Pressing the Right Buttons – New Product Development Strategy in High-tech Industries
By the very nature of the products they manufacture and market, companies in high tech-industries such as IT and telecommunications are under constant pressure to innovate. However, devising and launching increasingly sophisticated and novel products comes at a cost that may not be to the liking of all consumers. A trade-off between quality and marketability has to be made whereby the product standard remains acceptably high and the price sufficiently attractive. Just as importantly, the choice of development strategy will not only impact the end result but also the fundamental way in which a company works to produce that end result.
In an ever-more competitive market, it is increasingly difficult for companies from any industry to differentiate themselves from their rivals, hence the need to continue launching new products. Telecommunications is a prime example – one need only think of the hand-sized bricks that passed for mobile phones in the 1980s and compare them with the latest slim-line smartphones to see how far the industry has come and how far products have evolved. The ferocity of the competition can be illustrated by the fall of former giants Nokia, whilst the perils associated with technological innovation can best be summed up by the recent recall of the highly flammable Samsung Galaxy Note7. Technological advances are all very well but they must be properly gauged. On the flipside, in high-tech industries it has been calculated that 50% of a company’s success is generated by products launched in the last 5 years, so it is important that all players come up with new ideas and products. But, as a detailed look at telecom manufacturers Alcatel-Lucent and Huawei emphasises, there is a limit to just how much people are prepared to pay for the latest technological innovation. Getting the house in order can help develop a product that will keep the customer happy.
New Product Development = Firm Growth
The renewal of a company’s product range will, if successfully promoted, inevitably help the company in question to also diversify, adapt and reinvent itself in a changing market. Such a strategy prevents product lines from becoming obsolete, raises customer satisfaction, and creates new growth opportunities. To do so, companies need to gather market information, adopt a customer-oriented approach to project management and product release, ensure that senior and middle managers are working in harmony, and ensure that their internal organisational design is effective. A recent case study focusing on the respective Alcatel-Lucent and Huawei product development strategies shows the potential repercussions of getting this set-up right or wrong.
The study tackled the issue from two angles – the way each company worked internally and the perspective of their clients (in this case, China Telecom and China Unicom). From within the companies, data and feedback were collected by interview method with 27 representatives (10 senior managers and 17 engineers/designers) covering a range of departments, from marketing and sales to R&D, business development and industrialisation. On the client side, 6 senior managers were interviewed. The results offer fascinating insight into just how significant the impact can be of opting for a market-oriented strategy or an approach built upon technological excellence.
Putting the customer first
Two very different set-ups as well as strategies emerge from the findings of the interviews and data collection. Alcatel-Lucent, which has seen a downturn in revenue since 2007 and annual growth at a historical low of -20% in 2014, had previously built its reputation upon technological know-how, ultimately resulting in more expensive products that took longer to reach the market. In-house it is the chief technology officer who manages new product development and projects are handled by different divisions in a linear structure that does not allow for overlap when a project goes beyond the remit of a particular division. In short, in the eyes of their customers their products are too costly and less marketable – they are in the process of pricing themselves out of the market, as a result of their strategy and the way they implement and organise this strategy internally.
By contrast, Huawei has enjoyed a boom over the same period, with annual revenue soaring from $2.7bn in 2002 to $46.5bn in 2014. They now enjoy the status of being the world’s largest telecom equipment manufacturer. This success has spawned from a customer-oriented strategy, where the level of technological innovation is considered less important than meeting customer needs and keeping prices at a reasonable level. In-house, it is specialists from the marketing and sales departments but with the required technical knowledge who drive their product development strategy. Resources are shared across the board at corporate level and close interaction is maintained at all times with operators. The contrasting fortunes of the two companies over the period in question would seem to be rather more than pure coincidence…
When perfectionism comes at a cost
It is perfectly understandable for a company operating in the high-tech sphere to want to maintain as high a technical level of excellence as possible. However, faced with competition from companies proposing admittedly less sophisticated but ultimately more marketable and affordable products, the pursuit of technological excellence makes less sales sense. The telecom industry has shifted from a high-tech one to a commodity-based one, to the extent that customers are no longer prepared to accept delayed product launches caused by overly sophisticated developments.
The perfectionist approach as embodied by Alcatel-Lucent has its merits but, in the face of current market competition, is in danger of losing on an increasing basis. If companies operating in that industry (and, indeed others) want to boost flexibility and growth, then they should seriously consider the kind of cross-boundary organisational structure identified in Huawei, thereby enabling them to mobilise R&D resources and knowledge at an overall corporate level in order to achieve their targets.
By Jie Xiong, assistant professor of Strategy and Innovation at Rennes School of Business, France. His research interests include corporate strategy and international business.
This article draws inspiration from the paper Alcatel-Lucent falls, Huawei ascends: new product development makes the difference, written by Jie Yan, Le Wang and Jie Xiong and published in The Journal of Business Strategy, vol. 38 no. 1 (2017).