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Why did we make that cheese?

An
empirically based framework for
understanding what drives innovation
activity
Hanne Harmsen, 1 Klaus G. Grunert 1 and
Francis Declerck 2
1
The MAPP Centre, The Aarhus School of Business, Haslegaardsvej 10, DK-8210 Aarhus V,
Hanne.Harmsen@mar.hha.dk Klaus.Grunert@mar.hha.dk
2
ESSEC-IMIA, Avenue Bernard Hirsch, BP 105, 95 021 Cergy-Pontoise Cedex, France. declerck@edu.essec.fr

In the more recent product development literature the interplay between R&D skills and competencies
and market skills and competencies is seen as a major determinant of successful innovation. The study
reported in this article was done in order to cast more light on these two constructs in an industry with
low R&D expenditures, but where product development is nevertheless considered to be strategically
important. That industry is the food processing industry. The results of a series of case studies
indicate that constructs other than R&D and market orientation may be more appropriate for
understanding innovation and explaining innovation success in the case material. A new set of
constructs focusing on what causes specific innovation activities to occur is proposed and a revised
framework is developed.

Received views on innovation and success the detection and fulfilment of unfilled needs and
wants of potential customers, and innovation success

I nnovation is regarded as a major source of


companies' competitive advantage. The literature
on innovation and innovation success is vast and
is therefore closely linked to the concept of the
degree of market orientation of the innovative
company.
covers numerous perspectives, levels of analysis, and More recent literature has emphasized the need for a
objectives (e.g., Barclay, 1992; Cooper, 1990; Craig balance between the two views and the importance of
and Hart, 1992; Johne and Snelson, 1988; Lilien and an interplay between R&D and market orientation for
Yoon, 1989; Rothwell, 1992; Sundbo, 1994; von successful innovation to occur (Burgelman and Sayles,
Hippel, 1988). For a general overview, however, it 1986; Conway and McGuinness, 1986; Cooper, 1984b;
seems reasonable to say that there have been two Crawford, 1997; Gatignon and Xuereb, 1997; Ny-
major views on innovation. In one view, innovation stroÈm, 1990). The prevailing view of innovation today
and innovation success is closely linked to technolo- thus seems to be that R&D and market orientation
gical change and to research and development (representing technology push and market pull, re-
(R&D) activities: a view prevailing in the industrial spectively) are both necessary for successful innova-
economics literature. In the other view, mainly taken tion. This view can be reconciled in the framework
in the marketing literature, innovation is regarded as shown in Figure 1. Both R&D and market orientation,

R&D Management 30, 2, 2000. # Blackwell Publishers Ltd, 2000. Published by Blackwell Publishers Ltd, 151
108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.
Hanne Harmsen, Klaus G. Grunert and Francis Declerck

and their interplay, are regarded as major determinants information. For a fuller discussion of the concept of
of innovation in the form of new products or processes, market orientation see Bisp (1999).
which, when they are well-received by customers, can As for R&D, we follow the 1980 Frascati Manual
contribute to superior business performance. (OECD, 1981), which notes that R&D is a part of the
While Figure 1 gives an overview of commonly used innovation process, the whole process consisting of the
constructs and their interaction, specific definitions of scientific, technical, commercial and financial steps
the terms are subject to an ongoing debate. We will necessary for successful development and marketing of
therefore briefly describe how we use the terms new or improved manufactured products, the com-
included in the model. mercial use of new or improved processes or equip-
With regard to market orientation, we follow ment, or the introduction of a new approach to a social
Jaworski and Kohli (1996), who conclude that the service. R&D is only one of these steps, and in the
recurrent elements of definitions of market orientation manual R&D is distinguished from activities like new
are (a) focus on the customer, (b) external orientation, product marketing, parent-related work, financial and
(c) focus on being responsive to customers, and d) organizational change, design engineering, industrial
focus on more market players (e.g. competitors) than engineering and manufacturing start-up. R&D is thus
just customers. Thus, with market orientation we here related to the early activities of the innovation process,
associate an external orientation that gives a high mostly concerning scientific developments. These
priority to customers and to providing value to definitions have been incorporated into the Oslo
customers. As value to customers also depends on Manual and are now used by the OECD and Eurostat
competitors' offerings, it also implies a focus on in, for example, innovation surveys.
competitors. In the market orientation literature, the In defining innovation, we include both product and
concept has most often been operationalized and process innovations, and we distinguish between the
measured as a number of activities, for example related invention and the innovation (invention being a part of
to collection, dissemination and response to market R&D). Product innovations are products that are
perceived to be new by either the producer or the
customer; the latter can be both end-users and=or
distributors. Process innovations refer to new processes
which reduce the costs of producing existing products
or enable the production of new products (see Gobeli
R&D market and Brown, 1987; Grunert, et al., 1997; and Wind,
orientation 1982 for an in-depth discussion of this view on
innovation).
According to Figure 1, the level of and interaction
between R&D and market orientation will influence
both innovation and innovativeness. The term innova-
tiveness has two meanings: a characteristic of a
particular innovation (e.g. incremental vs. radical),
innovation and a characteristic of a company, where, e.g.
innovativeness innovation speed, innovation willingness, innovation
capacity, and innovation quality have been associated
with the term. Here we employ the term innovativeness
as a company characteristic covering, for instance, the
number of product innovations launched in a given
period, the number of product innovations launched
which have become long-term successes, the average
customer radicality of the company's product innovations, and
acceptance the percentage of sales accounted for by new products.
The dotted lines in Figure 1 represent the attempts
that have been made to empirically test the relation-
ships between R&D and business performance, and
between market orientation and business performance.
R&D is usually measured in terms of input (R&D to
sales ratio) or seen as a company resource (does the
performance company in question have R&D facilities or not), and
relating such measures directly to business perform-
ance has not resulted in clear-cut evidence (Cooper,
1984a; Narin et al., 1987; Scherer, 1984). Market
Figure 1. A framework for analyzing innovation. orientation is usually measured in terms of specific

152 R&D Management 30, 2, 2000 # Blackwell Publishers Ltd 2000


Understanding what drives innovation activity

activities such as generating market intelligence, (Harmsen, 1996). But how, then, does innovation in
dissemination of the resulting information within the the food industry come about?
company, and taking measures to respond to changes We employed a case-study approach in this study.
in the market (Atuahene-Gima, 1996; Jaworski and The term case study covers various qualitative
Kohli, 1993; Kohli and Jaworski, 1990). And there is approaches (Denzin and Lincoln, 1994). Yin (1987)
some empirical evidence on a positive relationship defines case studies as `an empirical enquiry that:
between a higher degree of market orientation and investigates a contemporary phenomenon within its
business performance (Doyle and Wong, 1996; Green- real-life context; when the boundaries between the
ley, 1995; Jaworski and Kohli, 1993; Lusch and phenomenon and context are not clearly evident; and
Laczniak, 1987; Narver and Slater, 1990; Oosthuizen, in which multiple sources of evidence are used'. In this
1994; Ruekert, 1992). case we conduct collective case studies (as opposed to
However, investigations of this kind raise more intrinsic or instrumental case studies) (Stake, 1994).
questions than they answer. Neither R&D nor market The unit of analysis is the product development
orientation can be expected to have a direct effect on function in each company and each case can on its
business performance. R&D and market orientation own illustrate the product development function in a
can influence innovation processes and innovation food-processing company. At the same time it is
activities, whose outcome can then influence business intended that the twelve cases together will lead to a
performance. Innovation is a necessary mediator, and better understanding of the factors influencing innova-
the way in which R&D and market orientation tion activities and also to new theoretical propositions.
together affect innovation as a possible cause of The unit of analysis has been the individual
success is therefore an important area for further company. To an increasing degree the food marketing
research. In addition, we find that some industries are literature recognizes the importance of supply chains
quite innovative in the sense that they put out a large or partnerships (Mohr and Spekman, 1994; Skinner et
number of new products or invest considerably in al., 1992; Wierenga, 1997). In this research we have
process development, but their level of R&D is tried to take this development into account by
notoriously low. The food industry is a good example including a number of questions on channel structure
of this (Grunert et al., 1997). and influence on innovation activities.
This leads us to the following question for the The research team in this project consisted of eight
present investigation. How can we describe, at a more researchers from six European countries, all profes-
detailed level, how R&D and market orientation sionally involved in agro-food management research.
contribute to superior business performance by the The researchers were responsible for choosing two case
way in which these affect product and process companies in their country (a total of twelve cases),
innovations? Which other intra-company factors, in representing food companies engaged in innovation
addition to R&D and market orientation, are im- activities. Further we made sure that the case
portant in understanding the determinants of success- companies maximized in variation on a number of
ful innovation? variables which were expected to have an influence on
the innovation process: size, brand manufacturer
versus private label manufacturer, independent com-
panies versus companies belonging to food conglom-
Research method and empirical basis erates, export oriented versus domestically oriented,
level of value-added, type of product manufactured.
Our research questions call for the identification of Data collection was based on semi-structured inter-
new constructs, the refinement of theory, and the views with managers in the companies, site-visits, and
development of new theory. A qualitative approach is company documents. The researcher from the country
therefore called for. Based on qualitative evidence, we in question paired up with a second researcher from
hope to be able to propose a new or refined model of one of the other countries and together they conducted
how R&D and market orientation influence business the case. An interview guide was developed on the
performance via innovation. This model can then be basis of a literature review and with special regard to
tested quantitatively in later research. the framework in Figure 1 to ensure that all cases
We use the food industry as an example. Large followed the same form (see case guideline in appendix
numbers of new food products are developed and A). We acquired information on importance and type
launched every year, and innovation is often cited as a of innovation in the company, organization of the
key success factor in an environment characterized by innovation process, the role of R&D in innovation,
more intense competition and increasing customer product versus process innovations, financial aspects
power (Grunert, et al., 1996). At the same time, R&D of R&D, market orientation, external relationships
levels in the food industry are quite low (Grunert, et relevant to the innovation process, including those
al., 1997). This may be a reason why the food industry with suppliers, customers, and research institutions,
has not been used as the focus of innovation studies market strategy, type of market served by the

# Blackwell Publishers Ltd 2000 R&D Management 30, 2, 2000 153


Hanne Harmsen, Klaus G. Grunert and Francis Declerck

company, and general factual information on the itself as an innovative company with a strong brand.
company like size, sales volume, and organizational Today Tholstrup has about 650 employees and an
structure. The informants were chosen in a way which annual turnover of about ECU110 million. Product
ensured that all levels and functional groups involved innovation is central to the company. They define
in the innovation process were tapped. This meant that themselves as having a niche strategy, where they
there were varying sets of informants in the various launch products perceived to be new by all actors on
companies, because of differences in organizational the market. The high degree of innovativeness of their
structure, size, and in the way in which innovation was products is for example mirrored in the fact that one of
organized, but informants typically covered general their recent innovations, a moulded cream cheese,
manager, product development manager, marketing or made it necessary to define a new category in official
commercial manager, production manager, quality cheese trade statistics.
control manager. The number of informants inter- Idea generation is undertaken internally by a product
viewed in a particular company varied from one to six. development committee. Neither input from research
All interviews were tape-recorded. An individual case institutions, internal R&D, nor market information play
report was prepared for each case and sent to the a major role in the generating of ideas. Market
informants for validation. information is not used because `if the consumers want
it, it is not new,' and suppliers of ingredients are for
example never allowed to participate, as they are seen as
Results from the case studies: some examples the sector's intelligence agents. Tholstrup does not
engage much in co-operation with retailers on the
All cases were analysed in relation to the constructs in development of new products, because they do not
Figure 1. How were innovative activities planned and believe this leads to products with the degree of
carried out? To which extent were the companies innovation they are looking for. Direct customers are
actually innovative, and to which extent were they in that respect kept at an arm's length, and the company
successful in their innovations? To which extent did the believes that it is able to manufacture products of a
case companies have R&D facilities, or have links to quality that is so high that they create a consumer pull
external R&D facilities? To which extent were they effect. Intuition ± `we know a good thing when we see
market oriented? How was the interplay between R&D it' ± experience ± both in terms of market knowledge
and market orientation? and knowledge of cheese production ± and a very
The overall picture, which emerged, is that the case strong commitment to high quality products (as defined
companies ± even those that can be labelled successful by themselves) seems to be what generates the ideas.
innovators ± had neither a high degree of R&D nor of During product development, products are tested on
market orientation. At the same time some of them are the market several times, which involves both tests of
quite innovative. But if the innovative activities in products and of packaging. Market orientation activ-
these companies are not driven by R&D, by market ities are thus performed quite intensively, but more to
orientation, or by their interplay, how then can we check and fine-tune the new product than to initiate it.
explain their innovativeness? In the following, a brief Market communication in the form of TV commercials
version of five of the cases might give some indications, and advertisements in print media is carried out, but to
which we will then try to generalize in the next section a limited extent. Tholstrup believes that the high quality
of the article. Due to space limitations only five of the of its products is the real vehicle for brand positioning.
twelve cases are presented. We have chosen these as About two thirds of all product development
they represent the depth of the empirical material well: projects require some kind of process innovation. This
there are medium-sized and large companies, produ- may be either new production equipment or adapta-
cers of branded and private label products, there are tion of existing production equipment. Frequently also
companies that are nationally and internationally new packaging equipment is required. Often new
oriented, well established and young, family-run and products are produced in a more manual way in the
professional, with close links to retailers or more beginning followed by processes with a higher degree
independent, and finally companies which differ in of automation being developed when the success of the
their amount of innovation activities. In appendix B all new product becomes apparent. Some process innova-
case studies are summarized with regard to the most tions are initiated independently of product innova-
important constructs. 1 tions, usually because they can lead to a cost reduction.
However, care is taken that process optimization will
not influence product quality negatively.
Tholstrup Cheese A=S
This is a private Danish dairy company, producing and
marketing speciality cheeses, almost entirely under
Groko B.V.
their own brand name. The company exports approxi- Groko is a medium-sized (220 employees) Dutch
mately 85% of its overall volume and has positioned company that mainly produces frozen vegetable-based

154 R&D Management 30, 2, 2000 # Blackwell Publishers Ltd 2000


Understanding what drives innovation activity

consumer products, supplemented by a small amount 10% of Brioche Pasquier's turnover is invested to
of prepared added-value products like TV dinners. The improve production efficiency and increase
company is quite successful in developing and intro- automation.
ducing products in these categories, and has a steady In terms of market orientation, Brioche Pasquier has
flow of new products. Half of the turnover comes from close links to retailers, and its level of service to
sales to retail chains under private labels, and this part retailers is very high (delivering products and filling
is expected to grow in the future. The company seems shelves once or twice per day). Products are priced
to follow a `challenger' strategy by producing imita- approximately 15% higher than those of competitors,
tions of products introduced as branded products as and 80% of the products are sold under the company
efficiently as possible. This strategy is realized by virtue brand. Advertising is restricted to in-store promotion,
of the company's considerable know-how in produc- PR-activities, e.g. sponsoring local sports events, and
tion, and a product development competence which vouchers for various merchandise, all aimed at school
comes down to being able to analyse and imitate children (the main target group). Even without
products on the market. intensive marketing campaigns, brand awareness in
No use is made of external research institutions, and the target group is quite high.
marketing research techniques are hardly used by the
company, because only products that have already
established themselves as successes are imitated.
Royal Greenland A=S
Process innovations to reduce costs further have the Royal Greenland A=S is among the world's largest
continuous attention of management. producers of fish and shellfish products and is owned
The company is market oriented to the extent that it by the State of Greenland. It has more than 3000
monitors competitors to find out about the introduc- employees and an annual turnover of approx. ECU300
tion of new products that might be interesting for million. During the last five years the company has
Groko to imitate. Also, Groko has close links to changed its strategy from mainly serving industrial
retailers, who will ask Groko to imitate specific customers to manufacturing and selling products to
products which the retail chains want to sell under consumer markets, in many countries under its own
their private label. Groko believes that retailers want brand name. As the prawn catch (historically the most
an alternative to the more expensive branded products, important product for Royal Greenland) has de-
and that therefore they supply Groko with market creased, the company attaches more importance to
information. value-added products and product development. The
The success of Groko seems not to rest on specific development department in Denmark deals with ready
products produced, but rather on its ability to analyse prepared frozen dishes and smoked products; new
existing products and turn them into cost-effective products cover everything from small adaptations to
production processes. products that are new in the market place. In 1994, 30
new convenience products were introduced, 10 ±12 of
which could be labelled `new products', whereas the
Brioche Pasquier
rest covered adaptations to local preferences or legal
This is a French, family-owned company focusing requirements or variations of current products.
especially on pre-packed pastry (especially brioche). R&D plays an insignificant role in the development
With a growth rate of approximately 20% per year, the process. A few projects mainly related to raw materials
company today has 1300 employees and is considered and processing prawns, however, have been carried out
to be very successful. Brioche Pasquier originated as a in co-operation with universities. Until recently the
local bakery managed by two brothers, but its brioches emphasis has been on prawns and the optimization of
are now distributed to major French retail chains. The the vertical chain from catch to supermarket shelves.
product range is limited, covering around ten different Process innovations or improvements were concerned
products. Production takes place with a high degree of with increasing efficiency and reducing costs. The
automation, and distribution is extensive with daily current broader product portfolio means less focus on
deliveries to supermarkets. In terms of innovation, this cost reductions and process optimization.
company only introduces a few new products, Market orientation during product development,
although line extensions are developed and marketed defined as the extent to which product development is
occasionally. Instead, its success is based on process based on information about consumer needs, dissemi-
innovation. Producing, packaging, and distributing a nation of this knowledge to relevant parties within the
product, traditionally sold in bakeries, to supermarkets organization, and responsiveness to this information,
on a large volume scale is the key to its success. Process has until now not been very high at Royal Greenland
innovations aimed at the production process, at the A=S. However, it differs slightly for two types of
distribution process, and in the area of electronic development projects, namely those concerning private
communication with retailers is the focus of most label products and those concerning products mar-
innovation activities in the company. Approximately keted under their own brand. For private label

# Blackwell Publishers Ltd 2000 R&D Management 30, 2, 2000 155


Hanne Harmsen, Klaus G. Grunert and Francis Declerck

projects, the close interaction with the customer means process aimed at harming products as little as possible
that Royal Greenland A=S indirectly has access to the in the production process. Process innovations that
retailer's market knowledge about consumer demands could lead to considerable savings are rejected if they
and trends (if they have this kind of information). are believed to compromise objective product quality.
However, this information does not reach Royal Product development has focused on other products
Greenland A=S in the early phases of product than sausages, especially ready meals. Ideas for new
development, where idea generation is most often products come from the development group, and are
handled by the company itself. RG does not contact not based on formal market research or contacts to
the retailer until they can present a number of different universities or other R&D sources. The company has a
concepts for new products. Up until this point Royal rather informal approach to its product development.
Greenland A=S relies on existing knowledge and The development team consists of the owner, the
experience and selection of concepts does not involve quality control manager, the restaurant manager, and
consumers. Occasionally, test sales are conducted cooks from the restaurants. They meet once a month to
before launch. discuss new products. Selection and improvement of
Products that are developed to be sold under the prototypes are made by the development team based
Royal Greenland brand are also developed without on their experience and personal preferences. Before
much market contact, to a large extent based on the final launch, the products are marketed in a limited
knowledge and experience of employees and subjective number of restaurants to get a feel for consumer
estimates from subsidiaries. The development process response and to further improve the product. New
is mostly concerned with the core product and the products are marketed via local advertising on TV and
development of appealing prototypes is a key step in in newspapers.
the development process. It is the preferences of key Regarding market information, the company has
players in the development function as well as their close contact to consumers in the restaurants, and the
volume estimates that guide the development. Recently development team gets information from shop man-
a number of products have been tested with con- agers on what the customers like and dislike. No
sumers, but this is not a formal part of the develop- formal market research has been carried out, and
ment process. Market communication is developed in potential customers are not surveyed in any way.
co-operation with advertising agencies and is not tested
either. Once the products have been launched, sales
figures are followed closely, but no formal market Towards a new model
research is done if a product fails to live up to
expectations and is delisted. Having concluded that, in most of the companies we
As convenience products are considered a future looked at, R&D is of minor importance in the
growth area and development of products in accord- innovation process, it is not likely that its interaction
ance with consumer and customer demands considered with market orientation will or should have a strong
a key factor of success, activities aimed at increasing influence on innovation. In some companies, the
market orientation during product development have interaction between R&D and market orientation is
recently been initiated. institutionalized in product development committees or
innovation teams, which comprise both the marketing
manager and the product development manager. How-
Philipp Reiter KGH Fleischwaren ever, information from most case studies is insufficient
With 550 employees, the German, family-owned com- in order to evaluate the importance of this interaction.
pany, Philipp Reiter, is nominally a large food While the role of R&D and its interaction with market
processing company. It produces traditional meat orientation does not correspond to our framework, the
products, which it distributes and sells through its cases also clearly show that there is considerable
own retail shops and restaurants. The distribution and innovation, both in terms of process and product
retail part of the business employs around two thirds of development. The cases also suggest that companies
the staff. All shops and restaurants are situated near the differ in the degree to which they are successful
factory (maximum distance 70 km), and the restaurants, innovators. Part of the differences in success may be
which are usually combined with a retail shop closing at explained by varying degrees of market orientation, but
6 pm, mainly cater to lunch-time customers. it seems that there are additional factors at work, which
Most of the 350 products, including 150 different our original framework did not take into account. We
sausages, have been on the market for decades, but the therefore propose a revised framework.
company has recently introduced a range of chilled
ready meals and continues to develop new variants.
Objective product quality is in focus. The quality
A new set of constructs
concept is related to traditional recipes, careful We would like to propose two new constructs which we
selection of ingredients, and a gentle production think may be useful in structuring what we observed,

156 R&D Management 30, 2, 2000 # Blackwell Publishers Ltd 2000


Understanding what drives innovation activity

and which, together with market orientation, may be find it difficult to imagine that a company can be both
helpful in explaining success by innovation. We call product- and process-oriented. Of course, a product-
them product orientation and process orientation. oriented company can have a certain degree of process
Product orientation is in the marketing literature orientation in some of its departments and vice versa,
usually defined as some kind of opposite of market but we find it hard to imagine that a company has
orientation: one's thinking starts with the product organization-wide high degrees of more than one
instead of what it does for customers. Kotler (1988) orientation. This is a departure from the view found
holds that product-oriented companies are guided by in the traditional innovation literature, which empha-
the product concept, which holds `that consumers will sizes that product innovations will lead to process
favour those products that offer the most quality, innovations, and that the two types of innovation are
performance, and features. Managers in these product- interrelated in a temporal sequence. Abernathy and
oriented organizations focus their energy on making Utterback (1978) argue that companies' innovative
good products and improving them over time' (p. 14), patterns occur in a consistent, predictable way, where
and he continues by suggesting that `product-oriented radical product innovations are followed by incre-
companies go about designing their products in the mental innovations, once a dominant design has been
wrong way' (p. 15) and concludes that `the product found, and later by process innovations aimed at
concept leads to marketing myopia, an undue con- reducing costs and improving efficiency. Following our
centration on the product rather than the need' (p. 15). point of view, these patterns would be based on
This point was earlier raised by Levitt (1960), who changes in orientations, which we find unlikely,
claimed that product orientation led to a wrong because the orientations are deeply rooted in the
definition of which industry one belonged to, risking company and are unlikely to change in a similar way in
the survival of companies and industries. most companies.
In some of our cases, however, we encountered a
positive product orientation, which seems not to be in
opposition but a supplement to market orientation.
Orientations, competencies, and behaviour ...
Product orientation, the way we would like to view it, The term `orientation', although widely used, is
has to do with respect for the product manufactured, actually a quite diffuse one. A major issue is whether
an emphasis on pride of craftsmanship, an emphasis on orientation is a mental construct, or whether it is
objective product quality, even a positive emotional mirrored in the manifest behaviour of=within organi-
attachment to the products ± and this orientation zations. This issue has been discussed at some length in
pervades all parts of the organization. Tholstrup and the market orientation literature (Bisp et al., 1996;
Philipp Reiter are examples of such companies. In Dreher, 1994) without any definite conclusion being
product-oriented companies, innovation is concerned reached. We would like to propose here that an
first of all with products, not with processes (although orientation is a mental construct which guides and
a product innovation may lead to some process evaluates behaviour, and thus is close to values and
innovation). Innovations are concerned with creating norms. Orientations therefore also guide the acquisi-
more value: with putting more value into the products tion and perfection of skills and knowledge, and thus
so that one can present the product to customers with the development of competencies and capabilities.
the pride which lies in offering a superior product. Manifest behaviour, in our case actual process and
Whereas thinking in the product-oriented company product innovation, will then be a result of the
is centred on products, process orientation conse- competencies and capabilities built up and used in
quently indicates that the company's usual terms of accordance with the prevalent orientations. This goes
reference are not a set of products manufactured, but a both for the individual and the organizational level.
set of processes, as we saw in both the Groko and The view that orientations guide and influence
Brioche Pasquier cases. Production units, not prod- competence development, which then guides and
ucts, are what are to be optimized, and are conse- influences behaviour, is illustrated in Figure 2.
quently also the focus of innovation. The process- We would also like to propose that a major
oriented company emphasizes efficiency, cost manage- difference between orientation and competence is that
ment, and thinking in terms of the whole food chain, competencies, or part of them, can be outsourced,
not just the manufacturing step. Process-oriented whereas orientation cannot. A product-oriented com-
companies tend to have strong links both up and pany can purchase a process innovation on the market
downstream, and increasing value-added might be if that is necessary to support the production of the
attempted by integrating additional links of the food products they love, and a process-oriented company
chain into the company, not by trying to put more can try to buy new product ideas from a consultancy
value into the products manufactured. company. Orientations cannot be outsourced. One
We believe that, in a given company, one of these may try to supplement a predominant company
orientations will be dominant. A company can score orientation by networking with other companies, but
highly only on one of the orientations. Specifically, we we would like to suggest that the choice of partners in a

# Blackwell Publishers Ltd 2000 R&D Management 30, 2, 2000 157


Hanne Harmsen, Klaus G. Grunert and Francis Declerck

orientation: competence: manifest behaviour:


values/norms skills/knowledge innovation

Figure 2. Orientation, competence, and behaviour

network will tend to favour partnership among offering the relevant market value and at the same time
companies with comparable orientations. We also it will contribute to the development of company
would like to suggest that the orientation of a company competences in accordance with the developments of
will have a major influence on which competencies are the market. The specific variations of the orientations
outsourced and which are developed in-house. A and resulting competencies will be rare and imperfectly
product-oriented company will develop most prod- imitable because they will have been built over time
uct-related competencies in-house, while it may out- and influenced by the specific events in that company.
source process competencies. The reverse will be true In that sense they can be seen as consisting of various
for process-oriented companies. To put it another way, kinds of more or less embedded knowledge (Leonard-
the competencies that are directly linked to the Barton, 1992).
company orientation can be perceived as the most The last requirement that the specific competence
central competence or the core competence of the cannot be substituted by other competencies is a bit
company. more problematic as we actually argue that food
This view of orientation is different from the one we companies can have success with either a product or a
started with in Figure 1. In Figure 1, market orienta- process orientation. This means that on a specific
tion was defined as a set of activities, which is in product market, both companies with a strong product
accordance with the literature dealing with the orientation and a strong process orientation could be
relationship between market orientation and business successful, since they would give value to the market in
performance. As a consequence of the discussion two different ways. The actual possibility of substitut-
above, we would like to apply the same distinction ing one for the other is still unlikely, since the history
between orientation as a mental construct, competen- and time dependent development of the competencies
cies, and actual behaviour to the market orientation make them difficult to imitate.
construct. Market orientation is thus defined as a way While process and product orientation on this
of thinking in terms of customers and markets, and conceptual basis fulfil the requirements of links to
putting this thinking first: market competencies are positive company performance, naturally only a test of
knowledge and skills concerned with market aspects, the model will reveal whether this is actually the case.
and finally manifest behaviour refers to the specific
activities carried out to collect, disseminate, and
respond to market information. Company orientation and marketing strategy
The concepts of product and process orientation may
appear quite familiar to readers acquainted with the
Orientations and success
marketing strategy literature. Specifically, they may
We argued earlier that the predominant orientation of appear to be quite similar to the generic marketing
the company will influence the development of strategies proposed by Porter and others (Abell, 1980;
competencies, which implies that a product-oriented Day, 1984; Porter, 1980). A process orientation seems
company will have product-related competencies to be quite similar to a cost leadership strategy, and a
among the ones most central. In the competence product orientation seems to be similar to a differ-
literature it has been discussed extensively how and entiation strategy. We would like, however, to point
under which conditions competencies are positively out some basic differences between what we have in
linked to performance outcome (Bogner and Thomas, mind and the generic marketing strategies.
1994; Hamel and Heene, 1994; Hitt and Ireland, 1985). Firstly, generic marketing strategies are concerned
Barney (1991) lists four requirements. Competences with a company's basic decisions about how to obtain
or resources as he labels them should be (a) valuable, a competitive advantage. Their intellectual roots are in
(b) rare, (c) imperfectly imitable, and (d) without direct the design and planning schools of business strategy
substitutes. We believe that on a conceptual basis (Mintzberg, 1990a,b), which assume that business
product or process orientation can fulfil these require- strategy is a question of top-down implementation of
ments, the argument being that they are valuable when decisions about a company's basic positioning. Since
they are paired with the right kind of market we relate the concepts of process versus product
orientation, which will direct the company towards orientation to the values and norms of the members

158 R&D Management 30, 2, 2000 # Blackwell Publishers Ltd 2000


Understanding what drives innovation activity

of an organization, and the way they relate to product information. The Tholstrup case is an example
organizational behaviour in the acquisition of skills of a product-oriented company with good consumer-
and knowledge, they cannot be expected to change related market competencies, whereas the Philipp
quickly, and the degree of process or product orienta- Reiter case seems to be one where such competencies
tion of a company is something which has evolved over are lacking. A process-oriented company will be
time and is linked to organizational history. If we want successful to the extent that it finds the market where
to relate them to the strategy concept, we would have there is a set of customers who appreciate the
to call them emergent strategy (Mintzberg and Waters, production possibilities which the processes bring
1985): a basic business outlook that has developed over about, and to the extent it keeps an eye on competitors
a longer time period, and which cannot be altered at and their process capabilities. Specific examples could
short notice by making strategic decisions at the be building relationships with retailers through perma-
executive level. nent communication links, co-operating with regard to
The Royal Greenland case is an example in which it logistics and data processing, and finding ways of
seems that a strategic marketing decision was not in integrating the customer into company decision-mak-
line with the historically developed dominant orienta- ing. These were the types of market competencies we
tion. Historically, Royal Greenland is process-or- saw at Groko and Brioche Pasquier.
iented, with an emphasis on optimizing a food chain Since we argue that innovation in a company to a
from catching prawns in the Greenland waters to large extent is driven by its orientation, we can also
putting them on the shelf in European supermarkets. expect that some companies will mainly be driven by a
The decision to engage in the production of frozen market orientation. Although we did not find examples
ready meals, i.e., products with considerable value- of this among our case companies, we see no reason
added and with a rather high degree of innovation, is why this could not be the case. In such a situation, the
not compatible with the predominant orientation, market competencies in the company will direct the
which makes building up the required competencies a acquisition and development of product and process
difficult matter. competencies needed to fulfil the needs and wants
Secondly, low costs by large volumes, which is at the identified. One could speculate that this kind of
core of the cost leadership strategy, are compatible company might have a broader product base and
with both product and process orientation. As has more varied technologies than product or process
been shown before (Phillips et al., 1983), an emphasis oriented companies, as its main driver would be the
on high product quality can lead to lower costs based ability to meet the requirements of the market.
on scale advantages if high (objective) quality is what Relating this to the marketing literature, this would
the market desires. And process orientation can lead to be a market-oriented company in the sense that it
low costs not only by large volumes and the scale would be driven by the marketing concept and not
advantages resulting from this, but also by establishing `just' use market competencies to check and direct its
processes which lead to flexible production and thus products.
enable the company to tailor processes to customer
specifications at low cost, if tailored products is what
the market desires, as the Groko case has shown.
A new model
This brings us to the third, and most important This brings us to a revised framework, which is shown
difference. We believe that both product and process in Figure 3. We now look at three orientation
orientation lead to success only when the company in constructs: product orientation, process orientation,
question is able to undertake actions that the market, and market orientation. We believe that a company
e.g. customers or consumers, value. To identify what will mainly be driven by one of the orientations (in the
the market values requires market competencies. Based figure, as an example, product orientation, indicated in
on our cases, it seems reasonable to expect that the bold). The competencies that are directly related to the
market competencies required for achieving success orientation, i.e. for market orientation the market
based on product orientation differ from those competencies, for product orientation the product
required for achieving success based on process competencies, and for process orientation the process
orientation. A product-oriented company will be competencies will be the most central or in other words
successful to the extent that its emphasis on a high the core competencies of that company (in the figure,
objective product quality is related to a good under- product competencies, indicated in bold). The orienta-
standing of its customers, making sure that the high tion and the core competence will influence and direct
quality is also in fact appreciated by customers, and the acquisitions of the other two sets of competencies,
especially by end users. Important market competen- which can be labelled supplementary competencies. All
cies for product-oriented companies will, in other companies will need all three types of competencies to
words, be related to understanding consumers ± their some extent as, e.g. a product-oriented company has to
needs, their underlying motives, their acceptance of develop process competencies in order to produce the
new products, their shopping behaviour, their intake of products they love in a cost-efficient way and has to

# Blackwell Publishers Ltd 2000 R&D Management 30, 2, 2000 159


Hanne Harmsen, Klaus G. Grunert and Francis Declerck

ORIENTATION the market. The revised model is still a model which


– product attempts to explain how innovation can have a positive
– process
– market impact on performance. It is thus not meant as a
complete model to explain company success. The
model argues that a company, if it is to be successful
CORE COMPETENCE by innovation, has to score high on one of the
– product
– process
orientations, and will have to develop a set of
– market corresponding core competencies, supplemented by
competencies in the two other areas.
The question whether a company can be successful
without being innovative is outside the scope of our
SUPPLEMENTARY
COMPETENCIES model, but we believe that this is hard to imagine.
– product Most markets change over time, which requires
– process
– market adaptation to the market, and consequently being
innovative in some way or another.
R&D no longer appears in our model as a separate
force. R&D is `relegated' to an instrumental force in
INNOVATIVE ACTIVITIES
developing product or process competencies, directed
– product & process innovation by process or product orientations. A product-oriented
company will look for R&D as one of several inputs
which can help bring about innovative products. In the
same way, a process-oriented company will use R&D
MARKET ACCEPTANCE
to optimize processes. R&D, no matter whether inside
or outside the company, may even trigger both process
and product innovations ± but only to the extent
PERFORMANCE decision-makers in the company regard it as helpful in
supporting the values embedded in their orientations.
Figure 3. A revised model of innovation success in low-tech
companies.
Implications for management, R&D policy,
and research
develop market competencies in order to be able to
check whether there is a market for the product they We set out to investigate to what extent it seems
are planning to introduce and whether adaptations reasonable to explain innovation and innovation
have to be made (supplementary competencies for a success in a low-tech industry with the constructs
company with a product orientation are indicated in derived from the literature ± first and foremost R&D
bold). We can imagine a process-oriented company and market orientation. Based on our case studies, we
which never develops any new products but is found that neither market orientation nor R&D
innovative in optimizing the production process ± an seemed to explain the level and kind of innovations
example in which they would score low on product taking place in the companies. A new set of constructs
competencies. But the cases show that some process- was developed, distinguishing between orientations,
oriented companies develop lots of `new' products ± competencies, and actual behaviour. In the new
possibly imitations or products with a low degree of model the degree of product, process, and market
newness. These companies develop product competen- orientation, respectively, are hypothesized to explain
cies in a process-oriented way ± for example by the kind of competencies developed in companies,
institutionalizing and optimizing the process of analys- and, based on those, the kind of innovative activities
ing competitors' products and turning them into undertaken. It was further hypothesized that a
product `innovations' of their own. company cannot be successful by innovation without
The whole set of competencies, and the process and= adequate market competencies. Furthermore, which
or product innovations they lead to, will then have an market competencies are adequate is expected to
impact on company performance. If the innovation differ between companies driven by product and
aims at increasing customer value, its effect on process orientations.
company performance will depend on whether the Since this research is of a qualitative nature, the
market accepts the product innovation. If the innova- following implications should be regarded as indica-
tion aims at cost reduction, the effect on company tions of areas that might benefit from the results and
performance is not necessarily contingent on market not as validated normative implications.
acceptance ± although a reduction of costs will usually For management, an implication of the study is that
be related to prices, which will result in a reaction from when trying to understand or change the innovation

160 R&D Management 30, 2, 2000 # Blackwell Publishers Ltd 2000


Understanding what drives innovation activity

activities in the company, management could benefit Turning to implications for research, a natural first
from looking more holistically at the competence set in step is quantitative work to test the hypothesized
the company (this also includes external consultants). relationships. Specifically, it should be tested
Specific innovations are an outcome of a set of
* whether there is a link between the prevailing
competencies that are built over time and based on
orientation, the core competencies, and the innova-
the orientation of the company. The orientation is
tive activities in a company;
something deeply rooted in the organizations, built
* whether innovation activities and innovation suc-
over even longer time, and very difficult to change.
cess can be explained by the level of product,
When setting directions for product development,
process, and market competencies;
companies might be tempted to form strategies that
* whether companies' success by innovation depends
are not at all in harmony with the current stock of
on their market competencies being in accordance
competencies and go against the prevailing orientation.
with their product or process orientation.
Such strategies run a high risk of failure.
Apart from acknowledging the specific competencies At a more general level, the study has highlighted the
of the company, the study has indicated that compa- need for combining strategic and operational levels of
nies with different orientations link very differently to analysis in innovation studies, in order to get a better
their markets. The market skills needed for a process understanding of what innovation is about. Within the
and product orientation, respectively, are not the same, product development management research tradition,
and care should be taken to develop market compe- these levels of analysis are almost exclusively dealt with
tencies that are suitable for the type of innovation the separately, leading to general normative implications,
company pursues. which might not, in the light of the cases above, be
In the cases we have also seen that one or the other generally applicable.
orientation dominates and influences competence In the current study, the unit of analysis has been the
development and actual behaviour. This implies that individual company. We have seen tendencies that for
pursuing both types of product development, i.e. instance a process orientation is more often than a
developments of an either process or product-oriented product orientation associated with close links to
nature will be problematic because two different sets of suppliers and distributors. Again, whether this is true
competencies as well as two different kinds of culture is a matter of a quantitative test. The close vertical
or orientations are needed at the same time. links could, however, suggest that the relevant unit of
The study also indicates some implications for R&D analysis for a further study should be the whole vertical
policy. Across different sectors, we have in recent years chain.
seen both national and international programmes
aimed at increasing the level of R&D activities in
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Wesley. Corporate divisional organization (business unit
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Sage.
Management structure
Organization of marketing:
Sales department, ± with ancillary marketing functions
Notes or marketing department (functional, geographic or
product=brand organization)
1. A fuller version of the cases has been published in Traill
Marketing information systems, Decision Support
and Grunert (1997).
Systems
Relationship of marketing department with other
departments:
Appendix A: Guidelines for the case studies
R&D, Engineering, Purchasing, Manufacturing,
Finance, Accounting, Credit.
General procedure
The procedure for conducting the case studies is as Type of markets served by the company
follows:
Market structure and competitive strategies
1. the `local' group member writes a first report on Characteristics of final consumers
the case company, based on documents and other Number and marketing strategies of competitors
material available to him Number and marketing strategies of retailers carrying
2. the companies are interviewed in teams of two, the product (chains, discounters, specialty shops)
where the local group member pairs up with Relevance of other government regulations and
another group member influence of other publics, like consumer unions and
3. the `non-local' group member writes a second lobby groups.
report, based on the 1st report and the interviews Growth, ripening or saturation of markets?

Whom to talk to Market strategy of company


The persons to be interviewed are a marketing Mission
manager, a board member, and a product development Profit target and=or other marketing objectives
manager (if existent). (share, ...)
Market strategy:
* focusing on core competences or on diversification ...
What information to get * market leader, market follower, specialist, com-
modity producer, market entrant.
The cases will be company-level cases, not project-level * shortening life cycle.
cases.
Competitive strategy (focus, differentiate, low cost)
Planning of market strategies (portfolio-analysis,
Description of the company
PIMS ...)
Product policy (quality, assortment, brand, positioning)
General characteristics
Promotional policies (budget, type of promotion, ...)
(Comment: most items probably available from Distribution strategies, in particular vis-aÁ-vis retail
Annual Reports) chains.

# Blackwell Publishers Ltd 2000 R&D Management 30, 2, 2000 163


Hanne Harmsen, Klaus G. Grunert and Francis Declerck

Relationship with suppliers Degree of formalization of the new product develop-


ment process
Purchasing method
* Free market, contract, integration? Innovation policies
* Buying centre?
* One or more suppliers? New product development strategy
Target number of new products per year?
Mechanisms used to co-ordinate policies and activities Is innovation
between company and supplier.
* `demand driven' or `technology driven'?
* company driven or supplier driven?
Relationship with other partners * company driven or client driven?
Horizontal cooperation with competitors, with produ- * competitor driven?
cers of supplementary products, with suppliers of Are innovations triggered by consumers, competitors,
know-how, of technology, of equipment distributors or government regulations?
Cooperation with retailers, exporters, agents, whole- Are innovations concerned with convenience, whole-
salers, in terms of market information, logistics etc. someness, health, taste, environment, being special?
What is the role of `credence characteristics?
Importance of and type of innovation Are innovations in particular focusing on the core
product or on the augmented product (packaging, ...)?
Market development or innovation by product Are `Me Too' products important?
development What is weak or strong in encouraging or discouraging
Share of new products in total sales innovation: communication, organization, education,
Profitability of new products management, policy and environment?
Type of innovation:
* completely new ± imitation; Process innovation
* new market, brand, reformulation, design, service,
extending performance, technological re-organiza- To which extent is there process innovation?
tion, process, packaging. Is process innovation mainly based on perceived cost
pressure, on availability of new technology?
Perceived pressure for innovation What is the relationship between product innovation and
Perceived profitability of innovations process innovation? Do they profit from each other?
Perceived lifetime of innovations
Financial aspects of R&D
Organization of innovations
How are R&D and innovation in general financed
Which type of innovation management? Special project How are R&D and innovation costs budgeted
teams? Is there profit management of new products after their
Organization of innovation process from idea genera- introduction to the market
tion until product introduction How is the financial risk of R&D and innovation
Who is involved in which stage of the innovation process? perceived, and how is it handled
* inside the company?
* outside the company? Market orientation
Role and commitment of top management? To which extent and how does the company regularly
Quality of innovation team: Scientific and marketing generate intelligence about its direct customers, about
expertise consumers, about competitors and other relevant
Innovation by R&D, licensing, acquisition and joint market actors.
venture How is this information used ± how is it distributed
R&D by company or R&D commissioned to research within the company, which departments receive it, at
institutes which intervals
Relationship between innovation team and introduc- How is market intelligence used in innovation ± both
tion team? in product innovation and in process innovation
Use of market research techniques Does the company regard itself as market-oriented

164 R&D Management 30, 2, 2000 # Blackwell Publishers Ltd 2000


Appendix B
# Blackwell Publishers Ltd 2000

Number of Brand Type of Market Overall


Company Country employees Sector Export Ownership strategy innovation R&D orientation impression

Tholstrup DK 600 Cheese Substantial Private Manufacturer's Fundamentally Little Not used in idea Innovative by
brand new cheese generation; new
every 3 years extensive products,
testing of successful
new products
Brioche F 1300 Brioches, No Private Manufacturer's Industrialize Process- Strong links to Innovative by
Pasquier croissants brand traditional oriented, retailers; some new
product links to consumer processes
universities testing of successful
products
Groko NL 220 Frozen Some Subsidiary Supplier of Imitate leading Limited; links Monitor Innovative by
vegetables of MNE private brands more to suppliers competitors' imitation,
labels cheaply of ingredients products; successful
and strong links
machinery to retailers
Neumarkter D 83 Ecological No Private Manufacturer's Change to Little Little Innovative on
LammsbraÈu beer brand sustainable one
production dimension,
success to
be seen
SkaÊne Erik S 120 Processed Some Subsidiary Manufacturer's 5 new product Little, some Little Low degree of
meats of MNE brand variants per input from innovation
year; varying suppliers of
degrees of machinery
innovation

Understanding what drives innovation activity


Bulmer UK 1200 Cider No Public; 53% Manufacturer's Variations of Considerable, Considerable Medium
of shares brand and basic product links to market degree of
family-owned supplier of outside intelligence innovation,
private R&D teams generation in successful
labels all phases of
product
development
R&D Management 30, 2, 2000

Reiter D 550 Processed No Private Manufacturer's Extend range Little Little Low degree
meats, ready brand, own of ready of
meals distribution meals innovation
Royal DK 3000 Seafood, ready Substantial Public; Manufacturer's Broaden Little Little Medium
Greenland meals owned by brand and product range degree of
Greenland supplier of of ready innovation;
home rule private meals success
labels remains to
be seen

(continued)
165
166

Hanne Harmsen, Klaus G. Grunert and Francis Declerck


R&D Management 30, 2, 2000

Appendix B (continued)

Number of Brand Type of Market Overall


Company Country employees Sector Export Ownership strategy innovation R&D orientation impression

SkaÊnemejerier S 700 Dairy products Little Cooperative Manufacturer's Functional Considerable, Some; mainly Innovation
brand and foods, links to in local based on
supplier of technologically universities markets hi-tech;
private sophisticated and other successful
labels products outside
R&D sources
Johma NL 200 Salads Little Subsidiary Manufacturer's Extend product Some; both Market Medium
of MNE brand range; internal and intelligence degree of
new line of links to generation in innovation;
branded outside all phases of successful
vegetables R&D teams product
development
Magdis F 180 Fresh, chilled No Subsidiary Manufacturer's Continuous Little, some Little; mainly Medium
pizzas, pies, of MNE brand and range of links to monitoring of degree of
sandwiches supplier of new variants external competitors innovation;
private R&D teams successful
labels
Pennine UK 600 Chilled ready No Subsidiary Supplier of Continuous Little Strong links to Medium
meals of large private range of immediate degree of
domestic label new variants customer innovation;
company success
dependent
on one
customer
# Blackwell Publishers Ltd 2000