Question 1: Reflect back on the readings and cases we discussed. Apply what you learned to one of the cases we discussed (Aqualisa Quartz, Surface Logix, Rohm and Haas, Nutz, CHEMAN, or Encyclopedia Britannica), and answer the questions listed the case you choose.
[Aqualisa Quartz: Why has the adoption of the new shower been so lackluster? How should the new shower be marketed?
Surface Logix: Should the firm pursue the food deal or the pharma deal?
Rohm and Haas: What price do you recommend for Kathon MWX? Applying the typology from the reading “The Dynamics of Product Innovation and Firm Competences,” what type of product is MWX? What consequences does that have for how MWX has been or should be marketed?
Nutz Inc: Evaluate the new product portfolio of Nutz Inc. according to the criteria in the reading. Which of the three products would you give the GO-decision?
CHEMAN: Evaluate CHEMAN’s efforts leverage its technology in light of the advice given in “Findings Applications”. What should CHEMAN have done differently?
Encyclopedia Britannica: What resources did EB have, both market-related and technology related, before entering digital media? Could these resources be leveraged to digital media? What resources were missing for the entry to digital media?]
Question 2: Reflect back on the readings and cases. Apply what you learned to a firm of your choice and formulate recommendations to make that firm more innovative. You can interpret “more innovative” as you choose, such as introduce more products, develop more innovative products, reduce cycle time, take better advantage of new markets or new technologies, etc.A Primer on Writing
Erwin Danneels
Credibility
Bad writing conveys a lack of:
• Interest
• Diligence
• Intelligence
• Professionalism
Writing is work
• Writing is hard work
• Good texts are revised, over and over again
• Start by putting your ideas down, and worry
about style and rules later
• Proof-read, spell-check, and grammar-check
• Read your writing out loud
Structure
• Start with your conclusion, and then
support it
• Business texts are not novels – Don’t
keep the business reader in suspense
• Never make readers wonder, “What
are you getting at?”
• Write to inform, not to entertain
Layout
• Readers love headings
– most readers scan headings first
– give a sense of comprehensiveness and details
– help the selective reader
• Improve the appearance and readability of
your writing by using plenty of white space
• Use 1.5 line spacing (as opposed to single
or double spacing)
• 11 point text tends to be best
Flow
• Be succinct
• Group similar topics together
• Write self-contained captions to tables
and figures
• Cite your sources of information in
footnotes at bottom of the page, with a
full list of references as an addendum
• Avoid acronyms
Flow
Common errors
• one company (one company’s products) many companies (many companies’
products)
• one customer’s needs – many customers’
needs
• one child’s education – many children’s
education
• there is a problem – this is their problem they’re my students
• you’re leaving – this is your coat
• it’s finally here – a company and its
customers
Common errors
•
•
•
•
•
•
•
•
compliment vs. complement
simple vs. simplistic
elicit vs. illicit
principal vs. principle
lose vs. loose
prospective vs. perspective
bear vs. bare
concerning vs. of concern
Common errors
• to affect something – to have an effect on
something
• a lot of problems (instead of “alot”)
• they could have done well (instead of “could
of done well”)
• a person who has problems – a company
that has problems
• this is the guy whose bike was stolen – ok,
who’s the wise guy?
• one criterion – many criteria; one medium many media
• an ad for a product – to add a class
Actual student writing
• “If you want to be successful, your company
has to emphasize customer service.”
• “Portfolio management ensures the correct
projects are accepted, and then can
prioritized projects based on the firm’s
strategic strategy.”
• “In today’s business people are either
growing or dying, and what they do in regard
to innovation directly impacts this
dichotomy.”
Actual student writing
• “With a core that comprises 5 of the top
scientists in Soft Lithography working on
commercial applications, though the food
deal might not be in the company’s “Sweet
Spot” and short sighted Surface Logix
should not have any problem coming out of it
and trying to concentrate in its preferred
categories of life sciences, photonics and
electronics.”
Actual student writing
• “In the case, there is evidence to point to the
idea that if excavating the bathroom was not
an issue, most clients would pick the mixer
shower because they do not like the electric
and power showers for a few reasons
including the bulky boxes, and the unreliable
nature.”
Actual student writing
• “The framework will provide the ABC team
with the tools to conduct this analysis and
help them determine the optimal solutions to
meet there desired goals.”
• “Because of the type and range of their
products, it creates a result in a path
dependency which culture invokes a firstorder technological competency as well as a
second-order competency that is good at
accessing new markets. Yet, they lack the
marketing competence.”
Actual student writing
• “A consequence of not using this preexisting consumer competence factor would
result in the lack of consumer awareness,
even a loss of profit. … A combination of
these marketing strategies leads to a few
profitable consequences. Consumer
awareness and product focus become the
catalyst for a more lucrative new product
development strategy.”
Still the best reference
• Strunk, William Jr. and E.B. White The Elements of Style
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REV: JULY 10, 2006
YOUNGME MOON
Aqualisa Quartz: Simply a Better Shower
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Plumbing hasn’t changed since Roman times.
— Tim Pestell, Aqualisa national sales manager
Harry Rawlinson (HBS ‘90) shrugged out of his overcoat and headed to the reception desk of the
South Kent County Marriott. “Can you direct me to the breakfast room?” he asked, “I’m meeting
some guests from America.” The receptionist pointed toward a hallway lined with photographs of
the region’s golf fairways and putting greens. “It’s just to the left down there,” she said. As he strode
down the narrow corridor, Rawlinson, managing director of Aqualisa (see Exhibit 1), a U.K. shower
manufacturer, felt a surge of energy. He had been looking forward to this opportunity to discuss an
HBS case possibility.
tC
In May 2001 Aqualisa had launched the Quartz shower, the first significant product innovation in
the U.K. shower market since—well, to Rawlinson’s mind—since forever. But here it was early
September 2001, and the euphoria surrounding the product’s initial launch had long since faded.
Rawlinson knew the Quartz was technologically leaps and bounds above other U.K. showers in terms
of water pressure, ease of installation, use, and design. But for some reason, it simply wasn’t selling.
The U.K. Shower Market
No
Rawlinson leaned forward as he began to explain his situation. Showers in the U.K. were plagued
with problems. While everyone had a bathtub, only about 60% of U.K. homes had showers. Archaic
plumbing, some of it dating to the Victorian era, was still common in many homes. For the most part
this plumbing was gravity fed; a cold-water tank or cistern sat somewhere in the roof, while a
separate boiler and cylinder were needed to store hot water in a nearby airing cupboard.
Do
Gravity-fed plumbing meant poor-to-low water pressure, about 3 to 4 liters per minute.1 Gravityfed plumbing also created frequent fluctuations in pressure, which caused the temperature to
noticeably vary from minute to minute. If the pressure from the cold-water pipe decreased
momentarily, the flow from the hot water pipe would increase, immediately raising the temperature.
1 Water pressure in the United States, in contrast, is generally at least 18 liters per minute.
________________________________________________________________________________________________________________
Professor Youngme Moon and Research Associate Kerry Herman prepared this case. HBS cases are developed solely as the basis for class
discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Some data have been modified or disguised.
Copyright © 2002 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
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These two problems—low pressure and fluctuations in temperature—were typically addressed
through the use of either electric showers or special U.K. shower valves.
Electric showers used water from the cold water supply. Electrical heating elements in the
shower instantaneously heated the water to the required temperature, eliminating the need
for a boiler to store hot water. While this made electric showers convenient for small
bathrooms, the electrical components were usually mounted in a bulky white box that was
visible in the shower stall. In addition, electric showers did nothing to address the poor water
flow of many showers in U.K. homes, since the flow was limited by the amount of energy that
could be applied to heat the water instantaneously. Aqualisa sold electric showers mostly
under a separate brand name, the “Gainsborough” brand. (See Exhibit 2 for shower sales by
type and brand.)
2.
Mixer shower valves came in two types: manual and thermostatic. Both types blended hot
and cold water to create a comfortable temperature, but while thermostatic valves controlled
the temperature automatically, manual valves required the user to manually find the right
temperature mix. Installing a mixer valve meant excavating the bathroom wall, which was
often a two-day job. If a user wanted to boost water pressure, an additional booster pump
(typically costing from €350 to €600) could be installed to enhance the flow rate.
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1.
The Aquavalve 609 was the company’s core product in the mixer-shower-valve category. At
about 60,000 units per year, it was by far Aqualisa’s top-selling shower. It was regarded by
plumbers as being a high-quality, reliable mixer shower with state-of-the-art technology. It
cost about €155 to manufacture and sold (at retail) for €675 to €750. The Aquavalve 609 was
thermostatic and could be supplemented by an Aquaforce booster pump to create stronger
pressure.
Integral power showers consisted of a single compact unit that combined a thermostatic
mixer valve and a booster pump. Although they provided up to 18 liters of blended water per
minute, they had to be mounted in the shower, resulting in the presence of a bulky box on the
wall. In addition, these units were generally regarded as being less reliable than a mixershower and booster-pump combination. The Aquastream Thermostatic was Aqualisa’s
primary product in this category. It cost about €175 to produce and sold (at retail) for about
€670. At about 20,000 units per year, it was Aqualisa’s strongest-selling shower in the power
shower category.
No
tC
3.
Do
Most consumers could readily identify what they disliked about their showers—poor pressure
and varying temperature being at the top of the list. But there were other complaints as well.
Showers often broke down, or “went wrong,” as Rawlinson described. “They break after awhile. The
mechanisms get gummed up with lime scale, making the valves stiff and hard to turn; the seals start
to leak, or they go out of date.” As a result, consumers complained about hard-to-turn valves, leaky
seals, and worn-out showers. (Almost half the U.K. shower market consisted of sales of replacement
showers—see Exhibit 3.) On the other hand, consumers were generally uninformed about showers,
and there was little understanding of product options (see Exhibit 4). Brand awareness was low;
only one company in the market (Triton) had managed to build brand awareness at the consumer
level.
Shower buyers in the U.K. tended to fall into one of three pricing segments: premium, standard,
and value. Consumers in the premium segment typically shopped in showrooms; they took for
granted high performance and service, and for them style determined their selection. Consumers in
the standard price range tended to emphasize performance and service; they usually relied on an
independent plumber to recommend or select a product for them. Consumers in the value segment
2
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Aqualisa Quartz: Simply a Better Shower
were primarily concerned with convenience and price; they liked to avoid solutions that required any
excavation and tended to rely on an independent plumber to select a product. (See Figure A for
Aqualisa’s core product offerings in the various shower categories.)
Figure A
Aqualisa’s Core Product Offerings in the Various Shower Categories2
Aqualisa’s Core Product Offerings
Type of Shower
Value
Standard
Electric Shower
• Does not require hot water supply
• Results in bulky box on the wall
• Low flow rate
Mixer Shower
• Requires both hot and cold water supply
• Requires additional pump to address
pressure problems
• Installation typically requires excavation of
bathroom
Aquavalve
Retail: €390
Aquavalve 609
Retail: €715
Power Shower
• Requires both hot and cold water supply
• Results in bulky box on the wall
• Regarded as less reliable than a mixershower and pump combination
Aquastream
Manual
Retail: €480
Aquastream
Thermostatic
Retail: €670
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Aqualisa.
Gainsborough
Retail: €155
Aquastyle
Retail: €230
tC
Source:
Gainsborough
Retail: €95
Premium
No
In addition, there was a sizeable do-it-yourself (DIY) market in the U.K. Do-it-yourselfers
generally shopped at large retail outlets that catered to them (for example, the popular B&Q, which
modeled itself after Home Depot in the United States). These customers were primarily interested in
inexpensive models that were easy to install, even though the DIY products were bulky and
unattractive. Electric showers were the overwhelming choice in this segment. They could be
adapted to all water systems and could be installed in a day; they were particularly popular among
landlords and apartment dwellers.
Finally, there was a significant property developer market in the U.K. Most developers did not
need to worry about pressure problems because new homes were almost exclusively built with highpressure systems. Developers faced a different set of issues, preferring reliable, nice-looking products
that could work in multiple settings. Developers were also price-sensitive; with the exception of
luxury builders, most developers did not feel the need to invest in premium valves. Developers
usually had relationships with independent plumbers who installed whatever product they selected.
Do
Aqualisa sold to developers under its ShowerMax brand, which was available only through
specialist contract outlets. Elements of the Aquavalve technology had been redesigned and rebranded for the ShowerMax product line and optimized for developers’ specific needs. Because new
homes did not use gravity systems, ShowerMax could deliver a high-pressure shower—with
2 Aqualisa offered a variety of other specialty shower models in each of these categories. The differences between these
showers were primarily stylistic (e.g., contemporary, antique, brass, etc.).
3
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Aquavalve technology—at a significantly lower cost. Rawlinson commented, “Aqualisa’s core
products are too expensive for them because of extra features aimed at the retail market. Even at a
discounted price, they consider Aqualisa too high-end. But a cut-down product branded
“ShowerMax” just for them, at the right price—they love it.”
Rawlinson continued:
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Real breakthroughs are pretty rare in the shower market. Innovations are primarily
cosmetic. Most of the major manufacturers recycle their product line and relaunch their main
products about every four or five years. It refreshes your brand, but market share doesn’t
really change. At Aqualisa, we’ve tended to do a relaunch every three to four years.
Aesthetically we’ve changed the look, and we’ve made incremental technological
improvements to boost the performance and quality, but it’s basically been the same
mechanisms inside. These aren’t breakthrough innovations we’re talking about.
Channels of Distribution
Showers in the U.K. were sold through a variety of channels (see Exhibits 5 and 6), including
trade shops, distributors, showrooms, and DIY outlets.
tC
Trade shops. Trade shops (or plumbers’ merchants) carried products across all available brands.
Their primary customer was the plumber, who worked for developers, showrooms, contractors, or
directly for consumers. Trade merchants tended to stock whatever there was demand for. The
Aqualisa brand was available in 40% of trade shops. As Rawlinson put it: “The staff in these outlets
don’t have the time to learn all the features and benefits of the 45,000 items they offer. They focus on
making sure they have the right stock of products that are in demand. Their customers are looking
for reliable product availability more than technical advice.”
No
Showrooms. Distributors supplied showrooms, which tended to be more high-end. Showroom
“consultants” typically led consumers through the process of selecting and designing a bathroom
“solution.” A shower might be one small part of an overall renovation project. Various shower and
bath options were displayed in the showroom, and although no inventory was held on location, these
ensembles allowed the consumer a chance to view the product in a pleasant environment.
Showrooms preferred to carry high-end product lines and brands (for example, Hansgrohe, a highend German brand) unavailable in other channels. Showrooms also offered installation services by
subcontracting with contractors and independent plumbers. There were about 2,000 showrooms in
the U.K.; the Aqualisa brand was sold in about 25% of them.
DIY Sheds. Do-it-yourself retail outlets like B&Q offered discount, mass-market, do-it-yourself
products. Electric showers, because they were cheaper and easier to retrofit, led sales in this channel.
The Aqualisa brand was unavailable through this channel, but its Gainsborough brand was available
in 70% of the approximately 3,000 DIY outlets in the U.K.
Do
Plumbers (Installers)
There were about 10,000 master plumbers in the U.K. Plumbers had to undergo several years of
training and three years of apprenticeship to become master plumbers. There was a significant
shortage of master plumbers in the U.K., and as a result, consumers often had to wait six months
before a plumber could take on a new job.
4
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A standard shower installation was usually a two-day job and required significant bathroom
excavation.3 Plumbers—who installed 40 to 50 showers a year—charged about €40 to €80 per hour,
plus the cost of excavation and materials (plumbers usually passed the cost of the shower and other
materials on to the consumer with a small markup). Because prices to consumers were usually
quotes as lump sums, consumers were often unaware of how the costs broke down (labor, materials,
excavation, and so on).
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For plumbers, unfamiliar products could present unknown performance problems, and a bungled
installation often required a second visit, paid for out of the plumber’s pocket. For this reason,
plumbers generally preferred to install a single shower brand and were extremely reluctant to switch
brands. Loyalty to a single brand created expertise in a given brand’s installation idiosyncrasies and
failure problems. Over time, plumbers also liked to familiarize themselves with the service they
could expect from a manufacturer.
As a general rule, plumbers distrusted innovation. For example, in the 1980s some manufacturers
had introduced electronic “push-button” controls for temperature settings. Rawlinson recalled: “The
mechanisms were poorly designed and didn’t work well at all. Ever since that, there’s been a great
deal of skepticism toward anything that seems technologically newfangled—especially if it involves
electronics.”
The Development of the Quartz Shower Valve
tC
Historically, Aqualisa’s reputation had always been strong in the U.K. shower market; the
company was generally recognized as having top quality showers, a premium brand, and great
service. Aqualisa’s market share ranked it number two in mixing valves and number three in the
overall U.K. shower market. (See Exhibit 7 for additional information on Aqualisa’s financials.)
No
However, when Rawlinson joined the company in 1998, he believed it was vulnerable, for several
reasons. First, Rawlinson believed that other companies were catching up to Aqualisa in terms of
product quality. Second, Rawlinson feared that the market was beginning to perceive Aqualisa
products as being overpriced (see Exhibit 8). Third, while Aqualisa’s service was still regarded as
being “great,” actual service had slipped over the past few years. And finally, about 10% of Aqualisa
showers still “went wrong,” a percentage that hadn’t improved in many years. Rawlinson
remembered:
When I first joined Aqualisa in May of 1998, what I found was a highly profitable company
that was quite comfortable with its niche in the market. It had 25% net return on sales and was
enjoying 5% to 10% growth in a mature market. Everyone was happy. But I was worried.
I knew the current points of difference were eroding and that eventually the market might
implode on us. From the start, I firmly believed that the future was to focus on innovation.
Rawlinson’s first priority was to build a research and development (R&D) team:
Do
We brought together a top-notch team of outsiders and insiders to look at the future of
showers. We had engineers, R&D, our sales and marketing director, and a market research
guy. We did research studies to understand peoples’ problems and attitudes to showering.
We had a top industrial designer and a bunch of Cambridge scientists who apply technology
to industrial applications. We put all these people into a huddle—held brainstorming sessions,
3 Typically, the plumber would either excavate himself, or he would subcontract the work to a plasterer. The price plumbers
charged for excavation varied significantly.
5
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with flip charts and felt-tip pens. And we came up with all kinds of things to improve in a
shower.
As a result of their market research, Rawlinson realized that the consumer wanted a shower that
looked great, delivered good pressure at stable temperatures, was easy to use, and didn’t break
down. Plumbers wanted a shower that was easy to install, with a guarantee to not break down or
require servicing. The team’s brainstorming led to some real breakthroughs. Rawlinson noted:
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The breakthrough idea was to locate the mechanism that mixes the water remotely—away
from the shower. All the problems with showers come down to the fact that you have to put a
clumsy, mechanical control right where the user doesn’t want it—in the shower. And that’s
why you get these big bulky boxes on the shower wall. Or you’re constrained to put the
mechanism somewhere in the wall behind the shower—equally difficult and costly to install or
repair. But locating the mechanism remotely—all of a sudden that opened up all kinds of
opportunities because now you didn’t necessarily have to excavate.
The problem was, how could a user control a mechanism that was located remotely? And
that’s when we brought the electronics people in. Of course, that generated a lot of skepticism,
because electronics had flopped so terribly in the ‘80s. But nobody had ever thought of using
the electronics to control the valve remotely. And when we came up with the idea, we realized
very quickly that it had huge potential.
Once the product started to take shape, field tests were next. Rawlinson arranged for about 60
consumer field test sites, installing showers in the homes of sales reps, company personnel, and
friends of friends. Feedback from the field tests prompted constant modifications. He recalled:
tC
Consumers told us they wanted maximum pressure. But once we gave them maximum
pressure (about 18 liters per minute) consumers felt it was wasteful. So we had to give them
the option to run at two-thirds speed—which they liked more than maximum pressure.
No
With the temperature settings, it was the same thing. We knew from our research that the
optimal water temperature was 41° [Celsius]; anything above that would be uncomfortably
hot. So we created this temperature control that had an upper limit of 41°. But people hated
the fact that it required them to turn the valve all the way to the right, into the “red zone” on
the indicator. Even though nobody wanted their water hotter than 41°, they all wanted the
option of being able to make the temperature hotter. So we reset the maximum to 45°, people
set their temperature at 41°, and everyone liked that much better.
Do
After three years of development—during which the company spent €5.8 million—the result was
a radically different kind of shower (called Quartz) that cost the company about €175 to €230 to make.
By this time, the company had invested in a new state-of-the-art testing facility, had acquired nine
patents, and had grown its engineering team from 6 to 20. Several additional products were in
advanced stages of development, while dozens of other ideas were in the early stages of the newproduct development pipeline.
The Quartz: A Breakthrough in Shower Technology
The Quartz came in two versions. The Quartz Standard Shower was designed for installations
that already had, or did not need, a pump; the Quartz Pumped Shower included a pump.
6
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Figure B
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To install the Quartz shower, the plumber had to identify a physical space to accommodate the
remote processor, which was about the size of a shoe box. The processor contained the thermostatic
mixing valve, and when applicable, the pump. The location of the processor could be anywhere
within reasonable proximity to the shower—under a cabinet, behind a wall, inside a closet, in the
ceiling, wherever. The device could be mounted horizontally, vertically, or on its side, depending on
space constraints. The only requirements were that it had to be in a location where cold and hot
water could be piped into the processor, and it had to be plugged into a standard power outlet. Once
these requirements were met and the processor was in place, a single pipe fed the mixed water from
the processor to the showerhead. Because of the flexibility associated with locating the processor
remotely, excavation of the bathroom could often be avoided altogether. Instead, a plumber had only
to drill a single hole (to accommodate the pipe feeding the mixed water to the showerhead, along
with a data cable) into the ceiling above the shower (see Figure B).4
The Quartz Technology
Only need to drill a
single hole in the
ceiling
Simple
screws attach
control to the
wall
Hot and Cold
piped in from
convenient
remote location
Pump
Electronically
controlled valve
No
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Shower rail
carries
blended water
and data cable
Source:
Aqualisa.
Do
The benefits of Quartz were significant. Whereas a traditional shower installation took two days,
some plumbers were already reporting an installation time of a half-day for the Quartz. Plumbers
were finding that the installation was so straightforward that they could even send their young
apprentices—many with little or no experience—to complete the entire job. Rawlinson had spoken to
several plumbers during the field trials, “They raved about it. They said, ‘It’s just what we want! We
need something like this that we can push-fit-connect-you’re done. It’s not in the wall, and it’s very
easy to use.’”
4 The ease of installation was a big selling point for the Quartz. In fact, it was so easy that the installation guide itself was
being used in Quartz’s promotional and sales materials.
7
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For the consumer, the Quartz shower provided efficient and reliable water pressure and
temperature. In addition, it featured a “one-touch” control mounted on the shower wall. The easyto-use push-button control light on the valve flashed red until the desired temperature was reached
(see Figure C). Rawlinson remembered that this had been another feature with unexpected
psychological benefits:
When consumers turn a traditional shower on, they almost always turn the shower to very
hot … and then wait for it to warm up. They usually have to stick their hand in the shower a
few times until they feel it’s hot enough to get in. Once they’re in the shower, they
immediately start fiddling with the controls again. It’s incredibly inefficient and inconvenient.
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With our Quartz technology, the temperature control is automatic—there’s no more
fiddling. You don’t have to manipulate anything anymore. Just set the temperature once, and
leave it on that setting. When you want to use the shower, just press a button, and you’ve
turned the shower on. When the red light stops flashing, you know the water’s at the right
temperature. Get in.
During field trials, consumers loved it. “We call it the ‘wow’ factor,” Rawlinson said. “They
loved how it looked; it delivered great power, and now it had neat fittings and push-button controls
that lit up. Parents loved it because it was safe for their kids to use on their own. The elderly loved it
because they didn’t have to fight with stiff valves. What wasn’t to love?”
The Quartz Thermostatic Control
No
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Figure C
Source:
Aqualisa.
Do
Rawlinson was already anticipating upcoming product releases. In a few months, Aqualisa
would be ready to launch a Body Jet product that fit easily on top of the Quartz control valve,
creating several jets of water that sprayed horizontally from the wall onto one’s body. This feature
was popular in spas and health clubs; women particularly liked it because it allowed them to shower
without getting their hair wet. The R&D team had also just finished designing a “slave” remote for
the Quartz. Rawlinson described it: “Imagine waking up in the morning, rolling over, and pushing a
‘remote control’ next to your bed that turns your shower on. By the time you stumble in the
bathroom, your shower is ready with the water at the right temperature, waiting for you to get in.
Because we’re dealing with electronics, the wireless technology to do this is almost trivial.”
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In fact, Rawlinson and the R&D team could spend endless hours coming up with new product
ideas; as Rawlinson liked to say, “Once you put a computer in the bathroom, the potential is
unlimited!”
To launch the new product, Aqualisa had hit the major shows, like the Bathroom Expo in London
in May 2001. At the Expo, the Quartz had been awarded the top prize.5 Press events had been
coordinated with demonstrations. The trade press had raved about the “cleverness” of the product
and its “elegant design.” One reporter wrote:
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Imagine a shower that takes less than a day to fit, doesn’t have flow problems, offers
accurate temperature control, is simplicity itself to use and comes in versions to suit all water
systems. It sounds too good to be true—but after three years of brainstorming . . . Aqualisa has
achieved the apparently impossible with a product that takes a genuinely new look at a set of
old problems—and solves them.6
Other reviewers had been similarly positive, and the Quartz had been featured on the covers of
several prominent trade journals.
Initial Sales Results
tC
Aqualisa had a 20-person sales force that sold to distributors, trade shops, showrooms,
developers, and plumbers. Tim Pestell, Aqualisa’s national sales manager, described the sales team’s
priorities: “Our sales force spends about 90% of their time on maintaining existing accounts—
servicing existing customers: distributors, trade shops, contractors, showrooms, and developers. Ten
percent of their time is spent on developing new customers.” Aqualisa’s sales force also had longstanding direct relationships with a group of plumbers—“our plumbers” as director of marketing
Martyn Denny called them—who were very loyal to the Aqualisa brand.
With the launch of the Quartz, the Aqualisa sales force had contacted its network of plumbers,
calling face-to-face to introduce and explain the new product, but few actual sales had resulted.
Indeed, despite all the early excitement over the product, and despite being made available in all of
Aqualisa’s normal channels, very few units had sold in the first four months on the market.
Rawlinson worried:
No
Our channel partners are sitting there having bought a thousand of these Quartz products,
and they’ve sold 81. The poor product manager is looking pretty stupid at this stage. This is a
huge problem for us—pretty soon they’re going to write this off as a failure and forget about
us. I can see a scenario in six months’ time where real sales in the market—currently about 15
units a day—are still down at 30 or 40 units a day. We’ll look like a niche product. We’ve got
to sell 100 or 200 a day to break through to the mainstream.
Do
Part of the problem was that plumbers were wary of innovation, particularly any innovation
involving electronics. Rawlinson told the story of a personal friend who had to insist that her
plumber install a Quartz:
His initial reaction was negative. He said, “Oh no, I wouldn’t put one of these in, Madam.
I’ve had these electronic showers before. They don’t work.” She insisted and made him put it
5 “Showered with Success,” Bathroom Journal, June 2001, p. 13.
6 Ibid.
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Aqualisa Quartz: Simply a Better Shower
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in. He told her it would take two days. He was done by lunchtime the first day. And he said,
“That was so easy. Can I have the brochure?” And now he’s got two or three more jobs. So
once a plumber puts one in, he’s a convert.
Pestell, however, noted that given the conservative nature of most plumbers, “Adoption is a long,
slow process. It takes time.” In addition, he pointed out:
Some people at the company think the Quartz will eventually replace our core product—
the Aquavalve—and become mainstream. I think it’s really a niche product—it’s good for
homes with children, or for the elderly and the handicapped. It’s easy to use, safe and so on,
but we can’t forget our core products every time we launch something new. The Aquavalve is
our bread and butter, and it can go away if no one’s watching.
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Denny concurred, “How do we pitch our other products alongside Quartz? Right now, if Quartz
is mentioned, our salesmen tend to gloss over our other products. In fact, to sell the Quartz, they
have to point out deficiencies in our existing products. That doesn’t really make any sense, does it?”
According to Rawlinson, the only place Quartz seemed to be gaining any traction was in the
showrooms:
Showrooms are traditionally quite a niche market. But I think we’ve made some
penetration into that sector, and we’re starting to get working displays around the country.
Because you put one of these things in, you press that control button, the little red light comes
on: it’s sold! Everybody loves it. And where it’s gone in—a working display—it’s become the
leading product in that showroom almost immediately.
tC
A Shift in Marketing Strategy?
The waitress began to clear the coffee cups. Rawlinson absently dusted at the crumbs on the
tablecloth as he leaned forward and said:
No
Once upon a time Microsoft was a tiny little provider of specialist software. Bill Gates had
the vision to see that if you own the operating system on the PC, you can build from there.
One of our presentations calls the Quartz the “Pentium Processor” because we can do so much
once we have this kind of control over your bathroom . . . we can use this technology with a
shower . . . but in the future we could use it with a bath, the sinks, whatever . . . . We’re only
limited by our creativity.
Do
The question was, how to generate sales momentum? Was the problem that the Quartz was
priced too high? Rawlinson wondered whether a discounted price might generate more market
enthusiasm for his innovation. Because Quartz was such a breakthrough product, Rawlinson was
loath to go this route. On the other hand, Rawlinson was willing to rethink his overall marketing
strategy for the Quartz. Some of the marketing options he was debating included the following.
Targeting Consumers Directly
“We have so many problems reaching the plumbers,” Rawlinson continued. “So I’m thinking to
myself, why not target consumers with this product and try to build a consumer brand? Triton has
proven that it can be done. And if there’s ever been a breakthrough product to do it with, this is it. I
think this is a ‘bet the company’ kind of product.”
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The problem with this option was that Rawlinson was finding it tough to justify a high-risk, highreward strategy when company results were already healthy. As a test, a one-time-only print
advertisement campaign was scheduled to run in The Mail on Sunday magazine in October (see
Exhibit 9 for copy of the advertisement). But, as Rawlinson noted, “One ad does not a campaign
make. I’m not overly optimistic.” A large-scale consumer campaign would cost about €3 million to
€4 million over two years. With a net income of about €17 million, this would be a very tough sell
across the company.
Targeting Do-It-Yourselfers
op
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A second alternative was to target the do-it-yourself market. Rawlinson noted, “The Quartz is so
easy to install, you or I could even do it.” Aqualisa was currently selling its Gainsborough line to this
market. The risk, as Rawlinson pointed out, was that “once you show up in the DIY sheds, you can’t
climb back out. You have to be careful about associating your premium brand with your discount
channel.”
On the other hand, the value proposition of the Quartz was so superior to that of the electric
showers that dominated this market, [that] perhaps it was possible to charge a premium for this
product through that channel, Rawlinson thought. In addition, he wondered if Aqualisa could get its
partners like B&Q to help push the product, avoiding the need for expensive consumer advertising.
Targeting Developers
tC
A third alternative was to target developers more aggressively. Rawlinson thought aloud: “The
plus side is that this could conceivably be a large-volume channel. If we could get a couple of
developers on board, we’d sell a lot of showers. In addition, it would force plumbers to get familiar
with our product since they would have to install whatever the developers tell them to install.” But
there were downsides—including the significant time lag before showers would reach consumers
through this route. As Rawlinson noted with some urgency, “We’ve got at most a two-year lead on
the competition.”
No
Rawlinson also wondered how tough a sell it would be to developers. Developers had already
shown a reluctance to spend money on conventional Aqualisa products because they perceived those
products to be premium brands; even at a 50% discount, the company had been unable to make the
sale. And again, given that Quartz was such a breakthrough innovation, Rawlinson was reluctant to
discount the price.
What to Do
If his managers were right and this was a niche product, Rawlinson wondered if maybe he should
simply lower his expectations. Everything was basically well with the company—but at the same
time, he could not help arguing:
Do
Business school taught me to think strategically, to be a visionary. Everything I learned at
HBS tells me this is a breakthrough product. My worry is we’ll miss the opportunity and in
five years’ time, someone else will have got the world market for this technology. We’ve had a
nice, comfortable, contented life in the U.K., and it’s hard to get a small company—particularly
one that’s been so profitable all these years—to be ambitious. But one of the things that a
Harvard background gives you is the itch to think big. You see other companies that break out
of the pack because they’ve got the right product and they’ve got the right vision. So why not
this company?
11
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Aqualisa Quartz: Simply a Better Shower
The Aqualisa Organizational Chart
Exhibit 1
PA
Susan May
FINANCE
DIRECTOR
Simon Dexter
NATIONAL SALES
COMPUTER SERVICES
CUSTOMER SERVICE
MATERIALS
COMMERCIAL SALES
ACCOUNTS
DEVELOPMENT
PURCHASING
PAYROLL & BENEFITS
DESIGN
MOULD SHOP
QUALITY
PRODUCTION WESTERHAM/OLDBURY
PRODUCTS
PRODUCTION
ENGINEERING
MAINTENANCE
Do
No
Aqualisa.
OPERATIONS
DIRECTOR
James Bruton
tC
MARKETING
TECHNICAL
DIRECTOR
Paul Pickford
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MARKETING & SALES
DIRECTOR
Martyn Denny
TECHNICAL SERVICES
Source:
MANAGING
DIRECTOR
Harry Rawlinson
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Exhibit 2
502-030
U.K. Market Share Data: Units Sold (2000)
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Electric Showers
Mixer Showers
Power Showers
Total Units Sold
Triton
479,000
41,000
25,500
545,500
Mira
155,000
200,000
35,000
390,000
Gainsborough
180,000
20,500
3,000
203,500
6,000
94,000
22,000
122,000
35,000
50,000
35,000
120,000
0
60,000
0
60,000
40,000
0
0
40,000
0
20,000
0
20,000
0
20,000
0
20,000
0
15,000
0
15,000
205,000
29,500
29,500
264,000
1,100,000
550,000
150,000
1,800,000
Aqualisa
Masco
Ideal Standard
Heatrae Sadia
Bristan
Grohe
Hansgrohe
Others
Aqualisa.
Do
No
Source:
tC
Total Units Sold
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Brand
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Aqualisa Quartz: Simply a Better Shower
Exhibit 3
U.K. Shower Sales, by Reason for Installation
Second Shower
10%
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New Build
15%
Replacement
Shower
44%
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Commercial
6%
New Penetration
25%
Source:
Aqualisa.
Note:
“New penetration” refers to new showers installed in existing bathrooms (where plumbing already exists—e.g., a
shower added to a bathtub). “Second shower” refers to installation of a new shower in a location where no
plumbing exists.
Shower Selection for Mixer Showers
tC
Exhibit 4
Consumer selects type and
brand of shower alone (without
advice from plumber)
27%
No
Plumber influences type of
shower, not brand
20%
Do
Consumer takes plumber’s
advice on type and brand of
shower
28%
Source:
Plumber selects type and brand
alone (without consultation with
consumer)
25%
Aqualisa.
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Exhibit 5
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U.K. Shower Market, by Installation Method (Mixer Showers Only)
Developer Installation for
New Home Build
20%
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Installation by
Independent Plumber
54%
Installation by Showroom
20%
Commercial Installation
6%
Exhibit 6
tC
Source: Aqualisa.
U.K. Shower Market, by Product Type and Channel (Total Units Sold, 2000)
Electric Showers
Mixer Showers
Power Showers
550,000
80,000
20,000
Showrooms
55,000
70,000
20,000
Trade Shops
330,000
400,000
110,000
Other (Electrical wholesalers)
165,000
550,000
150,000
No
Do-It-Yourself Sheds
Total Units Sold
1,100,000
Do
Source: Aqualisa.
15
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Aqualisa Quartz: Simply a Better Shower
Exhibit 7
Aqualisa Select Financials 2000 (€ in thousands)
Shower Sales (Electric, Mixer, Power, and Pumps)a
Otherb
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€46,212
21,744
Total Sales
€67,956
Gross Margins
€31,824
€4,080
Marketing
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Sales
2,724
Customer Service
1,322
Research and Development
Finance, Administration & Depreciation
Total Overhead Spend
4,579
€14,469
€17,355
Base Profit
Source:
1,764
Aqualisa.
a Includes all Aqualisa shower lines, including Aquastyle, Aquavalve, and
tC
Aquastream. Also includes Aqualisa pumps, as well as a variety of other specialty
shower models sold by Aqualisa; these were primarily differentiated by style (e.g.,
contemporary, antique, brass, etc.). Does not include other brands such as
ShowerMax and Gainsborough.
b Aqualisa sold a variety of other products, including shower accessories and
Do
No
commercial products.
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Exhibit 8
502-030
Aqualisa: Selected Products and Price Points
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Segment
Retail Price
MSP
Cost
Margin
Aquastyle
Premium
€230
€155
€95
€60
Aquavalve 609
Standard
€715
€380
€155
€225
Value
€390
€205
€75
€130
Standard
€670
€350
€175
€175
Value
€480
€250
€140
€110
Premium
€850
€450
€175
€275
Premium
€1,080
€575
€230
€345
Standard
€445
€230
€125
€105
Premium
€595
€310
€175
€135
Aquavalve Value
Aquastream Thermostatic
Aquastream Manual
Quartz Standard
Quartz Pumped
Aquaforce 1.0/1.5 Bar
Aquaforce 2.0/3.0 Bar
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Model
Aqualisa.
Note:
“Retail price” refers to the price charged by the retailer (trade shop, showroom, or DIY outlet) to the customer.
“MSP” refers to manufacturer selling price (Aqualisa’s price to the channel).
Do
No
tC
Source:
17
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Aqualisa Quartz: Simply a Better Shower
Advertisement for the Quartz Shower
Do
No
tC
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Exhibit 9
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Source:
Aqualisa.
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Nutz Inc. NPD Portfolio Analysis
Dr. Erwin Danneels ©
Prepared March 2018
Nutz Inc. is a financially stable and successful company. Its products are of high quality, and the
company has expanded its product line through continuous innovations. Nutz Inc. is a well-reputed brand for
many nut-related products, especially peanuts. The firm has been around for several decades, and its products
are only available in select outlets in the Southeast of the US. It was one of the first companies to implement
vacuum packing to keep peanuts fresh for a longer period of time. Nutz Inc. offers an attractive and modern
assortment of nut specialties, ranging from well-loved classics like roasted and salted peanuts, to more unique
products, like coated peanuts, nut mixes in different compositions and flavors, and super crunchy peanut
butter.
As an innovative company, Nutz Inc. continuously expands its product line with new products, tastes, and
production techniques. In early 2017, it was reviewing three new products under development: “Oven-baked
Peanuts, Salted”, “Peanut Butter, Crunchy with Honey”, and “Trail Mix, Sweet and Salty,” which involved
new flavors, ingredients, and production techniques. Nutz Inc. wants to build on its reputation as an honest
and sustainable company, and take advantage of trends towards healthy snacks.
1
Nutz Inc.’s new product development projects in the year 2017
1. “Oven-baked peanuts – salted”
Nutz Inc. developed a completely new production technique as an alternative to traditional roasting. This
technique will be used for its new product, “Oven-baked peanuts – salted.” The peanuts are salted and baked
in an oven. This process makes the nuts especially rich in terms of taste and extremely crunchy. It hopes to
open up a new health-conscious market segment with this product, which it plans to target later with
additional products. In order to protect Nutz Inc.’s brand reputation as a producer of high quality products
with carefully chosen ingredients, Nutz Inc. is going to sell this product exclusively to high-end grocery stores
such as Publix, Whole Foods, or Harris-Teeter. Nutz also wants to make the oven-baked peanuts available in
vending machines (in addition to grocers and drugstores), as an alternative to candy bars. Vending machines
are a new channel for Nutz Inc.
2. “Peanut butter – crunchy with honey”
Nutz Inc. has been producing peanut butter for 20 years. The company now wants to expand its range of
peanut butter with the new flavor “Peanut butter – crunchy with honey.” The peanut pieces are coated with
honey, which come exclusively from Floridian beekeepers. The product was initiated due to the desire of
many consumers for a sweet peanut butter. The peanut butter requires considerable new market-related
resources, because Nutz Inc. needs to gain a place on the shelf of mainstream grocers, in particular Publix.
Such retailers are notoriously difficult to persuade to carry new products, and take poorly performing
products off the shelves very quickly. The peanut butter product was furthest along in its development, and
was almost ready to launch.
3. “Trail mix – sweet & salty”
With the new “Trail mix – sweet & salty” Nutz Inc. expands its trail mix assortment with a fruit and nut
mix. The combination of salted peanuts, almonds, chocolate flakes, chocolate-coated cashews, and yoghurtcoated cranberries provides an extraordinary taste. For the first time, Nutz Inc. adds coated cranberries and
chocolate-coated flakes and nuts as components of a trail mix. Normally trail mixes contain uncoated raisins
and nuts. Moreover, the yoghurt-coated cranberries are bought by Nutz Inc. and not self-produced.
2
Nutz Inc.’s NPD Portfolio Analysis findings
Nutz Inc. conducted an analysis of its set of new products to see which of the products it could or should
pursue. Being a fairly small company, its product innovation budget is only $210,000.
1. Risk/NPV
Figure 1: Bubble chart “Risk/NPV”
3
The preceding bubble chart depicts the relation of risk to net present value (NPV) for the three new product
offerings. The oven-baked peanuts carry a low amount of market risk due to its high competitive advantage
and good fit with Nutz Inc.’s market-related resources. The technical risk is medium because a fair amount of
R&D still needs to be conducted regarding the new baking method. The NPV is the highest of the three,
partially because of the larger market size. Market exploitation should be relatively easy due to Nutz’s prior
success with similar peanut products. The gross margin is also the highest of the three products.
The market risk for the new trail mix is moderately low, with the main concern being that consumers are
becoming increasingly health-conscious, and this new mix has ingredients that are covered in chocolate.
Likewise, the technical risk is mostly low, albeit for one important concern: Nutz Inc. will have to source the
cranberries from a supplier, making them dependent on an external source. The NPV for this product is the
lowest of the three. This is because the company expects only a small percentage of the overall market.
The crunchy peanut butter with honey product has the highest amount of market risk due to the fact that
sweet peanut butter is not currently popular. It is uncertain to what extent consumers will take to the taste of
this new product, and the added sugar contradicts current health conscious trends. The technical risk is low
because of the ease of making this product with the current plant equipment. The NPV is the second highest
of the three new items, largely due to a very long product life cycle.
4
2. Risk/ROI
Figure 2: Bubble chart “Risk/ROI”
The preceding bubble chart depicts the relation of risk to return on investment (ROI) for the three new
product offerings. The aforementioned risk factors all apply to this chart as well. The ROI numbers lead to
different conclusions from the NPV numbers, in that the peanut butter has the highest expected ROI, while
the peanuts had the highest expected NPV. In both analyses, the trail mix has the lowest profitability forecast.
Nutz Inc. feels that the results of the ROI analysis are the most important, because it wants to maximize the
return on its scarce resources, in other words, “get the most bang for the buck.”
5
3. Resource building/Competitive advantage
Figure 3: Bubble chart “Resource building/Competitive advantage”
The preceding bubble chart depicts the relation of resource building and competitive advantage for the
three new product offerings. For the oven-baked peanuts, Nutz Inc. believes that the superior quality of the
product, in terms of taste and fat content, gives them a considerable competitive advantage. Likewise, the
company expects to be able to draw on much of its current market knowledge, with just a moderate amount
of effort needed to enter the vending machine channel. These healthier peanuts will enable the company to
6
give its brand a somewhat more health conscious connotation. Nutz Inc. does, however, expect that the new
baking process will require a considerable amount of technical resource building.
The trail mix yields the best combination of competitive advantage and minimal resource building
requirements. Once again, the company’s confidence in the superiority of its product leads to a high expected
competitive advantage. While Nutz Inc. buys the covered cranberries, the technology to produce a trail mix is
not new. Nevertheless, the target customers will shift due to the new ingredients. Nutz Inc. feels that its
current technical skillset and brand image/distribution channels are well suited, and hence they will require
few new technical and market resources.
The crunchy peanut butter with honey fares well in terms of competitive advantage, but not as strongly
as the other two products. Nutz Inc. is slightly less confident of the superiority of this item. The company
also expects that there will be significantly more effort involved in building market resources than for the trail
mix and oven-baked peanuts. This product does, however, have the advantage of requiring a minimal amount
of new technical resources to produce.
7
4. Resource building/NPV
Figure 4: Bubble chart “Resource building/NPV”
The preceding bubble chart depicts the relation of resource building and net present value for the three
new product offerings. In terms of NPV, all products are expected to be profitable. In terms of fit with the
firm’s current resources, the peanuts will lead the company into new technological directions while the peanut
butter will lead to the acquisition of new market-related resources. The peanuts show a great need to build
new technological resources and a lesser, but still significant, need for new market-related resources because
of the first time entry into the vending trade. Once Nutz Inc. has established a relationship with vending
services companies, the firm could try to supply vending machines with other products as well. Therefore this
8
is a “leveraging customer competence” new product type, as the customer competence for selling peanuts
largely exists, but the production technique (baking instead of roasting) is new to the company. On the other
hand, the peanut butter requires considerable new market-related resources, because Nutz Inc. needs to gain
a place on the shelf of mainstream grocers, in particular Publix. This is more like a “leveraging technological
competence” product. The trail mix has a fairly moderate need for new market and technological resources,
and hence is close to a “pure exploitation” type product.
5. Rank ordered lists of products
Figure 5: Rank-ordered list by ROI
When accounting for risk, we see that the ROI’s of all three products are reduced to half or less than
their original figures. The oven-baked peanuts see the greatest reduction, at about 32% of its original value.
9
Appendix 1: “Oven-baked peanuts, salted” Project Information
10
11
Appendix 2: “Peanut butter crunchy with honey” Project Information
12
13
Appendix 3: “Trail mix sweet & salty” Project Information
14
15
Key Concepts in Strategic
Analysis
Professor Erwin Danneels
Muma College of Business
USF
Strategic Positioning
• An outside perspective on explaining firm
success (competitive advantage –
performance)
• Key tenet: a firm needs to position itself in
an attractive industry and protect that
position – and if necessary exit an industry
that has become unattractive
What is an industry?
• An industry is a group of firms that offer a
product or class of products that are
similar and are close substitutes for one
another
– An industry consists of sellers – not
customers, not products – of goods or
services that meet similar customer needs
• Vary a lot in terms of profitability
(attractiveness)
Updates:
http://pages.stern.nyu.edu/~adamodar/New
_Home_Page/datafile/roe.html
Assessment of industry attractiveness
using Porter’s Five Forces
There are five determinants
of overall profitability in any
industry
Power of
Suppliers
Ease of
Substitution
Rivalry amongst
Industry
existing
competitors
Barriers to
Entry
Power of
Customers
Threat of Entry
• Industries are more attractive when threat of entry is low
• Drivers include:
– economies of scale and learning curve
– product differentiation
– capital requirement
– control of distribution channels
– proprietary knowledge
– customer switching costs
– regulation
– network externalities
Supplier Power
• Industries are more attractive when supplier
power is low
• Drivers include:
– number of suppliers
– switching costs between suppliers
– threat of forward integration by suppliers
– product differentiation of suppliers
– importance of suppliers’ input to final product
Buyer Power
• Industries are more attractive when buyer power
is low
• Drivers include:
– size and concentration of buyers
– switching costs – loyalty
– threat of backward integration by buyers
– product differentiation
– volume purchased
Threat of Substitutes
• Industries are more attractive when the threat of
substitutes is low
• Drivers include:
– buyer propensity to substitute
– relative price-performance relationship of
substitutes
Competitive Rivalry
• Industries are more attractive when competitive rivalry is
low
• How are competitors likely to react to new entries?
– Keep the peace, retaliation, predatory, cut prices, …
• Drivers include:
– industry growth
– fixed costs
– number of competitors
– product differentiation
– exit barriers
Overall Industry Attractiveness
• Consider the industry on all five forces
• Examine past, current, and future
• On what bases do competitors compete?
– What are sources of differentiation?
– Do customers perceive differences in competitive
offerings?
– Are new dimensions of competition possible?
Resource-Based View
• An inside perspective on explaining firm
success (competitive advantage –
performance)
• Key tenet: firms are different in terms of
the resources they have, as well as the
quality of these resources (resource
heterogeneity)
• A firm is a bundle of resources
• Resources are the key to success
Resource-Based View
• A firm is a bundle of resources
• Resource endowment
• Differences in endowment tend to persist
over time
• Resource stock = the firm’s current level of
resources
• Resource flow = change in level of
resources
Resource-Based View
• A resource can be a source of competitive
advantage if it satisfies the VRIN
conditions (each is necessary and
insufficient condition):
– Valuable
– Rare
– Inimitable
– Non-substitutable
Resources
• What are key market-related resources?
– Brands, customer relationships, customer
goodwill, distribution, sales force,
understanding of customers, …
• What are key technological resources?
– Patents, equipment, facilities, technical knowhow, …
Resources
• Resources can be intangible or tangible
– tangible (intangible) resources tend to
decrease (increase) in value with use
• Resources vary in terms of fungibility
– A fungible resource can be deployed
(redeployed) to other applications
– From very fungible to very specific: cash –
Coca Cola formula
– Brands can be more or less
fungible/transferable
Resources
• Identification of resources is problematic
• Correctly understanding a firm’s resources
is difficult
• Resource cognition
– Subjective evaluations managers make in
evaluating their firm’s resource stocks (what
are resources and what is their fungibility)
Resources
• Resources are accumulated over time
• Path dependency
– Resource stocks have been accumulated
over a great number of years
– Create legacy
– The options in the present are limited by past
decisions
• Resources decay over time
– Need to renewed, upgraded, replenished, …
Competences
• Aka capabilities
• Competence = the ability to do some task
– enabled by access to resources
• Core competence = what the corporation
does better than anyone else
Dynamic Capabilities
• Is the ability of a firm to change its
resources: add, re-combine, and delete
• Firms need to change their resource
portfolio over time to counter and take
advantage of environmental changes
• Second-order competence = ability to add
new resources
Dynamic Capabilities
• What key resources are needed vs. what
are already in place?
• Scope
– What resources will be built internally and
which will be outsourced/bought (including
take-over of existing business)
– Vertical and horizontal integration
Avenues for growth
• Growth possibilities in scale
– Achieve economies of scale
– Add more of the same
– Because of larger market share or growing market
• Growth possibilities in scope
– Achieve economies of scope (“synergy”)
– Add different but synergistic activities
– Leverage existing resources, e.g. technology, brand,
distribution
– Expand to other market segments
– Increase geographic scope
Business Model
• A business model describes how a firm builds
and uses its resources to offer its customers
better value than its competitors and how it
earns profits from this activity
– What does the firm offer and how it makes money
from that
• Value proposition = the offer of clear and
compelling benefits at a price target customers
are willing and able to pay
• Profit generation = whether the value proposition
generates more money than it costs to offer it
“Customers don‘t buy features, they buy benefits – perceived benefits.”
The technical
characteristics of the
product, enabled by the
underlying technology
Customers look for
benefits, not features –
How the product satisfies
their needs
Customers must understand
benefits – How the product
can serve their needs and be
willing to pay for that value
Sustainability of competitive advantage
Depends on potential for imitation and substitution :
• The presence of resources that cannot be imitated or
substituted
– speed and ease of replicating resources
• Proprietary elements such as patents, trade secrets,
brands
• Customer switching costs
• New technologies that can provide better or different
benefits offers opportunities for new ventures
• Relative to start-ups, established competitors may have
superior resources in manufacturing, brand, sales force,
distribution
Sustainability of competitive advantage
Survey of Fortune 500 CEOs: What are your company’s
biggest challenges?* Source: Fortune, 2017
1. Rapid pace of technology change 73%
2. Cyber security 61%
3. Increased regulation 40%
4. Shortage of skilled labor 36%
5. Geopolitical risk 26%
6. Competition from a start-up 26%
7. Management diversity 23%
8. Competition from China/developing countries 19%
9. Employee diversity 15%
10. Shareholder activism 9%
*Percent who answered either “single biggest challenge” or “one of our top three or four challenges.”
Sustainability of competitive advantage
• Continuous innovation is essential
– A stagnant firm will be overtaken sooner or
later
• Second-order competences are much
harder to imitate
– Ability to access new markets or incorporate
new technologies
– In turn depend on organizational culture, such
as constructive conflict
Financing
•
•
•
•
Sales
Variable costs
Fixed costs
Contribution margin: incremental profit
from every sale
• Contribution margins must be adequate to
cover the fixed costs
• Expected value = value of an outcomes
multiplied by its probability
New Product Portfolio Management
Professor Erwin Danneels ©
What is a New Product Portfolio?
A new product portfolio is the set of new
products that the firm currently has under
development
u
u
Set means it contains all projects
u
get a complete overview
u
no project is excused from assessment
New products
u
not pure R&D or process projects
u
not products already launched in the market (not
product line management)
Prof. Erwin Danneels
What is a New Product Portfolio?
u
Currently means that the assessment is a
snapshot that has to be updated periodically
u
u
revisions because of technical challenges,
competitive moves, changes in specs and costs,
etc.
Under development means any new product
before launch
u
at different stages – from initial concept to launch
u
can be used as soon as product is sufficiently
defined (target market, features, benefits,
positioning)
Prof. Erwin Danneels
What is NP Portfolio Management?
u
u
New products enable firms to prosper and
grow
u
increase revenues and profits
u
enter new markets, use new technologies
Often firms have a multitude of potential
products
u
which ones to pursue?
u
compare all opportunities with each other
Prof. Erwin Danneels
What is NP Portfolio Management?
Assess
evaluate the attractiveness of every product
opportunity
compare each new product to alternative
opportunities
Select
decide with products to pursue
make tough Go/Kill decisions
Prioritize
many more opportunities than resources to pursue
them
recognize opportunity costs of working on
mediocre products
Prof. Erwin Danneels
What is NP Portfolio Management?
u
Allocate
u
u
allocate resources among alternative projects in
order to maximize the return to development
resources, balance the portfolio, and align projects
with the firm’s strategy
Monitor
u
track which projects are ongoing, their status, their
purpose, and their expectations
u
repeat over time and track progress
Prof. Erwin Danneels
What does a good NP portfolio look
like?
Prof. Erwin Danneels
What does a good NP portfolio look
like?
Valuable
maximize the value of the set of new products
value in terms of future profits and growth potential
Balanced
incremental vs. breakthrough, short vs. long term,
risk vs. return
exploitation vs. exploration (new versus current
markets/technologies)
Aligned
portfolio of projects reflects the firm’s overall
strategy
products, markets, and technology areas
Prof. Erwin Danneels
What are the benefits of NP
Portfolio Management?
Prof. Erwin Danneels
What are the benefits of NP
Portfolio Management?
u
u
Comprehensive Information
u
a check that the required data on each project is
available and considered
u
new product decisions to be based on evidence
and careful analysis
Prevent Project Overload
u
the right amount of projects for the available
resources
u
if not: delays, shortcuts, quality shortfalls, poor
morale
Prof. Erwin Danneels
What are the benefits of NP
Portfolio Management?
Finish Projects On Time
pursue fewer projects, finish them quicker
delayed product launches – being beaten to the
market by a competitor
Avoid Project Isolation
consider all projects together on their relative
merits
recognize opportunity costs
Prof. Erwin Danneels
What are the benefits of NP
Portfolio Management?
u
u
Facilitate Discussion and Decision-Making
u
a common basis for discussion
u
communicate priorities throughout the organization
Support Morale, Buy-in, and Accountability
u
enhance transparency
u
reasons for selecting some projects and killing
others are comprehensible
Prof. Erwin Danneels
Driving Profits and Growth
u
u
Opportunity cost
u
value of the foregone alternative(s)
u
doing one thing means not doing another
Sunk cost
u
a cost that has already been incurred and cannot
be recovered
u
only prospective (future) cost should be
considered in investment decisions
Prof. Erwin Danneels
Driving Profits and Growth
NPV vs. ROI
NPV = sum of discounted cash flows (future
profits) – cost of project
ROI = sum of discounted cash flows (future
profits) / cost of project
ROI ignores magnitude of return (how many $)
e.g., 1000% on $ 10,000 vs. 100% on $1,000,000
Firm should invest until no positive NPV
projects are left
Prof. Erwin Danneels
Driving Profits and Growth
Expected value = value of outcome *
probability of outcome
Risk = likelihood of failure – commercial and
technical
Probabilities of failure are compounded
Include risk in cash flow projections – risk
adjustment
Project A has project future CFs of 10,000,000 that
are 50% likely
Project B has future CFs of 20,000,000 that are
25% likely
Prof. Erwin Danneels
Driving Profits and Growth
Product innovation leads to profits, and leads to
growth (generating CFs and building assets)
u
u
Consider products as a growth platform
u
learn about markets and technologies
u
stepping stone
u
accept small (even big) losses
The degree to which the resources required
by a new product are new to (vs. existing in)
the firm
Prof. Erwin Danneels
Figure 1: Product Innovation as Linking
of Technology and Customer
Competences
Technological
Competence
New
Product
Customer
Competence
u
Manufacturing plant and
equipment
u
Knowledge of customer
needs and processes
u
Manufacturing knowhow
u
Distribution and sales
channel
u
Engineering know-how
u
Communication channel
u
Quality assurance tools
u
Company/Brand
Reputation
Conducting a Portfolio Review
Plans are nothing. Planning is everything. –
Dwight D. Eisenhower
Going through the steps is itself useful for
challenging assumptions, revealing information
gaps, aligning on goals
The data used for these calculations are often
incomplete and uncertain
make reasonable estimates based on the best
available evidence
projects are assessed relatively
Prof. Erwin Danneels
Conducting a Portfolio Review
u
Develop contingencies by varying
assumptions
u
u
u
examine their impact on the attractiveness of
decision options
best, worst, and likely scenarios
Promote active discussions that enhance a
critical stance towards available evidence and
assumptions
u
an opportunity for healthy discussion and debate
u
use a Delphi approach
Prof. Erwin Danneels
Conducting a Portfolio Review
u
Data input and interpretation requires the
expertise and collaboration from many functions
in the organization
Estimate manufacturing cost,
market launch cost,
technological feasibility,
market size, fit with
marketing resources, cost of
capital, etc.
Prof. Erwin Danneels
What the best do
Willingness to make tough decisions about
what not to do
not do everything
willing to make tough kill decisions
people hate working on “living dead” projects
easier to accept if the decision is transparent
Support bold projects
breakthrough, game changers
too many incremental innovations
portfolio becomes stale and firm loses competitive
advantage
Prof. Erwin Danneels
What the best do
Constructive conflict
what Andy Grove has called “constructive
confrontation”
a climate of open and frank debate
people feel free to challenge each other’s ideas
without getting defensive – taking it personal
a conflict of ideas, not people
Prof. Erwin Danneels
What the best do
Prof. Erwin Danneels
Journal of Business Venturing xxx (xxxx) xxx–xxx
Contents lists available at ScienceDirect
Journal of Business Venturing
journal homepage: www.elsevier.com/locate/jbusvent
Normalizing vs. analyzing: Drawing the lessons from failure to
enhance firm innovativeness☆
Erwin Danneelsa, , Alex Vestalb
⁎
a
b
Muma College of Business, University of South Florida, 4202 East Fowler Avenue, Tampa, FL 33620, United States of America
Cameron School of Business, University of North Carolina Wilmington, United States of America
ARTICLE INFO
EXECUTIVE SUMMARY
Keywords:
Tolerance for failure
Learning from failure
Constructive conflict
New product exploration
New product advantage
The popular business press and academic articles have promoted the virtues of failure, particularly in the pursuit of innovation. Surprisingly, there has been very little systematic empirical
study to support this belief. This article distinguishes two organizational approaches to failure:
normalizing it (tolerating failure as a necessary part of the innovation process) and analyzing it
(purposeful attempts to convert failure experiences into knowledge). A longitudinal study of 106
U.S. manufacturing firms indeed finds that mere tolerance for failure has no effect on firm
product innovativeness. In contrast, firms that make deliberate efforts to analyze past failures
introduce more innovative new products. Further, this effect is contingent on a climate of constructive conflict within the firm. Hence, to foster firm innovativeness, organization members
need to extract lessons from failure, and such analysis must take place in a climate of constructive
conflict that enables open and honest discussion.
“The topic of failure is very important, and it gets more lip service than good practice. I think I learned more from my failures than from my
successes in all my years as a CEO. I think of my failures as a gift.”
AG Lafley, former CEO of P&G (in Dillon, 2011).
1. Introduction
Failure is popular these days. Many articles in the popular business press extol the virtues of failure (e.g., Business Week, 2006;
The Economist, 2012). Failure has also gained in popularity in academic research (e.g., Eggers, 2012; Khanna et al., 2016; Madsen
and Desai, 2010; Muehlfeld et al., 2012; Shepherd et al., 2011; Shepherd et al., 2013). Actions are considered failures when their
outcomes fall short of expectations (Cannon and Edmondson, 2005; McGrath, 1999; Shepherd, 2003), and all organizations, even
those with great overall performance, have plenty of them. While scholars and practitioners alike recognize that failure is not “an
inherently desirable outcome” (Sitkin, 1992: 240), it is considered central to organizational learning and innovation processes.
Hence, managers have been exhorted to tolerate, and even embrace, failure in order to promote innovation.
However, despite its popularity, there is very little research to support the growing calls to embrace failure. Moreover, prior
☆
This research was funded by grant SES 0620165 from the National Science Foundation’s Innovation and Organizational Change Program. The
funding source has no role in study design, in the collection, analysis and interpretation of data, in the writing of the report, or in the decision to
submit this article for publication. We are indebted to Sharon Sheridan for her insightful suggestions.
⁎
Corresponding author.
E-mail addresses: edanneels@usf.edu (E. Danneels), vestala@uncw.edu (A. Vestal).
https://doi.org/10.1016/j.jbusvent.2018.10.001
Received 8 January 2016; Received in revised form 2 August 2018; Accepted 3 October 2018
0883-9026/ © 2018 Elsevier Inc. All rights reserved.
Please cite this article as: Danneels, E., Journal of Business Venturing, https://doi.org/10.1016/j.jbusvent.2018.10.001
Journal of Business Venturing xxx (xxxx) xxx–xxx
E. Danneels, A. Vestal
research on how organizations learn from experience (Gavetti and Levinthal, 2000; Zollo and Winter, 2002), and the social nature of
sensemaking of past experiences (Byrne and Shepherd, 2015; Weick, 1995) cast doubt on how simply tolerating or embracing failure
may enhance innovation. We leverage this prior research to argue that purposeful reflection and analysis of past failures are key to
enhancing learning in support of innovation. We assert that prior studies of organizational learning from failure suffer from three
significant shortcomings. First, the use of archival data to examine the effect of accumulated failure experiences on the improvement
of organizational outcomes has led to a neglect of the mechanisms by which organizations learn from failure (Eggers, 2012; Madsen
and Desai, 2010; Muehlfeld et al., 2012). Thus, prior research has not directly observed organizational practices conducive to
learning from failure (e.g., Desai, 2015). Second, prior research has not examined how organizational conditions influence how well
practices adopted in response to failure may enhance learning. We contend that to this point, academic as well as practitioneroriented writing has assumed that failure experiences generate learning, and that it has conflated the experience of failure with the
deliberate analysis of failure. Third, none of these studies used innovation as their outcome, and so they can’t support an empirical
relationship between failure and organizational innovation. Consequently, we know little about whether embracing failure actually
promotes innovation, and if so, under what conditions it does so.
What does it mean to embrace failure? Organizational cultures, which we define as norms and values, and the practices that
express them (Keith and Frese, 2011; van Dyck et al., 2005; see also Alavi et al., 2005) vary in their responses to failure. We propose
two alternative modes of coping with failure: “normalizing” and “analyzing.” First, a “normalizing” culture recognizes, accepts, and
appreciates the inevitability of failure; it is tolerant of failure. Tolerance of failure is widely thought to facilitate learning and
innovation when organization members feel free to take risks because mistakes are not punished and, in fact, are often respected and
celebrated (Buckler and Zien, 1996; Danneels, 2008; Delbecq and Mills, 1985; Farson and Keyes, 2002; Maidique and Hayes, 1984;
McGrath, 1999). The freedom to make mistakes encourages experimentation and a broader search for alternatives (McGrath, 1999),
which is assumed to increase organizational learning, and ultimately, innovation. We will argue that mere tolerance for failure does
not lead to the learning that supports innovation. Second, in contrast to tolerance for failure, analyzing failures refers to purposeful
actions to analyze past mistakes. Extracting the appropriate lessons from failure is not automatic. In order to learn from failure, firms
must take deliberate actions to discuss and dissect past failures and challenge current cause-effect assumptions.
Although failure analysis represents an opportunity for learning, most organizations struggle to conduct a candid debate about
what went wrong (Baumard and Starbuck, 2005; Cannon and Edmondson, 2005). When dissecting past mistakes, organization
members may withhold input and avoid challenging ideas for fear of resentment or retribution (Amason, 1996). Indeed, discussions
about failure can deteriorate into personal attacks and finger-pointing (Cannon and Edmondson, 2005), which can damage relationships and derail attempts to learn from failures. Therefore, we expect that a firm’s climate of constructive conflict, which refers
to the constructive and respectful debate of ideas, beliefs, and assumptions by organization members (Danneels, 2008), is necessary
to effectively conduct failure analysis. Only in such a climate, can the key lessons from past failures be identified and incorporated
into a firm’s knowledge base, which in turn promotes successful innovation.
Consistent with these arguments, we find that it is not tolerance for failure that improves innovation, but rather the deliberate
analysis of failure. Thus, our results do not support the sensationalized view of failure where tolerance for failure improves innovation. Rather, we find that firm innovativeness is improved only when a deliberate and systematic analysis of failures is made. In
addition, we find firms vary in their ability to benefit from analysis of failure. We observe the benefits to innovation, which derive
from analyzing failures, are contingent on a firm’s climate of constructive conflict. Results show that a climate of constructive conflict,
in which it is safe to challenge ideas and assumptions, provides the necessary backdrop against which a deep analysis of failure can
improve organizational learning and innovation.
This article advances the literature in several ways. First, answering calls for more research “into the mechanisms by which
organizations deal with and learn from failure” (Madsen and Desai, 2010: 472), this study directly examines two mechanisms by
which failure could improve firm innovativeness: tolerance and analysis. In spite of the growing interest in failure from both researchers and practitioners, we have yet little understanding of how failure fosters innovation (Cannon and Edmondson, 2001;
Khanna et al., 2016). This article offers the first study (to our knowledge) to propose and empirically assess the distinction between
tolerance for failure and analysis of failure. Indeed, two recent extensive review papers do not address the distinction between them
(Dahlin et al., 2018; McMillan and Overall, 2017). We will argue that only the latter has the potential to lead to “knowledge
generation” that can improve organizational innovativeness.
Second, this study identifies the organizational conditions under which analysis of failure improves innovativeness. We find that
thoroughly analyzing past failures for lessons learned is not always a panacea. To benefit from failure analysis, firms must establish a
climate of constructive conflict where organization members feel safe to challenge others’ ideas and offer controversial viewpoints.
Thus, we identify constructive conflict as an important boundary condition for drawing the appropriate lessons from failure.
Third, this study focuses on “learning by collective reflection” – studying the effects of reflecting on experience. Learning by doing
vs. learning by reflection are complementary sides of learning (Gavetti and Levinthal, 2000). Research on learning from failure has
primarily focused on the role of doing (experience), leaving the processing of the feedback from experience in a black box. The flip
side of learning is “reflection, or the intentional attempt to synthesize, abstract, and articulate the key lessons taught by experience”
(Di Stefano et al., 2014: 5). Although reflection is the mechanism by which experience is translated into learning, prior research has
not investigated the deliberate reflection on past failures. It has assumed that somehow experience leads to learning, which in turn
improves performance. But learning is not automatic (Shepherd, 2003). Relatedly, the current article also makes a methodological
contribution by developing and testing a scale for analysis of failure.
Fourth, our distinction between tolerance for failure and failure analysis contributes to the literature on “error management
culture.” An organization’s error management culture involves its values, norms, and common practices regarding error detection,
2
Journal of Business Venturing xxx (xxxx) xxx–xxx
E. Danneels, A. Vestal
communication, and analysis (Keith and Frese, 2011; van Dyck et al., 2005; see also Alavi et al., 2005). Error management approaches consider errors to be opportunities for learning and innovation (see Frese and Keith, 2015, for a review). Therefore, like
much common wisdom propagated in the popular business press, this literature recommends embracing failure as a necessary part of
the innovation process. This study shows that this recommendation is misguided. We concur with recent research that “rejects the
rosy notion of failure as a valuable experience” (Jenkins et al., 2014, pages 28–29). Hence we will argue that merely tolerating failure
does not facilitate the learning that leads to innovation. Rather, organization members need to make explicit efforts to learn from
failure, and do so in a climate where people feel safe to talk about the tough issues.
Fifth, we also contribute to research on the role of emotions in reflecting upon and learning from failure, which are shaped by the
organization’s error management culture. Whereas prior research has examined how different emotional states shape efforts to make
sense of failures (Byrne and Shepherd, 2015), we describe how organizational norms and practices for coping with failure can
influence emotional responses in such a way as to increase sensemaking and learning from failure.
2. Failure and innovation
Firms, in order to remain competitive and to better adjust themselves to dynamic market conditions, aspire to continuously bring
innovative products to market. Although past writings have suggested the mere experience of failure promotes learning and innovation, prior literature has not provided clear evidence of such a relationship nor has it examined the organizational practices and
conditions for converting failure into knowledge.
According to behavioral learning theory, organizations learn from experience (Cyert and March, 1963; March and Simon, 1958).
Organizational learning refers to the organization-wide activity of gathering, interpreting, sharing, and using new knowledge
(Calantone et al., 2002). Organizational learning leads to a “change in the organization’s knowledge that occurs as a function of
experience” (Argote and Miron-Spektor, 2011: 1124). The accumulation of firm knowledge becomes an input to subsequent firm
innovation (Danneels, 2002; Calantone et al., 2002; Maidique and Zirger, 1985).
However, mere experience is not sufficient for learning to occur. According to organizational learning theory (Levitt and March,
1988) learning requires interpretations of outcomes of past actions, in the following repeating sequence: action – feedback – interpretation – knowledge – action. Organizational knowledge results from efforts at sensemaking with respect to prior experiences
(Weick, 1995). According to John Dewey (1933: 78; see also Di Stefano et al., 2014): “We do not learn from experience … we learn
from reflecting on experience.” As organizations learn, they accumulate knowledge regarding action-outcome linkages (Gavetti and
Levinthal, 2000). The development of new knowledge, in turn, is crucial for firm innovation capability (Danneels, 2002; Calantone
et al., 2002; Maidique and Zirger, 1985).
A “superior understanding of the action–performance linkages” (Zollo and Singh, 2004: 1238) is expected to enable superior
innovation, relative to competitors. Innovative activities have uncertain outcomes, and failure is common (Edmondson and
Nembhard, 2009). There are many factors that lead to product success and failure (Henard and Szymanski, 2001; Montoya-Weiss and
Calantone, 1994), and what makes for a successful innovative product is causally ambiguous (Colarelli-O’Connor, 1998). Better
organizational knowledge can guide a firm’s innovation choices and actions in the face of this ambiguity, and hence enables competitively differentiated products.
Failure experiences are potentially powerful occasions for such learning. Whereas successes reinforce firms’ current knowledge,
failures enhance learning by challenging the understanding of the cause-and-effect relationships between alternative organizational
actions and possible outcomes (Huber, 1991; Khanna et al., 2016; Sitkin, 1992; Zollo and Winter, 2002). Learning from failure
improves the quality of the inferences that firms make, leading to a better understanding of causal links that can guide future actions.
As a result of examining causes and mechanisms of failure, insights are incorporated into a firm’s knowledge base, which in turn
promotes successful innovation (cf. Yamakawa and Cardon, 2015).
Post-failure, organizational members engage in collective sensemaking (Byrne and Shepherd, 2015; Maitlis and Sonenshein,
2010). Sensemaking is an inherently social process where organizational members engage each other in search of a shared understanding about why outcomes were different than what was expected (Weick et al., 2005). A sensemaking view of organizational
learning from failure suggests that new knowledge is created when organizational members acquire information from a failure
experience, effectively process that information, and then are able to act on that new knowledge (Shepherd et al., 2011).
Recent research into emotional responses to entrepreneurial failure has shown that the degree of sensemaking triggered by failure
depends on the emotions they arouse (Byrne and Shepherd, 2015; Catino and Patriotta, 2013; Maitlis and Sonenshein, 2010;
Shepherd et al., 2009; Shepherd et al., 2013). Some emotions may motivate sensemaking of the failure event while others may
obstruct it (Byrne and Shepherd, 2015; Cacciotti et al., 2016; Maitlis and Sonenshein, 2010). We propose that failures invoke
emotional responses from organizational members, and these responses affect the degree of cognitive elaboration of the failure
experience, which in turns impact later innovativeness of the firm. Negative emotions triggered by failure include “regret, anger,
disappointment, frustration, or loneliness” while on the positive side there are: “feelings of pride, happiness, hope, excitement,
achievement, confidence, and enthusiasm” (Byrne and Shepherd, 2015: 380). We will argue that different failure approaches lead to
different types of affective arousal.
Both the cognitive and affective components of the experience of failure are shaped by social processes within the organization
(cf. Adler and Obstfeld, 2007; Maitlis and Sonenshein, 2010). In this study, we focus on three aspects of the social context within the
organization. First, building on our distinction between “normalizing” and “analyzing” organizational approaches to failure, we will
next argue that tolerance for failure has no non-trivial effect on innovation, whereas failure analysis facilitates the learning from
failure necessary for superior innovation. Although organizations tolerant of failure may gain a broader range of experience, drawing
3
Journal of Business Venturing xxx (xxxx) xxx–xxx
E. Danneels, A. Vestal
the appropriate lessons from these experiences in a way that enhances organizational knowledge is not a given (cf. Zollo and Winter,
2002). Rather, organizational learning from experiences requires purposeful reflection and “deliberate cognitive processes” (Zollo
and Winter, 2002: 340). Finally, we note that although a careful analysis of failures represents an opportunity for learning, most
organizations struggle to learn from failure (Baumard and Starbuck, 2005; Cannon and Edmondson, 2005). We argue that analyzing
past failures is difficult because it can deteriorate into personal attacks and finger-pointing (Cannon and Edmondson, 2005), which
can damage relationships and derail attempts to learn from failures. In order to extract the key lessons from failure, firms must foster
a climate of constructive conflict where individuals feel safe to disagree with and challenge established viewpoints without fear of
anger or retribution. Thus, we argue that a climate of constructive conflict is an important boundary condition for identifying when
firms are able to benefit from failure analysis.
3. Hypotheses
3.1. Tolerance for failure
Tolerance for failure refers to an organizational culture in which some failure is considered an inevitable and even beneficial byproduct of trying novel things (Danneels, 2008; Farson and Keyes, 2002; Maidique and Hayes, 1984; McGrath, 1999). Tolerance for
failure is a “normative influence” on the degree of experimentation that takes place in an organization (Lee et al., 2004). It consists of
the failure-related values and norms that define how failed actions and organizational members associated with them are viewed
(Carmelli et al., 2012). In an organizational culture tolerant of failure, “fear of failure is reduced by normalizing failure” (Shepherd
et al., 2009: 592).
A climate of tolerance for failure is one in which failure is forgiven, sometimes even celebrated. Advocates of failed projects do not
carry the entire burden of failure and do not become scapegoats (Delbecq and Mills, 1985; Maidique and Hayes, 1984). In failure
tolerant organizations members’ mistakes are not held against them, instead failures are taken with humor and participants retain
their dignity. Employees associated with failed initiatives are not stigmatized or punished, and are “confident they will not be blamed
or ridiculed when errors occur” (van Dyck et al., 2005: 1230). Buckler and Zien (1996) described one company that has a monthly
‘toilet seat award’ to recognize the manager of the most gloriously canceled project. It consists of a picture of the manager in the
middle of a toilet ring, and it is passed on from manager to manager. Similarly, Eli Lilly holds “failure parties” to honor scientific
experiments that fail to achieve the desired results (Edmondson, 2011). These celebrations reflect recognition of the inevitability of
failure that allows managers of unsuccessful projects to maintain face (Buckler and Zien, 1996: 400). In an organization that is failure
tolerant, authors of failed initiatives are given credit for good intentions (cf. Shepherd and Patzelt, 2015). Even though tolerance for
failure has been touted as beneficial for innovation by academics and journalists alike, surprisingly there has been no systematic
empirical study to support this belief. In what follows we will argue that mere tolerance for failure does not foster organizational
learning, and hence does not lead to more innovative products.
On the one hand, one might expect a failure tolerant organization to generate novel knowledge because it engages in a broader
range of experimentation (McGrath, 1999). An organizational climate tolerant of failure allows members to engage in activities that
deviate from established practices and beliefs. This greater latitude increases the repertoire of potential behavior (cf. Huber, 1991),
and promotes internal variety (McGrath, 1999). One can therefore expect that tolerance for failure leads to a broader range of
experience and thus potentially greater knowledge. As the variance of organizational activities is enhanced (McGrath, 1999), so is the
potential scope of organizational learning. In contrast, organizational members who fear failure will be reluctant to experiment
because of the personal and interpersonal costs of failure (Lee et al., 2004).
Hence, a stance more accepting of failure could foster greater learning. However, generating increased variance in organizational
activities does not necessarily lead to the learning that supports successful innovation. Generative variation (Zollo and Winter, 2002)
provides only an input into the organizational learning process. As Lee et al. (2004: 310) stated: “Experimentation is a trial-and-error
process in which each trial generates new insights on a problem.” However, the emergence of those insights cannot be taken for
granted, as Shepherd, Patzelt, and Wolfe (2011: 1232) stated: “[the] lessons to be learned may not be immediately apparent.”
Therefore we contend that normalizing failure (Shepherd et al., 2009) does not promote organizational learning. Regardless of
whether it leads to more experimentation, a failure-tolerant organization will learn little as its experiments may be ill-conceived and
their results are not thoughtfully analyzed. This may lead to “stupid failures” that have little informative content (cf. McGrath, 1999;
Sitkin, 1992). Lack of accountability may reduce decision-making effort and lower self-critical awareness (Lerner and Tetlock, 1999),
leading to poorly conceived actions. In contrast, “intelligent failure” requires carefully designed and executed experiments (McGrath,
1999; Sitkin, 1992). Organizational members feel accountable when they expect they may be called on to justify their decisions and
actions (Lerner and Tetlock, 1999). According to Edmondson (2011: 55), practitioners fear that “an understanding response to
failures will simply create a lax work environment in which mistakes multiply” and an “anything-goes” atmosphere arises. In a
climate tolerant of failure, employees feel little responsibility and make decisions without due diligence (Tjosvold et al., 2004).
Standards may be lowered or performance poorly monitored, and employees may not do their best work (Edmondson, 2011).
In addition, tolerance for failure may lead to inadequate and perfunctory analysis of feedback. Experiential learning, in parti…
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