- Email: [email protected]
Product development strategy: An integration of technology and marketing
J PROD INNOV MANAG 1985:2:25-33
25
0000
Product Development Strategy: An Integration of Technology and Marketing Harry Nystriim
Although it seems obvious that a new product development strategy must bring together marketing and R&D strategies, the conceptual development of marketing and R&D strategies has taken place in relative isolation. More than ten years ago, when Professor Harry Nystriim began his research program on product development in Swedish firms, he realized that the isolation wasn’t an appropriate point of view. He began to construct a conceptual framework for analyzing product development strategies that incorporated many more variables than had traditionally been considered. The latest set of firms in the research program are four pulp and paper companies. They are in mature, process industries, quite unlike the earlier study firms. Yet many of the same propositions from the earlier research still hold. In this article, Professor Nystrom presents the most recent version of his framework to help managers develop an integrated product development strategy.
It is becoming clear that new product strategies are important determinants of long-run company success in many if not all industries [1,2]. At the same time, a systematic framework for the analysis of product strategy problems has not yet been developed. This article presents some ideas that can contribute to such a framework. A common view of strategy is that success depends on whether the strategy and structure of the company matches its environment. For product development strategies, the most important environmental factors are linked to market and technological change [3-61. Companies thus need both marketing strategies and technology strategies to deal effectively with product development. But in particular, they need (1) to make their marketing and technology strategies more explicit, and (2) to integrate them into an overall new product strategy. This article provides a framework for characterizing and integrating marketing and technology strategies. Its purpose is to provide a way of evaluating existing strategies and proposed strategy alternatives.
Some Common Factors
Address correspondence to Professor Economics and Statistics, The Swedish ences, S-750 07, Sweden. 0 1985 Elsevier Science Publishing Co., Inc. 52 Vanderbilt Ave., New York, NY 10017
Harry Nystrijm, Department of University of Agricultural Sci-
The framework developed here has been proven applicable in industrial goods as well as consumer goods industries; in research intensive industries as well as those where research spending is relatively low-in pharmaceuticals and electronics instruments; in food processing and steel. The framework was developed in 0737-6782185/$3.30
26
JPROD
H. NYSTR6M
INNOV MANAG 1985;2:25-33
I
I
1 BIOGRAPHICALSKETCH
amy Nvstriim is Professor of Marketing and Organization at i theH Department of Economics and Statistics at the Agricultural University of Sweden, Uppsala. He received his doctorate from the Stockholm School of Economics and has previously been Professor of Business Administration at Uppsala University. His main research interest is in marketing strategy, product development, and innovation management.
I
I
five major research projects where managers in 17 1 fums in eight industry categories were interviewed over a ten-year period, beginning in the mid-1970s [8,9,11,12]. In the course of the interviews, case histories of 365 new products were examined in the search for details of implemented strategies as compared to stated or written strategies. The interviews were supplemented by the analysis of written materials such as company reports and product documents. The majority of the firms and products that were examined were in the farm machinery industry but the elements of the analytical framework were equally useful for structuring the strategies of the other firms in the studies. The list of industries in the research program is shown in Table 1. The common thread running through the studies is that, in most industries and in most companies, what I have called an open, innovative product development strategy is more successful than a closed strategy. The
Table 1. Industries Studied In The Ten-Year Research Programsa
Study A
Industry pharmaceutical electronic instruments industrial chemicals steel
B
farm machinery
C
farm machinery
Number of companies studied
Number of new products studied
3 4 2 2
24 31 13 23
140
166
4h
D
food processing
20
E
pulp and paper
- 4 171
276 121 - 14 365
“References: Study A [8], Smdy B [9], Study C [I 11, Study D [12], Study E (repotted in this article). %cluded in Study B totals.
rate of success varies among firms, but our data show that, by and large, the same strategic factors that are associated with success in high-technology firms are also associated with success in low-technology firms. In the following discussion, I define what I mean by “open” and “closed” strategies and present the elements of the product development strategy framework. After outlining the elements of the framework, I use four firms in the Swedish pulp and paper industry to illustrate the use of the framework as a tool for strategic analysis. Some notes on the research methodology are provided in the Appendix.
Technology Strategy
It is only in recent years that the notion of a technology strategy has been getting widespread and explicit attention. Ten years ago, when the research behind this article was first initiated, product development was mainly viewed as a marketing problem, at least in the business literature. Technology strategies for finding and developing new products were seldom discussed either in the business literature or in firms. Our company interviews at that time clearly pointed to the need for a specific formulation of technology strategies. Two dimensions of technology strategy emerged from the data as having crucial importance: technology use and technology orientation. Technology use refers to the way technologies are applied to the critical technical problems in product development. Technology orientation refers to the extent to which a company relies on its own internal technical competence and resources in new product development or depends on outside sources.
Technology
Use
Technology use can be isolated, where research and development work on new products is mainly within a given established area of technology, such as microelectronics or optical measurement. The technology is seen as a relatively well defined and delineated body of knowledge, usually the basis for professional and academic specialization. Isolated technology use is intradisciplinary and can be carried out by individuals or firms working in relative isolation from one another.
PRODUCT DEVELOPMENT
STRATEGY
I PROD INNOV MANAG 1985;2:25-33
Table 2. Examples of Isolated and Synergistic Technology Use Isolated technology
use
Biochemistry Steel metallurgy Hydromechanics Separation chemistry Paper chemistry Extrusion Therm0 technology Data programming Microelectronics
Synergistic
technology
Marketing Strategy use
biochemistry and immunology microbiology, pharmacology, and bacteriology steel metallurgy and welding technology optical measurement, mechanical construction, and microelectronics extrusion and mechanical construction paper chemistry and mechanical construction
Source: These were technology use examples as delineated by managers and R&D personnel who had direct involvement in product development.
Technology use can be synergistic, where new product R&D combines technologies. Synergistic technology is interdisciplinary in nature and requires the bridging of gaps between specialized experts from otherwise disjunct areas of knowledge. It requires that good contacts be maintained among the disciplines to achieve effective combinations. There are good chances for more innovative solutions when there are diverse approaches to problems. Synergistic technology use then can be said to be more open and innovative, compared to the more closed and static nature of isolated technology use. Some examples of isolated and synergistic technology uses by companies that were examined in the research are shown in Table 2.
Technology
27
Orientation
Few firms lie at the extremes of an internal orientation, where there is complete self-reliance, or an external orientation, where there is complete reliance on outside resources, but there is often a strong tendency in one direction or the other. External cooperation may be with, for instance, universities, research institutes, other companies, or independent inventors. l An external orientation, by involving the outside technological environment to a larger extent, can be called an “open” element of technology strategy. An internal technology orientation restricts the possible solutions to product development problems and is a more closed orientation.
‘Editor’s note: A full discussion of the use of external technology sources appeared in the last issue of JPIM. See, H&ansson, H&an and Laage-Hellman, I. Developing a network R&D strategy. Journal ofProduct Innovation Management 224-237 (1984).
Marketing strategy can be defined in terms of the product and customer focus of the company. On the dimension of product focus, a company can concentrate on developing products that are essentially variations of existing products-product modifications, or it can focus on products that fall outside the established product lineproduct diversifications. The second dimension of marketing strategy is customer focus. If new products are primarily aimed at getting new customers, the strategy is ofensive. If they are mainly directed toward tying existing customers closer to the company, the strategy is classified as defensive [7].
Product Design Whether the marketing strategy is offensive or defensive, it may be implemented through products that are directed either toward a wide range of customer needs-a general product design; or it may result in products that are aimed at a more narrow spectrum of customer needs-a specific product design. The choice of a general or specific product design orientation is an important factor in characterizing the overall product development strategy. In a sense, it is an intervening variable in a model that relates strategy to product development success.
Process Design Closely related to the choice of marketing strategy is the choice of process, especially in those industries, such as steel, chemicals, and food processing, where product and process innovations are closely connected. A general process is used for producing many types of end products. A specific process is one designed to produce a narrow range of end products, or even just one. In this sense, the process design can also be considered to be an intervening variable between product development strategy and product development success.
28
J PROD INNOV
MANAG
H. NYSTR6M
1985:2:25-33
Product Development Outcomes
Ultimately, the measure of success of a strategy is its effects on new product performance [l]. Of course, strategy alone is not the sole determinant of success. Nevertheless, it is worth defining some of the ways success can be measured in order to assess some part of the relationship between product development strategy and product development outcome. Three dimensions of performance are specified in the product development framework: technological, competitive, and financial.
Technological
Outcome
The main measure of technological outcome is the level of technological innovation. This is defined as the degree of novelty companies have to employ to solve the critical technical problems when developing new products. The underlying assumption is that a relatively high level of technical creativity is usually a necessary, but not sufficient, condition for achieving highly competitive new products, particularly in research and technology intensive industries. A high level of technological innovation also, as a rule, makes it easier to achieve patent protection. Further, as a rule, it requires a longer period of development time than more routine technical developments. In the research program, there were three measures of the level of technological innovation achieved by the companies. The principal measure was our rating of the degree of novelty or uniqueness of technological solutions. These were derived after intensive discussions with individuals in the firms. The ratings were highly correlated with the other two measures: degree of patent protection and time for development. Since companies, for competitive reasons, may not apply for patents, the patent situation is an imperfect indicator of the level of technological novelty. Development time is also an imperfect indicator, but its high correlation with the other two measures gives some confidence in the overall measures that were made.
Competitive Outcome In our framework, the measure of market outcome was the uniqueness or the interchangeability of the product
from the buyer’s point of view at the time it is introduced on the market. If buyers consider the product to be more or less interchangeable with competing products already on the market, the product’s uniqueness is low. The assumption is that, the more unique it is-the more that buyers see it as different in features and performance from competing products-the greater the market potential.
Financial Outcome Commercial success for new products is ultimately the profitability of the product over its life cycle. For this research, the measure was an estimate of the profitability over the time period, as judged and as justified to the researchers by company executives. Of course, as noted earlier, the profitability depends on many factors other than product development, so it is difficult to be conclusive about apparent relationships between strategy for product development and product development outcomes. The technological and competitive outcomes are similarly limited as a measure of strategy success although they are more direct consequences than profitability. The general analytical framework for product development strategies is shown in Figure 1.
Open and Closed Strategies
From a general point of view, product development strategies can be viewed as lying along the dimension of open or closed. Synergistic technology use and external technology orientation contribute to an open technology strategy. Product diversification and an emphasis on new customers are open aspects of marketing strategy. Conversely, an isolated technology use, an internal technology orientation, product modification approach, and an emphasis on existing customers are all elements of a closed strategy. General product designs to suit a wide range of customer needs and general process designs for a wide range of production operations can also be considered to be part of an open strategic orientation. Specific product and process designs are a part of a more closed strategic orientation. The main underlying assumption that has emerged
PRODUCT DEVELOPMENT STRATEGY
1 PROD INNOV MANAG 1985;2:25-33
29
-
PRODUCTDEVELOPMENTSTRATEGY
MARKETING STRATEGY
TECHNOLOGY STRATEGY Technoloqv Isolated
Product
Use Synergistic
-
Modification
Customers
Orientation Internal
-
Diversification
-
Existing
External
PRODUCT Specific -
DESIGN General
PROCESS Specific -
DESIGN General
M A R K
New
-
F
ii V I ii
PRODUCT DEVELOPMENT OUTCOMES TECHNOLOGY Technology Low
-
COMPETITIVE OUTCOME Product
OUTCOME Novelty High
Interchangeable
FINANCIAL Profitability
-
Unique
ICI E N T
OUTCOME
Over the Product
Life Cycle
Figure
1. Analytical
Framework
from the research program has been that more open, explorative strategies offer a greater creative potential and therefore should be more appropriate in highly changing and uncertain environments. More closed strategies, on the other hand, should focus the efforts of a company more efficiently and therefore should be better in more stable and predictable environments. A summary of the characteristics of open and closed strategies is provided in Table 3.
for
Product
Development
Strategies.
ture of the company strategies from annual reports, internal company documents, and discussions with managers in the firms. Then, a series of case histories of new product developments was compiled and analyzed to see what the company’s actual or realized strat-
Table 3. Characteristics Development Strategies
of Open and Closed Product
Open: creative potential for changing, uncertain environments
The Analysis of Four Firms
The strategy framework was used to analyze the product development strategies of four Swedish pulp and paper companies. The first step was to develop a pic-
technology orientation technology use product line focus customer focus product design process design
Closed: focus for efficiency in stable environments
External
internal
Synergistic Diversification New General needs General production
isolated modifications existing specific needs specific production
30
J PROD INNOV
H. NYSTR6M
MANAG
1985;2:25-33
egies were. We had some expectation that there might be a difference between the stated strategies and the realized strategies, and as it turned out, the two were not always consistent. What managers and their documents said they did-their intended strategies-was not what we found they actually did-their realized strategies-when we examined the product development case histories.
Company A Company A’s sales in 1982 were 4 billion Swedish Crowns (about U.S. $500 million) and it had about 8000 employees. Its product mix was mainly pulp, carton board, paper sacks, well-paper, chemicals, and lumber. Its overall policy was to concentrate on existing product lines and achieve cost rationalization. Its international strategy was to add value to its own raw materials by further processing in subsidiary companies abroad. The idea was that final processing in its subsidiaries would give better market contact and better technical adaptation to foreign markets than would direct exporting. In terms of our analytical framework, Company A’s product development had a pronounced closed, defensive strategy, with R&D and production technology geared, to a large extent, to specific process innovation and existing products and customers.
Company B In 1982, Company B had about 10,000 employees and sales of 4.8 billion Swedish Crowns (about U.S. $600 million). Its product mix was mainly pulp, fine paper, lumber, and chemicals. In its overall strategy, it had stressed diversification within existing product lines. The company was trying to achieve this by changing its emphasis from mainly process innovations to more product innovations. Marketing, R&D, and production technology were giving more emphasis to product diversification and new customers, especially in comparison to Company A. Company B had a relatively open product development strategy.
$450 million). Its products were mainly pulp, craft liner, journal paper, lumber, and paper machines. As an overall strategy, it concentrated on existing product lines with its own forestry and power system as its strategic resource base. The company had stressed both biological research (for its forestry) and technical product development. From the point of view of our framework, Company C had a pronounced closed product development strategy, similar to Company A, with R&D, production technology (as well as marketing) aimed primarily at process innovations for existing products for existing customers.
Company D Company D had about 630 employees in 1982 and sales of 350 million Swedish Crowns (almost U.S. $45 million). Its product mix was more concentrated than in the other three companies and consisted mainly of pulp, craft liner, and carton board. Its overall strategy was to diversify its existing product line within the limits imposed by a reliance on its own pulp as a raw material. This company had emphasized production flexibility and had concentrated on selecting market segments to increase the value added to its basic raw material, pulp. In the terms of our analytical framework, Company D had a more open, offensive product development strategy than any of the other three companies. Its R&D was more fully directed toward product, rather than process innovation, and toward new customers.
Realized Strategies
To a great extent, the descriptions of the strategies of the four firms, as outlined above, represent a summary of what the companies had done in the past and what their managers intended should happen. Descriptions of actual product histories can give a clearer picture of the product development strategies as they were actually implemented.
Company C
Choice of Products
Company C had about 6200 employees in 1982 and sales of 3.7 billion Swedish Crowns (just over U.S.
Company representatives were asked to give examples of products developed and marketed over a period, usu-
PRODUCT DEVELOPMENT
31
J PROD INNOV MANAG 1985;2:25-33
STRATEGY
Table 4. Ratings of Company Strategies and Outcomesa Company
Original strategy rating
Marketing strategy
Competitive outcome
A B C D
pronounced closed relatively open pronounced closed most open
3.7 3.0 3.5 3.0
4.0 3.0 3.8 3.3
Technology strategy
Technology outcome
1.7 1.0 3.0 3.5
3.7 2.0 3.2 2.8
Financial outcome 4.3 3.5 3.5 3.7
“Higher ratings indicate more open strategies and more successful outcomes
ally, of about ten years. To be included in the study, the products had to be new from both a technological and a marketing view, and the companies themselves had to have taken an active part in the products’ technical development and market introduction. The sample group of products from each company were to be representative of the total range of new products developed and introduced during the period studied. Both successful and unsuccessful products were to be included. These selection criteria gave a sample of products that, even in large companies, tended to be close to the total number of new product cases that were available. A total of 14 product case histories were developed, three or four from each of the four fil-IllS.
During interviews with the company representatives, information was collected that allowed ratings to be subjectively applied by the company personnel and the interviewers to the strategy dimensions outlined in the model shown in Figure 1. These ratings were very rough evaluations and should not be taken as precise, objective measures. Nevertheless, they do serve to indicate differences in strategy elements among the companies and to suggest some relationships between strategy and performance. The ratings were on a scale from 1 to 5. For the three “performance” or outcome dimensions, 1 indicates the lowest level of success, 5 the highest. For the strategy elements, 1 indicates a closed strategy characteristic, 5 an open characteristic. The details of the rating system are outlined in the Appendix.
Product Analysis
In each firm, there was some variety in the type of product and in the development process used. For this analysis, the ratings for the product cases were aver-
aged to give the rating for the firm. The overall strategy ratings and outcomes are shown in Table 4. The company we originally classified as having the most open strategy, Company D, expressed, in the product cases, clearly the most open technology strategy but one of the two most closed marketing strategies. The two companies with, originally, the pronounced closed strategies, had the two most open marketing strategies. There was some consistency in the ratings for Company B. It showed in its product cases the most closed technology strategy, and the poorest technology outcome; and one of the two most closed marketing strategies and the poorest competitive outcome. But the consistency fails when we compare the product ratings to the original rating of a relatively open strategy. The only apparent relationship between strategy and outcome is that an open marketing strategy-aiming at new customers and product diversification-was associated with a good competitive outcome-product uniqueness. Otherwise there was no clear pattern of relationship.
Company-Specific
Analysis
The results of this study and those of the earlier studies in our research program point to the need for a company-specific analysis of strategy and its relationship to performance. It is difficult to generalize across companies except with regard to one dimension-technology strategy. Although the records of the four pulp and paper companies are somewhat inconsistent in this regard, in all of our other studies in our research program over the past ten years, there is a tendency for more open technology strategies to be associated with more technological success. Technology success is measured in our model by the
32
H. NYSTRiiM
J PROD INNOV MANAG 1985;2:25-33
level of technological innovation, that is, the degree of novelty required and realized in critical aspects of new product design. To achieve competitive new products in any industry, some degree of technical creativity is necessary. In our data, synergistic technology use and an external orientation is more clearly related to higher levels of technological innovation than isolated technology use and internal orientation. More closed strategies may lead to a more efficient use of existing resources. Achieving the right balance between open and closed strategies, in both marketing and technology, is a major management issue. The integration of marketing and technology strategies is another major management issue. It is in the skillful management of these sets of marketing and technology variables that successful companies excell. Our framework is designed to help managers address the difficult new product strategy questions. Financial support for the study has been received from the Swedish Council for Research in Agriculture and Forestry, which is gratefully acknowledged.
Appendix: Methodological Note on Definition and Measurement
Technological
Strategy
[II
[51
[31
Most closed Internal R&D orientation and isolated technology use
Intermediate value Internal R&D orientation and synergistic technology use or External R&D orientation and isolated technology use
Most open External R&D orientation and synergistic technology use
More open technological strategies are thus aimed at generating new technological knowledge and competence by cooperation with the outside environment and the combining of technologies. More closed strategies are aimed at efficiently using the companies’ own technological knowledge and specialized competence. The technologies companies are working in and the extent to which they are utilized to solve critical problems in developing specific products are given by company representatives. This is also the case with regard to information on R&D cooperation for specific products.
Marketing Strategy
[II Most closed Defensive & product modification (variation of existing product to existing customers)
[31 Intermediate value Defensive & product diversification or Offensive and product modification
[51
Marketing Innovation
Most open
[II Offensive & product diversification (new products, new customers)
More open marketing strategies are thus aimed at generating new business by product and market development. More closed strategies are aimed at maintaining existing product types and markets. The distinction between product modification and product diversification is based on product usage, as reflected in how companies themselves view the products in their technical descriptions and sales promotion.
Product essentially similar to competing products
[a Completely product
unique
Marketing innovation is measured on a scale from 1 to 5 based on information from the companies. This refers to how unique a product is judged to have been at its market introduction, compared to existing competing products. In this way competitive response and the effect of marketing promotion and price is eliminated from our measure of market success. This measure then becomes a pure measure of how successful a company has been in developing a product which at the time of market introduction fulfills previously unsatisfied buyer needs. The extent to which this market potential is actually realized by the companies and transformed into profit is determined by competitive parameters, such as price and promotion.
J PROD INNOV MANAG 1985:2:25-33
PRODUCT DEVELOPMENT STRATEGY
Commercial Outcome
Technological Innovation
[ll Conventional technological solution, based on existing knowledge
33
[51 Unique technological solution, based on new knowledge
As in the case of marketing innovation, technological innovation is measured on a scale from 1 to 5, based on company information. With regard to each specific product, companies provided detailed information on the extent to which solving the critical technical problems required solutions novel not only to the company, but to society. Essentially this is a measure of technical creativity, similar to that required by patent law. A direct measure of technological innovation was used to avoid the incompleteness of more indirect measures such as patent data. Companies, for competitive reasons, often do not apply for patent protection, even if it is likely that it might be granted. In the present study development time is therefore used as the only validity check on our estimates of technological innovation. It should be pointed out, however, that in our other studies we have found a relatively high correlation between both the degree of patent protection and development time on the one hand and our estimates of the level of technological innovation on the other hand. As we have noted in the main text the present study also shows that development time increases with the level of technological innovation, which is what we would expect if our measurement of the level of technological innovation accurately reflects our intention.
Ul
PI
[31
Large loss
Small loss
Breakeven
[41 Small profit
PI Large profit
The commercial outcome for the products studied were assessed by company representatives on a scale from 1 to 5. This outcome refers to estimates over the total product life cycle and requires that the product has been on the market for some time.
References 1. Cooner. R. G. How new nroduct strategies imnact on ncrformance. Jo&al of Product Itmovahon Managem&t 5- iS (Jan 1984). 2. Crawford, C. Merle. Defining the charter for product innovation. Management Review 3-12 (Fall 1980). 3. Day, George, S. A strategic perspective on product planning. of Contemporary Business 1-34 (Spring 1975). 4. Gold, Bela. Alternate strategies for advancing nology. Research Management 4:24-29 (1975). 5. Kiel, George. Technology and marketing: Horizons 3:7-14 (May/June 1984).
Sloan Journal
a company’s
tech-
the magic mix. Business
6. Madique, M. A. and Patch, P. Corporate strategy and technological policy. In: Readings in the Management of Technology, M. L. Tushman and W. L. Moore (eds.). Boston: Pitman, 1982, pp. 273285. 7. Nystrsm, H. Market strategy and market structure: learning and adaptation in market relations. Marknadsverande 1:4 l-45 (1977). 8. Nystr(im, H. Company strategies for research and development. In: Industrial innovation: Technology, Policy, &+sion, M. J. Baker (ed.). London: MacMillan, 1979, pp. 417-440. 9. Nystrtim, H. and Edvardsson, B. Research and development strategies for Swedish companies in the farm machine industry. Report from the Institute for Economics and Statistics, No. 139. Uppsala, Sweden, 1978. 10. Nystriim, H. Creativity and Innovation.
New York: Wiley,
1979.
11. Nystriim, H. and Edvardsson, B. Research and development strategies for four Swedish farm machine companies. Report from the Institute for Economics and Statistics. Uppsala, Sweden, 1980. 12. Nystmm, H. and Edvardsson, B. Product innovation in foodprocessing: a Swedish survey. R and D Management 67-72 (April 1982).
25
0000
Product Development Strategy: An Integration of Technology and Marketing Harry Nystriim
Although it seems obvious that a new product development strategy must bring together marketing and R&D strategies, the conceptual development of marketing and R&D strategies has taken place in relative isolation. More than ten years ago, when Professor Harry Nystriim began his research program on product development in Swedish firms, he realized that the isolation wasn’t an appropriate point of view. He began to construct a conceptual framework for analyzing product development strategies that incorporated many more variables than had traditionally been considered. The latest set of firms in the research program are four pulp and paper companies. They are in mature, process industries, quite unlike the earlier study firms. Yet many of the same propositions from the earlier research still hold. In this article, Professor Nystrom presents the most recent version of his framework to help managers develop an integrated product development strategy.
It is becoming clear that new product strategies are important determinants of long-run company success in many if not all industries [1,2]. At the same time, a systematic framework for the analysis of product strategy problems has not yet been developed. This article presents some ideas that can contribute to such a framework. A common view of strategy is that success depends on whether the strategy and structure of the company matches its environment. For product development strategies, the most important environmental factors are linked to market and technological change [3-61. Companies thus need both marketing strategies and technology strategies to deal effectively with product development. But in particular, they need (1) to make their marketing and technology strategies more explicit, and (2) to integrate them into an overall new product strategy. This article provides a framework for characterizing and integrating marketing and technology strategies. Its purpose is to provide a way of evaluating existing strategies and proposed strategy alternatives.
Some Common Factors
Address correspondence to Professor Economics and Statistics, The Swedish ences, S-750 07, Sweden. 0 1985 Elsevier Science Publishing Co., Inc. 52 Vanderbilt Ave., New York, NY 10017
Harry Nystrijm, Department of University of Agricultural Sci-
The framework developed here has been proven applicable in industrial goods as well as consumer goods industries; in research intensive industries as well as those where research spending is relatively low-in pharmaceuticals and electronics instruments; in food processing and steel. The framework was developed in 0737-6782185/$3.30
26
JPROD
H. NYSTR6M
INNOV MANAG 1985;2:25-33
I
I
1 BIOGRAPHICALSKETCH
amy Nvstriim is Professor of Marketing and Organization at i theH Department of Economics and Statistics at the Agricultural University of Sweden, Uppsala. He received his doctorate from the Stockholm School of Economics and has previously been Professor of Business Administration at Uppsala University. His main research interest is in marketing strategy, product development, and innovation management.
I
I
five major research projects where managers in 17 1 fums in eight industry categories were interviewed over a ten-year period, beginning in the mid-1970s [8,9,11,12]. In the course of the interviews, case histories of 365 new products were examined in the search for details of implemented strategies as compared to stated or written strategies. The interviews were supplemented by the analysis of written materials such as company reports and product documents. The majority of the firms and products that were examined were in the farm machinery industry but the elements of the analytical framework were equally useful for structuring the strategies of the other firms in the studies. The list of industries in the research program is shown in Table 1. The common thread running through the studies is that, in most industries and in most companies, what I have called an open, innovative product development strategy is more successful than a closed strategy. The
Table 1. Industries Studied In The Ten-Year Research Programsa
Study A
Industry pharmaceutical electronic instruments industrial chemicals steel
B
farm machinery
C
farm machinery
Number of companies studied
Number of new products studied
3 4 2 2
24 31 13 23
140
166
4h
D
food processing
20
E
pulp and paper
- 4 171
276 121 - 14 365
“References: Study A [8], Smdy B [9], Study C [I 11, Study D [12], Study E (repotted in this article). %cluded in Study B totals.
rate of success varies among firms, but our data show that, by and large, the same strategic factors that are associated with success in high-technology firms are also associated with success in low-technology firms. In the following discussion, I define what I mean by “open” and “closed” strategies and present the elements of the product development strategy framework. After outlining the elements of the framework, I use four firms in the Swedish pulp and paper industry to illustrate the use of the framework as a tool for strategic analysis. Some notes on the research methodology are provided in the Appendix.
Technology Strategy
It is only in recent years that the notion of a technology strategy has been getting widespread and explicit attention. Ten years ago, when the research behind this article was first initiated, product development was mainly viewed as a marketing problem, at least in the business literature. Technology strategies for finding and developing new products were seldom discussed either in the business literature or in firms. Our company interviews at that time clearly pointed to the need for a specific formulation of technology strategies. Two dimensions of technology strategy emerged from the data as having crucial importance: technology use and technology orientation. Technology use refers to the way technologies are applied to the critical technical problems in product development. Technology orientation refers to the extent to which a company relies on its own internal technical competence and resources in new product development or depends on outside sources.
Technology
Use
Technology use can be isolated, where research and development work on new products is mainly within a given established area of technology, such as microelectronics or optical measurement. The technology is seen as a relatively well defined and delineated body of knowledge, usually the basis for professional and academic specialization. Isolated technology use is intradisciplinary and can be carried out by individuals or firms working in relative isolation from one another.
PRODUCT DEVELOPMENT
STRATEGY
I PROD INNOV MANAG 1985;2:25-33
Table 2. Examples of Isolated and Synergistic Technology Use Isolated technology
use
Biochemistry Steel metallurgy Hydromechanics Separation chemistry Paper chemistry Extrusion Therm0 technology Data programming Microelectronics
Synergistic
technology
Marketing Strategy use
biochemistry and immunology microbiology, pharmacology, and bacteriology steel metallurgy and welding technology optical measurement, mechanical construction, and microelectronics extrusion and mechanical construction paper chemistry and mechanical construction
Source: These were technology use examples as delineated by managers and R&D personnel who had direct involvement in product development.
Technology use can be synergistic, where new product R&D combines technologies. Synergistic technology is interdisciplinary in nature and requires the bridging of gaps between specialized experts from otherwise disjunct areas of knowledge. It requires that good contacts be maintained among the disciplines to achieve effective combinations. There are good chances for more innovative solutions when there are diverse approaches to problems. Synergistic technology use then can be said to be more open and innovative, compared to the more closed and static nature of isolated technology use. Some examples of isolated and synergistic technology uses by companies that were examined in the research are shown in Table 2.
Technology
27
Orientation
Few firms lie at the extremes of an internal orientation, where there is complete self-reliance, or an external orientation, where there is complete reliance on outside resources, but there is often a strong tendency in one direction or the other. External cooperation may be with, for instance, universities, research institutes, other companies, or independent inventors. l An external orientation, by involving the outside technological environment to a larger extent, can be called an “open” element of technology strategy. An internal technology orientation restricts the possible solutions to product development problems and is a more closed orientation.
‘Editor’s note: A full discussion of the use of external technology sources appeared in the last issue of JPIM. See, H&ansson, H&an and Laage-Hellman, I. Developing a network R&D strategy. Journal ofProduct Innovation Management 224-237 (1984).
Marketing strategy can be defined in terms of the product and customer focus of the company. On the dimension of product focus, a company can concentrate on developing products that are essentially variations of existing products-product modifications, or it can focus on products that fall outside the established product lineproduct diversifications. The second dimension of marketing strategy is customer focus. If new products are primarily aimed at getting new customers, the strategy is ofensive. If they are mainly directed toward tying existing customers closer to the company, the strategy is classified as defensive [7].
Product Design Whether the marketing strategy is offensive or defensive, it may be implemented through products that are directed either toward a wide range of customer needs-a general product design; or it may result in products that are aimed at a more narrow spectrum of customer needs-a specific product design. The choice of a general or specific product design orientation is an important factor in characterizing the overall product development strategy. In a sense, it is an intervening variable in a model that relates strategy to product development success.
Process Design Closely related to the choice of marketing strategy is the choice of process, especially in those industries, such as steel, chemicals, and food processing, where product and process innovations are closely connected. A general process is used for producing many types of end products. A specific process is one designed to produce a narrow range of end products, or even just one. In this sense, the process design can also be considered to be an intervening variable between product development strategy and product development success.
28
J PROD INNOV
MANAG
H. NYSTR6M
1985:2:25-33
Product Development Outcomes
Ultimately, the measure of success of a strategy is its effects on new product performance [l]. Of course, strategy alone is not the sole determinant of success. Nevertheless, it is worth defining some of the ways success can be measured in order to assess some part of the relationship between product development strategy and product development outcome. Three dimensions of performance are specified in the product development framework: technological, competitive, and financial.
Technological
Outcome
The main measure of technological outcome is the level of technological innovation. This is defined as the degree of novelty companies have to employ to solve the critical technical problems when developing new products. The underlying assumption is that a relatively high level of technical creativity is usually a necessary, but not sufficient, condition for achieving highly competitive new products, particularly in research and technology intensive industries. A high level of technological innovation also, as a rule, makes it easier to achieve patent protection. Further, as a rule, it requires a longer period of development time than more routine technical developments. In the research program, there were three measures of the level of technological innovation achieved by the companies. The principal measure was our rating of the degree of novelty or uniqueness of technological solutions. These were derived after intensive discussions with individuals in the firms. The ratings were highly correlated with the other two measures: degree of patent protection and time for development. Since companies, for competitive reasons, may not apply for patents, the patent situation is an imperfect indicator of the level of technological novelty. Development time is also an imperfect indicator, but its high correlation with the other two measures gives some confidence in the overall measures that were made.
Competitive Outcome In our framework, the measure of market outcome was the uniqueness or the interchangeability of the product
from the buyer’s point of view at the time it is introduced on the market. If buyers consider the product to be more or less interchangeable with competing products already on the market, the product’s uniqueness is low. The assumption is that, the more unique it is-the more that buyers see it as different in features and performance from competing products-the greater the market potential.
Financial Outcome Commercial success for new products is ultimately the profitability of the product over its life cycle. For this research, the measure was an estimate of the profitability over the time period, as judged and as justified to the researchers by company executives. Of course, as noted earlier, the profitability depends on many factors other than product development, so it is difficult to be conclusive about apparent relationships between strategy for product development and product development outcomes. The technological and competitive outcomes are similarly limited as a measure of strategy success although they are more direct consequences than profitability. The general analytical framework for product development strategies is shown in Figure 1.
Open and Closed Strategies
From a general point of view, product development strategies can be viewed as lying along the dimension of open or closed. Synergistic technology use and external technology orientation contribute to an open technology strategy. Product diversification and an emphasis on new customers are open aspects of marketing strategy. Conversely, an isolated technology use, an internal technology orientation, product modification approach, and an emphasis on existing customers are all elements of a closed strategy. General product designs to suit a wide range of customer needs and general process designs for a wide range of production operations can also be considered to be part of an open strategic orientation. Specific product and process designs are a part of a more closed strategic orientation. The main underlying assumption that has emerged
PRODUCT DEVELOPMENT STRATEGY
1 PROD INNOV MANAG 1985;2:25-33
29
-
PRODUCTDEVELOPMENTSTRATEGY
MARKETING STRATEGY
TECHNOLOGY STRATEGY Technoloqv Isolated
Product
Use Synergistic
-
Modification
Customers
Orientation Internal
-
Diversification
-
Existing
External
PRODUCT Specific -
DESIGN General
PROCESS Specific -
DESIGN General
M A R K
New
-
F
ii V I ii
PRODUCT DEVELOPMENT OUTCOMES TECHNOLOGY Technology Low
-
COMPETITIVE OUTCOME Product
OUTCOME Novelty High
Interchangeable
FINANCIAL Profitability
-
Unique
ICI E N T
OUTCOME
Over the Product
Life Cycle
Figure
1. Analytical
Framework
from the research program has been that more open, explorative strategies offer a greater creative potential and therefore should be more appropriate in highly changing and uncertain environments. More closed strategies, on the other hand, should focus the efforts of a company more efficiently and therefore should be better in more stable and predictable environments. A summary of the characteristics of open and closed strategies is provided in Table 3.
for
Product
Development
Strategies.
ture of the company strategies from annual reports, internal company documents, and discussions with managers in the firms. Then, a series of case histories of new product developments was compiled and analyzed to see what the company’s actual or realized strat-
Table 3. Characteristics Development Strategies
of Open and Closed Product
Open: creative potential for changing, uncertain environments
The Analysis of Four Firms
The strategy framework was used to analyze the product development strategies of four Swedish pulp and paper companies. The first step was to develop a pic-
technology orientation technology use product line focus customer focus product design process design
Closed: focus for efficiency in stable environments
External
internal
Synergistic Diversification New General needs General production
isolated modifications existing specific needs specific production
30
J PROD INNOV
H. NYSTR6M
MANAG
1985;2:25-33
egies were. We had some expectation that there might be a difference between the stated strategies and the realized strategies, and as it turned out, the two were not always consistent. What managers and their documents said they did-their intended strategies-was not what we found they actually did-their realized strategies-when we examined the product development case histories.
Company A Company A’s sales in 1982 were 4 billion Swedish Crowns (about U.S. $500 million) and it had about 8000 employees. Its product mix was mainly pulp, carton board, paper sacks, well-paper, chemicals, and lumber. Its overall policy was to concentrate on existing product lines and achieve cost rationalization. Its international strategy was to add value to its own raw materials by further processing in subsidiary companies abroad. The idea was that final processing in its subsidiaries would give better market contact and better technical adaptation to foreign markets than would direct exporting. In terms of our analytical framework, Company A’s product development had a pronounced closed, defensive strategy, with R&D and production technology geared, to a large extent, to specific process innovation and existing products and customers.
Company B In 1982, Company B had about 10,000 employees and sales of 4.8 billion Swedish Crowns (about U.S. $600 million). Its product mix was mainly pulp, fine paper, lumber, and chemicals. In its overall strategy, it had stressed diversification within existing product lines. The company was trying to achieve this by changing its emphasis from mainly process innovations to more product innovations. Marketing, R&D, and production technology were giving more emphasis to product diversification and new customers, especially in comparison to Company A. Company B had a relatively open product development strategy.
$450 million). Its products were mainly pulp, craft liner, journal paper, lumber, and paper machines. As an overall strategy, it concentrated on existing product lines with its own forestry and power system as its strategic resource base. The company had stressed both biological research (for its forestry) and technical product development. From the point of view of our framework, Company C had a pronounced closed product development strategy, similar to Company A, with R&D, production technology (as well as marketing) aimed primarily at process innovations for existing products for existing customers.
Company D Company D had about 630 employees in 1982 and sales of 350 million Swedish Crowns (almost U.S. $45 million). Its product mix was more concentrated than in the other three companies and consisted mainly of pulp, craft liner, and carton board. Its overall strategy was to diversify its existing product line within the limits imposed by a reliance on its own pulp as a raw material. This company had emphasized production flexibility and had concentrated on selecting market segments to increase the value added to its basic raw material, pulp. In the terms of our analytical framework, Company D had a more open, offensive product development strategy than any of the other three companies. Its R&D was more fully directed toward product, rather than process innovation, and toward new customers.
Realized Strategies
To a great extent, the descriptions of the strategies of the four firms, as outlined above, represent a summary of what the companies had done in the past and what their managers intended should happen. Descriptions of actual product histories can give a clearer picture of the product development strategies as they were actually implemented.
Company C
Choice of Products
Company C had about 6200 employees in 1982 and sales of 3.7 billion Swedish Crowns (just over U.S.
Company representatives were asked to give examples of products developed and marketed over a period, usu-
PRODUCT DEVELOPMENT
31
J PROD INNOV MANAG 1985;2:25-33
STRATEGY
Table 4. Ratings of Company Strategies and Outcomesa Company
Original strategy rating
Marketing strategy
Competitive outcome
A B C D
pronounced closed relatively open pronounced closed most open
3.7 3.0 3.5 3.0
4.0 3.0 3.8 3.3
Technology strategy
Technology outcome
1.7 1.0 3.0 3.5
3.7 2.0 3.2 2.8
Financial outcome 4.3 3.5 3.5 3.7
“Higher ratings indicate more open strategies and more successful outcomes
ally, of about ten years. To be included in the study, the products had to be new from both a technological and a marketing view, and the companies themselves had to have taken an active part in the products’ technical development and market introduction. The sample group of products from each company were to be representative of the total range of new products developed and introduced during the period studied. Both successful and unsuccessful products were to be included. These selection criteria gave a sample of products that, even in large companies, tended to be close to the total number of new product cases that were available. A total of 14 product case histories were developed, three or four from each of the four fil-IllS.
During interviews with the company representatives, information was collected that allowed ratings to be subjectively applied by the company personnel and the interviewers to the strategy dimensions outlined in the model shown in Figure 1. These ratings were very rough evaluations and should not be taken as precise, objective measures. Nevertheless, they do serve to indicate differences in strategy elements among the companies and to suggest some relationships between strategy and performance. The ratings were on a scale from 1 to 5. For the three “performance” or outcome dimensions, 1 indicates the lowest level of success, 5 the highest. For the strategy elements, 1 indicates a closed strategy characteristic, 5 an open characteristic. The details of the rating system are outlined in the Appendix.
Product Analysis
In each firm, there was some variety in the type of product and in the development process used. For this analysis, the ratings for the product cases were aver-
aged to give the rating for the firm. The overall strategy ratings and outcomes are shown in Table 4. The company we originally classified as having the most open strategy, Company D, expressed, in the product cases, clearly the most open technology strategy but one of the two most closed marketing strategies. The two companies with, originally, the pronounced closed strategies, had the two most open marketing strategies. There was some consistency in the ratings for Company B. It showed in its product cases the most closed technology strategy, and the poorest technology outcome; and one of the two most closed marketing strategies and the poorest competitive outcome. But the consistency fails when we compare the product ratings to the original rating of a relatively open strategy. The only apparent relationship between strategy and outcome is that an open marketing strategy-aiming at new customers and product diversification-was associated with a good competitive outcome-product uniqueness. Otherwise there was no clear pattern of relationship.
Company-Specific
Analysis
The results of this study and those of the earlier studies in our research program point to the need for a company-specific analysis of strategy and its relationship to performance. It is difficult to generalize across companies except with regard to one dimension-technology strategy. Although the records of the four pulp and paper companies are somewhat inconsistent in this regard, in all of our other studies in our research program over the past ten years, there is a tendency for more open technology strategies to be associated with more technological success. Technology success is measured in our model by the
32
H. NYSTRiiM
J PROD INNOV MANAG 1985;2:25-33
level of technological innovation, that is, the degree of novelty required and realized in critical aspects of new product design. To achieve competitive new products in any industry, some degree of technical creativity is necessary. In our data, synergistic technology use and an external orientation is more clearly related to higher levels of technological innovation than isolated technology use and internal orientation. More closed strategies may lead to a more efficient use of existing resources. Achieving the right balance between open and closed strategies, in both marketing and technology, is a major management issue. The integration of marketing and technology strategies is another major management issue. It is in the skillful management of these sets of marketing and technology variables that successful companies excell. Our framework is designed to help managers address the difficult new product strategy questions. Financial support for the study has been received from the Swedish Council for Research in Agriculture and Forestry, which is gratefully acknowledged.
Appendix: Methodological Note on Definition and Measurement
Technological
Strategy
[II
[51
[31
Most closed Internal R&D orientation and isolated technology use
Intermediate value Internal R&D orientation and synergistic technology use or External R&D orientation and isolated technology use
Most open External R&D orientation and synergistic technology use
More open technological strategies are thus aimed at generating new technological knowledge and competence by cooperation with the outside environment and the combining of technologies. More closed strategies are aimed at efficiently using the companies’ own technological knowledge and specialized competence. The technologies companies are working in and the extent to which they are utilized to solve critical problems in developing specific products are given by company representatives. This is also the case with regard to information on R&D cooperation for specific products.
Marketing Strategy
[II Most closed Defensive & product modification (variation of existing product to existing customers)
[31 Intermediate value Defensive & product diversification or Offensive and product modification
[51
Marketing Innovation
Most open
[II Offensive & product diversification (new products, new customers)
More open marketing strategies are thus aimed at generating new business by product and market development. More closed strategies are aimed at maintaining existing product types and markets. The distinction between product modification and product diversification is based on product usage, as reflected in how companies themselves view the products in their technical descriptions and sales promotion.
Product essentially similar to competing products
[a Completely product
unique
Marketing innovation is measured on a scale from 1 to 5 based on information from the companies. This refers to how unique a product is judged to have been at its market introduction, compared to existing competing products. In this way competitive response and the effect of marketing promotion and price is eliminated from our measure of market success. This measure then becomes a pure measure of how successful a company has been in developing a product which at the time of market introduction fulfills previously unsatisfied buyer needs. The extent to which this market potential is actually realized by the companies and transformed into profit is determined by competitive parameters, such as price and promotion.
J PROD INNOV MANAG 1985:2:25-33
PRODUCT DEVELOPMENT STRATEGY
Commercial Outcome
Technological Innovation
[ll Conventional technological solution, based on existing knowledge
33
[51 Unique technological solution, based on new knowledge
As in the case of marketing innovation, technological innovation is measured on a scale from 1 to 5, based on company information. With regard to each specific product, companies provided detailed information on the extent to which solving the critical technical problems required solutions novel not only to the company, but to society. Essentially this is a measure of technical creativity, similar to that required by patent law. A direct measure of technological innovation was used to avoid the incompleteness of more indirect measures such as patent data. Companies, for competitive reasons, often do not apply for patent protection, even if it is likely that it might be granted. In the present study development time is therefore used as the only validity check on our estimates of technological innovation. It should be pointed out, however, that in our other studies we have found a relatively high correlation between both the degree of patent protection and development time on the one hand and our estimates of the level of technological innovation on the other hand. As we have noted in the main text the present study also shows that development time increases with the level of technological innovation, which is what we would expect if our measurement of the level of technological innovation accurately reflects our intention.
Ul
PI
[31
Large loss
Small loss
Breakeven
[41 Small profit
PI Large profit
The commercial outcome for the products studied were assessed by company representatives on a scale from 1 to 5. This outcome refers to estimates over the total product life cycle and requires that the product has been on the market for some time.
References 1. Cooner. R. G. How new nroduct strategies imnact on ncrformance. Jo&al of Product Itmovahon Managem&t 5- iS (Jan 1984). 2. Crawford, C. Merle. Defining the charter for product innovation. Management Review 3-12 (Fall 1980). 3. Day, George, S. A strategic perspective on product planning. of Contemporary Business 1-34 (Spring 1975). 4. Gold, Bela. Alternate strategies for advancing nology. Research Management 4:24-29 (1975). 5. Kiel, George. Technology and marketing: Horizons 3:7-14 (May/June 1984).
Sloan Journal
a company’s
tech-
the magic mix. Business
6. Madique, M. A. and Patch, P. Corporate strategy and technological policy. In: Readings in the Management of Technology, M. L. Tushman and W. L. Moore (eds.). Boston: Pitman, 1982, pp. 273285. 7. Nystrsm, H. Market strategy and market structure: learning and adaptation in market relations. Marknadsverande 1:4 l-45 (1977). 8. Nystr(im, H. Company strategies for research and development. In: Industrial innovation: Technology, Policy, &+sion, M. J. Baker (ed.). London: MacMillan, 1979, pp. 417-440. 9. Nystrtim, H. and Edvardsson, B. Research and development strategies for Swedish companies in the farm machine industry. Report from the Institute for Economics and Statistics, No. 139. Uppsala, Sweden, 1978. 10. Nystriim, H. Creativity and Innovation.
New York: Wiley,
1979.
11. Nystriim, H. and Edvardsson, B. Research and development strategies for four Swedish farm machine companies. Report from the Institute for Economics and Statistics. Uppsala, Sweden, 1980. 12. Nystmm, H. and Edvardsson, B. Product innovation in foodprocessing: a Swedish survey. R and D Management 67-72 (April 1982).