The themes of technological innovation, entrepreneurship, and organizing
Effects of Product Development Phases on Innovation Network Relationships
Lund University, Sweden
In research literature, product development has frequently been associated with four distinct phases: introduction, growth, maturity, and decline. While these phases have been related to and used for the study of product life cycle, market strategies and competition, less or no attention has been given to the subject of Innovation Network Relationships (INRs), and more specifically, to whether and how INRs are affected by these Product Development Phases (PDPs). Based on a literature review of Resource Dependence Theory (RDT) and four case studies, this chapter contributes by discussing how various INRs are affected by PDPs of an innovative firm. Findings include: (1) the specific needs and resource dependence by the innovative firm during different PDPs affect the status of the firm’s INRs, whereas new relationships are built and old ones are finished; (2) during product development, the INRs become increasingly complex where network parties become negative resources of the innovative firm through increased uncertainty being introduced into previous relationships; and (3) the development of INRs cannot be captured on a dyadic level, but various parties ’ relationships with one another need to be considered.
DOI: 10.4018/978-1-61350-165-8.ch011
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Studies on products and markets often describe their development as consisting of four phases: introduction, growth, maturity, and decline (Christiansen, Varnes, Gasparin, Storm-Nielsen & Vinther, 2010; Levitt, 1965). These PDPs would expectedly follow one another, and companies would act differently in the various phases (Moon,
2005) . The phases have been described in terms of how a company should act in marketing, and what the competition looks like during the different phases (Lehmann & Winer, 2008). The PDPs could, however, also be considered in terms of INRs. INRs here describe the ties to external parties that an innovative firm is connected to by means of contracts, collaboration, ownership, or business deals. Thus, they include relationships with both equity and non-equity partners, as well as pure business partners. An innovative firm describes a new venture that was created to market a new product or service idea.
External parties have proven to be important for the development and prosperity of a company (Baldwin, Hienerth & von Hippel, 2006; Heide & John, 1990; Johnsen, Phillips, Caldwell & Lewis, 2006; Magnusson, 2003; Thomke & von Hippel, 2002; Oberg & Grundstrom, 2009), yet less seems to be known about how the relationships with these parties are affected by the development ofan innovative firm. The purpose of the chapter is to discuss various INRs and how they are affected by the PDPs of an innovative firm. Various network parties are discussed based on their roles as suppliers, customers, finance bodies, and so on, and how they are affected by the phases of development (introduction, growth, maturity, and decline). The chapter shows that: (1) the specific needs and resource dependence by the innovative firm during different PDPs affect the status of the firm’s INRs, whereas new relationships are built and old ones are finished; (2) during product development, the INRs become increasingly complex where network parties become negative resources of the innovative firm through increased uncertainty being introduced into previous relationships; and (3) the development of INRs cannot be captured on a dyadic (between two parties) level, but various network parties’ relationships with one another need to be considered. The concept of negative resources is developed in the chapter to express how relationships of a company may be negative in that company’s relationship with other firms. Negative resources thus describe assets or relationships of a company, and mean that other companies become less inclined to establish or maintain a relationship with the firm. This chapter contributes to the field of RDT through discussions on negative resources in terms of connected relationships and how such relationships need to be incorporated to fully understand the development of dependence, resource provision and balance/ imbalance between them. This chapter further contributes to research into business networks by showing that business relationships may develop and expire as a consequence of an innovative firm’s PDPs. In addition, this research contributes to the field of innovation by demonstrating how these PDPs involve different needs and dependencies on network parties.
The chapter is structured as follows. The next section describes the theoretical point of departure, RDT, and also refers to the PDPs and INRs. Thereafter, the method is described. The empirical part of the chapter is based on four case studies of innovative firms. These are summarized after the method section and then analyzed in terms of the development phases, the network parties, and whether and how RDT explains the effects on network relationships in the various phases. The chapter ends with conclusions and ideas for further research.
This section outlines the theoretical point of departure, RDT, and briefly introduces research on PDP and network relationships in innovations.
A Resource Dependence View on Network Relationships
RDT was developed from power-dependence (Emerson, 1962; Hogberg, 1999) to explain why companies commit into business relationships with one another and the consequences of such relationships. The power-dependence idea suggests that relationships would only continue as long as there is a balance between power from one firm’s perspective and dependence from its business partner’s point of view. The idea thus focuses on the dyadic level of relationships to explain their continuity. When not in balance, four basic strategic alternatives would expectedly apply: (1) the party with less power withdraws from the relationship; (2) extension of the power network, leading to bounding with and creating new relationships; (3) emergence of status, where the party with less power is given status recognition; or (4) coalition formation, meaning that alliances are created with other actors. This consequently means that when a relationship becomes imbalanced, this would potentially lead to other parties being considered or that changes are induced on the dyadic level.
RDT developed from this (Pfeffer & Salancik, 1978), while focusing more on how companies should make themselves as little dependent on other parties as possible. Consequently, RDT replaced the discussion on power with a similar one on resources. Dependence and uncertainty became those variables to minimize, while simultaneously optimizing company autonomy. Pfeffer (1972) used this argument early to explain mergers (cf. Katila, Rosenberger & Eisenhardt, 2008; Thompson, 1967), while the alliance literature has explained joint ventures and similar as a means to decrease uncertainty (Doz & Hamel, 1998; Gomes-Casseres, 1996). The wider network aspect of resource dependence suggests that other relationships are kept to ensure that alternatives are available, to decrease dependence on a single party and to maintain options should the first relationship become imbalanced to the detriment of the company.
While much ofthe focus in power and resource dependency theory remains on the dyadic relationship level, a wider network is consequently considered, however mostly as rescue plans or to decrease imminent dependence on a single actor. Network parties may act as alternatives to decrease dependence on existing business partners, or may become allies to retain a balance towards business partners.
The product life cycle is frequently used in marketing and product management research to depict how products, or even companies or industries progress (Agarwal, Sarkar & Echambadi, 2002; Rink & Swan, 1979; Tellis & Crawford, 1981; Van De Ven & Scott Pole, 1995). Levitt (1965) outlined the product life cycle as consisting of market development/introduction, growth, maturity, and decline. The introduction phase describes how a product is first brought to market without there necessarily being a demand for it, and without it necessarily having reached complete functionality. The growth phase is marked by increased demand and competition. Maturity describes how the product reaches a peak in terms of number of users, while also decreasing the number of new users. The decline phase refers to how customers abandon the product. Each phase means new challenges, and these could be expected to focus on various types of resource needs, and consequently also affect resource providers, dependence between firms and thereby network relationships in different ways.
Network Parties in Product Development
Several researchers have highlighted external parties in innovations. Von Hippel (1978), for instance, describes customers in idea generation. Lee, Lee and Pennings (2001) focus on venture capitalists. Chandra and MacPherson (1994) describe consultants, suppliers and customers in product development. Oberg and Grundstrom
(2009) summarize external parties to innovative firms in the following categories: innovators, financial backers, non-equity partners, owners, suppliers, customers, and public bodies. It is thus evident that various network parties provide the innovative firm with different resources, and the resource provision could, as argued in this chapter, be expected to vary with the PDPs of the innovation. But how are the network relationships then affected by the various PDPs?
This chapter is based on case study research. The case study method enables the exploration of data and allows additional analyses on previously collected data (Dul & Hak, 2008; Yin, 1994). Case study research is often criticized for not allowing generalization of findings. However, many case study results would be expected to be transferable to other situations and cases (Hirschman, 1986). Such arguments are further strengthened if similar findings are repeated between various cases studied while not being the reason for their selection. Those particular companies studied here are innovative firms in mature industries. They have all gone through the phases of introduction and growth and reached a phase of maturity or even decline, which made them suitable for this chapter. They were chosen based on how they represent various innovations, and their different reasons for founding the companies (technology - driven or customer initiative). The case companies however share resemblances in terms of how they now are part of mature industry structures, and that they have relied on external parties for support in their early developments.
The data collection for the four case studies consisted of interviews with owners, venture capital companies, managers, innovators, customers, suppliers, and other external parties. A total of forty-one interviews were conducted between 2003 and 2008. The interviews were complemented with a secondary data analysis to gather background data on the firms and check the accuracy of interviews (Welch, 2000). Results from the interviews have previously been presented in Oberg and Grundstrom (2009). The article by Oberg and Grundstrom (2009) focused on challenges and opportunities related to the development of innovative firms’ networks, and was explorative in that sense. Compared to this study, the present chapter deals with effects on INRs and use the RDT lens to understand such relationship effects. It further relates network parties to various PDPs.
In the analysis procedure, notes from interviews, interview transcripts and secondary data were coded. The coding was first performed to capture the content of the individual interviews, and as a second step to compare data on a crossinterview, cross-case basis. The second step also entailed the analysis of the data using the framework of RDT and the division of development into PDPs. Findings from the four cases presented in this chapter confirm each other through indicating similar findings (Guba & Lincoln, 1989; Hirschman, 1986).An additional four case studies have recently been performed to further ensure the transferability of the findings from this chapter. Thus, and as a consequence, the findings suggested in this chapter could be expected to be general (with certain case-specific differences) for INR effects in various phases of innovative firms’ development. Further, the conclusion on how various INRs need to considered beyond their dyadic relation with the innovative firm finds support beyond those specific circumstances of innovative firms, and contributes to RDT through describing network relationships as positive and negative resources of a firm.
This section summarizes the four cases through describing them in the various phases of development. All four companies are small or middle-sized companies with a turnover running from six to two-hundred million SEK, and with five to fifty employees. Companies B and D are the largest of the firms, while Companies A and C still have less than ten employees each. They were founded in the 1980s to the early years of the 21st century, Company B being the oldest of the firms. When they were first established, they all operated on the Swedish market, but have since expanded into new geographical markets. Three of the companies (Companies A, B and D) are today part of multinational industry groups, while Company C remains domestically owned.
The four cases studied all describe companies developing software solutions, either to be implemented in other products or to be sold as standalone solutions. Three of the companies (Companies A-C) developed their innovations based on technological ideas, while the fourth (Company D) based its innovation on a customer initiative. This was also the company that developed the standalone solution. Those three companies (Companies A-C), that were not initially backed by a customer providing ideas and financial resources, became dependent on such actors as venture capital companies or incubators in their early development. The three companies also had strong foundations in university environments. For one of the companies, its financial backers were industrial actors in the industry the company aimed for (Company A), while the other two companies (B and C) were supported by venture firms with good knowledge on how to develop companies but less knowledge on the specific innovations developed.
“They were financial bodies, first and foremost with no actual knowledge on our product. ” (Company C.)
An industry-related venture firm allowed for contacts with other firms through its network, while those supported by pure financial bodies developed skills in how to get to market, without these skills being specifically encompassed by the company and without it leading to any inherited relationships. The innovative firm built on a customer initiative (Company D) relied heavily on the customer to understand specific needs related to the product, and the customer also helped in spreading the innovation to other customers.
“Often when we are about to invest in a new system, we check if any colleagues have it.” (Customer to Company D.)
All four companies managed to establish relationships with other industry actors: suppliers, additional customers or money providers. In the early phases of development, there was no conflict ofinterest between these parties, although several of them actually were competitors. Additional relationships were mainly established during the growth phase, and network parties then helped the innovative firm to grow through providing initial income (Company D) and financial resources to the innovative firm (Companies A-C).
The network parties’ reasons for doing so much related to expectations on future returns: in terms of return on investments (venture firms), in terms of own revenues (customers and suppliers), or in terms of those products provided (customers). Venture firms had an explicit exit plan, and hence connected such returns to that point, while other network parties often saw returns as long-term and as benefitting the parties in also other than financial terms.
“It was clear from start that their (the venture firms’) interest was only temporal. ” (Company B.)
Relationships were often strong and close, and thus marked by a difference in time between experienced dependence and resource provision between the innovative firm and its network parties.
To secure financial resources long-term, the innovative firms were acquired. The acquired parties (that is, the innovative firms) were active to various extents in those processes, but clear for all cases is that the firms looked for long-term financial solutions for further growth at that point in time.
“A new owner was needed if we should be able to develop further. ” (Company C.)
The acquisitions meant that the companies indeed reached those financial resources provided, but also meant a lessened focus on developing innovations further. This was either a consequence of the acquirer having other intentions with the firm (Company C) or resulted from a more restricted innovation process than previously (CompaniesA, B and D). In addition, the acquisitions meant that previous business partners distanced themselves from the innovative firm (Companies A-D). The acquisitions largely meant that the innovative firms reached a maturity phase. Network parties experienced competition with the acquirers, either because they were competing industry parties (Companies A and B), or as a result of how the acquisitions changed their abilities to realize those long-term intentions that the network parties had had with the innovative firm (Companies A-C). Thus, for network parties, the acquisitions introduced an imbalance in their relationships with the innovative firms. Those future resources accounted for previously would not be realized, and the connection between the innovative firm and its new owner constructed a negative resource in that way, as well as a result of competition. For network parties, the maturity phase hence caused them to lose resources accounted for previously.
Unless the acquisition was performed successfully, the innovative firm reached a decline phase. This resulted from network parties no longer providing ideas, in combination with the performance and actions of the acquirer. Such declines were foremost seen in two ofthe four cases (Companies C and D). In the first of these (Company C), the acquirer only had interest in part of the innovative firm, and hence, the rest of the company was not given sufficient resources to continue, at the same time as those network parties that had previously supported its development decided to dissolve their relationships with the innovative firm. The other case (Company D) describes how the acquirer continued to make additional acquisitions. These subsequently drained the acquirer’s financial resources, in turn affecting the innovative firm and finally ending up in liquidation ofthe acquirer and the innovative firm. Network parties experienced this decline as fewer resources being provided, and also that expectations on future resources increasingly disappeared. Dissolutions or further distancing in network relationships followed.
Based on the cases, it seems apparent that several different network parties contributed resources to various extents, and at various times, to the development of products and the company established for the sake of the product. The innovative firm equally became dependent on these resources for its development. As new parties entered, such dependence decreased while also leading to increased uncertainty among network parties, resulting in the possibility of new relationships being considered as negative resources by the network parties.
The introduction phase was marked by innovators providing knowledge skills related to the innovation, and customers or financial bodies providing financial resources to enable possible growth. These network parties were affected by the introduction phase in terms of how it provided them with the potential for future business opportunities; hence, the resource balance between the innovative firm and its network parties was based on how resources provided were expected to equal future returns. Such returns were expressed in terms of finances for venture firms, and in longer-term perspectives for innovators. To customers, it was instead dependence on future resource provisions (in terms of the innovation as a complete functional product) that drove the customers to that phase, where they were dependent on the innovative firm for its knowledge in those specific areas that the customers did not comprehend themselves. Relationships during the introduction phase were close, yet often marked by how companies only included a limited amount of resources and actors in them. There was a balance between the expectations for future returns and the dependence on these external parties by the innovative firm.
The growth phase mostly entailed similar network parties as in the introduction phase. However, more customers or venture firms were included in the network. Similar balances, as in the previous phase, made them continue their relationship with the innovative firm, where the potential for returns in terms of actual products increased, and hence also for financial returns, while the per-party dependence of the innovative firm decreased. Incubators or universities in this phase realized that their resources were no longer needed, and such relationships were often dissolved. The innovative firm was not as dependent on their resources, and in their constructs as incubators, the innovative firm no longer provided the right fit. What is more, based on additional parties being included in the network (e. g., more customers), each party’s importance for the innovative firm decreased, potentially causing an imbalance in individual relationships. Resources provided by the innovative firm were less customized, for instance, and less attention was paid to individual needs as a consequence, thus creating an increased distance in relationships with customers. For network parties, however, those other established relationships of the innovative firm often were considered as positive resources ofthe innovative company that vouched for its continuity. Additional customers increased the likelihood of successful developments, for instance. Therefore, while individual relationships became increasingly distanced, they still remained. Little conflict was seen between various relationships in this phase, and they were thus considered rather as positive resources of the innovative firm, decreasing uncertainty in the relationship. Similar to the introduction phase, the growth phase meant that relationships were close, while also being marked by less-specific resources and actors of those network parties.
The maturity phase was in the cases reached through acquisitions. These acquisitions further increased the distance in existing network relationships, or caused them to dissolve. Previous research has related acquisitions to how a balance can be recreated in relationships, or how they may be a means to decrease dependence and uncertainty (Pfeffer, 1972). This chapter, however, shows that the maturity phase meant that an imbalance was created as a consequence of the acquisitions. This imbalance can be explained twofold. First, the network parties faced how their future positions with the innovative firm were challenged, and therefore reevaluated their relationships as future resources from the innovative firm would not meet their needs. Second, the relationship established between the innovative firm and the acquirer could be seen as a negative resource, resulting in less present positive resources from the innovative firm. The negative resource in terms of the ownership ties with the new owner resulted from competition between those other network partners and the owner, or was a consequence of other network parties intending to acquire the innovative firm. Such an acquisition would not take place, since the innovative firm had found another owner. The network parties did not automatically choose another party to compensate the loss, which underlines how, while they were the parties taking the initiative to dissolve the relationships, they did not dissolve the relationship as a result of other options.
Two of the companies reached the decline phase. Such a phase is marked by less competition and also decreasing customer interest (Levitt, 1965). This affected network relationships in terms of how customers dissolved their relationships with the company, a consequence of them not thinking that the innovative firm provided resources that were sufficiently attractive. At this point, network relationships had been increasingly distanced during the maturity phase, and were also marked more by business-related buyer-seller conditions than by financial resource provisions. The decline phase can be described as how business partners dissolved their relationships as a consequence of their dependence on the firm actually decreasing. Other alternatives were indeed available, but such dissolutions resulted rather from disappointments in the present relationship than from the attractiveness of other options. While decreasing dependence would normally make a company more inclined to continue its relationship with a firm, the decreasing dependence was less than the perceived decline in the need for the resource.
Table 1 summarizes the various phases. The figures (i) to (iv) refer to the various ways a company would be expected to react based on RDT, when the relationship with another party becomes imbalanced: (i) withdrawal of the party with less power from the relationship; (ii) extension of the power network, leading to bonding with and creating new relationships; (iii) emergence of status, where the party with less power is given status recognition;, or (iv) coalition formation, meaning that alliances are created with other actors.
Based on Table 1, certain issues would need to be addressed compared to RDT. For one thing, it is not certain that it is the party that negatively experiences an imbalance is the one to act. Rather, as seen in the decline phase, the stronger party was the one withdrawing from the relationship. Secondly, relationships of the network partners may need to be considered, thus extending the focus beyond the dyadic level of analysis. Here, they are introduced as positive and negative resources, depending on whether they bring credibility to the innovative firm or lead to competition between such parties and the acting network party.
This chapter discussed how INRs are affected by PDPs of innovative firms. Findings of a literature review on RDT and case studies were:
1. the specific resource needs ofthe innovative firm during various phases of development leads to new INRs being established while previous ones are dissolved,
2. during the development, the network becomes increasingly complex, also leading to competition between network parties, and
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Table 1. Innovative Firms and Network Parties in the Various Phases
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3. the development of INRs cannot be captured on a dyadic level, but various parties’ relationships with one another needs to be considered, where relationships as positive and negative resources become a means to capture network parties’ impact on a relationship.
RDT suggests that the reason that the dyadic relationships are there in the first place is the company’s needs for resources provided by others, since it cannot make everything itself. If relating this to INRs during various PDPs of an innovative firm, this would suggest that the innovative firm’s resource needs vary with the PDPs. As a consequence, the innovative firm would choose to establish yet also dissolve relationships with different network parties (Alajoutsijarvi, Moller & Tahtinen, 2000; Dwyer, Schurr & Oh, 1987) as it develops. Such changes in resource needs would consequently affect the INRs. Secondly, the innovative firm would establish new relationships to outweigh possible imbalance in existing ones, and the firm would aim to decrease its dependence on individual parties through either alliances with other firms or by dissolving relationships in imbalance. From the network parties’ perspectives, similar considerations would be anticipated: the network parties would keep their relationships with the innovative firm as long as they provide them with relevant resources (presumably in terms of innovations or returns on investments), and they would spread their risks to other parties if their dependence on the innovative firm becomes too strong.
While resource dependence theory may be used to explain changes on a dyadic level, as well as why additional network relationships are established (and indeed dissolved), indirect effects in networks are not as easily explained. Such effects include how changes in one dyadic relationship affect others, and may be seen as domino effects along a supply chain or how indirect business relationships affect one another on a network level (Havila & Salmi, 2000; Hertz, 1998). To exemplify the latter, this includes how a dissolved customer relationship may lead to other customers dissolving their relationships with the same supplier. Such other relationships could be accounted for as positive or negative resources of a firm, but this has not previously been addressed in RDT. It could also be described as how increased uncertainty is introduced into a relationship, but this is somewhat different from
how uncertainty is usually dealt with based on a resource dependence view. It is the business partner that becomes embedded in increased uncertainty, rather than describing uncertainty on behalf of the acting firm. This chapter hence introduces the discussion on negative resources, where these describe how relationships of one party through competition between actors may be negative for other firms. When judging the balance or imbalance in a relationship, these relationships become negative resources of the party and hence lead to an imbalance between dependence and resources in the relationship.
The purpose of this chapter was to discuss various INRs and how they are affected by the PDPs of an innovative firm. The findings show that INRs are indeed affected by the different PDPs of an innovative firm. Different decisions are taken by the innovative firm and its network parties as a result of changes in resource needs, dependencies on individual parties, and how relationships with other firms affect relationship decisions. Each new PDP creates a new type of imbalance in resource provision and dependence for the various parties to act upon. These findings contribute to research on RDT and network relationships through pointing at relationships as phase-specific. They contribute to research into business networks through showing that business relationships may develop, yet also expire, as a consequence of an innovative firm’s PDPs. In addition, the chapter contributes to research on innovation through showing how these phases include different needs and dependencies on network parties. This chapter further contributes to the field of RDT, through its discussions on negative resources in terms of connected relationships and how such relationships need to be incorporated to fully understand the development of dependence, resource provision and balance/ imbalance between them.
This chapter is based on a literature review and empirical findings of four case studies on innovative firms of software solutions. For future research, it would be interesting to perform complementary studies related to other products and services. It would further be of interest to measure innovation performance related to various parties’ participation, to conclude whether or not certain parties are more important than others.
