innovation, marketing strategy, environment, and performance

ELSEVIER

Innovation, Marketing and Performance

Strategy, Environment,

Franklyn A. Manu MORGAN STATE UNIVERSITY

Ven Sriram MORGAN STATE UNIVERSITY

The contribution of innovation to corporate survival and growth is an accepted notion in much of management. Typologies of strategic orientations of companies based on innovation have been developed and analyzed. Most of these typologies focus on a single dimension of innovation. This study, using the PIMS database, develops a typology of businesses based on multiple dimensions of innovation and examines their marketing strategies and performance. Results suggest that innovative types have different marketing orientations and performance levels, some of which confirm findings based on other typologies. A major implication in terms of pe~ormance is that great care must be taken in adopting an innovation posture. For example, extremely aggressive rates of product introductions are associated with poor marketing (absolute and relative market share) and financial performance but high market share growth. Pioneering a market results in superior all around performance, whereas late entry is associated with poor performance. The findings suggest a need to examine the type of innovation, the type of performance outcome, and the time frame for assessment when evaluating the type of performance outcome, and the time frame for assessment when evaluating the contributions of innovation to corporate survival and growth. j BUSN aES 1996. 35.79--91

trategic orientation refers to how an organization uses strategy to adapt to and/or change aspects of its environment for a more favorable alignment. This orientation

has been described variously as strategic choice, strategic thrust, strategic fit, and strategic predisposition (Chaffee, 1985). An organization can adapt or align itself to its environment in a variety of ways. This multiplicity of options has led to the development of generic strategies or strategic archetypes from classifications of how different organizations adapt to their environments. Additionally, there has been some research on

Address correspondence to: Franklyn A. Manu, Business Administration Department, School of Business and Management, Morgan State University, Baltimore, MD 21239.

generic business strategies, environment, and performance linkages (e.g., Galbraith and Schendel, 1983; Douglas and Rhee, 1989; Wright et al., 1991a; Doyle and Hooley, 1992; Hooley, Lynch, and Jobber, 1992; Wong and Saunders, 1993). Included in these strategic archetypes are classification schemes based

on organizational innovativeness (Ansoff and Stewart, 1967; Freeman, 1974; Miles and Snow, 1978).

Original developers of typologies relating to innovative behavior did not offer much detail about functional policies associated with those strategies. Subsequent researchers in the area have attempted to remedy some of these deficiencies by adding specifics of organizational behavior in such areas as production, marketing, and asset management. Related to this issue is the operationalization of innovation orientation. Previ- ous research on the subject has used single variable constructs based on such factors as timing of market entry (Ansoff and Stewart, 1967), research and development (R&D) expenditures (Freeman, 1974), and rate of change of products and markets (Miles and Snow, 1978). Each of these studies contributes to an understanding of the importance of a particular dimension of innovativeness, but there appears to be not as much consideration of how these different dimensions link together. We cannot, for example, tell how rate of new product introduction, timing of market entry, and R&D expenditures, when taken together, relate to strategy and performance. Consequently, we do not get a very full picture of the links between innovation orientation, marketing strategy, and performance.

We aim at extending previous work by identifying different types of innovation orientation based on multiple dimensions of innovativeness. This approach should provide a more com- prehensive and more realistic picture of what is involved in innovation as a strategy. More specifically, this study aims at: (1) developing a typology of innovation orientation using multiple variables relating to innovativeness; and (2) comparing the environments, marketing strategy attributes, and performance levels associated with each of the identified types.

Journal of Business Research 35, 79-91 (1996) © 1996 Elsevier Science Inc. 655 Avenue of the Americas, New York, NY 10010

ISSN 0148-2963/961515.00 SSDI 0148-2963(95)00056-X

80 J Busn Res F.A. Manu and V. Sriram 1996:35:79-91

Literature Review The basic premise of this study is that different innovation orientations are different forms of adaptation and are associated with different environments, marketing strategies, and performance levels. In this section, previous research relating to innovation orientation is discussed, and suggested links to environments, marketing strategy, and performance implications are noted.

Innovation Orientation The concept of innovation orientation has been operational- ized in a number of ways. Ansoff and Stewart (1967) developed a typology of strategies based on the timing of entry of a technologically intensive firm into an emerging industry. This timing of entry represents an aspect of innovativeness, with earlier entry indicating a greater degree of innovativeness. In this typology, "first to market" strategy is the most innovative, followed by "follow the leader," "application engineering," and "me-too" strategies, in that order. The underlying implications of this timing of market entry for R&D, marketing, and manufacturing form the basis of this typology. The typology highlights the importance of timing of market entry in influencing strategy and suggests that it is a major indicator of innovation orientation.

Freeman (1974) also developed a classification of strategic options available for firms faced with changes in their technological environments. This typology relates to the innovative efforts of firms and their focus, primarily in terms of R&D expenditures. Based on their posture toward R&D expenditure, "offensive," "defensive," "dependent," "traditional," and "oppor- tunist" firms were identified.

Miles and Snow (1978) and Snow and Hrebiniak (1980) based their notion of innovation orientation on the rate at which organizations changed their products and markets. They focused on the self-perceptions of top managers in the industries they studied to identify the archetypes of the typology, and their associated charateristics. Viewing this as subjective, Hambrick (1983) offered an operationalization based on actions relative to the competition. His classifying variable was relative percent of new products, which is the difference between a business's percent of new products sales as a proportion of total sales and that of its three largest competitors. Contrary to some of his arguments, however (1983, p. 8), he used an absolute percent of new products variable in parts of his analysis. Based on these operationalizations four types of organizations were identified. Prospectors have a strong concern for product and market innovation and attempt to pioneer in those areas. Defenders have narrow product-market domains, conduct little or no new product-market development, and pay a great deal of attention to improving efficiency of operations. Reac- tors are unable to respond effectively to their environments and only make adjustments when forced to do so by environmental pressures. Analyzers are a hybrid of the first two types, prospectors and defenders.

Cooper (1984) focused on the new product programs of successful and unsuccessful firms. Each firm's product innovation

program was characterized by a number of dimensions describing the program orientation, types of products, types of markets, technology type, and program commitment. Five strategy types were identified as follows: technologically driven, bal- anced, technologically deficient, low-budget conservative, and high-budget diverse. The general conclusion of the study was that, whereas both the strategy adopted and the type of industry had an influence on program performance, a firm's characteristics did not.

These strategic typologies provide a useful theoretical background for examining how organizations interact with their environments and the strategies that result. The issue of adapting has become very important in strategic marketing because of a number of environmental factors such as increasing competitive pressure, rapid technological change, deregulation, and increasing emphasis on quality (Day and Wensley, 1983; Jain, 1985). These changes in the environment now mean that marketing must take a more proactive view of the external environment, and this calls for further research on what kinds of marketing strategies are associated with different organizational types (Day and Wensley, 1983; Zeithaml and Zeithaml, 1984).

Innovation Orientation and Marketing Strategy As Hambrick (1983) indicated, strategic behavior guides an organization's alignment with its environment and shapes its strategic attributes and competencies. Thus, different innovative types should have different marketing strategy attributes.

Miles and Snow (1978), Snow and Hrebiniak (1980), Ham- brick (1983), and McDaniel and Kolari (1987) suggested that prospectors devoted more resources to marketing-related activities than defenders. Prospectors should therefore exhibit higher expenditures for advertising, personal selling, and sales promotion as well as prices higher than those of other types of businesses. The Miles and Snow typology also suggested that defenders, with their greater engineering competence, would have a lower level of costs and therefore a greater ability to charge lower prices. These views ignore the potential use of a penetration pricing strategy by a product innovative business or market level pricing by lower cost businesses to capture higher margins. Thus, the evidence is mixed with respect to pricing.

Another aspect of marketing strategy related to innovation orientation is product-market scope, i.e., product line breadth arid variety in customer types. Prospectorlike organizations, with their constant search for new markets and products, are likely to have broad product-market scopes, whereas defenderlike organizations, with a focus on stability, are likely to have narrow product-market scopes (Miles and Snow, 1978). An additional influence relates to timing of market entry. Prescott and Visscher (1977) suggested that pioneers develop broader product lines than later entrants by marketing their products for the largest and most attractive segments. Later entrants are thus left with smaller and less lucrative segments.

Based on the engineering capabilities of defenderlike organizations, Miles and Snow (1978) suggested that they would have

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higher quality products through a constant process of refine- ment. They would also offer better service because of their objective of totally serving their chosen market niches. However, product innovators like pioneers and prospectors, may gain a favorable product image due to perceptions of innovative- hess (Porter, 1980) as well as through quality improvements on existing products.

Innovation Orientation and Environment The literature relating to innovation, strategy, and performance suggests a need to take into account environmental factors in both the adoption of various innovation strategies and also in determining their relative effectiveness. This is because innovation is considered to be an adaptive mechanism to the environment in order to survive (Paine and Anderson, 1977; Miller and Friesen, 1983). However, another view is that it is an ac- tivity that falls within the realm of managerial choice (Aldrich and Pfeffer 1975; Miles and Snow, 1978; Hrebiniak andJoyce, 1985) and therefore is not environmentally determined.

The bulk of empirical evidence appears to favor the former view, and a number of variables have been shown to be of importance in influencing both the adoption and effectiveness of innovation strategy. Included are such factors as industry and market concentration, product life cycle, innovative opportunity and competitive pressure (Moore and Tushman, 1982; Hambrick, 1983; Ravenscraft, 1983; Thietart and Vivas, 1984; Angelmar, 1985; Miller, 1988).

Innovation Orientation and Performance Miles and Snow (1978) suggested that none of their three stable strategy types (prospector, defender, and analyzer) was inherently superior as long as they were all properly implemented. This Miles and Snow (1978) postulate is based on a notion of the relative immutability of strategy, which constrains organizational adaptation to the environment (Hambrick, 1983). In this view, the nature of the environment is not as important as the proper implementation of a strategy or adaptive mechanism.

Hambrick (1983), in a test of this postulate, rejected it because he found his innovative types associated with different levels of performance. This suggests that not all innovative orientations, i.e. the adaptive mechanisms, are appropriate for a given environment. Recent research has also demonstrated the link between market pioneering and superior performance (Lamb- kin, 1988; Conant, Mokwa, and Varadarajan, 1990; Wright et al., 1991b; Lambkin, 1992; Lengnick-Hall, 1992; Robinson, For- nell, and Sullivan, 1992). This further suggests that different innovation orientations are associated with differences in performance.

This literature review demonstrates the wide-ranging relationships between different aspects of innovativeness and marketing strategies, expenditures and performance, as well as links to environmental context. Again, the point must be made that single variable categorizations of innovativeness do not fully capture the complexities of innovativeness. This is not a criti-

cism, but it is important to recognize that fact before attempting extensions of that work. A multidimensional conceptualization of innovativeness should enable us consider interaction among its various aspects, in terms of timing, inputs and out- puts, and their relationships to marketing strategy attributes, environments, and performance.

Conceptual Basis for an Innovation Typology Theoretical Background As indicated in the introduction and literature review, the theoretical basis for this study is the notion of strategic choice. This framework has received much less attention in the marketing literature (Clark, Varadarajan, and Pride, 1994). Basi- cally, the framework suggests that managers have some degree of influence over their environment, as well as the ability to manage it. Innovation is considered to be one of the key ways by which organizations adapt to and manage their environments (Cohen and Cyert, 1973). In particular, this theoretical framework suggests that strategic types, based on how different firms adapt to their environments, develop relatively stable and enduring patterns of behavior and distinctive competencies (Ke- tin, Varadarajan, and Peterson, 1992). An important issue in this regard is how innovation relates to other aspects of strategy and what its implications are for performance. Other important issues are how to conceptualize and operationalize the notion of organizational innovation.

Oper ationaliz ation The notion of strategic configurations or archetypes (Lengnick- Hall, 1992; Miller, 1981) provides a theoretical and conceptual starting point for operationalizing the concept of organization innovativeness. The concept of an organization's innovativeness is extremely complex and is not fully explored with single-item conceptualizations. Innovation consists of diverse but interrelated elements. Thus, there are potentially different combinations of these elements. One way of viewing these potential combinations is through the notion of strategic configurations. These configurations describe broad, natural bundles of different elements that comprise a firm's strategy so that distinct archetypes are produced. Such configurations facilitate analysis in the presence of multidimensional elements by representing a synthesis of strategic choices but not specifying direct causal relationships among the individual elements (Lengnick-Hall, 1992).

Strategic configurations of how firms adapt to their environments through the development of specific products and services, entry into new markets, and R&D expenditures provide a basis for developing typologies of innovative behavior. These would be derived from differences in orientation or outlook toward different aspects of innovation. A literature review indicates a number of operationalizations of different aspects of innovativeness.

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In output terms, innovation has been measured primarily with statistics on new products and patents. Key statistics used for measuring innovation in input terms have been R&D expenditures and numbers of scientists and engineers as a percent of the workforce (Freeman, 1974; Nelson and Winter, 1977; Pavitt, 1982). The third aspect of innovation has to do with timing of market entry. There are usually three categories of timing involved in descriptions of innovation: pioneer or first to market, quick second or early follower, and late entrant (Ansoff and Stewart, 1967; Kamm, 1980).

The concept of innovation orientation used in this study has three components and is consistent with dimensions identified in the literature review. It consists of the following components, which are explained fully in Appendix 1:

1. New product introductions in both relative and absolute terms.

2. R&D expenditures (product and process). 3. Order of market entry.

The new product introductions reflect the output that results from effort or inputs (R&D). Whereas patent registrations also reflect innovative output, a significant number of these are not commercialized. This may make new product introductions a superior measure of output. The particular aspect of timing used in this study has to do with the position of a business with respect to these dimensions at the time of its initial entry into a particular product-market. To the extent that a business is one of the first to develop a particular product or service, it can be classified as being more innovative.

A combination of these components gives a better picture of organizational innovativeness than the single-item approaches. It is possible for a business to invest heavily in R&D but be unable to commercialize their results or have problems doing so. Another business may not invest as heavily in R&D but be very proficient at getting its few resulting products into the market. Both businesses may be classified as innovative but with differing emphasis and different implications for marketing strategy and performance. There is also the issue that these dimensions are likely to be interrelated. These possible combinations of dimensions of innovation suggest the use of a taxonomic approach to analyzing issues raised regarding innovation, marketing strategy, and performance. McKelvey (1978), Miller (1981), and Miller (1988) suggested that a taxonomic approach provides one of the best means for coping with the issue of integrating diverse components of relationships. As Miller (1988) suggested, " . . . through the study of data on types or classes of observations we can catalogue diverse phenomena and make sense of what otherwise might be an overwhelming mass of conflicting findings." Thus, this approach provides a parsimonious way of examining issues relating to a multi-item conceptualization of innovation and its relationships to marketing, environments, and performance.

Research Propositions Identifying potential organization types is not an easy matter given the numerous interrelationships between various dimensions of innovation. The literature review, however, suggests some likely types. Utterback and Abernathy (1975), for example, suggested that performance-maximizing strategies required emphasis on technology and product advances, whereas cost- minimizing strategies needed process technology innovation to decrease the total costs of production. Galbraith and Schen- del (1983) also suggested a strong link between strategy choice and R&D investment. Their climber, niche, and builder strategies depended on a strong commitment to successful R&D to achieve the necessary sales expansion and market share objectives. Harvest and cashout strategies, on the other hand, were characterized by low R&D investment, signaling a lower level of support for the product area. Hence, businesses differ in their relative emphasis on either product or process innovativeness and in the amount of effort that goes into this innovativeness. They are also likely to differ with respect to order of market entry. Given these possible combinations the first research proposition (RP) to be examined is as follows:

RPI: A typology of innovation orientation can be generated that indicates the relative emphasis businesses place on different dimensions of innovation. Specifically, some businesses exhibit high levels of product innovativeness, whereas others pursue an emphasis on process innovativeness. These two thrusts are associated with early or late market entry. A process focus is associated with earlier entry.

Theoretical and empirical evidence suggest that the strategic thrust of an organization guides its alignment with its environment and shapes its functional characteristics and competencies (Miles and Snow, 1978; Hambrick, 1983; Kerin et al., 1992). This arises because differing strategic thrusts require different strategies and tactics if an organization is to be internally consistent and be successful with its alignment. A second proposition to be examined that derives from this can be stated as follows:

RP2: Given differences in innovation orientation, the identified businesses exhibit differences in marketing strategy attributes. In particular, product innovative businesses have higher marketing expenditures and prices than process-oriented businesses. Product market scopes are broader, and image and quality better, for earlier entrants and product innovative businesses.

A third proposition examines the links between innovation and environment and reflects the issue of innovation as an adaptive mechanism. If innovation is an adaptive mechanism, then each innovative type should be associated with a particular type


of environment. In this sense the adaptation is a strategic choice on the part of managers who attempt to not only adapt their organizations, but also attempt to manipulate their environments (Hrebiniak and Joyce, 1985; Miles and Snow, 1978). This line of thinking suggests the examination of the following proposition:

RP3: Given differences in innovation orientation, the identified businesses exhibit differences in environments they are associated with. Process-oriented businesses are associated with environments with less technological opportunity, more instability, and greater competition.

A fourth proposition to be examined relates to performance. As indicated earlier, Miles and Snow (1978) suggested that none of their stable organizational types was inherently superior. This view has been called into question (Hambrick, 1983; Lamb- kin, 1988; Lambkin, 1992). The latter suggest that not all orientations are equally successful, suggesting that they are not equally effective as adaptive mechanisms. The proposition to be examined is as follows:

RP4: Given differences in orientation and marketing strategies, the identified innovative types exhibit differences in performance. Product innovative businesses and later entry are associated with poorer performance than process-oriented businesses and early entry.

Methodology Database The data that provide a basis for analyzing the previous propositions come from the profit impact of market strategy (PIMS) database. Information on the environments, competitive characteristics, strategies, and performance of a number of businesses is provided through a survey undertaken annually by the Strategic Planning Institute. A number of limitations of the database have been noted such as its cross-sectional nature, the lack of goal structures that would emphasize intended strategy, the unrepresentative nature of businesses and problems with the measurement of some variables (Anderson and Paine, 1978). Kerin et al. (1992) also discuss some of the problems with the order of entry classification, definition of business units, and the pooling of data. In fact, most of the criti- cisms of the database center around the statistical models used in predicting performance and not the use of the database itself. Despite these limitations, however, studies based on the database have been considered as having substantive relevance and merit. Anderson and Paine (1978) suggested, for example, that studies using the database are a major source for verifying conclusions on strategy with varied, accurate empirical data. Ramanujam and Venkatraman (1984) also found that PIMS- based research had substantive relevance to practitioners on the basis of its descriptive accuracy and goal relevance. Kerin et al. (1992) also point out that the PIMS data, despite its limita-

tions, is superior to small sample surveys. A full description of the PIMS database can be found in Buzzell and Gale (1987).

A number of variables describing innovation orientation, marketing strategy attributes, environments, and performance were selected for analysis. Selection was based on a review of literature on similar research relating to those areas (Cooper, 1984; Dess and Beard, 1984; Lenz, 1981; Manu, 1992; Miller and Friesen, 1983; Nelson and Winter, 1977; Scott, 1987; Venkatrarnan and Ramanujam, 1986). The variables and their definitions in the PIMS database are described in Appendix 1 and Appendix 2. They were chosen from the SPI4 version of the database which has data averaged over four years, in this instance, 1989 to 1993.

Data Analysis Data analysis was conducted in two phases, with each related to one of the research objectives. Phase 1 dealt with the issue of developing a typology of innovation orientation based on a random sample of 350 industrial businesses. Phase 2 dealt with a comparison of the marketing strategy, environments, and performance associated with the types generated in Phase 1.

PHASE 1. The approach followed in developing innovative types was the use of cluster analysis, with the derived clusters serving as a basis for the identification of the types. A cluster program from the analysis of quantitative data (AQD) package provided by the Strategic Planning Institute was used. The program involves a hierarchical algorithm using the minimum squared error approach and is based on squared Euclidean measures of similarity. The Euclidean measure of proximity is not a critical issue for a hierarchical algorithm, which is sensi- tive to the presence of outliers, if data is standardized before the clustering routine (Punj and Stewart, 1983). This procedure is followed, and it also provides the additional benefit of making comparisons easier as all variables are indicated in the same unit of measurement. The minimum squared method chosen is suggested to produce better results when Euclidean proximity measures are used (Punj and Stewart, 1983) and is also better for forming homogeneous groups (Schlaifer, 1974).

This clustering procedure was applied to a random sample of 350 industrial businesses drawn from the PIMS database. The clustering was based on the dimensions of innovation orientation discussed earlier, i.e., order of market entry, percent new product introductions, relative percent new product introductions, product R&D expenses, and process R&D expenses.

Two criteria were used to select the appropriate number of clusters for further analysis:

1. The interpretability and practicality of the derived clusters in terms of the dimensions of innovativeness discussed earlier.

2. The drop in the overall root-mean-square prediction error at different merger levels as shown by a dendrogram of the cluster process.

These criteria have been used in similar research (Galbraith


and Schendel, 1983; Douglas and Rhee, 1989; Miller, 1988; Manu, 1992; Manu, 1993).

PHASE 2. The second phase of the data analysis examined marketing strategy attributes, environments, and performance levels associated with the innovative types developed in the first phase. The statistical approach used in this second phase was ANOVA with cluster membership as the independent variable and the various marketing strategy attributes, environments, and performance levels as dependent variables. A comparison of a cluster with the overall mean of the sample on a particular dependent variable gives an indication of how that duster differs. For instance, in Table 2 product innovators have a score of 0.42 on sales force expenses. This score differs from the mean of the total sample at the .05 significance level.

Results and Discussion The reported numbers represent the mean scores of the different cluster groups relative to the average for the sample as a whole. Cluster comparisons are therefore made in terms of their relative differences from that average. A negative score indicates that a particular duster is below the average, whereas a positive score shows that it is above the average for all businesses in the sample. With respect to the order of market entry variable, however, a negative score indicates relative late entry whereas a positive score describes relatively early entry.

Profiles of the Innovative Types Four innovation orientation types were identified in the cluster analysis stage based on a four-cluster solution. Validation of the cluster solution was conducted to ensure that the chosen cluster solution was not an artifact of the procedure or the sample. Discriminant analysis was the first approach used in this process. The sample of clustered businesses was split in half, a discriminant function was developed on one half and then tested on the second half. Ninety-five percent of the businesses

in the second half were classified correctly into their true clusters. A second approach to validation was through ANOVA analyses in which cluster membership was the independent variable, and the dependent variable was one of the five innovation variables used in deriving the clusters. The clusters' mean scores were significantly different from the grand mean for the total sample, indicating their distinctiveness. These methods validate the chosen cluster solution and provide evidence of the stability of the clusters. They are also consistent with previous research and an approach suggested by Churchill (1987). The innovative profiles of the four clusters are shown in Table 1.

CLUSTER 1: PRODUCT INNOVATORS. This group is characterized by the highest rates of new product introductions in both absolute and relative terms. Expenditures for product R&D are also relatively high, but for process R&D they are just about average for the overall sample. This group of businesses entered their markets relatively late. Based on these characteristics, they are labeled product innovators and constitute about 9% of the sample. They could also be described as current pioneers.

CLUSTER 2: PROCESS INNOVATORS. Charac te r i zed p r imar i ly by

the highest expenditures on process R&D, this group also has moderate levels of expenditures for product R&D and new product introductions in absolute terms. In relative terms, however, they score quite low. This group entered its markets relatively early. On the basis of these characteristics this group is described as process innovators. They comprise 14% of the sample.

CLUSTER 3: LATE ENTRANT NONINNOVATORS. This is probably the least innovative group. They entered their markets relatively later than the other groups and have the lowest rates of new product introductions as well as low expenditures on both types of R&D. It is only with respect to expenditures on process R&D that they do not score the lowest, spending slightly more than the fourth group, former pioneers. Comprising about 39% of

Table 1. Results of Cluster Analysis: Innovation Profiles of Innovation Orientation Types-Standardized Mean Scores

Product Process Late Entrant Former Cluster Innovators Innovators Non-innovators Pioneers Variable (n = 30) (n =49) (n = 136) (n = 135)

Order of market entry -0.14 0.47 -0.97 0.83 (0.09) (0.00) (0.00) (0.00)

Relative % new products 2.56 -0.29 -0.16 -0.30 (0.00) (0.00) (0.00) (0.00)

Percent new products 2.00 0.86 -0.41 -0.34 (0.00) (0.00) (0.00) (0.00)

Product R&D 0.94 0.88 -0 .45 -0 .08 (0.00) (0.00) (0.00) (0.09)

Process R&D 0.28 1.56 -0.26 -0.36 (0.02) (0.00) (0.00) (0.00)

Standard errors in parentheses

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the sample, these businesses are described as late entrant noninnovators.

CLUSTER 4: FORMER PIONEERS. Having originally pioneered in their markets, these businesses are now quite noninnovative, especially with respect to new product introductions and expenditures on R&D. In fact they have the lowest score on process R&D expenditures. Constituting about 39% of the sample, this group is labeled former pioneers because it consists primarily of businesses that describe themselves as having pioneered when they originally entered their product-markets. They could also be described as former prospectors. The large size of this group is consistent with the breakdown of businesses in the database, which has a majority of businesses describing themselves as pioneers.

The identified innovation orientation types indicate some of the multidimensional aspects of innovativeness. For example, product innovators not only have a high rate of new product introductions, they also spend heavily on product R&D. In addition, they spend on process R&D at a rate similar to other businesses, suggesting that product innovativeness goes hand-in-hand with process innovativeness. Process innovators, in turn, have moderately high product innovation, thus sup- porting the previous point. Also supported is the view in the first proposition of differences in the timing of market entry associated with process and product innovative thrusts. The importance of timing, as a separate dimension in itself, is shown by the two clearly distinct groups of businesses loading separ- ately on late entry and early entry. The results further suggest that some of the businesses are attempting to break out of these molds by adopting product and process innovative postures. Early entrants focus on process, whereas late entrants emphasize product innovativeness.

Marketing Strategy Attributes of the InnovaFlve Types The second stage of the analysis compared the marketing strategies of the identified innovative types. The results of this analysis are shown in Table 2. In terms of marketing, product innovators are characterized by very high marketing expenditures, high product quality, and very little variety in customer types. Process innovators are characterized by moderately high marketing expenditures, relatively broad product-market scopes, relatively high-quality products, but a low level of services and a very poor image. Late entrant noninnovators have low marketing expenditures and narrow product-market scopes. They offer low quality, have poor images, and charge very low prices. These characteristics suggest that these businesses are operating in the low end of their markets. Marketing strategy attributes of former pioneers are high relative marketing expenses, broad product market scopes, and high relative images.

The high marketing expenditures of product innovators are consistent with previous research. Harnbrick (1983), McDaniel and Kolari (1987), and Miles and Snow (1978) all suggested that prospectortype organizations would devote substantial resources to the task of communicating with their customers because they are more marketing-driven. Thus, this group has the highest expenditures for promotion and total marketing in absolute terms. Relative to leading competitors, however, they still have some catching up to do. The marketing-driven nature of this group is further reinforced by their high level of services and product quality which translates into a high relative image. These latter findings may support Hambrick's (1983) contention that there are different types of quality, with different industries requiring different types. In the case of industrial markets, one would surmise that the quality of services offered would be closely linked to perceptions of product quality.

Table 2. Marketing Strategy Attributes of the Innovation Orientation Types (Standardized Mean Scores)

Attribute

Product Process Late Entrant Former Innovators Innovators N o n - i n n o v a t o r s P ioneers (n = 3 0 ) (n = 4 9 ) (n = I 3 6 ) (n = 135 )

Sales force expenses 0.42 a Advertising expenses 0.59 c Promotion expenses 0.43 d Total marketing expenses 0.64 c Relative sales force expenses -0.09 Relative advertising expenses -0.01 Relative promotion expenses -0.06 Relative product line breadth -0.08 Relative customer types -0.44 d Relative product quality 0.36 a Relative services 0.17 Relative image 0.20 Relative price 0.07

0.19 b --0.15 a --0.01 0.26 a --0.29 c 0.07 0.28 a --0.15 a --004 0.41 c --0.29 c --0.01

--0.23 a --0.04 0.15 a --0.09 --0.15 0.19 d --0.14 --0.07 0.13 ~

0.14 --0.23 c 0.19 d 0.18 b --0.15 a 0.18 d 0.18 b --0.18 d 0.04

--0.16 --0.04 0.07 --0.21 b --0.10 b 0.13 a

0.03 --0.10 b 0.08

p < 05. bp< .1.

p <.001. d p < 01

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Thus, the finding of higher product quality for product innovators, although contradicting Miles and Snow (1978), is plausible, especially in conjunction with the notion that product innovation may also give rise to perceptions of quality, which aids them in leapfrogging established businesses. Given the higher product quality for this group of businesses, it is interesting to note that they do not charge higher prices, a finding consistent with Hambrick (1983) who views this as paradoxical because of the higher costs associated with product innovativeness. These businesses may be pricing competitively to at- tain market share. The narrow product market scopes of product innovators suggests that they may be a variation of Miles and Snow's (1978) prospectors in that they do not engage in rapid changes of both products and markets. Product innovativeness is focused on narrow market niches for this group. This strategy may support Prescott and Vischer's (1977) contention that late entrants are often left with smaller and less lucrative segments of a market.

The moderately high level of marketing expenditures for process innovators is somewhat surprising in the sense that such businesses may on the surface be viewed as competing on costs because of their emphasis on production efficiency. Remem- bering, however, that these businesses also have moderately high product R&D expenditures as well as having entered their markets relatively early, these marketing expenditures may be viewed as necessary to an imitator strategy. However, when these expenditures are viewed relative to those of their leading competitors though, they are much less. This may raise doubts about the effectiveness of imitating through marketing. Another potentially damaging factor is the very low quality of services offered by this group and the resulting poor image. These latter findings are not consistent with the notion of defendertype businesses devoting their resources to serving a stable domain as

service quality is a crucial factor in industrial markets. It is not surprising then that these businesses show no signs of a price advantage. Also, unlike the defenders of Miles and Snow (1978), these businesses do not have narrow product-market domains probably because they are early followers expanding their domains as opportunities became available over time.

The marketing attributes of late entrant noninnovators appear to be consistent with the fact that they have no enduring innovative advantages. These businesses may have therefore chosen the low price niche as their focus and are conservative with respect to marketing expenditures. On the other hand, a low price may be necessary to make up for their lack of innovation.

The high relative marketing expenditures and broad product- market domains of former pioneers is consistent with the com- position of the PIMS database and previous research. The broad product-market domains necessarily lead to high relative marketing expenditures. These domains may be due to the fact that these businesses marketed their products for the largest and most attractive segments (Prescott and Vischer, 1977). Their still relatively high images in turn could be due to earlier perceptions of innovativeness (Porter, 1980). The "around the average" scores of this group on most attributes seems to indicate a middle-of-the road strategy to keep what markets they have. Overall it appears this group of businesses focuses on maintaining the status quo.

Environments of the Innovative Types The second stage of the analysis also examined the characteristics of the environments associated with each of the identified innovative types. The results of the analysis are shown in Ta- ble 3. The environments of the product innovators are characterized by a high degree of dynamism. There is significant pat-

Table 3. Environments Associated with the Innovation Orientation Types (Standardized Mean Scores)

Attribute

Product Process Late Entrant Innovators Innovators Non-innovators (n = 30) (n = 49) (n = 136)

Former Pioneers

(n = 135)

Product patent protection Process patent protection Product changes frequency New product development time Major technological change Industry long-term growth Real market growth Real market long-term growth Served market concentration Industry instability Competitors' % new products Major competitor exit

0.58 a 0.396 -0.24 a 0.23" 0.22 c -0.15 d

-0.65 ~ -0.07 0.04 -0.48 b -0.27 d 0.28 ~

0.57 a 0.42 ~ -0.20 a 0.21 0.492 -0.07 0.50 b 0.43 a - 0.17 b 0.65 ~ 0.55 a -0.20 a 0.16 0.05 0.14 d 0.10 0.27 d -0.02 0.55 ~ 1.22 ~ -0.36 a 0.36 d -0.07 -0.04

-0 .03 0.02 0.13 a

- 0 0 8 -0 .08 -0 .16 b -O. lO c -0 .15 d -0 .20 b -0.10 c -0.166 -0.02

a p < 0 0 1 b p < .01.

C p < 1 d p < 0 5


ent protection, short product development times, and major technological change. These businesses are operating in markets with high rates of growth and also face greater competitive pressure, evidenced by the exit of at least one major competitor and a high rate of competitors' new product introductions. The findings confirm the work of Abernathy and Utterback (1978), Moore and Tushman (1980), and Miller (1987), which indicated the positive relationship between product innovativeness and technological and market dynamism.

Process innovators are associated with environments characterized by relatively high patent protection and relatively short product development times. In addition, there are high rates of market growth, high industry instability, and a very high rate of new product introductions by competitors. It appears that although there is innovative opportunity for these businesses, they seem to have focused more on process innovativeness, quite probably because of the high industry instability.

Late entrant noninnovators are faced with low patent protection, little major technological change, and long product development times. They are in low-growth markets with a high degree of concentration. Their markets are further characterized by low competitive intensity as shown by a low rate of competitors' new product introductions and few entries by major competitors. This latter fact may also point to the unattrac- tiveness of these markets.

The environments of former pioneers may be described as nondynamic. Their markets have infrequent product changes, low growth, and relatively low rate of competitors' new product introductions and a high degree of industry stability. There is also low served market concentration. These characteristics suggest a mature environment, which probably explains the current lack of innovativeness on the part of these former pioneers.

Performance Levels of the Innovative Types The second stage of the analysis also compared the performance of the innovative types. The results are shown in Table 4. Prod- uct innovators experience very poor financial performance, a finding similar to that of Hambrick (1983) for prospectors. Such

a finding is not surprising given the high costs associated with the strategy and the moderate prices charged by the followers of such a strategy. Yet, new products and innovation in general are considered or accepted as crucial to the survival of companies. One explanation for this apparent inconsistency may be that it is a temporary strategy designed to gain entry into a market. This is plausible because these businesses are primarily late entrants into established mature market situations. The other significant performance attribute of this group is the very high rate of market share growth and again this is consistent with Hambrick (1983). For this strategy then, attempts to gain market share are successful but are associated with negative im- pacts on cash flow and ROI. These latter effects suggest that the strategy cannot be pursued for long periods of time.

Process innovators also exhibit poor financial performance, especially in terms of cash flow, although they are somewhat better than the product innovators. Previous research (Free- man, 1974; Miles and Snow, 1978) indicated that such defenderlike or imitatorlike efficiency-oriented strategies led to good performance, but the assumption there would be that the efficiency objective was achieved. For these businesses efficiency was not effective, probably because of industry instabilityl The performance of this group reinforces the discussion on product innovators that a strategy of extreme innovativeness is a drain on cash flow and profitability. Businesses in this group are not even rewarded by market share gains. A consideration here is how long such a situation may exist.

Significant attributes of late entrant noninnovators are very low levels of market share in both absolute and relative terms. Obviously this kind of low-end budget strategy is not designed to gain a strong market share position. Like the dependents of Freeman (1974) and reactors of Miles and Snow (1978), these businesses appear to accept their subordinate positions. Al- though not statistically significant, they do not appear to fare as badly on the measures of financial performance.

The former pioneer group has superior performance on all measures except market share growth for which it has the lowest score. Their superior marketing performance supports previous research by Robinson (1988), Robinson and Fo rnell (1985),

Table 4. Performance Levels of the Innovation Orientation Types (Standardized Mean Scores)

Attribute

Produce Process Late Entrant Innovators Innovators N o n - i n n o v a t o r s (n = 30 ) (n = 4 9 ) (n = 136)

For me r Pioneers

(n = 135)

Return on investment -0.38 a Cash flow on investment -0.70 b Cash flow from operations -0.72 b Market share 0.00 Relative market share 0.06 Market share growth 1.02 b

-0.12 -0.24 a -0.40 b -0.12

0.11 -0.12

-0.03 0.01 0.06

-0.20 c -0.23 b -0.04

0.15 a 0.23 b 0.24 b 0.16 c 0.18 c

-0.15 a

a p < .05 p < 001.

~p< Ol

8 8 J Bush Res F.A. Manu and V. Sriram 1996:35:79-91

and Urban et al. (1986), which pointed to the superior market share associated with pioneering in a market. For this group, such marketing performance may be attributable to their broad market scopes, which may facilitate scale and scope economies, and high relative marketing expenditures. The superior financial performance may, in turn, be attributable to the superior market share positions resulting from strong image and estab- lishment of a brand franchise with customers.

Conclusion Through the process of cluster analysis, a taxonomy of innovative types was developed that provided a basis for assessing differences in the marketing strategy attributes, environments, and performance levels of businesses with varying innovation orientations. The multidimensional nature of innovation used in this study probably makes analysis more difficult. This, however, is a more realistic picture of what goes into innovation. For example, aggressive product innovativeness is likely to be accompanied by high levels of product and process R&D. If the investment that goes into product innovativeness, i.e., R&D, is ignored, then the true cost of that innovative orientation would have been underestimated. A contribution of this study, then, is how it takes into account three important dimensions of innovativeness- output, input, and t iming- to give a fuller picture of its implications. Such a consideration of the major dimensions of innovativeness is necessary for a better perspective on its implications for businesses. The study also extends notions from the field of strategic management to the realm of marketing strategy. This is achieved through an examination of the marketing strategy attributes associated with a strategic typology. Although not prescriptive in nature, the findings suggest some of the likely relationships between marketing strategy components and this strategic typology.

Managerial Implications The taxonomy clearly indicates that different businesses focus on different dimensions of innovativeness, and this is associated with differences in their marketing strategy and performance. This suggests that innovation is indeed a multidimensional concept. The innovative types are also associated with different kinds of environments for the most part.

Evidence from this study indicates a need for great caution in accepting traditional notions of the benefits of innovation wholesale. In the case of extreme product and process innovativeness, the impact on performance does not appear to beneficial, at least in the shor t - term It is therefore vital to determine which performance criterion a business considers important because different innovative types deliver different types of performance. For example, if share growth is a primary goal, product innovation (i.e., product R&D and new product introductions) should be conducted at a much higher rate than other businesses as is the case for product innovators and their high

market share gains. Noninnovation seems to be an unworka- ble means of maintaining or increasing market share.

A further implication of these results is for managers to ap- preciate the long-term benefits of pioneering but its short-term costs, as is evident from the poor cash flows of product innovators. The superior financial performance of former pioneers clearly points to these long-term benefits. Although R&D in- vestments and subsequent introduction of new products are beneficial, managers need to carefully monitor the process and rate at which these are done in order to avoid cash flow crises.

Directions for Future Research A logical extension of this study would be a more careful analysis of the rationale behind the traditional acceptance of innovation's contribution to the survival and growth of firms. Specifi- cally, researchers need to focus more on environmental contingencies associated with adoption of a particular innovative posture, i.e., are certain innovative postures better in certain environments and in what ways?

Researchers also need to examine timeframes associated with traditional assumptions about the importance of innovation and conduct longitudinal studies to assess its long-term impact on performance. This would better reflect the dynamic nature of innovation. It would also provide an understanding of changes over time. For example, how does/should strategy change as one-time pioneers mature and become less innovative? These analyses will require more sophisticated statistical methods (e.g., modeling) than are available from the AQD package to which PIMS researchers are limited.

Related to our findings is the contention of Miles and Snow (1978) regarding the equal effectiveness of innovative types. The findings clearly demonstrate that this is not the case. This suggests either improper implementation or unsuitability of those strategies for their particular environments. Further research should therefore examine which marketing strategies lead to higher performance for a given innovative posture. Also, studies using larger sample sizes may be helpful in identifying the different marketing strategy types that emerge within each innovativeness type.

The striking difference is in the case of process innovativeness and performance. It could be argued that this is a situation where intentions (i.e., process R&D expenditures) do not match outcomes (i.e., production efficiency). This is an area where the criticism of the PIMS database as lacking indicators of intended strategies and goal structures may be pertinent. In es- sence, there may be gaps between intended outcomes and ac- tual outcomes. Research using nonPIMS data, reflecting intended strategies and goals, may be useful in this regard. This approach could also examine links to new product development processes to identify antecedents to innovative behavior.

Findings from this study should be viewed as tentative because firms providing information for the PIMS database tend to be larger and more mature. In addition, definitions of some concepts, for example, order of market entry, may need refine- ment as they are somewhat different from traditional usage.


Other conceptualizat ions of innova t ion should also be considered. For example, it would be interesting to find out what difference a definit ion of"new product" as n e w to the market or new to the bus iness would have on these relationships. Similarly, other measures of aspects of innovat iveness (e.g., n u m b e r of scientists, n u m b e r of patents) may be used to provide for con- f irmation of these findings. Great care mus t therefore be taken in applying these results to nonPIMStype businesses. These findings, however, provide a useful starting point from which to

more completely examine the dimensions of innovativeness and their relat ionships to market ing strategy, envi ronments , and performance.

Appendix 1. Components of Innovation Orientation and their Definition in the PIMS Database

A. New Product Introduction: A new product is described as follows in the PIMS database: " . . . . may either replace existing products or be added to the product line within the served market. They differ from improvements and product-line extensions in that they are characterized by one of the following: relatively long gestation periods, major changes to manufacturing facilities, separate promotional budgets, or separate product management" (PIMS Data Man- ual, January 1978, pp. 3-8). Two variables exist in the database describing new products:

1. Relative percent new products: Percent of total sales accounted for by products introduced by a business during the three previous years minus percent of total sales accounted for by products introduced during the three previous years averaged for the three largest competitors.

2. Percent new products: Percent of total sales accounted for by products introduced by a business during the three previous years.

B. R&D Expenditures: All expenses incurred to:

1. improve the existing products or services of a business or to develop new products or services, including improvements in packaging as well as product design, features and functions; or

2. improve the efficiency of manufacturing and distribution processes.

C. Order of Market Entry: At the time the business first entered the market whether it was:

1. one of the pioneers in first developing such products or services (=3)

2. an early follower of the pioneer(s) in a still growing, dynamic market ( -2) ; or

3. a later entrant into a more established market situation (= 1).

Appendix 2. Definitions of Selected PIMS Database Variables Describing Marketing Strategy Attributes, Environments, and Performance

MARKETING STRATEGY ATTRIBUTES Sales force expenses: Includes compensation and expenses incurred

by salesmen, commissions paid to brokers or agents, and cost of sales force administration as a proportion of revenue.

Media advertising expenses: Expenditures for media advertising as a proportion of revenue.

Promotion expenses: Expenditures for catalogues, exhibits and dis- plays, premiums, coupons, samples, and temporary price reductions for promotional purposes as a proportion of revenue.

Total marketing expenses: The sum of sales force, advertising promotion and other marketing expenses as a proportion of revenue.

Relative sales force expenditures: Relative to the three largest competitors whether the amount spent by a business on sales force effort as a percentage of sales was "about the same," "somewhat more" (or less), or "much more" (or less).

Relative advertising expenditures: Relative to the three largest competitors whether the amount spent by a business on media advertising as a percentage of sales was "about the same," "somewhat more" (or less), or "much more" (or less).

Relative promotion expenditures: Relative to the three largest competitors whether the amount spent by a business on sales promotion as a percent of sales was "about the same," "somewhat more" (or less), or "much more" (or less).

Relative product line breadth: Relative to the weighted average of the product lines of the three largest competitors whether the product line breadth of a business was "narrower," "same," or "broader".

Relative customer type: Relative to the weighted average of the three largest competitors whether the number of customer types for a business was "narrower," "same," or "broader".

Relative image: Relative to the three largest competitors whether end users" perceptions of product image and company reputation (for quality, dependability, etc.) for a business were "about the same," "somewhat better" (or worse), or "much better" (or worse).

Relative services: Relative to the three largest competitors whether the quality of customer service the business provides to end users is "about the same," "somewhat better" (or worse), or "much better" (or worse).

Relative product quality: The percentage of a business's products considered superior from the perspective of customers less the percentage of the three leading competitors' products considered superior.

Relative prices: The average level of selling prices of a business's products and services relative to the average level of the three largest competitors. Weighted average for three largest competitors = 100%.

ENVIRONMENT Patents and trade secrets: Whether a business benefits to a signifi-

cant degree from patents, trade secrets, or other proprietary methods of production or operation pertaining to products or service (yes = 1; no = 0).

Frequency of product changes: Whether it is the typical practice for the business to change all or part of the line of products or services offered "annually" ( - 1 ), "seasonally" ( -2) , "periodically, but at inter- vals longer than one year" (=3), or with "no regular, periodic pattern of change" (=4).

Technological changes: Whether there have been major technological changes in the products offered by the focal business or its major competitors or in methods of production during the previous eight years (yes - 1; no - 0). If the respondent is in doubt about whether the change was "major" then the answer is "no".

Development time for new products: For a business and its major competitors what the typical time lag is between the beginning of development effect for a new product and market introduction. Less than 1 year ( -1) ; 1-2 years ( -2) ; 2-5 years ( -3) ; more than 5 years (=4); little or no new-product development ( -5) .

Industry long-term growth: The long-term growth rate of total sales in the industry.

Real market growth: The short-run, inflation-adjusted growth rate of total sales in the served market.

Real market long-term growth: The long-term, inflation-adjusted growth rate of total sales in the served market.

Served market concentration: The percentage of sales in the served market accounted for by the four largest businesses competing in the served market.


Industry instability: The average percentage difference in the growth rate of the industry from an exponential trend.

Competitors' percent new products: The simple average of the percentage of total sales accounted for by products introduced during the three preceding years for the three largest competitors.

Major competitor exit: Whether over the previous five years any major competitors, that is, businesses with at least 5% market share, dropped out of the market.

PERFORMANCE Return on investment: Net income over the book value of average

investment. Cashflow on investment: Cash flow from ongoing operations over

the book value of average investment. Cashflow on revenue: Cash flow from ongoing operations as a propor-

tion of revenue. Relative market share: Sales of a business over the sales of the three

largest competitors in the served market. Change in market share: Growth rate at market for a business over

relevant time period.

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