Marketing of High-Technology Products and Innovations Chapter 4: Market Orientation and Cross-Functional (Marketing/R&D) Interaction

Questions to Consider What is a market orientation? What does a market-oriented firm look like? Why is organizational memory important? What is the purpose of cross-functional teams? How can the performance of cross-functional teams be enhanced?

Market Orientation A philosophy of decision making focused on customer needs Market oriented firms gather, disseminate, and utilize market-based information They exhibit a customer focus Decisions grounded in analysis of the intended user They harness the power of cross-functional teams to deliver customer value Result: Increased creativity Improved new product performance

4 Dimensions of a Market Orientation Intelligence Generation Dissemination Integration Coordinated Action 1. 2. 3. 4.

The Effect of Market Orientation on Company Performance

Impact of Market Orientation on Firm Performance Superior sales growth and profitability Effects of market orientation on performance may be stronger in dynamic (high-tech) markets Firms with a strong R&D base gain the most from a strong marketing capability Proactive, market-oriented firms generate more innovative products

Market Orientation: 1. Intelligence Generation Market intelligence: useful information about market trends/stakeholders Current and future customer needs Competitors’ capabilities and strategies Emerging technologies across industries

Resource allocation to gathering market- based data Must be budgeted for

Gathering Information: Market Research Expenditures and Staffing % of Revenue # of Market Research Personnel By Industry Sector Pharmaceuticals 0.78 % 52 Media Companies 0.68 % 22 Consumer Goods 0.51 % 18 Technology (B2B Sector) 0.25 % 15 Telecommunications 0.07 % By Company Size ($ Revenue) < $1 Million 5 > $5 Million 0.5 - 0.69 % 13-41 * Source: Corporate Executive Board, Market Research Executive Board, Member Benchmarking Survey Analysis, “2003-2004 Benchmarking the Research Function”

Market Orientation: 1. Intelligence Generation The Intelligence Continuum: Response to Proactive Information on: Proactive market orientation Responsive Expressed customer needs Current competitive threats Latent and future Anticipated

Market Orientation: 1. Intelligence Generation Responsive market orientation: responding to current intelligence Customers articulate their needs (difficult in high-tech market) Can result in marketing myopia and the tyranny of the served market Reacting to existing threats means the firm is always behind

Market Orientation: 1. Intelligence Generation Proactive market orientation: gather anticipatory intelligence (latent needs, future trends) Bifocal vision: current and future customer needs Marketing driving firms seek to: Redefine market structure Introduce an innovative value proposition Focus on multiple stakeholders * Market driving can be risky (high risk/high reward)

Contingency Theory of High-Technology Marketing Responsive market orientation Associated with development of incremental innovations Proactive market orientation Associated with development of radical innovation Firms must be ambidextrous— - both responsive and proactive - pursue both incremental innovations (serve known customer needs) and radical innovations for markets of the future.

Market Orientation: 2. Intelligence Dissemination Disseminate information: actively encourage information sharing Obstacle: knowledge hoarders Goals: Create a “boundary-less” organization Cultivate a team orientation

Market Orientation: 3. Intelligence Integration Integrate intelligence: shared interpretation of the information Debate, discuss, disagree, & dialogue Create an organizational memory to retain knowledge Explicit knowledge: can be documented Tacit knowledge: not easily recorded

Knowledge Management Practices used to document, preserve, store, & disperse “knowledge assets” Creates an organizational memory Associated with a learning orientation Requires investments in hardware, software, and Web 2.0 technologies (wikis, etc.)

Market Orientation: 4. Coordinated Action Execute: implement decisions through coordinated actions Requires cross-functional (interfunctional & interdivisional) integration Barriers Culture that disregards marketing input Organizational politics “Coopetition”

Assessing a Firm’s Market Orientation See Box 4-1 in Text. Management rates the business using the scale: (use items next slides) The sum of the scores indicates market orientation. Strongly Disagree -3 Disagree Moderately -2 Disagree Slightly -1 Agree Slightly 1 Agree Moderately 2 Strongly Agree 3

Assessing a Firm’s Market Orientation Responsive Customer Intelligence Generation: We continuously work to better understand of our customers’ needs. We pay close attention to after-sales service. We measure customer satisfaction systematically and frequently. We want customers to think of us as allies. Responsive Competitor Intelligence Generation: Employees throughout the organization share information concerning competitors’ activities. Top management regularly discusses competitor’s strengths and weaknesses. We track the performance of key competitors. We evaluate the strengths and weaknesses of key competitors.

Assessing a Firm’s Market Orientation Proactive Customer Intelligence Generation: We continuously try to discover additional needs of our customers of which they are unaware. We incorporate solutions to unarticulated customer needs in our new products and services. We brainstorm about how customers’ needs will evolve. We work with lead users, customers who face needs that eventually will be in the market – but face them months or years before the majority of the market. Proactive Competitor Intelligence Generation: We try to anticipate the future moves of our competitors. We monitor firms competing in related product/markets. We monitor firms using related technologies. We monitor firms already targeting our prime market segment but with unrelated products.

Assessing a Firm’s Market Orientation Intelligence Dissemination: We have interdepartmental meetings to discuss market trends and developments. Marketing personnel spend time discussing customers’ needs with other functional departments. We share information about major market developments. Data on customer satisfaction are shared at all levels in the organization. When one function acquires important information about customers or competitors, it shares that information with other functions.

Assessing a Firm’s Market Orientation Intelligence Integration: We have cross-functional meetings for the purpose of intelligence integration. We reach organizational consensus regarding the holistic meaning of related pieces of information before taking action. We utilize cross-functional teams or task forces for important initiatives to ensure that all points of view are considered before decisions are made. Collaboration is valued in this business. Coordinated Action: We are quick to take advantage of market opportunities. The activities of different functions in this business are well- coordinated. We make sure that all critical functions understand our objectives and strategy before we take action. There is a high level of cooperation and coordination among functional units in setting the goals and priorities for the organization to ensure effective response to market conditions.

Given the value of being market oriented, why is it so hard? Requires a cultural shift from technology to customer/market focus. Requires resource commitment to gathering data Requires cross-functional collaboration

Becoming Marketing Oriented: Facilitating Conditions

Difficult to comprehensively scan high- tech environments Market Orientation Facilitating Conditions: Prioritize Information Gathering Needs Difficult to comprehensively scan high- tech environments Scanning efforts must be focused Identify issues by the four strategy types (see Table 4-1 in text) Avoid “paralysis by analysis”

Prioritize Scanning Efforts by Strategy Type: Prospectors (Pioneers) Supply new technology solutions to address customers' expressed and latent needs Information focus: highest priority on understanding customers’ unarticulated needs through creative market research techniques Must stay ahead or abreast of technological developments

Prioritize Scanning Efforts by Strategy Type: Analyzers (Fast Followers) Bring out improved or less expensive versions of products introduced by Prospectors Simultaneously defend core markets and products Information focus: Closely monitor customer reactions to Prospectors’ offerings Monitor competitors’ activities, successes, and failures Limit new product introductions to categories that have shown promise in the marketplace

Prioritize Scanning Efforts by Strategy Type: Low Cost Defenders (Operationally Excellent) Provide quality products or services at the lowest overall cost Generally less technologically sophisticated product lines Role of technology is in process/operations Information focus: Competitor orientation: Competitors are a benchmark against which prices, costs, and performance are compared

Prioritize Scanning Efforts by Strategy Type: Differentiated Defender (Customer Intimate) Focus on customer value for individual/niche segments Information focus: Skilled at segmentation to identify customer segments that value superior quality and service Closely monitor customer satisfaction Identify opportunities to increase share of customer’s wallet Analyze reasons for customer defections Assess customer profitability

Market Orientation Facilitating Conditions: Top Management Commitment Unequivocal, visible commitment of top managers: To customers To collecting, gathering, and using market-based information

Fluid job responsibilities Market Orientation Facilitating Conditions: Decentralized Organizational Structure Fluid job responsibilities Informal, extensive, and frequent lateral communication

Organizational factor with the greatest impact on market orientation Market Orientation Facilitating Conditions: Market-Based Compensation System Organizational factor with the greatest impact on market orientation Less emphasis on short term sales and profit goals

The Heart of a Market-Oriented Organizational Culture Creating a market-oriented culture requires: Initiation: Recognize need to change Reconstitution: Build market-oriented processes Institutionalization: Solidify the cultural change Maintenance: Sustain over time

Cross Functional Interaction: Marketing Interactions Marketing is a boundary-spanning activity Effective marketing decisions are dependent on interactions with: Personnel in other departments External stakeholders

Cross Functional Interaction: Teamwork in Product Development Cross-Functional Product Development Teams Requires all functional areas to be closely integrated

Assessing a The Degree of Cross-Functional Integration See Box 4-2 in Text. Management rates the business using the scale: (Use items next slides) The sum of the scores indicates the level of cross- functional interaction within the organization. Strongly Disagree -3 Disagree Moderately -2 Disagree Slightly -1 Agree Slightly 1 Agree Moderately 2 Strongly Agree 3

Assessing a The Degree of Cross-Functional Integration The activities of functional units are tightly coordinated to ensure better use of our market knowledge. Functions such as R&D, marketing, and manufacturing are tightly integrated in cross-functional teams in the product development process. R&D and marketing and other functions regularly share market information about customers, technologies, and competitors.

Assessing a The Degree of Cross-Functional Integration There is a high level of cooperation and coordination among functional units in setting the golas and priorities for the organization to ensure effective response to market conditions. Top management promotes communication and cooperation among R&D, marketing, and manufacturing in marketing information acquisition and use. People from marketing, R&D, and other functions play important roles in major strategic market decisions.

Cross Functional Interaction: Teamwork in Product Development Characteristics for Successful NPD Teams Commitment of senior management Clear/stable vision to guide the project over time Improvisational approach to development Information exchange on continual basis Collaboration under pressure by focusing on goals rather than personal issues

Contingency Theory of High-Technology Marketing Greater inter-functional coordination Associated with development of radical innovations Reinterpretation of competencies Recombines existing knowledge to generate breakthrough ideas

Cross Functional Interaction: Teamwork in Product Development

Cross Functional Interaction: Teamwork in Product Development What determines the effectiveness of team interactions? Communication Team Orientation The Reward System

Cross Functional Interaction: Teamwork in Product Development Communication. Teams must: Simultaneously cooperate and compete Harness diverse functional perspectives Reduce language barriers across functions Engage in constructive conflict resolution

Cross Functional Interaction: Teamwork in Product Development Team Orientation Leaders with a clear set of values Confidence in other team members Reward system promotes organization (not individual) performance

Cross Functional Interaction: Teamwork in Product Development Reward System Reward team as a group; split: Equally amongst members –or- Based on position Reward individual team members Process-based: tied to procedures Outcome-based: tied to bottom-line

Findings on Reward Systems Individual vs. Group If an individual’s contribution to the team is easily evaluated, then position-based rewards are best; If individual’s contribution is not easily evaluated, does not mean company should use equal rewards— Rather, invest in monitoring to measure individual contribution to team. Outcome vs. Process For long, complex projects, used outcome based rewards, including employee stock options

Cross Functional Interaction: R&D – Marketing Interactions Cross-functional Marketing and R & D collaboration particularly important in high- tech firms Associated with greater new product success Need for R&D-Marketing integration greater when: Innovations are complex Environmental uncertainty is higher Product development is in the early “fuzzy front end”

Rivalry between R&D and Marketing: Reduces the use of information Contributes to failure Roles: Marketing brings the voice of the customer into the development process R&D brings the knowledge of what is technically feasible Both participate in customer visit programs, etc.

Cross Functional Interaction: R&D – Marketing Interactions

Contingency Theory of High-Technology Marketing Tailor the nature of R&D-Marketing interaction to the type of innovation For Breakthrough Products, Marketing-R&D interaction: Assess market opportunities Determine what industry/market segment company should compete in Set market development priorities Assess desired product feature set Generally, R&D takes the lead role

Contingency Theory of High-Technology Marketing For Incremental Innovations, R&D- Marketing interaction: Establishes direction for commercialization R&D assists with marketing strategies and materials Generally, Marketing takes the lead role

R&D – Marketing Interaction: Barriers to Collaboration Dominant engineering culture of many high-tech firms Manifested in “jokes” (see Table 4-2), job titles, responsibilities for marketing activities, etc. Differing values (see following table) Physical separation of personnel Competition for resources

R&D – Marketing Interaction: Barriers to Collaboration Different Orientations Between R&D and Marketing Personnel R&D Marketing Time Orientation Long Short Projects Preferred Breakthrough Incremental Ambiguity Tolerance Low High Department Structure Informal Moderately Formal Bureaucratic Orientation Less More Orientation to Others Permissive Professional Loyalty Profession Firm Professional Orientation Science Market

R&D – Marketing Interaction: Achieving Integration Formal systems specify marketing role in new product development Informal Techniques: Co-optation Cooperation Communication Constructive Conflict

R&D – Marketing Interaction: Achieving Integration Co-optation - merge R&D/Marketing interests: Build informal networks Gain product knowledge and credibility Build consensus through questions and subtle influence Form strategic coalitions Work on minor improvements to products outside of R&D

Cooperation - Enhanced by: Physical co-location of Marketing and R&D Job rotation of personnel across functions Informal cross-functional networks Decentralized organizational structure and tolerance for risk; joint reward systems

R&D – Marketing Interaction: Achieving Integration Communication Moderate amount of interaction is optimal Must exceed minimum threshold Too much interaction may exacerbate conflict and result in information overload Formal dissemination enhances credibility Informal channels provide openness and spontaneity

Communication (Continued) Information-sharing norms: expectations about how departments communicate If marketing managers identify more with the company (than with the marketing function), they communicate more

Communication (Continued) Integrated goals – organization’s goals take precedence over departmental goals Even if marketing managers identify strongly with the marketing department, they communicate more when integrated goals are stressed Caveat: Such marketing managers may use coercion to gain R&D compliance Implications: Encourage information sharing norms and set integrated goals

R&D – Marketing Interaction: Achieving Integration Relationships that are too close can result in “groupthink” Precludes alternative views Formalized roles (i.e., for devil’s advocate) Can help overcome groupthink

Must have a strategy to manage conflict between marketing & R&D Conflict handling strategies (next slide)

Conflict Handling Strategies Constructive conflict strategies for improved innovation performance Integrative - Demonstrate high concern for self and others Accommodating - Low concern for self and high concern for others Destructive conflict strategies that lower innovation performance Forcing – High concern for self and low concern for others Avoiding – Low concern for both self and others Compromise - moderate concern for self and others - associated with less destructive conflict as well

Assessing a The Degree of Integration Between the Marketing and R&D functions See Box 4-3 in Text. Management rates the business using the scale: (see items next slide) Sum the scores: negative scores indicate room for improvement, while high scores (rare) indicate a strong capability Strongly Disagree -3 Disagree Moderately -2 Disagree Slightly -1 Agree Slightly 1 Agree Moderately 2 Strongly Agree 3

Marketing and R&D: Coordinate work activities smoothly. Have senior managers who share values and perspectives. Enhance each other’s performance. Cooperate with each other. Have compatible goals and objectives. Agree on the priorities for each function. Respect each other’s capabilities.

R&D – Marketing Interaction: A Caveat- Remembering the Customer

Chapter Features Opening Vignette: Buckman Labs Technology Experts: Hewlett Packard (Product Manager) Xilinx Software (Engineer) Appendix: Agilent Senior VP of R&D and Marketing Technology Solution: Aravind Eye Hospital End-of-Book Case: Xerox, ESRI, Goomzee

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