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Product Development in Technology-Based Entrepreneurial Firms (July 2014 updated)

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Review of Yli-Renko, H. And R. Janakiraman (2008), “How Customer Portfolio Affects New Product Development in Technology-Based Entrepreneurial Firms,” Journal of Marketing, 72 (September), 131-148.

Review of Yli-Renko, H. And R. Janakiraman (2008), “How Customer Portfolio Affects New Product Development in Technology-Based Entrepreneurial Firms,” Journal of Marketing, 72 (September), 131-148.

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  • 1. Prepared by Michael Ling Page 1 LITERATURE REVIEW SAMPLE SERIES NO. 3 ―Yli-Renko, H. And R. Janakiraman (2008), “How Customer Portfolio Affects New Product Development in Technology-Based Entrepreneurial Firms,” Journal of Marketing, 72 (September), 131-148‖ Prepared by Michael Ling Email: msc_ling@yahoo.com.au Note: Michael Ling is the sole author of this document. You’re welcomed to use its contents but, as a courtesy, please quote the source of this paper http//www.michaelling.net/
  • 2. Prepared by Michael Ling Page 2 Theoretical Framework Yli-Renko & Janakiraman have limited the definition of new product development to the “prelaunch part” of the innovation process, which is defined as “the stages from idea generation and concept design; to prototype development and testing; to market launch, sales, and marketing; and finally to adoption by customers”. The reason for keeping the definition to the “prelaunch part‖ is, according to the authors, because “commercialization” can “obscure the effects of customers on new product development”. I argue that this is not a sound argument as commercialization is generally considered as an essential part of new product development. According to Song & Montoya-Weiss (2003), new product development consists of “four sets of NPD activities—strategic planning, market analysis, technical development, and product commercialization—are key determinants of new product success”. Hence, I argue that Yli- Renko & Janakiraman‟s measure of new product development has a construct validity problem. It also raises doubts on the validity of their theoretical framework. Effect of size of customer portfolio Yli-Renko & Janakiraman argue that, based on their results, “customer portfolio size has an inverse U-shaped relationship to new product output”. Deeds and Hill (1999), based on their research on 132 entrepreneurial biotechnology firms, find evidence to support an inverted U- shaped relationship between the number of strategic alliances and the rate of new product development. Strategic alliances, in most cases, refer to both customers and suppliers of an organization. Though Deeds and Hill‟s research is concerned with strategic alliances, I argue that their findings have strong relevance to Yli-Renko & Janakiraman‟s research because both studies select a sample of entrepreneurial firms and choose new product development as their research
  • 3. Prepared by Michael Ling Page 3 problems. Deeds and Hill use the economic law of diminishing returns to account for their findings, that is, “the more alliances a firm engages in, the more likely it is to enter some alliances whose marginal contribution is relatively minor “ (Deeds and Hill, 1999). Yli-Renko & Janakiraman has not put forward a convincing explanation of the effect. And I suggest that the law of diminishing returns might be considered as a good explanation of the observed effect. Effect of revenue concentration Yli-Renko & Janakiraman suggest that “focusing on one or a few customers’ needs is likely to constrain and hinder the firm’s development efforts because the time and resources required to meet key customers’ demands may curtail opportunities to develop new and diverse products for other customers or new markets”, and raise the concern that too much dependence on customers will produce a negative effect on new product development. I agree that heavy reliance on a number of powerful customers will often influence the decisions made by an organization. But the adverse effect of over dependence on customers is not only limited to small and emerging organizations. Christensen & Bower (1996) find that ―established firms led the industry in developing technologies of every sort - even radical ones -whenever the technologies addressed existing customers' needs. The same firms failed to develop simpler technologies that initially were only useful in emerging markets, because impetus coalesces behind, and resources are allocated to, programs targeting powerful customers.” As a result, the issue of dependence is a much more general issue that has a far reaching effect.
  • 4. Prepared by Michael Ling Page 4 Relational embeddedness Yli-Renko & Janakiraman find relational embeddedness “not only has a direct, positive impact on new product output but also can compensate for an otherwise suboptimal portfolio”, and encourage young technology-based firms to “strive to forge closer, more cooperative relationships with customers – particularly if the firm is dependent on key customers or has few customers”. On one hand, the authors raise concerns that over dependence on customers will constrain a firm‟s development effort (refer „Effect of revenue concentration‟ section); on the other hand, here, they suggest firms should establish closer relationships with customers. These two views are contradictory. I suggest the authors should further study the comparative effect of revenue concentration and relational embeddedness in relation to new product development. Reference: Christensen C. M. And J. L. Bower (1996), “Customer Power, Strategic Investment, and the Failure of Leading Firms,” Strategic Management Journal, 17(3), 197-218. Deeds D L. And C. W. L. Hill (1996), “Strategic Alliances and the rate of New Product Development: An Empirical Study of Entrepreneurial Biotechnology Firms,” Journal of Business Venturing, 11(1), 41-55. Song X. M. And M. M. Montoya-Weiss (2003), “Critical Development Activities for Really New versus Incremental products,” Journal of Product Innovation Management, 15 (2), 124-135.