-long research on NewProd project which involved
firms in the U.S., Canada, and Europe, Cooper (1979, 1983, 1985, 1992) identified
customer knowledge focus to understand and meet customer needs as one of the

most important factors in enhancing competitiveness in product innovation.

43

Not surprisingly, other researchers on product innovation reached similar
conclusion that customer knowledge focus strengthens competitiveness. For
example, in a comparative study of 116 Japanese firms and 86 British firms,
Edgett, Shipley, and Forbes (1992) identified customer focus to understand and
match customer needs as the most important factor contributing to innovation
competitiveness and success. On the other hand, among all the failure factors,
inability to understand customer needs was found to be the major cause of
product failure. Hence:

H“: The greater the customer knowledge focus of an organization, the

greater its competitiveness in product innovation.
3.1 .2. Integral Knowledge Focus and Competitlveness In Product Innovatlon

In the previous chapter I define integral knowledge focus as the generation
of solution pertaining to customer needs through marketing-R80 communication
and cooperation in the process of new product development. Integral knowledge
focus is critical to competitiveness in product innovation since market acceptance
of a new product depends on how well the firm synthesizes the knowledge of what
is needed in the market and the knowledge of how to produce it (Griffin and
Hauser 1991). While effective integration of marketing and R80 generates strong
infusion of the two types of knowledge thus resulting in customer needs being
better sewed, the seclusion of the two functions spawns a mismatch between
market needs and a company’s offering.

Because of its strong impact on competitiveness in product innovation,

integral knowledge focus has received extensive attention in the literature (Cooper

49
1983, 1984; COOper and de Brentani 1991; Griffin and Hauser 1991; Gupta, RBI.

and \Mlemon 1986; Pinto and Pinto 1990; Souder 1978, 1988). In each study, the
researchers either support or are consistent with the proposition that integral
knowledge focus enhances competitiveness in product innovation. Hence:

Hub: The greater the integral knowledge focus of an organization, the

greater its competitiveness in product innovation.

3.1.3. Competitor Knowledge Focus and Competitiveness In Product

Innovation

Competitor knowledge focus refers to generation of competitor information
on the weaknesses and strengths of the key current and potential competitors.
Competitor knowledge focus is strategically valuable since knowledge of the
competitor’s weakness and strengths allows an organization to create competitive
advantage in product innovation in three ways: (1) exploiting the competitor’s
weakness by pitching the organization’s strengths against the competitor’s
weakness, (2) internalizing the competitor’s strengths by first imitating and then
improving on the competitor’s strengths, or (3) avoiding the competitor’s strengths
by differentiating its products. Similarly, when being ignorant of its competitors”
activities, the organization’s strong position may be eroded by its more informed
foes. And for a week firm, it may further lag behind its rivals. Consequently,
"today’s companies are starting to pay as much attention to tracking their
competitors as to understanding their target customer." (Kctler 1988, p.234)
Several authors (Day and Wensley 1988; Sheth, Gardner, and Garrett 1988) even

posit that strategy should be founded on two pillars - a thorough understanding

50

of the customer’s needs and behavior, and a critical analysis of competitors for
competitive advantage.

While the idea that competitor knowledge focus strengthens competitiveness
is well conceptualized in the literature, empirical study is lacking. Therefore I hope
to address this deficiency through the following proposition: 2

Hm: The greater the competitor knowledge focus of an organization, the

greater its competitiveness in product innovation.
3.1.4. R80 Strength and Competitlveness In Product Innovation

The traditional economics theories (Adams 1970; Galbraith 1952; Fisher and
Temin 1973) used the absolute amount of R80 expenditure to gauge a firm’s R80
strength. Recent studies (Chussil 1988) in marketing and management adopted
more relative measures such as a firm’s R&D investment as percentage of its
sales, and a firm’s R80 expenditure compared with its competition’s.

When R80 was employed as the only factor to explain product innovation
and performance the result was often inconclusive (Chussil 1988). But when it was
used with multiple factors to explain innovation outcomes, it frequently yielded
positive impact on innovation and product quality (Hill and Snell 1989; Szymanski,
Bharadwaj, and Varadarajan 1993) since buyers may prefer products with more
innovative features and better quality and be willing to pay a premium price for
these products. Consequently, the increase in sales and greater revenues per sale
may more than offset the increased expenditures on R&D since R80 expenditure
per unit of products sold decrease as total sales increase (Buzzell and Gale 1987).

Therefore I propose:

51
Hm: The greater the R80 strength, the greater the competitiveness in

product innovation.

3.2. Competltlveness In Product Innovation and Market Performance
3.2.1. Competltlveness in Product Innovation and New Product Market

Performance

The ultimate goal of a firm’s innovation strategy is to succeed in the market
place. However, the issue of whether competitiveness in product innovation
correlates with performance is controversial. On the one hand, a number of
empirical studies in product innovation (Cooper 1982, 1983, 1992; Edgett, Shipley,
and Forbes 1992; Hise, O’Neal, Parsuraman, McNeal 1990) provide strong
evidence that competitiveness in product innovation leads to superior product
market performance. On the other hand, research on first mover advantage (Karin,
Varadarajan, and Peterson 1992) indicates that the evidence is inconclusive.

A careful examination of the two types of studies reveals the source of the
deviation: different measures of product innovation. Studies on product innovation
often measure competitiveness in product innovation in multiple measures: eg.
product newness, reliability, quality, and productivity, etc. Studies on first mover
advantage focus on one dimension only: the time of product introduction.

In this study, while I agree that the first mover may not achieve super
performance I believe that competitiveness measured by multiple indicators can
give a better picture of a firm’s product innovation and therefore may lead to

superior performance. Hence:

52

H”: the greater the competitiveness in product innovation, the better the

product market performance.

3.3. Environmental Factors and Market-Oriented Strategy

In Chapter 2, from a comprehensive review of the contingency perspective
we learn that the environment may act as a causal factor influencing a firm’s
strategy formulation and organizational performance is dependent upon the
efficient and effective adaptation of organizational strategies to environmental
contingencies. In particular, I identify three environmental factors that may provide
impetus for firms to pursue a market-oriented strategy: customer demandingness,
competition intensity, and technology change.
3.3.1. Customer Demandingness

The first factor hypothesized to have an effect on a market-oriented strategy
is customer demandingness. Customer demandingness refers to the level of
buyers’ requirement for product performance such as quality and reliability, and
their knowledge of technical standards and specifications. In recent years, as
customers in many product markets become more sophisticated they are
demanding for products with better quality, high reliability, and more advanced
features. Several authors point to customer demandingness as a catalyst for firms
to pursue a market-oriented strategy in product innovation (Gupta, Raj, and
Wilemon 1986; Porter 1990; Wheelwright and Clark 1992). Essentially, customer
demandingness drives firms to learn more about their clients’ particular needs and

preferences through customer knowledge focus, and then integrate their customer

53
knowledge with their technological capabilities. In addition, greater customer

demandingness may signal that customers are not satisfied with existing products,
thus pushing firms to increase their R&D investment to develop new products to
replace those in the market. No effects are expected for competitor knowledge
focus, since not every firm operates in a competitive product market. For those
firms in less competitive product markets (such as a monopolistic market), they
mainly respond to their customers to maintain their market status. Therefore, it is
hypothesized that:
H“: The greater the customer demandningness,the greater customer
knowledge focus.
H”: The greater the customer demandingness, the greater the integral
knowledge focus.
H”: The greater the customer demandingness, the greater the R&D
strength.
3.3.2. Competltlon Intensity
The second factor proposed to affect a market-oriented strategy pertains
to competition intensity. Competition intensity refers to the level of competition In
a product market including market volatility, predictability, and number of
competitors.
As several authors (Gupta, Raj, and Wilemon 1986; Kohli and Jaworski
1990) obsewe, in the absence of competition, monitoring competitors is not a
necessity by default. By contrast, under conditions of intensified competition, an

organization may be pressed to study its competitors constantly since competition

54

may introduce new products that are superior in quality and performance and
negligence of competition may end up in losing market share and customers.
Stated formally:
H“: The greater the competition intensity, the greater the competitor
knowledge focus.
3.3.3. Technology Change

The last environmental factor posited to influence a market-oriented strategy,
is the rate of technology change, measured by technology obsolescence rate and
new product introduction rate.

In a product market where technology experiences a shorter life cycle and
firms rival each other for new product development speed, organizations may have
a stronger need for gathering competitor information and for increasing R&D
investment. On the other hand, in a market with low rate of technology change, the
pressure on firms to engage in competitor intelligence gathering and to increase
R80 intensity may not be as heavy. The formal testable hypotheses are:

H“: The faster the rate of technology change, the greater the competitor

knowledge focus.

H“: The faster the rate of technology change, the greater the R80

strength.

The effect of technology change on customer knowledge focus is not as
clear. On the one hand, several authors (Day and Wensley 1988; Newer and Slater
1990) suggest that when technology experiences faster rate of change, it is more

imperative for firms to interact with customers since customer needs and

55
preferences may provide the directions for the changing product market. On the

other hand, other researchers (Jaworski and Kohli 1993) posit that when
technology changes rapidly, the importance of customer knowledge focus may be
diminished since a firm’s current customers may know little about nascent
technologies and close interaction with these customers may provide little insight
into the emerging markets associated with the new technologies. Thus, the
conflicting arguments are hypothesized as:

HR: The faster the rate of technology change, the greater the customer

knowledge focus, or the weaker the customer knowledge focus.

3.4. Top Management Perception of Market Knowledge and Market-

Orlented Strategy

Top management plays a key role in shaping an organization’s orientation
and values (Deshpande, Farley, Webster 1993; Felton 1959; Hambrick and Mason
1984; Kohli and Jaworski 1990). Unless top managers understand and appreciate
the value of market knowledge, the organization is unlikely to pursue a market-
oriented strategy.

The perceived importance of market knowledge is measured by several
indicators including top management’s perceptions of the importance of
continuous interaction with users, knowledge of customer needs, continuous
learning of market trends and change, and knowledge of competitors. The formal

testable hypotheses are:

56
H“: The greater the perceived importance of market knowledge, the

greater the customer knowledge focus.

Heb: The greater the perceived importance of market knowledge, the
greater the integral knowledge focus.

H“: The greater the perceived importance of market knowledge, the
greater the competitor knowledge focus.

Had: The greater the perceived importance of market knowledge, the

greater the R80 strength.

3.5. Construct Measurement

In this section, I provide indicators and measures for the constructs in the
model. The indicators are either borrowed from previous research or newly
developed from conceptual studies in the literature. Several measures are adopted
including: (1) 7-point semantic differential, (2) financial indicators, e.g. profit ,
sales, return on investment, and (3) length of time, eg. one year, two years, three

years. The indicators and measures of all the constructs are listed in Table 3.1.

57

 

 

TABLE 3.1.
Construct Measurement

CUSTOMER KNOWLEDGE FOCUS (7-point semantic differential)

1. We rarely/regularly meet customers to learn their current and potential needs for new
products.

I 2. Our knowledge of customer needs is scant/ thorough.

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

4. We casually/ systematically process and analyze customer information.

5. Customer information is barely/fully integrated in new software design.

6. We seldom / regularly use customers to test and evaluate new products.

7. Our spending on learning customer needs as a percentage of product development cost
is minimal/substantial.

8. We barely/fully understand our customers’ business.

9. We rarely/ regularly study customers’ operations for new product development.

INTEGRAL KNOWLEDGE FOCUS (7-point semantic differential)
Marketing and R&D:

1. rarely/regularly communicate for new product development.

2. Rarely/regularly share information on customers.

3. Rarely/ regularly share information about competitors’ products and strategies.

4. Seldom / fully cooperate in establishing new product development goals and priorities.

5. Seldom /fully cooperate in generating and screening new product ideas, and testing
concepts.

6. Seldom / fully cooperate in evaluating and refining new software.

7. Our company never/wholeheartedly fosters a culture of cooperation between R&D and
marketing.

 

  
   
   

R&D and Marketing are inadequately/ fully represented on our product development
team.

Technological knowledge and market knowledge are never/fully integrated in our new
product development.

 

 

 

58
TABLE 3.1. (cont’d)

 

   
  
 
 
  
  
   
 
   
 
  
 
 
  
  
  
 

comma KNOWLEDGE FOCUS (7-point semantic differential) "

' 1. We rarely/regularly search and collect information about our competitors’ products and
strategies.

2. We casually/ systematically analyze information about competitors.

3. Information about competitors’ products is scarcely/fully integrated as a benchmark in
5 our product design.

' 4. Our knowledge of our competitors’ strengths and weakness is scant / thorough.

_ 5. Our expense in competitor intelligence as a percentage of product development cost is
minimal/minimal.

. 6. We rarely/ regularly study our competitors’ software.

STRENGTH OF RESEARCH AND DEVELOPMENT

. 1. What is your annual R&D expenditure as a percentage of sales?
' 1%<, 1-3%, 4-6%,7-9%, 10-12%, 13-15%, >.15%

' 2. How would you compare the level of your annual R&D expenditure with your largest
competitor’s? Ours is much lower / higher.

3. How would you compare the strength of your company’s proprietary technology with
your largest competitor’s? Ours is much weaker/much stronger.

: COMPETITIVENESS IN PRODUCT INNOVATION (7-point semantic differential) ;

Compared with our largest competitor’s product, our software is not superior at

all/ extremely superior:

. 1. in terms of newness, i.e. the extent to which a product is new to the market.

. 2. in terms of productivity, i.e. the extent to which a software increases a customer’s work
efficiency.

. 3. in terms of reliability, i.e. the extent to which a software is free of errors.

, 4. in terms of compatibility, i.e. the extent to which a software is compatible with hardware ',

and other software.

 

 

' 5. in terms of uniqueness, i.e. the extent to which a software has unique features.
6. in terms of ease of use, i.e. the extent to which a software is easy to learn and use.
7. in terms of functionality, i.e. the extent to which a product meets customers’ functional
needs.
8. in terms of service, i.e. the extent to which a software is supported by the producer. _

 

59
TABLE 3.1. (cont’d)

l MARKET PERFORMANCE
Estimate of the market performance of this software in comparison with similar
products of other firms in the same market.

,’ 1. Before tax profit
' lowest 20%, lower middle X)%, middle 20%, upper middle 20%, top 20%

l 2. Return on investment
lowest 20%, lower middle 20%, middle 20%, Upper middle 20%, top 20%

3. Return on assets
lowest 20%, lower middle 20%, middle 20%, upper middle 20%, top 20%

j 4. Sales growth

1 lowest 20%, lower middle 20%, middle 20%, upper middle 20%, top 20%

‘ CUSTOMER DEMANDINGNESS (7-point semantic differential)
How would you compare your customers with other customers in the same industry?

1 Our customers are:
l 1. less/ more demanding for product quality and reliability.

2. less/ more sophisticated in terms of software technical specifications.

. 3. Less/more sensitive to product cost.

I: 4. Less/more demanding for product service and support.

,; 5. Less/more concerned with software productivity.

; 6. Less/more concerned with a good fit between their needs and product offering.

1 COMPETITION INTENSITY (7-point semantic differential)

l

I How would you describe your product market in general?

This product market:
l 1. is predictable/ unpredictable.
’ 2. is not competitive /very competitive.
l 3. has stable market share /volatile market share.

4. has few new domestic competitors/many new domestic competitors.

 

60

TABLE 3.1. (cont’d)

 

 

TECHNOLOGY CHANGE

1. Rate of new software introduction instigated by competitors.
1 yr 2 yr 3 yr 4 yr 5 yr 6 yr - 7 yr

2. Product obsolescence rate in this product market.
1 yr 2 yr 3 yr 4 yr 5 yr 6 yr 7 yr

3. Rate of technology change in this product market: slow/fast.
l
MANAGEMENT PERCEPTION OF MARKET KNOWLEDGE (7-point semantic differential) ;

Not at all important/extremely important

 

1. Continuous interaction with users.

2. Knowledge of customers’ needs.

3. Continuous learning of market trends and change.
4. Generating competitive intelligence.

5. Knowledge of competitors’ products.

CHAPTER FOUR

THE SOFTWARE INDUSTRY

The software industry consists of firms that write programs for computers.
Over the last two decades, the software industry has exerted a significant impact
on our society. Wordprocessor programs have changed the way we read and
write; spreadsheets have provided us with an entirely new means of computing;
and database programs have revolutionized the process we manage information. I

In terms of historical significance, only steam engine may rival computer
software. While the invention of steam engine made the Industrial Revolution
possible more than two hundred years ago, today the application of computer
software has transformed us into information society.

Because of its importance in the economy, the software industry has
experienced phenomenal growth in the U.S.. In 1983, the industry sales were
merely $7 billion. In 1993, sales reached $64 billion. The annual growth rate was
25%, higher than that of any other industry. The industry sailed through the
economic slump from 1991 to 1993 unscathed. In fact, the industry’s sales
continued to grow throughout downturn in 1991 and the ensuing sluggish
recovery. To a great extent, the software products the industry provide can cut
costs for businesses, so the incentive to purchase them is high even at tough
times. A

In this chapter, a brief historical account of the U.S. software industry is

provided, along with a discussion of the market segmentation of the industry.
61

62

4.1. The Domlnance of the Mainframe Producers In the 70s

In the 705, software was produced by two sources: mainframe vendors and
independent vendors. Mainframe vendors were manufacturers of mainframe
computers, such as IBM, Digital Equipment, Burroughs, and Honeywell. These
vendors produced both mainframe computers and software products. These
software products were normally for use on their own machines and were
incompatible with mainframe computers from other vendors. Independent vendors
developed software only and did not produce hardware. Their products were
normally application software for use on different main frame computers. With
fewer than ten of them, the mainframe suppliers were very limited in number. On
the other hand, there were more than 1000 independent vendors.

Although limited in number the software market was dominated by
mainframe vendors. The industry classifies software into two broad classes: system
and application software. More than 60% of the sales in system software was
generated by mainframe vendors. Mainframe suppliers dominated the system ,
software market because development of appropriate system software required in-
depth knowledge of the hardware. With 40% of the sales in the application
software market, mainframe vendors as a whole did not appear to have the overall
dominance. However, in terms of market share per vendor, the main frame
producers were much more superior. to the independent vendors. The sales of
application software by any hardware vendor was normally ten times of the sales
by the largest independent vendor. Table 4.1. lists software revenues in 1979 from

mainframe producers and Table 4.2. shows software revenues from the top ten

63

 

TABLE 4.1.
Software Product and Sewlce Revenues
1979-1980
(S millions)
1979 1980

International Business Machine $1,607 $1,026
Burroughs 566 580
NCR 541 598
Digital Equipment 422 589
Sperry 334 383

 

Source: Ulric Weil, Information Systems In the 80’s, p.22, New Jersey: Prentice-
Hall.

 

TABLE 4.2.
Revenues of Independent Software Vendors
In 1979

($ millions)
MSA 48
Cincom Systems 34
Policy Management Systems 32
Pansophic Systems 31
Cullinane 29
Applied Data Research 29
American Management Systems 29
Software AG of North America 26
Computer Associates 25
Kirchman 19

 

Source: Ulric Weil, Information Systems In the 80’s, p.23, New Jersey: Prentice-
Hall.

64

independent software vendors.

Among the mainframe vendors, IBM was undisputedly the dominant leader.
At the end of the 703, IBM had 60% of the mainframe market share and 35% of the
system software market share. Its revenues from software products and sewice

were 40 times of the largest independent vendor.

4.2. The Rise of the Independent Software Companies In the 80s

In the 705, the computer software industry was dominated by mainframe
producers and the role of independent software companies was minimal. In the
805, the industry experienced a revolutionary change and independent producers
no longer played a supplementary role.

This change can be obsewed in several areas. First, large-sized
independent software producers emerged. In the 703, shadowed by the mainframe
manufacturers, independent firms were limited both in revenue and employment.
For example, in 1979 the sales of none of the top ten software vendors reached
$50 million. In the 808, there were more than 30 independents whose sales topped
100 million. Many of these firms had more than 1000 employees. Table 4.3. shows
the 1990 revenue and employment of the top 30 independent software firms.

Second, most of these independent vendors were young firms with a short
history. Among the top 30 firms, almost half were established in the 805 and only
four were founded in the 603. Surprisingly, none of the top 10 independent
vendors in the 705 were still on the top 30 list of the 803. This indicates that

experience alone does not guarantee success in this industry.

65

 

 

TABLE 4.3.
Revenues and Employment of Independent Vendors
In 1990
($ millions)
Rank Company Revenue Employment Year
Founded
1 Computer Associates lnt’l Inc. 1290 6900 1976
2 Microsoft Corp. 1180 5635 1975
3 Oracle Corp. 970 7576 1977
4 Lotus Corp. 684 3538 1982
5 Dun 8 Bradstreet Software Svcs. 538 3500 1980
6 WordPerfect Corp. 452 2469 1979
7 Software AG NA 389 3800 1969
8 American Management Systems Inc. 261 3200 1970
9 SAS Institute Inc. 240 2264 1976
10 Ashton-Tate 230 1620 1980
11 Pansophic Systems Inc. 218 1500 1969
12 Cincom System 209 1400 1968
13 ASK Computer Systems Inc. 207 900 1972
14 Sterling Software Inc. 200 1900 1981
15 Information Builders Inc. 191 1400 1975
16 Autodesk Inc. 178 1100 1982
17 Legent Corp. 169 1200 1989
18 Adobe Systems Inc. 168 508 1982
19 Ingres Corp. 157 1300 1980
20 Candle Corp. 151 950 1977
21 lnformix Software Inc. 146 1100 1980
22 Software Publishing Corp. 140 700 1980
23 Aldus Corp. 135 860 1984
24 Systems Software Assoc. 124 550 1981
25 Compuware Corp. 118 1260 1973
26 Goal Systems lnt’l Inc. 117 700 1975
27 Cognos 116 1034 1969
28 Borland 113 875 1983
29 The Santa Cruz Operation 106 1300 1979
30 Systems Center Inc. 105 841 1981

 

Source: lnformationWeek, June 3, 1991. CMC Publications Inc. 600 Community

Drive, Manhasset, NY 11030.

66

Third, according to SoftLetter, the independent software producers became
the most productive of any industry. In 1990, average sales per employee for the
top 100 independent software companies was $151,957. Average sales per
employee for the top 25 firms was $198,065.
4.2.1. Four Large Independent Software Vendors
Microsoft Corp. With 14,430 employees, Microsoft Corp. is the largest
independent maker of personal computer software. Its systems software and
languages, the sales of which made up 34% of the company’s revenue in 1993,
include MS-DOS, Windows and LAN Manager. MS-DOS is by far the most widely
used operating system for IBM PCs and compatibles. Applications software which
made up 58% of the sales in 1993 includes word processing, spreadsheet,
database management, and other business programs. Non-U.S. sales were 48%
of sales and 37% pretax profits. The company spent 12% of the sales revenue on
research and development.

TABLE 4.4.
MICROSOFT CORP.

Financial Statistics
($ millions)

 

1988 1989 1990 1991 1992 1993

 

Sales 590 803 1183 1843 2758 3753
Net Profit 123 170 279 462 708 953
Retained to Eq. 33% 30% 30% 34% 32% 29%
Stock Price

High 15.7 19.8 35.9 74.7 95.0 98.0
Low 10.1 10.2 18.7 32.4 65.5 70.4

Source: Value Line, March 11, 1994.

 

 

 

67
Novell Inc. Novell Inc. designs, manufactures, and sewices high performance
local area networks (LANs). The company’s products are based on the proprietary
NetWare operating system and enable PCs to share resources and communicate
with other PCs on the same network. Products include NetWare software, DR DOS
and UnixWare operating software, data storage subsystems, and communications
products. International sales was 48% of total in 1993. R80 was 15% of the sales.
The company has 4,429 employees.
TABLE 4.5.
NOVELL INC.

Financial Statistics
($ millions)

 

1988 1989 1990 1991 1992 1993

 

Sales 281 421 497 640 933 1 122
Net Profit 30 45 94 162 249 282

Retained to Eq. 22% 19% 23% 27% 26% 28%
Stock Price

High 4.1 4.8 8.5 32.4 33.5 35.3

Low 2.2 3.0 3.4 7.6 22.5 17.0

 

 

Source: Value Line, March 11, 1994

 

Lotus Development. Lotus Development Corp. is one of the three largest
independent makers of personal computer software. 1-2-3, which is the most
popular personal computer application in the world, combines spreadsheet,
database, and graphing functions into a single program. It also sells Ami Pro, a
word processing application, Freelance Graphics, a presentation graphics

package, Notes, a workgroup product, and cc:Mail, an electronic application.

68

Foreign sales was 45% of the total in 1993. The company has 4450 employees.

TABLE 4.6.
LOTUS DEVELOPMENT
Financial Statistics
($ millions)

 

1988 1989 1990 1991 1992 1993

 

Sales 468 556 684 828 900 981
Net Profit 58 63 76 61 57 75
Retained to Eq. 25% 22% 24% 18% 14% 14%
Stock Price

High 34.3 33.5 39.3 40.8 38.8 58.8
Low 14.8 18.0 12.5 14.8 14.8 18.8

 

Source: Value Line, March 11, 1994

 

 

Borland International. Borland International Inc. develops and markets object-
oriented programming languages and application software. Three principal product
families are database (Dbase, Paradox), spreadsheet (Quattro Pro), and
languages, which are designed to run on IBM and compatible personal computers
under the MS-DOS or Window environments. The U.S. business accounted for
49% of 1993 revenue and R&D expenses were 15.5% of the revenue. The
company acquired Ashton-Tate in October, 1991. Currently, the company has 1885

employees.

69

TABLE 4.7.
BORLAND INTERNATIONAL
Financial Statistics
($ millions)

 

1988 1989 1990 1991 1992 1993

 

Sales 90 113 226 482 464 450
Net Profit d2 1 1 26 d15 d29 7
Retained to Eq. NMF 21% 31% NMF NMY 3%
Stock Price 10.5 32.0 82.5 81.0 27.0
Book Value 9.6 9.9 27.9 20.3 13.5

Source: Value Line, March 11, 1994

 

 

 

4.3. The Software Industry Segmentation

The software industry can be segmented according to software product
functions. The most popular segmentation is the horizontal and vertical
classification. Horizontally, the industry is classified into five major segments:
system software, business operation software, office automation software,
educational software, and recreational software. Vertically, each major segment is
further classified into numerous subsegments.
System software. System software is required for every computer. There are two
major types of system software: operating system (OS) software and software
development tool.

Programs that manage the operation of a computer are called operating
system. The operating system can be relatively simple, as it is for PCs (such as

DOS), or very complex, as it is for mainframe computers (such as UNIX). The

70

operating system is important because nearly all application programs use the
capabilities of the operating system and must adhere to its interfacing conventions.
Software dvelopment tools are programs that help construct new programs
and maintain old programs. Examples are high-level languages such as Basic,
Cobol, Fortran, C and Pascal. Other tools such as language compilers and
interpreters translate the higher level languages into machine code that computer
can understand. Further, languages that use object technology have become
important because they make it easier to manage complex programs. Smalltalk
and C+ + are examples of object oriented lanaguages. Utility programs which
simplify software development or computer operation also belong to this category.
Examples of utility software are disk management programs, performance
monitors, and backup programs.
Business operation software. Business operation software is a category of
programs that manage organizational activities. These applications usually have a
centralized database that is used by multiple divisions and by mutiple users.
Examples are accounting and inventory management software. Most of the
manufacturing processess and product design activities also fall in this segment.
Programs in this segment can be further classified into many market niches, such
as accounting software for medical offices, sales managment software for home
products dealers, design software for mechanical engineers and circuit design
simulation software for electronic engineers.
Office automation software. Office automation software is one of the largest

segment in the software market. Programs in this segment can help with common

71

tasks such as writing, calculating, filing, drawing, managing, decision making and
communicating with others. The majority of products in this segment are for
personal computers and, to a lesser degree, for workstations. Software products
in this segment play a critical role in the running of today’s organizations. The

following are the most popular products listed by their segments.

 

TABLE 4.8.
Office Automation Software

Wordprocessing Company

WordPerfect WordPerfect Corp.

Microsoft Word Microsoft Corp.
Spreadsheet

Lotus 1-2-3 Lotus Development

Microsoft Excel Microsoft Corp.

Ouattro Pro Borland International
Database

Dbase IV Borland International

Paradox Borland International
Graphics

Haward Graphics Software Publishing

 

 

 

Educational software. Educational software teaches specific subjects or tasks to
peOple. Therefore, educational programs are also called computer-aided instruction
(CAI) and computer-based training (CBT). Examples of CAI are mathematics for
5th grade, SAT training programs, and high school physics. CBT software ranges

from relatively simple tasks such as learning Lotus 123 to complex multimedia

72

software to learn to operate military weapons systems.

Recreational software. Recreational software became popular when personal
computers were introduced. The large installed base of PCs created a large market
for recreational software such as games and music programs. There is now a large
variety of computer games ranging from the classical board games such as Chess
and Monopoly to card games and simulation games. New classes of games such
as adventure games and battle simulations have become very popular.

4.3.1. Case Analysis: The Growth of Network Software Market

PC Network software is the fastest growth market in the system software
segment. In 1987, the worldwide revenue from LANs, one of network software
product, was only $190 million. In 1992, the sales of LANs reached $1.38 billion.
What is network software?

Network software connects multiple PCs to share printers, database, and
programs. Two types of technology are available for PC networking: peer-to-peer
networking and client-sewer networking.

Peer-to-peer mode requires that software and a computer board be added
directly into every PC. A cable links the computers to shared printers. Peer-to-peer
is generally the easiest and cheapest solution in very small firms where sharing
printers is the main goal.

The client-sewer mode also requires new hardware and software on the PC.
However, the bulk of the software is located on a PC dedicated to controlling the
networks. This dedicated computer is called a "sewer" and is the brain of the

network. The sewer directs data traffic between individual PCs that are called

73

"clients." Sewers require special software called "NOS" (network operating system)
that talks to clients and handles all network functions. Savers controlled by a NOS
allows users to more rapidly pass files between PCs. Users can also store directly
on the sewer large files regularly accessed by several pe0ple. The higher
performance client-sewer networks became dominant in most medium and large
companies by the end of the 19805.

Local area network (LAN). Local area network (LAN), software is common in
small departments in geographically concentrated locations. It is normally used to
connect 50-100 PCs. A typical LAN may compose all of the PCs on several floors
of a building, just sharing programs, files, and printers.

Wide-area network (WAN). As PC networks become widespread in corporations,
users want to communicate with PCs on other LANs, sometimes in distant locales.
This requires additional technology called wide area network (WANs) that connect
computers that are geographically dispersed.

In the 19803, most WANs were based on mainframe or minicomputer. A
typical example of a WAN was an airline resewation system. An airline would
maintain a computer control center with large mainframe computers. At airports
around the world, ticket counter computer terminals were connected to the central
computer. WAN systems were usually developed over many years, and
represented large investments by companies.

In the 19903, the development of WANs based on PCs is technically
possible, but still inefficient and expensive.

Client-sewer application (CSA). Client-sewer applications are application

74

software running on the sewer. As Lotus Development Corp. had to write different
versions 1-2-3 for each operating system (DOS, OS2, MAC), CSAs are written for
particular NOSs. A good example of CSA is Lotus Notes, a powerful program that
runs on a sewer, but allows everyone on the network to share information and
build common data bases.
Competition in the network software market. When the PC network software
market emerged, there were many firms developing and marketing peer-to-peer
products to connect PCs. Later, when client-sewer networking was introduced and
demands for complex products increased, the need for research and development
grew rapidly. The competition became intensified and an industry-wide shake-out
left only a handful of significant competitors.

Among the few firms left, Novell achieved the strongest position, with
approximately 60% market share. Banyan, Microsoft, and IBM are the other leading

competitors.

CHAPTER FIVE

RESEARCH METHODOLOGY

5.1. Measure Development

Measures of the constructs were developed in three stages. First, based on
the defined constructs, tentative measures were either borrowed or developed
from the exiting literature. In particular, for the construct of competitiveness in
product innovation, l integrated measures from the software industry literature,
such as Applied Software Measurement - Assuring Productivity and Quality
(Capers Jones 1991), and Total Quality Management for Software (Schulmeyer and
McManus 1992). These books were written by experts in the software industry and
provided the most relevant measures for competitiveness in software products.

In the second stage, a list of defined constructs and their measures was
submitted to a panel of five academicians familiar with the subject of product
innovation for item refinement. Following Churchill (1979), I requested recipients
to assign each measure to the construct they considered appropriate and to note
whether they thought the construct could be represented by any other measures.
In the third stage, I intewiewed five practitioners in the software industry with the
refined measures. I asked them to comment on the clarity and the relevance of the
measures to the practitioners in the software industry. Then the measures were

modified to reflect their opinion.

75

76
5.2. Sampling Frame

The sampling frame of the research was 1074 software companies in the
U.S. The sampling was obtained from Corporate Technology Information Sewices
(CorpTech), Inc., a company specializing in high-technology company information.
With its specialty and its company profile information updated bi-annually,
CorpTech is considered one of the most authoritative sources of information on
high-tech firms.

The sampling frame covered a wide spectrum of software firms in regard to
annual sales, firm size, and company age. The annual revenues of the firms in the
sampling frame ranged from $10 million to $4 billion. The firm size, measured in
number of employees, varied from 30 to above 4,000. The company age spanned
from 5 years to more than 30 years. Table 5.1. shows the profile of software firms

in the sampling.

5.3. Key Informant

The method used was a suwey among "key informant" decision makers
within software companies. The new product decision analyzed was the firm’s
overall orientation in new product development. In software industry, the president
or CEO is often the final decision maker in new product choice, new market
direction, and R&D investment level, becasue new product development is the
"pivotal event" in most software firms and corporate activities are organized around
this event. The role of the chief executive in new software development was also

confirmed in my pretest intewiews with managers in software firms. As one

77

TABLE 5.1.

Profile of Software Firms in the Sampling Frame (N: 1074)

 

 

 

 

 

 

Firm Size
(No. of Employees) No.0f Firms Percent
less than 50 193 17.9%
50 - 100 238 22.2%
101 - 200 308 28.7%
201 - 500 260 24.2%
501 or more 75 7.0%
1074 100.0%
Annual Sales
(in millions) No. of Firms Percent
$10m - 325111 529 49.2%
$26m - $50m 205 19.1%
$51m -$100m 120 11.2%
$101m-3250m 104 9.7%
$251m or more 116 10.8%
1074 100.0%
Years of Formation No. of Firms ' Percent
5 - 10 yrs 205 19.1%
11 - 20 yrs 501 46.7%
21 - 30 yrs 226 21.0%
More than 30 yrs 142 13.2%

1074 100.0%

 

78

manager expressed:"Our chief executive makes the major decisions about software
development because in our industry more than any other industries the life and

death of the firm hinge on the success and failure of new software."

5.4. Mall Suwey and Sample

From March to May 1994, three waves of mailing were sent to the
presidents/CEOs of the 1074 software firms in the sampling frame. The first and
the third consisted of questionnaires and the second was a postcard reminder.
Sixteen questionnaires were returned undelivered and twenty-three companies
wrote or called back expressing regret at their inability to participate for various
reasons, usually because their company policies prevented them from answering
these questionnaires. From the remaining pool of potential respondents, 173
usable responses were received resulting in a 16.1% response rate. The response
rate is similar to that obtained in similar large-scale suweys of executives which
ranges from 5.9% to 22% (Gatignon and Robertson 1989). Table 5.2. shows a
profile of the sampled software firms.

To examine the possibility of nonresponse bias, I performed a comparative
analysis of the sample distribution versus the sampling distribution on key
characteristics which reflect the factual information contained in CorpTech’s
database. These characteristics include (1) firm size measured in number of
employees, (2) annual sales in millions of dollars, and (3) firm age measured in
years of formation. Chi-square goodness-of-fit test was conducted to compare the

distributions in the sample and the sampling frame. The low Chi-squares and high

79

TABLE 5.2.

Profile of Surveyed Software Firms (n= 173)

 

 

 

 

 

 

Firm Size
(No. of Employees) No. of Firms Percent
less than 50 28 16.2%
50 - 100 39 22.5%
101 - 200 60 34.7%
201 - 500 32 18.5%
501 or more 14 8.1%
173 100.0%
Annual Sales
(in millions) N o. of Firms Percent
$10m - $25m 93 53.8%
$26m - $50m 26 15.0%
$51m -$100m 21 12.1%
$101m-3250m 16 9.3%
$251m or more 17 9.8%
173 100.0%
Years of Formation No. of Firms Percent
S - 10 yrs 25 14.5%
11 - 20 yrs 77 44.5%
21 - 30 yrs 45 26.0%
More than 30 yrs 26 15.0%

m - 100.0%

 

80
probabilities (significance all above 0.05), reported in Table 5.3. for the

comparisons on these three dimensions, indicate a lack of significant difference
between the sample and the sampling frame, suggesting that nonresponse bias,

if any, may be negligible.

5.5. Unit of Analysis

The unit of analysis is an individual new software product introduced into the
U.S. market by a software firm. The approach of selecting an individual product as
the unit of analysis is rooted in research on product innovation (Griffin and Page
1993). This approach is popular because it allows researchers to measure new
product performance more accurately. For example, when this unit analysis is
adopted, researchers can determine precisely the market performance of a
product including market share, growth rate, and profit, etc. On the other hand, if
a firm is used as the unit of analysis, researchers will find it difficult to measure
performance, since a firm may have a portfolio of diversified products, and
performance of these products would be compounded. Further, when a firm has
both old and new products in the market, the compounding will become more
senous.

To conform responses to this unit of analysis, at the beginning of the
questionnaire, I asked respondents to identify a new software product they had
introduced into the U.S. market over the last five years, and then requested them
to describe the type of software product they selected and the industry the product

sewed. Based on their descriptions, l classified these products into 26 categories

 

81

TABLE 5.3.

Goodness-of-t‘it Test on Distributions
of the Sample and the Sampling Frame

a. Firm Size Distribution

 

 

 

 

 

 

 

 

 

 

 

 

 

, 1|
Firm Size No. of Firms No. of Firms in Chi-square Test

(No. of Employees) in the Sample the Database

(11 = 173) (N = 1074)
Less than 50 28 193 x2 = 4.59
50 - 100 39 238 d.f. = 4
101 - 200 60 308 sig. = 0.332
201 - 500 32 260
501 or more 14 75

b. Annual Sales Distribution
Annual Sales No. of Firms No. of Firms in Chi-square Test
(in millions) in the Sample the Database

(n= 173) (N = 1074)
$10m - $25m 93 529 12 = 2.718
$26m - SSOm 26 205 d.f = 4
$51m -$100m 21 120 sig =0.606
$101m-3250m 16 104
$251m or more 17 116

 

 

 

 

c. Firm Age Distribution

 

 

 

Years of N o. of Firms No. of Firms in Chi-square Test I
Formation in the Sample the Database '
(n= 173) (N = 1074)
5 - 10 yrs 25 205 x2 = 4.778
11 - 20 yrs 77 501 d.f. = 3
21 - 30 yrs 45 226 sig. = 0.189
More than 30 yrs 26 142

 

 

 

 

 

82

in Table 5.4. In addition, a total of 22 major industries, from aerospace and airline
to retailing and transportation, were sewed by these software products (see Table

5.5).

5.6. Measure Purification and Reliability

Following Gerbing and Anderson (1988), l purified the measures by
assessing their reliability and unidimensionality. First, I examined the item-to-total
correlations for the items in each of the proposed scales and deleted items with
low correlations if they did not represent additional domain of interest. Table 5.6
presents Cronbach’s alpha for each constructs (Cronbach 1970). An inspection of
the alpha coefficients reveals that among the ten alpha coefficients seven are
greater than 0.80. In particular, the alpha coefficients for the three constructs of
market orientation are all above .90, indicating good reliability of these constructs
(Nunnally 1978). The alpha coefficients for R&D strength, market competitiveness,
and technology change are somewhat smaller, but very close to the satisfactory
level of .70 .

The measures were further subjected to confirmatory factor analysis through
EOS (Bentler 1989) to assess their unidimensionality. Covariance matrix was used
as input for the confirmatory factor analysis. Table 5.6. also carries the results of
EOS confirmatory factor analysis. The Bentler-Bonnet normed fit index and
nonnormed fit index (Bentler 1980) and the comparative fit index (Bentler and
Bonett 1980, Bentler 1990) are all above 0.99 indicating good fit of the confirmatory

measurement model. In addition, EOS confirmatory analysis also estimates the

TABLE 5.4.

Types of Software Products Represented In The Sample

 

 

 

Accounting software

Artificial intelligence software
Banking software

Construction software
Communication system software
Database management software
Educational software

Facilities management software
Financial analysis software
Government software

Health services software
Insurance software

Legal software

Library software

Manufacturing software

Media communications software
Natural resource management software
Office automation software
Program development softv'vare
Public utilities software

Real estate software

Sales/ marketing software
Service industry software
Software services
Transportation software

Utility systems software
Warehousing/distribution software
Application software

 

 

84

TABLE 5.5.

Major Industries Served By
The Sampled Software Companies

 

 

 

 

 

Aerospace

Airline Insurance
Automobile Manufacturing
Banking Petrochemical
Communication Petroleum
Computer Pharmaceutical
Construction Publishing
Education Real estate
Electronics Retailing
Government Transportation
Health care Utilities

 

85

TABLE 5.6.

Measurement Model and Confirmatory Factor Analysis by EQS

 

 

 

 

never/fully integrated in our new product development.

 

I— f =—
EQS
Normed fit index: 0.993 Item-Construct Cronbach’s
Constructs Items Nonnormed fit index= 0.999 Correlation Alpha
Comparative fit index= 0.999 Stand. t-value

CUSTOMER KNOWLEDGE FOCUS .946

1. We rarely/regularly meet customers to learn their .919
current and potential needs for new products.

2. Our knowledge of customer needs is scant/ thorough. .970 22.06

3. We rarely/ regularly use research procedures, e.g. .866 13.82
personal interviews, focus groups, and surveys, to
gather customer information.

4. We casually/systematically process and analyze .876 13.77
customer information.

5. Customer information is barely/fully integrated in new .929 19.50
software design.

6. We seldom / regularly use customers to test and .894 15.83
evaluate new products.

7. Our spending on learning customer needs as a .786 8.84
percentage of product development cost is
minimal/ substantial. '

8. We barely/fully understand our customers’ business. .923 18.56

9. We rarely/regularly study customers’ operations for .895 15.58
new product development. I.

INTEGRAL KNOWLEDGE FOCUS .958
Marketing and R&D:

1. rarely/regularly communicate for new product .946
development.

2. rarer/ regularly share information on customers. .943 16.06

3. rarely/ regularly share information about competitors’ .849 11.12
products and strategies.

4. seldom / fully cooperate in establishing new product .915 17.39
development goals and priorities.

5. seldom/fully cooperate in generating and screening .951 17.96
new product ideas, and testing concepts.

6. seldom /fully cooperate in evaluating and refining new .911 13.15
software.

7. Our company never/wholeheartedly fosters a culture of .950 21.35
c00peration between R&D and marketing.

8. R&D and Marketing are inadequately/fully .799 10.06
represented on our product development team.

9. Technological knowledge and market knowledge are .966 22.96

 

 

 

86
TABLE 5.6. (Cont’d)

 

k

 

 

 

EQS
Constructs Items Item-Construct Cronbach’s
Correlation Alpha
Stand. t-value
COMPETITOR KNOWLEDGE FOCUS .954
1. We rarely/ regulme search and collect information .948
about our competitors’ products and strategies.
2. We casually/ systematically analyze information about .943 19.43
competitors.
3. Information about competitors’ products is .890 13.18
scarcely/fully integrated as a benchmark in our product
design.
4. Our knowledge of our competitors’ strengths and .901 15.39
weakness is scant/thorough.
5. Our expense in competitor intelligence as a percentage .779 6.92
of product development cost is minimal/minimal.
6. We rarely/regularly study our competitors’ software. .890 9.49
STRENGTH OF RESEARCH AND DEVELOPMENT .693
1. What is your annual R&D expenditure as a percentage .921
of sales? (percentage points converted into 7 point
scale: 1%<, 1-3%, 4-6%,7-9%, 10-12%, 13-15%,
>.15%)
2. How would you compare the level of your annual .768 9.89
R&D expenditure with your largest competitor’s? Our
is much lower/higher.
3. How would you compare the strength of your .790 9.90
company’s proprietary technology with your largest
competitor’s? Ours is much weaker/much stronger.
COMPETITIVENESS IN PRODUCT INNOVATION .865
Compared with our largest competitor’s product, our
software is not superior at all/ extremely superior:
1. in terms of newness, i.e. the extent to which a product .825
is new to the market.
2. in terms of productivity, i.e. the extent to which a .919 20.61
software increases a customer’s work efficiency.
3. in terms of reliability, i.e. the extent to which a .780 9.50
software is free of errors.
4. in terms of compatibility, i.e. the extent to which a ~ .762 11.30
software is compatible with hardware and other
software.
5. in terms of uniqueness, i.e. the extent to which a .755 10.18
software has unique features.
6. in terms of ease of use, i.e. the extent to which a .632 8.02
software is easy to learn and use.
7. in terms of functionality, i.e. the extent to which a .872 15.79
product meets customers’ functional needs.
8. in terms of service, i.e. the extent to which a software .439 3.33

 

baa-HIE

is supported by the producer.

 

 

 

 

87
TABLE 5.6. (Cont’d)

 

 

 

 

 

 

 

EQS :
Constructs Items Item-Construct Cronbach’s ,
Correlation Alpha 3
Stand. t-value
MARKET PERFORMANCE .856
Estimate of the market performance of this software in
comparison with similar products of other firms in the
same market. (5 point scale: lowest 20%, lower middle
20%, middle 20%, top 20%)
1 Before tax profit. .908
g 2. Return on investment. .914 16.45
‘ 3. Return on assets. .955 24.83
’ 4. Sales growth. .663 8.64
CUSTOMER DEMANDINGNESS .862
How would you compare your customers with other
customers in the same industry ?
E Our customers are:
. 1. less/more demanding for product quality and .869
‘ reliability.
, 2. less/more sophisticated in terms of software technical .875 15.09
specifications.
3. Less/more sensitive to product cost. .610 7.71
I 4. Less/more demanding for product service and support. .879 15.13
; 5. Less/ more concerned with software productivity. .770 9.88
1 6. Less/more concerned with a good fit between their .846 11.64
i needs and product offering.
“ COMPETITION INTENSITY .683
‘ How would you describe your product market in
general?
This product market:
, 1. is predictable / unpredictable. .901
l 2. is not competitive/very competitive. .789 8.50
. 3. has stable market share/volatile market share. .628 6.05
4. has few new domestic competitors / many new domestic .358 3.06
competitors.
TECHNOLOGY CHANGE .682
1. Rate of new software introduction instigated by .748
competitors: 1 to 7 years.
2. Product obsolescence rate in this product market: 1 to .638 6.73
7 years.
3. Rate of technology change in this product market: .840 9.12
slow/fast.
PERCEIVED IMPORTANCE OF MARKET KNOWLEDGE .878
Not at all important /extremely important
1. Continuous interaction with users. .945
2. Knowledge of customers’ needs. .940 21.94
3. Continuous learning of market trends and change. .902 16.73
4. Generating competitive intelligence. .886 11.49
5. Knowledge of competitors’ products. .872 10.93

 

 

88

item-construct correlations and t-test statistics for the measurement model. An
inspection of Table 5.6. shows all the 49 measures are significantly loaded into

their respective constructs at a significance level of 0.01.

5.7. Hypothesis-Testing Approach

Having satisfied the requirement arising from the measurement issues, I
subsequently tested the structural relationships through EQS path analysis (Bentler
1989). Using the results from the confirmatory factor analysis, a single measure
was developed for each construct equal to the arithmetic mean of the constituent
items. The structural relationships of the market orientation model is represented
in the following sets of equations.

V5 = B,V1 + 32V3 + 33V4 + E5

V6 = p,v1 + 35V4 + l-E,5

W=AW+aW+gW+g

V8 = 39W + 3,0V3 + p,,V4 + E,3

vs = p,2vs + gave + p,,V7 + p,,vs + E9

V10= e,,,vs + i=_1o
where

V1

customer demandingness

V2

competition intensity
V3 = technology change
V4 = perceived importance of market knowledge

V5 = customer knowledge focus

89
V6 = integral knowledge focus

V7 = competitor knowledge focus

V8 = research and development strength

V9 = competitiveness in product innovation

V10= market performance

and A and E are parameters to be estimated.

V9 is competitiveness in product innovation and hypothesized to be
influenced by the four market-oriented strategy components, customer knowledge
focus (V5), integral knowledge focus (V6), competitor knowledge focus (V7), and
R&D strength (V8). The equation with V9 on the left side tests hypotheses H,,,, H,.,.
”res and "id"

V10 is the new product market performance which is proposed to be
impacted upon by competitiveness in product innovation (”2.)-

V5 is customer knowledge focus which is suggested to be affected by three
external and internal factors, customer demandingness (V1), technology change
(V3), and perceived importance of market knowledge. Hypotheses H“, l-Ix, He. are
tested through this equation.

V6 is integral knowledge focus and this strategy component is posited to
be affected by customer demandingness (V 1) and perceived importance of market
knowledge (V4). Two hypotheses, H” and Hab, are represented by the equation.

V7 is the third strategy component and is hypothesized to be correlated with
competition intensity (V2), technology change (V3), and perceived importance of

market knowledge (V4). The hypotheses that are tested through this equation are

90

H“, It”, and H50.
V8 is the last strategy component and is supposed to be affected by

customer demandingness (V1), technology change (V3), and perceived importance
of market knowledge (V4). Three hypotheses, I-Iac, l-gb, Had, are tested through this

equation.

CHAPTER SIX

RESEARCH FINDINGS AND IMPLICATIONS
Integrating several streams of literature in marketing and product innovation,
the current research presents and tests a model of a market-oriented strategy and
its impact on competitiveness in product innovation. In chapter 6, the focus is on
the substantive interpretation of the results and the emergent findings. Additionally,

managerial implications and future research directions are discussed.

6.1. Test of the Model

The model was tested through the General Least Square method (GLS) on
EOS. The model converged rapidly (8 iterations) and had no problems estimating
the model parameters. As shown in Table 6.1. and figure 6.1. the fit indexes
indicate a good fit of the model. The normed fit index (NFI) and the nonnormed fit
index (Bentler 1980) are 0.995 and 0.993 respectively, and the comparative fit
index (CFI) (Bentler and Bonett 1980) is 0.997. In addition, the average
standardized residual is 0.0379. The chi-square is 37.59 with 18 degrees of
freedom and p = 0.00439. While the chi-square test is not as satisfactory as the
indexes, model fit is best assessed by examining fit indexes other than the chi-
squere statistic alone (Bagozzi and W 1988; Hayduk 1989; Bentler 1990; Duwasula

and Sharma 1990). Based on these results, I feel the model fits the data well.

91

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TABLE 6.1.

Assessment of Path Model by EQS

 

 

 

 

of Market Knowledge

Model Goodness of Fit

Normed fit index: 0.995 Chi-square: 37.59

Nonnormed fit index: 0.993 d.f. 18

Comparative fit index: 0.997 Probability 5 0.00439

TABLE 6.2.
Assessment of Research Hypotheses by EQS
Path
. Constructs Hypothesis Expected Coefficient t-value Assessment
Sign (Unstand. Stand.) ( p s .01)

Competitiveness in

Product Innovation
Customer Knowledge Focus H1, + .238 .270 4.20 S
Integral Knowledge Focus Hlb + .289 .352 6.08 S
Competitor Knowledge Focus ch + .136 .187 3.95 S
R&D Strength I-l1d + .158 .188 3.93 S

Market Performance
Competitiveness in H2, + .760 .908 10.58 S
Product Innovation

Customer Knowledge Focus
Customer Demandingness H3a + .387 .289 3.88 8
Technology Change HSC + /- -.117 -.123 -2.65 S
Perceived Importance H6a + .649 .584 7.92 S
of Market Knowledge

Integral Knowledge Focus
Customer Demandingness H3b + .443 .309 3.57 S
Perceived Importance I-I6b + 521 .437 5.07 8
Of Market Knowledge

Competitor Knowledge Focus
Competition Intensity H4a + .072 .048 0.80 as.
Technology Change H5a + .265 .229 3.87 S
Perceived Importance H6c + .785 .583 9.45 S
of Market Knowledge

R&D Strength
Customer Demandingness H3c + .244 .175 1.72 S a psm
Technology Change H5b + .092 .093 1.37 as.
Perceived Importance H6d + .458 .395 4.08 S

 

94
6.2. Research Findings

6.2.1. Does a Market-Oriented Strategy Strengthen Competitlveness In

Product Innovation?

This research centers on the relationship between a market-oriented
strategy and competitiveness in product innovation. As shown in Table 6.2., the
relationship appears to be positive with each component of a market-oriented
strategy exerting a significant impact (p501) on competitiveness in product
innovation. Customer knowledge focus, as expected, seems to drive
competitiveness in product innovation (standardized b = 0.27), as well as integral
knowledge focus and competitor knowledge focus ( b = .352 and b F- .187
respectively). These results support the view that generation of customer
knowledge, integral knowledge, and competitor knowledge is critical for firms to
create superior new products that meet customers needs better than competitors’
products. Among the three knowledge components, it appears that integral
knowledge focus exerts the strongest impact with the largest standardized
coefficient. This corroborates the long-prevailing proposition in the product
innovation literature that it is essential for marketing and R80 to cooperate In
creating solutions pertaining to customer needs.

Turning now to the role of R80 strength, competitiveness in product
innovation appears to be positively related to R&D strength (b = .188). This finding
suggests that in a high-tech industry R80 intensity sewes as an important factor

in improving innovation competitiveness.

95
6.2.2. Does Competltlveness In Product Innovation Improve Market

Performance?

The ultimate goal of a firm’s innovation strategy is to improve market
performance. As shown in Table 6.2., competitiveness in product innovation is
significantly related to new product market performance which is measured by four
indicators, before-tax profit, return on investment, return on assets, and sales
growth. The large coefficient (b = .908, p s .01) suggests the relationship between
the two outcome constructs is very strong. This finding provides a significant
linkage between a market-oriented strategy and product market performance and
demonstrates that an innovation strategy improves product market performance
through enhancing competitiveness in product innovation.

6.2.3. Is a Market-Oriented Strategy Driven by External Factors?

The relationship between environmental factors and a market-oriented
strategy in product innovation is another important aspect of the model. In this
section, the effect of each external factor is discussed and analyzed.
6.2.3A. Customer Demandingness

As indicated in Table 6.2., Customer demandingness appears to exert a
significant impact on two strategy components, customer knowledge focus (b =
.289, p s .01) and integral knowledge focus (b = .309, p s .01). This suggests that
a firm’s implementation of a market-oriented strategy is influenced by the
characteristics of its customers. When customers are more sophisticated and
demanding in regard to technical specifications and product features, firms are

more likely to interact with customers to understand their needs and preferences,

96

and to improve communication and cooperation between marketing and R&D in
the process of new product development. These findings concerning customer
demandingness seem to support Von Hippel’s theory (1976, 1977, 1978, 1986) on
"lead" users. Von Hippel proposes that possession of lead users, defined as those
customers who are more sophisticated and demanding than the rest of the
customers, strengthens a firm’s competitiveness in new products. These findings
help us explain why lead users play an important role in product innovation
process. Lead users provide an impetus for firms to engage in customer learning
and marketing-R80 knowledge integration. In turn, the superior customer
knowledge and integral knowledge obtained may allow firms to achieve greater
product competitiveness.

The relationship between customer demandingness and R&D strength is
significant at p = 0.05 providing some evidence to support the proposition that
when customers are more demanding a firm is more likely to increase its R&D
investment.

6.2.38. Competltlon Intensity

In the previous chapter, I propose that competition intensity affects a firm’s
competitor knowledge focus. The result in Table 6.2. does not support this
hypothesis indicating the relationship between competition intensity and competitor
knowledge focus is insignificant. The insignificant relationship may be due to the
fact when a market is crowded with numerous competitors, it becomes more
difficult for firms to track and monitor competitors. Alternatively, it may also be

interpreted that whether to generate competitor information is a managerial

97

decision made independent of the external competition factor. To some extent this
finding corroborates with recent studies by Jaworski and Kohli (1993) and Slater
and Newer (1994) who find that competitive environment does not have an effect
on the strength of the market orientation-performance relationship.

6.2.36. Technology Change

Technology change, which refers to technology obsolescence rate and new
product introduction rate, is proposed to affect customer knowledge focus,
competitor knowledge focus, and R80 strength.

As indicated in Table 6.2., technology change has a significant negative
impact (b = -0.123, p s .01) on customer knowledge focus. This finding seems to
suggest that when technology changes too rapidly firms are less likely to increase
their interaction with customers. Management may feel it unworthwhile to
concentrate its efforts on existing customers since the emergence of new
technology may render the current market obsolete.

On the other hand, the relationship between technology change and
competitor knowledge focus is significantly positive (b = 0.229, p s .01) indicating
when technology life cycle shortens and product introduction speeds up, firms are
more likely to intensify their competitor intelligence activities.

Unexpectedly, the relationship between technology change and R80
strength is weak (b = .093) and insignificant. While it has been long hypothesized
in the literature that the shortening of technology and product life cycle is the major
factor for firms to increase their R&D investment, the result does not support this

view. The insignificant relationship seems to suggest that it is an uncommon

98

practice for firms to increase their R&D investment in a market that experiences
rapid technology change. firms may feel it risky to increase R&D investment in a
technologically uncertain market.

6.2.30. Does Top Management Perception Affect Market-Oriented Strategy?

Results from Table 6.2. indicate that top management perceived importance
of market knowledge has a significant effect on all four components of a market-
oriented strategy, customer knowledge focus, integral knowledge focus, competitor
knowledge focus, and R80 strength.

Additionally, an inspection of the standardized coefficients shows that the
correlations between top management perception and the four strategy
components are very strong, all above 0.39, which is larger than any of the
correlations between the strategy components and external factors. This suggests
that top management plays a critical role in shaping a market-oriented strategy.
Further, these findings imply that a market-oriented strategy is more driven by top

management’s phil050phical thinking than by external environment.

6.3. Significance of the Research Findings
The findings of this research are significant in several ways. In particular, this
study builds a unifying framework, identifies major determinants of strategic

behavior, and resolvs issues concerning information intensive products.

99
6.3.1. Drucker’s Theory as a Unifying Framework

First, this research demonstrates that Drucker’s theory of knowledge-based
innovation can be used as a framework to unify different perspectives in product
innovation. Previously, product innovation research was fragmented with various
views and beliefs. The most popular among these were market orientation
perspective (Calantone and Cooper 1977, 1981; Kohli and Jaworski 1990; Newer
and Slater 1990), marketing-R80 integration perspective (Griffin and Hauser1992;
Gupta, Raj, and Wilemon 1986; Souder 1988), and R&D investment perspective
(Galbraith 1952). Based on Drucker’s theory, this study identifies knowledgeas a
common denominator underlying these perspectives and then assigns each
perspective to a particular aspect of knowledge generation. The results show that
this integrated framework, named market-oriented strategy, is a valid multiple-
construct model, and as an innovation strategy it indeed exerts a significant impact
on competitiveness in product innovation. Academically, through the construction
and application of this integrated framework, this study presents a rallying point for
researchers with different perspectives in product innovation.

The integrative power of the knowledge-based theory is not limited to its
ability to unify the three perspectives discussed above. This framework is also
capable of blending other theoretical perspectives. For example, in product
innovation, two other prominent theories are "market pull" hypothesis and
"technology push" hypothesis. While market pull hypothesis believes that
successful product innovation is driven by market demand, technology push

hypothesis advocates that innovation success depends on superior technology.

100
Both of these theories can be integrated into this framework handily. Market pull

hypothesis, in essence, emphasizes on understanding of customer demand, and
thus belongs to the domain of customer knowledge focus. On the other hand,
technology pull hypothesis centers on the development of technological capability,
and thus fits into technological knowledge focus.

6.3.2. Top Management’s Beliefs as Major Determinant of Strategic Behavior

Second, this research shows that top management’s beliefs are the major
determinant of a firm’s strategic behavior. This finding advances our understanding
on the issue.

According to the traditional contingency theory (Zeithaml and Zeithaml
1984), extemal environment is the major causal variable that drives a firm’s
strategic posture. In other words, external factors are the primary determinant of
a firm’s strategy formulation while internal factors, if there are any, are secondary.

Contrary to the traditional view, this research finds that top management’s
perception of market knowledge exerts a major impact on a market-oriented
strategy, and its impact on each strategic component is much larger in magnitude
(as measured in standardized coefficients) than that of any of the environmental
factors.

The finding of top management as the primary determinant of a market-
oriented strategy demonstrates that a firm’s choice of strategy depends on its top
management’s philosophical thinking and environmental influences, if there are
any, are secondary.

This finding explains why firms operating in a similar environment may adopt

101

dissimilar strategies. The strategic variation is mainly attributable to top
management’s diverse philosophical beliefs. The strategic variation would be
uninterpretable under the contingency approach which would expect firms facing
a similar environment to employ identical strategies.

Additionally, this finding suggests that firms do not have to react to the
environment passively. It is entirely appropriate for firms to establish a proactive
strategic posture through adopting a positive managerial philosophy.

6.3.3. Resolving Issues Concerning Information-Intensive Products

Third, the findings of this research also provide timely answers to issues
concerning information intensive products and industries.

As the economy transforms from industrial-based to information-based, the
informational component is becoming an increasingly large part of the product or
offering itself. Accordingly, a considerable interest in information intensive products
has been developed in the marketing literature. While Glazer (1991) defines
information intensity as the degree that a product is based on the information
collected and processed as part of exchanges along the value-added chain, many
issues remain unsolved. In particular, what types of knowledge are required to
develop an information intensive product? And what strategy can be implemented
to strengthen innovation competitiveness in an information intensive industry?

Based on Drucker’s theory, this research develops a typology for the study
of information intensive products in two steps. First, this research classifies

knowledge into four categories: customer knowledge, integral knowledge,

102
competitor knowledge, and technological knowledge (R80 strength). Then it

rationelizes each type of knowledge with extensive literature review. The
development of this typology offers further insight into the nature of information
intensive products and lays a foundation for studying the issue in a more
systematical manner.

Based on the typology, this research proposes a market-oriented strategy
and investigates empirically the impact of the strategy on competitiveness in
product innovation in an information intensive industry. The empirical results are,
in particular, meaningful to practitioners in information intensive industries since
their primary interest is to improve their organizational performance. For those
practitioners who have already followed a market-oriented approach, the significant

results will reinforce their own beliefs.

6.4. Managerial Implications

The main objective of the study was to empirically test several hypotheses
advanced in the marketing and product innovation literature regarding
consequences of a market-oriented strategy in product innovation. The findings of
the research indicate that (1) a market-oriented strategy exerts a strong impact on
competitiveness in product innovation, and (2) competitiveness in product
innovation, in turn, leads to superior market performance. The significant linkage
found between a market-oriented strategy and innovation outcomes suggests that
managers should implement a market-oriented strategy in their efforts to

strengthen new product competitiveness and market performance.

103

More importantly, the study uncovers four major components of a market-
oriented strategy: customer knowledge focus, integral knowledge focus, competitor
knowledge focus, and R80 strength. It appears that knowledge generation is a
common thread that links the four strategic elements together. As such, it is
imperative for managers to focus their attention on customer and competitor
knowledge generation. In addition, managers should continue to improve
communication and 000peration between marketing and R&D in order to generate
integral knowledge which is critical for creating solutions to customers needs.

The study also reveals that competitiveness in product innovation is a
construct with multiple facets, including product newness, uniqueness, reliability,
functionality, and productivity, etc. This finding seems to suggest that managers
should take multiple measures to gorge their product competitiveness. Relying on
any single aspect of product functions and features may be detrimental to product
market performance.

In addition to the consequences of a market-oriented strategy, the study
investigates the relationship between a market-oriented strategy and external and
internal factors. The results demonstrate that top management perception of
market knowledge is the most important factor in shaping up a market-oriented
strategy. This finding implies that undewaluation of market knowledge by top
management may be the greatest hindrance to the implementation of a market-
oriented strategy. Hence, a firm’s new product development program may be
benefitted from a critical reevaluation of top management’s view on market

knowledge.

104

In regard to the relationship between environmental factors and a market-
oriented strategy, the results show that customer demandingness and technology
change appear to affect certain strategy components. Specifically, customer
demandingness is found to be positively related to customer knowledge focus and
integral knowledge focus. This result seems to suggest that managers should
adjust their market-oriented strategy according to the characteristics of their
customers. Additionally, it may be beneficial to actively seek those customers who
are more sophisticated and demanding in terms of technological features and
specifications. Possession of such customers may be a valuable asset rather than
a burden. Technology change is found to exert a positive impact on competitor
knowledge focus, but a negative impact on customer knowledge focus. This
finding suggests that when technology experiences a rapid change managers
should constantly monitor their competitors’ product development strategies.
Negligence of competitor information in time of swift technology innovation may
weaken a firm’s competitive position. On the other hand, managers may not want
to devote all their attention on their current customers in time of rapid technology

evolution since such change may render the current market obsolescent.

6.5. Future Research Directions

There appears to be several areas in need of future research attention. The
first relates to the assessment of the consequences of a market-oriented strategy
in product innovation. In our research, the unit of analysis for the product

innovation outcomes is an individual new product and related product market.

105

Although such unit of analysis presents certain degree of measurement accuracy,
the resultant assessment of the impact of a market-oriented strategy may be partial
and incomplete. Future research may employ the product development program
as the unit of analysis. The inclusion of the whole product program may help us
depict a full picture of the impact from a market-oriented strategy. However, using
the product program may also present some research challenges. For example,
these new products may sewe various product markets and therefore result in
heterogeneous performances, can we develop an integrated measure to account
for these differences. Further, is it possible for a product development program to
generate both success and failure by employing the same strategy? If so, how can
such discrepant phenomenon be explained?

Second, this research focuses on one industry, computer software. While
the principles investigated by this study may be applied to other related high-tech
industries, the generalizability of the research is limited. This limitation may be
overcome in the future through a multiple industry research. For this purpose,
some measures need to be adapted and modified, since measures developed in
this research are idiosyncratic of the software industry. Nevertheless, a
comparative study on multiple industry settings will both enhance the
generalizability of the model and enrich our understanding of product innovation
and strategy.

Third, the domain of the current study is the software industry in the U.S.
market. It seems desirable to assess the impact of a market oriented strategy not

only in the U.S. but also in the international market. Are the strategic principles

106
uncovered in this study only applicable to the U.S. market? Can they be extended

to the foreign export market? Particularly, the performance of the U.S. software
products has been considered an exceptionally bright spot in the international
market. What role does a market-oriented strategy play in the U.S. software

success abroad? Future research is needed to address these issues.

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