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The linkage between new product development (NPD) and inter-firm relationships has received increased attention both in research and practice. A number of key success factors have been identified, many of which are related to the crucial role of customers and suppliers.
In particular, being able to access rich information and knowledge from key customers provides an understanding of the customers' problems and needs, which again is a critical success factor for the developer.
Involving customers and suppliers is therefore considered an important factor impacting new product success.
Customer involvement in NPD
External communication with key customers is a key success factor for product development projects. Such external communication increases the amount and variety of information, which in turn increases the quality of the development process. Direct interaction with customers can be regarded as a high-bandwidth mode of communication. Sellers need to determine how precisely they are willing to meet their customers' needs through the product configuration at an early stage of the NPD process.
An important aspect of a product configuration is reflected in the marketing strategy of the firm. Involving customers in NPD requires commitment to the relationship from both customer and supplier. NPD is a value creation strategy requiring actors to invest in specific assets dedicated to the relationship, thereby developing a close relationship characterized by commitment and a long-term perspective.
The firm's marketing strategy and the level of specific investments can thus be considered as two important factors impacting whether customer involvement will take place or not, and furthermore, the firm's marketing strategy is likely to impact the level of specific investments.
Product differentiation
Product differentiation is a widely used concept both in marketing and strategy. The aim of differentiation is to earn superior profit through, for example, reduced price sensitivity or achieving a price premium. Differences in product offerings can be perceptual and created by mechanisms such as usage experience, word of mouth and promotion, or actual and created by specific product characteristics
Differentiation is related to delivering something different to the customers compared to the offerings of the competitors, and developing and implementing a differentiation strategy requires access to information and knowledge. Such information and knowledge can be acquired through different sources such as market research and customer interaction.
Compared to traditional market research, close customer relations represent a high-bandwidth mode of communication that facilitates the transfer of complex, ambiguous and novel information. Such specialized, fine-grained information and knowledge from customers can be particularly valuable in product development processes in order to secure that the firm develops products and technologies in line with customer preferences.
A product differentiation strategy may also require actors to make specific investments. A differentiation strategy requires a "well-orchestrated" set of marketing tools and value chain. Specific investments in the customer interface, such as transportation and logistics, and information systems for ordering and delivering, may facilitate and ease the implementation of a differentiation strategy that requires close coordination across inter-firm boundaries. Furthermore, such investments may support and enhance crucial product attributes increasing the perceived value of the product.
Competitive orientation
Competitor orientation is the ability and willingness to acquire information about competitors' actions in the target market, and the will to respond to these. In particular, it refers to "the extent to which a firm will go to differentiate itself from competition.
A firm with a keen competitive instinct keeps up to date with information about its competitors' offerings, never fails to monitor its competitors' moves, and is often ready to react at short notice". Implicitly, a competitive orientation means that the company understands the strengths and weaknesses of its offerings compared to the offerings of other firms, and is ready to adapt its offerings if the moves taken by the competitors at any time give the firm's products a less attractive image.
Competitor orientation is closely related to product differentiation, as both dimensions concern how a firm is positioned compared to the competitors. However, while product differentiation represents a long-term strategy that cannot be changed at short notice, competitor orientation represents attention to the continuous competitor moves and adequate responses to these moves at short notice if necessary.
"Drawing on customer knowledge in product development should enable the supplier to develop products and services that provide more value and are superior in solving customer problems."
Responding to competitor moves by adapting products and services requires information that can be accessed at short notice. Competitor surveillance can be obtained through different sources of market research and market intelligence, but also through well informed and interested customers, often called lead customers. Such information can be used to match the moves of competitors through adjustment of product offerings. For example, customers may suggest how to develop products with a design that allows the firm to price its product lower than alternative products, or how to develop a product with a set of unique features.
Specific investments dedicated to customer relationships can also be undertaken in response to competitor moves. Such investments may enhance product customization, which provides the customer with "greater value by more completely addressing their idiosyncratic needs". Such investments can improve customers' perceptions of the strengths of the firm's offerings compared to competitors' offerings, and thereby reduce the firm's vulnerability to competitor moves. Competitor orientation can thus lead the firm to make specific investments in order to make it less attractive for the customer to switch to another supplier.
Brand profiling
Brand profiling emphasis refers to the extent to which the company profiles its brands and reputation in its sales and marketing activities. Generally, when a firm puts a high emphasis on brand profiling, it seeks to obtain highly desired and valuable market positions, resulting in an incremental increase in cash flow relative to the cash flow normally accruing to the product.
A strong brand profiling emphasis means that the supplier seeks to build brand equity and focus on the extra margins caused by the brand. In turn, it may be less attractive for the customers to be involved in NPD, as the customers may fear that they will be voluntarily participating in activities aiming at increasing the value of the supplier's brand. A strong brand profiling emphasis may thus result in customers that are less motivated to be involved in NPD.
Implications for relationship profitability
Drawing on customer knowledge in product development should enable the supplier to develop products and services that provide more value and are superior in solving customer problems.
Customer involvement should enable the supplier to develop improved functional requirements, modify product design to reduce production costs, or develop a design that meets the special needs and problems of customers to a greater extent.
Furthermore, customer involvement can enable more efficient ways of supplying products and services to the customer, by methods such as integration of supply activities into customers' processes or by improving procedures for communication and feedback. Taken together, these benefits should facilitate long-term rebuys of the supplier's products at a greater profit margin and thus result in superior relationship profitability.
Managerial implications
Both the overall firm strategy and the product market strategy have important implications for the approach taken in product development. Moreover, for realization of potential synergies between buyer and seller, the seller needs to be committed to the relationship.
Marketing strategy and commitment through specific investments are variables under the discretion of managers, and thus can be influenced. Hence, the design of an overall marketing strategy across all markets and at the product market level will have implications for the value created in conjunction with customers.
An overall product differentiation strategy and an emphasis on acquiring a unique position relative to competitors need to be followed up with greater specific investments aimed at customers, as well as intensive efforts to involve customers in the product development process. Such actions are important to realize gains through NPD.
It may be difficult for firms to simultaneously build close customer relationships and have a strong emphasis on brand profiling. Firms with strong brands may fear that if they make investments in specific customer relationships, the extra gains from branding may be subject to bargaining and partly claimed by the customers, and this threat may prevent the firms from establishing close relationships to customers. Hence, managers need to compare possible extra gains from branding to possible extra gains from closer customer relationships.
Suppliers need to evaluate the capacity and willingness of their customers to be involved in joint product development. Since high-involvement strategies usually require specific investments by both actors, the supplier needs to evaluate the customer's willingness to make such investments.
Furthermore, there is always a risk of being exploited by a partner acting opportunistically in such situations, and the supplier also needs to evaluate the customer's inclination to be involved in hold-up strategies in order to claim larger portions of the value creation in the relationship.
November 2011.
This is a shortened version of "Marketing strategy and customer involvement in product development", which originally appeared in European Journal of Marketing, Volume 45 Number 4, 2011.
The authors are Mons Freng Svendsen, Sven A. Haugland, Kjell Grønhaug and Trond Hammervoll.