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19X7:4:X9- IOX


Firm Size and Product Innovation

John E. Ettlie and Albert H. Rubenstein

The linkage between firm size and product inno- Introduction

vation has frequently been discussed by both re- A persistent controversy in the organizational re-
searchers and other writers. John Ettlie and Al- search literature has been the role of firm size in
bert Rubenstein report the results of a study the product innovation process. In particular, the
which, by distinguishing between the incorpora- causal position, relative importance, and mea-
tion of radical and incremental technology, at- surement of organizational size as it relates spe-
tempts to resolve some of the controversy sur- cifically to various types of innovation among and
rounding this issue. In particular, the authors in organizations is becoming a widely debated
hypothesize that up to a certain point, large firms and frequently researched issue. While most
with greater resources are more likely to com- studies and conjectures have assumed size to be a
mercialize radically new products successfully. determinant of innovation at the firm level, size
Findings generally support this theory but re$ne- may, in fact, be an intervening variable or result
ments to the model are now possible. For exam- of the innovativeness as well. It is rather easy to
ple,jrms with 1000 employees or less need not be find examples of both large and small firms that
excluded from radical product introduction if have grown as the result of being successful inno-
they resolve critical funding and research prob- vators. In addition, a number of large firms, like
lems. This size-radicalness distribution is shaped Procter & Gamble, thought to be secure product
like a fish hook or a claw. That is, up to about innovators, have recently fallen prey to stiff com-
1000 employees, there is no signi$cant relation- petitors [.5].
ship between number of employees and radical- The relative importance of size as a predictor
ness of a new product. Between 1200 and 11,000 of organizational innovativeness and the direc-
employees there is u sign$cant, direct relation- tion and nature of the causal influence of size on
ship. Finally, very large organizations (in excess innovativeness is not a topic of widespread agree-
of about 45,000 employees) are unlikely to intro- ment in the research literature. Some studies
duce radically new products. Larger firms were have found smaller firms to be more innovative
significantly more likely to adopt ambitious new [27, 151, while others [22, 2, 191 have found orga-
processing technologies in order to introduce nizational size to be directly related to innova-
these new products. Also, new product success tion. That is, they have found that larger organi-
was signi!cantly predicted by the absence of zations are more likely to be innovative in
funding problems in introducing the innovation product, process, and new materials. Even
and the degree to which the new product was a Rothwell [27] qualifies his results by saying that
radical departure from existing practice. when large capital investment is required to be
innovative, it is not the small and medium-sized
firms that are innovative.
Address correspondence to John E. Ettlie, School of Business From all of these results, one could conclude
Administration, University of Michigan, Ann Arbor, Ml 48109. that it is the type of innovation that moderates the
rc) 1987 Elsevier Science Publishing Co., Inc. 0737.6782187LS3.50
52 Vanderbilt Ave.. New York, NY 10017

Foundation report [26] found that among the ma-

BIOGRAPHICAL SKETCHES jor problem areas faced by small high-technology
John E. Ettlie is the Dwector of the Office of Manufacturing Research, firms believed to be engaged in R&D, “The lack
School of Busmess Admmistrtmn, University of Michigan. Ann Ar-
of adequate funds appears to be an underlying
bor. Michigan. He earned his Ph.D. in InduQrial Engineering at

Northwestern University in lY75. Since then he has held several re-

factor in most, if not all, of the problem areas.
search, consulting, and university positions and has published over40 For example, small firms with sufficient funds
articles on the management of technological change. His recent re- could offer more competitive salaries and benefits
search activities include the direction of a longitudinal study on the
. . . ” [26, p. 31. The absence of slack resources
deployment strategies for advanced manufacturing technologies in do-

me\tic plants funded by the National Science Foundation. can act as an entry barrier into many established
Albert H. Rubenstein earned his B.S. from Lehigh University and hi\ industries. Therefore, it is not surprising that
M.S. and Ph.D. from Columbia Umversity. all in industrial engineer-
small firms are often the leaders in start-up indus-
mg. He was on the Industrial Engineering staff at Columbia from

IYSO-lY53 and on the faculty of the School of Industrial Management

tries [ 151, and that when entry is unrestricted in
at the Massachusetts Institute of Technology from 1953-1959. Since established industries, newcomers to this estab-
1959. he ha\ been Professor of Industrial Engineering and Manage-
lished industry are most often the innovators be-
ment Sciences at Northwestern University. where he established and
heads the Organization Theory area and the Program of Research on
came of their lack of sunk cost investment in es-
the Management of Research and Development. He is also Director of tablished technologies [ 161.
the Master of Engineering Management program at Northwestern and
Depending on context, organizational size may
was recently named Walter P. Murphy Professor and Director of the
Center of Information Technology.
represent any number of key organizational char-
acteristics in the innovative process [9]. For ex-
The authors would like to thank the three anonymou\ reviewer\ and ample, Teece [31] has proposed that firm reputa-
Mr. Erneato Reza for comments that led to changes in this manu- tion, often related to size, is the real variable of
interest. Further, Ettlie, et al. [II], found that
radical new packaging technology (process inno-
vation) was significantly correlated with new
product introduction. It seems that most of these
characteristics point to the resource constraints
size-innovativeness relationship. For radical in- hypothesis for innovating. That is, substantial
novations, which may require additional funds slack resources in time, money, and people are
for technical work, capital investment for plant required for radical new product commercializa-
and equipment, marketing, promotion, and other tion.
necessities, large size may be a key enabling con- One also has to allow for the distinct possibility
dition because of access to resources. An alterna- that increasing size of an organization contributes
tive argument has equal merit: large size discour- to product innovativeness in only a marginal fash-
ages innovation because of sluggish response to ion after a certain growth point has been reached.
environmental changes, sunk costs in past pro- Later organizations may have more organiza-
cessing technologies, resistance to change among tional problems to overcome in innovating in
key decision makers, etc. We propose that one spite of increased access to resources. For exam-
way to sort out this apparent contradiction is to ple, larger firms have often grown to their size
focus on the type of product innovation offered. because of success with a technology that may
That is, the more radical the innovation in the now be mature. Large firms are often thought to
product, the more the discretionary resources re- be slower to respond, have longer communica-
quired. tion channels, and resist change out of shear com-
Although the most likely size correlate that plexity. Teece [31] argues that small firms tend to
makes a difference in the innovation process is be more innovative but often fail while larger
available slack resources, including money, peo- firms are less innovative but tend to survive be-
ple, and facilities [17, 10, 211, there are theoreti- cause they have more generalized assets that are
cal reasons to suspect that organizational size can less dependent upon a particular innovation.
be both an advantage and a disadvantage to orga- A related aspect of the size and innovation is-
nizational innovativeness. Small firms, in particu- sue is highlighted by findings showing that small
lar, have to overcome the disadvantage of inade- organizations are relatively more innovative in
quate slack resources. A recent National Science proportion to their size. This is the so-called “in-

novation efficiency” issue. For example, one re- tremely large organizations may be at a disadvan-
cent study found that “small firms produce 2.5 tage with respect to radical new product offer-
times as many innovations as large firms, relative ings.
to the number of people employed,” [ 13, p ii]. In
an earlier study, it was found that during a 21- Radical Products and Firm Size
year period, 47.3% of the innovating organiza-
It is hypothesized that radical new products usu-
tions had fewer than 1000 employees and 52.6%
ally require more resources to commercialize and
of the firms had more than 1000 employees. This
that larger organizations, up to a point, tend to
suggests that during the 21-year period, small and
have easier access to the resources necessary to
medium-sized firms kept pace with the innovative
accomplish this over the long run. Therefore, if
activities of large firms.” [14, p. 511. However,
one were able to effectively distinguish between
both of these studies reported that large organiza-
radical and incremental technology incorporated
tions were more frequently the sources of sign&
into new products, one could also predict that
cant innovations.
larger as opposed to smaller organizations would
In an extensive evaluation of significant inno-
have the relative advantage of offering these new
vations in the United Kingdom since 1945, Pavitt
products for sale.
[25] recently reported percentages considerably
The following proposition is offered for testing:
below the Gellman [14] numbers. Small firms (up
to 1000 employees) accounted for only 20% of Proposition 1: Increasingly, larger organizations
over 2000 significant, successful commercial in- are more likely to be able to commercialize radi-
troductions of new or improved products, pro- cal new products up to a point at which increas-
cesses, and materials over the period 1945-1980 ing size does not contribute to more radical prod-
in 30 manufacturing sectors. uct innovation.
In summary, despite the relative importance of
organizational size in the literature, the effect of What does it really take to introduce a radically
differentiating innovations by radical vs. incre- new product? Hage [ 171 hypothesizes that radical
mental technology incorporation, when using new products are rare and risky in the history of a
firm size to predict innovativeness, is not well firm. Such radical products like the computer, the
understood. The purpose of this study is to ex- commercial airplane, and others are clear exam-
plore the implications of accounting for the differ- ples. These products started new industries and
ence in type of innovation has on this relationship required significant investment to commercialize.
and new product success. The markets for these product lines were ulti-
mately very significant, and precipitated follow-
on incremental technology improvements. But
not all new products, even those which a majority
Propositions of experts would agree are significant, have an
This article argues that one of the major reasons economic impact as substantial as these exam-
for inconsistencies in research findings on organi- ples. There appears to be a tendency in the litera-
zational size and product innovation is that the ture on radical innovation to either classify a case
type of innovation has not been taken into ac- on scientific grounds in terms of departure from
count. In particular, the key to unravel some of past practice or on economic grounds in terms of
the confusion in these findings is whether the new wealth creation.
product represents a radical, innovative depar- In addition, many significant new products ac-
ture from existing practices or whether it is tually incorporate any number of interrelated
merely an incremental new product. Radical in- technologies and innovative components, so this
novations usually require more organizational re- issue often becomes very clouded and difficult
sources to commercialize up to a point at which to resolve. In fact, Hage [17] implies that the
increasing size begins to contribute to innovative- amount of change required in material (input),
ness at a decreasing rate. That is, after some processing (manufacturing), and product (output)
threshold is reached, factors other than size take should comprise a total concept of degree of radi-
over as important even to the point where ex- calness. We choose here, however, to separate

the three types of technological innovation and tions at all, but extremely minor modifications of
seek to test empirically the relationship between existing technology. It is important to note that
product and processing innovation. It is highly the way in which success has been measured in
likely that one of the drains on resources during most of these studies leaves much to be desired
commercialization is the process innovation re- because of dependence on single indicators. This
quired to reduce, at the outset of introduction, has made it difficult to settle the controversy in
the cost of the new product to within competitive predicting new product success. For example,
reach. Again, consistent with the resource depen- did the new product just survive or was it a block-
dency theory of the innovation process, the fol- buster in return on investment?
lowing proposition is offered. Past studies have used a variety of measures
of new product success including reports from
Proposition 2: Larger organizations, up to a firm representatives on degree to which expecta-
point, are more likely to change processing tech- tions have been met, actual returns on invest-
nology in order to offer a new product. ments in the product development, whether or
not a research project actually lead to commer-
cialization, archival data on reported earnings of
Rudicul Product Success a firm, and published reports of how a particular
A dominant stream of research in the innovation product did in the market place. However, these
studies literature has been and continues to be the measures have been consistently challenged in
prediction of new product success. Several stud- the literature, for example, by Mowery and Ro-
ies [28, 27, 8, 201 have shown market factors, senberg [23], as being highly suspect in their va-
including knowledge of customers’, needs to be lidity.
the most consistent, significant correlates of suc- There are several reasons for this challenge to
cess and failure. Recently, Shrivastava and the validity of new product success measures.
Souder [30] extended these results by finding that First of all, both technical and commercial suc-
combinations of certain variables were even more cess are important, but they are not always cap-
significantly correlated with success and failure tured simultaneously. Second, measuring a con-
of 114 R&D projects, which suggests that market cept based on a respondent’s perception of
factors alone are not sufficient for success, or expectations can be very misleading unless these
broader management of the innovation process is predictions are anchored on comparable scales
needed. In particular, they found that the combi- like return on investment or financial criteria.
nation of clarity of problem definition, clarity of Third, but not last in any exhaustive sense, firms
understanding of users’ requirements, and the often have a vested interest in not sharing clean
perceived level of fit between company and financial return data with nonmembers and no
project was the “most potent” [30, p. 121 corre- one knows if there is systematic or random bias in
late of project success. reports on new product returns.
This modified model of R&D project success is Perhaps the most coherent set of arguments
very consistent with the differentiated model of advanced yet concerning firm size and commer-
new product introduction, because a model seg- cialization of new products appears in Freeman
regated by radical vs. incremental innovation [12, p. 1371. Data on patents, R&D efficiency,
should be sensitive to differences in capabilities and development leading to new production
to launch a new product and how successful these strongly suggest that “small firms have an advan-
needed products will be. This points to the heart tage in the earlier stages of inventive work and
of the innovation research agenda: what makes a the less expensive but more radical innovations,
new product an innovation or imitation of the while large firms have an advantage in the latter
past? Also consistent with the theme of this paper stages and in improvement and scaling up of early
is a suggestion made by Mowery and Rosenberg breakthroughs.” In a focused study or commer-
[23] that the reason market factors-so-called cialization, as is the present, this strongly sug-
“market pull” vs. “technology push” forces- gests that larger firms will have the persistent ad-
appear to predict new product success so well is vantage. It also suggests predictions about, and
because most new products are not really innova- perhaps even a more general theory about, the

differential roles of smaller and larger firms for paper (SIC 26), chemical (SIC 28), rubber (SIC
innovating. This theory is beyond the scope of 30), machinery (SIC 35), and electrical equipment
this paper, but is revisited in the discussion later. (SIC 36) industries.
Another issue that is often raised concerning
new products is the extent to which break-
throughs originate from firms or operating units Nomination of Cases
of firms not formally participating in the market Two primary methods were used to nominate
of that industry [29, 161. This “innovation by in- cases for the study. The general strategy was to
vasion” process has many documented examples include in the sample as many domestic award-
(e.g., mechanical vs. electronic calculators). winning new products as possible-that is, inno-
Therefore, we include all firms in our theory and vations that had been offered for sale and had
sample regardless of product introduction his- received some industry award. Awards given ex-
tory. clusively to individuals were excluded because
Finally, there is a general wisdom in the new the new product offered for sale by the firm was
product management culture that the more radi- taken as the unit of analysis in this study. In order
cal the concept incorporated into the offering, the to locate award winning new product innova-
more the resistance to it. It follows that only a tions, as opposed to just new products that were
sustained, consistent, and well-serviced effort being introduced, a one-page survey question-
will be successful. Only the firm that is willing to naire was mailed to professional and trade associ-
recover the investment in the long run, and can ations serving the targeted six major SIC code
withstand financial stress in the short run, will groupings. The questionnaire inquired about
likely prevail under these conditions. It is often awards that the association either gave directly,
thought that radical new products have the poten- or that they were aware of in the industry. We
tial to ultimately return a greater percentage of also asked a number of these and other experts if
their investment and even can be the beginning of they were aware of awards that were objectively
a new product line or industry. Yet many small assigned to significant new products.
firms fail to survive their first product commer- Although the response rate of the association
cialization and many medium-sized firms cannot survey was acceptable (82 of 134 eligible case
survive the management challenges of rapid ex- questionnaires were mailed back for a return rate
pansion in a cyclical economy. of 61%), very little new award information on
A final proposition is offered here for testing. jirms as opposed to individuals was obtained. We
were already aware of most of the awards sug-
Proposition 3: A radical new product innovation gested, e.g., the IR 100 [used by 131, Vaaler
is more likely to be successful in the marketplace awards in chemical processing, and the Putnam
as long as resource dependencies in offering the awards in food processing [used by 241. Some of
new product can be resolved. the awards were very restrictive or narrow in cri-
teria, were outside manufacturing industries
(e.g., software), or were given for reasons other
than for innovative new products. Our preference
was to concentrate on well-known awards in ma-
The overall design of this study called for two jor industry groupings that subsequent research
separate phases. The first phase was devoted to might replicate. We were particularly interested
focusing the study on a limited set of manufactur- in those awards assigned to firms for significant
ing industries and then developing a nomination new product contributions to the industry.
process to generate a set of candidate innovations New products that had not won awards were
that had been offered for sale primarily during the nominated by screening new product and tech-
years 1979-1982. Ideas and inventions not com- nology news sections from trade publications
mercialized are not innovations by definition. The which approximately covered the SIC major
second phase of the study was focused on locat- groupings. We also accessed other general pub-
ing and obtaining data from the firms originating lished sources available on new technology offer-
these innovations primarily in the food (SIC 20), ings such as High Technology, Food Processing,
19x7:3:x9- IOX

and Production Engineering. A complete listing employed. Of these, 31 (57.4%) were small (499
of trade journals and awards that were used for or fewer employees). These percentages. which
the years 1979-1982 is included in the Appendix. are almost identical with the ultimate sample dis-
Approximately 2500 telephone calls were made tribution (53.6% small), indicated that nonre-
to screen candidate cases for the original target sponse was unrelated to firm size. For two of the
population of IO00 cases. Complete confidential- eight variables of focus below, ten additional
ity was guaranteed throughout the study. Simi- cases had to be eliminated because of missing or
larly, both award and nonaward cases were inconsistent responses.
screened to obtain correct mailing addresses. The 380 complete questionnaires that were
This screening had the added benefit of alerting eventually reduced to 348 complete data cases
the potential respondent and originator organiza- did include information on respondents. These
tions of the impending mailing which, in most 348 cases included 135 products in manufacturing
cases, seemed to create a positive expectation. SICs outside the original target groups. This was
The positive feedback appeared to be especially done purposefully to test the robustness of hy-
true when the primary originating person in the potheses with a more heterogeneous sample. As
firm was located in the case screening. Further, mentioned earlier, all cases were screened on the
the screening was very useful: approximately 100 telephone before initial mailings. In this screen-
award cases were eliminated from the population. ing, an effort was made to locate the person most
These firms had either never offered the products knowledgeable about the new product in the or-
mentioned in the awards “for sale,” could not be ganization. In many cases, the developer or in-
located, refused participation in the survey, were ventor was actually reached before the question-
foreign owned, or were eliminated for a number naire was mailed. The distribution of returned
of other reasons. Eventually, the 1000 population questionnaires was as follows:
cases were generated with a total of 535 award
and 465 nonaward cases, predominately in the six 1. A total of 129 respondents were marketing di-
targeted SIC code groups. We did not exclude rectors (70), or product managers (59), includ-
award cases if they fell outside these groups, as ing some market specialists, so about 33.9% of
long as they were manufacturing, because we the sample was represented by the marketing
wanted every opportunity to include radical new function for the new product
products in the population. 2. The second largest category was top manage-
ment (general manager or above, including
president, vice president, chief operating offi-
Mail Survey Questionnaire for cer, and chairman), and 112 (29.5%) of the
Originating Firms sample was in this category
3. Next was the technical function in the organi-
Sample. The collection of data consisted of zation, with the directors of R&D and engi-
two mail survey waves using the originator ques- neering (28), and actual scientists and engi-
tionnaires, mailing label compiled during tele- neers or their group managers (44), for a total
phone screening, and a cover letter. A total of 532 of 104 (27.4%) of the respondents
questionnaires were returned. Of these, 53 re- 4. The last category of identified respondents in-
spondents refused participation and 73 said they cluded 17 (4.5%) public relations directors and
were ineligible, usually because the product had communications personnel
not been launched yet. Therefore, the final re- 5. A total of I8 respondents or 4.7% of the re-
sponse rate was 406 returned questionnaires out turned, nearly completed questionnaires failed
of 927 eligible cases (43%). Of the 406 returned to give a title.
questionnaires, 380 were complete and 348 were
eligible (i.e., product launched, qualified respon- Variables, indicators, A scale of
and scales.
dent), complete and satisfied all our requirements three indicators was constructed to measure radi-
(e.g., new award information was verifiable). A calness of the new product: these included award
random sample of 100 nonresponse firms was status [ 13, 241, the degree to which the new prod-
called and 54 supplied the total number of people uct offered for sale was new to the world, the

United States, or the industry [3, 251, and the new product [17]. This question was coded 3 =
degree to which the new product incorporated “significant new process,” 2 = “some modifica-
technology that was a significant departure from tion,” and 1 = “no process change.”
existing practice [9]. The latter study used the Cost and funding difficulties were included as
Science Indicators definition of radical change to problem categories and were separate questions
study process change in the shoe industry. It de- on the questionnaire exploring a number of prob-
fines revolutionary innovation as one incorporat- lem contingencies in the propositions. The per-
ing technology that is a significant departure from centage of development funding provided by divi-
existing technology at the time of its commerciali- sions in decentralized firms was included because
zation. Respondents answered in three catego- of the autonomy that these units might exercise.
ries: Information sources were listed for check-off but
were differentiated by stages of the new product
1. No new knowledge contained in the machine
introduction, specifically development, produc-
or process
tion, and marketing.
2. The machine or process is an improvement of
An index to measure new product success was
existing technology
constructed. A six-item scale emerged from the
3. The machine or process is a major technologi-
principal components factor analysis and item-
cal advance [9, p. 4291.
analysis with a Cronbach alpha of 0.62. Success-
,4 similar approach was used here (see Appen- ful innovations achieved a satisfactory level of
dix for detailed items.) These indicators are all technical performance, at budgeted cost, during a
significantly intercorrelated and a resulting Cron- required time period. They also achieved overall
bath alpha = 0.55 (n = 357) was obtained. In the commercial success, reasonable market share,
case the correlations between award status with and a good return on investment. Based on the
novelty (r = 0.27, p < 0.01) and award status with corrected item-total correlations, the latter three
incorporation of new technology (r = 0.26, p < items, emphasizing commercial return, were bet-
O.Ol), the results constitute a favorable, if some- ter representatives of the scale than the three
what, approximate indicator of convergent valid- technical success items.
ity because two independent bases of inference This overall scale of new product success was
are being utilized and the measures of association broken down into technical success and commer-
are significantly different than zero [6]. These two cial success. The scale to measure technical suc-
independent measures are self-reports of repre- cess included the first three items of the overall
sentatives of originating firms and expert opin- scale measure: technical success defined by the
ions of panels of experts. This gives increased project specification, technical success at or very
confidence in the reliability of this construct, the near budgeted cost, and technical success
relatively depressed Cronbach alpha notwith- achieved during the required time period. The
standing. The correlation between new technol- Cronbach alpha for this technical success sub-
ogy incorporation and novelty was r = 0.42 (p < scale was 0.58. The commercial success subscale
O.Ol), therefore making all three indicators signifi- included the last three items: overall commercial
cantly intercorrelated. success expectations met, market share expecta-
As suggested by Kimberly and Evanisko [19], tions met, and return on investment for the new
firm size was measured by the natural log of num- product. The Cronbach alpha for the commercial
ber of year-round, full-time employees because success subscale was 0.63. All relevant question-
the correlates of size all increased substantially naire items and scale development information
with this transform, and the marginality hypothe- are included in the Appendix.
sis in proposition one and two. There are two methodological issues raised by
Accurate information on the absolute or rela- this procedure that need to be addressed in subse-
tive cost to introduce the product was not avail- quent research. First, the extent to which award-
able from the survey, so the R&D efficiency argu- ing agents or agencies favor larger firms in their
ment could not be evaluated. One item on the selection process, all other things being equal,
questionnaire covered the need for significant needs to be carefully examined. We eliminated
new process innovation in order to introduce the the Fortune product awards (see Appendix) for

this reason, because only large firms were in- coefficients are typical, and the power of these
cluded by Fortune. Other awards don’t seem to statistics can more carefully be examined with
be as limited to large firms, but if awards are used these more focused procedures [7].
to select cases, this issue needs to be raised. Sec-
ond, if only a restricted range of industries and
limited measure of radicalness and success are
available, the issue of restricted variance in these Radical Products and Firm Size
scales may limit the degree to which we capture Table 1 presents the correlation matrix and de-
innovation by invasion cases and true degree of scriptive statistics showing results that are
magnitude of these variables. We included as needed to test the first proposition that larger
many award cases within manufacturing as possi- firms, up to a point, are more likely to introduce
ble, but we could have expanded the sample out- radically new products. The findings support this
side manufacturing at the risk of introducing an proposition.
even more heterogeneous sample. Again, this is These data show that increasing size will in-
an issue that needs to be weighed in this line of crease the probability of radical product introduc-
research. tion only up to a point. An accepted method to
straighten an exponential curve is to use the log
Results transform [18, 191. The natural log of size has
been used in the correlation matrix (Table 1) and
Analysis the correlation between this transformed measure
In order to test our three propositions on radical- of size and radicalness (r = 0.21, p < 0.01) is
ness of new products, new processes, firm size, almost double the nontransformed correlation be-
and new product success, a combination of corre- tween number of employees and radicalness (r =
lation and step-wise regression was used. This 0.11, p < 0.02), and the difference between these
latter procedure was selected in order to evaluate two coefficients is statistically significant (t =
the stability of standardized regression coeffi- 2.05, p < 0.025).
cients and the amount of additional explained In order to get an overall picture of the nature
variance with successive variable entry. Given of the relationship between firm size, as mea-
the large sample size, small multiple correlation sured by number of employees, a plot of these

Table 1. Correlation Matrix and Descriptive Statistics (n = 348)

Variables 1 2 3 4 5 6 7 8

1. Product success (.62)O

2. Radical product 0.146 (0.55)”
3. % division funding 0.01 0.02 0
4. Continuing cost problem -0.12’ 0.10 0.03 ()
5. Overbudget problem -0.18b 0.02 -0.01 0.26” ()
6. Log no. employees 0.03 0.21b 0.176 0.09 0.07 ()
7. New process intro.d -0.05 0.23” -0.01 0.176 0.10 0.13” (1
8. Internal information 0.06 0.05 0.08 0.03 0.01 0.11’ 0.07 ()

Mean 16.57’ 8.24f 49.02 0.12 0.07 6.4 1.89 0.47

SD” 3.41 2.16 46.82 0.32 0.25 3.1 0.80 0.50

0 Cronbach alpha reliability coefficient.

b p < 0.01 (two-tail).
( p < 0.05 (two-tail).
d” = 338.
c Excluding recoded missing data, scale X = 16.64, SD = 3.46, n = 295.
/Excluding recoded missing data, scale f = 8.31, SD = 2.15, n = 357.
8 SD: standard deviation.

two variables appears in Figure 1. Even with the are presented. The size effect appears to kick in
rather limited range of scores for the radicalness at coarse grain cut (four categories) between 400
variable on the y axis, the pattern of this relation- and 11,000 employees, with r = 0.15 (p = 0.09,
ship is potentially very helpful in understanding n = 82) for number of employees with radical-
the nature of the new product introduction pro- ness. For a finer grain cut (eight categories), r =
cess. The pattern of degree of radicalness for new 0.116 (p = 0.23, n = 44) for the 1208 to 11,000
products introduced by relatively small firms ap- category. This direct relationship disappears for
pears to be almost random. That is, there is an categories above 11,000 employees where other
absence of significant correlation between num- factors apparently are more important. Above
ber of employees and radicalness of product up to 45,000 employees, the correlation becomes nega-
about 5000 employees. Then the correlation re- tive again, but nonsignificant (r = -0.095, p =
mains relatively stable, with a bit of a dip up to 0.27, n = 44).
9000 or 10,000 employees. These restricted sam- The overall shape of the distribution is very
ple correlations are shown in the insert to Fig- much like a thick-shank fish hook on its side or
ure 1. claw which is schematically represented in Fig-
Smaller firms introduce relatively radical or in- ure 2. The early portion of the distribution is the
cremental new products in a rather unpredictable thick-shank, and the hook for the very large firms
fashion. Larger firms seem to be more selective in where radical new product scores drop off drasti-
introducing new products; they favor more radi- cally (also see Figure 1). In between the two ex-
cal offerings. It cannot be said that small firms do tremes, the effects of size are first felt, apparently
not introduce radical products. They do just that between about 1200 and 11,000 employees; then
in a large number of cases. But larger firms- size, as measured here, becomes less important
especially those with more than 5000 employ- as a determinant of radicalness. A test for curvi-
ees-tend to introduce products that sustain their linearity supports the general shape of an in-
size and require processing technology changes. verted “U” curve. The F = 9.9 (p < 0.01) for
Large firms probably screen many of these prod- a second-order regression test was statisti-
ucts from their portfolios early. But the meaning cally significant for the distribution as a whole
of large and small can now be made more clear (n = 348) but not for the four categories taken
than the somewhat arbitrary 500 employee cutoff separately.
often used for policy and government reporting Although it becomes increasingly difficult to
purposes. attach meaning to the terms large and small for
To further explore the shape of this size-new the purposes of researching the innovation pro-
product radicalness relationship, segments of the cess, these results seem to suggest that medium-
size continuum were separated and correlations sized firms are quite possibly the most interesting
run for the intervals or categories of number of to study. Further, at some time during the growth
employees for this sample. The results appear in history of a firm, there appears to be a crucial
Table 2. Both four category and eight category period when a premium might be placed on mak-
breakdowns of this overall bivariate distribution ing the additional sacrifice of allocation of re-

Table 2. Number of Employees and New Product Radicalness by Size Categories

Correlation coefficient Correlation coefficient

Size range four categories Size range eight categories

O-48 r = -0.15 (p = 0.08, n = 86) O-20 r = 0.118 (p = 0.21, n = 47)

so-350 r = -0.06 (p = 0.29, n = 87) 21-48 r = 0.002 (p = 0.495. n = 39)
400- 11,000 r = 0.15 (p = 0.09, n = 88) 50-120 r = 0.073 (p = .32, n = 45)
I1 ,ooo+ r = -0.03 (p = 0.39, n = 97) 125-350 r = -0.144 (p = 0.18, n = 42)
400- 1200 r = 0.115 (p = 0.23, n = 44)
1208-I I ,000 r = 0.116 (p = 0.23, n = 44)
11,200-44,000 r = 0.064 (p = 0.34, n = 43)

45,000+ r = 0.095 (p = 0.27, n = 44)

a’0000sh 0’0SLEEE
- 0’0
- 0’1
- 0-z
- 0’E S
- 0’il
- 0’S
?u - 0’9 tJ
* * - 0’L
* - 0’8 a
* 0’6
** * 0’0
w! 0’11

Figure 2. Schematic Relationship Between Firm Size and New Product Radicalness

sources-now perhaps more readily obtainable- radicalness (beta = 0.14, p < 0.01). Entering
to radical product launch. third is the absence of continuing cost problems
Although shown in Table 1 with fewer com- (beta = -0.09, ns.). It should be recalled that
plete data cases, the correlation between new cost problems are coded so that a direct relation-
process requirement and log of number of em- ship and positive sign coefficient shows the pres-
ployees is r = 0.13 (p < 0.01, n = 338). As would ence of the barrier, while a negative sign indicates
be expected, new process introduction also is sig- absence of the problem. Although the total pro-
nificantly correlated with radical product, r = .23 portion of variance in new product success ac-
(p < 0.01, n = 338) and continuing cost problems, counted for by these three predictors is relatively
r = 0.17 (p < 0.01, n = 338). These data and small (about 5%), all three stepwise regression
results provide support for the second proposi- equations are statistically significant. Further, the
tion and show that larger firms are more likely to multiple R for the regression exceeds 0.25, well
have the needed resources to introduce process beyond the chance level. The fourth predictor,
changes in order to launch new products. Fur- the number of employees (beta = 0.02), was ex-
ther, it appears that the more radical the new cluded because the adjusted R2 began to decline
product, the more likely that a process change on the fourth step, although the regression equa-
will be required. tion with four predictors is also significant (F =
5.35, p < 0.01). This suggests that size may have
a direct effect on new product success as well as
its indirect influence through incorporation of
Radical Product Success radicalness.
Proposition 3 states that radical new product in- Separate regressions were run with the sub-
novations are more likely to be successful if re- scale for technical success and subscale for com-
source dependency issues can be resolved by the mercial success as dependent (three items each)
firm offering the new product for sale. The results with comparable results. For the technical suc-
of testing this proposition are presented in Table cess subscale, the first two predictors to enter
3 with a regression summary taking the new prod- were absence of overbudget requests (beta =
uct success scale as dependent. The correlation -0.30) and then radicalness (beta = 0.06), with
matrix for this regression was presented earlier in the adjusted explained variance slightly higher
Table 1. than before at 9%. For the commercial success
The first two significant predictors to enter the subscale, radicalness enters first (beta = 0.15)
regression for success were absence of over- and then absence of continuing cost problems
budget requests (beta = -0.16, p < O.Ol), and (beta = -0.10) with the adjusted explained vari-

Table 3. New Product Success Multiple Regression Summary (n = 348)

Standardized regression
Cumulative coefficient (BETA)
Predictor entered” Regression
is dependent equation F R? R2 1st Step 2nd Step 3rd Step

1. Overbudget request Il.2h 0.031 0.029 -.18” -0.18” -0.16h

(coded 1 = yes, 0 = no)
2. Radical product 9.23h 0.051 0.045 0.14h 0.14h
3. Continuing cost (coded 7.12h 0.058 0.050 -0.09
1 = yes, 0 = no)

0 Next (4th) predictor to enter is Log # employees. (beta = 0.02) and adjusted R? declines (to 0.047) on this step. although the regressing
equation was significant (F = 5.35, p < 0.01).
h p < 0.01.

ante lower at 3%. As would be expected, we can Discussion

explain more of the variance in the technical per-
formance subscale than the commercial perfor- Findings of this study on new manufactured prod-
mance subscale with these noncontextual predic- ucts show that, as firms grow from between 1,200
tors that exclude competitor behavior. and 11,000 employees, they are significantly more
Although the magnitudes of these explained likely to introduce radically new products which,
variance estimates are small, they are all statisti- in turn, are more likely to be successful than in-
cally significant and are, therefore, assumed to be cremental new products. For a restricted size
due to nonchance factors. Furthermore, over range, they apparently screen out many incre-
2000 new consumer products alone were intro- mental new products from market offerings.
duced into the United States in 1985 [4], and be- Their radically new products receive industry
ing able to explain even 5% of the variance in the awards for their significance, incorporate scientif-
success of these new products is not a trivial ically new technology, and are new to the world
result. So these findings may represent the begin- market. However, firm size was not found to be
ning of a very practical line of work and consider- directly and significantly related to the success of
ation. new products, and firms up to about 1,000 em-
In addition, the traditional arguments that large ployees were found to introduce both radical and
firms remain very successful by continuing to incremental new products. This suggests that
make fine adjustments in existing product lines is larger firms have to obtain relatively larger re-
breaking down. For example, Procter & Gamble turns on new product offerings because they have
Company in its diaper wars with Kimberly- larger operations to support, and that smallev
Clark’s Huggies lost a significant portion of its jirms can he successful with radical new product
75% market share and has now regrouped with offerings if resource constraints are resolved. Fi-
the introduction of improved Pamper and Luv nally, the largest of firms, say in excess of ap-
brands. The company has spent $500 million to proximately 45,000 employees, were unlikely to
modernize equipment [5, p. 361. introduce radically new products.
These results represent modest support for the These findings tend to support and extend the
third proposition, and, based on these findings, Freeman [ 12, p. 1371 theory concerning differen-
we concluded that successful new products in tial advantages and disadvantages of firm size in
this sample exhibit an absence of over-budget re- the new product introduction process. That is,
quests and continuing cost problems, and they smaller firms tend to introduce products that in-
incorporate significantly new technology. Over- corporate both radical and incremental depar-
all, these results tend to shed new light on the tures from the past. As firms grow up to a point
new product innovation literature which has not they tend to select the more radical new prod-
adequately accounted for the radical vs. incre- ucts. This is probably because of their capabilities
mental technology variable in the past. to solve resource problems-especially in adopt-

ing new processing technologies required-and process, or new product or service innovation, it
abilities to screen new product ideas for winners. may be desirable to make a clear theoretical and
Many new small firms are innovative but they fail empirical distinction between radical and incre-
because they apparently cannot carry on after mental technology incorporation.
one new product disaster. This frequently over- There is a serious question implied here of
looked, yet obvious, risk is a key aspect of the whether small manufacturing firms will be able to
innovation process. It may also be that small participate in the process innovation often
firms that are truly innovative get our attention needed to commercial new products. We have
and we ignore or discount these failures. People found that there was a statistically significant ten-
who have been through this startup experience dency for larger firms to report substantial new
often try again- win or lose-either on their own process requirements for new product launch.
or with another company, and ultimately come to The more radical these new products, the more
our attention in the success category. likely they will require a process change. This
There is another important hypothesis to ex- further suggests that smaller firms may be at a
plain why the small-medium sized subsample of distinct disadvantage in their ability to mount rad-
firms appears to exhibit randomness in the firm ical new products if they require new plant and
size-new product radicalness relationship for equipment resources. The ways in which smaller
the l-1,000 employee range. That is, there is firms can overcome these difficulties when intro-
quite possibly an imperfect relationship between ducing new products need to be examined. A
the cost to commercialize a new product and its recent example is the case of processing tech-
radicalness for innovating firms in the small to nologies needed to effectively commercialize bio-
medium size range. This allows for the possibility technology ventures.
that very clever new ideas in products need not Logic and evidence suggest that small and
all require substantial resources to develop. large firms differ. The most persistent notion vis-
These ideas may have been the prototypes from a-vis product innovation is the agility and re-
earlier failed firms, joint ventures, limited R&D sources trade-off. Yet, even while all organiza-
partnerships, a university-industry consortium, tions are resource constrained and all
and foreign investment ventures. organizations structure to meet goals, the product
Three other ideas warrant future research. innovation process is unique in this respect. The
First, size may be a proxy for reputation and cus- attempt to implement and embody an idea that
tomer confidence [32]. Second, the age of a firm few have had is challenging. Some might say this
may be a confounding factor with size (anony- is a necessary challenge for any organization to
mous reviewer). Third, the backtracking in strat- take on at least at some point in its history in
egy to earlier stages of development in the prod- order to survive and grow. Larger firms-which
uct-process evolution of the productive segment might perhaps be called medium-sized firms-
[ 1, 331 of more mature firms is probably in evi- apparently do evolve methods of screening out
dence for many of the firms sampled here in the less innovative new product ideas before they
1, IOO- 11,000 employee range. This suggests that are introduced. Perhaps this goes beyond
stage of development and firm size may not be just methodology and extends to a culture for
related as a simple function of environmental screening.
changes. Yet, the largest of firms also develop vested
The results of this study can only be logically interests in routinized technologies and have to
generalized to mature manufacturing firms. It is organize to continue the flow of disruptive new
these industries, however, that are most threat- ideas by formalizing the R&D function. Small
ened today in many domestic markets. Still, the firms often survive their chaos to go on to this
study should be replicated to include less mature level of problem solving. Regardless of size, firms
manufacturing and in nonmanufacturing indus- that successfully commercialize new products
tries, especially selected service sector firms un- will always be of interest because of their ability
dergoing industry change like banking. It does to capitalize on an opportunity that was not
seem clear that in subsequent studies of the inno- widely recognized. This type of rare event, and
vation process, whether they involve material, the effectiveness of these changes, continue to

have practical significance and have yet to be ad- boy phenomena to increasing innovation and improvement in
equately captured in organization science. new technology. R & D Management 9:33-44 (1974).
17. Hage, J. Theories of Orgunization: Form, Process, and Trans-
,formation. New York: Wiley, 1980.
18. Kimberly, J. R. Organization size and the structuralist perspec-
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Appendix A: Sources for Nomination of 7. Newspapers (e.g., New York Times) (e.g.,
New Products new machinery, instrumentation, and pro-
cesses industry-wide)
There were eight primary awards that were used
8. News Magazines (e.g., Newsweek) (e.g.,
tonominate this type of case for the study:
new machinery, instrumentation, and pro-
1. The IR 100, which covers all industrial R&D cesses industry-wide)
2. The Vaaler awards in Chemical and Chemical 9. Business Periodicals (e.g., Barrons) (e.g.,
processing industries new machinery, instrumentation, and pro-
3. The Putman awards in food processing and cessing industry-wide)
food processing supply 10. Chemical Processing (e.g., machinery, pro-
4. Plastics World awards cesses related to chemical processing and en-
5. Manufacturing Engineering awards gineering)
6. Food Technology achievement awards 11. Scientijc Magazines (e.g., Science, Scien-
7. Flexible Packaging Association awards t$c American) (e.g., new instrumentation)
8. Production Engineering awards 12. Direct Input from Experts

Most of the target SIC major groupings were Examples of new product cases not included
well covered by these awards. Some of these in the study but representative of those sam-
awards were given for innovations outside the pled:
target SIC groupings but were also included.
1. Award Cases
Other new products were nominated by
a. Source of information: Chicago Tribune,
screening new product and technology news sec-
Sunday, October 9, 1983, page 6. Gaussme-
tions of trade publications that approximately
ter invented by Charles Castronovo, Zndus-
covered these same SIC major groupings. We
trial Research and Development Maga-
also used some of the more general sources avail-
zine, IR 100.
able on new technology offerings like High Tech-
b. Fortune Magazine, Products of the Year
nology. A listing of trade journals that were ulti-
(1982)) Jello-Pudding Pops, General Food
mately used for the years 1979-1982 is given
Corporation, 53,000 employees; Timex Sin-
clair 1000 computer, Timex Corporation,
1. Food Processing (e.g., food processing 21,000 employees; USA Today newspaper,
equipment and new products) Garnett Company, 24,000 employees; Boe-
2. Production Engineering (e.g., industry-wide ing 767, Boeing Company, Inc., 110,000
review of new machinery, computers, instru- employees.
mentation) 2. New products, no known award
3. High Technology (e.g., electronics and com- a. Ticaloid #480 Stabilizer for slow-separat-
puter technology, instrumentation) ing Italian Salad, by TIC Gums, Inc., an-
4. IEEE Spectrum (e.g., electronic and electri- nounced in Food Processing in the new in-
cal engineering technology) gredients section.
5. Chemical Engineering (e.g., machinery, pro- b. Refactometer, model MDR-7, from Ana-
cesses related to chemical processing and en- con, announced in Food Processing,
gineering) March 1982.
6. Chemical Engineering Progress (e.g., ma- C. Multistate, high-vacuum systems, by Croll-
chinery, processes related to chemical pro- Reynolds Company, Inc., in Chemical En-
cessing and engineering) gineering Processing, March 1980.
19x7 :4:X% IO8

Appendix B: Factor and Item-Analysis


Table Al. Radical New Product (n = 357)O

Principal components factors

(eigenvalues in parenthesis)

Factor 1 Factor 2 Factor 3

(1.64) (0.782) (582)

Award status .436 .243 .008

(Item 1)
Novelty .653 -.071 -.I03
(Item 13)
New technology ,646 - .092 ,099
(Item 16)

ClCronbach alpha = .55.

Table A2. New Product Success (n = 295)”

Principal components factors Corrected item-total

(eigenvalues in parenthesis) correlations

Factor I Factor 2 Factor 3 Six-item Tech Comm.

(2.26) (1.36) (0.87) scale scale scale

Tech success ,294 ,100 .096 ,245 .223

(Item 10a)
Tech budget ,434 ,552 .I37 ,306 514
(Item lob)
Tech time .526 ,575 -.171 ,360 ,537
(Item 1Oc)
Comm. success .725 -.379 .178 ,524 .603
(Item 1la)
Market share ,599 -.324 -.285 ,422 .478
(Item I lb)
ROI .603 -.168 .073 ,477 .506
(Item llc)

0 Cronbach alpha = .62, standardized item alpha = .66. For Technical Success scale only (three items), Cronbach alpha = .58, standard-
ized item alpha = .57. For Commercial Success scale only (three items), Cronbach alpha = .63, standardized item alpha = .73.
19X7;4:W- IOX

Appendix C: A Study of Significant New

Products in U.S. Manufacturing, 1970-1982


corresponding to the appropriate responses or fill in information as needed).

1. According to published information, your firm first offered the following new
product for sale in 19 - : and won the following award

a) Is this information correct? Yes (skip to Q.2) ...........

Don’t know . . . . . . . . . . . . . . .

b) If this information is incorrect or incomplete, please correct it here:

The new product was and offered for sale in 19_;

and won the following award .

2. At the time of the introduction of this new product, published sources indicated
that your organization (total enterprise) had the following number of full-time,
year-round employees:

Approximately employees.

a) Is this information correct? Yes (skip to Q.3) .


b) What was the correct number of full-time, year-round employees for your
organization (total enterprise) at the time the new product was offered
for sale?

Approximately employees.


1. What percent of the total cost of bringing the new product to market (e.g., R&D,
capital investment, tooling, production and marketing) came from the
following sources?

% of total funding

Division, plant or funds from this location

Corporate or total firm funds
Joint venture with other firms
Government funds
External investment capital
Other (Please describe)

2. a) Were any of the following problems encountered in obtaining adequate

funding for the development?

Expense vs. capital budget ... 1 Debt service (high interest rate) ... 5
Lag in funding ........... 2 Initial cost .................. 6
Timing in funding ......... 3 Continuing cost .............. 7
Obtaining total amount ..... 4 Over-budget requests .......... 8
Other (Please name ) .................... 9

b) Of these problems, what was the most significant funding barrier? Fill in the
number from Q.8a that corresponds to the answer.

Most significant problem:

3. a) Was the new product a technical success? (We define technical success as
achievement of technical performance required in the project specification.)

Yes ..................... 1
Too soon to tell ............ 2
No ..................... 3
Don’t know ............... 8

b) Was technical success achieved at or very near budgeted cost?

Yes .....................
Too soon to tell ............
No .....................
Don’t know ...............

c) Was technical success achieved during the required time period?

Yes .....................
Too soon to tell ............
No .....................
Don’t know ...............

4. a) Overall, was the new product a commercial success (met commercial success

Yes . . . . . . . . . . . . . _ . . . . . . .
Too soon to tell . . . . . . . . . . . .
Don’t know . . . . . . . . . . . . . . .

b) Was market share attained by the new product above, about the same as or
below expectations?

Market share above expectations . . . . 1

Market share about same as expectations . 2
Market share below expectations . . . . 3
Too soon to tell . . . . . . . . . . . . . . . 4
Don’t know . . . . . . . . -. . . . . . . . . 8

c) Which one of the following statements best describes the return on investment
(ROI) for the new product to date?

Below total costs . . . . . . . . . . . . 1

About equal to operating costs . . 2
About equal to total costs . . . . . . 3
Moderately above total costs . . . . 4
A good multiple of investment . . 5
Too soon to tell . . . . . . . . . . . . . 6
Don’t know . . . . . . . . . . . . . . . . 8

5. a) Which of the following statements best describes your new product?

(Circle only one.)

Our firm was first in the world to introduce the product

Our firm was first in the U.S. to introduce the product
Our firm was first in the industry to introduce the product
Our firm was second or third in our industry.to introduce the new product

6. a) At the time of introduction, did this new product incorporate technology that
was a significant break from past knowledge, technology, or practice in the
industry? (Circle only one.)

The most significant breakthrough in the industry for many years 1

A very significant break with the past, but not the most significant 2
It represents an improvement on past technology--not a breakthrough 3
The new product is a modest improvement on current practice 4
The product is similar to competitors offerings with some different features 5
The product is the same or almost the same as our competitors 6
Don’t know 8

7. a) To what extent were significant (new to the industry) processing technologies

necessary in order to produce the new product when it was introduced?

At least one significant new (to the industry) process technology 1

was required
Some process modifications were necessary, nothing major 2
No process changes required for introduction (skip to Q.19) 3

b) Please describe the new process technology briefly, in general (non-proprietary)

terms, that was requried for the introduction of the new product
(e.g., vendor supplied).

8. From the following list of information sources, please indicate which were the most
important sources of information for the development, production, and marketing
of the new product. (Fill in the numbers next to the function, as appropriate.)

Information Source Important for:

(please fill in numbers)

1. Trade shows
2. Suppliers
3. Articles in trade publications
4. Competitors a) Development
5. Customers
6. Government, other than military b) Production
7. Military (U.S. Government)
8. In-house information c) Marketing
9. Trade associations, other than trade shows
10. Consultants
11. Licenser
12. Joint venture partner
13. Foreign source
14. Other (please name)