Reports

Payoffs from Participation in Complementary Product Strategy

Sanjit Sengupta, 1995, 95-118

Breakthrough complementary products can substantially expand sales of the primary product, both by adding value and by differentiating it from competitors. In a classic example of a successful complementary product strategy, sales of personal computers received a tremendous boost from the introduction of powerful software programs, as well as the development of peripherals such as laser printers, modems, and network servers. Given the added market strength that complementary products can bring and the risks of moving beyond a firm's core competencies, developing and marketing complementary products is a major strategic issue for managers.

While multi-stage frameworks for screening and evaluating new product ideas have been around since the 1980s, they do not address how to organize the development effort once an attractive complementary product has been identified. Building on the strategy-structure and strategy-performance paradigms in organization theory, this study empirically analyzes two key questions:

  • How should complementary product development be implemented?

  • Do complementary product strategies pay off in terms of competitive advantage and improved business performance?

Implementing Complementary Product Development
In exploratory interviews with 25 senior executives from research and development, marketing, and strategic planning in a range of high-technology firms, Professor Sanjit Sengupta identified several approaches to carrying out a complementary product strategy. These "modes of participation" vary in terms of the resources the firm must commit to bring the complementary product to the marketplace, ranging from making it in-house to buying an "off-the-shelf" solution. In between are co-development options varying in exclusivity and intensity of committed resources.

Drawing on a sample of high-tech executives from the Million Dollar Directory who had experience with at least one of these modes of complementary product development, Professor Sengupta then conducted a formal survey to test which factors determine a firm's mode of participation. The conditions examined are organizational fit, multiplier effect, business opportunity, specialized investments, availability, and external orientation.

The results suggest that the better the organizational fit, the larger the multiplier effect (the unique boost to primary product sales that a complementary product delivers by adding value for users). In addition, the better the business opportunity, the more likely firms are to make the complementary product in-house. Of the three strategic factors, organizational fit (the match between the firm's assets, resources, and skills and those required to develop and market the product) has the greatest impact on mode of participation. When specialized investments are considered, Professor Sengupta's analysis indicates that managers pay more attention to strategic factors than to transaction costs in choosing how to embark on a complementary product project.

Competitive Advantage Payoffs
Competitive advantage from complementary product strategies comes from two sources: the innovativeness of the complementary product, and the multiplier effect. While other studies have found that innovativeness provides a source of advantage, Professor Sengupta's analysis also establishes a link between the multiplier effect and competitive advantage, and between competitive advantage and managers' perceptions of business performance. In the realm of high-tech products and systems, this means that software, peripherals, add-on accessories, and enhanced services can make or break the sales of basic hardware boxes.

Organizational fit and business opportunity have no impact on competitive advantage. Although organizational fit is a necessary condition for participating in complementary product strategies, it does not differentiate the primary product from the competition. In addition, even if the complementary product by itself has low sales potential, it can still be a major source of differentiation and advantage due to the multiplier effect. This is in keeping with the loss-leader product line strategy-sell razors cheap to make money on blades. As a result, in evaluating new complementary product ideas, marketers and product designers should compromise on the attractiveness of the business opportunity if the project would have a large multiplier effect on primary product sales.

Sanjit Sengupta is Assistant Professor of Marketing at the University of Maryland at College Park.

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