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J. of the Acad. Mark. Sei. (2008) 36:322-336DOI 10.1007/s] 1747-007-0082-9

O R K j EMPIRICAL RESEARCJ

Influence of custom er participation on crea tingand sharing of new product valueEric Fang Robert W. Palmatier Kenneth R. Evans

Received; II December 2006 /Accep ted: 5 December 2007/P ublished online: 8 April 2008 Academy of Marketing Science 2007

Abstract This research applies an institutional arrange-ment perspective to develop an end-to-end model for theinteraction between customers and upstream suppliers todevelop a new product to understand how new productvalue is created and shared. The model is empirically testedby collecting primary data from 188 manufacturers acrossdifferent industries. The research demonstrates that cus-tomer participation affects new product value creation byimproving the effectiveness of the new product develop-ment process by enhancing information sharing andcustomer-supplier coordination and by increasing the levelof customer and supplier specific investments in theproduct development effort. In addition, increasing theformal i zation of the custom er participation proeess enhan-ces both customer and supplier relationship-specific invest-ments in the new product development process. The impactof customer participation on the customer's share ofthe newproduct value pie is more complex then is first apparent.Based on the dependence and equity perspectives theresults suggest that exchange parmers' power (relativedependence) positively influences a partner's ability to

E. Fang (S))College of Business, University of Illinois,Urfeana-Champaign, USAe-mail: [email protected]. W. PalmatierUniversity of Washington,PO. Box 353200, Seattle, WA 98195-3200, USAe-mail: [email protected]. R. EvansCollege of Business, University of Oklahoma,307 W. Brooks. Room 207,Norman, OK 73019-4007, USAe-mail: [email protected]

capture new product value, but this power is offset by adesire of exchange partners to ensure the distribution ovalue is "fair" and reflects each party's contribution to thevalue creation.Keywords New product development Dependence Equity Customer participation Relationship marketingInstitutional arrangemen t InnovationUtilizing new product development and innovation strate-gies to generate competitive advantage and superiorfinancial performance have become widespread in the pastdecade, but many of these new products fail to meetexpectations (Henard and Szymanski 2001). One common-ly identified cause is that the information regarding the"need" resides within the customer, while the informationregarding "the solution" is in the seller's domain (Henardand Szymanski 2001; Zipkin 2001). For example, thefailure of Coming's optical fiber new product developmentin early 2000 was attributed largely to its failure to matchtheir product to the customer needs (BusinessWeek 2006).Thus, closely linking the customer to the seller during thedevelopment process is argued to be a key success factor innew product development (Terwiesch and Loch 1999).Traditionally, in business markets, the impetus is forupstream suppliers to ask their customers to participate inthe new product development (NPD) process, but morerecently, customers are recognizing that they need toproactively become involved in their supplier's productdevelopment efforts to reduce costs and improve theirproduct performance. For example, instead of being merelya passive buyer of components. Dell is a close participant inits vendors' development of new materials and parts.Prahalad and Ramaswamy (2000: 80) have called attentionto this emerging trend, "customers are fundamentally

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.1. of the Acad. Mark. Sei. (2008) 36:322-336 323changing the dynamics of the marketplace. The market hasbecome a fomm in which consumers play an active role increating and competing for value." Thus, both suppliers andcustomers are recognizing the advantage of and are pushingfor close customer participation in suppliers' NPD processto create valuable new products, but along with this newawareness, customers are now demanding their share of thecreated value. Understanding the role of customer partici-pation in the creation and sharing of new product value andthe ultimate new product value obtained by the customer isthe key focus of this paper; more specifically, we addressthree research questions: How does customer participation in the NPD processafect the size of the new product value pie? How does implementation of customer participationaffect new product value creation? How is the customer's share of the new product valuepie determined?

With regard to the first research questions, managerialpractice supports the notion that customer participationimproves suppliers' NPD performance but leaves themechanisms of value creation unclear. This researchdemonstrates that customer participation affects new prod-uct value creation by improving the effectiveness of theNPD process by enhancing information sharing andcustomer-supplier coordination and by increasing the levelof customer and supplier specific investments in theproduct development effort. Thus, the research contributesby explicating the mediating mechanisms by whichcustomer participation drives new product value creationproviding a foundation for further research aimed atimproving the success of NPD.

We investigate how formalization of the customerprocess leverages the effects of customer participation onthe drivers of new product value creation to infonn thesecond question. Results suggest that increasing theformalization of the customer participation process enhan-ces both customer and supplier relationship-specific invest-ments in the NPD process. Moreover, i t providesmanagerial direction on how the process of customerparticipation can be implemented to increase its impact.The impact of customer participation on the customer'sshare of the new product value pie is more complex than isfirst apparent. Based on the dependence and equityperspectives the results suggest that exchange partners'power (relative dependence) positively infiuences a part-ner's ability to capture new product value, but this power isoffset by a desire of exchange partners to ensure thedistribution of value is "fair" and refiects each party'scontribution to the value creation. In addition, we fmdcustomers face a tradeoff, where making specific invest-ments in the NPD increases the overall size of the new

product pie., but also increases the customer's dependencelowering their share of the pie ceteris paribus.This research applies an institutional arrangement per-spective (Carson et al. 1999) to develop an end-to-endmodel for the interaction between a customer participatingwith an upstream supplier to develop a new product tounderstand how new product value is created and shared.This model is empirically tested by collecting primary datafrom 188 OEMs across different industries. In the followingsections, we first develop our conceptual m odel and presentindividual hypotheses. Second, the empirical context ofthe research, data collection procedures, measurements, andthe analysis of the model are discussed. Finally, we present theresults and discuss the theoretical and managerial implica-tions, research limitations, and future research directions.

Customer participation: an institutional arrangementperspectiveI

The perspective of institutional arrangement is a theoreticalframework that focuses on understanding why and howfirms engage with other firms. Institutional arrangementsinclude any type of contracting, ownership, or engagementin which firms seek to build or maintain an exchange and/orrelationship (Davis and North 1971). Specifically, thisperspective suggests that businesses will engage in valuecreating institutional relationships only when the exchangesupports the allocation of benefits such that the joint benefitmaximization is aligned with the maximization of firm-owned benefits (Carson et al. 1999). As Ghosh and John(1999: 133) argue, firms "will implement the activitiesassociated with larger joint value if, and only if, their ownshare of the joint value also exceeds their previous profits."

Two key elements in institutional arrangements contrib-ute to the firm-owned benefit maximization (Carson et al.1999). First, the new set of joint activities implemented bythe partners' creates value, which affects the size of thevalue pie. Second, the joint benefits are shared betweenrelevant partners to compensate for engagement in theseactivities such that each partner receives a share of thevalue pie. The institutional arrangement offers a valuableperspective to understand the value obtained by a customerfTom participating in a supplier's NPD process, since itintegrates both value creation and sharing.

More specifically, applying the institutional arrangementperspective to an interaction between a customer partici-pating with an upstream supplier to develop a new productsuggests that both the size of the new product value pie andthe customer's share of the pie will be critical tounderstanding how much value will be obtained by thecustomer and their willingness to participate. Thus, while

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324 J. of the Acad. Mark. Sei. (2008) 36:322-33the research on new product development (NPD) isconsistent in promoting the benefit to suppliers in havingcustomers participate in the product development processlittle research has focused on understanding this phenom-ena fi-om he customers perspective (Srivastava et al. 1999).This is critical since only by understanding the ultimatevalue obtained by the customer will suppliers understandhow to gain their support in the NPD process and maximizethe impact of their participation.

Understanding how customer participation influences thesize of the new product value pie and the customer's shareis more complex in the NPD context than is first apparentsince some of the drivers of pie size may also affect theshare received. Thus, participants must evaluate the tradeoffin expanding the size of the new product pie againstpotentially reducing their share of the value captured. Inessence, customers are both collaborators and competitorswhen participating in a supplier's NPD project (Prahaladand Ramaswamy 2000). As a collaborator, the customershares pertinent infonnation with the supplier, coordinatesactivities, and integrates and adapts engineering andmanufacturing processes to those of the supplier, therebysignificantly improving the value of the product (Lengnick-Hall 1996; Dyer and Singh 1998). As a competitor, due tothe self-interest nature of the parties seeking to maximizetheir individual benefits, the customer negotiates with thesupplier over the pricing, delivery, and other terms of thenew products, thus affecting how the created value isshared (Lengnick-Hall 1996; Jap 200 1; Wem erfelt 2005).For example, a customer's investment in a supplier'sproduct development effort may results in a more valuablenew product, but these same investments may increase thecustomer's dependence on the supplier, reducing their

ultimate share of the new product value (due to lesnegotiation power).

Next, we develop a conceptual model for the impact ocustomer participation in the NPD process on the ultimatevalue obtained by the customer (Fig. 1). First, weinvestigate how customer participation infiuences thedrivers of new product value creation (NPD processes andNPD investments) and explore how these effects may beleveraged. Second, consistent with the institutional arrangement perspective we investigate how the drivers of newproduct value creation impact the size of the new producvalue pie and the customer's share of this pie, andultimately, the new product value obtained by the customerEffect of customer participation on drivers of new productvalue creationCustomer participation refers to both the breadth and depthof the customer's involvement in the NPD process. Breadthcaptures the scope of participation across the producdevelopment process, where a customer could be involvedin jus t one activity (e.g., product testing) or in a wide rangeof activities from new concept generation, prototyping, upto and including product testing. Depth represents thecustomer level of involvement in a phase of the productdevelopment process, where some customers may only besuperficially involved and other may be deeply involved.The level of customer participation can play a role in thekey drivers to new product value creation, the NPDprocess, and the level of resources itivested in the NPD(Dyer and Singh 1998; Sobrero and Roberts 2001).

Researchers have proposed that customer participationaffects a supplier's NPD process by increasing the level of

Drivers f New ProductValue Creation

Cuaiomcr relationship-specific investment

Size of New Produ ctValue PieNew productvalue

Determinants ofCuslomer Share of NewProduct Value Pie

New productvalue obtained

by customer

Votes: NPD = new product development.Figure I Influence of customer participation on creating and sharing new product value.

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J. of the Acad. Mark. Sei. (2008) 36:322-336 325information shared during the NPD process, and byimproving how well two firms coordinate their actionsduring the NPD process or coordination effectiveness (Dyerand Singh 1998; Larson 1992). Infurmation-.shating refersto the extent to which two partners effectively exchangecritical information about the product idea, market, andcompetition, among other issues, during the NPD process,and coordination effectiveness is the extent to which thetwo partners effectively work together in order to accom-plish a collective set of tasks during the NPD process (Jap1999; Van de Ven et al. 1976).

Customer participation enhances both parties' ability toidentify what information needs to be shared and how towork more cooperatively. When a customer participates in asupplier's NPD process, each party knows the pertinentknowledge possessed by the other, which helps themevaluate and recognize what information to share andincreases the efficiency of their coordination effort (Dyerand Singh 1998; Larson 1992). Researchers have found thatcustomers' early involvement in the NPD process andhigher levels of social interaction between the partiesimprove the information intensity, frequency, and breadth(Celly and Frazier 1996). Most research argues for thepositive effects of customer participation on NPD, but ispossible that if the interaction is dysfunctional or leads toconflict then higher levels of involvement could bedetrimental and offset some of the expected benefits. Inaggregate, we expect that higher levels of customerparticipation improves communication, and helps both thecustomer and supplier specify the behaviors desirable in therelationship, which enhances the effectiveness of coordina-tion efforts (Kogut and Zander 1996;Vli-Renko et al. 2001).Thus, we hypothesize that:

H ]! In aggregate, customer participation in NPDpositively affects (a) information sharing and (b)coordination effectiveness.Customer participation in the NPD process will posi-

tively affect customer and supplier's relationship specificinvestments since the higher levels of interaction associatedwith customer participation provide more opportunity foruncovering high return opportunities motivating invest-ments. In addition, closer interaction between suppliers andcustomers enhance relational bonds and provides moreopportunity to monitor behaviors, both of which decreasethe risk associated with making specific investments.Relationship-specific investments are non-flingible invest-ments that uniquely support the customer-supplier relation-ship (Williamson 1985); these investments can be physicalassets, such as specialized design tools and engineeringprocesses for a customized new product, or human assets,such as task-specific training relevant to customer prefer-ences or manufacturing competencies. Lai (1990) suggests

that close interactions enhance both parties ability touncover investment opportunities and increases confidenceto make investments by suppressing opportunistic behav-iors associated with specific investments. It must also berecognized that closer interactions may uncover informationthat could undermine a partner's desire to make invest-ments. Overall, this negative effect may offset some of thebenefits of increased customer participation. Customerparticipation provides both parties with opportunities toclosely monitor each other's behavior and performanceduring various stages of the N ?D process, which serves as amechanism to safeguard past investments and promotesadditional investments (Heide and John 1990). Therefore,we expect that:

H2: In aggregate, customer participation in NPDpositively affects relationship specific investments bythe (a) customer and (b) supplier.

Leveraging the effect of customer participationWe expect customer participation to have an overallpositive impact on NPD process and the level of newproduct focused specific investments, but how a manage-ment team implements the customer participation processmay enhance these effects. Customer participation formal-ity represents the extent to which the customer participationin the NPD process follows specific rules and procedures(Zaitman et al. 1973). Formalization of decision-makingprocesses enhances the likelihood that the partners will actcooperatively and not opportunistically since roles andresponsibilities are more clearly defined (Das and Teng1998), and thus, promotes risk-taking behaviors. GrifTin(1997) suggests that a formalized development processinvolving the customer is more likely to improve theeffectiveness of the NPD process. Therefore, more formal-ized customer participation should facilitate infonnationsharing and resource investment and higher levels ofcooperation among customers and suppliers. In sum, wehypothesize that:

H3: In aggregate, the afect of customer participationon (a) information sharing, (b) coordination effective-ness, (c) customer relationship specific investment,and (d) supplier relationship specific investment aregreater under high customer participation formalitythan under low customer participation formality.

Effects of NPD processes and investments on the sizeof new product value pie

I

Cooper and Kleinschmidt (1995) have identified commu-nication between the supplier and customer regarding

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326 J. of the Acad. Mark. Sei. (2008) 36:322-336

customer preferences as a key prerequisite for new productvalue creation. Research on the formation of customers'new product preferences suggest that these preferences andneeds evolve through the customer's engagement withspecific new product ideas, concepts, and prototypes acrossthe NPD stages (Hamei and Prahalad 1994; Huber 1991;Prahalad and Hamel 1990). Constant information sharinghelps supphers to probe and leam how customer needsevolve and emerge during the NPD process. Moreover,infonnation shared by the supplier with the customer aboutthe cost strueture and production and engineering optionshelp customers realize constraints and, thereby, makeappropriate adjustments in their preferences for newproducts (Joshi and Sharma 2004). Due to informationsharing, customers and supplier are better able to discoverunique competencies and value creating opportunities.Thus, infonnation sharing between supplier and customershould increase the size the of the new product value pie.

In order to take advantage of each parties individualcompetencies, suppliers and custotners must coordinate theirefforts (through a regular pattern of similar or complemen-tary actions) to increase the effectiveness of their interactionsacross the different stages in the NPD process (Ande rson andNarus 1990). For example, in the product specificationstage, suppliers and customers must develop productspecifications of the new product to both fit customers'needs and control development costs (Iyer et al. 2005).

Customer-focused new product develop typicallyrequires unique adaptation by both the supplier andcustomer, these adaptations are often reflected as relation-ship-specific investments where specific changes are onlyusable with a specific partner. Empirically, a manufacturer'sphysical asset specificity has been found to enhance newproduct improvements in engineering efficiency, fit withcustom er needs, and product quality (Nishiguchi 1994). Acustomer's physical investments, such as specific productline engineering modifications, are expected to improve thenew product integration with the production line andpotentially enhance the quality and reduce the engineeringand manufacturing costs of the product (Walter 2003).Moreover, human asset specificity allows suppliers andcustomers to speak the same "language" and reducecommunication errors, thereby enhancing the product'sspeed to market (Dyer 1996). Consistent with the literature,relationship specific investment by both customers andsuppliers are expected to increase the ultimate value of anew product. Thus, we hypothesize that:

H4 : New product value is positively affected by (a)infonnation s haring and (b) coordination effectiveness.H5: New product value is positively affected by (a)customer relationship specific investment and (b)supplier relationship specific investment.

Determinants of customer share of new product value pieIt is in the best interest of both the su pplier and the customerto maximize the overall value o f the new produ ct, but only tothe degree that they are able to capture a share of this value(Carson et al. 1999). For example, if the supplier increasesthe price of the new product to match the "value created"then the customer may actual receive no return on theirparticipation in the NPD process. Thus, a key question iswhat determines the customer's share of the new productvalue pie?

Researchers have utilized dependence and equity per-spectives to understand how jointly created value will beshared (Ghosh and John 1999). The dependence of a firm ina business relationship is the firm's need to maintain arelationship with a partner (Emerson 1962; Frazier 1983)and is determined, to a large extent, by how difficult itwould be to replace that partner (Heide and John 1988).Thus, the difference in dependence between the two firmsdetermines the power each partner has in the negotiationprocess and will impact their share of the new productvalue (Ganesan 1994; Heide and John 1988). In interorga-nizational relationships, based on the equity principle, theuse of power is often mitigate by a desire to ensure thedistribution of value is "fair" and refiects each party'scontribution to the value creation (Bolton 1991; Corstenand Kumar 2003). For example, a supplier wants to ensurethe customer perceives their share as fair to maintain goodrelationship quality and continuity in the relationship.Customer perception of their 'fair share" is the customer'sevaluation of the share they would judge as fair whencomparing their ratio of inputs and outputs to the ratio ofthe supplier's inputs and outputs (Adams 1965). Researchsupports that both of these mechanisms operate to deter-mine the ultimate share received by each partner, wherepower drives the pursuit of more absolute value, andfairness drives the value allocation toward equity (but notnecessarily equality) between the two bargainers (Iyer andVillas-Boas 2003; Kagel et al. 1996).

While dependence is often modeled as an endogenousfactor, researchers have shown that a party's specificinvestments in a relationship can increase their dependenceon that relationship (Heide and John 1988; Palmatier et al.2007). Because all or a large portion of the specificinvestments will be lost if the relationship is terminated,both parties' investments increase their dependence on eachother (Ganesan 1994). This dependence occurs because afirm can no longer rely on the threat of switching to anotherrelationship partner to reduce opportunistic behaviors. Thisswitching cost, or the lack of replaceabiiity, is a directconsequence of the immobility of a firm's assets (Heide andJohn 1988). In particular, Thompson (1967) suggests that ifa firm's outcome is contingent on the input and resources of

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J. ofthe Acad. Mark, Sei. (2008) 36:322-336 327its relationship parmer, then the firm is more likely todepend on that partner. Thus, we expect a partner'srelationship specific investments to not only increase thesize ofthe new product value pie, but to also increase theirdependence (reducing their power), which lowers theirshare of the pie ceteris paribus.

Moreover, since customers determine their "fair share"by comparing the ratio of their inputs and outputs to thesupplier's ratio of inputs and outputs, as customer's increasetheir relationship specific investments (or suppliers de-crease their investments) they will require a higher portionofthe new product value to be considered fair. Conversely,according to the equity perspective (Emerson 1962), if tbesupplier contributes more tangible or intangible resources tocustomer specific new product development then thecustomer would expect the supplier to capture more shareof the new product value.

It is worth noting tbat, given the nature of NPD, itsoutcomes are often wrought with uncertainty (e.g., newproduct value is difficult to predict ex ante) and agreementsover value sharing often evolve ex post (after the NPDprocess is completed) (Myerson and Satterthwaite 1983;Jap 2001). Hence, the negotiation process regarding valuecreation and sharing are endogenous in our model, and arehypothesized to be affected by customer NPD participationactivities, Thus:

H^: Customer relationship specific investment posi-tively affects (a) customer dependence and (b) cus-tomer perception of fair share, while supplierrelationship specific investment (c) positively affectssupplier dependence and (d) negatively affects cus-tomer perception of fair share.

Effects of size and share of new product value pie on valueobtained by customerAs discussed previously, based on an institutional arrange-ment perspective (Carson et al. 1999), the size and the shareof the new product value pie are two key elementscontributing to tbe benefits obtained by a firm. The newproduct value obtained by the customer captures the overallvalue or benefits that the customer receives from partici-pating in tbe new product development process. All elsebeing equal., we expect that the larger the new product valuepie then the more value the customer will receive. Inaddition, the detenninants of the customer share will affectthe overall value obtained by the customer.

The detenninants ofthe customer share derived from theequity and power perspectives can be viewed though amotivation-ability paradigm (Merton 1957). Fairnessaffects how much value the customer believes they deservebased on their and the supplier's contributions to the NPD

process and thus affects the customers motivation tonegotiate, while the power/dependence of both partiesaffect their ability to negotiate for greater benefits. Ascustomer perception of their fair share increases, we expectthem to be more motivated to negotiate witb the supplierfor a higher share; thus, the customer is more likely toobtain more value of the new product. Further, when thesupplier's dependence on the customer increases or cus-tomer's dependence decreases, customers have a greaterability to negotiate, so they are more likely to obtain morevalue of the new product. Therefore:

H?: New product value, the size of the new productvalue pie, positively affects the new product valueobtained by the customer.H: Detenninants of customer share of the newproduct value pie affect the new product valueobtained by the customer, or more specifically (a)customer dependence negatively affects, and (b)supplier dependence and (c) customer perception offair share positively affect new product value obtainedby the customer.

MethodologyThe structural model in Fig. 1 was tested by surveyingpurchasing and procurement executives from OEMs.Consistent with previous studies on business-to-businessrelationships (e.g. Heide 2003), this research focused onOEMs in three two-digit SIC major groups: 35 (generalmachinery), 36 (electrical and electronic machinery), and37 (transportation equipment). This context is appropriatefor testing our model since customers (OEMS) in theseindustries often participate in their suppliers' new productdevelopment process.Data collectionFor the survey portion of this study, we procured a mailinglist from a commercial list broker, removed all incompleteaddresses, and eame up with an initial sample of 976 firms.For the first stage of data collection, we mailed aprescreening survey to the potential respondents assessingtheir appropriateness and willingness to participate in thestudy. We determined whether respondents had beeninvolved in their supplier's NPD process in the last 2 years.Information was collected as to the respondents' title,number of years with the firm, and percentage of timespent on supplier-related activities. Of the 976 firms, wereceived prescreening responses from 387. We eliminated20 respondents due to non-involvement in their suppliers'

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328 J. of the Acad. Mark. Sei. (2008) 36:322-336NPD process in the previous 2 years, having less than2 years in the position, spending less than 50% of their timewith suppliers, or bearing titles that reflected a low-levelposition. The remaining 367 respondents held positionssuch as Vice President of Purchasing, Purchasing Manager,Procurement Manager, and Production Manager.

Questionnaire packets were then mailed to these 367managers. Survey instructions requested respondents toreflect on the most recent NPD project they had beeninvolved in and to complete the questionnaire with thatproject in mind. We sent a follow-up mailing 2 weeks later.In addition to the survey, each mailing included a prepaidreturn envelope and a cover letter. We used multiple mailcontacts, first-class postage, prepaid return envelopes, andinformative cover letters to increase survey response. Thistwo-wave sampling effort generated 195 responses. Threeresponses were removed due to too many missing values(>5%). Early and later responses were compared and noindication of response bias was found.The survey instrument included post hoc checks on theinfonnants' knowledge and involvement in the suppliers'NPD processes. On a seven-point scale, the mean of theirknowledge in their firm's purchasing decisions was 6.35,and the mean of their involvement was 6.13. Fourresponses that showed inadequate levels of informantknowledge or involvement were eliminated (less than 4on a seven-point scale). Thus, 188 responses were includedoverall for further data analysis ( 51 % effective responserate).

To ftirther validate the measures and reduce concern ofalternative explanations (e.g., common method variance),all the respondents were asked to indicate the contactinformation of the manager at the supplier who coordinatedtheir participation in the NPD process. Questionnaires weresent to the 135 managers of supplier firms based on contactinformation provided by their customer. After a two-wavemailing. 64 responses were received. The supplier reportedtheir dependence on the customer and their level ofrelationship-speciftc investments. As a supplementary testa reduced model was tested including all hypothesizedpaths involving these two supplier reported constructs usingdyadic data (/^=64). Reported results are consistent withthe findings from the reduced model'.MeasurementOur measurement of customer participation was based onacademic and practitioner literature as well as our field

A summary of the results from these supplementary tests areavailable upon request.

interviews. We conducted nine extensive interviews withexecutives from different firms across the three industrieslisted above. The objective was to understand the phenom-enon of customer participation in a supplier's NPD processand to develop a measure of customer participation. Afterintroducing the objectives of our research, we conductedthe interview, which lasted about 90 min. To minimizeinterviewer bias and broaden our understanding beyond ourpreconceived framework, we asked open-ended questionsabout the key underlying factors determining the levels ofparticipation in the supplier's NPD process and the causallinkages between participation and the value obtained bycustomers (McCracken 1988; Zaltman 1997). Based onthese interviews two aspects of customer participationemerged. Breadth and depth captured the level or extentof customer participation. More specifically, breadth refersto how broadly customers are involved in a supplier's NPDprocess. The scope of participation can range from one or afew NPD activities, such as new concept generation andprototyping, up to and including all NPD activities. Thedepth of customer participation represents how far custom-ers are involved in the NPD process, w hich in some cases isvery superficial with limited influence, and in other casescustomer can be deeply involved or tnay even control theoutcome of certain NPD activities, Overall, the extent orlevel of customer participation is reflected by the breadthand depth of the involvement in the supplier's NPD. Itshould be noted we are only capturing the breadth anddepth of customer participation, but these measures do notindicate if this participation adds to or distracts from theoverall NPD process.

Based on the NPD literature and our interviews withcustomers, we identified ten activities central to the NPDprocess (see Table 4 of the Appendix for all measures). Foreach one, we asked if the customer was involved (O="notinvolved" and 1 ^-"involved") in this activity, the sum of thenumber of activities the customer checked was used torepresent the breadth of customer participation. If custom-ers were involved in the activity, then we asked about thedepth of their involvement using a seven-point Likert scale.We determined the overall depth of participation across theactivities they were involved in by calculating the mean ofthe completed items. Thus, the level of customer participa-tion is treated as a latent variable with two items: customerparticipation depth and customer participation breadth.Since breadth is determined as an additive measure (0 to10), it was converted into a seven-point scale to correspondto the depth measure (Homburg et al. 2002).

Customer participation formality was measured usingthe average of three items developed for this study, whichassessed the extent to which the customer participationprocess was formalized into structured rules and activities.For the other constructs in the proposed framework.

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J. of the Acad. Mark. Sei. (2008) 36:322-336 329

existing measures were used wherever possible. All theitems used to measure the constructs were closed-ended,with seven-point Likert-type scales anchored at stronglydisagree and strongly agree, except where otherwise noted.

New product value is reflected in (1) the direct benefitsof the new product (or component) and (2) how the newproduct (or component) improves the engineering, produc-tion, and delivery of the final end-product. Three itemswere developed to measure direct new product benefits, andthree items were used to measure the indirect aspects.Information sharing is the extent to which the supplier andcustomer effectively exchange critical infonnation aboutthe market, product, and competition. Four items, basedon the work ofHeidc and John (1990), were used to evaluatethe extent to which critical information and knowledgewere shared between the two partners. Coordinationeffectiveness describes the extent to which suppliers andcustomers effectively work together to accomplish acollective set of tasks in the NPD process. Four items wereadapted from Jap (1999).

Customer (supplier) dependence is defined as the needto maintain a relationship with the other party. Three itemswere adopted from Kumar et al. (1995) to evaluate eachtype of dependence. Specifically, respondents were asked toevaluate their dependence on their supplier as well as theperceived dependence of the supplier on them. Customerperception of 'fair share" involves the extent to which thecustomer feels they deserve a larger portion of value of thenew product than does the supplier. Two items weredeveloped specifically for this study.

The scales to measure relationship-specific investmentsfrom the customer (supplier) described the investmentsmade by the customer (supplier) dedicated to the relation-ship with a particular supplier (customer) for the develop-ment of a new product. These investments are difficult toredeploy in another relationship, except at a loss in value.Four items were used based on the work of Heide and John(1990) to measure this construct.

With regard to new product value obtained by thecustomer, most scholars agree that value is a construct thatinvolves a trade-off between benefits and costs (e.g.,Huser and Urban 1986; Zeithaml 1988). New productvalue obtained by the customer is the trade-off betweenbenefits of the new product versus the costs (price)incurred by customers in order to obtain the product.Three items were developed to measure this construct. Anumber of control variables were included in the model.Customer share of new product development cost could beexpected to affect the customer's perception of their fairshare and thus, is included as a control variable. The ageof the supplier-customer relationship is also included as acontrol variable for new product value obtained by thecustomer.

Analytical approachA two-stage approach was employed to analyze the dataand test the proposed model. In the first stage, aconfirmatory factor analysis measurement model wasassessed using AMOS. Once a suitable measurement modelwas obtained, a path model was identified using themaximum likelihood criterion in AMOS. According toAnderson and Gerbing (1988), the two-stage approach tomodel fitting has two main advantages. First, it is lessdemanding on the sample size owing to the reduced modelat each stage. Second, the potential confounding effectbetween the structural model and the measurement modelcan be avoided.Assessment of the measurement modelConfirmatory factor analysis was used to estimate ameasurement model to evaluate construct reliability andconvergent and discriminant validity. All latent constructswere estimated in one measurement model with each scaleitem loaded on its a priori specified factor, and correlationamong factors was allowed (Gerbing and Anderson 1988).Maximum likelihood estimates of the measurement modelswere obtained using AMOS. The measurement modelexhibited acceptable fit indices: x^((>45)^ 1.874.05 (/7

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33 0Table 1 DescriptiveConstructs

statistics an d correlationsMean SD Ave. Corre la t ion

1 2 3coefficients

4 5

J . of the

6 7

Acad.

8

Mark.

9

Sei.

10

(2008)

11

36:322-336

12 131. Customer participation 4.3 2 1.32 .492. New product value 5.24 0.97 .483. Information sharing 5.23 0.93 .544. Coordination effectiveness 4.84 1.32 .635. Customer dependence 4.12 1.67 .626. Supplier dependence 4.00 1.49 .577. Customer perception of "fair share" 3.46 1.13 .568. Customer relationship-specific investment 3.41 1.40 .559. Seller relationship-specific investment 4.09 1.58 .5810. New product value obtained by customer 5.65 i.36 .6011. Customer share of new product 3.25 1.23 n/adevelopment cost12. Customer participation formality 4.2 3 1.03 .5913. Age of the relationship 5.35 4.98 n/a

.62.18

.54.34.05.29.01.13.30.13.22

.41.16

.93

.33.47.10.32.04.08.27.22.07

.07

.07

.83.53.06.33-.11- .06.25.01

.11

.12.07

.84.11.35-.22- .19.45.16.32

.to

.17

.73.34- .05.32.29- .17.20- .08.17

.75

.02

.16.53.13.20

.02

.14

.67.24- .09.21.34

.01

.80

.3 5

.02

.13

.19.15

.82.10.14

.06

.16

.75.08 n/a

.12 .01 .78.13 - .10 - .11 n /aCoefficient alphas ar e reported along th e diagonal;/).ll or /< -. 17.Ave.: average variance extracted, n/a: single-item manifest variable

analysis, using structural equation modeling methodology,made it possible to test simultaneously all the hypothesizedrelationships among the focal constructs. Item factor scoreswere averaged to derive the factor scores for path analysis(Jap 1999).Common method and acquiescence biasBecause we used a cross-sectional survey, it was necessaryto control for two sources of potential bias: (1) commonmethod bias due to a single instrument of data collection.,and (2) acquiescence bias due to a person's tendency toagree with items {Agustin and Singh 2005). To control forcommon method bias , based on procedures recommendedby Lindell and Whitney (2001) and Agustin and Singh(2005), we included a construct (supervisor's trust towardthe respondents measured by three items adapted fromRamaswami and Singh (2003)) that is theoretically unre-lated to the constructs in the model, and related it to all theendogenous constructs in the tested model to partial out theeffects of common instrument bias. To control for acquies-cence bias, we followed Baumgartner and Steenkamp's(2001) recommendation to identify three matched sets ofpositively and negatively worded items. We then computeda difference score between these items and included it as anexogenous factor in the model and linked it to all constructsin the structural models to partial out the effect ofacquiescence

Items used in constructing common method an d acquiescencefactors ar e available from th e authors upon request.

Results: hypothesized main effectsThe structural model indicated good fit indices: x^(43)~135.11 (p

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332 J. ofthe Acad. Mark. Sei. (2008) 36:322-336Table 3 Results: moderation effects of custotner participationformalityHypothesized path high low HypothesesCustomer participation-information sharingCustomer participation-

coordinationeffectivenessCustomer participation-customer relationship-specillc investtnentCustomer participation-supplier relationship-specific investment

.26** .37** 0.57

.32** .28** 1.11

.26* .05 5.11*

.37** .16 4.55*

represents the unstandardized path coefficient for that group; Ax ^represents the difference in \ ' between the constrained and freemode ls tor the path being tested with 1 degree of freedom.*p

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J. of the Acad. Mark. Sei. (2008) 36:322-336 3 3 5Table 4 (continued)Constructs FactorloadingsCustomer 's dependence on sel lerIt would be difficult to replace this supplier. .66If this relationship ended , we would face a significant loss. .90We are quite dependen t on this supplier. .84Seller's dependence on customerIt would be difficult for our supplier to replace us. .66This supplier is quite depende nt on us. .90If this relationship ended, this supplier would faee a .73significant loss.Customer's perception of fair shareWe feel that we deserve more of the value of the componen t .70purchased from this supplier than our supplier.it is reasonable that we take away mo re value created in the .67purchased component from this supplier than oursupplier.

Customer specific investments in new product developmentDuring the NPD processWe have made significant investmen ts in tooling and .76equipment dedicated to our relationship with thissupplier.Our production system has been tailored to meet the .88

requirements of dealing with this supplier.Our production system has been tailored to use the .64particular components bought from this supplier.Gearing up to deal with this supplier requires highly .60specialized toots and equipment.Seller specific investments in new product developmentDuring the NPD processThis supplier has ma de significant investments in tools and .68equipment dedicated to the relationship with our com pany.This supplier's production system has been tailored to meet .70the requirements of dealing with our company.This supplier has made extensive adaptations in physical .82plant and equipment in order to deal effectively with ourcompany.

The procedures and routines developed by this supplier as .63part of their relationship with our company are tailoredto our particular situation.New product value obtained by customerFor the involvemen ts and efforts you input in the .77component, 1 would say the component is of great valueFor the price and efforts, I am very satisfied with the .84functioning of the product.I would think of the com ponent as providing great value. .68Customer participation formalityWe are involved in the NP D process of this .80component . ( l=" informal ly" to 7="fonna l ly" )There is imposed regarding our involvemen t in this .77supplier's NPD process of the component. (I ="no formalrule" to 7="a system of formal rules")We follow in otir participation activities of the NPD .84process. (1 ="no fonnal procedure" to 7="'fonnal writtenprocedures")

All items were measured usin g seven-point scales anchored by 1 ="stronglydisagree" and 7="strongly agree" unless otherwise indicated.

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