Of Resources and Opportunities

Of Resources and Opportunities

Danneels with products from Smith Corona. Pictured are antique typewriters, plus a now-obsolete "portable personal word processor." The company provides a fascinating case study for Danneel's research on product innovation and corporate renewal.

Why do some companies thrive and grow like well-tended plants, while others bloom and fade like cut flowers? How do some firms manage to adapt to shifts in technology and the ebb and flow of market demand, while others gradually become footnotes in corporate history?

Erwin Danneels, associate professor of management at WPI, has been pondering questions like these for a number of years. As an authority on the link between product innovation and organizational renewal, his insights help executives think more clearly about the challenges and benefits of exploring new technologies and new markets, and the lost opportunities that result from not making the most of their assets.

Having conducted up-close field studies of individual companies and large scale surveys of American public manufacturing firms (his latest project is funded by the National Science Foundation), Danneels says he sees the process of new product development as a sort of continuum where the effort and risk depend on whether firms can exploit existing competencies or whether they must develop new ones. Exploiting only existing competencies is the easiest route, but does the least to propel a company forward and shield it from environmental changes. Exploring a new technology and a new customer base entails significant risk. The middle route is most attractive: leveraging an existing competence to explore either a new technology or a new market.

In articles published in 2002 and 2007 in the Strategic Management Journal, Danneels reports on an in-depth study of five manufacturing firms. One of those companies (dubbed “Cheman”) developed a technology that fuses a silicon-based coating onto stainless steel, making the metal inert. Using the technology, the com-pany created new products that were popular with existing customers, but it realized that the technology could have a broad range of applications in other markets.

“Cheman” had made the first step to leverage its technology to new markets: it was able to mentally “de-link” the technology from the products themselves and to see it as fungible. The company believed the technology could become the root of a host of potential applications, but it faltered in building the resources necessary to serve those markets, such as developing a deep understanding of prospective customers and building a sales force with the necessary access and expertise. Though executives were sure the technology represented a path to virtually unlimited growth, their lack of knowledge of how to address other markets and their hesitation to invest adequate funds proved insurmountable barriers to extracting the potential value from their new technology.

“Cheman’s” experience illustrates a common occurrence, Danneels says. “Many firms sit on technologies that they could do a lot more with, by developing more products or selling the intellectual property, but they don’t have the marketing acumen to know which markets to address and how to do it.”

Danneels says companies should carefully consider which resources and competencies they have, and how they can be applied profitably. One set of primary resources and competencies is the technologies that underlie their products and the related engineering and manufacturing knowledge required to turn them into products. The other set relates to the company’s ability to serve certain customers—its brand, its knowledge of its customers, and its sales and distribution channels.

Danneels says these can add up to both an avenue for growth and a straitjacket. Developing and capitalizing on company resources is like walking down a path, he says. The farther down the path the company travels, the more likely it is to continue and the less attractive it becomes to consider alternatives.

“You must explore—that is, develop new resources and competencies,” he says. “Even if you are doing well right now, you could be missing opportunities to do even better. In addition, just exploiting current competences puts you at risk should an environmental event make your technology or your market competence obsolete.

“Your historical choices constrain your future choices,” he adds. To overcome this “path dependency,” firms need what Danneels calls second-order competencies. “Those are driven by the ability to evaluate and pursue other opportunities, which is dependent, in turn, on marketing and R&D competencies (the competencies to serve new markets and build new technologies). Danneels’s research is devoted to understanding these second-order competencies, the kinds of organizational cultures and top management teams that support them, and how they affect product innovativeness and financial performance.

Danneels says that new research based on his own work shows that inexperienced entrepreneurs tend to focus on only one opportunity, while serial entrepreneurs consider multiple opportunities and markets before they dive in—which leads to greater success. “New entrepreneurs develop or license a technology, but their horizon of market opportunities is limited by their industry background,” he says. “They often stick with what they know, which is, per se, not such a bad thing—it’s just that it may lead them to make suboptimal choices. Repeat entrepreneurs develop a second-order marketing competence which gives them a broader appreciation of the options.”

Getting the most out of technologies is important, Danneels says, because when a technology’s potential lies fallow, the result is more than lost revenue. “There is a lost societal benefit,” he notes. “If you have a technology that could be used in different applications and customers would be willing to pay for products that use that technology, it shows there is a benefit not being realized. And the sum of all of those benefits is our welfare."

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