Capitalizing on the Voice of the Customer During New Product Development

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Master’s Thesis | MSc BA Business Development Final version | January 2013

Capitalizing on the Voice of the Customer

During New Product Development

Stefan H. J. Groot Student number 2039176 shjgroot@live.nl Remeha B.V. Marchantstraat 55 7300 AA Apeldoorn Netherlands University of Groningen

Faculty of Economics and Business

Department of Innovation Management and Strategy Landleven 5

9727 AD Groningen Netherlands Supervisors

Supervisor Remeha: ing. I.W.T. de Wit

Supervisor University of Groningen: prof. dr. ir. J.M.L. van Engelen Co-assessor University of Groningen: dr. C. Reezigt

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Preface

This graduation project is both a research and a design assignment where you are expected to apply and build on the theories you have developed in the Business Development program. For this thesis, I had to find an assignment that is in line with both the study and my interest. I am therefore happy that I found an assignment about one of the hottest and most interesting business topics of today: “the voice of the customer.”

I experienced a pleasant though professional working atmosphere at Remeha. I am thankful to all colleagues for my time at Remeha and for their helpful comments and constructive input. In particular, my supervisor Idse de Wit deserves my gratitude and thanks. I am grateful that he took me under his wings and helped me throughout this process. His friendliness and positive energy is something that I will never forget. I also want to thank Jo van Engelen for his supervision, guidance and support. Both his practical and academic experience contributed to this report. I am also thankful to Frank van Thienen for his comments and feedback. Moreover, many other people have contributed to this thesis. Therefore, I am grateful to my family, Nicolette, Koos and above all my dear friend Beau for his backing and guidance. Last but not least, I want to thank Guusje for her love and support.

It’s interesting to note that systematic design of new products is not much different than designing a thesis. For example, it is of crucial importance that research objectives and requirements are made clear at the beginning of the project. Also discursiveness, making steps back and forth, played an important role in writing this thesis. Moreover, regarding the satisficing1 principle, I continuously found new insights and wanted to include these insights in the paper. However, an “optimal solution” had to be found because of limited time and resources. I hope I found that optimum.

My objective was to help Remeha make distinctive, lasting and substantial improvements in their NPD process. With my recommendations, I hope to convince Remeha that the road to market orientation is the road to successful new products and that certain market-related activities need to be embedded in the very fabric of the product development process. Consequently, I want to end this preface with a mission statement of Remeha, which also served as motivation behind this thesis:

“To create meaningful innovations that anticipate the wants and needs of people.”

Stefan Groot Vierlingsbeek, 2013

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Summary

Introduction

Anticipating customer needs and changing market conditions becomes important for the success of firms and calls for the introduction of new products and services together with a capacity to innovate. Creating a new product can be a great success, or a flop. By conducting research to understand the “voice of the customer”, companies can save headaches, time and money. An intimate understanding of customer needs makes the difference between success and failure. The challenge in designing new products is therefore to integrate the different technological components into a product that is consistent with existing and evolving customer needs. Hence, market oriented businesses listen closely to the voices of their customers and use this information to create valuable products.

Although Remeha waves “the voice of the customer” banner, there is only limited customer knowledge available during new product development. This results in the risk that products do not meet customer needs, or that market opportunities are missed. The current new product development process seems to be unable to capitalize on the voice of the customer. This research therefore focuses on the redesign of the product development process in order to reduce market risk and anticipate on emerging market opportunities.

Results of the analysis

Because of its historical success in a stable environment, Remeha is maintaining its current pace. Managers rely on established understandings and capabilities, which are familiar and comfortable, and have proven their worth in the past. As a result, market research is rather narrow and is based on inferences from existing products. This exploitation of current know-how inhibits explorative learning which is needed to gain new customer insights and to develop innovative products. In addition, there are no processes to generate and implement ideas that are new to the business. The current development process is strictly limited to the development of new boilers.

Product are currently being developed from the inside out, based on established technological regimes and capabilities. Consequently, customer needs research and product testing from a customer perspective seems to be a slapdash affair. Since these activities are not woven into the fabric of the product development process, there is an increased risk that product design will not meet customer needs. Besides, a lack of (actionable) customer information results in a lack of trust and allows employees to interpret the market in their own way. Consequently, this results in a “battle” when defining new products.

Solution redesign

The redesign takes the focus away from technologies and redirects attention to Remeha’s customers. The product development process therefore requires careful design to capitalize on the voice of the customer concerning five aspects:

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3 1) Perform explorative learning activities. Use new ways to listen to the voice of the

customer to gain new customer insights and to identify market opportunities. 2) Employ an innovation process. Put processes into practice to capitalize on novel

market information and discontinuous ideas. This allows Remeha to make big leaps in product development, rather than small jumps.

3) Design new products systematically. Clarify the task in the eyes of the customer instead of pushing the new technology into the market. Systematic designing ensures a strong link between customer needs and technologies.

4) Incorporate customer learning loops during new product development. The redesign places greater emphasis on customer needs and builds in the voice of the customer throughout different activities especially in the front-end of the development process. Therefore, use customer needs research and use multiple iterations to reduce the chances that there are any surprises at the end of the product development process.

5) Share customer insights. Reach consensus about customer needs by sharing and communicating customer insights across functional boundaries. This is essential to overcome conflicts, and to anchor customer requirements and product specifications in a healthy manner.

The reward of the redesign becomes twofold. Firstly, the chances of newly developed products failing in the market are reduced if products are developed in a systematic way and if effective market research has been undertaken before and during new product efforts. Secondly, by conducting explorative market research, together with a process to capitalize on this knowledge, Remeha is able to identify and anticipate new market opportunities before competitors do. With the vast amount of costs inherent to new product development, and Remeha’s ambition to be the “comfort innovator”, these should be convincing arguments to embrace a market orientation approach.

Research evaluation

This study used a combination of analytical research and design research in order to build a market oriented new product development process. This approach allowed me to discover why and where problems occur during the process, and how the product development process could be improved. Although this approach seems to be the best approach to increase market orientation of product development, subsequent research should focus on other elements to further increase the market orientation of Remeha.

The practicable, yet theoretically grounded framework of this study is beneficial for firms who might be stuck in their technology focus and daily routines. In other words, it contributes towards an understanding of how engineering brilliance in the past impedes market orientation of today. This paper presents implications for managers to break down this framework in order to increase market orientation of product development. A number of directions for future research are also being suggested.

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4

PART

I

–

SETTING

THE

STAGE

1. Introduction

1.1 Purpose of this study

Technological developments are the raison d’être for many firms operating in high-tech industries. In developing any technological product, great care is taken to make sure the technology works correctly. Yet, in the end, an organization’s success is measured not by the sophistication of its technology, but by how well it serves its customers. Nevertheless, because customers judge the value of an innovation by the decision to purchase or ignore it, they determine whether a product will be a success or not. Thus, technology firms constantly face the challenge in ensuring that their innovations are designed to serve their customers’ needs. If not, a technically successful product still could fail in the market. Today it is widely acknowledged that companies have to stay in touch with their customers as a prerequisite for successful product innovation (e.g. Montoya-Weiss & Calantone, 1994; Kirca, Jayachandran & Bearden, 2005). Firms should therefore listen carefully to customers and should develop the competency to correctly translate customer needs into valuable technological solutions. The complexity and dynamic nature of the marketplace is exerting even greater pressure on managers to capitalize on the “voice of the customer” (Homburg & Pflesser, 2000). However, many firms do not bring the customer’s voice into their new product development process effectively (Ottum & Moore, 1997; Cooper, 1996; 2008). Apparently, many technology firms that were founded by engineers continue an approach that is overly focused on technology. What we have today is a larger, technology focused company that is struggling to become market oriented in today’s volatile market environment. Adams, Day and Dougherty (1998) indicate that the activities involved in learning about markets for product innovation are new for many large organizations with a long history of stable markets. This means that organization employees do not have shared routines to order market learning activities. However obvious the notion of “know your customers” seems to be, organization members do not have a repertoire of shared routines that would enable them to actually learn new things about customers (Adams, Day and Dougherty, 1998, p. 405). This also seems to apply to Remeha (see chapter 2). Consequently, the purpose of this thesis is to improve the degree of market orientation during new product development. This thesis will give recommendations how Remeha should redesign their new product development process in order to capitalize on the voice of the customer. Although the solutions are tailor-made for Remeha, other audience might include any manager who sees the need to make better use of market information. This thesis therefore serves as a valid reading guide that allows managers to integrate the customers’ voice in the new product development process. Note that during this project, I will have the role as practitioner (problem-solver) and scientist

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7 (researcher). This means that the problem will be solved from a business point of view and will be evaluated in an academic perspective.

1.2 Reading guide

Emphatically, this thesis is meant to be read in the order in which it is presented. Firstly, chapter 2 describes the Remeha case and provides background information and the problem definition which is recognized by means of several orientation interviews. This problem definition establishes a preliminary cause-effect, and gives direction and focus to this research by “naming and framing” of the problem (see Schön, 1983). According to Schön (1983, p. 40) problem setting is “a process in which, interactively, we name the things to which we will attend and frame the context in which we will attend to them.” This naming and framing can be understood as making sense of the uncertain situation at hand, using existing concepts for naming the problem and its causes. Consequently, the second part of the thesis reviews the literature corresponding with the practical situation of the problem. The goal of the literature review is to shed light on the issue in question. This research will therefore be complemented by a study which gives theoretical insights and directions for the analysis and redesign. Chapters 3 and 4 review the concept of market orientation in the context of new product development. Yet, we also need to develop an understanding of the process through which market information is actually used by organizations to create new products. Therefore, chapter 5 describes the most influential methods in designing and developing new products. Moreover, chapter 6 reviews the barriers companies may face in market learning during new product development.

The third part of the thesis contains the research design, results and solutions. The research methodology is described in Chapter 7. The aim of this chapter is to provide a clear overview of how the research is conducted. The next step of this project was to collect and analyze relevant data regarding the business problem, and to find its causes. The results of this analysis are presented in chapter 8. After diagnosis and analysis, design solutions are recommended in order to enhance market learning during product development (see chapter 9). These recommendations concern practical implications for improving the degree of market orientation in new product development. Finally, based on the specific findings of the redesign, the solution is reviewed scientifically in chapter 10 in order to extract its theoretical relevance.

2. The Remeha case

2.1 About Remeha

Remeha, based in Apeldoorn, the Netherlands, is a leading European manufacturer and distributor of innovative heating and hot water systems and services. Having around 550 employees, Remeha achieved an annual turnover of nearly €300 million in 2010. Remeha is part of BDR Thermea which is the heating products group operating in more

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8 than 70 countries with an annual turnover of €1.8 billion. BDR Thermea, headquartered in Apeldoorn and employing over 6,300 people, is producer and seller of the brands Baxi, De Dietrich, Remeha, Heatrae Sadia, Brötje, Potterton, Chappée, BaxiRoca, Baymak and other leading brands of heating products. BDR Thermea continuously improves performance, environmental friendliness and energy savings, confirming and building on the leadership in the emerging market for low carbon micro combined heat and power products. Remeha is Competence Center HR (high efficiency), developing high efficiency water heaters for the whole group. This means that Remeha is responsible for the development of product platforms, which are the basic components for the products of other brands.

Throughout the years, with high quality and innovative, technological solutions, Remeha established itself as a reliable developer of heating and hot water systems. As early as the 1980’s, Remeha played a pioneering role in the development of the first generation of high efficiency boilers. By investing in Research and Development (R&D), Remeha has become an important player in the market for sustainable and high efficiency heating products. Clients include distributors, installers, prescribers and end-users in both the commercial and domestic markets worldwide (see appendix 1 for a brief description of the heating industry). Remeha’s mission is to be the leading heating company by offering both innovative products and services under the slogan “the comfort innovator”.

A number of developments are fueling the drive for Remeha to instill a more outward orientation. In this industry, the product life cycles become shorter, competition is increasing and customers are more demanding. Besides, shifts in value propositions and changes towards more energy-efficiency and smart solutions call for adapting to the external marketplace. Moreover, an almost total lack of meaningful differentiation in manufactured goods drives Remeha towards finding new ways to differentiate. Thus, the main question in this industry is who will prosper in this environment of rapid and unpredictable change. These changing market conditions are fueling the drive of managers to incorporate the voice of the customer into their product creation process. Therefore, adapting to customer needs and changing market conditions becomes important for the success of Remeha and calls for the introduction of new products and services, together with an effective development process.

2.2 Preliminary problem statement

The promise Remeha makes is that they will use all their technical know-how and research information to meet their customers’ wants and needs. Paradoxically, with a clear focus on technological developments, Remeha seems to lose touch with their customers during new product development. In developing any new product, Remeha does not know what the customer wants. They experience a shortage of customer knowledge and the integration of that knowledge to create new products. Therefore, although Remeha waves “the voice of the customer” banner, they will not succeed,

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9 either because of a shortage of knowledge, or a lack of determination. The consequences of this problem are twofold. Firstly, it increases market risk, which stems from a new product not meeting customer needs. During product development, there is insufficient knowledge about what is important from a customer perspective. As a consequence, at the end of the development process, Remeha found that design specifications did not fulfill customer needs. More specifically: midstream corrections in the product design were needed when it became clear that Remeha developed something customers didn’t want. These solutions were necessary at the end of the process to prevent failure. However, learning about design problems near the end of the process makes corrections difficult and costly. Secondly, without an effective capability to learn from customers, Remeha is afraid they will miss opportunities in the future and will never seem to be able to do more than catching up. This means that Remeha cannot continue claiming to be the comfort innovator.

Hence, it seems that the customers’ voice is not in the fabric of the product development process, which increases market risk and results in missing market opportunities. In short, the problem is stated as:

“Remeha is unable to capitalize on the voice of the customer during new product development.”

The context of this research is the new product development process of Remeha.2 The actual causes of the lack of market learning will be analyzed within this context. Consequently, the main research question is formulated as:

“How to capitalize on the voice of the customer during new product development?”

Therefore, I need to know why Remeha fails to learn about their customers (i.e. market) by answering the following questions:

“How does Remeha currently learn about their customers during new product development?”

“What are the factors that negatively influence market learning during product development?”

Solutions will be given in order to redesign the current new product development process. Therefore, the design-questions are stated as follows:

“How to redesign the new product development process in order to reduce market risk?”

“How to redesign the new product development process in order to identify and anticipate on emerging market opportunities?”

2_{Whether the market information gathered is correctly or not, or is interpreted in the right way is}

excluded from the scope of the research. The focus is thus on whether market-related activities are performed correctly or not during new product development.

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10 Although not in the scope of this research, it is important to note that, since Remeha recently became Competence Center for the whole group, other forces have a significant influence on the development of new products. For example, international Product Managers represent their brands with contradicting requirements and specifications, resulting in a political tug-of-war during product development. As a result, the complexity of the group is causing delays in defining the new product concept and thereby increasing the time-to-market.3

3

Future research within BDR Thermea will be useful to study the consequences of this complexity on new product development performance.

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PART

II

–

A

REVIEW

OF

THE

LITERATURE

3. Market orientation

3.1 The market orientation concept

The marketing concept has been a cornerstone of marketing since Drucker argued in 1954 that creating a satisfied customer is the only valid definition of a business purpose. He described marketing as the whole business seen from the point of view of its final result, that is, from the customer’s point of view (cited from Mohr & Sarin, 2008). A firm’s market focus and market information processing activities is captured by the market orientation (MO) concept (Hunt & Lambe, 2000). Over the years, many researchers attempt to define the market orientation concept. To give a broad view, a wide set of definitions is provided below:

“Market orientation is the organization-wide generation of market intelligence pertaining to current and future customer needs, dissemination of the intelligence across departments, and organization-wide responsiveness to it” (Kohli & Jaworski, 1990, p. 6).

A market orientation is the business culture that is entirely committed to the continuous creation of superior customer value, and consists of three behavioral components – customer orientation, competitor orientation, and interfunctional coordination – and two decision criteria – long-term focus and profitability (Narver & Slater, 1990; Slater & Narver, 1994).

The level of market orientation is defined as “the degree to which the business unit: (1) obtains and uses information from customers; (2) develops a strategy which will meet customer needs; and (3) implements that strategy by being responsive to customers’ needs and wants” (Ruekert, 1992, p. 228).

Customer orientation is a set of beliefs that puts the customer first (Deshpandé, Farley & Webster, 19934).

“Market orientation represents superior skills in understanding and satisfying customers” (Day, 1994a, p. 37).

Although major differences lie in the organizational elements to implement market orientation, all definitions entail an external focus and call for putting the customer first in all decisions. Undisputedly, the most acknowledged definitions are those of Kohli and Jaworski (1990) and Narver and Slater (1990). Kohli and Jaworski use the term “market orientation” to mean the implementation of the marketing concept. In their early article, they argue that market intelligence is the starting point of market orientation, and emphasize the relevance of information-processing activities to make use of this

4_{Deshpandé et al. (1993) do not explicitly use the term market orientation, but customer orientation}

instead. They refer to the same concept as they see “customer and market orientations as being synonymous” (p. 27).

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12 market intelligence (Kohli & Jaworski, 1990). Market intelligence entails an understanding of current and future customers’ needs, and includes a consideration of how they may be affected by market factors such as government regulation, technology, competitors, and other external forces (Kohli & Jaworski, 1990). Others argue that market orientation is embedded in the culture and assert that this kind of behavior is a consequence of being market oriented (e.g. Narver & Slater, 1990; Deshpandé, Farley & Webster, 1993). Within this perspective, Narver and Slater (1990) defined market orientation as an ideology that places the highest priority on the creation of superior customer value. They further emphasize that creating superior customer value requires three behavioral components: customer orientation, competitor focus and cross-functional coordination (Narver & Slater, 1990; Slater & Narver, 1994). Consequently, they assert that a market oriented culture underlies the necessary behaviors that create superior customer value.

Day (1994a; 1994b) proposes a holistic approach to market orientation and argues that a market orientation represents an amalgamation of a market oriented culture with particular practices. He refers to this outside orientation as a market learning capability whereby organizations continuously learn about their market through market sensing and sense-making activities. The market learning process can be described as a number of sequential information processing activities (see figure 1), and is characterized by activities such as scanning outside the periphery, seeking insights beyond the usual sources and continuous experimentation (Day, 1994a; Day & Schoemaker, 2006). Note that the Kohli and Jaworski (1990) conceptualization of market orientation, which places an emphasis on generating, disseminating and responding to market information, represents a market sensing capability. Day (1994a) also argues that a hallmark of market orientation is broadly shared assumptions about how markets behave. He urges that a lack of shared values and understandings would compromise the activity patterns advocated by the behavioral perspective, unless

Data collection (market sensing)

Data distribution

Interpretation

(sense-making) Action Reflection

Open-minded inquiry Wide-spread information distribution Mutually informed mental models Information utilization Systematic evaluation of outcomes

Accessible memory Augmentation of memory

Figure 1. The market learning process5 (derived from Day, 1994a)

5_{This figure seems to suggest that this process is a finite process that stops when information is}

actually used and outcomes evaluated. However, market learning is an ongoing process and never has an end. Hence, continuous improvement of the market learning process is a precondition to become market oriented (Day, 1994a).

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13 these differences are recognized and taken into account when decisions are made (see section 6.3). Therefore, he notes that market learning consists of both cognitive associations (shared beliefs, values and norms) and behavioral outcomes reflecting these cognitions. This integration captures the essence of both market sensing and sense-making activities.

Viewing market orientation as an organizational learning capability has established itself in the literature (e.g. Sinkula, 1994; Slater & Narver 1995; Hurley & Hult 1998; Morgan, Katsikeas & Appiah-Adu, 1998; Farrell, 2000; Olavarrieta & Friedmann, 2008). Kok, Hillebrand and Biemans (2003, p. 140) argue that both the behavioral and cognitive perspectives are necessary when the aim is to generate managerial guidelines for changing an organization’s degree of market orientation. They assert that “taking only a behavioral perspective does not suffice, because changes in behavior may occur without the corresponding development of a firm’s cognitive systems, resulting in long-term problems because the new behavior is not supported by a changed cognitive structure. Conversely, they argue that taking only a cognitive perspective would not suffice either, because changes in cognition may occur without resulting changes in organizational behavior. Furthermore, Slater and Narver (1995) argue that although a market oriented culture is the foundation of market orientation, a market oriented culture only can achieve its effectiveness if it is complemented by a suitable organizational climate (i.e. structures, processes and incentives) to operationalize the cultural values.

A chain of effects emerge that relates market orientation to organizational outcomes (see figure 2). Firms with a market orientation realize greater business performance because they have a greater understanding of their customers’ expressed wants and latent needs, and of a broader market environment than their competitors (Jaworski & Kohli, 1993; Hult & Ketchen, 2001). According to Day (1994a), market oriented firms are distinguished by an ability to sense events and trends in the markets ahead of their competitors. That is why many studies claim that a market orientation is associated with superior business performance (e.g. Kohli & Jaworski, 1990; Ruekert, 1992; Deshpandé, Farley & Webster, 1993; Narver, Slater & MacLachlan, 2004; Ottum & Moore, 1997). In a meta-analysis of 56 empirical studies, Ellis (2006) found a positive relationship between market orientation and organizational performance. Moreover,

Learning Resources Business process efficiencies Positional advantages Performance outcomes Market learning Knowledge about markets Value creation processes Differential customer value Performance outcomes Information processing

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14 a market orientation is even more essential in highly competitive and dynamic markets (e.g. Homburg & Pflesser, 2000). Also Atuahen-Gima (1995) found that market orientation has a greater effect when the intensity of market competition and industry hostility are high.

3.2 Responsive versus proactive market orientation

There are two forms in which customer needs and solutions exist: expressed and latent (e.g. Narver et al., 2004). Expressed needs are needs and solutions of which the customer is aware and can express. In contrast, latent needs are needs and solutions of which the customer is unaware and, therefore, cannot express. Note that “latent needs are not less “real” than expressed needs, but they are not in the consciousness of the customer” (Narver et al., 2004, p. 336). Based on this distinction, Narver et al. (2004) supposed that market orientation consists of two essential sets of behaviors: responsive and proactive market orientation (see table 1 for key differences between responsive and proactive MO). Jaworksi, Kohli and Sahay (2000) use the market-driven approach (reacting to current needs) and the driving-markets approach (anticipating future needs) when making the same distinction. This distinction is essential because the market orientation concept has been criticized as being reactive and too narrowly focused on existing customers (Jaworksi et al., 2000; Narver et al. 2004; Atuahene-Gima, Slater & Olson, 2005).

The first approach, responsive market orientation, refers to discovering, understanding, and satisfying current and expressed customer needs (Narver et al., 2004). It involves the generation, dissemination, and use of market information related to the current experience of a firm, thereby reflecting exploitative learning (March, 1991). According to March (1991), the essence of exploitation is the refinement and extension of current competences, technologies, and paradigms. Consequently, responsive market orientation may have a positive influence on product development performance through experience efforts (March, 1991), and is therefore associated with incremental innovations (Baker & Sinkula, 2007; Reid & De Brentani, 2012). By focusing on current customers and their expressed needs, responsive market orientation may reduce the likelihood of errors in problem solving, and makes information research and

Responsive MO

(customer-led) Proactive MO

Strategic orientation Expressed wants Latent and future needs

Adjustment style Responsive Proactive

Temporal focus Short-term Long-term

Objective Customer satisfaction Customer value

Learning type Adaptive (exploitation) Generative (exploration)

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15 use more reliable and less complex (March, 1991; Atuahene-Gima et al., 2005). The second approach is proactive market orientation in which a business attempts to discover, to understand, and to satisfy latent, unarticulated needs of customers (Narver et al., 2004). Proactive market orientation involves the search for new and assorted information that takes the firm beyond the scope of its experience, thereby reflecting explorative learning (March, 1991). According to March (1991), explorative learning includes things such as variation, play, experimentation, innovation and risk-taking. This type of learning allows firms to explore and discover new market opportunities, and to develop innovative solutions that produce superior customer value (Narver et al., 2004; Atuahene-Gima et al., 2005). Therefore, this type of learning is associated with radical or discontinuous innovations (Baker & Sinkula, 2007; Spanjol, Mühlmeier, & Tomczak, 2012).

Narver et al. (2004) were the first who empirically studied the effect of both approaches on business performance. They found that the strength of the relationship between proactive market orientation and new product success is larger than that of responsive market orientation. In a more recent study, Jing and Yanling (2010) found that the role of responsive market orientation in new product success is more significant in stable market conditions, while proactive market orientation has a greater advantage in a turbulent environment. Although both orientations are necessary, Atuahene-Gima et al. (2005) suggest that firms engaging in both behaviors simultaneously do not necessarily gain greater benefits from a high-high combination. Too much focus on current customers and their expressed needs can lead companies to miss emerging opportunities in the market, and leaves the company vulnerable in the long run (Leonard-Barton, 1992; Christensen, 1997; Henderson, 2006;), and carries the risk of an inability to adapt to changing customer needs (March, 1991; Slater and Narver, 1995). Successful companies tend to be overly dedicated to their existing customer base and serving existing customers’ needs (Atuahene-Gima et al. 2005; Narver et al. 2004). Hamel and Prahalad (1994) refer to this situation as the “tyranny of the served market” in which managers see the world only through their current customers’ eyes.

Although Narver et al. (2004) argue that a firm always needs to consider customers’ expressed needs, those needs often do not provide enough information to differentiate its products. Moreover, such needs can easily be found by competitors who can incorporate them into their products as well. This may lead to product commoditization and price competition (see Narver et al., 2004, p. 336). In order to avoid falling into a trap like this, Christensen and Raynor (2003) suggest that companies need to constantly look beyond their existing customer base. On the contrary, although proactive market orientation may result in radical products with unique benefits, it also carries more risk and costs than responsive market orientation because of a high degree of inefficiency and uncertainty associated with a focus on unfamiliar information (March, 1991; Atuahene-Gima et al., 2005). Besides, an excessive devotion to explorative learning may hold back a focus on developing products for current

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16 customers (March, 1991). Therefore, March (1991) suggests that firms need to search for a balance between exploitation and exploration. This implies that responsive market orientation will be more valuable to a firm when complemented with a lower level of proactive market orientation and vise-versa (Atuahene-Gima et al., 2005). More specifically, “a firm extremely competent in responding to existing market challenges (responsive MO) will be more successful in product development when it incorporates new insights obtained through proactive market orientation” (Atuahene-Gima et al., 2005, p. 476).

3.3 Improving the degree of market orientation

It is appropriate to conceptualize the market orientation of an organization as one of a degree on a continuum, instead of just being either present or not (Kohli & Jaworski, 1990; Slater & Narver, 1999). This implies that the degree of market orientation can be developed or improved. Along with the variety of definitions of market orientation, differences lie in the organizational elements to implement a market orientation. As a result, a multitude of scales have been developed for measuring the market orientation construct. For example, along with the definitions of Kohli and Jaworski (1990) and Narver and Slater (1990), measures can focus on processes, activities and behaviors, or attitudes, norms and beliefs respectively.6

Homburg and Pflesser (2000) argue that a behavioral perspective (i.e. focusing on behaviors and attitudes) on market orientation is too restricted since activities are relatively easy to copy by competitors. Consequently, this approach fails to create an enduring competitive advantage. However, although culture is an important and enduring element of market orientation, it is not the most effective lever to implement the desired changes (Day, 1999; Kok and Biemans, 2009). Also Narver, Slater and Tietje (1998), who earlier represented the cultural perspective of market orientation, suggest that a change in behavior results in a change in culture. Day (1999) proposes to start a change program with the transformation of processes and behavior, ultimately results in a change in values and beliefs. Moreover, the product development process seems to be the ideal candidate to implement market orientation in the organization, since this is a business process in which those activities that are associated with a market orientation are executed (Day, 1994b). In this vein, Kok and Biemans (2009) found that the firm’s process/project management structure is the most important driver to create a market oriented innovation process. The focus of a change program should therefore be on changing the supporting (organizational) infrastructure, rather than its business culture (Kok and Biemans, 2009).

6_{These scales often are derived and reused from the ones developed by Kohli and Jaworski (the}

MARKOR scale is a 20-item, 5-point Likert-scale), and Narver and Slater (the MKTOR scale is a 15-item, 7-point Likert-scale). These scales often are the basis for a quick scan, aimed at assessing levels of MO across companies. However, this raises questions regarding the instruments’ usefulness as a tool to diagnose a company’s single MO (see Deshpandé and Farley 1998 for more information).

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Section Most important conclusions

3.1 The market orientation concept comes with a multitude of definitions, but in essence calls for putting the customer first in all decisions. A market orientation is associated with greater organizational performance by delivering superior customer value.

3.2 It is important to distinguish between responsive and proactive market orientation. Responsive market orientation (exploitative learning) focuses on satisfying customers’ expressed needs, and therefore is associated with incremental innovations. On the other hand, proactive market orientation (explorative learning) focuses on satisfying customers’ latent and future needs, and is therefore associated with radical innovations. Note that an excessive devotion to only one of these approaches hinders the focus on the other orientation.

3.3 The behavioral and process approach to market orientation is considered the most effective lever for improving the degree of market orientation. Moreover, because the product development process is a core organizational process, it seems to be the ideal candidate.

4. New product development

4.1 What is product design?

Firstly, it is important to stress the difference between product design and engineering. Product design is paramount to every company involved in the manufacturing and marketing of products of any type. Design is often what one sees or interacts with. Simply put, design is an effort to create a product, service, or experience that combines both functionality and esthetics (Mohr, Sengupta & Slater, 2009). Product designing is the process of determining the function of an object, combined with making a model or prototype of it. In Steve Jobs’ words: “design is not just what is looks like and feels like, design is how it works.” Engineering is ultimately the technological science that enables the design to last. In other words, one could view engineering as applied science, and product design as applied engineering. Hence, I see design and engineering as separate but interactive professions. In this thesis, design is operationalized as an integral part of new product development to deliver better customer value and improve business performance through the integration of customer information.

4.2 What is new product development?

New product development (NPD) is the gateway that brings design and engineering to reality. NPD is a broad field of endeavor dealing with the design, engineering, production and marketing of new products. It is the basis for profitability and growth of most companies (Brown & Eisenhardt, 1995). The Product Development and Management Association defined NPD as “a disciplined and defined set of tasks and steps that describe the normal means by which a company repetitively converts embryonic ideas into saleable products or services” (Osteras, Murthy & Rausand, 2006, p. 179). In other words, an NPD process refers to the steps, activities, and decision

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18 points that are involved in the development of a new product, from the initial idea to product launch, and is aimed at delivering a commercial benefit to customers (Calantone, Vickery & Droge, 1995; Cooper & Kleinschmidt, 2007). Obviously, NPD is a complex activity that is dependent on knowledge and learning (Goffin & Koners, 2011). This is apparent since the entire NPD process can be seen as a process of embodying new knowledge into a product (Madhaven & Grover, 1998).

4.3 Market oriented product development

It is worth noting that the definitions of NPD include developing a saleable product and is aimed at delivering a commercial benefit to customers. Nevertheless, product innovation is about new value for customers, not about new things. The combination of technological knowledge and market knowledge enables the creation of that value (Song, Droge, Hanvanich, & Calantone, 2005). Many studies argue that having a market orientation is essential for new product success (e.g. Atuahene-Gima, 1995; Cooper, 1996; Ottum & Moore, 1997; Kok, Hillebrand & Biemans, 2003; Im & Workman, 2004; Enkel, Kausch & Gassmann, 2005). As early as the 1970’s, Cooper (1979) found that including market information during new product development was one of the factors that contributed to new product success. Ottum and Moore (1997) found that 80% of the new product successes gathered and used more market information than average. Conversely, 75% of the failures knew less than average about the market. In a similar vein, Cooper (1999) found that performing market oriented activities increases the chances of success:

“Successful businesses and teams, that drive winning new product projects, have a slave-like dedication to the voice of the customer. New product projects that feature high-quality marketing actions – preliminary and detailed market studies, customer tests, field trials, and test markets, as well as launch – are blessed with more than double the success rates and 70% higher market share than those projects with poor marketing action” (p. 117).

It is for this reason that a meta-analysis by Kirca et al. (2005) found that a market orientation has a positive effect on organizational outcomes via product innovation. Also, a meta-analysis by Montoya-Weiss and Calantone (1994) found that the proficiency of employees to perform market-related activities during product development has a positive impact on a product’s success. Poolton and Barclay (1998) reviewed the literature associated with the successful development of new products. They found that understanding customer needs is one of the factors that have been cited by all the research studies as being critical to the success of innovations (p. 200). Moreover, a literature review of Brown and Eisenhardt (1995) found that customer involvement leads to better product designs. These findings indicate that superior technology alone is insufficient for achieving success in high-tech markets. During the

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19 product development process, detailed market information should therefore be captured and integrated with technological know-how to design new products (Grant, 1996; Atuahene-Gima & Murray, 2007; Li & Calantone, 1998). Therefore, technology firms must “incorporate the voice of the customer into the product development process, despite the inherent difficulties and the tendency to overlook them” (Mohr et al., 2009, p. 189).

Section Most important conclusions

4.1 Product design – determining the required function of an object – is an integral part of the new product development process.

4.2 New product development deals with the design, engineering, production and marketing of new products, and is the basis for profitability and growth.

4.3 A market oriented culture and the associated information processing behavior enhances a new product’s success through understanding and meeting customer needs.

5. Controlling market information

5.1 The need for a disciplined approach

NPD projects have the need for an approach that can be planned, optimized and verified (Leenders, van Engelen, & Kratzer, 2007). Most companies follow a formalized NPD process in which a series of activities move the project along from idea to launch (Cooper, 1998; Ulrich & Eppinger, 2004; Unger & Eppinger, 2011). Krubasik (1988) argues that product development is not monochromatic. Each situation has a different context, and needs different managerial processes or actions. Also the type of innovation requires different processes and activities (Cooper, 2008; De Brentani & Reid, 2012). For example, radical or discontinuous innovations need an approach that allows more risk and uncertainties during the early stages of product development (De Brentani & Reid, 2012).

Although companies employ a variety of approaches, they often use similar actions and steps to manage product development (Unger & Eppinger, 2009). “Manuals contain a step-by-step description of what needs to be done when, which deliverables are required when and by whom, and how and when management decides whether or not the project can continue to the next stage” (Leenders et al., 2007, p. 170). A well-designed process increases information utilization and decision-making, and therefore improves the likelihood of success (Cooper, 1999). Moreover, using a disciplined approach is essential to reduce development time and to manage risks inherent to product development (Cooper, 1996; Unger & Eppinger, 2011).

5.2 Systematic design of new products

One way to manage product design is the systematic design approach. The systematic design approach has become widely used in NPD (Leenders et al., 2007). Systematic

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20 design of new products is the use of a model or template for designing some artifact. This approach is applicable to a variety design problems, from simple to difficult, and from engineering to any other type of problem. One of the most important methods in engineering science is the systematic approach developed by the German professors Pahl and Beitz (Pahl & Beitz, 1995). The authors argue that such an approach, if applied flexibly and adapted to a particular situation, is essential for successful product design. This method divides the flow of work during the design process into four main phases:

1) The first phase, clarification of the task, involves the collection of information about the requirements that the products should meet. This phase results in a detailed design specification.

2) The next phase, conceptual design, is the establishment of functional structures, the search for suitable solution principles and their combinations into concept design alternatives.

3) The third phase, embodiment design, is the development of layouts and forms for the concepts, their evaluation, determination of a preliminary layout, optimization, definite layout and determination of production procedures. 4) In the final phase, detail design or finalization of design, drawings and production

documents are completed.

Systematic design approaches that focus on the user (or customer) have been discussed by researchers using different terms such as user-centered design, human-centered design and customer-human-centered design (Veryzer & Borja de Mozota, 2005). User-centered design (UCD) is used to refer to sensitivity towards the user during product design (Veryzer & Borja de Mozota, 2005). More specifically, UCD is a type of design in which the needs of end users are given extensive attention during the design process. This perspective is captured in modern systematic design methods which in essence can be captured along six principles.7

1) Clarifying the objective. The first principle is clarifying the objective of the product. Understanding your customers is the first step in creating a new innovative product – it should be clear what needs the product should satisfy. 2) Setting requirements. The next principle is to transform customer insights into

specific design requirements. A requirement is a statement or need, something that some class of user or other stakeholders want. According to the IEEE definition, a requirement is a condition or capability needed by a user to solve a problem or achieve an objective.A requirement uncovers details of a customer's problem and reveals the information necessary to create a solution to the problem. The challenges in writing requirements is to really understand customer needs, and to identify the right product attributes that will meet those needs (Griffin & Hauser, 1993). Nevertheless, a product with misguided

7

This systematic approach is adapted from the lecture slides “Introduction to systematic design” of the specialization course Business Development (University of Groningen) in 2010.

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21 specifications may not fulfill customer needs. The collection of customer requirements is the body of what’s called a Market Requirements Document, which combines the many requirements into a coherent whole.8

3) Hierarchical decomposition. The third principle is decomposing the overall problem or product into smaller pieces. Because of the complexity in NPD, it is helpful to decompose the overall product into semi-independent components corresponding to its many functional parts. For example, when developing a new airplane, Boeing decomposes an airplane into smaller parts such as wings, landing gear, turbine engines and the cockpit. The design of each component can then be carried out with some degree of independence of the others, although each component will affect the others through its functions and details (Leenders et al., 2007). The division of subtasks decreases complexity since teams only need to focus on their subtask.

4) Systematic variation. Leonardo Da Vinci was the first who used systematic variation in the 15th century. He consistently considered variation in his paintings, statues, sculptures, architecture and constructions. Leenders et al. (2007, p. 169) argue that systematic variation is applied in three ways in the NPD process: firstly, a team can apply systematic variation to determine alternative decompositions; secondly, systematic variation is applied to find multiple solutions for each subfunction, and; thirdly, systematic variation is used to creatively recompose the decomposed task into overall solutions. Making variations on established themes, through the reordering and recombination of existing elements, is an important element in designing new products (Leenders et al., 2007).

5) Satisficing. Design decisions are never easy. Besides, performing design activities seems to be an unlimited task: more effort results in more solutions. Moreover, “since further thinking increases the optimal character of most new products, the universally optimal solution often does not even exist” (Leenders et al., 2007, p. 196). Even if it existed: why would one actually care to find the “best” solution if one has a satisfactory design that meets all goals and requirements? The search is therefore for a new product solution that is satisfactory, so it is important to make best compromises to select an optimal, complete solution, from the many that have been generated. Hence, this satisficing principle states that designers choose the best design from those that are satisfactory, although it may not be the overall best design (Leenders et al., 2007).

6) Discursiveness. Designing new products is rarely straightforward. It is almost impossible for a design concept to reach the market in exactly the same shape

8_{It is important to note that, especially in high-tech industries, requirements not only stem from}

customers and users, but also from other stakeholders, and regulations and standards such as safety and environmental issues (Alexander & Stevens, 2002). Besides, there also needs to be a level of technical understanding of the manufacturing processes – people need to be able to explain how you will make something. It is important to understand the interrelated nature of various attributes.

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22 as originally intended.Therefore. changes during the course of the project are almost always necessary. That is why discursiveness plays a vital role in product design. Discursiveness allows the approach to be iterative (Leenders et al., 2007). Although systematic approaches require clear steps with clearly defined output at clearly defined points in time, they also require flexibility when and how to make these steps. Discursiveness is the art of making these organized steps back and forth. Pahl and Beitz (1995) point out that the delimitations between phases are approximate and therefore need iteration and recursion. Given the complexity, uncertainties and risks inherent in product development, iteration is inevitable and must be managed effectively (Pahl & Beitz, 1995; Leenders et al., 2007; Biazzo, 2009).

Although these design principles are rarely (explicitly) delineated in the representations of the product development process, it is integrated or implied in many of the activities that make up the process (Veryzer & Borja de Mozota, 2005).

5.3 Quality Function Deployment

A commonly used methodology that is used during product design is Quality Function Deployment (see Griffin & Hauser, 1993). Quality Function Deployment (QFD) emerged from the Total Quality Management concept, and has become closely linked with the notion of market orientation (Mohr et al, 2009). QFD is a methodology for requirements engineering and uses the voice of the customer to guarantee a tight correlation between customer needs and product attributes (Griffin & Hauser, 1993). The voice of the customer is deployed by following three steps (Mohr et al., 2009):

1) Collect the voice of the customer. Identify customer needs regarding the benefits they want the product to deliver (e.g. by means of empathic design).

2) Collect customer perceptions of competitive products. Surveys of customers can be used to assess how well current products meet customer needs. These data are an important element to compare with competitive products and to find any gaps or opportunities in the market.

3) Transform customer insights into specific design requirements. Identify the product attributes that will meet the customers’ needs. This step emphasizes the intimate linkage between the technology characteristics and market requirements. It is important here to understand the interrelated nature of various attributes. This step is often referred to as the House of Quality, that links customer requirements, competitive data and design parameters.

The process ensures that all design decisions take customer’s perspective into account. It allows the product development team to develop a common understanding of the design issues and trade-offs, bases resolution of those trade-offs in customer needs, and enhances collaboration and communication among marketing, manufacturing, R&D and other departments (Mohr et al., 2009). The final outcome of this process is a

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23 new product that provides superior value via a customer-informed design team (Griffin & Hauser, 1993).

5.4 Phased processes

A widely used type of product development process is the traditional phased or staged process (see table 2). A staged process proceeds in distinct stages, or phases, from

Phase/gate Stage-Gate® by Cooper Design in NPD by Ulrich & Eppinger (2004) Phase/gate 1 Ideation

Initial screening

Exploration

Consider product platform/architects Assess new technologies and new needs

Phase/gate 2 Preliminary investigation

Market assessment Technical assessment Business assessment

Concept development

Investigate feasibility of product concepts Develop industrial design concepts Build and test experimental prototypes

Phase/gate 3 Detailed investigation

Market research

Users’ needs and wants studies Value in use studies

Competitive analysis Concept testing

Detailed technical assessment Manufacturing appraisal Detailed financial analysis

System level design

Generate alternative architectures Define major sub systems and interfaces Refine industrial design

Phase/gate 4 Development

Product development (money gate9)

Detail design

Define part geometry Choose materials Assign tolerances

Complete ID documentation

Phase/gate 5 Testing and validation

In house product testing Customer test of products Market test

Testing

Reliability and life tests Performance testing Regulatory approvals Implement design changes

Phase/gate 6 Market launch

Trial production

Pre-commercialization business analysis

Production and market launch

Production ramp-up

Evaluate early production output

Table 2. The new product development process (adapted from Veryzer & Borja de Mozota, 2005).

9_{There are three stages – discovery plus two homework phases (preliminary and detailed}

investigation) – before serious financial commitments are made at the go-to-development gate (Cooper, 2008).

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24 product planning to product release. At the end of each phase is a review (gate or milestone) to evaluate whether the previous phase was successfully completed. Many studies show structured models that challenge new product ideas at their various stages of development against technical and customer judgment (e.g. Cooper, 1990; Ulrich & Eppinger, 2004). The aim for such a structured process is to reduce the failure rate and thereby increasing a new product’s performance. The best known of these models is the Stage-Gate® process which facilitates the product development process from idea to market launch (see Cooper, 1990; Cooper, 2008). It consists of six stages and gates in which new product ideas are developed and tested before a go or no-go decision is made. Each stage is designed to gather essential (market) information to reduce uncertainties and risks. The gates serve as quality checks for each stage, consisting of criteria against which the project is judged (Cooper, 2008). Thus, new product processes have a number of reviews built into the process to ensure that critical activities are carried out, and thereby reducing the chances of rework (see also Cooper & Kleinschmidt, 1986). Another example of a staged process is the model by Ulrich and Eppinger (Ulrich & Eppinger, 2004). The consecutive phases include exploration, concept design, system-level design, detailed design, testing or prototyping, and production ramp-up (Ulrich & Eppinger, 2004).

It seems that Cooper’s model presents more of a market orientation, while the process by Ulrich and Eppinger is somewhat more engineering oriented. Cooper (1996) notes that inadequate performance of marketing activities to generate market information, such as preliminary market study, detailed market analysis and tests, can lead to product failure. Especially in the fuzzy front-end of product development it is essential to solicit customer input. Cooper (1996) shows that especially weaknesses in up-front marketing activities seriously enlarge the chances for failure. Hence, the key to success is to determine customer needs and the product performance requirements before development starts. Nevertheless, a failure to define the product (its customers, its benefits, its requirements, its features and its specifications) before development starts, is a major cause of product failure and negatively impacts the time-to-market (Cooper, 1990; 1996).

How and what type of information is collected depends on the stage of the process. For example, in the idea generation stage explorative market studies are relevant, whereas in the concept stage, customer needs and wants studies are needed to define customer requirements (Cooper, 1996; Kok & Biemans, 2009; Unger & Eppinger, 2011). The testing stages require the participation of customers to test and evaluate the performance of (early) prototypes (Cooper, 1996; Kok & Biemans, 2009). One could argue that the number of involved customers should decrease from concept development to market launch. This argument is based on the thought that uncertainty in innovation projects is high in the beginning and is decreased throughout the process (Cooper, 1990; Unger & Eppinger, 2009; 2011).

Capitalizing on the Voice of the Customer During New Product Development