X. Koufteros et al. Journal of Operations Management 19 2001 97–115 109
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
3
a,b
39.18 3.26
9.68 0.95
c
0.86
d
Quality 7
e
41.71 5.96
5.32 0.29
∗∗
0.08
f
0.94 0.69 Product innovation
5
e
26.90 5.38
5.31 0.34
∗∗
0.12 0.63
∗∗
0.40 0.89 0.62
Premium pricing 3
e
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 Λ
x
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 by χ
2
per 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
110 X. Koufteros et al. Journal of Operations Management 19 2001 97–115
Table 7 Decomposition of effects unstandardized coefficients and fit statistics, validation sample n = 122
a
Concurrent engineering ξ
1
Product innovation η
1
Quality η
2
Premium pricing η
3
Product innovation η
1
Direct effects 0.43 4.15
∗∗
Hypothesis 2 Indirect effects
– – – – – Total effects
− 0.43 4.15
∗∗
Quality η
2
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 η
3
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 andor 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 affect
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.
X. Koufteros et al. Journal of Operations Management 19 2001 97–115 111
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 strategy 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
