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Keywords:

  • innovation;
  • customer-focus;
  • complexity;
  • qualitative study;
  • software industry

Abstract

Economic models suggest that firms use a simple cost-benefit calculation to evaluate customer requests for new product features, but an extensive organizational literature shows the decision to implement innovation is more nuanced. We address this theoretical tension by studying how firms respond to customer requests for incremental product innovations, and how these responses change when the requested innovation is complex. Using large sample empirical analyses combined with detailed qualitative data drawn from interviews, we find considerable variance in the relationship between customer demands, complexity, and investments in incremental innovations. The qualitative study revealed the importance of organization structures, competitive pressures, and incentives for resource allocation processes. Copyright © 2011 John Wiley & Sons, Ltd.