Directory UMM :Journals:Journal of Operations Management:Vol19.Issue1.Jan2001:

Concurrent engineering and its consequences

Xenophon Koufteros

a,∗

, Mark Vonderembse

b

, William Doll

b a_{Information Technology and Operations Management, Florida Atlantic University,}

220 SE 2nd Avenue, Fort Lauderdale, FL 33301, USA

b_{College of Business, The University of Toledo, Toledo, OH 43606, USA}

Received 15 April 1999; accepted 27 May 2000

Abstract

Technology and market changes introduce uncertainty and equivocality in the product development arena, and firms are considering various structural relationships to help them cope with these changes. Concurrent engineering (CE) is a mechanism that can reduce uncertainty and equivocality and improve an organization’s competitive capabilities. CE is typically manifested through concurrent work-flows, product development teams, and early involvement of constituents. It enables information to flow through the organization quickly and effectively thereby, reducing uncertainty. At the same time, it enables debate, clarification, and enactment which are essential elements in combating equivocality. CE practices are also purported to have significant effects on product innovation, quality, and premium price capabilities.

This research carefully defines CE and creates a valid and reliable instrument to assess it. It reports on the development and testing of a model that relates CE to some of its most salient consequences. Half of the sample of 244 firms is used for exploratory purposes and half for confirmatory work and hypotheses testing. Results indicate that firms that experience a high technological and product change in their environment are using more CE practices. In addition, results suggest that CE practices have significant direct effects on product innovation. However, only the indirect effects of CE on quality and premium pricing are statistically significant. Firms with higher levels of product innovation have higher levels of quality. Firms with higher levels of product innovation do exhibit premium pricing capabilities but only if they affect quality capabilities. Firms that display elevated quality levels excel in their premium pricing capabilities. © 2001 Elsevier Science B.V. All rights reserved.

Keywords:Product development; Concurrent engineering; Competitive capabilities; Empirical research; Structural equation modeling

1. Introduction

Customers have grown more sophisticated. They demand new products and features, which has fueled technological change and innovation. Levels of prod-uct quality once considered extraordinary are now a minimum requirement for doing business. In many

∗_{Corresponding author. Tel.:+1-954-762-5208;}

fax:+1-954-762-5245.

E-mail address:kouftero@fau.edu (X. Koufteros).

industries, sustained competitive advantage can only be secured by sustained improvements in quality. As customers have grown more sophisticated and demanding, the variety of products has increased dramatically (Wheelwright and Clark, 1992). More and more firms are finding that their competitiveness, indeed their very survival, is determined by the speed and effectiveness of their product development pro-grams. To that effect, there is a number of examples and case studies that have been published and attest to the importance of product development and its effects

0272-6963/01/$ – see front matter © 2001 Elsevier Science B.V. All rights reserved. PII: S 0 2 7 2 - 6 9 6 3 ( 0 0 ) 0 0 0 4 8 - 6

on quality and pricing capabilities (Dumaine, 1989; Nayak, 1990; Clark and Fujimoto, 1991; Clark, 1989; Clark et al., 1988; Hartley, 1992).

Much of this change can be attributed to the insur-gence of Japanese products. The rapid introduction of new products along with shorter product life cycles increased uncertainty and equivocality for many orga-nizations. Many firms were poorly equipped to face the realities of this new competition because they were highly bureaucratic with functional structures that in-hibited the free flow of information (Liker et al., 1996). These structures were also incapable of dealing with the equivocality that comes from a rapidly changing environment. Firms unable to adjust their organiza-tional design have seen their market shares slip and their dominance recede.

Successful firms employ organizational designs that enable them to reduce uncertainty and equivocality and deal effectively with changes in the competitive environment. These firms have reorganized the prod-uct development process from a sequential, ‘over the wall’, process to a concurrent process where market-ing, product engineermarket-ing, process engineermarket-ing, man-ufacturing planning, and sourcing activities overlap (Wheelwright and Clark, 1992; Clark and Fujimoto, 1991; Susman, 1992; Mansfield et al., 1971; Clark, 1989). They involve important constituents early in the product development effort, and those constituents become part of a cross-functional team. This inte-grated approach has been described as ‘concurrent engineering’. Team members coordinate problem solving efforts to improve product innovation, and enhance quality. Improvements in product innova-tion and quality capabilities are thought to have a determining impact on premium pricing capabilities.

Many companies have been using CE practices but, there is no strong theory for the adoption of CE prac-tices. In general, companies found CE practices useful in their attempts to improve product innovation capa-bilities and quality. But the question remains as to why the CE practices and not other practices. Do firms in high change environments adopt higher levels of CE practices? Do higher levels of CE practices lead to better product innovation and quality competitive ca-pabilities? In turn, do product innovation and quality lead to premium pricing capability?

While there is keen interest in understanding how to improve product development and competitive

ca-pabilities, our knowledge about how to do so is sup-ported by anecdotal evidence (McDonough and Bar-czak, 1991). Cooper and Kleinschmidt (1994) state that most prescriptions for improving product devel-opment capabilities are founded on speculation, opin-ion, and a handful of case studies. In fact, Gerwin and Susman (1996) report that very little in the form of empirical work has been published. Two recent special journal issues (i.e. IEEE Transactions on Engineering Management 6 (2) (1996); Journal of Operations Man-agement 17 (6) (1999)) have been particularly useful in the body of empirical literature for product develop-ment. Trygg (1993) notes that the lack of broad-based research has made it difficult to establish whether the more innovative practices in highly visible companies represent a cultivated movement in industry or merely changes found in a few successful, technology-based companies. Such research requires the development of instruments for measuring product development prac-tices and their consequences.

This manuscript offers an explanation for the selec-tion of CE practices. Essentially, concurrent engineer-ing is conceptualized as an efficient organizational design that tackles both uncertainty and equivocality in the environment leading to improved firm capabili-ties. This study also presents and tests a hypothesized measurement model and a structural model that relates CE to some of its more pronounced consequences.

2. Theory development

The present product development environment is characterized by rapid change which introduces both uncertainty and equivocality. The work of Daft and Lengel (1986) is indispensable in understanding the effects of uncertainty and equivocality on information requirements and structural design. Based on early work in psychology (Miller and Frick, 1949; Shan-non and Weaver, 1949; Garner, 1962), they describe uncertainty as the absence of information. Similarly, Galbraith (1977) defines uncertainty as “the differ-ence between the amount of information required to perform the task and the amount of information already possessed by the organization”. Daft and Lengel (1984) citing the prevalent view in organi-zation theory (e.g. Galbraith, 1973, 1977; Tushman, 1978; Tushman and Nadler, 1978), suggest that

orga-nization design enables additional data processing to reduce uncertainty. They point that structural design can facilitate the amount of information needed for management coordination and control. McDermott’s (1999) research suggests that high levels of uncer-tainty result in many challenges especially in the area of managing functional integration. Souder et al.’s (1998) results support the idea that product devel-opment activities involve high levels of uncertainty which then necessitate the use of integration.

On the other hand, Daft and Lengel depict equiv-ocality as ambiguity, the existence of multiple and conflicting interpretations about an organization sit-uation. Equivocality is portrayed as being similar to uncertainty but equivocality “presumes a messy, un-clear field and an information stimulus may have sev-eral interpretations” (p. 554). The presence of high equivocality implies confusion and lack of understand-ing. With respect to reducing equivocality, structural mechanisms have to enable debate, clarification, and enactment more than simply providing large amounts of data (Daft and Lengel, 1986). Daft and Lengel in-dicate that “the key factor in equivocality reduction is the extent to which structural mechanisms facilitate the processing of rich information” (p. 559). Rich media are typically personal and involve face-to-face contact. Such media include the use of teams where members can converse on the meaning of equivocal cues. In ad-dition, a team approach enables rich communication which can be used for difficult and equivocal issues.

Firms that are facing a changing environment will have to battle the uncertainty and equivocality that comes along. They will have to adopt an organizational design that is efficient in acquiring and processing ad-ditional information but also one that is capable of processing rich information. Wheelwright and Clark (1992) describe such an organizational design as an ‘integrated problem solving’ approach which includes an early involvement of constituents who belong to a cross-functional team that works on different phases of product development concurrently. This links the upstream and downstream groups involved in product development in time and in the pattern of communi-cation (Wheelwright and Clark, 1992). Others have called this approach ‘concurrent engineering’. Black-burn et al. (1996) describe the need to manage both activity and information concurrency. They develop a model of information concurrency that includes the

early involvement of constituents, the preliminary in-formation transfer, and the intensive and rich commu-nication among team members.

The three basic elements of CE (i.e. early involve-ment of participants, the team approach, and the simultaneous work on different phases of product development) allow additional information to flow across constituents while constituents can engage in face-to-face communication (rich medium) and de-bates for the enactment of solutions. Cross-functional teams provide an avenue for constituents to express concerns and a mechanism for capturing learning. Early involvement empowers downstream partici-pants; they have a say before decisions are finalized. Simultaneous planning of product, process, and man-ufacturing allows issues of manufacturability to be evaluated and incorporated in the final product design. Concurrent engineering is the early involvement of a cross-functional team to simultaneously plan product, process, and manufacturing activities (Hartley, 1992; Susman and Dean, 1992). The posited relationships between CE practices and its consequences appear in Fig. 1.

2.1. Concurrent work-flow

With concurrent work-flow, parallel activities are stimulated. With early release of information, engineers can begin working on different phases of the problem while final designs are evolving. Time-consuming rework is also avoided because the early release of information promotes early detection that the product design is veering off target. Test engineering, for example, may use early design in-formation to assure that new products are tested and inspected in a systematic way. Purchasing may be able to order long lead time items in advance of the formal issue of engineering documents.

2.2. Product development teams

McKee (1992) suggests that cross-functional teams are conducive in a high change environment because they enhance communication and organizational learn-ing. Communication is a vital and basic element in organizational activity. Communication for a complex process such as the new product development process is extremely important. Fischer (1980) has described the innovation process as basically a process in which

Fig. 1. Hypothesized structural model.

ideas rather than physical technologies are transferred from originators to users. Similarly, Utterback (1971) claims that innovation is most often the result of communication of a need followed by a search for information about a technical means to meet the need. Meyers and Wilemon (1989) point that teams can function as a flexible learning mechanism that encour-ages the meaningful transformation of knowledge. Such a mechanism stores, “retrieves, reinvents, and transfers the contents of its knowledge base” (p. 80).

Henke et al. (1993) support the notion that “a logical answer to overcome barriers to communication and in-formation sharing comes in the form of lateral decision processes which cut across the traditional vertical lines of functional authority” (p. 217). They further suggest that one of the more useful forms of lateral communi-cation in product development situations, where joint efforts across multiple functional departments are re-quired, is the cross-functional team.

The literature cited by Donnellon (1993) also ad-vocates that teams produce more creative solutions (Osborn, 1957), make better decisions (Davis, 1973), improve the implementation of decisions, and increase commitment (Cohen and Ledford, 1991; Hoffman, 1979). Long ago, Lawrence and Lorsch (1967) stated that work teams could be used as one of several mech-anisms for integrating the differentiated perspectives present because of functional specialization within firms. According to Donnellon (1993), the literature also argues that certain tasks require teams because

they can be only accomplished through constant mu-tual adjustment to the information provided by each team member (Pinto and Pinto, 1990; Thompson, 1967). In this way, firms can reduce equivocality. 2.3. Early involvement of constituents

Early involvement of many (e.g. manufacturing, purchasing, marketing) constituencies is essential for cycle time reduction and improvements in product in-novation capabilities. In fact, the most cited reason for delays in product development projects in manufac-turing systems is engineering change orders (Barkan, 1992; Millson et al., 1992). These occur when ma-terials are unavailable and/or parameters about the product do not match manufacturing capabilities and/or customer expectations. This points to the lack of information and or equivocality. Designers may find out that manufacturing cannot meet the specifi-cations or that the specified material is unavailable or that customers are not satisfied. Time is wasted when physically separate functions need to communicate.

The benefits are derived from fewer mismatches between product characteristics and existing process capabilities. These mismatches are often caused by the designer’s mis-perceptions of factory capabilities (Langowitz, 1988). Manufacturing may also suggest ways to design the product for ease of manufactur-ing. Manufacturing may suggest how products can be designed with fewer parts, assembled or tested

more easily, or accommodated to automated equip-ment (Boothroyd and Dewhurst, 1988). Susman and Dean (1992) suggest the early involvement of man-ufacturing, bringing manufacturability issues into light, can reduce lead time from design conception to delivery of the product. This early involvement of constituents begins as early as the concept stage. It is plausible that potential problems can be identified early enough to avoid costly delays later.

Early involvement of various constituents in the de-velopment process provides an avenue for various in-terest groups to express their concerns and to provide their input early into the process. Adams et al. (1998) suggest that through a broad functional participation in the acquisition and interpretation of data, organi-zations can reduce the perceived ambiguity of market information. Design characteristics such as manufac-turability, complexity, and design for quality can be improved through greater cross-functional involve-ment, leading to shorter manufacturing lead times later in the product life-cycle, premium pricing, and better quality (Putnam, 1985; Whitney, 1988; Raturi et al., 1990; Fleischer and Liker, 1992; Ulrich et al., 1993).

Hypothesis 1. Firms in high change environments will adopt higher levels of CE practices than firms in low change environments.

Hypothesis 2. CE practices have significant direct effects on product innovation.

Hypothesis 3. CE practices have significant direct effects on quality.

Hypothesis 4. CE practices have significant direct effects on premium pricing.

2.4. Product innovation

Product innovation refers to the capability of the organization to introduce new products and new fea-tures. The fast pace of technology and the demands of the customers for novel and better products requires that companies be able to innovate continually and bring these innovations to the market place quickly (Blackburn, 1991). Already the automobile companies have realized that they do not have the luxury of 7

or 8 years to design and introduce a new style of a vehicle.

The continuing efforts in innovation foster organi-zational learning and enable ‘time to market’ to be shortened (Clark and Fujimoto, 1991). Due to the fre-quent innovation process, products closely match cur-rent customer demands and expectations and can adopt technological advancements as they become available. Any design or quality deficiencies are overcome faster, resulting in more satisfied customers. Quality then is a prospective benefactor of improvements in product innovation capabilities. Current and future needs of customers are incorporated into new products expedi-tiously. Innovation can produce a product that is per-ceived by consumers to be intrinsically superior to competitors’ offerings. Companies that innovative fre-quently can charge price premiums.

Karagozoglu and Brown (1993), Rosenau (1990), and Smith and Reinersten (1991) note that earlier product introduction improves profitability by creat-ing an opportunity to charge a premium price and extending a product’s sales life. Premium prices can be charged in the early stages of the new product’s life cycle before competitors have brought their tech-nology on stream. Significantly, the largest profit margins accrue under the umbrella created by being the only producer in the market (Blackburn, 1991). Customers are willing to pay premiums not only for the faster service but also because they can, in turn, create and deliver innovative products to their customers (Blackburn, 1991).

Hypothesis 5. Product innovation has significant direct effects on quality.

Hypothesis 6. Product innovation has significant direct effects on premium pricing.

2.5. Quality

Quality gauges the capability of the firm to pro-duce products that would satisfy customer needs for quality and performance (Hall et al., 1991; Doll and Vonderembse, 1991). When firms emphasized quality in the industrial era system, usually what they meant was internal quality, conformance to specifications. Post-industrial enterprises emphasize a variety of cus-tomer oriented quality aspects (Doll and Vonderembse,

1991). Garvin (1984) has proposed eight dimensions of quality: performance, features, reliability, confor-mance, durability, serviceability, aesthetics, and per-ceived quality. Miller et al. (1992) used conformance, performance, and reliability as measures of quality. Giffi et al. (1990), on the other hand, used the same dimensions suggested by Garvin. The list provided by Garvin is quite comprehensive while observed mea-sures for each are difficult to establish.

Product quality is unquestionably a means by which companies attempt to differentiate their product. In many cases, companies exploit their capability to meet customer quality requirements and command premium prices. Indeed, customers are sometimes willing to pay a premium price to get better quality, whether it is per-ceived quality or real. A differentiation strategy based on an intrinsically superior product depends, however, on the firm’s ability to maintain those inherent dif-ferences in the face of competitive imitation (Murray, 1988). Companies that offer products matching cus-tomer quality requirements not only capture market share, but they build loyalty.

Hypothesis 7. Quality has significant direct effects on premium pricing.

2.6. Premium pricing

The unorthodox capability of premium pricing is used by several firms including time-based competi-tors. Unorthodox in the sense that manufacturing researchers have not acknowledged its importance in their research on competitive capabilities. On the other hand, other disciplines have elaborated exten-sively on premium pricing. Marketing for example is using premium pricing within the context of a ‘skimming’ strategy.

Several researchers (e.g. Stalk, 1988; Stalk and Hout, 1990; Blackburn, 1991; Karagozoglu and Brown, 1993; Rosenau, 1990; Smith and Reinersten, 1991) suggest that those firms that have a high level of product innovation capability can charge premium prices. Birnbaum (1984) suggests that the first prod-uct to reach a particular market segment will capture market share and provide higher profitability for some length of time. Customers may also see premium pricing as indicative of a superior product and/or service.

3. Scale development

The scales were developed based on existing theory, a literature review, interviews with 10 practitioners and a formal pretest study with fourteen experts, both practitioners and academics. Fig. 2 shows a roadmap of the instrument development approach and research methods. Multiple indicators for each latent variable are used because they provide a greater degree of re-liability than individual measures.

Fig. 2. A roadmap of the instrument development process and methods.

Items for the CE practices constructs were gene-rated by reviewing the relevant product development literature (e.g. Stalk and Hout, 1990; Blackburn, 1991; Clark and Fujimoto, 1991; Clark et al., 1992; Mc-Kee, 1992; Millson et al., 1992; Donnellon, 1993; Sus-man and Dean, 1992; Cooper and Kleinschmidt, 1994; Clark, 1989; Karagozoglu and Brown, 1993; Flynn et al., 1996). This literature provides examples and illustrations of CE practices. They also provide evi-dence of how these practices improved the competitive capabilities of the firms that use them. A five-point Likert-type scale was used, where 1 = not at all, 2 =a little, 3 =moderately, 4 =much, and 5 =a great deal. Items were grouped into their correspond-ing scales.

To generate items for competitive capabilities, previous research in competitive capabilities was re-viewed (e.g. Roth and Miller, 1990; Wood et al., 1990; White, 1996; Garvin, 1984; Ward et al., 1990; Ferdows and DeMeyer, 1990; Roth and Miller, 1992; Noble, 1995; Safizadeh et al., 1996; Vickery et al., 1997). This literature is a rich source of examples and items for competitive capabilities. A seven-point Likert-type scale was used in reference to the capabi-lities of the firm compared to the average in the indus-try, where 1 =much below, 2 =moderately below, 3 =slightly below, 4=about average, 5 =slightly above, 6 =moderately above, and 7 =much above. After 10 interviews with practitioners, items were modified and a few items were added.

To render further support for content validity, the items for all scales were reviewed in a formal pretest study by 14 experts (9 faculty from Business and En-gineering Colleges and 5 practitioners located in the Midwest region of the US). The experts had the op-portunity to keep items, modify items, and drop items. Where the experts felt that the items did not cover the intended domain, they provided suggestions or aug-mented the instruments with additional items. Some space was left under each of the scales measured for experts to identify and indicate any aspects of a scale not measured or to comment about the scale. In order to drop an item from the scales a content validity co-efficient was computed for each item (Gatewood and Field, 1994).

In addition, the scales were pilot tested with re-sponses from 34 firms and were revised accordingly. We should note, however, that such assessments were

made in light of the fact that a small sample was at hand. After purifying the items, an exploratory factor analysis within block was conducted to assess the in-ternal rule of unidimensionality of the retained items. The reliability (internal consistency) of the remain-ing items comprisremain-ing each dimension was examined using Cronbach’s alpha. Finally, to assess predictive and nomological validity, the CE practices were cor-related with a composite measure of competitive ca-pabilities. Quality, product innovation, and premium pricing competitive capabilities were correlated with a measure of profitability.

Cronbach’s alpha reliabilities based on the pilot data were above 0.80 for all scales and a single fac-tor emerged within each block of items. There were no apparent problems with the dimensionality or the validity of the scales.

Twenty nine indicators (items or measures) emerged from the pilot study: (1) four for concurrent work-flow, (2) five for product development teams, (3) five for early involvement, (4) five for product innovation, (5) seven for quality, and (6) three for premium pricing. The items for the scales were mixed throughout the instrument presented to respondents to make sure that the results were not an artifact of the sequence of the questions.

4. Research design and large sample characteristics

The Society of Manufacturing Engineers (SME) co-sponsored the large scale administration of the survey and provided the mailing list and logistical support. SME sent a pre-notification card to the exe-cutives 2 weeks prior to mailing the questionnaire. The questionnaires were sent out using envelopes and stationary from SME and the cover letter was co-signed by an SME executive. The cover letter iden-tified the purpose of the study and indicated that sum-mary results will be made available to respondents. Questionnaires were sent out to executives in 2500 discrete-part manufacturing firms with more than 100 employees each. Four SIC codes (SIC 34: fabricated metal products (except machinery and transportation equipment), SIC 35: industrial and commercial ma-chinery, SIC 36: electronics, electrical equipment and components, and SIC 37: transportation equipment) were targeted primarily because the intent was to have

Table 1

Sample description (n=244)

SIC code and name Percentage

Respondents by SIC code

SIC 34: fabricated metal products (except machinery and transportation equipment) 35

SIC 35: industrial and commercial machinery 30

SIC 36: electronics, electrical equipment and components 12

SIC 37: transportation equipment 15

Miscellaneous 8

Position Percentage

Respondents by position

Presidents/CEO 12

Vice Presidents 31

Directors 11

Managers 19

Miscellaneous 27

Number of employees Percentage

Firms by size

Up to 499 69

500–999 16

1000–4999 11

5000–9999 1

Over 10 000 3

a sufficient sample size to perform industry analysis at a later time. These specific SICs have been chosen be-cause they are popular by manufacturing researchers and this may allow the development of a nomological network of constructs for those industries.

Out of 253 responses received in a single mail-ing, 244 were usable resulting in a response rate of 10%. Such response rate is not unusual when the unit of analysis is the firm and it involves an extensive organizational level survey (the study included four major parts measuring product development practices, manufacturing practices, competitive capabilities, and contextual variables and demographics). Griffin (1997) produced a similar response rate for new prod-uct development practices. Sample statistics appear in Table 1 and indicate that 92% of responses came from the targeted SIC codes. The majority of respondents were high level executives from firms with less than 500 employees.

To evaluate the representativeness of the sample, a

χ2-test of differences between observed and expected (population) frequencies for two digit SIC codes and firm size was carried out. Theχ2-test showed that the distribution of the sample fits very well with the

dis-tribution of the population for SIC codes (p >0.527) while the sample seems to include more large firms than the population would imply (p <0.000).

5. Research methods

Following Gerbing and Anderson’s (1988), and Anderson and Gerbing’s (1982, 1988) paradigm on testing models, the measurement model is tested first followed by the testing of the structural model. This should be done in order to avoid the possible in-teractions between the measurement and structural models. The measurement model is examined using exploratory as well as confirmatory techniques (Fig. 2).

The methods employed for development and ex-ploratory evaluation of measurement scales include corrected item-total correlations (CITC), exploratory factor analysis within block, exploratory factor ana-lysis on the entire set, and reliability estimation using Cronbach’s alpha. For exploratory purposes, an explo-ration sample of 122 firms was picked from the entire dataset.

Corrected item-total correlations were used for pu-rification purposes because ‘garbage’ items may con-found the interpretation of the factor analysis. Within block factor analysis may tell us whether more than one factor can be identified in a given block of items and in essence addresses the internal rule of unidi-mensionality. Exploratory factor analysis (EFA) helps to determine how many latent variables underlie the complete set of items. Cronbach’s alpha is one of the most widely used metrics for reliability evaluation.

The focus of the confirmatory study instead is the assessment of measurement properties and a test of a hypothesized structural model using the validation sample of 122 firms. The approach used here is prima-rily adapted from Koufteros (1999) and Segars (1997). Confirmatory factor analysis (CFA) is performed on the entire set of items simultaneously. Anderson et al. (1987) suggest that assessments of unidimensionality for sets of measures should be made in the same con-text (i.e. model) as the one which the researcher is interested in making statements about the unidimen-sionality of those measures. They further state that in substantive applications, most often, the context of in-terest will be the measurement model for the overall set of measures under study.

Convergent validity is assessed by examining the significance of individual item loadings through t-tests. The overall fit of a hypothesized model can be tested by using the maximum likelihoodχ2-statistic provided in the LISREL output and other fit in-dices such as the ratio ofχ2to degrees of freedom, Bentler and Bonett’s (1980) non-normed fit index (NNFI), Bentler’s (1980) comparative fit index (CFI), standardized RMR, the Akaike’s (1974, 1987) infor-mation criterion (AIC), and Browne and Cudeck’s (1989) expected cross-validation index (ECVI).

Potential mispecifications in the measurement model can be examined by reviewing each item’s completely standardized expected change inΛx (i.e. potential cross-loadings). Items exhibiting change in

Λx greater than 0.4 should be investigated for their

lack of unidimensionality and possible mispecifica-tions in the model.

Discriminant validity can be assessed by comparing the average variance extracted (AVE) to the squared correlation between constructs (Fornell and Larker, 1981). Reliability estimation is left for last because in the absence of a valid construct, reliability is almost

irrelevant (Koufteros, 1999). The AVE estimate (For-nell and Larker, 1981) is a complimentary measure to the measure of composite reliability.

To test Hypothesis 1 (i.e. do firms in high change environments have higher means of CE practices than firms in low change environments?), an analysis of variance approach was taken. Change was measured using a seven-item scale (Table 2). The scale is uni-dimensional and has a Cronbach’s alpha of 0.87. To test the other hypotheses, a structural model was evaluated.

To assess the fit of the structural model to the data,

χ2per d.f., CFI, NNFI, standardized RMR, AIC, and ECVI were computed. If the model fits the data ade-quately, thet-values of the structural coefficients (i.e. gamma and beta) will be evaluated to test the research hypotheses. At-value is the ratio of an estimated pa-rameter to its standard error (Marsch and Hocevar, 1985).

6. Exploratory measurement results

The corrected item-total correlations (CITC) appear in Table 3. Two items had CITC scores less than 0.50 and were eliminated from further analysis. As Table 3 also shows, only one factor has emerged from each block of items. This supports the notion that there is a common core within each block. Because it is interesting to see how items from one block relate to items of other blocks, exploratory factor analysis is performed on the entire set of items as well.

The resulting overall exploratory solution with an oblique rotation does indicate a four factor solution (Table 4). The four factors had eigenvalues (i.e. 9.52, 5.36, 2.06, 1.83) greater than one and accounted for 69.52% of the variance. All items measuring concur-rent work-flow, product development teams, and early involvement loaded on a single factor labeled con-current engineering. This supports the claim that CE is a second-order construct composed of three sub-constructs. All other items loaded on their intended factors. Overall, items loaded strongly on their in-tended factors as the lowest factor loading stood at 0.61. Cross-loadings were very low and not alarming. There were no cross-loadings greater than 0.29 and the great majority of cross-loadings were below 0.10. These results point to a ‘simple’ factor structure.

Table 4

Exploratory factor analysis, exploratory sample (n=122)a

Item Factor loading

1 2 3 4

QP1 0.87

QP5 0.84

QP7 0.83

QP2 0.80

QP6 0.80

QP4 0.79

QP8 0.66

EI4 0.86

DT1 0.83

DT4 0.83

CA3 0.81

DT2 0.80

CA1 0.77

CA4 0.75

EI2 0.74

DT3 0.72

EI1 0.72

EI5 0.66

DT5 0.61

PI4 0.87

PI2 0.82

PI3 0.81

PI5 0.79

PI1 0.77

PP2 0.89

PP1 0.87

PP3 0.85

Eigenvalue 9.52 5.36 2.06 1.83

Variance (%) 35.24 19.85 7.64 6.79 Cronbach’s alpha 0.93 0.94 0.90 0.92

a_{Only loadings greater than 0.29 are shown. Loadings are}

sorted by size.

The Cronbach’s alpha reliabilities for the six fac-tors appear in Table 4 and meet the acceptable cri-teria of values greater than 0.80. The values were 0.94, 0.93, 0.90, and 0.92 for concurrent engineer-ing, quality, product innovation, and premium pricengineer-ing, respectively.

7. Confirmatory measurement results

Turning now to the confirmatory study using the validation sample of 122 firms, thet-values (Table 5) associated with each of the loadings indicate that for

Table 5

Completely standardized loadings, error terms andt-values, vali-dation sample (n=122)a

Latent variable Item Completely standardized loadings

S.E. t-values

Quality QP1 0.69b –b –b

QP2 0.79 0.14 8.21

QP3 0.87 0.18 9.03

QP4 0.89 0.16 9.15

QP5 0.80 0.18 8.29

QP6 0.87 0.20 8.99

QP7 0.87 0.21 8.98

Concurrent engineering XTc _0.93b _–b _–b

XC 0.93 0.09 17.82

XE 0.93 0.07 17.81

Product innovation PI1 0.63b _–b _–b

PI2 0.82 0.17 7.43

PI3 0.83 0.18 7.55

PI4 0.86 0.19 7.69

PI5 0.77 0.19 7.13

Premium pricing PP1 0.78b _–b _–b

PP2 0.92 0.13 10.56

PP3 0.85 0.14 9.97

a_{Fit indices: χ}2 _{= 273.50, 129 d.f., χ}2 _{per d.f. = 2.12,}

NNFI= 0.91, CFI = 0.92, standardized RMR = 0.05, model AIC=357.53, independence AIC=2063.86, saturated AIC=

342, model ECVI = 2.95, independence ECVI = 17.06 and saturated ECVI=2.83.

b_{Indicates a parameter fixed at 1.0 in the original solution.} c_{Three first-order factors representing product development}

teams, concurrent work-flow, and early involvement of constituents.

each item or indicator they exceed the critical values at the 0.001 significance level. Thus, all indicators are significantly related to their specified constructs verifying the posited relationships among indicators and constructs (latent variables).

With respect to fit indices, the LISREL program us-ing as input the covariance matrix of 122 observations demonstrates reasonable fit (Table 5). The CFI was 0.92 and NNFI was 0.91 while theχ2 per d.f. was 2.12. The standardized RMR was 0.05. The estimated model AIC and ECVI appear similar to the saturated model AIC and ECVI and significantly lower than the independence model AIC and ECVI. The model fits well and represents a reasonably close approximation in the population.

The highest completely standardized expected change in Λx was 0.33 and does not suggest an

Table 6

Descriptive statistics, correlations, composite reliability, and discriminant validity, validation sample (n=122)

Factors No. of

items

Mean Mean per item

S.D. of factor

Concurrent engineering

Quality Product innovation

Premium pricing Concurrent engineering 3a,b _{39.18 3.26 9.68 0.95}c_(0.86)d

Quality 7e _{41.71 5.96 5.32 0.29}∗∗ _(0.08)f _{0.94 (0.69)}

Product innovation 5e _{26.90 5.38 5.31 0.34}∗∗ _{(0.12) 0.63}∗∗_{(0.40) 0.89 (0.62)}

Premium pricing 3e 15.79 5.26 2.93 0.17 (0.03) 0.45∗∗_{(0.20) 0.36}∗∗ _{(0.13) 0.89 (8.72)}

a_{Second-order construct with a total of 12 items.} b_{Items measured on a five-point scale.}

c_{Composite reliabilities are on the diagonal.} d_{Average variances extracted are on the diagonal.} e_{Items measured on a seven-point scale.}

f_{Squared correlations are in parentheses off the diagonal.}

∗∗_{Correlation is significant at 0.01.}

alternative specification. Taken together, fit statistics and completely standardized expected change in Λx

did not identify any indicators which may be complex (i.e. load significantly on multiple factors) or contain abnormal amounts of random variation. In evaluating discriminant validity (Table 6), the highest squared correlation was observed between quality and product innovation and was 0.40. This was significantly lower than their AVE. The AVE for the two latent variables were 0.69 and 0.62, respectively.

The composite reliabilities for the CE practices, quality, product innovation, and premium pricing scales were 0.95, 0.94, 0.89, and 0.89 (Table 6), re-spectively. All reliability estimates exceed customary acceptable levels. The estimates of AVE are 0.86, 0.69, 0.62, and 0.72 for the CE, quality, product in-novation, and premium pricing scales, respectively. All estimates exceed the 0.50 critical value providing further evidence of reliability.

8. Hypotheses testing results

Turning now to hypotheses testing, an analysis of variance procedure indicates that the mean CE prac-tices scores are statistically different (p < 0.02) for firms in low versus high change environments (Hy-pothesis 1). The data shows that in the face of high change environments, firms will adopt higher levels of CE practices. This is done presumably to help the firm cope with the uncertainty and equivocality that is brought by change and the desire to stay abreast of competition. CE practices allow the flow of more

in-formation and enable the enactment of solutions and reduction of ambiguity. Integrated action reduces in-formation uncertainty, false starts, and design rework (Ettlie, 1997). Thus, these practices render the firm more capable in battling competitors.

Before addressing the other hypotheses, the fit of the structural model is evaluated. The model ap-pears reasonable (Table 7) byχ2per d.f. (2.12), CFI (0.92), NNFI (0.91), and standardized RMR (0.05). The model AIC and ECVI were significantly lower than the respective AIC and ECVI estimates for the independence model and were similar to the saturated model AIC and ECVI estimates.

Concurrent engineering practices seem to have sig-nificant positive effects on product innovation (Hy-pothesis 2,t = 4.14). Firms with high levels of CE practices exhibit high levels of product innovation. These firms have better capabilities of introducing products and features than their competitors that do not use the same level of CE practices. In that respect, CE practices seem to be more effective than other product development practices. The results here cor-roborate previous research that portrays the positive effects of CE practices on product innovation.

Concurrent engineering practices do not have a sig-nificant direct impact on quality (Hypothesis 3,t = −1.12). The literature suggests that CE practices are conducive for quality. The early involvement of con-stituents, the overlap of different phases, and the team approach are purported to affect quality in a positive way by solving problems before they manifest them-selves in the marketplace and by ensuring that the voices of upstream and downstream participants are

Table 7

Decomposition of effects (unstandardized coefficients) and fit statistics, validation sample (n=122)a

Concurrent engineering (ξ1) Product innovation (η1) Quality (η2) Premium

pricing (η3)

Product innovation(η1)

Direct effects 0.43 (4.15∗∗_{) (Hypothesis 2)}

Indirect effects – – – – – Total effects −0.43 (4.15∗∗₎

Quality(η2)

Direct effects −0.08 (−1.12) (Hypothesis 3) 0.88 (5.99∗∗_{) (Hypothesis 5)}

Indirect effects 0.38 (4.04∗∗_{) – – – – –}

Total effects 0.30 (3.10∗∗_{) 0.88 (5.99}∗∗₎

Premium pricing(η3)

Direct effects −0.05 (−0.51) (Hypothesis 4) 0.17 (0.91) (Hypothesis 6) 0.55 (2.99∗∗_{) (Hypothesis 7)}

Indirect effects 0.24 (3.06∗∗_{) 0.49 (2.99}∗∗_{) – – – – –}

Total effects 0.19 (1.99∗_{) 0.66 (4.73}∗∗_{) 0.55 (2.99}∗∗₎

Squared multiple correlation 0.18 0.72 0.48

a_{Fit indices:χ}2_{=273.50, d.f.=129,χ}2_{per d.f.=2.12, NNFI=0.91, CFI=0.92, standardized RMR=0.05, model AIC=357.5,}

independence AIC=2063.86, saturated AIC=342.00, model ECVI=2.95, independence ECVI=17.06 and saturated ECVI=2.83.

∗_{t-value is significant at 0.05.} ∗∗_{t-value is significant at 0.01.}

heard. Constituents can see now how their work im-pacts efforts by others in the product and process de-velopment. A review of Table 7 reveals, however, that the indirect effects of CE practices on quality are sig-nificant (t = 4.04). The total effects are significant (t =3.10) as well and this points to the plausibility that CE practices have an effect on product innovation which then has an effect on quality. It is through new products and/or new features that quality can improve. Essentially, to sustain a quality-based differentiation strategy a firm may have to be more capable than its competitors in its product innovation. This appears to be a reasonable explanation for the lack of a direct relationship between CE practices and quality. It is also possible that quality has other more important an-tecedents such as manufacturing and quality control practices. Another possible explanation could be that the firms surveyed already have reached high levels of quality and CE practices are used for product innova-tion. CE practices may also be helpful in reducing the cost of quality but those effects are not accounted here. The direct relationship between CE practices and premium pricing capability is not supported by the data (Hypothesis 4,t= −51). Although the literature implies that CE practices do affect the capability of the firm to command premium prices, there has not

been much large scale empirical evidence to support that. The literature may be alluding to a possible indi-rect relationship between CE practices and premium pricing capability. In fact, Table 7 illustrates that the indirect and total effects are significant (t=3.06 and 1.99, respectively). This suggests that CE practices af-fect product innovation and quality which then afaf-fect premium pricing capabilities. In essence, CE practices appear to support the two major courses to attain dif-ferentiation. It is on the basis of differentiation that firms can charge premium prices (Porter, 1980; Black-burn, 1991).

Companies that have experienced higher levels of product innovation have reported higher levels of product quality (Hypothesis 5, t = 5.99). As firms innovate more frequently, they benefit from learning how to develop products and processes and avoid costly mistakes in both time and quality. The strategy and marketing literatures have suggested that it is through sustained product innovations that firms can maintain a lead in their quality (Murray, 1988). Lead-ers in the industry can strengthen their position by con-tinually modifying and improving their product. This may render competitors incapable of differentiating their products by designing in features or performance levels the leader does not have (Boyd et al., 1995).

While it was expected that firms equipped with product innovation capabilities would also be able to command premium prices, the direct effects are negli-gible (Hypothesis 6,t =0.91). The time-based com-petition literature has been a strong advocate of the relationship between product innovation and premium pricing. It is posited that firms can attain a premium price capability when they can introduce products and features before their competitors do.

This kind of strategy has been described as a prospector strategy within the marketing and strat-egy literatures. The prospector stratstrat-egy (Miles and Snow, 1978) is suitable in industries that tend to be at an early stage in their life cycles (Boyd et al., 1995). This may not have been the case here since the respondents came primarily from well established industries. In mature industries you may find firms using an analyzer strategy or a defender strategy (Miles and Snow, 1978). The analyzers are concerned with defending, via low costs or differentiation in quality, a strong share position. In order to maintain differentiation in quality, analyzers must have product innovation capabilities so they do not get leapfrogged by competitors. The product innovation capability allows them to build a quality capability but they do not necessarily use the quality capability to com-mand premium prices. They are going after market share. Defenders defend their profitable share in one or more segments in a mature industry. Differentiated defenders defend their position typically by superior quality via successive product innovations. These de-fenders can charge premium prices because of their differentiation through quality.

Murray (1988) suggests that product innovation alone probably cannot ensure sustainable differenti-ation and proposes that other bases for product dif-ferentiation must be found such as quality. This may occur because a single act of imitation can eliminate the advantage an innovative product design provides for a firm. Friar (1995) points that unless there is a clear superiority of a product in a customer’s mind, a differentiation strategy based on innovation is likely to be ineffective. A product introduction first in the market to be successful, has to be inherently better than existing offerings (Cooper and Kleinschmidt, 1991, 1993). Friar further states that this is especially true in markets characterized by numerous product introductions from many competitors. In such a

mar-ket, emphasis on product innovation is necessary to keep pace with competition. However, because product innovation is not sufficient to provide mar-ket differentiation and premium prices, a company must steer its competitive thrust toward other di-mensions such as quality. It becomes important then to evaluate whether product innovation has indirect effects on premium pricing. Firms that have high product innovation capability will enjoy higher levels of quality than competitors and subsequently they could command premium prices. The indirect path, from product innovation to premium pricing through quality, is significant (t =2.99) and the total effects are indeed significant (t = 4.73) as well. In mature industries, product innovations, in the absence of real or perceived benefits to the customer in terms of quality, may not justify premium pricing. Customers are willing to pay premium prices when they perceive that the innovation has increased the product’s value. Quality has significant direct effects on premium pricing (Hypothesis 7, t = 2.99). This relationship has been well discussed in the literature and the evi-dence here supports the positive effects of quality on premium pricing. Whether a firm is in an emerging industry or in a mature industry it is expected that a quality capability can support a premium price ca-pability. The prospectors may use quality not only to charge premium prices but also to build loyalty and market share. The analyzers build the capability for quality, but they do so in order to maintain their market share. They can potentially command pre-mium prices but the competitive environment dictates to them not to exercise that option. Differentiated defenders use quality to differentiate themselves and can charge premium prices on that basis.

9. Implications for management

The research implies that firms seeking to im-plement CE should focus on developing the three dimensions that form the CE construct: concurrent work-flow, product development teams, and early involvement. This would support the formation of cross-functional teams at the beginning of product development efforts. The team members should work simultaneously on a variety of tasks to cut product de-velopment time and achieve organizational rather than

functional objectives. Management should charge the teams with successfully completing the project and achieving system-wide outcomes rather than re-quiring engineering to meet specific design goals or manufacturing to meet cost targets.

A cross-functional product development team should form and develop some degree of internal inte-gration before it can effectively include external con-stituents in joint problem solving. Thus, concurrent engineering is an antecedent, and perhaps a determi-nant, of a firm’s customer and supplier involvement practices. Early involvement of functional specialists and team-based problem solving efforts create an information rich environment. In this context, it be-comes apparent that many internal problems require a coordinated cross-functional solution that demands information sharing and joint problem solving with external as well as internal constituents.

The research also supports the claim that firms operating in high change environments adopt higher levels of CE practices than firms in low change en-vironments. Sutcliffe and Zaheer (1998) cite several studies that have shown that perceived environmen-tal uncertainty exerts a considerable influence on organizational structure and processes. CE is an or-ganizational design that addresses uncertainty and ambiguity, which accompanies product and technolog-ical change. It arms firms with an effective approach to cope with the environment and subsequently enjoy competitive capabilities such as product innovation and quality. The results support the claim that CE practices lead to high levels of product innovation, quality, and premium pricing. However, the effects on quality are indirect. The data suggests that firms that use CE practices extensively do have higher product innovation capability which then leads to higher levels of quality. In the absence of product innovation, CE practices do not seem to impact quality. The effects of CE practices on premium pricing are also indirect and similar to the indirect effects on quality. CE prac-tices lead to improved product innovation and quality, which, in turn, affect premium pricing. Building CE practices seems to be an important element for firms seeking high performance in environments with rapid market and technology changes.

Product innovation has significant direct effects on quality and significant indirect effects on premium pricing. Based on the time-based competition and

differentiation literatures, it was expected that product innovation would have significant direct effects on premium pricing but the results did not support that position. It is possible that because the sample was drawn primarily from mature industries, the posited direct effect may not be significant. In mature indus-tries, firms may use product innovation to build a quality advantage and thus differentiate their offerings to customers.

Firms with high levels of quality did have high lev-els of premium pricing capabilities. This was expected as quality is a basic ingredient of a differentiation strategy. Whether in emerging or mature industries, quality provides firms with the capability of charging premium prices. Premium pricing has other potential organizational and environmental antecedents and fu-ture research should attempt to identify and address them.

10. Conclusions and future research

This research complements previous studies by pro-viding a clear definition of CE, operationalizing that definition through a measurement model, explaining the use of CE practices in rapidly changing environ-ments, and setting up and investigating a network of relationships among CE and its consequences. This framework may be useful for future research in CE practices.

A set of valid and reliable scales was developed to measure CE practices, product innovation, quality, and premium pricing. CE practices is a second-order factor composed of three sub-dimensions: concurrent work-flow, product development teams, and early in-volvement. The final scales are short and easy to use. The content domain of the constructs has been ade-quately covered because care was taken during item generation. The factor structure is ‘simple’ and the confirmatory study demonstrates that the instruments exceed generally accepted validity and reliability standards.

Firms that adopt CE practices report better perfor-mance in product innovation and quality, and they enhance their ability to charge premium prices. It is important to identify relevant consequences and test these relationships because they have an impact on the firm’s financial performance. This study may assist

Table 7

Decomposition of effects (unstandardized coefficients) and fit statistics, validation sample (n=122)a

Concurrent engineering (ξ1) Product innovation (η1) Quality (η2) Premium

pricing (η3)

Product innovation(η1)

Direct effects 0.43 (4.15∗∗_{) (Hypothesis 2)} Indirect effects – – – – –

Total effects −0.43 (4.15∗∗₎

Quality(η2)

Direct effects −0.08 (−1.12) (Hypothesis 3) 0.88 (5.99∗∗_{) (Hypothesis 5)} Indirect effects 0.38 (4.04∗∗_{) – – – – –}

Total effects 0.30 (3.10∗∗_{) 0.88 (5.99}∗∗₎

Premium pricing(η3)

Direct effects −0.05 (−0.51) (Hypothesis 4) 0.17 (0.91) (Hypothesis 6) 0.55 (2.99∗∗_{) (Hypothesis 7)}

Indirect effects 0.24 (3.06∗∗_{) 0.49 (2.99}∗∗_{) – – – – –}

Total effects 0.19 (1.99∗_{) 0.66 (4.73}∗∗_{) 0.55 (2.99}∗∗₎

Squared multiple correlation 0.18 0.72 0.48

a_{Fit indices:χ}2_{=273.50, d.f.=129,χ}2_{per d.f.=2.12, NNFI=0.91, CFI=0.92, standardized RMR=0.05, model AIC=357.5,}

independence AIC=2063.86, saturated AIC=342.00, model ECVI=2.95, independence ECVI=17.06 and saturated ECVI=2.83. ∗_{t-value is significant at 0.05.}

∗∗_{t-value is significant at 0.01.}

heard. Constituents can see now how their work

im-pacts efforts by others in the product and process

de-velopment. A review of Table 7 reveals, however, that

the indirect effects of CE practices on quality are

sig-nificant (

t

=

4

.

04). The total effects are significant

(

t

=

3

.

10) as well and this points to the plausibility

that CE practices have an effect on product innovation

which then has an effect on quality. It is through new

products and/or new features that quality can improve.

Essentially, to sustain a quality-based differentiation

strategy a firm may have to be more capable than its

competitors in its product innovation. This appears to

be a reasonable explanation for the lack of a direct

relationship between CE practices and quality. It is

also possible that quality has other more important

an-tecedents such as manufacturing and quality control

practices. Another possible explanation could be that

the firms surveyed already have reached high levels of

quality and CE practices are used for product

innova-tion. CE practices may also be helpful in reducing the

cost of quality but those effects are not accounted here.

The direct relationship between CE practices and

premium pricing capability is not supported by the

data (Hypothesis 4,

t

= −

51). Although the literature

implies that CE practices do affect the capability of

the firm to command premium prices, there has not

been much large scale empirical evidence to support

that. The literature may be alluding to a possible

indi-rect relationship between CE practices and premium

pricing capability. In fact, Table 7 illustrates that the

indirect and total effects are significant (

t

=

3

.

06 and

1.99, respectively). This suggests that CE practices

af-fect product innovation and quality which then afaf-fect

premium pricing capabilities. In essence, CE practices

appear to support the two major courses to attain

dif-ferentiation. It is on the basis of differentiation that

firms can charge premium prices (Porter, 1980;

Black-burn, 1991).

Companies that have experienced higher levels of

product innovation have reported higher levels of

product quality (Hypothesis 5,

t

=

5

.

99). As firms

innovate more frequently, they benefit from learning

how to develop products and processes and avoid

costly mistakes in both time and quality. The strategy

and marketing literatures have suggested that it is

through sustained product innovations that firms can

maintain a lead in their quality (Murray, 1988).

Lead-ers in the industry can strengthen their position by

con-tinually modifying and improving their product. This

may render competitors incapable of differentiating

their products by designing in features or performance

levels the leader does not have (Boyd et al., 1995).

While it was expected that firms equipped with

product innovation capabilities would also be able to

command premium prices, the direct effects are

negli-gible (Hypothesis 6,

t

=

0

.

91). The time-based

com-petition literature has been a strong advocate of the

relationship between product innovation and premium

pricing. It is posited that firms can attain a premium

price capability when they can introduce products and

features before their competitors do.

This kind of strategy has been described as a

prospector strategy within the marketing and

strat-egy literatures. The prospector stratstrat-egy (Miles and

Snow, 1978) is suitable in industries that tend to be

at an early stage in their life cycles (Boyd et al.,

1995). This may not have been the case here since

the respondents came primarily from well established

industries. In mature industries you may find firms

using an analyzer strategy or a defender strategy

(Miles and Snow, 1978). The analyzers are concerned

with defending, via low costs or differentiation in

quality, a strong share position. In order to maintain

differentiation in quality, analyzers must have product

innovation capabilities so they do not get leapfrogged

by competitors. The product innovation capability

allows them to build a quality capability but they

do not necessarily use the quality capability to

com-mand premium prices. They are going after market

share. Defenders defend their profitable share in one

or more segments in a mature industry. Differentiated

defenders defend their position typically by superior

quality via successive product innovations. These

de-fenders can charge premium prices because of their

differentiation through quality.

Murray (1988) suggests that product innovation

alone probably cannot ensure sustainable

differenti-ation and proposes that other bases for product

dif-ferentiation must be found such as quality. This may

occur because a single act of imitation can eliminate

the advantage an innovative product design provides

for a firm. Friar (1995) points that unless there is a

clear superiority of a product in a customer’s mind, a

differentiation strategy based on innovation is likely

to be ineffective. A product introduction first in the

market to be successful, has to be inherently better

than existing offerings (Cooper and Kleinschmidt,

1991, 1993). Friar further states that this is especially

true in markets characterized by numerous product

introductions from many competitors. In such a

mar-ket, emphasis on product innovation is necessary

to keep pace with competition. However, because

product innovation is not sufficient to provide

mar-ket differentiation and premium prices, a company

must steer its competitive thrust toward other

di-mensions such as quality. It becomes important then

to evaluate whether product innovation has indirect

effects on premium pricing. Firms that have high

product innovation capability will enjoy higher levels

of quality than competitors and subsequently they

could command premium prices. The indirect path,

from product innovation to premium pricing through

quality, is significant (

t

=

2

.

99) and the total effects

are indeed significant (

t

=

4

.

73) as well. In mature

industries, product innovations, in the absence of real

or perceived benefits to the customer in terms of

quality, may not justify premium pricing. Customers

are willing to pay premium prices when they perceive

that the innovation has increased the product’s value.

Quality has significant direct effects on premium

pricing (Hypothesis 7,

t

=

2

.

99). This relationship

has been well discussed in the literature and the

evi-dence here supports the positive effects of quality on

premium pricing. Whether a firm is in an emerging

industry or in a mature industry it is expected that

a quality capability can support a premium price

ca-pability. The prospectors may use quality not only

to charge premium prices but also to build loyalty

and market share. The analyzers build the capability

for quality, but they do so in order to maintain their

market share. They can potentially command

pre-mium prices but the competitive environment dictates

to them not to exercise that option. Differentiated

defenders use quality to differentiate themselves and

can charge premium prices on that basis.

9. Implications for management

The research implies that firms seeking to

im-plement CE should focus on developing the three

dimensions that form the CE construct: concurrent

work-flow, product development teams, and early

involvement. This would support the formation of

cross-functional teams at the beginning of product

development efforts. The team members should work

simultaneously on a variety of tasks to cut product

de-velopment time and achieve organizational rather than

functional objectives. Management should charge

the teams with successfully completing the project

and achieving system-wide outcomes rather than

re-quiring engineering to meet specific design goals or

manufacturing to meet cost targets.

A cross-functional product development team

should form and develop some degree of internal

inte-gration before it can effectively include external

con-stituents in joint problem solving. Thus, concurrent

engineering is an antecedent, and perhaps a

determi-nant, of a firm’s customer and supplier involvement

practices. Early involvement of functional specialists

and team-based problem solving efforts create an

information rich environment. In this context, it

be-comes apparent that many internal problems require

a coordinated cross-functional solution that demands

information sharing and joint problem solving with

external as well as internal constituents.

The research also supports the claim that firms

operating in high change environments adopt higher

levels of CE practices than firms in low change

en-vironments. Sutcliffe and Zaheer (1998) cite several

studies that have shown that perceived

environmen-tal uncertainty exerts a considerable influence on

organizational structure and processes. CE is an

or-ganizational design that addresses uncertainty and

ambiguity, which accompanies product and

technolog-ical change. It arms firms with an effective approach

to cope with the environment and subsequently enjoy

competitive capabilities such as product innovation

and quality. The results support the claim that CE

practices lead to high levels of product innovation,

quality, and premium pricing. However, the effects on

quality are indirect. The data suggests that firms that

use CE practices extensively do have higher product

innovation capability which then leads to higher levels

of quality. In the absence of product innovation, CE

practices do not seem to impact quality. The effects

of CE practices on premium pricing are also indirect

and similar to the indirect effects on quality. CE

prac-tices lead to improved product innovation and quality,

which, in turn, affect premium pricing. Building CE

practices seems to be an important element for firms

seeking high performance in environments with rapid

market and technology changes.

Product innovation has significant direct effects on

quality and significant indirect effects on premium

pricing. Based on the time-based competition and

differentiation literatures, it was expected that product

innovation would have significant direct effects on

premium pricing but the results did not support that

position. It is possible that because the sample was

drawn primarily from mature industries, the posited

direct effect may not be significant. In mature

indus-tries, firms may use product innovation to build a

quality advantage and thus differentiate their offerings

to customers.

Firms with high levels of quality did have high

lev-els of premium pricing capabilities. This was expected

as quality is a basic ingredient of a differentiation

strategy. Whether in emerging or mature industries,

quality provides firms with the capability of charging

premium prices. Premium pricing has other potential

organizational and environmental antecedents and

fu-ture research should attempt to identify and address

them.

10. Conclusions and future research

This research complements previous studies by

pro-viding a clear definition of CE, operationalizing that

definition through a measurement model, explaining

the use of CE practices in rapidly changing

environ-ments, and setting up and investigating a network of

relationships among CE and its consequences. This

framework may be useful for future research in CE

practices.

A set of valid and reliable scales was developed

to measure CE practices, product innovation, quality,

and premium pricing. CE practices is a second-order

factor composed of three sub-dimensions: concurrent

work-flow, product development teams, and early

in-volvement. The final scales are short and easy to use.

The content domain of the constructs has been

ade-quately covered because care was taken during item

generation. The factor structure is ‘simple’ and the

confirmatory study demonstrates that the instruments

exceed generally accepted validity and reliability

standards.

Firms that adopt CE practices report better

perfor-mance in product innovation and quality, and they

enhance their ability to charge premium prices. It is

important to identify relevant consequences and test

these relationships because they have an impact on the

firm’s financial performance. This study may assist

re-searchers who are interested in other antecedents and

consequences of CE. Other constructs such as external

integration, the use of platform designs and

informa-tion technology, and the deployment of a heavyweight

product development manager may be added to

com-plement this network of constructs.

The study illustrates how a firm’s internal

context facilitates its internal efforts to achieve

cross-functional integration (i.e. concurrent

engineer-ing). Once established, the more effective product

de-velopment teams seek external integration by forming

strategic partnerships involving customers and

sup-pliers to coordinate activities across the value chain.

Information technology may enable cross-functional

information sharing and may link the firm’s problem

solving efforts with customers and suppliers (Hartley

et al., 1997a,b; Zirger and Hartley, 1996).

The need to retest the models with a new dataset is

always necessary and especially useful for newly

cre-ated measurement and structural models. Only then

researchers can be confident of the true nature of

ex-hibited relationships. In addition, credible models

al-low future research to build on them. While many of

the relationships posited here were significant, it is

possible that contextual variables are masking the true

nature of the hypothesized effects. To further

exam-ine the structural model, each path can be examexam-ined

under various conditions such as high and low

com-plexity, and make-to-order versus make-to-stock

ver-sus assemble-to-order operations.

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