Master’s thesis
Exploration & exploitation capabilities
within new product development and old product improvement
Name: Len Debets
Student number: 10317406
Supervisor: Dr. ir. Jeroen Kraaijenbrink
Study: MSc. in Business Studies - Track: Strategy - Executive Programme University: Amsterdam Business School, University of Amsterdam Date: 22, August 2014
Version: 2nd Final
Table of contents
Abstract 3
1. Introduction 4
1.1. Innovation is important for firms 4
1.2. Product development as part of innovation 5 1.3. Capabilities needed for product development 6
1.4. Research gap 7
1.5. Research question 8
1.6. Managerial implications 8
1.7. How the research is presented 9
2. Theoretical overview and hypotheses 10
2.1. Types of product development 10
2.2. Exploration and exploitation capabilities 12 2.3. Relation between exploration/exploitation and OPI/NPD 16
2.4. Effects of structural differentiation 20
2.5. Conceptual model 21
3. Methods 23
3.1. Sample reliability 24
3.2. Dependent variables 25
3.3. Independent variables 26
3.4. Moderator and control variables 26
3.5. Data preparation 27
4. Results 30
4.1. Regression 30
4.2. Multiple regression 31
4.3. Moderator results 32
4.4. Post hoc analyses 33
5. Conclusion and discussion 34
6. Limitations and further research 37
7. References 39
8. Appendices 44
Abstract
The strategy research field has developed common accepted relations between incremental innovation and exploitation, as well as radical innovation and exploration. Product development plays a large role in these two forms of innovation by introducing new product or services (NPD) or by improving old products or services (OPI). Research is limited about these two different forms within product development and the capabilities that are needed to exercise NPD or OPI. Exploitation and exploration capabilities are two groups of capabilities that enable firms to strive for better performance. This research tries to make a distinct separation between the two different forms of product development and defines which exploration and exploitation capabilities a firm needs to obtain to achieve a competitive advantage. The findings of this research show that firms not only need exploitation capabilities to improve existing products but also exploration capabilities for old product improvements. The same effect is found with the introduction of new products, where firms benefit from previous exploitation capabilities that help them modify, improve or upgrade existing products. Additional findings show that structural differentiation within these ambidextrous firms plays no role in how well firms are able to exercise product development. This develops a new question for future research; how are managers capable of aligning the ambidextrous capabilities and the resources needed for product development?
Keywords:
Exploration, Exploitation, Ambidexterity, Capabilities, New product development (NPD), Old product improvement (OPI), Structural differentiation
1. Introduction 1.1. Innovation Is Important for Firms
In recent decades, more and more research has been conducted on the many different forms of innovation. Innovation is essential for firms in order to bring products or services to the market, which can lead to a competitive advantage (Christensen, 2001). Different typologies of innovation within the strategy research field are described, but a truly consistent definition for innovation has not yet been set (Garcia & Calantone, 2002). Garcia and Calantone (2002) state that categorizing the different forms of innovation leads to a better understanding of the
development process within firms. A better understanding also helps in order to distinguish how new innovations differ in altering the product development process (Garcia & Calantone, 2002). Two common forms of innovation in the strategy research field are radical innovation and incremental innovation (Utterback & Abernathy, 1975). These two forms of innovation are currently essential in the research field of developing new products (Garcia & Calantone, 2002). According to Norman and Verganti (2014), radical innovation is not only essential for the
development of new products, but is currently the center of attention of product design studies. Radical innovation is defined as “the propensity of a firm to introduce new products that are substantially different from existing products” (Chandy & Tellis, 1998, p475). Leifer et. al. (2001) add to the definition of radical innovation, that radical innovation is possible in new as well as in existing markets. The IBM 5100 was the first commercial laptop and is an example of a radical innovation that not only radically changed the previous product (personal computer) but also created a new market for portable computers. Incremental innovations are minor improvements or simple adjustments in current technology (Munson & Pelz, 1979). These incremental
innovations mostly take place over a larger period of time and happen gradually. As with radical innovation, incremental innovation can be possible in new as well as existing markets
incremental innovation not only occur in new markets but also in existing ones. This happens because it is sometimes easier for firms to create new markets instead of competing against competitors in current markets (Kim & Mauborgne, 2005). The strategy by which products are created and improved to enter or exit markets is largely shaped by a firm's product development processes and is essential for the innovation of a firm.
1.2. Product Development as Part of Innovation
Product development plays a large role in understanding the complete innovation process within firms (Brown & Eisenhardt, 1995). Product development is the creation and modification process needed to create or alter a firm’s products or services. Product
development is knowledge-intensive work that has become increasingly important within firms in order for them to create better products or services than their competitors. Each product or service has a lifecycle that needs to be managed over time to maximize profits, which is mostly called product development. For example, Sony managed to produce their Sony Walkman for over 31 years, starting 1979 and stopping production late 2010. Product development often takes place within one or two specialized product development departments within a firm, which are responsible for the product strategy to help the firm innovate. Firms are constantly changing and adding products or services to keep up with market needs, which can be done in two ways. One way for these firms to innovate is to introduce completely new products or services into new or existing markets. Another way to innovate is to improve and exploit existing products or services in new or current markets. Therefore, product development can be separated into new product development (NPD) and old product improvement (OPI) (Johne & Snelson, 1989).
1.3. Capabilities Needed for Product Development
The capabilities firms need in order to achieve innovation and execute product
development is widely researched within the strategy field. The degree to which firms search for new innovations is described by many as the exploration capability. The degree to which firms implement and exploit existing innovations is described as the exploitation capability of a firm (Schumpeter, 1934; Holland, 1975; Kuran, 1988). Exploration and exploitation of products or services significantly contributes to a firm’s innovation. How well firms achieve exploration and exploitation of their products and services depends on the exploration and exploitation
capabilities within that firm. The strategy research field has adopted as common logic relation between exploration capability and radical innovation, as well as a relation between exploitation capability and incremental innovation. For example, Benner and Tushman (2003) make the following important links between exploration and radical innovation and between exploitation and incremental innovation: “Incremental technological innovations and innovations designed to meet the needs of existing customers are exploitative and build upon existing organizational knowledge. In contrast, radical innovations or those for emergent customers or markets are
exploratory, since they require new knowledge or departures from existing skills” (emphasis
added, p 243). Although these linked concepts are not the same, they extend to each other by grouping what firms need in order to reach different forms of innovation. Firms that strive to achieve radical innovation need to acquire exploration capabilities, where firms that strive for incremental innovation need to acquire exploitation capabilities to innovate better than their competitors. But is this always the case?
1.4. Research Gap
The Boston Consulting Group once said of innovation, “There are no old roads to new directions,” but is this always the case in current firms? Old products are frequently adjusted in order to satisfy customer needs, and over time these products evolve in completely new directions for firms. For example, over the last 127 years Coca Cola has adjusted its famous cola recipe in order to contain less and less sugar, which led to completely new successful products like Diet Coke and Coca Cola Zero. A firm’s choice to focus on either exploration of new products or exploitation of current products raises the question of whether the exploration and exploitation capabilities are strictly applied separated for NPD and OPI. If this is not the case, the exploration and exploitation capabilities can contribute to product development as a total by benefiting both NPD and OPI at the same time. Yalcinkaya, Calantone and Griffith (2007) find a strong relation between the exploration capability and new products. Their research does not clearly differentiate the relation between OPI or NPD as separate parts of product development but mainly focuses on NPD as the fundament of innovation. Their research also states that only the exploration capabilities of a firm are used for product development and that exploitation capabilities negatively benefit product development within firms. More research in the separation between NPD and OPI is needed in order to find out whether the exploration capabilities of a firm benefit only NPD and the exploitation capabilities benefit only OPI.
1.5. Research Question
This research looks into whether the exploration capabilities of a firm could also be used for product improvement to achieve a competitive advantage. For example, Samsung recently launched its new smart watch Galaxy Gear, which could be labeled as a new product within a
new or existing market. Although this is a new product, its purpose could not only be to explore this new market but also to exploit the previous innovations discovered during the exploration phase of the their Galaxy S5 smartphone. This effect also could benefit and support future Galaxy S5 smartphone sales. In order to maximize competitive advantage, Samsung may need to apply different capabilities than their product development team used with the introduction of the original Galaxy S5. This effect could also occur between the exploitation capabilities of a firm and the development of new products. Technology and exploration capabilities derived from previous innovations could also be used by firms to improve existing products. For example, Apple used the innovation of mobile device touch screens to upgrade and adjust their already existing iPod product lines. Therefore, this research looks into whether a firm’s exploration and exploitation capabilities are used to maximize competitive advantage for new and old products. Scientific research about the way in which NPD and OPI are linked to exploration and
exploitation capabilities is missing. If this relation is present, firms could use both these
capabilities for NPD and OPI to stay ahead of their competitors. Therefore this research tries to answer the following research question:
“To what extent do firms need different capabilities for exploring and exploiting new products than for old product improvements?”
1.6. Managerial Implications
The answer to this question contributes to the scientific knowledge on whether
ambidextrous organizations with a high degree of exploration and exploitation capabilities have an advantage in not only new product development or old product improvement, but also in the complete area of product development. The findings of this research could also help managers in selecting and aligning the employee's for product development within their firm. It helps define a better method for how operational teams and departments should work together to exchange knowledge and capabilities within a firm. A better understanding of how the exploration and
exploitation works within product development could also help managers get better at selecting and gathering resources to obtain and improve these capabilities.
1.7. How the Research Is Presented
The following chapters of this research use an academic approach to gain an answer to the given research question. The second chapter of this research explains the different
theoretical concepts that are important for answering the research question. In this section the difference between NPD and OPI within product development is examined, followed by what exploration and exploitation capabilities are and why they are needed for product development. The relation between these concepts leads to the testing of four hypotheses. The section
following describes two hypotheses about how structural differentiation within a firm could act as a moderator for these relations. The third chapter of this research explains the research method and the sample used for this research. It also described how the variables are transformed and computed for the quantitative analyses. The fourth chapter describes the results of the statistical analyses from the questionnaire study. The fifth chapter answers the research question and the conclusions derived from the quantitative research. The last chapter of the research explains the limitations of the research and suggests some research questions for future research.
2. Theoretical Overview and Hypotheses
2.1. Types of Product Development
Product development plays a significant role in organizations. It is a large part of a company's strategy, and as Brown and Eisenhardt (1995) state, product development is a potential source of competitive advantage that comes in many forms. Product development focuses on the development of products and services within a firm. The product development process embraces the whole product life cycle from product idea to creation, improvements, launch and termination of products and services. Product development can also be seen as the transformation of a market opportunity into a product that can be bought (Krishnan & Ulrich, 2001). Product development defines the many aspects associated with the evolution of a product. The form of product development not only differs between competitors, but also differs within a single firm due to a firm’s evolution over time (Krishnan & Ulrich, 2001). This means that product development within a firm is constantly subject to changes inside and outside the firm. Although there is limited recent research about the different forms of product development, Johne and Snelson (1989) state that product development is a concept embracing a wide span of options from two basic types: old product development (OPI) and new product development (NPD). Johne and Snelson (1989) specify that OPI involves modification, upgrading and extensions to existing brands or product lines whereas NPD involves the development of products that are completely new to the firm. This research therefore divides product
development into NPD & OPI. OPI is not the same as process improvement, which is mostly driven by cost reduction or efficiency where OPI focuses on improving existing products or services for current or new customers to achieve innovation.
Radical and incremental innovations could lead to new or improved products, but they also lead to the discontinuity of existing products and activities. As Garcia and Calantone (2002)
state, “Radical innovations are innovations that cause marketing and technological discontinuities on both a macro and microlevel. Incremental innovations occur only at a
microlevel and cause either a marketing or technological discontinuity but not both” (p. 127). If firms want to innovate better than their competitors, they need to manage their innovations. A clear separation between radical innovation and incremental innovation within firms is therefore important because these forms of innovation are two different processes that need to be
managed differently (Leifer et. al. 2001). Radical innovation and incremental innovation are not the only types of innovation researched within the strategy research field. Porter (1985)
introduced similar concepts of incremental and radical innovation by the name of continuous and discontinuous technological evolution. Continuous technological evolution focusses on the incremental technological changes of products, and discontinuous technological evolution focusses on the replacement of these products by new ones in the market. These concepts show great similarities with the concepts radical and incremental innovation, but focus more on the technological lifecycles of products instead of the firm’s overall innovation. The same
similarities with incremental and radical innovation can be found in the definitions of incremental technological change and technological breakthroughs by Anderson and Tushman (1986). They state that products evolve through true periods of incremental change, and this evolution is sometimes by punctuated breakthroughs that either enhance or destroy a firm's competencies. Another innovation concept, this one by Christensen (2001), is disruptive innovation, which could be explained as a transition for new market innovation that disrupts old markets over time. The transition between old and new market innovations occurs after the dominant design is set in the industry (Abernathy & Utterback, 1978). Markides (2003) states that this explanation is too broad and that disruptive innovation could be separated into business-model innovations and radical new-to-the-world innovations, which have again great similarity with radical and incremental innovation.
All these different concepts of innovation have the same effect on product development within a firm. If a product, service or market becomes disruptive over time, a firm has two choices: introduce a new product or improve an existing product in order to achieve radical or incremental innovation to gain a competitive advantage. This research states that these concepts are used in the same way. Table 1 shows that NPD & OPI both show a large alignment with the concepts of radical and incremental innovation, respectively. Radical innovation focuses on developing new products (NPD) and incremental innovation features improvements in existing products or services (OPI) (Leifer, 2001). This means that the same capabilities that are needed to achieve radical and incremental innovation could also be essential for NPD & OPI, which are major drivers behind these forms of innovation.
2.2. Exploration and Exploitation Capabilities
Consumers, competitors, products, services and markets are constantly changing, which requires firms to adapt and change in order to survive. One way to meet consumer or market needs is to introduce new technology or combine previously introduced technologies that lead to innovation (Utterback & Abernathy 1975). In order for a firm to optimally create innovations, a combination of certain capabilities is needed, or as Teece et al. (1997) states, “Winners in the
global marketplace have been firms that can demonstrate timely responsiveness and rapid flexible product innovation, coupled with the management capability to effectively coordinate and deploy internal and external competencies” (p. 515). More current research describes different capabilities or competencies organizations must obtain in order to innovate products faster, better or more efficiently than their competitors. In the strategy research field there is much terminology that describes the definition of capabilities or competencies needed for radical or incremental innovation. The definitions of these capabilities have some ambiguity (Winter, 2000); however, a form of consensus has been met for capabilities (O’Reilly & Tushman, 2008), and a well-used capability definition is as follows:
An organizational capability is a high-level routine (or collection of routines) that,
together with its implementing input flows, confers upon an organization's management a set of decision options for producing significant outputs of a particular type. (Dosi, Nelson & Winter, 2000, p983)
A firm's capabilities are also essential for the product development process within a firm. Managers of firms must use the organizational advantages of their core capabilities for NPD without having these capabilities negatively influence other projects, which will inhibit innovation within the firm (Leonard-Barton, 1992). Exploration and exploitation (Utterback & Abernathy, 1975) are two groups of these capabilities that a firm needs in order to turn these innovations into a return. Exploration is the capability of a firm to achieve new things for future currency, or as March (1991) states, “Exploration includes things captured by terms such as search,
variation, risk taking, experimentation, play, flexibility, discovery, innovation” (p. 71). A common exploration capability for a firm is the method by which new (technical) knowledge is found and acquired that could be used for (future) product development. Fundamental research within the
R&D department could be seen as an example of a firm’s exploration capability to search for new knowledge. Exploitation is the capability to exploit previous innovations and turn them into present currency, where “Exploitation includes such things as refinement, choice, production, efficiency, selection, implementation, [and] execution” (March, 1991, p71). This is, for example, the capability of an investment firm to select, sell and acquire profitable product portfolios. Table 2 shows an overview of the different features of exploration and exploitation capabilities within a firm.
A similar conception of the exploration and exploitation capabilities, described by Jansen et al. (2006), defines innovation along two domains, exploratory innovation and exploitative innovation. Exploratory innovation enables firms to achieve radical innovation that satisfies the needs of new customers and markets, where exploitative innovation enables incremental innovation and satisfies the needs of existing customers or markets. Although these
conceptions look very similar to exploration and exploitation capabilities, these conceptions are a combination of exploration and exploitation capabilities, with the concepts of radical and incremental innovation as one.
Knowledge plays an important part for both the exploration and exploitation capabilities of a firm. Atuahene-Gima (2005) explains that exploitation capability is based on a firm’s current knowledge and focuses on seeking greater efficiency to enable incremental innovation, where the search for new knowledge and experimentation is described as exploration to achieve
radical innovation. This means that firms use new knowledge to achieve radical innovation and existing knowledge for incremental innovation, but this not always the case. For example GM launched its first commercial electric car, the EV1, in 1996. A few years later the EV1 was discontinued for controversial (political) reasons. Although GM’s investment clearly did not pay off in the following decade, a part of the knowledge could be used in the electric/hybrid car market almost 10 years later. This already-available knowledge could be the source that made it possible for GM to more quickly introduce the Chevrolet Volt in now the fast-moving and
innovating electric/hybrid car market.
Some firms do not only focus only on exploration or exploitation, because if a firm is able to simultaneously explore and exploit innovations this can have a positive effect on the
performance of that firm (Tushman & O’Reilly, 1996; Andriopoulos & Lewis, 2009). How well firms are able to manage their exploration and exploitation capabilities simultaneously is
described as ambidexterity (Duncan, 1976; March, 1991). Ambidextrous firms are challenged to specialize in not only one capability but to simultaneously balance both the capabilities that are needed to support product development. As March (1991) explains, “In studies of organizational learning, the problem of balancing exploration and exploitation is exhibited in distinctions made between refinement of an existing technology and invention of a new one” (p. 72). Ambidexterity makes it possible for an organization to adapt over time (O’Reilly & Tushman, 2005) and to focus their exploration and exploitation capabilities on product life cycles. Google is an example of an ambidextrous firm that simultaneously focuses on exploration and exploitation. For
example, since 1999 Google has been focusing on the exploitation of their main product “Google Search” with “Google Adverse,” which over the years generated enough revenue for the company to also explore new products like “Android.” Soon after its release, the product is in its turn also exploited to ensure the (financial) capacity for new explorations. A second method of striving to achieve this perfect balance between exploration and exploitation within a firm is
described as punctuated equilibrium (Gupta et al., 2006). Punctuated equilibrium occurs when a short burst of exploration or exploitation eventually leads to an alternative balance system. Firms that strive for punctuated equilibrium are, just as ambidextrous firms, trying to focus on both exploration and exploitation capabilities, but instead of focusing on both at the same time they alternate their focus periods, looking at just one capability at a time. Firms that pursue a high grade of ambidexterity are perceived as having better performance than their competitors (Gibson & Birkinshaw 2004; Lubatkin et al. 2006).
However, obtaining the perfect balance between exploration and exploitation remains a difficult task for firms and managers, or as Levinthal and March (1993) state, "The precise mix of exploration and exploitation that is optimal is hard to specify” (p. 105). Finding the appropriate balance between exploration and exploitation is difficult because the same issues occur at different levels within the firm, which makes them hard to manage (March, 1991). For example, both executive management and middle management in most firms are involved in the decision making processes of investing in new products, where the decision of how to exploit existing products is the often the responsibility of the middle management. This difference can lead to conflicting interests within the firm about which exploration or exploitation capabilities to obtain. Exploration and exploitation are capabilities that make it easier for a firm to specialize in one instead of focusing on both (Greve, 2007) because it is naturally easier to be good at just one skill instead of two. The balance between exploration and exploitation capabilities is also difficult because these capabilities are closely linked to each other (Rothaermel & Deeds 2004). This makes it harder for firms and managers to identify and separate them from each other.
2.3. Relation between Exploration/exploitation and OPI/NPD
Most current research on the capabilities needed for innovation focuses on the
relationship of the exploration and exploitation capabilities with new product development (Katila & Ahuja, 2002; Rothaermel & Deeds, 2004; Gupta et al., 2006; Atuahene-Gima & Murray, 2007;
Greve, 2007). The effect of these capabilities on the different forms of product development has received limited research. The difference between NPD and OPI and the exploration and
exploitation capabilities is important because firms use different procedures, capabilities and employees to execute each of these two types of product development. For example, Johne and Snelson (1989) state that NPD and OPI are two separate things that need to be managed differently. This separation is also shown in a study by Molina-Castillo et al. (2011), which separates product development into two similar concepts, product exploration and product exploitation. The study demonstrates that product exploration focuses on the search for new knowledge to venture on different technological trajectories in the form of new products, where exploitation focuses on using and developing existing capabilities. These definitions show a large similarity with NPD and OPI in combination with exploration and exploitation capabilities.
From concept design to the launch of a product, the exploration capability of a firm plays a huge role has a positive impact on new products (Katila & Ahuja, 2002), but is this also the case for product improvements? An important component that is needed to innovate products is knowledge, in order to accurately launch or adjust products in both NPD or OPI. New
knowledge is a key aspect within the exploration capability of a firm that might be needed for both NPD and OPI. One core aspect of exploration, as described by many (Levinthal & March, 1993; Jansen et al., 2009), is this search for new knowledge in order to innovate. It is important for firms to distinguish explorative innovations that require new knowledge from those that exploit current knowledge (Greve, 2007), but this does not mean they cannot benefit each other. For example, Dewar and Dutton (1986) state that to achieve incremental innovation, a low level of new knowledge is needed. This could be the same new knowledge that is gathered with the exploration capabilities of a firm. There are many different forms of knowledge, like tacit knowledge, that are needed for a firm to increase its overall innovation capability (Cavusgil et. al., 2003). NPD needs a great amount of this tacit knowledge in order to be successful
(Madhavan & Grover, 1998). Next to exploring new knowledge, exploiting existing knowledge within the firm is important for the whole innovation process (Garcia, 2003). Cohen and Levinthal (1990) argue that individuals within the firm need previously obtained knowledge to assimilate and use new gathered knowledge.
This means that in NPD as in OPI, new and existing knowledge both play a crucial role in the innovation of the products (Griffin, 1997). The ability to search for new knowledge is one of the exploration capabilities within firms (Table 1). Prior research states that the exploitation of products within firms is linked to the prior exploration of that firm, or as Rothaermel and Deeds (2004) describe, “successful exploration also creates demand for resources required to exploit newly discovered opportunities” (p. 203). This raises the question: when is knowledge “new” and used for NPD, and when is it “old” and used for OPI? If there’s a difference between these forms of knowledge, managers or firms need to be capable of interpreting which explored knowledge must be used solely for NPD and which knowledge should be used for solely OPI. If firms are not capable of separating these forms of knowledge between NPD or OPI, the
knowledge gathered by the exploration capability not only affects NPD but also could positively or negatively influence OPI. Because new and old knowledge is a potential source of innovation in NPD (Carlile, 2002), it is likely that the new knowledge derived by the exploration capability of a firm positively affects both NPD and OPI. The positive relation that is found in prior research between exploration capability and innovation (Yalcinkaya, Calantone & Griffith, 2007) should therefore be further explored not only in relation to NPD, but OPI as well. The ability to search for knowledge is not the only aspect of exploration that could be useful for product improvement. All the other key features of exploration capability (Table 1) are mainly used to improve new products, but they could also be used to improve existing products. For example, the capability to take risk is also important for OPI. In the selection of which products to improve and how much to invest in these upgrades, firms face the risk of not profiting from the upgrade. This
means that the exploration capabilities of a firm could positively benefit both NPD and OPI. Firms that have acquired exploration capabilities, could have an advantage in executing all aspects of product development. This leads to the following hypotheses:
H1: The exploration capability of a firm has a positive effect on NPD.
H2: The exploration capability of a firm has a positive effect on OPI.
Yalcinkaya, Calantone and Griffith (2007) describe the dynamic exploitation capability as the ability to continuously improve existing resources and processes. Exploitation focuses on the capability to broaden existing knowledge and uses this to improve products and services (Jansen et al. 2006). Prior research about exploitation mainly focuses on existing products and process improvement, where the effect of how NPD benefits from the exploitation capabilities within a firm is barely researched. Two exploitation capabilities, as described by March (1991), are the implementation and selection capabilities of a firm. Firms that are better at selecting and implementing products have a competitive advantage over their competitors. Customer input plays a large role in the implementation and selection capabilities of (new) products within firms. Most firms conduct market and customer research to determine which products sell best.
Benner and Tushman (2003) state that process management within a firm focuses on better understanding and satisfying existing customers through customer input, and it targets innovation in areas that benefit existing customers. The definition that Benner and Tushman (2003) use for process management shows a great similarity with OPI. This means that NPD and OPI are both focused on servicing existing customers with new or improved products. The customer input obtained by the exploitation capability therefore benefit OPI. Input from not only existing customers but also future (new) customers serves as input for NPD also (Bonner & Walker, 2004). This input helps the development process in the selection and implementation of
the new products. This means that obtaining new or existing customer input with exploitation capabilities could not only affect the old products, but could also benefit NPD within firms. The other key features of the exploitation capabilities (Table 1) are mainly used to exploit existing products, but all of these could also be used to develop new ones. For example, the ability to efficiently implement products is a crucial process also within NPD, where the timing of the product launch and the associated required supplier logistics is very important in order to be successful. Firms that have acquired these exploitation capabilities could use them not only for OPI but also for NPD. This leads to the following hypotheses:
H3: The exploitation capability of a firm has a positive effect on NPD.
H4: The exploitation capability of a firm has a positive effect on OPI.
2.4. Effects of Structural Differentiation
Product development within firms is conducted by employees, which could be
considered as resources according to the resource-based-view (Barney, 1991; Peteraf, 1993). Better resources, and thus better employees, lead to a competitive advantage. The allocation of these resources is different between firms. In some firms the managing task of exploration and exploitation capabilities is undertaken by one product development team. In other firms these functions are separated into different organizational departments, such as R&D departments and process optimization units. This is done because radical and incremental innovations need different strategies and require different organizational capabilities (Henderson & Clark, 1990). Raisch (2008) defined the “trade-off view” between exploration and exploitation, on which “organizations must choose between structures that (either) facilitate exploration (or) enable exploitation” (p. 484). This can be done by either “temporal separation,” “structural separation” or the use of “parallel structures” to allocate different resources within a firm. These three different structures try to (temporarily) allocate the firm’s resources to optimize both exploration
and exploitation capabilities at the same time. A permanent allocation of these resources is described by Jansen et al. (2009) as structural differentiation. Structural differentiation in ambidextrous organizations consists of spatially dispersed units that each focus on exploratory or exploitative tasks from different locations within the firm to maximize ambidexterity. If firms are successful in structurally differentiating their exploration and exploitations capabilities simultaneously, this can benefit their ability to do product development (Gilbert, 2006; Tushman & O’Reilly, 1996). This means that structural differentiation could have positive benefits for both the exploration and exploitation capabilities in relation to NPD and OPI at the same time. This leads to the following hypotheses:
H5: The organizational structural differentiation of a firm has a positive moderating effect
on the relation between the exploitation capability and NPD.
H6: The organizational structural differentiation of a firm has a positive moderating effect
on the relation between the exploration capability and OPI.
2.5. Conceptual Model
The exploration and exploitation capabilities within a firm are not used strictly for NPD or OPI. These capabilities could, therefore, benefit product development in general. This research examines whether this is the case and to what degree. The six hypotheses discussed in the previous sections lead to the conceptual model (Figure 1) that is used to define the
measurement variables that help to answer the research question. In the conceptual model, the direction and states (positive/negative) of the six hypotheses are shown with arrows and the +/- signs. Performance is added as a control variable in the conceptual model, because the
research variables should also benefit a firm’s performance, otherwise the correlation might be there but have no benefit for the firm’s overall performance.
3. Methods
To test the hypotheses mentioned in section 2, a deductive causal research approach was used. The conceptual model was used to test underlying hypotheses, which have the purpose of answering the main research question. The hypotheses were tested with a survey study and the results were analyzed with a quantitative method. This survey study was based on online questionnaires and distributed to a specific stratified sample in a cross-sectional time frame. The research sample consisted mainly of a random sample of currently employed product managers, product marketers, executive directors and general managers with an understanding of NPD or OPI in the Benelux. The sample covered a large range of different industries and markets in both product and service. A database of 100,000+ potential firms was bought from a commercial supplier of business email addresses ("Email database", 2014). A selection in the database was made with the following selection filters: 1) firms within the Benelux; 2) firms with at least 25 employees and 3) respondents that speak English or Dutch. The filter on firm size was set to help to target firms large enough to have the resources to potentially differentiate product development tasks within their firm. The Benelux filter was set to minimize cultural differences between firms on a demographic scale. This gave the research access to a target sample of approximately 18,248 different firms with 15,965 email addresses. Due to the method of emailing, a response rate of 1.5% was forecasted before the survey was sent. The respondents were contacted by email with an invitation to participate in an online survey based on Qualtrics software. The survey was available in English as well as in Dutch, where the Dutch translation was re-translated back to English by a third party to make sure that both questionnaires were interpreted the same. To ensure the respondents were professionally interested, the respondents were asked if they wanted to receive the research results after completion. Also a draw for a € 25 gift card was added as an incentive to participate.
3.1. Sample Reliability
The online survey was distributed to 15,965 business email addresses of executive managers within the Netherlands and Belgium. 11.3% of the emails did not arrive at the respondent and bounced before arrival, which resulted in a potential sample of 14,147
respondents. In a period of four weeks, 480 (3.3%) respondents started the survey, while 216 (1.5%) respondents fully completed the online survey. With a confidence level of 5%, this sample had a confidence interval of 6.63%. Only fully completed surveys were used to analyze the results; no missing data technique was used, and irrelevant outliers in the data collection were removed. To ensure reliability, particular survey questions were asked to give an indication of the data value. The survey was completed by executive directors (37.96%), managers
(28.24%), product managers (11.57%), marketing managers (4.17%), account managers (2.78%), consultants (2.31%) and employees in other functions (12.96%). Of the respondents, 87.5% had direct influence within product development in their current function. The
respondents were employed in their current function an average of 9.2 years (SD = 8.8) and employed at their current firm an average of 14.5 years (SD = 10.27). The average employee size of the firms that participated in the survey was 74 employees (M = 74.39, SD = 524.02). Of the participating firms, 88.4% are currently active in product development, where 65.4% of the firms focus on product development and 33.8% focus on service development. The firms are active in a very wide range of industries: manufacturing (21.3%), construction (10.9%), wholesale (9.7%), transportation or warehousing (6.3%), professional, scientific or technical services (6.5%), retail trade (4.6%), financial services (3.9%), agriculture (3.9%) and other industries (32.9%).
3.2. Dependent Variables
The hypotheses of this research were based on two independent, one mediator, and two dependent variables, as well as one control dependent variable. These constructs were drawn
from prior academic research to ensure a high degree of validity and reliability (see Appendix I). The variable new product development was measured based on the concept incremental innovation performance (Chandy & Tellis, 1998; Atuahene-Gima, 2005). The respondents were asked to rate the percentage of total sales from new product or service introductions by their firm over the last three years. The respondents were also asked to rate 1) how frequently the firm introduced improved product or service into existing markets 2) how the firms compared to its major competitor in terms of the amount of product or service introductions in the last three years, both on a five-point Likert scale. The last measurement of the new product development construct was taken by asking for the number of product or service introductions introduced by the respondent’s firm in the last three years. The same four measurements were used for “old
product improvements, with the sentences in the same questions changed to align with product
or service improvement (Appendix I). The performance variable was added as a control
dependent variable, which was not directly linked to the hypotheses. This variable was based on the market performance variable from Steensma, Tihanyi, Lyles and Dhanara (2005). To
measure performance, respondents were asked to rate their firm's performance for the last three years on a 5-point Likert scale from “poor performance” to “excellent performance” for the following criteria: “increase in business volume”, “lower unit costs”, “increase in market share”, “increase in employee productivity”, “lower overhead costs”, “achieved planned goals”, and “make profits”.
3.3. Independent Variables
The exploration capability was measured twice based on the concepts competence exploration (Atuahene-Gima, 2005) and exploitative innovation (Jansen et al, 2006). The variable for exploration was measured twice to increase the validity of the findings. For the variable competence exploration, respondents were asked to rate the extent to which their firm
over the last three years 1) acquired manufacturing technologies and skills entirely new; 2) learned product development skills and processes entirely new; 3) acquired entirely new managerial and organizational skills that are important for innovation; 4) learned new skills in areas such as funding new technology, staffing R&D functions, training and development of R&D and engineering personnel for the first time and 5) strengthened innovation skills in areas where it had no prior experience. The ratings of to all these factors were based on a 5 point scale from ‘no extent’ to “great extent.” The variable exploration innovation was measured by ratings of the following four statements: 1) Our organization accepts demands that go beyond existing products or services; 2) We commercialize products or services that are completely new to our organization; 3) We frequently utilize new opportunities in new markets; and 4) Our organization regularly uses new distribution channels. The exploitation capability variable worked in the same way and was measured twice based on the concepts competence exploitation (Atuahene-Gima 2005) and exploratory innovation (Jansen et al, 2006). The questions were similar but based on old product improvement instead of new product development (Appendix I).
3.4. Moderator and Control Variables
The moderator variable structural differentiation (Jansen et al, 2009) used a seven-point Likert scale. The respondent was asked to rate the following statements: 1) Innovation and production activities are structurally separated within our organization; 2) Our business units are specialized in specific functions and/or markets; 3) We serve our customers’ needs from
separate departments; 4) The line and staff departments are clearly separated within our
organization; 5) Our organization has separate units to enhance innovation and flexibility; and 6) We have units that are either focused on the short term or the long term. To increase sample reliability in the research, the survey asked respondents to provide information on the following aspects of their employment: 1) respondent’s function, 2) occupation duration, 3) firm size, 4)
number of employees in product or service improvement or development, 5) firm’s industry, and 6) firm’s focus on services or products. The questions about number of employees and number of employees in product or service improvement or development were used as the control variables firm size and employees active in PD.
3.5. Data Preparation
No counter-indicative items were used in the survey. The items “number of old product improvements” and “number of product introductions” contained a very high standard deviation because of the high variance (variance > 46,278,469, min = 0, max = 100,000) and the
relatively small sample size. In order to standardize these items, and create an equal variance with other scale items, a logarithmic transformation (Field, 2009) was used, Log(Xi +1).
A principal component analysis (PCA) was conducted on the different items in subsets with orthogonal rotation (varimax). The Kaiser-Meyer-Olkin measure of all subsets verified the sampling adequacy for the analyses, KMO = .93 (Field, 2009), and all KMO values for individual items were > .69 which is well above the acceptable limit of .5 (Field, 2009). The component loadings in the eight subtests ranged from .4 (exploratory innovation) to .88 (competence exploitation). All subsets had an eigenvalue of >1 that explained at least > 54.31% of the variance. After defining which items were fit for the variables, a few items within structural
differentiation (2) and market performance (3) were deleted and a reliability analysis was done
on remaining items. The remaining two components after deletion of the items contained loadings with a minimum of .72 (structural differentiation) and .72 (market performance). All the combined items within the 8 different variables had high reliability (Table 3), where all
Cronbach’s alpha values are at least α > .7. Kline (1999) describes that this is the acceptable cut off point for ability tests, instead of .8. The corrected item-total correlations of the reliability analyses were all above > .3.
Eight variables were computed by taking the mean of the subset items based on the principal component analyses. All the computed eight variables are positive scaled variables. Means and standard deviations were analyses with descriptive statistics analyses where the means ranged from M = 2.97 (competence exploration) to M = 5.64 (exploitative innovation). All underlying items were based on a seven-point Likert scale, except for NPD and OPI. The two control variables firm size and employees active in product development were translated into a logarithmic scale in order to achieve a more equal variance. A bivariate Pearson correlation was made on all 10 variables, where in the correlation results multiple p <.01 level significant
4. Results
The two measurements of exploitation capability and the two measurements of exploration capability were tested for their relation to NPD and OPI to accept or reject the hypotheses. According to the Pearson correlation (Table 2), the variables that represent the conceptual model for H1 to H4 were all significantly correlated each other, where competence
exploration (.48, P < .01) and competence exploitation (.41, P < .01) had a larger effect on NPD
than exploratory innovation (.44, P < .01) and exploitative innovation (.25, P < .01). This larger correlation was also the case with competence exploration (.44, P < .01) and competence
exploitation (.50, P < .01) compared to exploratory innovation (.22, P < .01) and exploitative innovation (.36, P < .01) on OPI.
4.1. Regression
A linear regression between competence exploration and NPD was conducted to pre-test H1. The results showed that exploration capability explains 22.8% (β = .499 p < .000) of the variance in NPD (Table 5). The ANOVA analysis for this relation was significant F(1, 214) =
63.28 p < .000. A secondary linear regression analysis was conducted between competence exploration and OPI to pre-test H2. The results showed that exploration capability explains 19.0% (β = .438 p < .000) of the variance in OPI. The ANOVA analysis for this relation was also significant F(1, 214) = 50.17 p < .000. A third regression was conducted between competence
exploitation and NPD to pre-test H3. The results showed that the exploitation capability explains 16.4% (β = .424 p < .000) of the variance in NPD. The ANOVA analysis for this relation was significant F(1, 214) = 42.03 p < .000. A fourth linear regression analysis was conducted between competence exploitation and OPI to pre-test H4. The results showed that exploration capability explains 25.3% (β = .507 p < .000) of the variance in OPI. The ANOVA analysis for this relation was also significant F(1, 214) = 72.51 p < .000.
4.2. Multiple Regression
A multiple regression analysis was conducted to accept or reject H1 and H3, where
competence exploration together with competence exploitation was tested in relation to NPD. A
significant relation was found, which shows that exploration (β = .387 p < .000) and exploitation (β = .172 p < .037) together explain 24.4% of the variance of NPD. These results mean that hypothesis H1 and H3 are accepted. A second regression analysis was conducted to test
hypothesis H2 and H4, where the competence exploitation together with competence exploration was tested in relation to OPI. A significant relation was found, which shows that exploitation (β = .383 p < .015) and exploration (β = .190 p < .000) together explain 27.4% of the variance of
OPI. These results mean that hypothesis of H2 and H4 are also accepted. These multiple regressions show (Table 6) that the exploratory and explanatory capabilities together
significantly (P < .027) explain more of the effect on NPD (R2 = .244) and OPI (R2 = .231) than separate. This adds to existing findings that firms need both capabilities in order to exceed in product development. Additional tests with the control variables firms showed no significant effect on the relations between the exploration and exploitation capabilities and NPD (β =.032, p < .221) but showed a small but significant effect with the relation OPI (β =.071, p < .030). A more significant relation was found in a multiple regression with the number of employees active
in product development (β =.171, p < .000) and OPI, where the capability competence exploration (β =.124, p < .094) decreased to non-significant.
4.3. Moderator Results
In order to test H5 and H6, two extra moderator variables were computed. By
standardizing variable values, the mean was subtracted from the original variable, creating a new moderator variable. This was done for the variables competence exploration, competence
exploitation and structural differentiation. These variables were multiplied by each other to
create two new moderator variables, moderator exploration and moderator exploitation, which were used for a new linear regression to test hypotheses H5 and H6. The linear regressions showed that the moderator structural differentiation has a very small negative influence on the relation between competence exploration and NPD (β = -.058) but the result is not significant (p =.26). This results do fail to reject the null hypothesis of H5, hence one must assume that H5 is rejected. A second linear regression to test H6 also shows that the moderator structural
differentiation has no influence on the relation between competence exploitation and OPI (β
=.003), and it is far from significant (p = .96). The result is that the null hypothesis of H6 is accepted and H6 of this research is rejected. To confirm these results, the research sample was split into two separate cases, a case with a high structural differentiation (> 4) and a case with a low structural differentiation (< 4). By comparing the relation between OPI and competence
exploration the results clearly show no changes in the relation between OPI and competence exploration (Figure 2).
Figure 2: Structural differentiation in relation with OPI and exploration
4.4 Post hoc Analyses
Although H5 and H6 are rejected, a post hoc linear regression showed that structural
differentiation as an independent variable instead of a moderator variable significantly correlates
with NPD (β = .155, p <. 001) and OPI (β = .144, p < .001). This could mean that structural
differentiation does not moderate exploration and exploitation capabilities, but adds to the total
product development processes within a firm. A second post hoc linear regression showed that the same effect occurs with the number of employees in product development on NPD (β = .144, p < .000) and OPI (β = .261, p < .000). This relation shows that the number of employees in product development plays a crucial part in how firms achieve more NPD and OPI.
5. Conclusion & Discussion
The quantitative analysis reconfirms that the exploratory capabilities and the exploitative capabilities of a firm indeed lead to an increase in performance (Tushman & O’Reilly, 1996; Andriopoulos & Lewis, 2009). Next to performance, new product development (NPD) and old product improvement (OPI) both also contribute significantly to a firm’s performance. The research shows that the capabilities that are needed for NPD and OPI help firms to obtain a competitive advantage over their competitors. The findings show that the firm’s capabilities that are used in product development not only benefit NPD but also OPI. This means that in answer to the research question, a firm does not need different capabilities for exploring and exploiting new products than for old product improvements. This answer aligns with prior research which states that firms use their exploration and exploitation capabilities to add to a better NPD (Katila & Ahuja, 2002) buts adds to the strategy research field that both exploration and exploitation capabilities are also used to achieve OPI.
This research shows that the exploitation capability of a firm has a strong positive correlation with and is the main driver behind OPI. This effect is strengthened by the explorations capability that adds significantly, but to a lesser extent, to OPI. With this, the research confirms that the exploration capability of a firm is used not only for new products or services but also to improve old products or services. Firms that currently excel at exploration could use these capabilities in order to better improve and exploit old products. Managers that effectively align these capabilities derived from NPD could achieve better OPI, which leads to better performance. This alignment could, for example, be useful for firms that frequently
implement new products but also improve existing products. Using their exploration capability in old product improvement, firms can forecast better performance than they could if they used only their exploitation capabilities.
NPD, where the exploitation capability of a firm significantly contributes to the success of both OPI and NPD. The relation between exploitation capability and OPI is stronger than the relation between exploitation and NPD, but both are significant. These are different findings than those of Yalcinkaya, Calantone and Griffith (2007), who found a negative correlation between
exploitation and innovation. The term innovation, however, is too broad and is not the same as NPD and OPI. The research findings show that the exploitation capability of a firm has a positive effect on NPD and OPI, and therefore adds new information to the strategy research field. Firms could use their expertise to exploit existing products, based on introduction, selection and implementation, to better develop new products. This could especially benefit firms that are active in long-term markets that by nature focus only on exploitation of products. By using their already gathered exploitation capabilities together with external exploration capabilities (for example, consultants), firms could achieve a better performance in NPD than their competitors with low exploitation capabilities who hire the same external consultants. Another important finding in the research data is that NPD and OPI are highly correlated with each other. This means that firms that are currently active in product development are focused on improving existing products but also on the development of new products. This raises the question of whether NPD and OPI indeed need to be managed as stated by Johne and Snelson (1989) or whether firms have developed methods to manage both processes simultaneously.
This research also shows that structural differentiation does not modify the effect of the exploration and exploitation capabilities of a firm and its OPI and NPD. The research results do not answer the question of how exploration and exploitation capabilities are separated within firms and aligned by managers to do product development. The separation of the capabilities by structural differentiation (Jansen et al., 2009) does not have an influence on the relation
between exploration and exploitation capabilities and NPD and OPI. Therefore, this research does not answer the question of how these capabilities are transferred within the organization.
One could argue that a great deal of these exploration and exploitation capabilities lie within the general management that is not separated by structural differentiation (Tushman & O’Reilly, 1999). If this is the case, and management oversees both the exploration and exploitation capabilities for product development, the general management could then transfer the exploitation and exploration capabilities in order to use for OPI or NPD.
6. Limitations & Further Research
This research tries to focus on the difference between OPI and NPD and on the difference between exploitation and exploration, which is limited to the understanding of these concepts, whereas academic research about these forms of product development is currently limited. This research tries to make a clear difference between the two concepts; hence, the 216 managers who participated the survey would have likely used their own definition of these concepts for filling in the survey. This could influence the correlation between OPI and NPD, which is very high (.692) within this research. This effect could be minimized by combining a future quantitative study with a qualitative study in a mixed method where respondents would then be informed about the differences between OPI and NPD. More research is needed about the separation of NPD and OPI (Johne & Snelson, 1989), which is based on current
(technological) firms. Research is very limited on OPI in the strategy field, and most of the previous research focuses on NPD or process optimization. Knowledge about how firms need to optimize their old product improvement based on product or service adjustments is limited. This research adds to the OPI field, but more scientific research is needed in order to successfully make a framework to optimize the theoretical concepts within product development of firms.
Product development within firms could be influenced by the economic state of a market or country and the investment possibilities or the (de)regulation laws set in motion by
governments. Testing these factors in a longitudinal study in order to minimize these effects on product development would add to existing theoretical knowledge. This study focuses on exploration and exploitation capabilities as a group of static capabilities instead of focusing on the underlying aspects like risk taking, knowledge transfer and employee training that contribute to exploration and exploitation capabilities. By further exploring which of these aspects
contribute significantly to NPD an OPI, firms could focus more on which exploration or exploitation skills or resources they wish to acquire and how this can be done.
This research is conducted on a relatively small, contained sample base with certain limitations. By enlarging the sample size in future studies, distributing the survey across more and different firms and widening the distribution to other countries than the Benelux,
demographic and cultural differences could be further explored. A larger sample size also contributes to more reliable quantitative findings, where this research has only a sample of 216. An important new question this research creates is that of how the alignment of resources works within firms for product development. NPD and OPI separated by structural differentiation is not the way firms align their exploration and exploitation capabilities within firms. More research is needed on the link between these ambidextrous firms and their product development
processes. Future research within firms that excel in NPD and OPI could give more insight into how these firms align their ambidextrous capabilities over time. The findings of such research could help managers and researchers understand more about how exploration and exploitation capabilities are use and could benefit product development within firms.
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