Portfolio Renewal: The Impact of Organization Design and Supporting Resources on New Product Sales

Abstract

In many industries firms’ on-going livelihoods are determined by the renewal of their product portfolios through the continuous introduction of new products. However, our understanding of what shapes a firm’s ability to continually renew its product portfolio appears to be somewhat limited. In this paper, I examine the process of on-going product portfolio renewal through evaluating how firms’ organization designs and level of supporting resources can shape the proportion of a firms’ product sales that come from new products. Through examining the trade-offs associated with greater organizational decentralization, I argue that greater decentralization is associated with more effective commercialization of firms’ new products as the benefits associated with the ability to use high-powered incentives more effectively and increased market-specific knowledge outweigh the costs of reduced intra-organizational knowledge flows and reduced functional expertise. However, this relationship is moderated by firms’ investments in supporting resources that facilitate the commercialization of inventions such that at higher levels of investment the advantages of decentralization are reduced. This is because business units will tend to over-inflate the opportunities associated with their suite of products to garner more resources resulting in less effective resource allocation across products potentially starving new products of vital supporting resources. I find support for my arguments in the context of the pharmaceutical industry between 1995 and 2015 using a hand-collected data set supplemented by 61 interviews with 28 leading pharmaceutical companies.