how do innovation intermediaries add value.pdf

How do innovation intermediariesadd value? Insight from newproduct development infashion markets

Yen Tran1, Juliana Hsuan2 and Volker Mahnke3

1Heriot-Watt University, School of Management and Languages, Edinburgh, EH14 4AS, UnitedKingdom. [email protected] Business School, Department of Operations Management, Solbjerg Plads 3,DK- 2000 Frederiksberg, Denmark. [email protected] Business School, Department of International Economics and Management,Porcelnshaven 24A. DK - 2000 Frederiksberg. [email protected]

Innovation intermediaries are increasingly being used in practice, but there is little concretetheoretical guidance on when and how they add value to clients new product development(NPD) processes. This paper develops propositions on innovation intermediaries value-addedbased on a detailed case study of an innovation intermediarys relations to three major clientsin the European apparel fashion industry. We identify key contingencies to an innovationintermediarys value added (e.g. NDP speed and complexity of involvement). We also suggesta framework that specifies when a combination of four types of specific intermediarycapabilities (best-cost capabilities, timing-capabilities, market-response capabilities, andproduct solution capabilities) increases value added in clients NDP processes.

1. Introduction

The function of innovation intermediaries isincreasingly being explored (e.g. Howells,2006;Mahnke et al., 2008; Lichtenthaler and Ernst,2009). While their services continue to be deliveredin different forms (e.g. brokers, third parties agen-cies, and electronic platforms) their activitiesbecome increasingly apparent (Howells, 2006), in-cluding, foresight, and diagnostics; scanning andinformation processing; knowledge processingand combination/recombination; gatekeeping andbrokering; commercialization of innovation; andevaluation of outcomes. While we increasinglyunderstand what innovation intermediaries do,far less is known about how they add value to aclients new product development (NPD) process.

The development of product innovation in-creasingly requires firms to tap into networks ofexternal specialists (Mahnke et al., 2007). Yet, theanticipated benefits of the outsourcing effort areoften not realized, due to a number of difficulties,such as a lack of experience in using exchangeplatforms (Lichtenthaler and Ernst, 2009), com-petency gaps between contracting partners(Cusumano, 2006), poor relational capabilities(Lane and Lubatkin, 1998), insufficient technolo-gical dialogue (Monteverde and Teece, 1995) aswell as technological uncertainty and culturaldistance (Mahnke et al., 2008).

Although firms are increasingly aware of thepotential benefits of innovation outsourcing in-cluding access to creative input and acceleratedNPD speed, their ability to exploit them appears

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to be far more limited. To traverse the complica-tions of innovation outsourcing while reaping itsbenefits, organizations in their NPD efforts oftenturn to innovation intermediaries (e.g. Spulber,1999; Howells, 2006; Mahnke et al., 2007), that is,organizations that can facilitate the exchange ofNPD expertise across groups of players who holddifferent design and NPD capabilities, goals, andtechnical languages (Allen and Cohen, 1969;Aldrich and Herker, 1977; Tushman and Scanlan,1981). Howells (2006) recently suggested, in theUK context, that the innovation intermediaryfunction has changed over time to increasinglygo beyond mere information provision and trans-action services to also assume knowledge integra-tion and combination functions. Yet, still little isknown on concretely when and how innovationintermediary capabilities add value to clientsNPD processes.

This paper provides new insights into the R&Dmanagement literature in the following ways: (1)while prior research has stressed the importanceof innovation intermediation capabilities, thispaper makes explicit how such capabilities addvalue in creative NPD processes; (2) adapting acase study design, this paper compares instancesof intermediary value creation that are contingentof strategic choices made by a fashion firm (e.g.slow versus fast NPD speed; simple versus com-plex scope of involvement of intermediaries).Taken together, this paper suggests an integrativeframework on how and when innovation interme-diaries add value. We develop our contribution inthe context of the fashion industry, where productdevelopment cycles are updated frequently, thedegree of outsourcing is substantial, and the useof innovation intermediaries is persuasive (Tran,2008).

The paper is organized as follows: in the nextsection, the salient literature on innovation out-sourcing and innovation intermediaries is re-viewed. We outline the most pressing challengesof outsourcing in NPD and the boundary span-ning services that innovation intermediaries pro-vide. Then we use a theory-based groundedanalysis of a Scandinavian fashion innovationintermediary, FlexTex, and its three diverse cli-ents operating in the increasingly fast pacedEuropean fashion industry. Specifically, we focuson different bundles of value-adding innovationservices carried out by the innovation intermedi-ary. We report our initial evidence on how in-novation intermediaries create value in the NPDprocesses of a fashion client, both with fastand with slow NPD speeds. Next, we introduce

a framework for classifying intermediary value-adding functions with respect to NPD speed (slowversus fast) and the scope of intermediary invol-vement (simple versus complex). We conclude thepaper with a discussion of the managerial impli-cations, the limitations of our research, and futureresearch.

2. Literature review

2.1. Outsourcing product innovation

The migration of innovation capabilities to ex-ternal players continues, with few indicationsof abatement (Mikkola, 2003; Howells, 2006;Mahnke et al., 2007). An increasing tendency ofoutsourcing innovations has been associated witha variety of reasons including an increasingly dis-tributed nature of innovation systems (Coombset al., 2003), increasingly geographically dispersedsources of innovation (Mahnke et al., 2008), atendency to include a greater number of technol-ogies per product class (Pavitt, 2000), and, mostrecently, increasing product development speed(Tran, 2008).

The supply chain management literature onoutsourcing of innovation and NPD activitiesincludes early supplier involvement (ESI) (cf.Dowlatshahi, 1998; Wynstra et al., 2001; Ragatzet al., 2002), platform strategies, and modularitydesign strategies (cf. Mikkola, 2003; Mikkola andSkjtt-Larsen, 2006). ESI, for example, refers to aform of vertical cooperation between the firm andits suppliers at the early stages of the NPDprocess (Bidault et al., 1998). Firms increasinglyengage in ESI in order to reduce developmentcosts (Bonaccorsi and Lipparini, 1994), improveperformance (Hsuan, 1999), reduce lead time, andto have access to suppliers technical expertise andcapabilities (Wasti and Liker, 1997; Ragatz et al.,2002). Likewise, the literature on platform devel-opment often emphasizes the importance of un-derstanding the interdependencies among all thecomponent suppliers embedded within a system(e.g. Meyer and Lehnerd, 1997; Mikkola, 2006).In fact, modularity design strategies are con-cerned with how product platforms can be de-composed so that different design choices can beoutsourced (Mikkola, 2003). This is especiallycrucial for those components that are outsourcedto third parties for development. While the pos-sibly of outsourcing innovation has received in-creasing attention, firms capabilities to reapassociated benefits are far more limited, which

How do innovation intermediaries add value?

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raises the following question: how do innovationintermediaries add value to a firms NPD process?

2.2. Innovation intermediary

The use of innovation intermediaries creates theopportunity for firms to increase the feasibility ofoutsourcing innovation while mitigating the asso-ciated costs. The subject of intermediation hascommanded most theoretical attention in theliterature on financial transactions (Rousseauand Wachtel, 1998). In this perspective, interme-diaries are effectively middlemen, brokeringtransactions between buyer and seller (Rubinsteinand Wolinsky, 1987). Intermediaries have beenheralded for their ability to aggregate supply anddemand, provide market transparency and liquid-ity, mitigate moral hazard and adverse selectionby clearing transactions and providing trade fi-nancing, hold inventories to absorb variations insupply and demand, and re-bundle portfolios ofgoods and services across multiple suppliers (Ru-binstein and Wolinsky, 1987; Spulber, 1999).Consistent with traditional intermediation theory(Rubinstein and Wolinsky, 1987; Spulber, 1999),our argument acknowledges that in any form ofexchange, parties have the option to transactdirectly with the each other, or transact throughan intermediary. However, a middleman wouldwant some form of economic compensation forthe services provided; hence, the value that theinnovation intermediary provides should exceedthe cost of using them. But just exactly where thistradeoff occurs is poorly understood.

Unlike trading of financial assets, the complexrelationships between the innovation intermedi-aries and the clients are not conducted via stan-dard interfaces with structured technologicalsyntaxes (Monteverde and Teece, 1995; Mahnkeet al., 2008; Mahnke et al., 2006). In order toadd value, innovation intermediaries must offer aset of capabilities that are idiosyncratic to theclients they serve, such as knowledge-intensiveservices in design, R&D, and NPD. A crucialrequirement includes establishing structuredtechnological dialogue that allows clients tospecify requirements and permits vendors to traceinterdependencies and impacts on overall systemperformance (Monteverde and Teece, 1995).Thus, one key task of the innovation inter-mediaries is to develop inter-firm social and rela-tional capital (Nahapiet and Ghoshal, 1998), tocreate interfaces between a firms NPD processand suppliers of innovation input allowing

for inter-firm knowledge identification, sensing,knowledge-sharing, and knowledge-combinationacross company boundaries (Kogut and Zander,1992).

Prior research also reveals that innovationintermediary capabilities are delivered in differentforms, including intermediary firms as bridgers(Bessant and Rush, 1995), brokers (Hargadonand Sutton, 1997), electronic markets (Lich-tenthaler and Ernst, 2009), design platforms(Mikkola, 2003), and sourcing agents (Tran,2008). In a most recent study of electronic in-novation intermediaries in the marketing of pa-tented technologies, Lichtenthaler and Ernst(2009), however, assert that there is little systema-tic evidence on how such innovation intermedi-aries add value. Thus, while the empiricalliterature offers substantial advance in under-standing what innovation intermediaries do, thereremains a lack of empirical insights on how theyadd value in particular sectors. Our empiricalinvestigation of this question proceeds in thecontext of NPD processes in the fashion industry.Specifically, we explore the following researchquestions:

What types of value-adding services do inno-vation intermediaries provide to the NPDprocess of fashion firms?

How do these value-adding services vary withthe NPD speed?

Is there a match between the NPD speed andthe capabilities of innovation intermediaries?

3. Research methodology

The literature review and insights into industrialpractices on innovation outsourcing revealed thatwe need to carry out a closer investigation of therole of innovation intermediaries in adding valueto their clients NPD processes. However, there isa dearth of both theoretical and empirical re-search on this topic. Given the limited theory, acontextualized case study (Eisenhardt, 1989;Yin, 2004) of an innovation intermediary, Flex-Tex, and its clients was conducted in the fashionindustry from 2006 to 2008. Inductive case studiesare especially useful to develop theoretical in-sights and allow not only to explore the phenom-enon of value added in its complexity butalso to identify emerging concepts and their rela-tions as they crystallize from in-depth under-standing of the research context (Miles andHuberman, 1994).

Yen Tran, Juliana Hsuan and Volker Mahnke

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3.1. Research context

The research context of our investigation is theNPD processes in the fashion industry. Tradi-tionally, the European fashion industry has had along turnaround of introducing new productsinto the markets. In the early 1990s, however,things started to change. The NPD cycles startedto improve largely due to quick response (QR)efforts. QR is a set of policies and practicestargeted at improving coordination between re-tailing and manufacturing so as to increase thespeed and flexibility of responses to market shifts.Such programs also provided more suitableproducts, and reduced inventories and price re-ductions. However, NPD lead time still tookapproximately 1 year. Since 2000, competitionin the high street segment of the fashion industryhas evolved from price based toward fast responseto constantly changing fashion trends and fluctu-ating consumer demands within a single season.This fast-moving environment continually addspressure for fashion companies to compete ontheir ability to deliver newness and refreshedlook in products (Tran, 2009). If not sold in time,items have to be marked down substantially,often between 60% and 79%, as a means to reactto changing fashion collections introduced bycompetition (Christopher et al., 2004). In such acontext, increasing the frequency and newness offashion collections has become increasingly cru-cial for the survival of many fashion companies.

Today, fast fashion has emerged as the new andwidely adopted industry trend, which means thatcompanies must be able to react to new and real-time fashion trends with a lead time as short as 15days to 1 month. Many companies in the mid-scale fashion market segment such as Zara,Mango, Peacock, Next, TopShop, Vero Moda,and H&M chose to offer whatever the marketwants, and update fashionable clothes that havehigh value for money with increasing introductionfrequencies. These companies have shaken themarket and have become the drivers of therevolutionary change in the industry by intensify-ing the competition in a turbulent environment.By raising consumers expectations in getting fre-quent new fashion styles at affordable prices, suchcompanies also create tremendous pressure forother companies to change their NPD and marketresponse processes. As expressed by Enric Casi,Director General of Mango: In the textile sector,speed is everything. We need to have a strongresponse to market demands (Tran, 2009). Withinsuch context, the role and influence of innovation

intermediaries in adding value for a clients NPDprocess becomes very interesting to investigate.

3.2. Data collection and analysis

Value creation by innovation intermediaries wasexplored in its natural setting through an investi-gation of an innovation intermediarys interac-tions with three diverse clients representing theinnovation intermediarys service portfolio. Datawere collected by two researchers from interviewswith the case company, FlexTex, the innovationintermediary, as well as three of its major clients;the names of the clients are withheld due toconfidentiality reasons. Such interviews were tri-angulated with several secondary sources andexternal data material. Eight informants fromthe main case company included the CEO, twodesigners, two project lead managers, and threeclient account managers. We intentionally spoketo informants at different levels of the organiza-tion in order to ensure data representativenessand sampling data from stratified sources thatappropriately represented the organization or thephenomenon studied. Toward this goal, we alsointerviewed three major clients of the innovationintermediary. Informants from each client in-cluded the CEO, designers, production managers,marketing managers, and sourcing manager. Cli-ents followed different product development stra-tegies, ranging from slow, to medium, to highspeed. In addition to personal interviews, othersources of primary data included telephone inter-views and email correspondence. Finally, archivaldata, such as company internal documents andwebsites, were also used by the third researcher tocorroborate the findings of the first two research-ers; the resulting case write-ups were coded sepa-rately and cross compared with control forresearcher bias.

The data gathered from the three clients en-abled us to investigate the value-added inputs ofthe innovation intermediary from both perspec-tives. The comparative analysis therefore pro-vided a more accurate and generalizable theory,in comparison with simply investigating from asingle perspective (Miles and Huberman, 1994;Yin, 2004; Eisenhardt and Graebner, 2007). Ourresearch design uses theoretical sampling andallows the assessment of variations and common-alities of added value through innovation in-termediaries in alternatively paced product devel-opment processes. The data were coded usingguidelines from the Straussian tradition (Strauss


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and Corbin, 1990). This tradition encourages theresearcher to use prior knowledge and under-standing (e.g. the literature from related disci-plines as reviewed above) to shed light on thephenomena being examined. In the current case,prior understanding from the NPD and interme-diation literature guided our investigation (e.g.Howells, 2006). We converged on the followingtop-level codes: (1) innovation intermediary in-volvement points, (2) value-added dimensions, (3)NPD speed, (4) scope of intermediary involve-ment, and (5) intermediarys capabilities.

4. Findings

Based on the analysis of our case data, we iden-tified five key factors influencing when and howinnovation intermediaries add value to clientsNPD processes.

4.1. Innovation intermediary involvementpoints

The NPD process of a fashion design is illustratedin Figure 1: planning, concept development, sys-tem-level design, detailed design, testing, andproduction ramp-up. The planning stage is whenthe fashion trends are identified, market segmentsare defined, the supply chain strategy is devised,and various design options and textile innova-tions are assessed. Once the planning is set, the

next stage of NPD process is the concept devel-opment. During this stage, the fashion companyis concerned with activities related to identifyinglead users, best designers, and competitors. It alsoneeds to investigate fashion and design conceptsvis-a-vis material development, such as trims,colors, coating, silhouettes, and samples. Detaileddesign stage is considered to be the critical stageof NPD process by many fashion companies. Itentails many critical processes such as developingplan for design options for variety, setting pricingstrategy, defining modular design templates,choosing materials, defining baseline sketch andmeasurements, identifying key suppliers, and de-ciding on material development. After the de-tailed design, the new garment designs need togo through the testing stage. It includes thefollowing processes: testing prototypes, translat-ing sketch to pattern, creating 3D visualizationfor virtual settings, generating physical photos,developing promotion materials, preparing forlaunch, refining quality control, and verify thatmaterial development is in conformance to speci-fications. The final NPD stage is productionramp-up. This is when the fashion companiesevaluate the production output and send earlypromotion items and collections to the stores.

As Figure 1 shows, innovation intermediaries,such as FlexTex, can be involved in any and/or allthe stages. They can provide a wide range ofservices and added value depending on whetherthey are involved early or late in the clientsNPD process. Depending on the urgency of

Planning

Identify fashion trends

Define market segments

Assess design options Assess textile

innovations Devise supply chain

strategy

Concept

development

Identify lead users Identify designers Identify competitors Investigate fashion and

design concepts Investigate material

development (trims, colors, coating, silhouettes/samples)

Detailed design

Develop plan for design options for variety

Set pricing strategy Define modular

design templates Choose materials Define baseline sketch

and measurements Identify key suppliers Decide on material


Testing

Test prototypes Translate sketch to

pattern Create 3D visualization

for virtual fittings Generate physical

photos Develop promotion

materials Prepare for launch Refine quality control Verify material


Productionramp-up

Evaluate production output

Send early promotion items an collection to stores

INNOVATION INTERMEDIARY INVOLVEMENT POINTS

EARLY LATE

Figure 1. Innovation intermediary involvement points in the fashion NPD process.



concept-to-market lead times, clients might seekvarying complexity of services from the innova-tion intermediaries. For the relatively slow NPDprocess, most prominent with identity-drivenfirms, for example, the innovation intermediarytends to become involved during the early stages ofthe NPD process. Conversely, in the market-drivenfirms that have a much faster NPD speed, rangingfrom 12 to 16 collections per year, the intermediarytends to become involved at the later stages.

4.2. Value-added dimensions

Based on our case study with FlexTex and itsclients, we identified several value-added dimen-sions in the fashion clients NPD process, includ-ing (a) decreasing costs of product development;(b) improving hit-and-miss rate of collections; (c)reducing product development risks; (d) enhan-cing product attributes; (e) improving fashion

actuality; and (f) increasing product developmentspeed.

Table 1 lists the value-added dimensions by aninnovation intermediary at various stages of fash-ion clients NPD processes. Investigating thelinkage and subsequent match between the ser-vices provided and value appreciated by theclients, we gained some powerful insights intothe value-adding capabilities of the innovationintermediary.

4.3. NPD speed

NPD speed in the fashion industry is typicallydetermined by the product life cycles of thefashion items, ranging from 15 days to longerthan 1 year. Whereas items with long product lifecycles typically have a slow NPD speed, itemswith short product life cycles require a fast NPD.Fashion items can vary from basic to fast

Table 1. Services provided by the innovation intermediaries and value-added dimensions

Involvementpoints

Services provided by the innovationintermediaries

Value-added dimension (key dimensionsemphasized)

Planning Visits of fairs, shops of customer and competitors Decreasing costs of product developmentAnalysis of trends Improving hit/miss rate of collectionsAnalysis of competition Reducing product development riskDesign of new fabrics Enhancing product attributesResearch with suppliers Improving fashion actualityAnalysis of customer needs and Increasing product development speedVisits of new factoriesFinding new products

Conceptdevelopment

Organization of information and contract Decreasing costs of product developmentTrouble shooting of the concepts Improving hit/miss rate of collectionsCrisis management and conflict mediation Reducing product development riskCommunication with customers and suppliers Enhancing product attributesAdvice on speed Improving fashion actuality

Increasing product development speedDetailed design Analysis of sample requests Decreasing costs of product development

Registration of specifications Improving hit/miss rate of collectionsCapacity planning Reducing product development riskApproval of counter samples Enhancing product attributesCommunication with customers and suppliers Improving fashion actualityOrder tracking and control of time schedule Increasing product development speed

Testing Checking fabric references Decreasing costs of product developmentOrder analysis Improving hit/miss rate of collectionsTesting colors, fabric, print and embroideryquality

Reducing product development risk

Evaluation of lab test results Enhancing product attributesElaboration of lab test reports Improving fashion actualityOrder tracking and control of time schedule Increasing product development speed

Productionramp-up

Order analysis Decreasing costs of product developmentControl of time schedule Improving hit/miss rate of collectionsApproval of style Reducing product development riskApproval of workmanship and accessories Enhancing product attributesQuality control of production Improving fashion actualityElaboration of quality control reports Increasing product development speedManagement of claims

Bold sentence emphasize key value added dimentions.


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fashion. Basic items, such as T-shirts, socks,generic underwear, etc., have predictable demandpatterns and can have long life cycles, often muchlonger than 1 year; hence, markdowns are rarelyobserved. Fast fashion items referred to the mostrecent fashion trends that are designed and man-ufactured quickly and cheaply; hence, the custo-mers can afford to have fashionable clothes atcheap prices. Examples of fast fashion retailersinclude H&M, Forever 21, and Zara.

4.4. Scope of intermediary involvement

Depending on the complexity of the servicesprovided by the intermediary and the number ofinvolvement points, the scope of intermediaryinvolvement can either be simple or complex.Simple scope denotes simple value-added tasksand the intermediary is only involved in one stageof the clients NPD process. Complex scopedenotes specialized tasks and the intermediary isinvolved in multiple stages of the NPD process.The insights from the empirical analysis inducedus to propose a theoretical framework for classi-fying innovation intermediarys value-addingfunctions (Figure 2).

4.5. Innovation intermediary capabilities

The grounded investigation with FlexTex and itsthree clients corroborated the view that the speedof NPD and the complexity of intermediary

involvement are two key contingencies of theintermediarys value-added services to the clientsNPD process. Based on the NPD speed (slow andfast) and the scope of intermediary involvement(simple and complex), four types of value-addingcapabilities of innovation intermediaries are iden-tified: (1) value creation through best-cost capabil-ities, (2) value creation through timing capabilities,(3) value creation through product solution cap-abilities, and (4) value creation through marketresponse capabilities.

4.5.1. Value creation through best-cost capabilitiesWhen the speed of NPD is slow and the scope ofintermediary involvement is simple, the innova-tion intermediarys main value-adding functionrests on best-cost capabilities. In this context, theinnovation intermediary helps the client to reachbest-cost suppliers of innovation input to servetheir basic fashion items such as T-shirt, pants,socks, etc. A sourcing manager commented: Ba-sic fashion items remain similar across seasons.We order them in bulk quantity and stock them.What we look for is the low cost of the productsand decent quality so we dont mind if theproducts are delivered in a year. Today, thesuppliers of slow basic fashion items are globallydispersed and exceed most fashion clients abil-ities to tap into the best cost locations. As oneclients designer put it: The fashion world hasbecome so competitive, that we change our supplybase every year or else have to change our marketsegment. Basic collections are purchased, for

Scope of intermediary involvement

Simple Complex

NPDSpeed

Slow Best cost Intermediaries add value through searching best cost locations for

innovative supply

Key value dimension:

Decreasing costs of product development

Product solution Intermediaries add value through

providing product innovation solutions

Key value dimension:

Offering new and enhancing current product attributes

Fast Timing Intermediaries add value through

delivering fashion in time

Key value dimension:Increasing product development

and scaling speed

Market response Intermediaries add value through

providing complete innovation solution and fashion timing

Key value dimensions:Reducing hit/miss risk

Improving fashion actuality Offering new product attributes

Figure 2. Framework for classifying intermediary value-adding functions.



example, from China, India, the Baltic States inaddition to locations in closer proximity to Flex-Texs European clients (e.g. Egypt, Turkey andPortugal). By implication, the ability of fashionfirms to receive delivery in time while minimizingcosts and ensuring quality is one key value-addingfunction an innovation intermediary can provide:Fashion sensitive products are usually sourced atcloser proximity, in close cooperation with reli-able and committed suppliers . . . less trend sensi-tive and basic fashion items can be sourced inremote location and this is a long range process.For basic items, we can even order all the yearround, but to find the best cost location would beimpossible without an innovation intermediary, aclients sourcing manager commented.

4.5.2. Value creation through timing capabilitiesWhen the speed of NPD is fast and the scope ofintermediary involvement is simple, innovationintermediaries main value-adding function restson timing capabilities. To reap the market de-mand at peak times, many fashion companiesseek to replenish items delivered as quickly aspossible during the season. The innovation inter-mediary helps the clients to replicate best-sellinginnovative products with a short lead time so thatthey can arrive at the stores in time for the season.As the styles of the fashion products are repeated,the task of the intermediary is simply to fulfill thedetailed specified orders by accelerating dispersedproduction and logistics of best-selling products.In this case, an innovation intermediary does notneed to be concerned about product attributesand the design of the products or whether theproducts can be sold successfully. As a sourcingmanager of a FlexTexs client commented: Re-plenishment service for our innovative productline is very important for us, you never knowwhat will hit the market to plan the productionvolume until the first sales record shows in theseason. In the old days, we would wait until thenext season to repeat the successful items . . . .now with the service provided by the agent, wecan do it right away, it takes maybe one to twoweeks for the items to arrive, customers arehappy, and we earn extra! A sourcing managerfrom another client engaged in both fast and slowfashion collections added another interestingnuance: The innovation intermediarys selectionof a blend of close to output market suppliers forthe introduction of fast collections during theseason and long distance suppliers for cheap coreand commodity items is important. As stated bya production manager of the same company:

Delays become truly a bottleneck for our fastfashion strategy, especially, the delays in ourexpress collections put our concept shops injeopardy. Indeed, he continues: . . . to us, geo-graphic dispersion of sourcing activities appearsnecessary to hedge supply risk and tap intochanging comparative cost advantages of remotelocations . . . however, coordination costs alsoincrease, and economies of scale in sourcing arehard to come by when coordinating globallydispersed supplier this is why we engage aninnovation intermediary to synchronize our sup-ply need across alternatively paced collections.

4.5.3. Value creation through product solutioncapabilitiesWhen the speed of NPD is slow and the scope ofintermediary involvement is complex, innovationintermediarys main contribution is to possessproduct solution capabilities. This is a servicesought by fashion firms in the high-end segmentwho focus on product strategy of high quality andinnovative styles. These firms are constantlysearching for innovative product solutions. Theyusually offer two collections per year; thus, theydo not require fast product delivery. They spendthe majority of their time on planning, conceptdevelopment, and design activities. The inter-mediary can, therefore, add value by offeringnew materials, new product solutions, and sug-gesting carefully tailored production processes toensure high quality and high style value of theproducts. As a designer of an identity-basedfashion firm comments: . . . our collection islimited in number but very innovative: mostimportantly, the quality has to be guaranteed,because that is what we stand for. We take ourtime to bring the best to the customers. Theinnovation intermediary has an important rolein proposing to us new materials to add productfunctionality (stain resistant or odor free orwrinkle free) and sometimes FlexTex also helpsus to turn our design into workable productionplans and schedules. FlexTex is our innovationpartner, they understand our design concept andbusiness ideas and help the implementation. Theirtask is quite diverse and complex.

4.5.4. Value creation through market responsecapabilitiesWhen the speed of NPD is fast and the scope ofintermediary involvement is complex, the inter-mediary must possess market response capabilities.Fashion companies seeking market-responsivenessvalue suppliers commitment to deliver the best


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products with good quality and innovative styles,and at the same time to guarantee fast delivery oftheir fashion to the stores to stay abreast ofemerging market trends. They offer not just timelyreplenished products but also new products ad-dressing the real-time fashion trend. This NPDstrategy helps firms to stay responsive to themarket, reduce inventory, lower mark downs,reach higher sell-through, and eventually to avoidhit-and-miss fashion risk. More importantly, italso enhances the brand value of the company bykeeping customers returning to their shops tosearch for updated fashion items. To support valuecreation, the intermediary assumes the complextask of servicing several involvement points simul-taneously that can range from design proposal tocomplete product solution delivered within a singleshort-lived season cycle. In such a situation, theinnovation intermediary helps to sense the markettrend, to propose the right styles, and to take careof the complete production and logistics. As afashion designer commented, they [the innovationintermediary] offer complete solutions for thecomplex development of in-season items, it savestime and coordination. They understand ourbrand identity, our styles, our products, and ofcourse they know what hits the markets. They alsojust fill up newly demanded items for us, byshipping the items to our shops. Even if we knowwhat products hit the market we could not designthem by ourselves, we need to communicate backand forth to suppliers . . . but until then it would betoo late, thats why we cooperate with FlexTex.The production manager of the same companyadded: The innovation intermediary has a designteam too. They work like us: Sensing the marketand finalizing workable styles. But they are fasterbecause they are also specializing in productionand logistics so the coordination between innova-tion input providers does take less time, so wedelegate the total product development tasks.

From our empirically grounded theory devel-opment effort with the innovation intermediary,FlexTex, and its three main clients, we found thatinnovation intermediaries can add value to fash-ion firms NPD processes in a variety of ways,including reducing the costs and risks, searchingthe best cost locations, providing complex productsolutions, improving hit-and-miss rates, and in-creasing a fashion firms responsiveness to chan-ging market demands. Moreover, in order to addvalue, innovation intermediaries should possessthe following capabilities: best cost capabilities,timing capabilities, product-solution capabilities,and market response capabilities.

It is important to stress that value creationappears to be richly interrelated with the situa-tional contingencies such as the speed of NPDand the scope of intermediarys involvement inthe process. When NPD proceeds in a relativelyslow-paced manner, erroneous expectations onconsumer demands can be corrected. This re-quires the innovation intermediary to alert theinnovator in time about the fashion risks, costconsequences of delays, and to suggest flexibleadaptation to long-term production schedules.Things become vastly more complicated whenNPD takes place under conditions of increasingNPD speed, where a rapid response to consumerdemands requires an integrated, synchronized,and coordinated reaction in all involvementpoints of the innovation value chain. As a con-sequence, the requirements for intermediary cap-abilities increase accordingly, as illustrated inTable 2.

Despite its beneficial deployment in a variety ofNPD contexts, innovation intermediation servicesalso have their costs. As a consequence, innova-tion intermediaries need to be carefully selectedaccording to the NPD needs and requirements ofthe innovating firm. One key dimension in thisrespect, emerging from this research, is the cap-ability base of the innovation intermediary, whichsubstantiates its value-added functions. Further-more, value-adding capabilities of an innovationintermediary can capitalize on the combinedsynergy of complex involvement in a clientsNPD process. Through such an extensive colla-boration, both the client and the intermediary canco-create new knowledge and competences thatcontribute to NPD competitiveness for the inno-vative fashion firms.

5. Discussion and conclusion

Whenever innovation sourcing capabilities can-not be developed internally by the client ofinnovation services, a third-party intermediarymight be able to add value for the firm in termsof speeding up, increasing the quality, and im-proving the cost effectiveness of its NPD process.Most prior studies on outsourcing innovation arerooted in the supply chain management (SCM)and innovation management literature, oftenfrom the lenses of ESI, product platform, andmodularity. Until most recently, studies on inter-mediation, on the other hand, have been moreprevalent in the literature on financial transac-tions and information technology. Specifically,



little knowledge exists on the role of intermedi-aries in the NPD processes. Thus, our maincontribution is through investigating how innova-tion intermediary do add value to clients NPDprocess in the fast-paced fashion industry. Wefocused on the interface between fashion inter-mediary and its clients where various crucialperformance issues lie, such as NPD speed, inter-mediary involvement points, and value-addingactivities and competence development.

This studys findings have several implicationsfor management and research on outsourcinginnovation. First, prior research explored the pos-sibility of using innovation intermediaries andtheir various activities (Spulber, 1999; Howells,2006) and illuminated the salience of innovationintermediaries in a variety of market contexts(Hargadon and Sutton, 1997; Spulber, 1999;Howells, 2006; Mahnke, Wareham and Andersen,2008; Lichtenthaler and Ernst, 2009). The currentstudy is among the first to focus on the questionwhen and how an innovation intermediary addsvalue to a clients product development processes.Thus, this research, more generally, begins tounpack the relation between outsourcing innova-tion and the profitability of such efforts.

Secondly, our findings also have implicationsfor research on organizational agility. Agility inproduct development cannot be achieved if theorganization and its supply chain are not flexible.In the current context, agility means using emer-ging market knowledge and a virtual organizationto exploit profitable opportunities in a volatilemarket place (Naylor et al., 1999). Our study ofthe fashion industry provides a rich example as tohow agility in the supply chain can be obtainedand managed by intermediaries. In other words,as the use of intermediaries in product develop-ment processes becomes the preferred mode oforchestrating agile supply networks, it becomesan important issue to be addressed in futureresearch.

Furthermore, one strategy to deal with theturbulent markets, such as the fashion industry,is mass customization as a way to devise evenfiner differentiation of market segmentation andquick responsiveness (Pine, 1993; Mikkola andSkjtt-Larsen, 2006; Pan and Holland, 2006).Mass customization takes the customers as thestarting point, in the sense that product varietiesare driven by customer demand. According toPine (1993), the key features of mass customiza-tion include: fragmented demand, heterogeneousniches, short product development cycles, shortproduct life cycles, and low cost, high quality,customized goods and services. The ability to co-design and/or to co-produce products togetherwith the customers could provide the innovatingfirm with the ability to capture valuable newknowledge. However, implementing the masscustomization process into the supply chain mightbe risky, expensive, and time consuming. Innova-tion intermediaries may have an important role inshaping such mass customization processes. Thus,future research can beneficially explore additionalvalue-adding capabilities that such a strategyrequires.

More broadly, agility and mass customizationalso impose a tremendous impact on how servicesshould be designed and configured. Based on theconceptual development on innovation intermedi-ary value-added and associated contingencies inthis paper, it would be interesting for futureresearch to consider other innovation strategies,including those present in service sectors. Inter-estingly, Voss and Hsuan (2009) introduced theconcept of service architecture modularity toinvestigate and measure the degree of modularityin a service system. They state that there are threeareas that contribute to the competitiveness ofservices: (1) the possession of unique services thatare not easily copied by the competitors in theshort term, (2) the ability to exploit these uniqueservices through replication across multiple ser-

Table 2. Services provided by the innovation intermediaries and value-added dimensions

Basic Ordinary fashion Fast fashion

NPD strategies Long product lifecycles (41 year)

Shorter product life cycles( 90 days)

Very short product life cycles(1530 days)

Low markdownsas % of sales

Higher markdowns as % ofsales

Highest markdown risk

More predictabledemand pattern

Less predictable demandpattern

Unpredictable demand pattern

Intermediary valueadding capabilities

Best costcapabilities

Best cost capabilities andproduct solutioncapabilities

Best cost capabilities, productsolution capabilities, andtiming and responsecapabilities

NPD, new product development.


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vices or multiple sites, and (3) the possession of adegree of modularity that supports both customi-zation and rapid NPD. In such a context, innova-tion intermediarys capabilities may unfold theirvalue-creating impact by orchestrating and inte-grating a modular solution.

In sum, then, the current research on the valueadded of innovation intermediaries suggests afresh agenda of research into the contingenciesof value added through open innovation strate-gies more generally, in addition and beyondcurrent fascination with the trend to increasinglyoutsource innovation.

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Yen Tran is Assistant Professor of InnovationStrategy and International Marketing at Heriot-Watt University, Edinburgh, UK. She receivedher PhD in Strategic Management from Copen-hagen Business School. Her works have beenpublished in Thunderbird International Review,R&D Management, Management InternationalReview, Industry and Innovation, and Long RangePlanning. Her current research focuses on strate-gic management and product development inhigh-velocity environments.

Juliana Hsuan is Associate Professor of Opera-tions Management at Copenhagen BusinessSchool, Denmark. Her works have been pub-lished in Decision Sciences, Journal of ProductInnovation Management, IEEE Transactions onEngineering Management, Production Planning &Control, Technovation, R&DManagement, SupplyChain Management: An International Journal,European Business Review, and others. Her cur-rent research focuses on platform strategies, newservice development, collaborative purchasing,and service operations management.

Volker Mahnke is Professor of Global Strategy andEntrepreneurship at Copenhagen Business School,Denmark. His works have been published in Inter-national Journal of TechnologyManagement, Journalof Information Technology, Industry and Innovation,Journal of Management Studies, IEEE Transactions,R&D Management, and Management InternationalReview. His current research and applied workfocuses on corporate-venturing processes and theoutsourcing/offshoring of innovation.


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