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How Customer Portfolio Affects New Product Development In Technology Based Entrepreneurial Firms.

ABSTRACT The innovation of new products in technology based firms is influenced mostly by the firms current customer relationships. The firms 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 customers current needs. This report summarizes the technology-based firms 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

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 firms 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).

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 users 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 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 customers 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 firms 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 technologybased 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 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

6 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 firms 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 firms ability to network with different customers, which then leads to limited ideas for new products.

7 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 firms revenues ( Venkataraman et. Al1990: YliRenko, 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 customers influence. Relational Embeddedness of the Customer Portfolio Customer relationships can be characterized on a continuum ranging from impersonal, constantly shifting, arms-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 firms 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 between both the firm and the customer will create open channels of communication.

8 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 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

9 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 firms revenues in it customer portfolio, the smaller amount of products developed by the firm. This suggests that dominant customers have a voice in the firms decision to develop new products. For hypothesis 3, the more relationally embedded the firms customer portfolio, the 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

10 revenues in their customer portfolios will be successful in the development of new products. For hypothesis 4, the larger the firms 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 firms 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 firms 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, 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.

11 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 customers 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 firms current resources. Firms 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 spread their customer portfolio across a variety of customers to prevent such a situation as this.

SUMMARY AND CONCLUSIONS

12 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 Officers 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 firms 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 dependent upon dominant customers due to high revenue earnings because dominant customers may seek to influence the entire firm.

REFERENCES

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(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 ( 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.