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New product strategy in small technology-based firms : a pilot study online

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NOV 7 1985



WORKING PAPER
ALFRED P. SLOAN SCHOOL OF MANAGEMENT



New Product Strategy
In Small Technology-Based Firms ^
A Pilot Study



Marc H. ^eyer
Edward bC Roberts



August, 1985
WP# 1A28-2-85



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MASSACHUSETTS

INSTITUTE OF TECHNOLOGY

50 MEMORIAL DRIVE

CAMBRIDGE, MASSACHUSETTS 02139



New Product Strategy
In Small Technology-Based Finns ^
A Pilot Study



Marc H. hjeyer August, 1985

Edward bT Roberts WP# 1A28-2-85



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ABSTRACT



A pilot test is reported on a method for relating the degree
of "newness" within a firm's portfolio of products and the firm's
economic success. The embodied technology and market applications
newness is measured in the sequences of 79 products developed and
released by a sample of 10 small technology-based companies, each
under $50 million in most recent sales. A two-dimensional
"technology newness/market newness" grid is prepared for the product
set of each firm, based on the conditions existent at the time of
each product's development. Alternative weighting schemes are used
to generate a "newness index" for each firm. The degree of
"strategic focus" is shown to relate directly to corporate growth in
that small firms with more restricted degrees of technological and
market change in their successive products outperform companies with
wide diversity. The evidence suggests, however, that some product
"newness" is better than no "newness", and that more technological
change can be effectively employed in small company product strategy
than market change.



NEW PRODUCT STRATEGY

IN SMALL TECHNOLOGY-BASED FIRMS: A PILOT STUDY

Marc H. Meyer and Edward B. Roberts

Sloan School of Management

Massachusetts Institute of Technology

Cambridge, MA 02139

This article presents a pilot study of an empirical method to
examine the effectiveness of new product strategies in small
technology-based firms. The research methodology enables exploration
of a possible relationship between the degree of "newness", in terms
of the embodied changes of technology and market applications within
a firm's portfolio of products, and the firm's economic success.
Specifically, does the degree of "strategic focus" exhibited in small
technology-based companies' product lines affect corporate growth in
a systematic manner?

RESEARCH BACKGROUND

Building Blocks in the Literature

While the research in corporate strategy and innovation is
extensive, the subject of new product strategy as a specific research
topic lacks both conceptual modeling and methods for empirical
testing. Nonetheless, as sjmopsized below, the existing strategy and



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innovation research points to a large number of Important variables
that, together with the new product strategy, affect the firm's
performance.

The goals and business implementation tactics that emerge from
corporate strategy have a direct bearing on new product decisions.
Accordingly, from a research perspective, the study of new product
strategy should find a home in the corporate strategy literature.
Abell and Hammond (1979) and subsequently Abell (1980) have described
the complex interrelationships between defining business missions,
developing functional strategies, and allocating resources to
implement strategies. Porter (1980) conceives the process of
defining business activities in terms of differentiation, where the
firm identifies specific market opportunities that are defined by
customer requirements and competitive analysis. Lorange and Vancil
(1977) focus on the process of strategic planning itself and present
formal mechanisms for integrating planning that occurs at different
levels of the organization. Techniques for corporate planning and
business portfolio management are a logical outgrowth of this
research. However, new product strategy is treated as a tangential
issue to this research and is commonly viewed as the outcome of
market segmentation and other forms of market planning. The
technology factor in new product activities, which would appear
equally important as the target markets of new products, is the
orphaned child of strategy research: it is certainly there, but
nobody knows what to do with it I

A second vein of strategy research is empirical in nature.
This research has focused on the relationship between patterns of



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business diversification and organizational structure. Chandler
(1962) defined the hypothesis that structure follows strategy, and
supported it by tracking developments within seventy large
corporations over a twenty year period. Rumelt (1974) expanded upon
Chandler's thesis with another sample of large corporations,
demonstrating that corporations with related business units
outperformed those with wider business diversity. Roberts and Berry
(1985) most recently reviewed the research on diversification
strategy at the level of a firm's portfolio of businesses. But that
research does not seem to extend downward to the product level.

The technological resources of the firm and their utilization
also have a direct bearing on new product strategy. The forecasting
of technological change has been explored in some depth, both at the
general level (Martino, 1969; Fusfeld, 1970), and in terms of
contrasting rates of product versus process innovation over time
(Utterback and Abemathy, 1975). Using a different approach, Petrov
(1982) describes how a firm may profile its technologies in a fashion
similar to standard portfolio management techniques, using two
parameters of technological "attractiveness" and "relative
technological position" of technology units identified in the firm.
Gluck and Foster (1975) indicate conceptually how this profiling
approach can be applied to competitive analysis at the product
level. While the technology strategy research thus has many
interesting components, it suffers from a lack of empirically-tested
cohesive models.



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Innovation research provides a broader foundation for the
study of new product strategy. Research In this area has been both
diverse and substantial. The subset most applicable to the authors'
research interests are the empirical studies of the sources of
innovation. While research in this area has examined a broad range
of innovation-facilitating factors, the outcomes are often presented
In the context of the roles of "market pull" versus "technology push"
in effective Innovation (Myers and Marquis, 1969; Langrlsh, et al.,
1972; Rothwell, et al., 197A). Those factors deemed Important for
new product success by these researchers have Included a clear
understanding of user needs, strong marketing Investments, active new
product champions and sponsors, and the flow of relevant technical
information into the organization from external sources.

Since the sample of the present study is comprised of small to
medium-sized technology-based enterprises, prior entrepreneur ship
research may also be of background utility. The "need to achieve".
Identified by McLelland (1961) as the primary motivating force
affecting entrepreneurs, was further examined by Wainer and Rubin
(1969) as a factor affecting performance of the young
technology-based corporation . Similarly, the role of prior business
experience in successful technical entrepreneurship is examined in
Cooper (1970) and Cooper and Bruno (1977). Roberts (1968) has
identified a range of factors associated with success and failure of
technology-based startups, including the presence of a diversified
management team, the implementation of proactive rather than
opportunistic marketing programs, and a high degree of technology
transfer from former places of employment. But none of these



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entrepreneurial studies has concentrated on product strategy Issues.

Research that has specifically targeted new product strategy
has usually focused on multi-company samples of Individual products
or paired product comparisons. Calatone and Cooper (1981), for
example, reported on 195 new product cases from 103 firms, finding 18
cluster dimensions that related to individual product success.
Marquis (1969) and Rothwell, et al., (1974), cited above, and Cooper
(1979) reported similar analyses on large samples of single
products. But by their nature studies of single product successes
and/or failures within a company cannot empirically explicate the
firm's historical new product strategy.

In his latest works Cooper (1984, 1984a) has surveyed company
managers ' responses to an extensive questionnaire to define new
product strategy at the overall company level and to relate these
strategies to various company performance measures. But the authors
have not uncovered any prior research that has focused on examining
the sequences of product releases that become, eventually, a firm's
product line or multi-product portfolio. Yet intuitively the product
line or portfolio of products must be a more evident manifestation of
a company's strategy than any single product. The resulting research
question is therefore: Does one pattern of sequential product
development, identified in this article as a "new product strategy",
lead to different corporate success than another pattern?

This question of what new product approaches contribute to
successful corporate growth would appear elemental to both the



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strategy and entrepreneurial fields. Yet, with few exceptions,
empirical research on the subject is absent. Further, some potential
models that might be applied to the study of new product strategy,
namely business or product portfolio management, have been developed
primarily for large diversified business settings. The development
of a cohesive framework for the study of new product decisions in
smaller technology-based firms, one suited to empirical testing,
therefore assumed high priority in our research agenda.

Conceptual Framework

New product strategy requires a historical base for
assessment. Only an understanding of a firm's past product
activities can provide the full context by which to evaluate the
challenges posed by its next set of new products. Cooper (1984)
identified 66 individual product strategic elements as falling into
four clusters involving the nature of: products developed; markets
sought; technology employed; and the new product process. In turn,
these four elements suggest that measurable comparisons of present to
past products may be performed along two basic dimensions. The first
dimension is the newness of the technology within the new product
relative to technology (ies) already developed by the firm. The
second dimension is the newness of the market application for which
the new product is targeted compared with the users of past
products. The pairing of embodied technology and market application
for the examination of new product strategy is an idea used
previously by many authors, including Johnson and Jones (1957) among
the earliest, and more prominently by Rumelt (1974). Each of the two



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dimensions incorporates a set of factors. For example, the degree of
newness in market application includes levels of newness regarding
product packaging, buyers, distribution channels, and support
mechanisms. As each new product comes on stream, the cumulative body
of the firm's technology and market experience grows accordingly, and
is that much broader for the evaluation of the next new product
effort. This freimework is shown in Exhibit 1.

For the technological dimension of Exhibit 1, the critical
unit of analysis identified is the "key core technology(ies)" of a
product. A core technology is a discrete, unique set of skills or
techniques which finds application within one or more products or
services. A given product embodies at least one identifiable core
technology, and it may include several or more separate
technologies. However, not all core technologies embodied within a
product have the same impact upon the firm's competitive advantage.
Accordingly, those particular core technologies which provide the
firm with a proprietary, competitive edge and differentiate it from
other companies making similar or substitute products have been
identified as key core technologies (Ketteringham and White, 1983).
Key core technologies can be distinguished from other technologies
used by the firm that are commonly available in the marketplace as
components. This latter, more broadly available group of core
technologies are referred to as "base technologies". A firm that is
engaged in an industry characterized by rapidly advancing technology
typically concentrates on one or more specific key core technologies,
and by packaging or integrating it with a variety of component base



Exhibit I
The Product Innovation Grid



KEY
TECHNOLOGY

New,
Unrelated



New,
Related



Major
Enhancement



Minor
Improvement



Region 4 [ | Region 6

1 !

1 1

._ J 1




1 1

Region 2 i i

1 !
__ 1 L-


1 1 1 1

- Region 1 < i Region 3 1 i Region 5

New 1 1 1 '
Models • 1 } 1

1 ! 1 1 1 1 1 1



Existing
Customers



New

Niche



New
Segment



New
Market



MARKET APPLICATIONS



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technologies, generates its final product. The key core technology
becomes the basis for the "value added" of the firm. Clearly, this
process occurs only in those firms that undertake their own product
develofment and are not simply sales or support organizations.

Therefore, the differentiating element along the technological
dimension of a firm's product portfolio is the degree to which each
new product entails changes to the embodied key core technology of
past products. This level of change runs along a conceptually
continuous range of expended resources and effort. However, for the
purposes of research, specific discrete levels of change or newness
can be identified. The spaces in the diagram between "regions"
suggest areas of overlap or ambiguity.

The first two levels identified are "minor improvement" and
"major enhancement" to a key core technology that the firm had
developed some time in the past. Major enhancement is often achieved
through the addition of new base technologies to a product line. It
often requires a substantial development effort. By adding new
components or subsystems, the firm can leverage its existing key
technology into new product/market areas without having to develop
additional new technologies of its own. While still concentrating on
a single set of internal core technologies, a firm may expend
considerable R&D resources to remain a consistent leader in that
technological area or aggressively to advance its chosen key
technology into new frontiers of application. The third level of
technological newness is the development of a "new, related" key core
technology, "related" by virtue of either sharing a product



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appllcatlon in which the firm is presently involved or being
combinable with an existing key technology into a wholly new product
application. The development of a "new, but unrelated" key
technology presents no such opportunity for combination with the
firm's existing product technology. This is the most extreme level
of technological newness, a major departure from what we have
labelled "technological focus".

A schema for identifying levels of newness in the market
application dimension of Exhibit 1 has been adapted from the
competitive structure model of Urban, Johnson, and Brudnick (1979).
This model, shown by example in Exhibit 2, segments a market into a
hierarchical tree structure by assigning possible product attributes
to specific tree branches. These branches are defined by an analysis
of the types and effects of product usage and the characteristics of
users.

In the conceptual adaptation of this model to the present
pilot research, the market tree structure(s) for a firm's products Is
derived by extensive discussion with the interviewees. However,
individual tree branches are not statistically tested by random
sampling of consumers of the firm's products, as had been done by
Urban et al. Additionally, the layers of the market structure are
restricted to three generic levels: the general market, segments
within the market, and niches within each segment. This taxonomy
captures most of the degrees of newness in the target markets for new
products. Since the market structures facing a firm can change over
time, the degree of market newness assessed for a particular product



■ 11-



Exhibit 2
The Hierarchical Market Structure



PRINTER
fy^ARKET



GENERAL
MARKET



Persona I



Business



Drafts



Graphics



Letter
Quality



Batcti
Drafts













Sci en
ti f ic






















Plotting




Equa
■t 1 ons



MARKET
SEGMENTS



MARKET
NICHES



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is based on the "current" structure at the time of the new product's
release. As illustration, the market tree in Exhibit 2 was developed
with the founder of a printer company that is part of the sample of
this pilot study.

The Intersections of technological and market newness on the
Exhibit 1 grid, sixteen in all, can be grouped into regions of new
product activity. Region 1 represents the release of new versions or
models of current product lines, requiring some degree of enhancement
to existing key core technology. In Region 2, the firm broadens its
activities in an existing, or to a closely related, product/market by
developing a new key technology that is combined in some fashion with
the firm's existing technology. Forward integration from components
into systems is an example of this type of new product activity.
Region 3, on the other hand, is characterized by adaptive
innovation. Here, the firm applies its existing technology to new
sets of users who are closely related to current ones. In Region 4,
a high degree of technological newness is combined with relatively
low market newness. This is a "customer-bound" focus where the firm
tries to make markedly different products for a single set of
customers. Region 5, on the other hand, represents extreme instances
of adaptive innovation. Finally, new products that require the
largest amounts of technical and market diversification fall within
Region 6.



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HYPOTHESIS
The general purpose of the research is to examine the possible
relationship between patterns of new product strategy and the
economic performance of the technology-based firm, i.e., a firm that
participates in an industry characterized by substantial rates of
product innovation. The authors hypothesize that technology-based
firms which exhibit a high degree of strategic focus in their new
product development activities are more successful than those which
have less focus.

The extreme of a focused strategy would be represented by a
firm that without fail takes small steps of incremental improvement
in a single key technology for one basic customer set. At first
glance, this may seem the least risky of strategies because the firm
takes no chances in exploring new technological areas or market
applications for its products. However, a dogged faith in the
continued viability of a single technology/customer set could, over
time, prove to be a risky course of action. The opposite extreme
strategy is a firm that, with each new product introduced,
consistently attempts to implement radically new technologies for
substantially different applications than those with which it has
previous experience. Between these limits lies the gamut of possible
strategic variation in degree of change in technology and market
applications .



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The hypothesized relationship between the degree of focus in
new product strategy and performance in small technology-based firms
follows a bell-shaped curve that is skewed to the left (Exhibit 3).
The most successful firms are posited to be those that on average
pursue a focused strategy, with relatively low levels of cumulative
product newness, but which, in several or more critical new product
development efforts, have substantially enhanced their existing key
core technology to exploit new market niches or segments. Those
firms which remain narrowly focused and never undertake major
technological enhancement, nor the application of their technology to
new related niches or segments, may achieve a certain degree of
economic success by virtue of their resource concentration and
expertise, but it is hypothesized that their growth potential will
remain limited. On the other side of the coin, those firms that
exhibit high degrees of product diversity will be trapped into trying
to achieve too much with too little in terms of practical working
experience with both the new technology and marketplace demanded by
their new products.

The hypothesis suggests that a firm may undertake either
substantial technological improvements in a related sense for its
current customer base or try to reach new related applications with
enhanced existing technology, but not both types of product newness
at the same time. If a firm cannot remain stagnant, is it better, in
assessing relative risk of new product moves, to try to learn new
complementary technologies to substantially enhance a product line
for essentially the same sets of customers, or to try to reach new



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markets that will require only customization of existing technology?
In other words, can the small technology-based firm more effectively
learn new technology or new markets?

We posit that for such a company, mastering new, related key
technology is on average a more certain, achievable task (such as in
backward integration) than is penetrating new market niches or
segments with customized existing technology. The reasoning behind
this assertion rests upon the very character of the subject
organization: long on technology skills, often lying with the
founders, and often short on the marketing skills and resources
required successfully to target, distribute product, and otherwise
support new customer sets, even those closely related to the firm's
existing ones. In terms of the conceptual grid shown In Exhibit 1,
the authors hypothesized stronger performance for those firms whose
new product activities generated products characterized as "minor
improvements" or "major enhancements" in the technological dimension,
and targeted for "existing customers" or "new market niches".

The strategic direction suggested by the authors' "strategic
focus" hypothesis runs counter to the tendency of many American
businesses to pursue wide diversity in their product technologies, as
described by Rosenbloom and Abernathy (1982). "Since the 1950s, a
penchant for diversification has led U.S. firms away from their core
technologies and markets." Part of the justification behind this
asserted trend lies in corporate financial portfolio theory, which,
as misapplied by some leading consulting organizations to business
strategy, argues that overall risk can be minimized by having



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assets spread across a variety of product /market areas. Heavily
oversold "learning curve theory" has also played a role in the
tendency observed by Rosenbloom and Abemathy. By placing a high
priority on major increases in manufacturing output to achieve
economies of scale, management may forego the flexibility needed to
implement new, innovative features in existing product lines, a
danger documented in the automobile industry by Abemathy and Wayne
(1977). Product development resources may, by default, be allocated
primarily to other, newer business areas.

"Strategic focus", on the other hand, implies a level of
concentration on a key technology area which, on average, may be the
most important factor in the firm's effort to compete in the world
marketplace. This source of competitive advantage seems even more
critical for the particular type of company examined in this
research: the small technology-based firm. That firm
characteristically has limited financial resources, may well have
relatively undeveloped market strength, but may possess advanced
technology (Roberts, 1980).

THE SAMPLE
In development of a pilot study of the "strategic focus"
hypothesis, the framework described above was applied to a group of
ten small technology-based firms and their 79 products, a subset of a
larger sample developed for a multi-subject study on technological
ventures (Utterback and Rietberger, 1982). The larger
Utterback/Rietberger sample consisted of firms started between 196 5


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Online LibraryMarc H MeyerNew product strategy in small technology-based firms : a pilot study → online text (page 1 of 2)