How Customer Portfolio Affects New Product Development In Technology

Based Entrepreneurial Firms.

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ABSTRACT

The innovation of new products in technology based firms is influenced mostly by the firm’s current customer relationships. The firm’s relationship with its most dominant customers determines whether or not new products will be developed, how they will be developed, and when they will be developed. A B2B relationship such as this causes new technology based firms to develop, and innovate new products contingent upon its dominant customer’s current needs.

This report summarizes the technology-based firm’s dependence upon its customer portfolios to develop new products. A through examination of the theory and hypothesis surrounding the aforementioned issues provides the information necessary to support this suggestion. The issues discussed are: I. The role of Customers in New Product Development, II. The Size of the Customer Portfolio, III. Revenue Concentration Within the Customer Portfolio, IV. Relational Embeddedness of the Customer Portfolio, V. Interaction Effects of Relational Embeddedness.

INTRODUCTION

This report examines how customer portfolio affects new product

development in technology-based entrepreneurial firms. Technology firms are in

constant need to develop and innovate new products to generate revenue for their

respective firms.

As with any industry, technology firms have competitors, therefore they

not only need to develop new product, but they need to also develop products that

will appeal to prospective customers. In addition technology based firms must

adapt to the constantly changing needs of prospective customers. In analyzing the

affects of how customer portfolio influences new product innovation, both the

size of the firm, and its relationship with its customers are of significant

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importance, and therefore must me taken into consideration. The first

element that will be examined is the size of the firm followed by relational

aspects.

Small firms have do not have many resources available, however they

have been able to successfully innovate new products. This is a result of the

external relationships that these types of firms have with various organizations.

Scholars have examined how various kinds of inter-organizational relationships

enable firms to gain access to other organizations’ knowledge bases, and

resources(Jarillo 1987: Varradarjan and Cunningham, 1995), and have argued that

such access can enable novel connections( Kogut and Zander 1992), stimulate

broader perspectives and synthesis( Dewar and Dutton 1986), and spread out the

risks and costs associated with innovation( Sivadas and Dwyer 2000).

Firms that network with other organizations will limit the liability of risks,

and reduce costs for technology based firms. It can also invite new ideas, and

different views that can help to create a marketable innovation. This translates

into benefits for a firm’s innovative capability, which is observable as outcomes

such as a higher number of patents, or new products( Ahuja 200:Wuyts, Dutta,

and Stremersch 2004), the perceived success of new product

development( Sivadas and Dwyer 2000), creativity (Im, and Workman 2004),

new product development speed ( Rindfleish and Moorman 2001), and

profitability ( Wuyts, Dutta, and Stremersch 2004).

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The result is variety of quality new innovations produced at an accelerated

rate, and at a higher quantity. In, addition the firm will appear successful to

stakeholders. Creativity will assist in Research and Development R&D.

LITERATURE REVIEW

The literature review will consist of an elaboration of the issues presented for review, as well as the various arguments presented in the entire hypothesis. This includes a review of I. The role of Customers in New Product Development, II. The Size of the Customer Portfolio, III. Revenue Concentration Within

the Customer Portfolio, IV. Relational Embeddedness of the Customer Portfolio, V. Interaction Effects of Relational Embeddedness.

The Role of Customers in New Product Development

Customer involvement has been shown to improve the effectiveness of new

product development( Cooper and Kleinschmidt 1987; Griffin and Hauser 1996).

Customers that actively participate in new product development can offer insights

for new products from a user’s perspective. As buyers of current and future

products, customers contribute to all three phases of new the product development

process: idea, generation, development, and testing (Lettl, Herstatt, and

Gemuenden 2006). Customers realize their needs and wants, and therefore are

able to think of new ways of creating products to fits their particular needs and

wants. Customers are able to form networks with various organizations in the

development phase of new products. Rarely is new product development confined

to one firm: rather it is typically conducted as a collaboration among technology

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experts, customers, and suppliers( Chesbrough 2003: Von Hippel 1998). In the

development phase, customers can work directly within networks of production to

offer feedback, positive or negative, and utilize their ideas on not only the

development of a product, but also how the product should be developed.

Customer involvement may improve the efficiency of the process by decreasing

the development time and costs ( Lettl, Herstatt, and Gemueden 2006) and

improving the decision quality in the process( Griffin and Hauser 1993).

Innovators and developers alike cannot fully ascertain what customer’s needs and

wants are, they only have the ability to speculate. The customer is able to identify

the features and benefits of a certain product, and can offer new strategies to

develop new products or improve existing ones. This component of this report has

established the fact that customers are a very important entity in the development

of new products.

Size of the Customer Portfolio

In the alliance literature, the size of a firm’s R&D alliance portfolio has been

found to have a positive effect on innovation (Pennings and Harianto 1992;

Powell, Koput, and Smith-Doerr 1996: Shan, Walker, and Kogut 1994). When

technology-based firms have access to the variety of technologies available to

them through their various customer networks, they have the ability to maximize

the creation, development, and distribution of new innovations. The underlying

rational is that a larger portfolio provides more exposure to external knowledge

bases (Dewar and Dutton 1986), leads to scale effects in development (Ahuja

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2000), and enables the firm to learn to better extract value from its infirm

agreements( Gulati, Nohria, and Zaheer 2000). Though it has been shown that a

large customer portfolio has some benefits, having an excessively large customer

portfolio contains some drawbacks. First, significant costs are involved with

building and managing a large customer portfolio ( Morgan and Hunt 1994:

Palmatier et al. 2006; Storbacka, Strandvik, and Gronroos 1994).

Second, firms are limited in the amount of managerial attention devoted to

using external sources of knowledge for new product development ( Koput 1997).

With a large customer portfolio, more management staff is required to handle the

increased duties associated with a large portfolio. Without additional management

available, the firm may experience delays in the creation of new innovations.

Generally speaking, the size aspect of the customer portfolio has a major affect in

regard to new product development. Customer portfolio should be large enough to

benefit the technology based firm, however if the size of the portfolio is exceeded,

the costs, and the limitations on management may depreciate the value of the

overall benefits.

Revenue Concentration Within the Customer Portfolio

The revenue received from customers may drastically affect the firm’s

ability to maintain a diversified customer base. If a firm has individual customers

that make high contributions to their overall revenue, the firm may be unwilling to

adopt new customers that will contribute less revenue. Doing so limits the firm’s

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ability to network with different customers, which then leads to limited ideas for

new products.

Prior research has shown that firms-in particular, young, technology based

firms- often become dependent on dominant customers who account for a

disproportionately large share of a firm’s revenues ( Venkataraman et. Al1990:

Yli-Renko, Autio, and Sapienza 2001; Yli-Renko, Sapienza, and Hay 2001).

Firms may become so dependent on these types of customers that the firm may

only make decisions on new product development only with their high revenue

producing customer’s influence.

Relational Embeddedness of the Customer Portfolio

Customer relationships can be characterized on a continuum ranging from

impersonal, constantly shifting, arm’s-length ties to close, cooperative,

relationally embedded relationships ( Dwyer, Schurr, and Oh 1987: Larson 1992:

Uzzi 1997). For example, Rindfleisch and Moorman (2001) find that relational

embeddedness has a positive impact on information acquisition in new product

development alliances. The technology based firm’s relationship with its

customers determines how effective the firm will be in the creation, and

development of new products. If the firm has a close relationship with its

customers, the firm will absorb more ideas from customers. First, relational

embeddedness increases the willingness of the exchange parties to share

information ( Larson 1992; Nahapiet and Ghoshal 1998). A strong relationship

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between both the firm and the customer will create open channels of

communication.

The firm can then work directly with customers in the implementation of

new products to the benefit of both the firm, and the customer. Second, the closer

the firm and its customers are, the greater are the frequency and intensity of

information exchange Larson(1992). Through open channels of communication,

and more importantly trust, more information will flow to the firm from its

customers. The result is the establishment of new products at a rapid rate. Third,

relational embeddedness increases the efficiency of information exchange. The

closer the firm and its customers are, the less time is spent on monitoring, and

bargaining activities ( Dyer and Singh 1998). Time conservation allows the firm

to focus more on research, and development of new products.

Interaction Effects of Relational Embeddedness

Young technology-based firms with small customer portfolios have

limited access to information, and ideas for new products due to having a small

customer base. However, they can benefit from strong relationships with their

current customers in the form of networking. Their customers may have ties to

other industry sources in which the firm can gain new ideas in developing new

products. Firms that have large customer portfolios do not have strong

relationships with their customers. Though large firms have more customers, they

are not able to fully benefit from customer ideas due to having poor relationships

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with their customers. The result is less new product innovations. In addition,

firms with large customer portfolios must spend more on managing their large

customer portfolios. Close, cooperative relationships involve the exchange of

reciprocal favors and a long-term horizon. (Larson 1992; Uzzi 1997). Firms with

strong customer relations benefit not only from the customer having an interest in

the firm, but also benefit in the form of mutual favors. Relational embeddedness

has a definite effect on new product development in both positive and negative

aspects. Interaction effects of relational embeddedness demonstrate how the

characteristics of the relationship with customers can have both positive and

negative effects. A firm simply having a close relationship with a customer is

insufficient. The B2B relationship must be based on trust, knowledge, and

integrity.

Empirical Study

Yli-Renko & Janakiraman( 2008) formed the following hypotheses in support of

how customer portfolio affects new product development. For hypothesis 1, it is

noted that firms with a small customer portfolio can benefit from external

relationships without the costs associated with a having a large portfolio. For

hypothesis 2, the more concentrated a firm’s revenues in it customer portfolio, the

smaller amount of products developed by the firm. This suggests that dominant

customers have a voice in the firm’s decision to develop new products. For

hypothesis 3, the more relationally embedded the firm’s customer portfolio, the

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larger is the number of new products developed by the firm. Firms that have

strong relationships with their customer, and do not have a large concentration of

revenues in their customer portfolios will be successful in the development of new

products. For hypothesis 4, the larger the firm’s customer portfolio, the less

positive is the relationship between relational embeddedness, and the number of

new products developed by the firm. The large size of the customer portfolios

inhibits the development of close relationships which then leads to a limitation of

ideas, and additional external relationships. For hypothesis 5, the higher the level

of revenue concentration in a firm’s customer portfolio, the more positive is the

relationship between relational embeddedness and the number of new products

developed by the firm. This is somewhat of a contradiction of the second

hypothesis. In order for firms to produce more new products when having a large

revenue concentration in a customer portfolio, the activities must be spread evenly

across the customer base. More specifically, there must not be any dominant

customers with high revenue concentrations in the firm’s customer portfolio. The

hypothesis was tested using longitudinal data from young, technology based firms

in the United Kingdom. The collection of data utilized mail surveys that were sent

to 180 firms in 1998. A follow up study was then conducted in 2004 via telephone

interviews, web searches, and archival data. The firms studied needed to be at

least one year old, but not more than ten years old, independent, not a subsidiary,

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involved in developing, manufacturing, or commercializing. There were 1140

firms that matched this criterion. These chief executive officers of these firms

were then mailed questionnaires. All companies that were found to have not met

the criteria were eliminated from the study.

The dependent variable was the number of new products created. The results of

this study supported Hypothesis 1, 2,4,and 5.

DISCUSSION

New product development is not simply confined to technology based

entrepreneurial firms, rather it is the result of the external relationships a firm has

with its existing customers, and the customer’s affiliates. Research and

development of new product innovations is the result of networking with

suppliers, manufacturers, and most importantly customers. Though a large

customer portfolio has been shown to increase the number of new products

developed, the technology based firm must find a common ground in managing

its portfolio size to decrease the costs associated with managing a large customer

portfolio. A customer portfolio must be effective in the creation of new products,

but must not become too expensive for a technology based firm’s current

resources. Firm’s that have good relationships with their customers show positive

results in new product development. However, technology based firms must not

become too dependent on dominant customers because this has been shown to

decrease the number of new products developed. Technology based firms should

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spread their customer portfolio across a variety of customers to prevent such a

situation as this.

SUMMARY AND CONCLUSIONS

This paper examined how customer portfolio affects new product development in

technology based entrepreneurial firms. There were five issues discussed in this

report 1. The role of Customers in New Product Development, 2. The Size of the

Customer Portfolio, 3. Revenue Concentration Within the Customer Portfolio, 4.

Relational Embeddedness of the Customer Portfolio, 5. Interaction Effects of

Relational Embeddedness. The empirical study utilized questionnaires directed to

the Chief Executive Officer’s of 180 firms. The dependent variable, which was

new product development, was studied over a six year time period. Included in

the study were the five aforementioned issues. The findings in this study were that

customers play a direct role in the innovation, and development of new products;

The firm’s relationship with its customers my increase or inhibit the number of

new products developed; The size of the customer portfolio needs to be regulated

so that the firm may develop new products without incurring the high costs of an

oversized customer portfolio; The firm must have a good relationship with its

customers to accelerate new product development; The firm should not be

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dependent upon dominant customers due to high revenue earnings because

dominant customers may seek to influence the entire firm.

REFERENCES

(Lettl, Herstatt, and Gemuenden 2006). Yli-Renko & Janakiraman( 2008)“Learning from Users for Radical Innovation”(Larson 1992; Uzzi 1997). “Network Dyads in Entrepreneurial Settings”( Dyer and Singh 1998). “The Relational View, Comparative Strategy of Strategy and Sources of Inter-organizational Competitive Advantage.( Larson 1992; Nahapiet and Ghoshal 1998). “Social Capital, Intellectual Capital and the Organizational Advantage”Rindfleisch and Moorman (2001) “ The Acquisition and utilization of Information in New Product Alliances”( Dwyer, Schurr, and Oh 1987: Larson 1992: Uzzi 1997). “Developing Buyer Seller Relationships”( Venkataraman et. Al1990: Yli-Renko, Autio, and Sapienza 2001; Yli-Renko, Sapienza, and Hay 2001). “Social Capital, Knowledge Acquisition, and Knowledge Exploitation in Young Technology Based Firms”( Koput 1997).” A Chaotic Model of Innovative Search”( Morgan and Hunt 1994: Palmatier et al. 2006; Storbacka, Strandvik, and Gronroos 1994). “The Commitment Trust Theory of Relationship Marketing”(Ahuja 2000) “Collaboration Networks, Structural Holes, and Innovation”( Gulati, Nohria, and Zaheer 2000). “Strategic Networks”(Pennings and Harianto 1992; Powell, Koput, and Smith-Doerr 1996: Shan, Walker, and Kogut 1994).Technological Networking, and Innovation Implementation”( Griffin and Hauser 1993).”The Voice of the Customer”( Chesbrough 2003: Von Hippel 1998).” The Era of Open Innovation”( Cooper and Kleinschmidt 1987; Griffin and Hauser 1996).”Entrepreneurship and High Technology”

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( Wuyts, Dutta, and Stremersch 2004).”Portfolios of Interfirm Agreements in Technology Intensive Markets”(Im, and Workman 2004),”Market Orientation, Creativity, and New Product Performance in High Technology Firms”( Sivadas and Dwyer 2000), “An examination of Organizational Factors Influencing New Product Success in Internal, and Alliance Based Processes”.

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